But now there is a bipartisan tax reform proposal from two prominent senators that has earned praise in policy circles and may jump-start serious consideration of the idea over the next year — a year marked by growing concern over U.S. debt.

Done right, experts say, tax reform should simplify the tax code, increase fairness and apply taxes at lower rates to a broader base of activities.

Among the goals: decrease tax avoidance and increase economic competitiveness.

The Bipartisan Tax Fairness and Simplification Act of 2010 — put together by Sen. Ron Wyden, D-Ore., and Sen. Judd Gregg, R-N.H., — arguably could do much of that to some degree.

And in the process, more taxpayers than not could see their federal tax burdens fall, according to a new analysis from the nonpartisan Tax Policy Center.

Among the changes, the Wyden-Gregg proposal would eliminate the Alternative Minimum Tax and reduce the number of individual income tax rates from six to three — 15%, 25% and 35%.

It would more than double the standard deduction to $15,000 for single filers and $30,000 for joint filers.

The proposal would also change how capital gains and dividends are taxed. It calls for a capital gains exclusion: The first 35% of long-term gains and qualified dividends would be tax free and the remainder would be taxed as ordinary income.

That effectively would raise the long-term capital gains rate to 22.75%, up from 15% today (or 20% starting in 2011).

Tax-free savings would be expanded. The proposal would create a Lifetime Savings Account and it would consolidate all types of IRAs into a single Retirement Savings Account. Between the two accounts, a person could save up to $7,000 a year tax free (up to $14,000 for married couples) on top of their 401(k) savings.

It would repeal, restructure or consolidate a number of tax breaks for individuals. The plan, for instance, would kill flexible spending accounts for workers who wish to put away tax-free money to pay for health costs. That change alone would raise $567 billion over 10 years.

But to make sure the proposal remains “politically viable,” Gregg said at a forum in March, it preserves the two most popular — and expensive – tax breaks on the books: the mortgage interest deduction and the health care tax exclusion for workers whose employers subsidize their health insurance.

And the plan would permanently extend the recently expanded earned income tax credit, the dependent care credit and the child tax credit.

On the corporate income tax, the Wyden-Gregg proposal would replace today’s six rates with one flat rate of 24%, well below the current top rate of 35%. Economists have long argued that a lower corporate rate would make the United States more competitive internationally, attracting more investment from companies abroad.

In exchange, the proposal repeals a number of corporate tax credits, deductions and exclusions.

The effects of change

The Wyden-Gregg proposal would increase by about $23 billion a year the amount of revenue brought in on the individual side, the Tax Policy Center estimates. At the same time, it would reduce corporate revenue collected by $22 billion.

So the net effect of the proposal is to produce roughly the same amount of revenue overall as today’s system. That assumes current policies, such as the 2001 and 2003 tax cuts, stay in effect over the next decade.

But that doesn’t mean everyone’s tax bite would be the same as it is today. The Center estimates that on average the top 20% of households would see their tax bite go up under the proposal. Within that group, the Center estimates 61% of households would see a tax increase, while 39% would likely see their federal tax burden go down.

The bottom 80% of households, meanwhile, would see their tax bite on average fall.

The Center’s analysis does not factor in how people might respond to the changes proposed. Researchers said if they did such a dynamic analysis they would expect the amount of revenue collected overall to decline somewhat.

The conservative Heritage Foundation arrived at a different conclusion after conducting its own dynamic analysis, using different methodologies and assumptions than the Center. Heritage estimates that the proposal could reduce the deficit by an average of $61 billion a year; spur foreign investment in the United States and create 2.3 million jobs a year.

What’s next

The Wyden-Gregg plan — already introduced as legislation — is just a first step in the tax-reform discussion. Chances are near nil that Congress would seriously reconfigure the tax code in a mid-term election year.

But Gregg, who sits on the president’s bipartisan fiscal responsibility commission, is likely to draw on the proposal as the commission considers how best to generate sufficient revenue in efforts to stabilize U.S. debt without hurting economic growth.

To the extent that fellow lawmakers on the commission support some of the Wyden-Gregg measures, the better the chance those measures will get a fuller hearing when the next Congress convenes.

http://money.cnn.com/2010/05/25/pf/taxes/tax_reform/index.htm

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“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.

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.

http://money.cnn.com/2010/04/09/pf/taxes/tax_freedom_day/index.htm

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For those of you who do not spend your spare time reading sociology textbooks, homophily is just a fancy word expressing the birds-of-a-feather-flock-together cliché.

