New Reporting Requirement for Individuals with Foreign Financial Assets

 

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn’t provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn’t reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give this office a call to discuss your particular situation.

 

For Form 8938 and instructions from Stuart Rohatiner, CPA, JD click here

Need additional information about this article? Please contact my office at 305-868-3600 ext 3105

January 2012 Taxes Individual Due Dates

January 3– Time to Call For Your Tax Appointment

Image by 401K via Flickr

January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded.

January 10 – Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.

January 17 – Individual Estimated Tax Payment Due

It’s time to make your fourth quarter estimated tax installment payment for the 2011 tax year. Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day.

January 17 – Farmers & Fishermen Estimated Tax Payment Due

If you are a farmer or fisherman whose gross income for 2010 or 2011 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2011 using Form 1040-ES. You have until April 17, 2012 to file your 2011 income tax return (Form 1040). Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day. If you do not pay your estimated tax by January 17, you must file your 2011 return and pay any tax due by March 1, 2012 to avoid an estimated tax penalty.

January 31 – File 2011 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payments File 2011

Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar).

January 2012 Business Due Dates

January 17 – Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, January 17 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2011. This is also the due date for the nonpayroll withholding deposit for December 2011 if the monthly deposit rule applies. Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day. As of 1/1/11, federal employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.

January 31 – 1099s Due To Service Providers

If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. “Services” can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012 (April 2, 2012 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance.

Payments that may be covered include the following:

• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish

• Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)

• Dividends and other corporate distributions

• Interest

• Amounts paid in real estate transactions

• Rent

• Royalties

• Amounts paid in broker and barter exchange transactions

• Payments to attorneys

• Payments of Indian gaming profits to tribal members

• Profit-sharing distributions

• Retirement plan distributions

• Original issue discount

• Prizes and awards

• Medical and health care payments

• Debt cancellation (treated as payment to debtor)

January 31 – W-2 Due to All Employees

All employers need to give copies of the W-2 form for 2011 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.

January 31 – File Form 941 and Deposit Any Undeposited Tax

File Form 941 for the fourth quarter of 2011. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

January 31 – Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2011 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

January 31 – File Form 943

All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2011. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 – W-2G Due from Payers of Gambling Winnings

If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2011.

January 31 – File Form 940

Federal Unemployment Tax File Form 940 (or 940-EZ) for 2011. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 – File Form 945

File Form 945 to report income tax withheld for 2011 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

4 more Credit Suisse bankers charged in tax case

By JESSICA GRESKO

Associated Press

WASHINGTON — Federal prosecutors in Virginia have charged four more bankers with Zurich-based Credit Suisse Group with conspiracy in what they say was a long-running scheme to help U.S. taxpayers hide as much as $4 billion in assets.

Prosecutors originally charged four people in the scheme in February, so the charges announced Thursday bring the total number of people charged up to eight. Charging documents filed in the case do not specify what bank the group worked for, but The Associated Press previously reported its identity.

Prosecutors wrote in February that as of late 2008 Credit Suisse was maintaining thousands of secret accounts for U.S. customers with approximately $3 billion in assets, but that amount was increased to $4 billion in a document filed Thursday. Prosecutors previously alleged that the conspiracy goes back as far as 1953.

The four individuals charged Thursday were: Markus Walder, who was the head of North American Offshore Banking; Susanne D. Ruegg Meier, a member of the bank’s senior management; Andreas Bachmann and Josef Dorig, both of whom worked for a Credit Suisse subsidiary. Court documents did not include Dorig’s nationality, but all three others charged are Swiss.

Credit Suisse itself is not charged in the case, but prosecutors wrote that bank officials “knew and should have known that they were aiding and abetting U.S. customers in evading their U.S. income taxes.”

“Credit Suisse is committed to a fully compliant cross-border business. Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the U.S. authorities in an effort to resolve these matters,” the bank said in an emailed statement.

The four individuals previously charged in the case were Italian citizen Marco Parenti Adami and Swiss citizens Emanuel Agustoni, Michele Bergantino and Roger Schaerer. Schaerer has dual citizenship with the United States.

Revised court documents released Thursday discuss how the group is alleged to have worked with 35 clients including people in New York, New Jersey, California, Florida and Virginia to conceal assets and income in secret accounts. The original court papers noted 17 customers, none of them by name.

