Last night was the State of the Union speech as delivered by President Obama. Traditionally, the State of the Union speech is delivered once a year to both houses of Congress. For the last hundred years or so, the speech has been delivered in January of each year and is the President’s opportunity to address Congress and the nation about how we’re doing as a country and what his particular agenda will be for the coming year.

Let’s start with the fun stuff:

• The State of the Union speech, including the salutation, weighed in at 6,998 words (by contrast, the Declaration of Independence – not counting the signatures – is 1,337 words in length).
• During the course of the speech, Obama mentioned the word “tax” in some context 34 times.
• The phrase “tax rate” or “tax rates” appears 3 times.
• The word “reform” only got a mention 9 times.

You can probably tell from those numbers that the key elements of the speech did not involve taxes or tax reform. My guess is that’s because neither party has a whole lot to offer this year in terms of reform. So, Obama went for the obvious: payroll tax cut extensions and the Bush tax cuts.

Obama made the case for payroll tax cuts in his speech, saying:

Right now, our most immediate priority is stopping a tax hike on 160 million working Americans while the recovery is still fragile. People cannot afford losing $40 out of each paycheck this year. There are plenty of ways to get this done. So let’s agree right here, right now: No side issues. No drama. Pass the payroll tax cut without delay.

You already know where I stand on this: I think the payroll tax holiday is wasteful and confusing. Congress can’t stand the idea of not having some kind of tax break for somebody so we’re in a revolving door of temporary tax breaks. The payroll tax holiday was meant to last only one year and take the place of the Making Work Pay Credit. Of course, now that taxpayers are used to having some extra dollars in their pockets, Congress practically has to pass the payroll tax cuts or actually engage in real tax reform efforts. So payroll tax cuts it is.

Only, the “drama” that President Obama references has to do with this silly two month nonsense. As you may recall, the payroll tax cuts were extended – but only for two months. The extension runs out at the end of February. Here it is, the end of January, and we are… where, exactly?

And speaking of temporary cuts, President Obama also addressed the matter of the so-called Bush tax cuts. He said:

When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings. But we need to do more, and that means making choices. Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, [entity display="Warren Buffett" type="person" active="true" key="warren-buffett"]Warren Buffett[/entity] pays a lower tax rate than his secretary.

Admit it… You, like me, half expected the President to slip in Romney’s name. To his credit, he didn’t. Instead, he referenced the Buffett rule, saying:

But in return, we need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes. And my Republican friend Tom Coburn is right: Washington should stop subsidizing millionaires. In fact, if you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions. On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up. You’re the ones struggling with rising costs and stagnant wages. You’re the ones who need relief.

Obama also took a swipe at efforts to qualify tax reform in terms of class warfare, stating:

Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.

Maybe. But realistically, pushing rates down or eliminating favorable tax treatment for investments will neither fix our economy nor – and this is the most important bit – win the day in Congress. Yes, I’m as confident as you are that if Congress put their minds to it, they could negotiate some kind of band-aid deal with the President. But we don’t need band-aid deals. We’ve endured them for years and we’ve seen… what, exactly?

That said, it was an effective speech. It was one of those feel good moments and I happen to think that, as a country, we need more of those. And President Obama made the points he wanted to make, knowing full well that Congress isn’t going to run with them. If I had to guess, we will see some kind of temporary compromise next month wherein the payroll tax cuts are extended through the end of the year – but no further – in exchange for some version of an extension of the Bush tax cuts.

Sigh. But if that’s the State of our Union, we’ve got some work to do.

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I know, I know. You, like me, woke up this morning and your first thought was: what’s on those darn Romney tax returns?

Okay, maybe you didn’t. But I did (true story, ask my husband). And not because I really care in a this-will-dramatically-change-my-life kind of way but rather I was interested in what the release would mean to the campaign and to the primary. And. YAWN. Now that it’s happened, I don’t think it means a thing.

