Financial overhaul bill gets bipartisan push in Senate

By Brady Dennis and Shailagh Murray

Washington Post Staff Writer

In a rare show of bipartisanship, the Senate on Wednesday overwhelmingly approved an amendment to the financial regulatory bill aimed at ensuring that taxpayers never again be on the hook for bailing out collapsed banks and investment firms.

The 93 to 5 vote brought together senators as diverse as ultra-liberal Bernard Sanders (I-Vt.) and Richard C. Shelby (R-Ala.), the conservative who co-wrote the amendment with Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee.

The vote came as Democrats on Wednesday also sought to undercut key GOP objections to the bill, a strategy aimed at securing much-needed Republican support for the sweeping legislation in the days ahead.

Lawmakers began voting on proposed amendments to the 1,400-page bill a week after the Senate opened formal debate on the legislation. The first two amendments Democrats allowed to reach the Senate floor had an unambiguous purpose: To put an end to GOP attacks that the far-reaching bill would perpetuate taxpayer-funded bailouts.

Sen. Barbara Boxer (D-Calif.) secured nearly unanimous support for her three-paragraph amendment clarifying that taxpayers would not bear any losses from the liquidation of bankrupt firms, a goal widely shared by both parties and reflected in a 96 to 1 vote.

Perhaps more significant was the Dodd-Shelby amendment that followed.

Their deal — hammered out late Tuesday night and into Wednesday — centered on a portion of the bill aimed at giving the government power to wind down large, troubled firms without putting taxpayer money at risk. The heart of the agreement was Dodd’s willingness to drop a proposed $50 billion fund, which would be filled upfront by the financial industry, that would cover the cost of closing down failing firms.

Republicans had criticized the provision as a “bailout fund” that could encourage financial firms to act recklessly, knowing the fund was in place. Dodd said Wednesday that neither he nor the Obama administration had proposed the fund. It was a GOP suggestion, he said.

Under the Dodd-Shelby deal, the Federal Deposit Insurance Corp. would liquidate faltering firms by borrowing money from Treasury to cover initial costs. The government would recover the costs by selling off the firm’s assets, with creditors and shareholders incurring losses. Other large banks could be assessed to pay for additional costs as a last resort.

Also, creditors of a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding. Any seizure of a large, failing firm would require court approval to ensure that the government not shut down a company inappropriately. In addition, Congress would have to approve the use of federal debt guarantees, and regulators also would be able to ban management and directors of failed firms from working in the financial sector for a minimum of two years.

‘A good first step’

Both parties praised the deal Wednesday, though from different perspectives.

Minority Leader Mitch McConnell (R-Ky.) said in a statement that “while some said the Dodd bill did not allow for bailouts, this bipartisan agreement improves the bill by limiting loopholes and seeks to make sure investors, not taxpayers, are on the hook when a Wall Street bank fails.” He called it “a good first step.”

Dodd and other Democrats said the amendment addressed one of the primary complaints that so far has kept Republicans united against the legislation. “With this agreement,” Dodd said, “there can be no doubt that this Senate is unified in its commitment to end taxpayer-funded bailouts.”

After voting on the Dodd-Shelby changes, lawmakers quickly approved two amendments put forward by Sen. Olympia J. Snowe (R-Maine), aimed at preserving the ability of small-business owners to use their homes as collateral and lightening regulatory burdens on small banks.

Democrats have been eager to please Snowe because they view her as one of the Republicans most likely to lend support for the bill.

In another effort to acquire Republican backing — and to satisfy thousands of community bankers, who comprise a powerful lobbying force — Democrats moved to an amendment from Sen. Jon Tester (D-Mont.) and Sen. Kay Bailey Hutchison (R-Tex.) that, as Tester said, “would force the big banks to pay their fair share of assessments” into the FDIC’s deposit insurance program. The bill instructs the FDIC to set the premiums that banks pay based on how risky they are. Dodd said he expects wide support for the amendment.

Next up: More debate

Despite the harmonious votes Wednesday, thorny issues lie ahead.

Republicans made a renewed push to put their own stamp on the wide-ranging bill, offering alternative visions for a proposed regulator of consumer financial products, as well as oversight of the vast derivatives market and legislation to overhaul government-backed mortgage giants Fannie Mae and Freddie Mac.

GOP members argued for placing a consumer protection division within the FDIC, with the authority to make rules that would be approved by the agency’s board. The proposal also would keep in place the doctrine of preempting states, which has allowed big banks to answer solely to federal regulators. Dodd’s bill currently would create a more autonomous consumer watchdog housed at the Federal Reserve.

Administration officials disparaged the Republican proposal Wednesday, with White House spokeswoman Amy Brundage calling it “nothing more than a lobbyist-influenced defense of the status quo.”