Deadline looms for US citizens to file tax returns and FBAR reports

Image by Getty Images via @daylife

Attention! United States persons meaning US citizens residing abroad, dual citizens with the United States, green card holders (Permanent Residents) and US residents for income tax purposes, deadlines are fast approaching for compliance with US reporting and filing obligations. Specifically, for individuals, there are two tax reporting and filings due this month: the Report of Foreign Bank and Financial Accounts (the ‘FBAR’) and the US Individual Income Tax Return.

What is an FBAR? The FBAR is used to report a financial interest in or signature authority over a foreign financial account. The report for the calendar year 2010, although linked to the US Individual Income Tax Return, is not sent to the US Internal Revenue Service. It goes to the US Department of the Treasury and must be received by the Treasury on or before June 30th 2011. Postmarked by June 30th is not acceptable, and note that no extension for later filing is available.

Who Must File an FBAR?

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A very common misconception is that only one account has to be over $10,000. This is incorrect. It is the aggregate value of all foreign accounts. If the individual has five accounts with $2,000 in each of four, and $3,000 in number five, all accounts must be reported. Foreign financial accounts also mean accounts held jointly with others, such as foreign national spouses, friends, and as guardian for children, etc.

What kind of Financial Account are we talking about?

Foreign Financial Accounts are accounts and financial interests held in Bermuda or other jurisdictions outside the United States by US persons – see description above.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures, or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

This comprehensive list includes foreign pensions, foreign whole of life insurance policies, foreign annuities, and investment accounts holding foreign mutual funds, foreign money market funds and related type accounts.

What does a Financial Interest mean?

A United States person has a financial interest in a foreign financial account for which:

(1) the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following:

(a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;

(b) A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;

(c) A partnership in which the United States person owns directly or indirectly:

(i) an interest in more than 50 percent of the partnership’s profits or

(ii) an interest in more than 50 percent of the partnership capital;

(d) A trust of which the United States person:

(i) is the trust grantor and

(ii) has an ownership interest in the trust for United States federal tax purposes.

(e) A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

(f) Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

This is a daunting list of financial interest situations and requires complex research in many instances. Those who may have signatory authority, but no financial interest, are generally assessed more on a case by case basis due to the complex nature of a compound structure.

Why do you have to report these accounts and financial interests?

Most importantly, the FBAR reports are also linked to new reporting requirements under the US Internal Revenue Service initiative and part of the Hire Act legislated by US Congress. The Foreign Account Tax Compliance Act FATCA as it is called placed new and very significant reporting requirements on foreign financial entities (FFE) and non-financial foreign entities (NFFS): your foreign bank, your foreign trustee, your foreign pension administrator, your foreign mutual fund investment provider, your foreign insurance company, your foreign small business private corporation if you own shares and others.

FFEs are required to report all US person’s accounts, balances, transactions, and identifiers to US Internal Revenue Service. Non-cooperation with this mandate by FFEs will trigger an onerous withholding tax penalty on the foreign financial institutions. It is an understatement to say that this new mandate has generated controversy offshore.

These are complex and taxing times for US persons abroad. The discussion above only covers one required form. There are a number of others that are linked to the FBAR that US citizens abroad may have no knowledge of. A good rule to follow is that every time you open/close an account, transfer monies, receive/give gifts, earn, invest, sell/buy an acquisition, die or otherwise implement estate and succession planning, there is a tax consequence.

If you misinterpret IRS instructions, miss deadlines, or inadvertently file incomplete returns, the penalties range from significant to very, very severe. Therefore, it is not recommended, when it comes to US and international tax matters, to rely upon the advice of anyone who does not have an extensive background, license and most importantly competency and experience in US and international tax matters. Well intended friends, foreign brokers, foreign counsel, foreign trustees, foreign pension administrators or even professionals such as CPAs who have had no experience in international tax law practice (they specialized in audit or investments) may not have the expertise to understand current US tax law regarding international tax issues affecting US persons residing abroad.

It is always preferable not to be exposed to significant tax errors or missed tax obligations. If you are audited by US Internal Revenue Service, you may be asked to provide the names of the foreign advisors who provided the advice to you, not a comfortable position to be in.