Of course, that’s what Romney was banking on. He’s clearly anxious to move beyond the tax return issue, going so far as to hire former Commissioner of the Internal Revenue Service Fred Goldberg to review the returns. After his review, Goldberg released the following statement:

I have reviewed Governor and Mrs. Romney’s joint tax return for 2010, including returns for the Ann and Mitt Romney Family Trust, the Ann D. Romney Blind Trust, and the W. Mitt Romney Blind Trust. I have also reviewed the return in process for 2011. These returns reflect the complexity of our tax laws and the types of investment activity that I would anticipate for persons in their circumstances. There is no indication or suggestion of any tax-motivated or aggressive tax planning activities. In my judgment, they have fully satisfied their responsibilities as taxpayers. They have done so by relying on a highly reputable return preparer and other advisors, who have in turn relied primarily on information provided by third parties to them and to the IRS. The end result of that process has been returns that include a multitude of schedules, IRS forms and accompanying statements that provide appropriate transparency and the proper payment of taxes that Governor and Mrs. Romney owe under current law.

Meh. Take that with a grain of salt. That’s like me saying it. Okay, a little more impressive than me. But it’s still the mere opinion of a tax professional. It’s not the same as a tax clearance.

But if had been an honest to goodness tax clearance, would it matter?

I don’t think anyone really believes that Romney is cheating on his taxes. That’s never been what this has been about, despite Gingrich’s statements that he wanted Romney to release the returns to ensure that there’s nothing on them that will come back to hurt the GOP. Let’s call a spade a spade. This whole exercise has been about making Romney unlikeable. Here’s what some politicians want you to know:

• Romney is not just rich, he’s über rich.
• Romney invests offshore.
• Romney pays a 14-15% tax rate, lower than many taxpayers.
• Romney gives lots of money to the Mormon Church.

Check ‘em all off. They’re all true. And you can’t possibly have thought differently before those returns came out.

With that in mind, I breezed through the 2010 federal income tax returns for the Romneys this morning (all 203 pages of them) and found them rather unremarkable, all things considered (though I did enjoy poking through them in a tax geeky kind of way).

Here’s what you probably already knew:

• He files as married filing jointly.
• He had more in capital gains last year than most people will ever see in a lifetime (about $12 million).
• He itemizes his deductions on his returns.
• He is subject to the AMT.
• He is the beneficiary of a few trusts (including a blind trust a la Kerry, Bush and Cheney).
• He makes a lot of money from speaking (even though he doesn’t think it’s a lot, per his statements on the campaign trail).
• He has Swiss bank accounts and interests in tax havens like the Cayman Islands, Bermuda and Ireland.
• He donates a lot of money to the Mormon Church.
• He has a few household employees.

Here’s what you maybe didn’t know:

• Less than 1% of the interest earned by Romney was tax exempt. Far less.
• He claims foreign tax credits and has for years.
• Most of his income is passive, largely from investments and trusts.
• He filed his 2010 return on extension. As in really on extension (signed on 10/15/2011, the last day you can file if granted an automatic extension).
• He makes significant charitable donations to the Tyler Charitable Foundation, a private foundation in Boston.
• He made a few section 83(b) elections last year with respect to restricted stock.
• He gets a fairly good rate on health insurance (he’s self insured).

And here’s what Romney probably wishes you didn’t know:

• His first name is Willard.

You can see the returns here (downloads as a pdf and warning: they’re loooong).

I haven’t yet sorted through the trust returns or the 2011 estimates. I plan on doing that later today. If I find something worth reporting, I will. But I wouldn’t hold your breath that I’ll find anything astonishing.

The returns are – as predicted – remarkably unremarkable. Are we okay with moving on now?

(Editor’s note: Earlier today, I reported that Romney made donations to the Tyler Foundation which serves families whose children are undergoing treatment for epilepsy at Children’s Hospital Boston and UMass Memorial Children’s Medical Center. That was my mistake: the folks at Tyler Foundation responded to my request for more information by noting that Romney is not a donor to their organization. It is a different Tyler Foundation, which appears to be a private foundation. I regret the error.)

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With South Carolina behind us and Florida looming, we’re firmly in the throes of primary season. I feel strongly that it’s important to understand what it is that each candidate hopes to bring to the table in terms of tax incentives, tax policy and tax proposals. With that in mind, I contacted each of the candidates who has officially declared an intention to run for president. To keep it simple, I asked each of the candidates the same six tax-related questions.