Sociologists have found homophily to be very common. Studies show that rich people want to associate with other rich people. Lawyers like to be with other lawyers. Doctors prefer to hang with other doctors. And people of the same gender, race, and/or ethnic group tend to favor each other’s company.

So it shouldn’t surprise you that investors prefer to finance entrepreneurs who are similar to them. But you might not have considered the implications of this basic tenet of human behavior.

EVIDENCE ACROSS A VARIETY OF SETTINGS

Academic research has shown that a wide variety of investors prefer to finance entrepreneurs who are similar to them. For example, John Becker-Blease of Washington State University and Jeffrey Sohl of the University of New Hampshire found that business angels are more likely to invest in startups founded by entrepreneurs who are of the same gender.

In a completely different setting—trade credit in Africa—Raymond Fisman of Columbia University concluded that trade creditors are twice as likely to finance entrepreneurs if they are from the same ethnic group than if they are from a different one.

In yet another context, Ola Bengtsson of the University of Illinois and David H. Hsu of the University of Pennsylvania discovered that the founders of venture capital-backed startups and the venture capitalists who serve on their boards are much more likely than random to have the same ethnicity. In fact, they find that having “a shared ethnicity almost doubles the likelihood of a match.”

WHY INVESTORS PREFER ENTREPRENEURS WHO LOOK LIKE THEM

Academics have a lot of theories about why people favor those who are similar to them, but two are particularly important to entrepreneurial finance. The first is that similarity breeds trust between entrepreneurs and investors. According to Bengtsson and Hsu, it’s easier to develop shared understandings and implicit agreements with people who are like you.

The second is that similarity gives investors more control over the entrepreneurs they back. Being similar increases the odds that the entrepreneur and investor travel in the same social circles. Because ostracizing someone from a common social network is a good way to punish bad behavior, Bengtsson and Hsu explain that investors prefer similar entrepreneurs as a way to get more leverage over them.

THE IMPLICATIONS

For an individual entrepreneur, the implications of homophily for financing are fairly benign. Your odds of getting money from someone who is similar to you are greater than the odds of getting it from someone who is different. But homophily exists across a variety of dimensions—race, age, gender, ethnicity, occupation, and so on. So your odds of getting a specific investment might not be that different than those of anyone else because of the way your particular attributes match with those of investors. For instance, you might be twice as old, the opposite gender, and of a different race and ethnicity of an investor, but your common occupation of software engineering might be enough similarity to trigger an investment.

For a society, however, homophily brings with it the problem of unintentional bias. Most people won’t condone the direct discrimination of an investor who says, “I won’t invest in so-and-so’s business because he’s black or because she’s a woman.” But we are more ambivalent about the type of bias that comes from homophily. We tend to take for granted that people will be more comfortable investing in entrepreneurs with whom a common bond exists.

However, if investors are more likely to provide capital to entrepreneurs who are of the same race, age, gender, ethnicity, and/or occupation as them, and investors aren’t spread out evenly across these characteristics, then the entrepreneurs who look different from the typical investor are at a disadvantage when looking for money.

While no one said that investors should treat all business owners exactly the same, homophily makes entrepreneurs’ access to money uneven when looked at across the whole economy. The seemingly innocuous higher comfort level that male investors have with male entrepreneurs, investors trained in engineering have for engineer-led startups, and Chinese American financiers have with entrepreneurs of Chinese heritage, might mean that black female chemists have little access to capital.

TRICKY SOLUTION

That’s one of the arguments for the creation of female-only angel groups or black-led venture capital firms. If homophily exists, one way to combat any biases it creates is to offer the benefits of homophily to the disadvantaged groups as well.

But these policies are a tricky business to make work because, in aggregate, homophily works against the disadvantaged group. If all investors put money in businesses run by people who look like them, then entrepreneurs who don’t look like most investors will have a harder time getting capital. So if underrepresented groups exploit homophily as a finance tool, and everyone follows suit, those who look least like the typical investor will be worst off.

Moreover, if investors feel more comfortable investing in similar-looking entrepreneurs, then keeping them from operating in their comfort zone might stop them from investing at all.

Policymakers might decide that the costs of homophily outweigh the benefits. But before they take action against it, they need to understand all the ways policies to reduce it could affect financing for entrepreneurs.