US Internal Revenue Service has instituted a complex licensing program for tax professionals who advise and prepare US tax returns for compensation. The practitioners are required to take a competency exam, demonstrate tax experience, complete continuing education programs every year, pass a background check (with fingerprints for non-CPA practitioners), be current on all personal individual and related tax reporting and liabilities, and submit to announced office audits by IRS personnel. The Service has implemented severe fines, disbarment from practice before the US Internal Revenue Service, and criminal prosecution for violations of professional conduct and lack of due diligence in conducting a tax practice.

The Internal Revenue Service has made it very clear through various pronouncements, meetings with experienced tax professional groups and in speeches by the Commissioner, Mr. Douglas Shulman, that there will be no relenting of the pressure to bring US persons back into compliance with US tax law.

American Citizens Abroad are aggressively lobbying Congress and various interested representatives on the disincentives of the current US citizenship-based tax system.

This could be a taxing summer for those not in compliance.

By Martha Myron

Should We Cut Corporate Taxes By Raising Rates on Investors?

Howard Gleckman | Posted on March 29, 2011, 5:35 pm

 

While there seems to be growing agreement in Washington that the U.S. needs to cut its tax rate on corporations, there is (surprise) no consensus at all on how to pay for this. One way: Raise taxes on capital gains and dividends.

This idea was one element of the broad tax reforms proposed last year by the chairs of President Obama’s deficit reduction commission, Alan Simpson and Erskine Bowles, and by the Bipartisan Policy Center’s deficit panel, chaired by Alice Rivlin and Pete Domenici. Both panels relied in part on analysis in a paper by my Tax Policy Center colleagues Eric Toder, Ben Harris, and Rosanne Altshuler.  The plan has so far received little attention. It deserves more.

The plan would tax dividends and long-term capital gains at ordinary income rates, with a maximum rate on gains of 28 percent–compared to 15 percent today–and use the revenue to cut corporate tax rates. Those of you with long memories may remember these investment rates were the law back in 1997.

Eric, Ben, and Rosanne figure the revenue this idea would generate would allow Congress to cut the corporate rate from 35 percent to about 26 percent, assuming corporations and investors do not change behavior (by, say, reducing dividend payments). Since they almost certainly will adjust, a redesign would probably buy less of a rate cut. At a roundtable last Friday sponsored by Tax Analysts, Congressional Research Service economist Jane Gravelle suggested it might get rates down to just 30 or 31 percent. Still, that ain’t nothing.

Here’s a bit of background to help explain what this is all about: Economists believe that all income should be taxed once but only once. By that standard, the current taxation of corporations is a mess. In theory, corporate income is double-taxed—once at the firm level and again when income is distributed to shareholders through dividends or capital gains. In reality, some is taxed repeatedly while some is not taxed at all.

To avoid this, many economists have argued for a fully integrated system where corporate income is paid either entirely at the business level or fully by shareholders. In fact, the vast majority of U.S. firms already do this by organizing themselves as pass-through entities such as S corporations and partnerships. In this model, owners pay tax on their individual returns but their business is not taxed at all.

Matters are much more complicated for other corporations, however. Some profits are double-taxed. But others are never taxed at the business level, largely thanks to the ability of multinationals to shift income to low-tax countries and deductible expenses to the U.S. Worse, in that environment, high corporate rates discourage investment in the U.S.

Similarly, foreign investors and tax-exempt shareholders (such as pensions) pay no tax on a big chunk of corporate profits. Another slug of capital gains goes untaxed because investors die and their unrealized gains pass tax-free to their heirs.

The challenge in this environment is to figure out how to reduce the corporate rate so it is competitive with the rest of the world, make sure that profits are somehow taxed, and not increase the deficit by tens of billions of dollars annually.  The Congressional Budget Office figures that over the next decade corporations will pay about $400 billion-a-year in income taxes.

That brings us to the option of raising taxes on investors. Shifting some taxes on corporate profits from firms to shareholders has some obvious advantages. The biggest may be that it would reduce those disincentives for companies to invest at home. A tax on shareholders is based on where they live, rather than where their profits are earned. Thus, a lower corporate tax and a higher shareholder tax may, on balance, help keep investment in the U.S.

The TPC paper also figures it would be more progressive than the current regime. Since some share of corporate taxes is paid by workers (just how much is a matter of theological debate among economists), lowering the corporate rate would raise their after-tax earnings. At the same time, TPC figures 70 percent of the higher individual investment taxes would be paid by the top one percent of earners.

