Senate Would Revoke Your Passport If You Owe Taxes

Harry Reid introduced an amendment to a transportation bill before the Senate. The provision allows the Secretary of State to deny or revoke a passport if you owe taxes. Here is the language:

SEC. 7345. REVOCATION OR DENIAL OF PASSPORT IN CASE OF CERTAIN TAX DELINQUENCIES.

(a) IN GENERAL.

If the Secretary receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 4 of the Act entitled ‘An Act to regulate the issue and validity of passports, and for other purposes’, approved July 3, 1926 (22 U.S.C. 211a et seq.), commonly known as the ‘Passport Act of 1926’.

Would you believe this nonsense PASSED the Senate? It now goes to the House, which hopefully has more common sense. The current transportation authorization expires at the end of March, so I suppose something will pass.

Do these people scare you – even a little bit?

Status of the Payroll Tax Cut

The Senate today approved a two-month extension of the employee Social Security tax cut.

You will recall that the employee FICA rate was cut from 7.65 to 5.65 percent, but only for 2011. The FICA tax is composed of two parts: a social security tax of 6.2 percent and a Medicare tax of 1.45 percent. Together they add-up to 7.65 percent and are referred to as FICA. The social security portion was reduced in 2011 by 2 points – from 6.2 to 4.2 percent. It is this portion that we are discussing.

A number of economic and financial commentators have pointed out that 2011 economic growth has been roughly equivalent to this payroll tax cut.  Add to the mix an upcoming election year and the issue of extending the cut has become quite electric.

The bill will next go to the House, where there has been some activism to cut the tax for all of 2012, not just two months.

The President has indicated his intention to sign the bill when it arrives.

My take?

Payroll is reported to the IRS on a quarterly basis. The first quarter is January through March. Accountants and payroll services now have to subdivide the quarter to determine which tax rate to apply to the payroll. Would it have been that difficult - especially since nothing has been accomplished anyway – to have the payroll tax cut run the full quarter?

Payroll Tax Cut Voted Down

I was reading this morning that the Senate was unable to pass a payroll tax cut bill yesterday. There were two bills and neither passed.

You may recall that the employee share of FICA was reduced from 6.2 to 4.2 percent for 2011. The balance of 1.45 percent for Medicare was untouched. The purpose was to stimulate, or at least not depress, the economy.

The problem is that the 2 percent reduction expires at the end of 2011.

The politicians now want to extend the program. The Senate Democrats proposed a plan to reduce the 6.2 percent withholding to 3.1 percent. In an unanticipated move, the Democrats proposed this be paid for by a tax increase on the wealthy.

The Republicans proposed extending the tax cut at 2 percent and paying for it by freezing federal salaries and streamlining the federal workforce by 10 percent. This was predictably described as extreme.

The President demanded action and announced his next vacation.

The House is taking up the issue next.

Thinking on This Week's Senate Surtax

The Senate Democrats have offered yet another tax to pay for yet another $447 billion stimulus package. They now want to impose a 5.6% surtax on income over $1 million per couple.

Let’s add-up the increases that are being discussed or have already been passed into legislation:

·         The expiration of the Bush tax cuts                          39.6%

·         The phase-out of itemized deductions (Pease)        1.19%

·         The phase-out of personal exemptions (PEP)           1.15%

·         The Medicare surtax on investment income            3.8%

·         The Medicare surtax on earned income                    0.9%                   

·         This week’s Senate Democrat proposal                    5.6%

                                                                                              --------------            

                                                                                                                       52.24%                                                                          

I doubt this list is complete as the above is just off the top of my head. 

You get the idea.

Senators Question IRS Gift Tax Enforcement

You may have read that the IRS has decided to pursue Section 501(c)(4) organizations. This beggars the question: what is a 501((c)(4) organization?

The (c)(4) is a tax-exempt. That is not saying much, as there are over two dozen types of tax-exempts in the Internal Revenue Code. So what is different about this flavor of tax exempt?

The( c)(4) must not be organized for profit and must be operated exclusively for the promotion of social welfare. Examples of (c)(4)s are AARP and the National Association for the Advancement of Colored People. You may also remember MoveOn.org and America Coming Together.

A (c)(4) may further its social welfare purposes through lobbying without jeopardizing its exempt status as long as it is consistent with the organization’s purpose. It cannot however be the organization’s primary activity. If it is, then one should consider a Section 527 organization.

Are donations to a (c)(4) deductible? That depends. Donations to 501(c)(4)s that are public entities (such as a volunteer fire station) are deductible. Donations to other (c)(4)s are not deductible.

So what has happened to draw the IRS’ attention? Tax advisors such as me have known for a long time that donations to a (c)(4) are not deductible, and we make adjustments when a client includes these amounts in a list of contributions. The IRS has now decided to pursue the (c)(4)s with the argument that contributions are taxable gifts by the donors.

A taxable gift? This is a new issue to me, and I have been at this for a while.

It has caught the Senate’s attention. Six senators from the Finance Committee recently wrote a letter to IRS Commissioner Shulman. The Finance Committee writes tax law in conjunction with the House Ways and Means Committee. The Senators wrote (in part):

The applicability of gift taxes to 501(c)(4) contributions is ambiguous. Historically, the IRS has deliberately opted against vigorous enforcement of the gift tax on 501(c)(4) contributions. There are good reasons for this. First, it is unclear if contributions to these organizations are eligible for the gift tax given their gratuitous nature, and the fact that the donations are made with the expectation that the organization will work to advance the donor’s policy views. Moreover, these contributions are clearly not designed for tax planning purposes or to avoid the estate tax. Most importantly, however, enforcement of gift taxes on contributions to 501(c)(4) organizations engaged in public policy debate runs an unacceptable risk of chilling political speech, which receives the highest level of constitutional protection under the First Amendment

This pattern of nonenforcement over a period of nearly three decades, coupled with the troubling issues regarding the adverse impact that enforcement might have on the exercise of constitutionally protected rights, raises important questions regarding the timing of the decision to enforce the gift tax on these contributions. Retroactive enforcement of the gift tax in this highly politicized environment raises legitimate concerns and demands further explanation."

The statement by IRS spokeswoman Michelle Eldridge did not assuage these concerns and left us with only more questions. According to Eldridge, “[a]ll of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS.” We would expect that decisions regarding particular enforcement actions would be made by career civil servants. The more pressing question, not answered to date, is whether political appointees inside or outside the IRS were involved in any way in the decision to prioritize this category of cases."

I understand that (c)(4)s are not supposed to be piggybanks, but are there really enough tax dollars here for the IRS to prioritize this issue?

I was too young, but I have understood that President Nixon used the IRS as a political weapon against his opponents. In a country where half the population does not trust the current President to do the right thing, it is unfortunate to have the IRS call its neutrality into question. You can accept or hate the IRS, but it is imperative that the IRS act and be perceived as a neutral entity.

One can argue that perhaps there is no good time for this type of action, but the observation remains that this is not a good time.

I will come back in a separate post with more detail on the tax issues raised by (c)(4)s.