Next in the series is Republican candidate Tom Miller. Here’s what Miller had to say:

taxgirl: What’s the single most important tax issue facing Americans today?

Miller: The current tax system simply doesn’t work. It is incredibly complex, ever changing, and seemingly punitive. Between five and ten times the size of the Bible (no one seems to agree on the exact size of the tax code), even IRS employs are unable to accurately explain basic tax code questions. A Government Accountability study in 2008 concluded that the IRS gave erroneous answers to tax payer questions in millions of cases. But this certainly isn’t a new problem, for decades the American people have been over charged and falsely penalized tens of millions of dollars simply because neither tax payer or IRS employee was able to decipher the tax code.

Of course the tax code is also used as a political weapon. A perfect example is the so called “green credits.” These credits promote consumer “behavior modification” by rewarding those who buy electric cars, add solar panels, etc. and reward companies who contribute financially to the politician. People who are financially unable or unwilling to adopt the “green” mantra are penalized through loss of credits and in some cases higher tax rates such as those levied on “gas guzzler” cars.

The current tax code must be scraped and replaced with a simple, non political, transparent flat tax system.

taxgirl: If you could only make one “quick fix” in terms of an extra credit, a disallowed deduction or the like, what would it be?

Miller: While I think that the only effective “quick fix” is to adopt the flat tax system, if I had to make one change to the current tax code, it would be to eliminate deductions. Deductions reward one group over another which is counter to the basic American concept of equality. Rent is typically much higher than the monthly mortgage payment would be for the same property. We reward those who have the financial ability to purchase a home with mortgage deductions while those who can not afford to do so are penalized with both higher costs and no deduction. This scenario of rewarding one group over another with tax deductions or penalties is replayed throughout our tax system. Taxes shouldn’t be about popular choices or preferential treatment. A flat tax puts control back into the hands of tax payers and doesn’t penalize success or lack there of.

taxgirl: The current federal estate tax exemption is $5 million for individuals or $10 million for married couples. Do you recommend lowering the exemption, boosting the exemption, keeping it at its current rate or something else altogether?

Miller: Part of the problem with our current tax system is the ebb and flow of ever evolving exemptions, deductions, and credits. I do not support exemptions of any kind. Instead, I support a flat tax of 14% for all income earned, levied against ALL Americans and businesses, without exception or exemption. This creates stability and insures that the costs of running this country are shared equally, without favoritism, political rewards, or confusion.

taxgirl: It has been suggested that the IRS should be eliminated. Do you believe that this makes sense, and if you do, what would you establish in its place?

Miller: Employing over 100,000 people and costing tax payers in excess of $11billion dollars annually, the IRS has become a behemoth. When you add the fact that nearly 16,000 lobbyists in Washington use their time, energy, and money to make the tax code MORE complex through lobbying for special tax breaks, loop holes, crack downs on their competition, etc. It becomes clear that a simple “fix” is impossible.

I support the immediate elimination of the IRS and the Federal Reserve. A simple, streamlined system that includes a flat 14% income tax without exception or exemption, managed by the US Treasury would, in my opinion be most effective.

taxgirl: Do you think that significant tax cuts are possible considering the current state of the economy, specifically with respect to the issues surrounding the debt ceiling and the federal deficit?

Miller: Tax cuts, as the term is used today, are an illusion. Almost half of the population doesn’t pay income tax at all. This means that the tax paying members of society shoulder a larger portion of the burden. In a country that prides itself on equality, the inequality under our current tax system is shocking. Giving a token tax cut to people who are already grossly over taxed because they are subsidizing non-tax paying members of society and political pet projects, is an appeasement designed to keep tax payers in line.

By adopting a flat income tax system, which taxes ALL without favoritism, or exception, we could remove all of the politics and much of the administration costs associated with taxation. This would not only increase tax revenue, it would reduce the incredible costs of tax collection and administration. This of course helps reduce the deficit and pulls us back from the debt ceiling.

taxgirl: And just for fun, if Uncle Sam handed you a huge refund check right now, what would you do with it?