There are lots of issues to sort out with such a shift. But it is certainly worth considering.

Summary for Week ending February 5th

Sunday, February 06, 2011

Note: here is the economic schedule for the coming week.

Two ongoing stories …
• Egypt: From the NY Times: Muslim Brotherhood Join Egypt Talks

As Western powers backed the Egyptian vice president’s [Omar Suleiman] attempt to defuse a popular uprising, the outlawed Muslim Brotherhood joined other groups meeting with him on Sunday in what seemed a significant departure in the nation’s uprising and political history.

• Europe: From the WSJ: European Leaders Clash at Summit

Sharp disagreements opened up among European Union leaders at a summit here over a German-led plan to boost the competitiveness of weaker euro-zone economies, threatening to unsettle recently calm European financial markets.

Below is a summary of the previous week, mostly in graphs.

• January Employment Report: 36,000 Jobs, 9.0% Unemployment Rate

The Employment Situation report contained mixed signals with a sharp drop in the unemployment, but few payroll jobs added. The BLS mentioned that severe weather impacted the payroll report. The following graph shows the employment population ratio, the participation rate, and the unemployment rate.
The unemployment rate decreased to 9.0% (red line).

The Labor Force Participation Rate declined to 64.2% in January (blue line). This is the lowest level since the early ’80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.)

The Employment-Population ratio increased to 58.4% in January (black line).

The second graph shows the job losses from the start of the employment recession, in percentage terms from the start of the recession. The dotted line is ex-Census hiring.

For the current employment recession, the graph starts in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early ’80s recession with a peak of 10.8 percent was worse).

The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined to 8.407 million in January.

These workers are included in the alternate measure of labor underutilization (U-6) that declined sharply to 16.1% in January from 16.7% in December. Still very high, but improving.

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 6.21 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.44 million in December. This is still very high.

Summary

This was a decent report with two obvious exceptions: the few payroll jobs added, and the slight decline in the average workweek – both potentially weather related.

The best news was the decline in the unemployment rate to 9.0% from 9.4% in December. However this was partially because the participation rate declined to 64.2% – a new cycle low, and the lowest level since the early ’80s.

The 36,000 payroll jobs added was far below expectations of 150,000 jobs, however this was probably impacted by bad weather during the survey reference period. If so, there should be a strong bounce back in the February report.

• Q4 2010: Homeownership Rate Falls to 1998 Levels

The Census Bureau reported the homeownership and vacancy rates for Q4 2010 this week.

The homeownership rate was at 66.5%, down from 66.9% in Q3. This is at about the level as 1998.

The homeownership rate increased in the ’90s and early ’00s because of changes in demographics and “innovations” in mortgage lending. Some of the increase due to demographics (older population) will probably stick, so I’ve been expecting the rate to decline to around 66%, and probably not all the way back to 64%.

The homeowner vacancy rate increased to 2.7% in Q4 2010 from 2.5% in Q3 2010.

This has been bouncing around in the 2.5% to 2.7% range for two years, and is slightly below the peak of 2.9% in 2008.

A normal rate for recent years appears to be about 1.7%.

The rental vacancy rate declined sharply to 9.4% in Q4 2010, from 10.3% in Q3 2010.

This fits with the recent Reis data showing apartment vacancy rates fell in Q4 2010 to 6.6%, down from 7.1% in Q3 2010, and 8% in the Q4 2009.

This also fits with the NMHC apartment market tightness index that has indicated tighter market conditions for the last four quarters.

• ISM Manufacturing Index increased in January

PMI at 60.8% in January, up from 58.5% in December. The consensus was for a reading of 57.9%. ISM’s New Orders Index registered 67.8 percent in January, and ISM’s Employment Index registered 61.7 percent. Here is a long term graph of the ISM manufacturing index.

This was a strong report and above expectations. The new orders and employment indexes were especially strong.

• Private Construction Spending decreased in December

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Both private residential and non-residential construction spending decreased in December.

Residential spending is 66.5% below the peak in early 2006, and non-residential spending is 37% below the peak in January 2008.