Original Source:

http://www.businessweek.com/smallbiz/content/jul2010/sb20100723_230223.htm

Here’s the background: The American Jobs and Closing Tax Loopholes Act (H.R. 4213) was recently approved by the U.S. House of Representatives. One provision of the bill is designed to help curb tax abuses by small business owners whose companies are organized as S corporations. The way things are currently structured, many of these small business firms have been able to avoid Social Security and Medicare taxes (“payroll taxes“) they will likely now have to pay. Congress’ Joint Committee on Taxation estimates that closing this tax loophole could generate almost $11 billion over the next 10 years. H.R. 4213 is now stalled in the Senate. But even if this loophole-closing provision isn’t adopted as part of the pending legislation, expect to see it resurface as Congress struggles for ways to cut the deficit, without harming entitlement programs such as Social Security.

What abuse is Congress targeting? According to a recent Government Accountability Office (GAO) report, about 13% of all S corporations are abusing the system by understating the wages of their owners. Instead of paying themselves reasonable compensation, these owners report most of their earnings as corporate income. The report further reveals the median understatement of wages was $20,127 per tax year, with virtually all of the underpayment concentrated in S corporations with three or fewer shareholders. (S corporation income isn’t taxed at the corporate level but is passed through to shareholders’ personal tax returns; they are liable for federal and, where applicable, state income taxes on it, but not for payroll taxes.)

The House bill would mandate payroll taxes be paid on all income from certain professional service S corporations. Specifically, it would apply qualitative test: where the business is in any one of 12 specific service areas, such as law, accounting, and medicine; and is principally based on the “skill and reputation” of three or fewer employees.

The Senate has attempted to replace the qualitative test with a more quantitative measure that states: “…if in the above service areas 80% or more of the income is attributable to the services of three or fewer owners, all S corporation income will be subject to payroll taxes.”

Currently, no tax reporting guidelines exist to determine the proper level of wages to be paid to shareholders who are also employees in an S corporation that provides professional services. Therefore, some pay only modest wages to their shareholders. For example, a law firm owner could pay the partner $25,000, and pay the balance of the net income as S corporation income to avoid payroll taxes. If the act passes in any one of the proposed forms, it is likely the earnings of small professional service shareholders will be fully subject to payroll taxation without exceptions.

Time will tell the final form of the provision and how it will be applied. If the Senate version is passed, an analysis of the S corporation’s income generated by the three most productive shareholders would be compared to the total income of the S corporation. If the income attributable to the three shareholders exceeds 80%, then the firm will face payroll taxes on all the profits passed through to the owners. If the House version passes, it is unclear, but it’s possible a valuation of the “skill and reputation” of the three most valuable shareholders would be required to determine if the S corporation income will be subject to payroll taxes. However, it is likely the Treasury Regulations interpreting the House version would apply a more quantitative measure of “skill and reputation.” In either case, both proposed tests use a combined measurement of three shareholders and a percentage of revenue or value as a threshold to payroll taxation.

Should some form of this provision pass, as many are forecasting, there are ways small businesses might be able to minimize the impact. For example, it may very well be possible to bring in a “fourth” shareholder or employee so as to reduce the combined revenue of the three to below 80% of the total. In other words, if the personal service S corporation expands its professional employee base ever so slightly, imposition of the new payroll taxes could likely be avoided.

There’s a bright side to this provision too: IF S Corp owners decide to report this income as wages, they will become eligible to fund larger tax deductible contributions to a qualified retirement plan such as a 401(k). Ironically, the overall tax savings may just outweigh the cost of the new payroll taxes. Regardless of whether some version of this loophole closer is adopted this year, there will still be a need to eliminate the abuses of payroll taxation that result merely from the form of entity that is chosen to provide personal services.

http://www.forbes.com/advisernetwork/

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The Senate voted 60 to 39 to pass the Wall Street Reform Act on Thursday afternoon, clearing the way for President Obama to sign it into law. The vote, mostly along party lines, ends a year of contentious debate on Capitol Hill, but the fierce lobbying effort by the banking industry will likely continue. Much of the details of implementation will be left up to rulemaking by the various regulatory agencies.

In New York, industry veterans and Washington insiders met Thursday morning to talk about the ramifications of the new regulations.