Miller: Despite the complexity, like many Americans, I try to manage my Federal withholdings in an effort prevent the overpayment/refund or underpayment/owe problem.

But if I happened to come into a windfall, I would take a couple weeks off with some buddies to explore the Boundary Waters wilderness area of Superior National Forest.

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You can read more about Miller’s campaign here.

You can read more about other candidates in the series here:

Tax Talk 2012: Vern Wuensche
Tax Talk 2012: Lee Wrights

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There’s a reason that the stock market continues to make news: over half of Americans own individual stocks, mutual funds, or stocks in a 401(k) or IRA. According to a 2011 Gallup poll, 54% of Americans hold stocks in some form despite fears of a shaky market.

While reasons for investing in the stock market vary almost as much as the number of securities available, stocks have traditionally been valued as long term investments. Generally, when you purchase a share of stock, you’re buying a piece of a company. You, along with other shareholders, are banking on the fact that the company will continue to grow and that the value of your share will increase over time. In that regard, it’s a bit like legalized gambling.

Some stocks pay dividends, which are taxable in the year issued, but many do not. The real value of stock for many shareholders is growth. When the stock is sold, the difference between the sales price and basis is subject to capital gains tax.

Basis is, at its most simple, the cost that you pay for an asset together with any adjustments. With respect to stock, basis may be difficult to calculate since shareholders may hold stock over a period of many years; inherit or gift stock; or participate in a dividend reinvestment plan (DRP). Additionally, companies may split, merge or spin off their shares.

Remarkably, prior to this year, there were no statutory requirements for brokers or other financial service providers to identify basis for tax purposes; it was up to the individual taxpayer. That changed in 2011 as a result of the Emergency Economic Stabilization Act of 2008 (sometimes referred to the “bailout bill”). Brokers are now required to file an informational return with the IRS each year which reports gross proceeds from the sale of stock together with the taxpayer’s adjusted basis.

Beginning on January 1, 2011, brokers were required to report the basis of stocks purchased after that date. If the stock is in a mutual fund, exchange traded fund (ETF) or part of a DRP, the effective date for reporting is pushed off to January 1, 2012. The basis for debt securities, options and private placements must be reported after of January 1, 2013.

Brokers must not only report basis as the amount of cash paid or credited for the purchase of stock but must also reflect adjustments for commissions and fees as well as other events that affect basis, such as a stock split. Additionally, sales must be identified as short term or long term for capital gains purposes.

Of course, stock sales are rarely done in neat packages: shareholders don’t buy and sell the same number of shares each time. Selling less than an entire position in an account can cause confusion because it’s difficult to figure the cost basis for the shares which were sold compared to the shares which remain.

Under the new regulations, the basis for most stocks will be reported using the first-in, first-out (FIFO) method, meaning that shares which were acquired first will be considered sold first unless the customer specifically identifies the shares to be sold. The rules for mutual funds and DRP stock are a bit different: the adjusted basis of those shares will be reported according to the broker’s default method unless the customer says otherwise. To keep things simple, taxpayers may average the basis of stock held in a DRP; exceptions and special rules apply so ask your broker if you’re not sure whether your account qualifies for averaging.

For the most part, the burden to report the basis of stocks now falls squarely on the financial industry, making reporting capital gains and losses easier for taxpayers come tax time. Information about basis will be reported to taxpayers, as noted above, in a staggered fashion beginning this year on a form 1099-B, Proceeds from a Broker or Barter Exchange Transaction, or on a consolidated report. Those forms, showing those shares affected by the 2011 reporting requirements, should be popping up in your mailboxes now. If you don’t see yours, be patient: brokers have until February to get them to you.

However, this doesn’t mean that taxpayers should become complacent. Keeping excellent records is still a must, as is reviewing monthly statements and sale confirmations. You should also consider meeting with advisors on a regular basis rather than waiting until the end of the year to address any concerns about sales or tax consequences. Since taxpayers can choose a reporting method or identify specific shares for sale, planning opportunities for offsetting gains with losses abound. With some careful attention, the result of the new legislation could be a lower tax bill.