Sometime this year (in 2011), residential construction spending will probably pass non-residential spending. Although I expect the recovery in residential spending to be sluggish, residential investment will probably make a positive contribution to GDP and employment growth in 2011 for the first time since 2005. And that is one of the reasons I think growth (both GDP and employment) will be better in 2011 than in 2010.

• U.S. Light Vehicle Sales increased in January to 12.62 million SAAR

Based on an estimate from Autodata Corp, light vehicle sales were at a 12.62 million SAAR in January. That is up 17.5% from January 2010, and up 1.0% from the sales rate last month (Dec 2010). This is the highest sales rate since August 2008, excluding Cash-for-clunkers in August 2009. This was at the consensus estimate of 12.6 million SAAR.

This graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate. The current sales rate is still near the bottom of the ’90/’91 recession – when there were fewer registered drivers and a smaller population.

• ISM Non-Manufacturing Index showed expansion in January

The January ISM Non-manufacturing index was at 59.4%, up from 57.1% in December. The employment index showed faster expansion in December at 54.5%, up from 52.6% in December. Note: Above 50 indicates expansion, below 50 contraction.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

• Other Economic Stories …
• Chicago PMI Strong
• Fed: Little Change in Lending Standards in January Loan Officer Survey, Outlook “more upbeat”
• Personal Income and Outlays Report for December
• Restaurant Performance Index Shows Expansion in December
• ADP: Private Employment increased by 187,000 in January
• Fed Chairman Bernanke: The Economic Outlook and Macroeconomic Policies
• Unofficial Problem Bank list at 946 Institutions
by CalculatedRisk on 2/06/2011 08:50:00 AM
Best wishes to all!

 

 

House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric

By Robert Greenstein and James R. Horney,
Center on Budget and Policy Priorities

House Republican leaders yesterday unveiled major changes to House procedural rules that are clearly designed to pave the way for more deficit-increasing tax cuts in the next two years. These rules stand in sharp contrast to the strong anti-deficit rhetoric that many Republicans used on the campaign trail this fall. While changes in congressional rules rarely get much public attention, these new rules — which are expected to be adopted by party-line vote when the 112^th Congress convenes on January 5 — could have a substantial impact and risk making the nation’s fiscal problems significantly worse.

Current House rules include a pay-as-you-go requirement that any tax cut or spending increase for a mandatory (i.e., entitlement) program must be offset by cuts in other mandatory spending or increases in other taxes, in order to avoid increasing the deficit. [1] Current rules also bar the House from using budget “reconciliation” procedures — special rules that facilitate speedy action on specified budget legislation — to pass bills that would increase the deficit. The new rules would alter and greatly weaken these commonsense measures:

• The new rules announced December 22 would replace pay-as-you-go with a much weaker, one-sided “cut-as-you-go” rule, under which increases in mandatory spending would still have to be paid for but tax cuts would not.In addition, increases in mandatory spending could be offset only by reductions in other mandatory spending, not by any measure to raise revenues such as by closing unproductive special-interest tax loopholes. For example, the House would be barred from paying for continuation of a provision enacted in 2009 (and extended in the just-enacted tax compromise) that enables many minimum-wage families to receive a full, rather than a partial, Child Tax Credit by closing wasteful tax breaks for multinational corporations that shelter profits overseas. Use of such an offset would violate the new House rules because the provision expanding the Child Tax Credit for working-poor families counts as spending and hence could not be paid for by closing a tax loophole. Yet the same new rules would enable the House to expand tax loopholes for multinational corporations and wealthy investors without paying for those tax breaks at all, because any tax cut, no matter how costly or ill-advised, could now be deficit financed.
• The new rules would stand the reconciliation process on its head , by allowing the House to use reconciliation to push through bills that greatly increase deficits as long as the deficit increases result from tax cuts, while barring the use of reconciliation in the House for legislation that reduces the deficit if that legislation contains a net increase in spending (no matter how small) that is more than offset by revenue-raising provisions.

By itself, this change in the House rules governing reconciliation would have a limited effect. Reconciliation rules are most important in the Senate because they prohibit use of a filibuster to block a vote on reconciliation legislation, enabling such legislation to pass the Senate with a majority vote instead of the 60 votes needed to end a filibuster (filibusters cannot be used in the House on any legislation). This change in House rules would not affect the current Senate rule barring the use of reconciliation to pass deficit-increasing legislation. But, revising the House rules to allow use of reconciliation to push through deficit-financed tax cuts could well be the first step toward elimination of all rules restricting the use of reconciliation for that purpose. After all, the current bar on using the reconciliation process to pass budget-busting tax cuts (and budget-busting spending increases) was made part of House and Senate rules only in 2007, over GOP opposition.

