The Mayans and Tax Reform

1) The Mayans and Tax Reform

2) Sandy Pension Loans

3) Income is Rising!

4) Interest Rates at IRS

1). It is the day before the end of the Mayan calendar, and if in fact you're getting a chance to read this, the world has not come to an end. While not at least the way many had anticipated. You probably took a shower this morning, and with any kind of luck headed off to your office. Frankly, I had wondered how anyone could believe a culture of fellows wearing loin cloths, sacrificing animals on stone altars dictating the end of the world to a culture that had harnessed the atom and sent men to the moon. But I wasn't willing to take any chances. I thought I would get this bulletin done and over to the Bar Association early enough so that if the world did end on Friday, December 21, I could not be accused of dereliction of my duty up until the last. All was proceeding normally, with thoughts of the Mayans behind me until I took a look at the morning's New York Times. There tucked away in the business section was a horizontal bar graph that made me shudder. Right before my eyes the Mayan prediction became clear. The graph set forth selected 2012 tax expenditures. It demonstrated the amount of loot the federal government was losing by each of the tax deductions and credits depicted. Now you may want to pick up a pencil and draw your own graph to get the full picture. If you are old enough you may be nostalgic for “Winky Dink and Me” where a cartoon character asked us kids to draw on our TV screens to save him from peril. Let me explain the graph: far and away the exclusion of employer health care contributions gets the longest bar at $128.1 billion. The second is reduced tax rates on dividends and long-term capital gains, receiving a length of 93.1 billion. Going down, the mortgage interest deduction accounted for 83.7 billion. The exclusion of capital gains at death rings in a paltry 36.3 billion. Next in the graph is deductions for charitable contributions at 32.4 billion, followed by exclusion of interest on state and local government bonds at 32.1 billion. Near the bottom is exclusion of capital gains on sales of primary residences 22.9 billion and lastly, property tax deductions of 15.1 billion. Now if you have drawn the graph correctly, you see depicted before you, a Mayan version of the end of the tax world. It is no coincidence, I believe that on this important last full day of the world, a noted newspaper has portrayed by a humble bar graph a tax cliff. But what does it all mean? The answer is that there is a New World coming just as the Mayans predicted and it will be one where there will be fewer exclusions for employer health care contributions, a different take on dividend and long-term capital gain taxation and a major revision in allowable mortgage interest deductions whether by cap or formula of some kind. Don't blame me. I think the Mayans were predicting this 5000 years ago.

2). In IRS Announcement 2012 – 44, the Service has eased the rules for 401(k) and similar employer sponsored retirement plans to make loans and hardship distributions to Sandy storm victims and members of their families. The tax law imposes certain requirements that must be met to avoid treating a loan as a taxable distribution. Plans must also contain language authorizing these loans. According to the announcement loans may be paid to an employee or former employee due to hardship needs arising from hurricane Sandy. These can be made to persons whose principal residence or place of employment on October 26, 2012 was located in one of the counties that have been identified as covered disaster areas. This includes most counties in New Jersey. Plan administrators may rely on representations from the employee as to the need for an amount of hardship distribution unless the plan administrator has actual knowledge to the contrary. Persons affected should consult their plan administrators to see whether they may qualify for such loans.

3). They say Noah floated about for some time waiting for the flood waters to recede. Historians now say there may have been, in fact, such a flood and an Ark to go along with it. Noah just had to wait things out. The American economy has been floating about for the last several years. But now there is good news. The dove has returned and land is within sight. The Internal Revenue Service recently released its fall 2012 edition of its Statistics of Income Bulletin. The IRS keeps yearly track of such things as gross income, taxable income and tax paid. According to the bulletin, in 2010 adjusted gross income reported on individual returns totaled $8.1 trillion, which was a 6.1% increase from the previous year. This was the first increase in adjusted gross income after two years of decreases. Business income also had large increases in 2010. Total rental and royalty net income increased 40.5%, partnership and S. corporation income rose by 14.3%. Business or professional income rose by 9.1%. And total income tax also increased: taxable income by 8.1% and total income tax by 9.9%. We are not going to drown.

4). With the kind assistance of the folks in Washington, the IRS will once again maintain the same interest rates on underpayments and refunds that they did last quarter. The rate will remain unchanged at 3%.

Eleven Tax Questions to Ask Before You Get Married

                                                                Eleven Tax Questions to Ask Before Getting Married

Someone once told me that if you buy a horse you should first check its teeth. I have never been a horse buyer, but I have had many clients who were surprised at their post marriage tax problems. The phrase means more than checking the orthodontia of your future bride or groom. It may be unromantic but it could save a lot of pain later on  “after the bloom is off the rose” as they say:

Consider these:

1.      Have you filed all of your state and federal income tax returns and reported all your income? Would you mind if I take a look at the last three years?