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This week, the eyes of the nation turn to South Carolina. No, not for the 37th Annual South Carolina Square and Round Dance Convention (though who among us doesn’t enjoy a good line dance?). They’ll be watching the South Carolina Republican primary, to be held on January 19, 2012. I know what you’re thinking: why does South Carolina matter? Aren’t the big guns Iowa and New Hampshire? Not necessarily. No Republican candidate for President has ever failed to win South Carolina and gone on to secure the nomination.

Apparently, as South Carolina goes, so goes the nation.

That’s why it was interesting to see the budget as proposed by Gov. Nikki Haley (R) this week. South Carolina voters are being issued a challenge this year as the legislature works to get spending under control without raising taxes, a challenge familiar to voters on the national scene.

Under Haley’s budget proposal, corporate income taxes would be phased out over four years. Individual taxpayers would receive a break, too, worth about $84 per taxpayer. Tax brackets would also be streamlined, reducing the number from six brackets to three.

Lower tax revenues, however, also mean fewer dollars to spend. As a result, Haley suggests cutting funding for public schools (and boosting charters, a notion popular among conservative voters) and pushing the responsibility for maintaining roads to counties. Her most controversial cuts include freezing wages for state employees, though the budget also includes increases for funding and employee health care. Haley acknowledged that this would be a bitter pill for state employees to swallow, saying:

You can’t give everything you want to give. Do I want state employees to have more? Yes. Was this year the year to do it? No, I think they deserve it. We have some of the hardest-working state employees out there.

I’m guessing that’s not going to be enough for state employees.

Pay freezes for government employees are a pretty popular budget cutting maneuver these days. The House of Representatives passed a similar bill that would affect federal employees but the final version didn’t make it through the Senate. Republicans generally supported the freeze while Democrats, including President Obama, have opposed the freeze.

But… why aren’t pay freezes on the table in lean times? It is in private enterprise. Why not in government? And yes, when I say government, I’m including Congress and their aides.

I don’t understand how we’ve gotten to the point where raises are automatic simply based on the passage of time. It used to be that raises were about achievement. Now, it’s simply for hanging around without getting fired. Isn’t that a bit like handing out a diploma merely because you showed up for school? Don’t misunderstand: I’m not begrudging anyone a raise. But when we start looking at how to save money, why should government employees get a pass?

I’m not so sure that those in the South Carolina legislature will share that sentiment. It will be interesting to see how the pay freezes and other parts of the budget will be embraced. It’s significant on a number of levels, including the fact the although Haley is in her second year as Governor, this represents her first official budget proposal. She’s touting pieces of it as important tax reform, a key platform issue. Tax reform and cost cutting… As South Carolina goes, so does the nation?

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“The income tax has made more liars out of the American people than golf has.” – Will Rogers

But what if it were easier? And what if the IRS made it nearly impossible to lie? What then?

Last year, IRS Commissioner Doug Shulman hinted that one way to reduce the potential for tax fraud was to have IRS prepare returns for taxpayers. That’s right, you wouldn’t have to prepare returns come tax time: the IRS would do it for you.

The idea is commonly referred to as a “simple return” or “ready return” (yes, it sounds like a snack you might buy at a Wawa). Under the plan, the IRS would send out tax returns that had already been completed with taxpayer identification and wage information. Taxpayers would merely review the returns for accuracy and sign at the bottom… kind of a “check the box if you agree” system. Taxpayers would have the opportunity to correct any mistakes prior to submitting the returns to the IRS.

Why not? The IRS already has a good chunk of taxpayer information on file. Add to that the obligations of employers, financial institutions and other third parties to provide wage and other income information to the IRS and there’s already a nice little database at the IRS’ disposal.

But putting those returns together is not cheap. Right now, the IRS simply doesn’t have the manpower to prepare returns for taxpayers and pursuant enforcement and collections activities and adding to the rosters (and thus, the budget) would be a major endeavor. Shulman, however, seems to believe that it might be worth considering.