Sadly, we’ve been here before. In the 1990s, when pay-as-you-go rules applied to both spending increases and tax cuts and Congress used reconciliation solely to enact deficit-reduction packages, the country went from large deficits to a balanced budget. (A strong economy obviously helped as well.) But in the early 2000s, with Republicans controlling Congress and President Bush in the White House, Congress set aside pay-as-you-go and turned reconciliation on its head, using it not to reduce deficits but instead to push through costly, unpaid-for tax cuts in both 2001 and 2003. Previously, reconciliation had only been used for deficit reduction.

The results are plain to see. The Bush-era tax cuts were a significant factor in the return to large deficits after 2001, contributing $2.6 trillion (including added interest costs on the national debt) to the budgetary deterioration between 2001 and 2010. House Republicans now plan to restore the very type of permissive budget rules that contributed markedly to that fiscal deterioration.

Moreover, measures to scuttle the current, even-handed pay-as-you-go rule and to allow use of the reconciliation process to increase the deficit are even more indefensible today than such steps were in 2001 — because now we already have deficits that exceed $1 trillion a year.

It should be recognized that the House rules unveiled December 22 go to great lengths to make clear the intent of the new Republican majority to pass an array of tax-cut measures that will significantly enlarge deficits. Not only do the new rules eliminate the pay-as-you-go restriction on tax cuts that are not paid for, but the rules also specifically authorize the Chairman of the House Budget Committee to ignore for purposes of budget enforcement rules all of the costs of:

• Extending or making permanent the 2001 and 2003 Bush tax cuts (including the tax cuts for the highest-income taxpayers) and relief from the Alternative Minimum Tax;
• Extending or making permanent the hollowing out of the estate tax included in the just-enacted tax-cut compromise legislation; and
• Legislation to provide a major, costly new tax cut — a deduction equal to 20 percent of gross income for “small businesses,” which Republican lawmakers typically have defined very expansively so the term covers a vast swath of firms and wealthy individuals that do not resemble what most Americans think of as a “small business.”

New Rules Allow Imposition of Spending and Revenue Limits that Members Have Not Been Allowed to See, Debate, or Vote On Another aspect of the proposed rules also seems at odds with promises made in the campaign about what a new Republican majority would do. There was much talk about increasing the transparency of the legislative process, and some proposals in the new rules package would do that. But the new rules also include a stunning and unprecedented provision authorizing the Chairman of the Budget Committee elected in the 112th Congress, expected to be Representative Paul Ryan of Wisconsin, to submit for publication in the Congressional Record total spending and revenue limits and allocations of spending to committees — and the rules provide that this submission “shall be considered as the completion of congressional action on a concurrent resolution on the budget for fiscal year 2011.” In other words, in the absence of a budget resolution agreement between the House and the Senate, it appears that Rep. Ryan (presumably with the concurrence of the Republican leadership) will be allowed to set enforceable spending and revenue limits, with any departure from those limits subject to being ruled “out of order.” This rule change has immediate, far-reaching implications. It means that by voting to adopt the proposed new rules on January 5, a vote on which party discipline will be strictly enforced, the House could effectively be adopting a budget resolution and limits for appropriations bills that it has never even seen, much less debated and had an opportunity to amend. (There is no requirement for Representative Ryan to make his proposed spending and revenue limits available to Members or the public before the vote on the new rules.) This would, among other things, facilitate the implementation of incoming Speaker John Boehner’s radical proposal to cut non-security discretionary funding for fiscal year 2011 by $101 billion (or 21.7 percent) below the level appropriated for 2010, as adjusted for inflation without any consideration or vote on that proposal. Once Rep. Ryan places in the Congressional Record discretionary funding limits set at the Boehner level, they will become binding on the House, and any attempt to provide funding levels that allow for less severe cuts will be out of order. This imposition of budget limits without debate or votes hardly seems consistent with the promised increase in transparency in the legislative process, much less with sound — or fair — budget practices.