Gary Gensler, the head of the Commodity Futures Trading Commission, told the audience at the Securities Industry and Financial Markets Association meeting that the work was far from over. The CFTC alone has 30 areas of focus, he said. The agency will have to write the new rules within a year, possibly sooner. And Robert Cook, the head of trading and markets at the Securities and Exchange Commission, has over 100 different tasks assigned it by the bill, many of them in coordination with the CFTC.

The Dodd-Frank bill, named after its proponents in the Senate and House, is the most sweeping reform of Wall Street since the 1930s. Many bankers complain the new rules impose heavy compliance costs and business restraints that will make it harder to earn profits in the future, and and they predict a number of unintended consequences. But critics of the legislation say it stops far short of truly reining in risk taking on Wall Street.

One of the main elements of the legislation is a new consumer financial protection bureau within the Federal Reserve. However, banking analysts warn the new consumer protections could paradoxically lead to a reduction in banking services for low- and moderate-income people.

Derivatives trading was a big focus of lawmakers. The bill requires standardized swaps to be traded on an exchange or in other centralized trading facilities, the better to promote transparency in this little-understood market. Derivatives tied to mortgage-backed securities played a key role in the financial crisis of 2008, with AIG driven to the brink of bankruptcy by bad moves in that market.

Swaps trading is a huge enterprise for the big U.S. banks, who control 97% of the trillions-dollar swaps market. Gensler has long pressed for more centralized trading of the products to promote competition and lower the risk to the system. Standardized derivatives will also have to be handled by central clearinghouses, another layer of risk management.

In a win for Wall Street, a measure introduced by Sen. Blanche Lincoln requiring banks to spin off their swaps trading units was scaled back. Banks will still be able to trade swaps to hedge risk and trade interest rate or foreign exchange swaps, but dealing in riskier swaps transactions must still be moved into affiliates.

The bill also curbs proprietary trading by banks and toughens the rules regarding the quality of capital and amounts of capital banks need to hold in reserve. The government also gets new authority to take over and unwind foundering companies deemed a systemic risk.

In the time between the signing of the bill and its implementation, banks will look to shift their businesses in directions that the new regulations can’t touch. Those directions appear to be abroad, and away from the mass-market consumer in the U.S. toward the affluent.

http://blogs.forbes.com/streettalk/2010/07/15/senate-passes-financial-reform-in-60-39-vote-president-to-sign-into-law/?boxes=Homepagetopnews

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July 12 (Bloomberg) — Billionaire Nelson Peltz is seeking to raise $1.5 billion for a fund aimed at buying minority stakes in public companies, according to two people with direct knowledge of his plans.

Peltz, who oversees New York-based hedge-fund firm Trian Fund Management LP, is marketing the investment pool as a private-equity fund because client money will be locked up for longer than with most hedge funds, said the people, who declined to be identified because the information is private. The fund will seek representation on the board of companies in which it invests, said one of the people.

Peltz, 68, is the largest investor in fast-food chain Wendy’s/Arby’s Group Inc. and is known for buying stakes in companies and then pushing them to increase their value by cutting costs or merging. He is venturing into private equity at a time when fundraising is at an eight-year low and firms struggle to revive leveraged buyouts amid stricter lending conditions.

“Due to the lack of debt financing, private equity investors will direct money increasingly towards listed companies, with the aim to exert influence over the companies’ strategy,” said Jeremie Le Febvre, partner at Paris-based Triago, which advises funds seeking to solicit investors. “The frontiers between private and public equity are blurring.”

Trian on Jan. 8 filed with Delaware state to incorporate the fund, called Trian Partners Strategic Investment Fund LP along with the general partnership that would run it, one of the people said. The fund has yet to file a private placement notice with the U.S. Securities and Exchange Commission.

http://www.businessweek.com/news/2010-07-12/peltz-said-to-seek-1-5-billion-fund-for-public-companies.html

“This is not a normal recovery,” Michael Englund, chief economist at Action Economics, says of recent economic releases. “There are headwinds that are delaying the growth process.”

After strong economic data earlier in the year, recent numbers have disappointed:

• On June 29, the Conference Board’s measure of consumer confidence dropped to 52.9 from 62.7 in May.

• Retail sales fell 1.2 percent in May, following a 0.6 percent rise in April.

• Also in May, nonfarm private payrolls rose just 41,000 after increases of 158,000 in March and 218,000 in April.

• U.S. new home sales dropped 32.7 percent in May.