As of Wednesday, nearly 100 proposed amendments had been filed to the legislation. It remained unclear how many would get a hearing on the Senate floor in the coming days.

‘Bush-ama’ tax cuts: The $2.2 trillion decision

May 4, 2010: 12:10

NEW YORK (CNNMoney.com) — They’re often called the “Bush” tax cuts. But at this point they might as well be called the Bush-ama tax cuts.

That’s because President Obama has embraced the tax relief measures introduced in 2001 and 2003, proposing they be extended indefinitely for most Americans. If lawmakers do nothing, the measures expire Dec. 31.

The tax cuts lowered income and investment tax rates, boosted the child credit, reduced the estate tax, and narrowed inequalities affecting married taxpayers.

Another reason for the new Bush-ama moniker: Like President Bush, President Obama has not called on Congress to pay for the cost of the tax cuts. In fact, the extension of the cuts is exempt from the new “pay-go” rules that Obama signed into law recently.

Extending the tax cuts for most Americans will increase the federal deficit by an estimated $2.2 trillion over 10 years.

Deficit hawks are uber-frustrated.

“Why do you spend over $2 trillion in your budget — the most you spend on any single policy item — on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?” Diane Rogers, chief economist for the Concord Coalition, wrote in her blog Economistmom.com.

In a nod to deficit reduction, Obama did propose that lawmakers let the tax cuts expire for high-income households, couples making more than $250,000. Doing so would reduce the deficit by $678 billion from where it would be if the cuts were extended for everyone.

But recently, while he didn’t say so explicitly, Obama seemed open to rethinking his campaign promise not to raise taxes on the middle-class. In an interview last month, he said he would weigh recommendations from the bipartisan fiscal commission he created to suggest ways to put the U.S. fiscal house in order.

“We should be able to solve this problem without putting a burden on middle class families,” he told CNBC. “Having said that, I’m also going to wait for the fiscal commission to provide me [with] their best recommendations. … At a certain point, what we’ve got to do is match up money going out and money coming in.”

The next 7 months

The commission won’t report its recommendations until Dec. 1. In the meantime, it’s not clear when Congress will take up the issue of the 2001/2003 tax cuts. One theory is that they’ll vote to extend them before their August recess to score political points before the midterm elections in November.

“It would look ugly to go home and campaign for five weeks without having done something for the middle class,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

On the other hand, the legislative agenda is already fairly packed.

Anne Mathias, director of research at Concept Capital’s Washington Research Group, is in the camp that believes Congress may not address the issue until December.

It’s also not clear yet how long lawmakers might opt to extend the tax cuts. There had been a push by both parties to make them permanent. But some believe extending them for a year or two may be the smartest move given current political and economic constraints.

IOUSA Solutions’: Deficit explosion

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, proposes that lawmakers extend the tax cuts to the end of 2012, and then use the prospect of making them permanent as a “sweetener” to draw votes for a serious deficit-reduction deal. No deal, no tax cuts.

“This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer … . Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible,” MacGuineas wrote in a blog post.

No matter how long the tax cuts are extended, no one should bank on low rates forever, Stretch cautioned. The country’s long-term fiscal condition is too precarious for that.

“No matter what happens, Americans’ taxes are going up one way or another. The middle class is going to have to be called on to help reduce the deficit. There’s not enough fiscal capacity if we just tax the top 3%,” Stretch said.

CPAs Provide Expertise for Transfer Pricing Analyses

MAY 2010

Transfer pricing, the process by which multinational companies set arm’s-length prices for cross-border transactions within a corporate group, is complex and consistently ranks as the No. 1 international tax issue facing multinational companies, according to Ernst & Young’s 2009 Global transfer pricing survey. To avoid penalties and potential interest, most tax authorities require taxpayers to prepare annual transfer pricing reports when they file tax returns.

During its infancy, transfer pricing was dominated by economists. However, as global transfer pricing regulations developed, international examiners gained experience and financial accounting standards evolved. Consequently, companies now need experienced tax accountants not only to validate the reliability of the data during tax controversies but also to guide taxpayers during implementation. There is definitely still a role for economists on project teams, but CPAs are probably more conversant with such steps as making a compensating adjustment journal entry or quantifying FIN 48 risks (FASB Interpretation no. 48, Accounting for Uncertainty in Income Taxes, now codified in FASB ASC Topic 740) for financial reporting purposes.