The new rules also specifically empower the Budget Committee Chairman to exempt from budget enforcement rules the fiscal effects of repealing the health reform law. The Congressional Budget Office has estimated that the health reform law will reduce deficits by more than $100 billion over the first ten years and by roughly $1 trillion or more over the second ten years. Its repeal would increase deficits by those amounts.

Finally, the new rules would pave the way for a further widening of the already very large gap between rich and poor. While the new rules would allow the House to make permanent the Bush tax cuts for high-income families, continue the new estate-tax provisions that benefit only the top one-quarter of one percent of estates (those with a value in excess of $10 million for a couple, and create a big new tax break for “small businesses” — all without paying for the costs — they would prohibit the continuation of improvements for low-income working families in the child tax credit and earned income tax credit that were enacted in 2009 and extended in the recent tax-cut compromise legislation unless the cost of those extensions was fully offset. And, as noted above, the House would be barred from offsetting the cost of maintaining these low-income tax-credit provisions by curbing unwarranted tax loopholes, which will make the demise of these low-income tax-credit benefits more likely. To simultaneously pave the way for both deficit-financed extensions of massive tax cuts for the wealthiest Americans and termination of critical tax-credit measures that keep several million low-income working parents and their children out of poverty represents a set of priorities that can aptly be described as worthy of Ebenezer Scrooge.

At bottom, the new House GOP rules proposals make one other point abundantly clear — tax cuts for high-income taxpayers, not deficit reduction, is the top priority of the incoming House leadership.

Obama Signs Bill To Extend Bush Tax Cuts

In a display of compromise rarely seen during his time in office, President Obama has signed into law a $858 billion tax cut bill despite the misgivings of members of both parties.

“We are here with some good news for the American people this holiday season,” Mr. Obama said.

The bill, which was largely worked out earlier this month between the White House and Congressional Republicans, extends the Bush-era tax cuts for all Americans for two years, extends unemployment benefits for 13 months and includes a one-year Social Security tax cut, among other measures.

The measure is not paid for, and costs more than Mr. Obama’s controversial stimulus package that was harshly criticized by Republicans for exacerbating America’s deficit and debt problem.

The president acknowledged that the bill’s cost and the coming effort to address the deficit, stating, “In some ways this was easier than some of the tougher choices we’re going to have to make next year.”

Mr. Obama said the bill would create jobs and boost the still-struggling U.S. economy. He called it a “substantial victory for middle class families” who would otherwise have seen a tax increase.

“In fact, not only will middle class Americans avoid a tax increase, but tens of millions of Americans will start the new year off right by opening their first paycheck to see that it’s larger than the one they get right now,” he said.

The president also noted the bill included tax breaks for millions of college students and their families and extensions of the earned income tax credit and $1,000-per-child tax credit. It also includes extensions of tax incentives for businesses to invest and expand and lower taxes on capitol gains and dividends.

The 2 percent Social Security tax reduction would mean a savings of about $1,000 for a worker making $50,000 per year.

Senate Republican leader Mitch McConnell was one of five Republicans present at the bill signing ceremony, along with 19 Democrats. It was Mr. Obama’s 29th public bill-signing ceremony — but the first at which McConnell was in attendance.

President Obama, joined by Vice President Biden, speaks before signing a compromise bill that extends the Bush-era tax cuts for all Americans, December 17, 2010.

The tax cut package angered liberals in the president’s party due to the extension of the Bush-era tax cuts for the roughly two percent of highest-earning Americans, which comes at a cost of $120 billion over two years. They were also incensed at the level at which the estate tax was set in the measure, which exempts estates under $10 million for couples and taxes subsequent income at 35 percent.

But the bill passed overwhelmingly in the Senate and also got through the House, where angry Democrats eventually accepted what came to be seen as inevitable. Still, many complained that the bill was an expensive giveaway to the richest Americans at a time when America could not afford it. Some fiscally conservative Republicans also expressed concerns about the cost of bill, though most GOP lawmakers supported it.

Had Congress not acted to address the expiring Bush-era tax cuts, all Americans would have seen a tax increase on January 1st. (The average tax increase per family, the White House said, would have been $3,000.) Mr. Obama, who had long opposed extending the Bush tax cuts for America’s highest-earners, has argued he had no choice but to agree to GOP demands to do so in order to avoid a tax increase on the middle class.