The consensus on Wall Street is too optimistic about the U.S. economy and, in turn, about U.S. corporate profits, says Standard & Poor’s equity strategist Alec Young. “If we continue to get disappointing numbers, analysts will be cutting their earnings estimates.”

According to Bloomberg’s survey of analysts, earnings of the broad Standard & Poor’s 500 index are estimated to rise 34.1 percent this quarter. Alcoa (AA) starts the second-quarter earnings season on July 12.

June Jobs Report

A crucial test of the market’s view of the economy will come on the morning of July 2, when the June U.S.jobs report is released. “So much is going to depend on job creation,” says Prudential Financial (PRU) market strategist Quincy Krosby.

According to Bloomberg’s survey of economists, U.S. nonfarm private payrolls are expected to rise 110,000 in June. A weaker number could sap the morale of a market already in negative territory for the year. “If the numbers disappoint on Friday, this market is going to break down,” Young says.

The S&P 500 closed down 3.1 percent at 1,041.24 on June 29, and is off 6.6 percent since the beginning of 2010.

Based on how the last two recessions ended, a “soft patch” is not unusual during an economic recovery, says Michael Sheldon, chief market strategist at RDM Financial Group. The difference this time is the severity of the recession and the high levels of debt still plaguing the economy. “There are a number of structural issues that will take time to work through,” he says.

Englund believes many observers got “overly enthusiastic” based on better-than-expected March and April data that got an artificial boost. Bad winter storms in January and February led to a “post-weather bounce” in the following months. Now, he says, “some lofty expectations have been trimmed.”

Stimulus from the Federal Reserve and U.S. government spending helped spur the economy, but that is waning, says Keith Hembre, chief economist at First American Funds. “We’ve come off a sugar high from stimulus,” he says. The U.S. House of Representatives failed to approve an extension of U.S. unemployment benefits on June 29, and a broader jobs bill failed the previous week.

Earnings Season

When it comes to the economy, one thing that could help reassure investors is a good earnings season—even if better-than-expected profits failed to help the market last time.

During first-quarter earnings season, S&P 500 earnings beat analyst estimates by 14.1 percent, according to Bloomberg. Yet since the start of the last earnings season, the S&P 500 is down 13 percent.

This time, because stocks and expectations have fallen, investors might be more easily impressed. “It could pave the way for a bounce if we get [positive] surprises,” Krosby says. Also reassuring would be commentary from CEOs about future sales, earnings growth, and the strength of the economy. “Earnings guidance is taking on an increasingly significant role,” she adds.

3M (MMM) said in a statement on June 28 it expects sales of $6.6 billion to $6.75 billion this quarter, more than the $6.56 billion that analysts had estimated according to Bloomberg. 3M Chairman and Chief Executive Officer George W. Buckley told analysts on June 29 that he expects a “pretty good year” in 2010, according to Bloomberg News.

“If we get more comments like 3M’s, that could improve investor psychology at least on a temporary basis,” Sheldon says.

Unfortunately for anyone trying to make predictions, more is affecting U.S. stocks than the domestic economy and earnings. Global worries—including a growth slowdown in China and debt concerns in Europe—are dragging stocks lower. “The key still is uncertainty over in Europe,” says Schaeffer’s Investment Research equities analyst Ryan Detrick.

Even if the U.S. economy regains its footing this summer, it could still be slammed later by economic and financial problems from overseas. That signals challenging times ahead for equity investors.

http://www.businessweek.com/investor/content/jun2010/pi20100629_384510.htm

Apart from the section of the bill providing increased consumer financial protection, its important changes include: a restriction on US banks’ ability to trade derivatives and to take risks by trading on their own accounts; powers given to regulators to wind up failed institutions; stricter controls through a new regulatory body; and action on bankers’ remuneration.

The bill will create a Financial Stability Oversight Council to monitor the market to identify potential threats to the stability of the financial system. Through the Federal Reserve, that Council will subject financial companies that it judges to pose a threat to financial stability to much stricter standards and regulation, including higher capital requirements, leverage limits, and limits on concentrations of risk.

The proposed legislation, significantly, imposes risk retention on all lenders. For the first time banks will be required to retain a portion of the risk they generate, in order to provide real market discipline for underwriting decisions. New rules will require institutions to retain at least 5% of the credit risk associated with any loans that are transferred, sold or securitized.

Tough restrictions are to be imposed on government assistance in times of crisis so as to eliminate bailouts. Official guarantees will only be given to solvent banks in a liquidity crisis, and will be funded by fees paid by those banks.