2.      Who prepares your income tax returns? How do you know this preparer?

3.      Have you ever been audited by the Internal Revenue Service?

4.      Have you ever been behind in any tax payments to any of the tax authorities?

5.      Have you ever owned a business? Were there employees or independent contractors and were proper employment returns filed? Anybody paid “Off the Books”?

6.      Have you ever had a lien or levy filed against you?

7.      Is there any ongoing investigation of either you or your business?

8.      Has IRS attempted to contact you either by mail or personal visit?

9.      Did you and your ex-spouse, if there was one, have any tax liabilities or tax problems?

10.  Have you had access to a foreign business or personal bank account? Was it properly reported to IRS?

11.  Do you still Love me after asking these questions?

Ethics Requirements for Tax Lawyers- OPR

Ethical Requirements for Tax Lawyers-OPR

The Office of Professional Responsibility (OPR) enforces Circular 230, which is the IRS code of professional conduct for persons who practice before the Internal Revenue Service. This includes accountants, as well as lawyers and others who represent individuals and businesses or prepare tax returns which are submitted to the Internal Revenue Service. Currently Karen Hawkins is the director of OPR. The previous director, its first, Cono Omarado, was the former head of the criminal investigation division (CID) of the Internal Revenue Service.

The law provides that OPR is independent of the Internal Revenue Service. Among its powers is to disbar, suspend and reprimand practitioners. Monetary penalties can also be assessed. In 2011, 726 cases were reviewed, which resulted in 7 disbarments, 161 suspensions, 280 reprimands and 245 no change actions. OPR no longer deals with the tax preparer issues and responsibility as IRS has now created the Return Preparer Office (RPO) to deal with these problems.

OPR generally will not bring a case for noncompliance that is more than five years old. It also considers remorse and rehabilitation of the practitioner involved. Those sanctioned will have their names published, both at the IRS website and in internal revenue bulletins. Most cases are resolved, by agreement with the practitioner involved. Where no agreement can be reached, the matter is sent to the IRS Chief Counsel's Office for review. In February 2012 OPR stated that monetary penalties would be used against firms and not individuals. OPR can access 100% of the gross income derived from inappropriate conduct as a penalty.

In cases where IRS has waived penalties to a taxpayer due to reliance on a tax adviser  OPR would like to know the name of the advisor so that appropriate follow up action could be taken.

OPR is regulatory and not substantive. It is not in the business of judging whether or not the advice that was given was correct but rather whether due diligence was done and conflict of interests avoided. They are not attempting to make and replace judgments made by practitioners.

In most first instances a reprimand is the most likely result of an investigation. Most referrals for OPR action originate from within IRS.

Of the more important sections of circular 230 are the following:

Section 10:23 prompt disposition.

Section 10:34 return documents and affidavits.

Section 10:21 knowledge of omission.

Section 10:27 contingent fees.

Section 10:37 requirements for written advice.

Section 10:51 incompetent and disreputable conduct.

A Poem: In Defense of Lawyers

A Poem: In Defense of Lawyers

Everyone loves to hate that lawyer man,

A visit to him can cost a couple grand;

But when it hits the proverbial fan,

By your side who will stand?

“It's just for the money" makes us so blue,

Lawyers actually care what happens to you;

Ask yourself when something occurs that's truly bad,

Do you call your lawyer or your mom and dad?

“They have no feelings, hearts of stone,

Insensitive, tough is how they've grown"

Not a word of this is true,

But how else could we deal with you?

Perhaps we must face that our clients,

Are not too often mental giants;

They try our patience and resolve,

In the quest to problem solve.

We lawyers hear all the dirt,

About the pain and how you hurt;

We judge not how you made your life a mess,

We argue and sue to get redress.

Say what you want ifs and buts,

But lawyers have often shown their guts;

Remember, it was lawyers too,

Who helped create the ole red, white and blue.

So when next you pray on bended knee,

Thank the Lord we will work for thee;

Perhaps another fifteen round bout,

Trying hard to bail you out.

As for me, I'm still proud,

To be a member of this crowd;

And when I go to my eternal rest,

I’d like to think I had done my best.

Ethics: Saints, Sinners and Lawyers

Ethics:  For Saints, Sinners and Lawyers

                                                                                                 

All lawyers have ethics. They know the difference between right and wrong. Maybe you can say all people have ethics, but they may not always agree with your version. So what is ethics?

Peak & Valley tax lawyers provide other firms and clients with legal tax advice about dealing with the IRS. Questions of what is ethical involve the extent to which Peak & Valley has

            a.         a legal duty beyond those duties mandated by ethics.

            b.         an ethical duty beyond those duties mandated by law.

            c.         any duty beyond those mandated by both ethics and the law.

            d.         any duty when it is uncertain whether a legal duty exists.

Ethics is the study of what constitutes right or wrong behavior. It is a branch of philosophy, focusing on morality and the way moral principles are derived. Ethics has to do with the fairness, justness, rightness or wrongness of an action.