A limited version of the plan is already in place in California. The plan, called (of course), ReadyReturn, is free to taxpayers who qualify in the Golden State. The state uses information from the prior year’s return along with information from the form W-2 to pre-fill a California state tax return. The return only needs to be reviewed by the taxpayer and signed. Brilliant, right? Then how come no one is signing on?

For one, the number of taxpayers who qualify is limited. To qualify, taxpayers must have filed a 2010 California resident return as single or head of household and no more than five dependents. Taxpayers must only have income from wages from a single employer and must claim the standard deduction with no credits other than the renter’s credit. Depending on who you are, the program was either wildly successful or a terrible failure. The pilot program, sent out to 50,000 taxpayers, had a 27% participation rate. That works out to about 13,500 taxpayers. The state has about 20 million taxpayers, making the overall participation rate less than 1/2%. In 2009, the number of participants in the program grew to 60,000 taxpayers, or about 3%. Hardly statistically significant. But the folks who are using the system appear to like it.

The program has also seen success outside of the U.S. Programs in Sweden and Denmark claim participation rates of over 75% (downloads as a pdf). Could the IRS duplicate those kinds of results?

I’m not so sure.

Notwithstanding the costs – which would be huge – to convert to such a system in the U.S., I don’t think that U.S. taxpayers would embrace a system where the government prepared their returns. For one, U.S. taxpayers aren’t enthralled with the feds these days. Most are seeking less government interference, not more. I don’t think many taxpayers would trust the government with their own finances; after all, the government can barely manage its own. Further, if you’ve ever seen a substitute return (one prepared by the IRS for a taxpayer), you know that there’s a financial incentive to prepare a return that produces the most revenue for the government, not what’s most advantageous to the taxpayer. And the benefit of that to taxpayers is what, exactly?

The underlying problem isn’t that taxpayers don’t have the wherewithal to fill out a simple tax form (and keep in mind that this option would only be available to taxpayers with simple returns): it’s that the Tax Code is far too complicated as it stands. The simple tax forms aren’t the problem and yet, those are the very returns the IRS seeks to make more, well, simple with this kind of plan. We keep skirting the real problem: a tangled, confusing Tax Code. I would suggest that reform, not pre-filled returns, is a better, more economical answer.

What do you think?

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My seven year old has a penchant for getting herself into trouble. She’s that kind of kid who pushes boundaries to see exactly how far she can get. Lucky for her, she also has a pretty quick wit and a couple of looks up her sleeve. When she gets into trouble, she peers up at me and begs, “One more chance!” You, of course, know exactly why she does this: I usually give in.

Yeah, I know better. But I do it anyway. I feel like maybe this time – this time – she’ll learn her lesson.

The IRS isn’t so very different. In a surprise move, the IRS has announced that they’re giving “One more chance!” to those folks with offshore accounts.

It’s deja vu all over again. In February 2011, IRS Commissioner Doug Shulman announced the Offshore Voluntary Disclosure Initiative (OVDI), saying:

As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them. (emphasis added)

Only last year, I totally expected it. This move, I’ll admit, I didn’t see coming. I thought “once and for all” really meant once and for all.

I guess $4.4 billion can change your mind pretty quickly. That’s the total amount of taxes collected by the IRS under the previous two programs, one in 2009 and the most recent in 2011. That total is expected to climb as the IRS processes the 2011 disclosures, including those which were extended due to Hurricane Irene.

The new program hopes to further increase compliance and – hopefully – add some more dollars to the Treasury. But there’s a catch – and it’s a pretty big one: there are no rules.

Okay, maybe that’s a bit dramatic. There are some rules. The IRS just reserves the right to change them at any time.

For example, there’s no deadline for compliance. That’s the kind of thing that is going to give tax professionals like me a headache. We like deadlines. But the IRS has not set a deadline. They can end the program at any time.

Also? The existing terms of the program may change at any time going forward. According to the IRS, they “may increase penalties in the program for all or some taxpayers or defined classes of taxpayers.”

So, er, I guess the strategy is to keep taxpayers guessing? Or encourage compliance as early as possible?