In his remarks Friday, however, he cast the agreement as evidence that both parties can work together.

“Now, candidly speaking, there are some elements of this legislation that I don’t like,” he said. “There are some elements that members of my party don’t like. There are some elements that Republicans here today don’t like. That’s the nature of compromise. Yielding on something each of us cares about to move forward on what all of us care about.”

The president said the bill ultimately reflected “a good deal for the American people.”

“The final product proves when we can put aside the partisanship and political gains, we can get a lot done,” he said. “If we can keep doing it, if we can keep that spirit I’m hopeful that we won’t just reinvigorate this economy and restore the American dream, I’m also hopeful that we might refresh the American people’s faith in the capability of their leaders to govern in challenging times.”

Posted by Brian Montopoli
Brian Montopoli is senior political reporter for CBSNews.com.

Unofficial Problem Bank list increases to 920 Institutions

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Dec 3, 2010.

Changes and comments from surferdude808:

It was a very quiet week for the Unofficial Problem Bank List. There were two additions and one removal because of duplication.

The two additions were First Community Bank, Glasgow, MT ($219 million) and Monadnock Community Bank, Peterborough, NH ($110 million), which is the first institution from New Hampshire to appear on the Unofficial Problem Bank List. The duplicated entry was SouthBank, a Federal Savings Bank, Cornith, MS, which has relocated to Huntsville, AL.

The other change is the termination of a Prompt Corrective Action order by the OTS issued against Aurora Bank FSB, Wilmington, DE ($4.4 billion). After these changes, the Unofficial Problem Bank List includes 920 institutions with assets of $410.3 billion.

AICPA Urges Repeal of Expanded 1099 Reporting Requirements

NOVEMBER 16, 2010

In letters to members of the House of Representatives and the Senate, the AICPA on Nov. 16 expressed its concerns about the compliance burdens being placed on businesses (including rental property owners) by recently expanded Form 1099 information-reporting requirements. The letters, signed by Patricia Thompson, CPA, chair of the AICPA’s Tax Executive Committee, urge Congress to repeal the new requirements.

Two recent pieces of legislation expanded information-reporting requirements for businesses and for individuals who receive income from rental property. The Patient Protection and Affordable Care Act, PL 111-148, overturned the regulation that exempted payments to corporations from the information-reporting rules. The act also expanded the information-reporting requirements to include business payments for property (instead of just services, as required under current law). Under the act, starting with payments made in 2012, businesses would generally have to provide a Form 1099 to vendors and the IRS—and collect the required Form W-9 information—for purchases of $600 or more in property or services from another entity (including corporations).

The Small Business Jobs Act, PL 111-240, requires taxpayers who receive rental income to issue Forms 1099 to service providers for payments of $600 or more during the year. The act subjects recipients of rental income from real estate to the same information-reporting requirements as taxpayers engaged in a trade or business, so rental income recipients making payments of $600 or more to a service provider in the course of earning rental income will be required to provide an information return (typically Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010.

The two AICPA letters, one to House members and the other to Senators, express several concerns with the new rental property owner reporting requirements. They note that, “(1) keeping records to track expenses by provider, (2) obtaining tax identification numbers and other information from providers of property and services, and (3) providing Forms 1099-MISC during January, a month when taxpayers would not normally be focused on tax issues, would be extremely burdensome.”

The AICPA letters also focus on other burdens and costs that collecting relevant information and preparing and mailing Forms 1099 will impose on taxpayers. The letters note that, for fiscal-year or accrual-basis corporations, reconciling cash-basis, calendar-year information reported on Forms 1099 will be burdensome. The AICPA also questions the value of the information reported to either taxpayers or the IRS.

The letters argue that repeal of both expanded information-reporting requirements “is the best alternative to imposition of an overwhelming compliance burden on the nation’s small businesses and real estate owners.”

Legislative Proposal

Sen. Max Baucus (D-Mont.), chair of the Senate Finance Committee, has announced that he will introduce legislation during the current congressional session to repeal the requirements enacted by the Patient Protection and Affordable Care Act. However, his bill, called the Small Business Paperwork Relief Act, does not address the expanded rental property owner requirements. Sen. Baucus’ bill has not yet been introduced, and its prospects for passage are unclear.