Stuart Rohatiner, CPA, JD

Below are examples of transfer pricing issues where expert accounting skills are important:

Financial reporting. Certain industries have unique accounting revenue and expense treatment, and to calculate the appropriate benchmark ratios for transfer pricing purposes, an accountant needs to analyze the financial statement footnotes and understand which items are characterized as operating, pass-through, etc. For example, the income statements for a professional services firm include a special line item called “reimbursements” under the revenue and cost-of-sales categories. Reimbursements are generally pass-through contractor costs and reimbursed expenses and would likely be excluded from the operating revenue and operating expense calculations for transfer pricing purposes. In addition, with the currently volatile economy and corresponding impact on profitability, companies are increasingly monitoring their taxable income in each jurisdiction and likely making year-end compensating adjustments to the books and records to get profit margins within the arm’s-length ranges.

Transfer pricing audit document requests. The IRS and other tax authorities historically requested that taxpayers provide copies of their transfer pricing reports to support their pricing during audit years. Fast-forward to the current environment, and a typical audit request specifies tying the transfer pricing data from reports to general ledgers, consolidating income statements and balance sheets.

FIN 48 analysis. Public companies and their auditors are now required to analyze the income tax calculations and determine if the company needs to quantify and include in the financial statements any tax exposures that are “more likely than not” to be sustained upon examination. Auditors have increasingly identified transfer pricing risks, especially adjustments and penalties proposed by tax authorities, and forced taxpayers to disclose the details in SEC public filings and book reserves.

Reliability of financial data. Since much of transfer pricing financial analysis involves comparing unaudited financial statements with audited ones, a tax accountant who can validate the reliability of the unaudited data is invaluable, especially in tax controversy settings.

IRS analysis of adjustments and methods. The trend toward an increased focus on the accounting details of intercompany transactions may be a result of the IRS’ hiring international examiners with accounting backgrounds. Whatever the reason, the IRS has placed a new emphasis on reviewing all accounting and functional differences between the taxpayer-tested party and the comparable companies selected in the transfer pricing report. For example, during a recent meeting of a taxpayer with the IRS, the IRS international examiner compared each accounting line item from the taxpayer’s annual report with those of the comparable companies to make sure that adjustments were considered for any differences in functions or risks. Similarly, the examiner insisted on analyzing all potential transfer pricing methods and profit level indicators available, even though the IRS had agreed to the same method and profit level indicator with the taxpayer twice previously and the facts hadn’t changed significantly.

It shouldn’t come as a surprise that with the increasing complexity of transfer pricing and diminishing taxable income of corporations, the level of scrutiny by tax authorities has risen exponentially. In fact, in 2009, the IRS announced plans to hire an additional 800 agents in fiscal 2010 to focus on international examinations, and the agency’s proposed fiscal 2011 budget contains funding for 800 more. The field of transfer pricing will continue to grow and present employment opportunities for practitioners with the desired blend of economics and tax accounting skills.

 By Steve Snyder, CPA/CFF, CVA

You owe the IRS 99 days of hard work

Stuart Rohatiner, CPA, JD

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) — This year, it’s going to take the average American 99 days to earn enough money to pay the IRS. That’s one day longer than last year.

“Tax Freedom Day” marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation’s annual calculation, which is based on government tax and income data.

Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder — for more than three months — just to pay their 2010 taxes.

The number of days Americans have to work to pay off their taxes has declined steadily since 2007. That’s due to a handful of tax cuts, certain income tax provisions that were repealed for 2010 and because the recession has reduced tax collections faster than it has cut income, according to the Tax Foundation.

But while it will take people less time to earn the money this year than it did in 2007, Americans will still spend more on taxes in 2010 than they will on food, clothing and shelter combined, the Tax Foundation said.

State-by-state:

Each state has its own Tax Freedom Day. The day arrived earliest in Alaska and Louisiana — on March 26 — because of “modest incomes and low state and local tax burdens,” the Tax Foundation said.

Mississippi, South Dakota and West Virginia celebrated soon after, on March 28, March 29 and March 30, respectively.

Connecticut, the state with the highest per capita income, will be the last to celebrate. Tax Freedom Day won’t arrive until April 27, the 117th day of the year.

New Jersey, New York, Maryland and Washington will join Connecticut as the last states to celebrate. In these states, Tax Freedom Day will fall on April 25, April 23, April 19 and April 15, in that order.

Business Tax Tip of the Day Apil 9 2010

The amount of investment interest expense deduction is limited to the amount of the taxpayer’s net investment income. The excess is carried forward and treated as an amount of investment interest expense incurred in the next year.

Common Tax Schemes

Tricks of the Trade 

Income tax returns are soon due to the IRS.  If you’re like most people, you’re hoping for a nice lump sum refund.  However, as you prepare your forms, be aware that others are plotting ways to steal your hard-earned money.  Avoid falling into common tax traps by reading up on some of the ways con artists are targeting their victims. 

The Miami-Dade Consumer Services Department lists some of the common schemes to steer clear of. 

Common Rip-offs 

·         Making Work Pay Refund.  This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit. 