For the record, as it exists right now, individuals who participate in the program will pay a penalty of 27.5% (up from 25% in the 2011 program) of the highest aggregate balance in foreign bank accounts or value of foreign assets during the eight full tax years prior to the disclosure. As in 2011, if circumstances warrant, some taxpayers will be eligible for penalties of just 5% or 12.5%.

To qualify, participants in the program must file all original and amended tax returns for up to years prior to the disclosure. Payment must also be made for the taxes and interest due as well as applicable penalties.

Further, taxpayers who have come forward since the previous OVDI closed last year will be eligible to participate in the new program.

Again, that could all change. But that’s how it stands as of now.

For its part, the IRS believes that this new opportunity is a good one for taxpayers. Commissioner Shulman offers:

As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.

This is a tricky area. I’ve been critical of the underlying laws requiring disclosure. I believe that it pulls too many taxpayers into noncompliance by accident. Under the rules, taxpayers who pay taxes on their foreign income but don’t properly disclose the specific accounts are breaking the law. And taxpayers who have modest foreign accounts for things like paying tuition for study abroad programs, internships or travel, can find themselves noncompliant. Also at risk? Executives and workers in the US on temporary visas and dual citizens. Not your run of the mill tax scofflaws as the IRS would paint them. But folks who just didn’t understand and comply with the rules.

So, in that regard, I think that these efforts to give taxpayers “One more chance!” make sense. I’m just not a fan of the constantly moving target now in effect.

Yes, yes, taxpayers should get compliant as soon as possible. And I don’t believe in rewarding those who wait.

But – and I know this is crazy talk – maybe there’s an alternative to disclosure program after disclosure program meant to weed out the bad guys? Maybe we should change the rules altogether. Why not rewrite the laws so that people who weren’t intended to get caught up in the whole mess to begin with aren’t affected? I know that would take some effort on the part of Congress and (deep breath) cooperation (and goodness knows that’s asking for a lot) but wouldn’t it make more sense?

*Sigh* For now, it is what it is.

Of course, if the “One more chance!” thing doesn’t work, we can always try what we do to the seven year old: straight to bed with no TV and no more dancing in your room.

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So now that the payroll tax cut has been extended for two months, what does that mean for taxpayers?

Well, even though the collective wisdom is that Congress will hammer out a longer term deal, the IRS gets to play a game of “let’s put a bunch of provisions in place within the space of a few days only to turn around and undo it in a few weeks.” Sure enough, the IRS released Newswire Issue IR-2011-124 today advising that the cuts have been extended on wages paid through February 29, 2012.

The IRS further advised that:

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

More importantly, the IRS has advised – since Congress didn’t give this much play at all – that the law includes a new “recapture” provision for employees who will be paid more than $18,350 in wages during those first two months. The Social Security cap for 2012 is $110,100 so that Social Security taxes are not imposed on wages over that amount; there is no corresponding cap for Medicare. If you average the cap out over the year, $18,350 would be the equivalent of two months’ pay.

With me so far?

Under the new law, an additional income tax will be imposed on those taxpayers who receive more than $18,350 in wages during that two month period. The tax is an amount equal to 2% of the amount of wages received during the two-month period in excess of $18,350 (and not greater than $110,100).

The IRS notes that the “recapture” tax is an add-on to income tax liability in 2012 and is not subject to reduction by credits or deductions. The extra tax is payable in 2013 when the taxpayer files his or her federal income tax return.

And those new tax forms I said we’d need? They’re coming, too.

The crazy part of all of this is that the IRS will scramble to get all of this in place for… what? It’s all subject to change depending on which way the wind blows or what kind of mood Congress is in. Costly and inefficient. Thanks, Congress.

With all of this in mind, the IRS also advised that it will issue additional guidance as needed.

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Ooh, talk about efficiency. Here I was totally expecting the Senate to at least pretend to entertain extending the payroll tax cut until tomorrow. Instead, they rushed right into a “no” vote a day early.