The bill provides for the orderly dissolution of failing firms, ending “too big to fail”. When a firm enters the dissolution process, management responsible for the failure will be dismissed, parties that should bear losses – particularly shareholders and unsecured creditors – will do so, and the firm will cease as a going concern.

Any dissolution shortfall will be repaid by assessments on all large financial firms – not by the taxpayer. A Systemic Dissolution Fund, pre-funded by a levy on financial companies with more than USD50bn, and by hedge funds with more than USD10bn, in assets, would be used to pay creditors and help wind down failing financial institutions, but not to preserve them. It has been estimated that the total of that levy could reach around USD19bn.

There will be, for the first time, a comprehensive system of regulation of the over-the-counter derivatives market, requiring clearing and trading on exchanges or electronic platforms for all standardized transactions, including swaps and credit derivatives, between dealers and other large market participants. Counterparties will have to comply with transaction reporting requirements established by regulators.

Implementing a modified Volcker rule, banks will not be able to trade derivatives for their own account, unless they are considered low risk and necessary for their internal risk management purposes. Riskier derivatives, such as those linked to energy or commodities, will only be tradable by banks through subsidiaries, set up by them and using their own capital.

The bill also fills a hole that allows hedge funds and their advisers to escape regulation. Now, all investment advisers to private funds with over USD150m in assets under management will be required to register with the US Securities and Exchange Commission. Banks will also be limited to investing a maximum of 3% of their core capital in such hedge funds or private equity funds.

In addition, with regard to pay structures, all financial institutions with more than USD1bn in assets will be required to disclose remuneration arrangements that include any incentive based elements. Federal regulators would be authorised to ban inappropriate or imprudently risky compensation practices.

Overall, while some banks may be forced to restructure some of their business, the bill does not include some of the more draconian measures that had been previously mentioned, such as breaking the link between the banks’ commercial and investment banking operations.

However, the US Treasury Secretary, Tim Geithner, called the bill “strong”. He said that “it represents the most sweeping set of financial reforms since those that followed the Great Depression. It prevents financial firms from taking risks that will threaten the economy. And it provides the government with significant new tools to better protect taxpayers from the damage of future financial crises.”

President Obama reiterated that Congress had finalized a “strong Wall Street reform bill”, and urged it “to finish the job” and send the bill to his desk. It is now expected that Congress will approve the bill in its revised form in the next few days and send it to the President by July 4.

http://www.tax-news.com/news/US_Congress_Finalizes_Bank_Reform_Bill____44041.html

By: Lynnley Browning

Originally Published: March 12, 2010

The Internal Revenue Service is intensifying its scrutiny of wealthy Americans.

The federal agency increased its audits of taxpayers who earned $1 million to $5 million by 33 percent last year compared with 2008, new I.R.S. figures show.

The numbers, released late Thursday in the agency’s 2009 annual data book, also show that the I.R.S. increased its audits by 16 percent for those earning $5 million to $10 million last year. Audits of those who made at least $10 million rose by 8.5 percent, according to the data.

The figures are the strongest evidence yet that the agency is honoring a vow by the I.R.S. commissioner, Douglas H. Shulman, to increase scrutiny of wealthy taxpayers.

Taxpayers who earned at least $1 million a year made up 0.25 percent of the more than 144 million individual federal returns filed last year, the data showed, but affluent Americans account for a far greater share of the underpayments in federal income tax returns.

“The 2009 results show our emphasis on higher-income individuals,” Bruce I. Friedland, an I.R.S. spokesman, said Friday in a statement. “We will continue to focus our enforcement efforts on high-income taxpayers, particularly those hiding their assets overseas.”

Tax specialists said Friday that the new data showed a surprisingly strong increase in the agency’s scrutiny of the affluent. “There is definitely a new focus on what we call high-dollar audits,” said Richard Boggs, the chief executive of Nationwide Tax Relief, a company in Los Angeles that helps taxpayers negotiate settlements of tax bills with the I.R.S.

“The I.R.S. is getting smart,” he said. “They are starting to better leverage their time, resources and talent in order to collect the most money. There is a definite shifting of the tide.” He said audits of those making at least $10 million rose slightly less than for other categories because so many of the ultrawealthy were already being audited.