Business ethics focuses on what is right and wrong behavior in the business world. Business decision-makers often address more complex ethical issues than they face in their personal lives. Business ethics therefore may be much more complicated than personal ethics. For example, Bernie Madoff was convicted of bilking investors out of more than $50 billion through a Ponzi scheme that he had perpetuated for decades. Bernie probably stopped at every red light he came to while driving and played poker with his friends with no ace up his sleeve.

Ethical problems in the US financial institutions contributed to the onset of the deepest recession since the Great Depression of the 1930s. More than $9 trillion in investment capital evaporated. Millions of people have lost their jobs and the American economy has been in near free-fall.

The minimum acceptable standards for ethical business behavior are known as the moral minimum. It is usually considered to be that which is in compliance with the law. However, in making business decisions, business persons must remember that just because an action is legal does not necessarily make it ethical.

The law obviously has made no attempt to codify all ethical requirements. Though professionals of all types are subject to ethical codes of conduct,  individuals are still to be guided by their own personal set of ethics about rightness and wrongness.

This personal guidance stems from exposure to parents, family, religious beliefs, as well as employment and professional responsibilities.

Ethical reasoning requires an individual to examine the situation at hand in light he is or her moral convictions or all ethical standards. Traditionally ethical reasoning, relating to business, has been characterized by two approaches. One such approach is duty-based ethics. This second approach is outcome based aspects.

DUTY BASED ETHICS

Duty-based ethics are derived from religious precepts and other revealed truths. They are also derived from philosophical reasoning.

In the Judeo Christian tradition the Ten Commandments of the Old Testament create fundamental rules for moral action. For believers, the truths are absolute with respect to their behavior. Madoff could have solved his personal and business decisions early by adhering to the “Thou shalt not steal” mandate.

Derived from philosophy, sometimes ask the individual to evaluate their actions in light of the consequences that would follow if everyone in society acted in the same way. This is called the categorical imperative, which can be applied to any action. If your decisions are based on this imperative cheating in business would not be done. As such, cheating by everyone would guarantee no gain to anyone.

Another philosophical view is that of the principle of rights. In this ethical theory, a major factor in determining whether a business decision is ethical is how that decision affects the rights of others. This would include a law firm’s partners its employees as well as its clients and the community and society as a whole. And I plying this theory, a problem exists in determining which rights are most important. What relative weight should be given to each element in the decision process? One way of resolving the problem is to determine which right is the stronger in a particular circumstance. If a decision affects 10 people verses 1000 people, an ethical decision may be resolved. But when all the rights are considered all seen equally weighted the decision becomes much more difficult.

OUTCOME BASED ETHICS

Outcome based ethics is based on the utilitarian approach. This means the greatest good for the greatest number. Unlike duty-based ethics utilitarianism is outcome oriented. This focuses on the consequence of an action, not on the nature of the action itself or on any set of preestablished moral values or religious beliefs.

A decision is ethical under this theory and an action is morally correct. When among the people it affects it produces the greatest amount of good for the greatest number. When this action adversely affects the majority of people it is morally wrong.

In order to make ethical decisions under this theory, a person must determine which individuals will be affected by the action in question; a cost-benefit analysis which involves an assessment of the negative and positive effects of alternative actions on these individuals; and a choice among alternative actions that will produce the maximum societal utility. That is the greatest positive net benefits for the greatest number of individuals.

Some companies use published guidelines to assist their employees in making ethical decisions. They may be useful to lawyers as well:

1. Is the action being considered legal.

2. Are the rules and procedures which are required by either law or internal manual being followed?

3. Are the values of the company being maintained by the decision? That is, is the spirit of the law followed?

4. Does this decision comport with your conscience. If you feel guilty, it does not.

5. Does your decision match up to the promises and commitments you have made to others both inside the business and outside.

A practical decision guide for resolving ethical questions:

Inquiry: the process begins with an understanding of the facts. That is, the parties involved. The ethical problems are then identified and a list of relevant ethic principles is created.

Discussion: a list of action options is developed each option carries with it certain ethical principles.

Decision: those participating in the decision process attempt to create a consensus for  a plan of action.

Justification: will the decision would stand moral scrutiny? Reasons should be determined for each proposed action or series of actions.

Evaluation: does the solution to the ethical issue satisfy professional values, community values and individual values? Can the decision as well as the process which was used to reach those decisions withstand moral scrutiny,.

In law firms, like any other business, one of the most effective ways of setting a tone of ethical behavior is to create an ethical code of conduct. A well-written code of ethics will state the firm's ethical priorities and demonstrate the firm's commitment to ethical behavior. It may also be necessary to create effective training for employees as to the application of the ethical standards involved. This training may include ethical seminars during which employees can openly discuss ethical problems that they may be experiencing. If an employee of the firm is accused of an ethics violation, a court may consider the presence or absence of such training in evaluating the firm's conduct.

By the way the answer to the above Peak and Valley problem is (b). How did you do?

Excerpted and complied from: Ethics and Business Decision Making. Chapter 5; Clarkson, Miller, Cross, 2012.