The charge was led by Senate Republicans despite statements by House Speaker (R-OH) in support of an extension. Boehner said about the cuts that “there’s no question that the payroll tax relief in fact helps the economy.” His contemporaries don’t appear to agree with Sen. Jon Kyl (R-AZ) telling Fox News Sunday that “the payroll tax holiday has not stimulated job creation.”

The vote on the bill, known as S.1917, was almost entirely along party lines. The bill would have extended the payroll tax cut for workers and expand the cuts to employers. To pay for the cuts, the bill would have imposed a 3.25% surcharge, or “millionaire’s tax”, on those taxpayers with income over $1 million.

A three-fifths majority was required to move the bill forward. Supporters of the bill could only muster 51 votes with 49 of those votes coming from Democrats. Sen. Susan Collins (R-ME) was the only Republican to vote for the measure while Sen. Joe Manchin (D-WV) and Sen. Jon Tester (D-MT) were the only Democrats to vote against it.

The Republicans have offered an alternative plan, sponsored by Sen. Dean Heller (R-NV), which would extend the payroll tax cuts for one year, paid for by a freeze in federal workers’ pay together with weeding out more federal jobs. That plan, which was introduced yesterday, remains in the Senate. A vote to proceed on the bill failed earlier today by a vote of 20-78.

Despite the back and forth, it’s likely that the payroll tax will probably be voted in by the year end. Senate Republican Minority Leader Mitch McConnell (R-KY) wouldn’t rule out an eventual compromise earlier, saying:

It’s important to underscore, however, that the only reason we’re even talking about extending a temporary cut in the payroll tax is because President Obama’s economic policies have failed working Americans.

Considering that Congress has failed to put together any sort of comprehensive economic policy, I don’t know that McConnell is wise to start with the finger pointing. But apparently, judging from the lack of movement in Congress, he doesn’t have anything better to do.

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It was originally touted as the worst thing that could possibly happen. Okay, the second worst. Yet, the failure to meet the self-imposed Congressional deadline for tweaking the budget came and went last week with relatively little drama. That was surprising after the dire predictions made by members of Congress and the President which sounded suspiciously like the terrible warnings that they made after they couldn’t manage to remedy the debt ceiling mess.

But, of course, that’s Congress for you. They’ve been treating spending cuts like a bad diet: dreaming up consequences and then deciding that it’s not really so bad. It’s the whole, “I must lose five pounds by Thanksgiving” but then reaching for another pumpkin cupcake after dinner because they figure they can work it off later. Only with Congress, later never actually comes.

Sen. Pat Toomey (R-PA) who managed to put forth a sensible revenue alternative last week has apparently fallen off the fiscal responsibility wagon. He’s joined the “let’s do it tomorrow” crew by recommending that the automatic spending cuts not be so automatic. Of course, we knew that was coming. I just didn’t see Toomey leading the charge.

Toomey, a member of the “Super Committee” (which really, really needs another name now), didn’t support the law which made $1.2 trillion in cuts automatic if the budget wasn’t remedied. The law passed anyway. Taxpayers breathed a sigh of relief at the time because we had a solution. But it was a fake solution, of course, because some members of Congress (apparently Toomey included) never took the deadline seriously.

The real problem? The automatic cuts don’t make everyone happy.

I know, you’re thinking that’s the whole point of the Super Committee in the first place… to work out which cuts actually needed to happen so that we didn’t have to rely on the automatic cuts. But that would be the sensible answer. The real answer was that the Super Committee was apparently a vehicle for foot stomping so that later, members of Congress could argue that they didn’t get their way.

Toomey is now arguing that the automatic cuts will undermine the military. Maybe that’s a fair statement. But why argue it now? Why not have cut a deal – when he had the chance – to save military programs if that’s what he felt was important?

I don’t want to hear that it was impossible. It wasn’t impossible. For more than 200 years, our country has managed to pay the military and keep the lights on. Why this Congress can’t make this happen is mind-boggling.

Of course, the cuts won’t take effect until 2013 which means that for all of the histrionics, Congress has plenty of time to keep passing the blame and making dire threats. In the meantime, President Obama has threatened to veto an attempt to circumvent the automatic cuts which should make for an interesting 2012.

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