·         Instant Rebate Scams. Some unscrupulous and predatory tax preparers prey upon low-income earners with promises of “fast money” at tax refund time.  Their victims often do not realize that an instant refund is actually a “refund anticipation loan” that could drain away as much as half their refunds in the form of interest rates and fees.  

Consumer Smarts 

·         Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return they submit to the IRS.   

·         The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:

*         Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.

*         Do not click on any links, for the same reason. Also, be aware that the links often connect to a phony IRS Web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony Web sites appear legitimate because the appearance and much of the content are directly copied from an actual page on the IRS Web site and then modified by the scammers for their own purposes.

·         Be cautious when choosing a tax preparer.  Filing false income tax returns with inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions could result in penalties.  Regardless of whether the preparer is responsible for manipulating income figures, it is ultimately the taxpayer who is faulted and required to pay additional taxes.  

·         The IRS advises:

*         Avoid tax preparers who claim they can obtain larger refunds than other preparers.

*         Ask about service fees and be wary of preparers who base their fee on a percentage of the   amount of the refund.

*         Use a reputable tax professional who signs your tax return and provides you with a copy for  your records.

*         Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.

*         Review your return before you sign it and ask questions on entries you don’t understand.

*         Find out the preparer’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

*         Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you.  If you think you have been targeted by a fraudulent tax scheme, forward the suspicious e-mail or URL address to the IRS mailbox phishing@irs.gov, then delete the e-mail from your inbox. 

You can learn the status of your refund by going to the IRS.gov website and clicking on “Where’s my refund?”

DRS announces Voluntary Disclosure Program for offshore accounts: Conn Residents Amnesty Opportunity for Offshore Accounts

Program is opportunity to come forward and pay back taxes and avoid possible criminal prosecution

The Connecticut Department of Revenue Services (DRS) today announced the Connecticut Offshore Voluntary Disclosure Program. “This program provides an opportunity for Connecticut taxpayers who have unreported offshore income to settle their State tax liabilities without civil or criminal penalties,” DRS Commissioner Richard Nicholson said.

The Offshore Voluntary Disclosure Program follows on the heels of the agreement between the Swiss government and the U.S. Department of Justice and Internal Revenue Service (IRS) regarding the release of the names of 4,450 United States residents suspected of using foreign bank accounts held by UBS AG to evade taxes. At Governor M. Jodi Rell’s request, Attorney General Richard Blumenthal is pursuing information from the U.S. Government relating to Connecticut taxpayers who may have undisclosed assets in Swiss banks.

“The recent agreement between United States and the Swiss Confederation, along with the efforts of Attorney General Blumenthal, mean it is only a matter of time before we find these taxpayers,” Commissioner Nicholson said. “Taxpayers that do not come forward through the voluntary disclosure program will face the possibility of criminal prosecution in addition to civil penalties and interest on the original tax amount. Taxpayers can avoid this by coming forward and getting their tax house in order.” The Disclosure Program corresponds with a similar voluntary disclosure program initiated by the IRS for federal tax liabilities on unreported offshore income, Nicholson said

The Offshore Voluntary Disclosure Program runs through January 15, 2010, and allows taxpayers to come into compliance with Connecticut tax law by reporting and paying taxes on funds kept in previously unreported offshore accounts. Taxpayers do this by sending a cover letter to DRS stating their intention to participate in the program. In addition to the letter, taxpayers must submit information about the offshore account, including:

• A description of the source of funds or other assets in each account;
• The date the initial deposit was made or the date on which the taxpayer took control or ownership of each account;
• Documentation indicating whether the principal (which includes initial deposits and all subsequent contributions) has been taxed and the tax years involved;
• The amount of potential tax liability; and
• Whether the taxpayer participated in the IRS Offshore Voluntary Disclosure Program.

More information about the Offshore Voluntary Disclosure Program will be posted on the DRS website at http://www.ct.gov/DRS/offhsore, or interested taxpayers can call the Business and Employment Tax Audit Unit during regular office hours at (860) 541-4560.

For information about other tax issues, visit the DRS website at http://www.ct.gov/DRS or call 1-800-382-9463 in state, or (860) 297-5962 from anywhere.

IRS to Receive Unprecedented Amount of Information in UBS Agreement

IR-2009-75, Aug. 19, 2009

WASHINGTON — The Internal Revenue Service and the Department of Justice today announced the successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information on United States holders of accounts at the Swiss bank UBS.

As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.

Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Also, the agreement retains the U.S. Government’s right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.

The agreement involves a number of simultaneous legal actions:

· The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.

· Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.

In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.

The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.
Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.

Related Items:

U.S.-Swiss Government Agreement
Declarations
Bank Agreement
Offshore Tax Avoidance and IRS Compliance Efforts