Mr. Boggs said the 2009 I.R.S. data showed that taxpayers who made at least $1 million had an 8 percent chance of being audited last year, meaning about one out of every 12 was scrutinized — up from 6 percent in 2008, or nearly one in 17.

The I.R.S. created the Global High Wealth Industry Group last fall to scrutinize people earning at least $10 million a year. It focuses on deciphering the techniques the wealthy sometimes use to illegally minimize their tax bills. Those techniques include the use of partnerships, trusts and offshore entities.

The I.R.S. is also sorting through more than 15,000 disclosures filed by wealthy taxpayers last fall as part of an amnesty program aimed at luring out of hiding taxpayers who had not reported income hidden overseas.

Click Here for the original article.

                Most people start a business from their home by registering the business name as a sole proprietorship or partnership in the county in which they reside. The owners obtain Employer Identification Numbers (EIN) from the IRS and report information about the business on their personal tax return. This method is widely used because sole proprietorships and partnerships are by nature easy to create, maintain, and close down. Unfortunately, the characteristics of sole proprietorships and partnerships have many disadvantages to business owners. One of the disadvantages of having one of these two entities is the lack of separation of the business and the individual. If a customer files suit against a sole proprietorship or partnership, the customer can go after the possessions of the small business owner such as cars, houses, and property. Similarly if the business files bankruptcy or runs into financial hardship, banks and collectors can use the same personal property to settle debt or payment dilemmas. In this situation a failed business can not only destroy the dreams of a business owner but it can also alter their personal life in a huge way.

                Knowledgeable business owners or those who have received professional advice will form a corporation or limited liability companies to offset such a situation. These businesses are not used initially by individuals because people are unsure how to create, maintain, and dissolve them correctly. The corporation and limited liability company are created by filing Articles of Incorporation or Articles of Organization within the state the business will operate. Corporations and limited liability companies separate the business from the individual and allow flexibility on taxation. If a customer files suit against a LLC or corporation, they are generally only able to make gains on the business. Similarly if the business enters into bankruptcy or financial hardship, only personal property owned by the business can be affected protecting the personal property of the shareholders or members. Owners of these entities are also able to choose how their business will be taxed. Limited liability companies can be taxed as a sole proprietorship, partnership, s-corporation, or c-corporation while corporations can file for sub chapter “S” status or by nature stay a c-corporation. Even though these entities can be complex to create, maintain, and close down, they offer the protection and flexibility that every small business owner deserves and needs.

                Along with choosing the best business entity owners must know if they need to obtain a business license or sales tax ID number. A list of appropriate licenses and permits for businesses can usually be obtained from the county where the business operates. The sales tax ID number is usually harder to understand for small business owners. Sales tax was created in 1921 in the state of West Virginia. Today, 45 states and the District of Columbia require anyone who is physically engaged in selling taxable items to register as a retailer with their state and collect sales tax. Businesses operating E-commerce in any of the 46 areas usually need to obtain a sales tax ID while people engaging in Real Estate activities usually have no use for them.

                In most jurisdictions the sales tax license is acquired from the Department of Revenue by submitting easily accessible applications. Again, business owners must check to see if the item they are selling is taxable property. Taxability varies by state/jurisdiction so local laws need to be understood before any selling occurs. Sales tax rates are always different as well and they usually vary from county to county. Items are taxable within jurisdiction where these items are delivered to customers or where customers take delivery of the product. However, sellers are only required to be registered and collect sales tax in the states where the sellers have a physical presence. For example a seller with a physical presence in New York will be required to collect sales tax from all taxable sales delivered customers within New York. Since each county in New York State has a different sales tax rate, the amount of tax is to be based on the county where product is received by the customer. However, if the same seller sells an item to a customer in Florida, no sales tax is to be collected unless that seller has a physical presence in Florida such as a warehouse or principle office. In this scenario sales tax will not need to be collected. Instead the Florida customer will be liable to pay Use Tax to the state of Florida based on the sales tax rate of the jurisdiction where the product is acquired by the purchaser.

                New business owners must be well informed before engaging in ventures of their own. Failing to incorporate or organize a business with the state can result in the loss of personal property due to the lack of separation between the individual and the business. Failure to properly obtain a sales tax license can result in heavy fines from the IRS and the inability to properly conduct business. Professionals at The Tax Club can help you with questions you may have regarding starting your own business or obtaining the appropriate licenses to run your business legally. Contact us today for a free consultation at 888-773-7176.