First, themes that emerge from federal and state tax developments of 2011 (in my opinion):
- Due diligence reminders - several cases and IRS actions remind practitioners of the need to be sure clients have proper documentation such as for charitable contributions and the need for reasonable and timely documentation of hours to prove that a person is a "real estate professional" if they are claiming benefits of being one.
- Tax planning remains challenging due to items expiring at the end of 2011 and the likelihood nothing will be renewed until sometime in 2012 (including the AMT patch). And the 2001/2003/2010 tax cuts expire at the end of 2012.
- Continued focus on the tax gap - but Congress repealed some of these measures this year (the extra 1099 reporting added by 2010 health care legislation and the 3% government contractor withholding). And 1099-K reporting started in 2011 (Section 6050W) on credit/debit card and Paypal reporting. I expect that this provision will do little towards the tax gap but will make it difficult for Congress to enact better tax gap measures that will really get at the tax gap because they have to carve out from any new 1099 reporting requirement, payments made by credit/debit card or Paypal to avoid duplicate reporting.
- State and multistate tax actions - there has been continued movement to economic nexus for income tax by more states, legislative activities to broaden sales tax nexus with questionable constitutionality; some efforts to provide guidance on taxation of coupon deals (such as Groupon) and cloud computing. State legislatures focused on accountability for special credits and deductions - more so than in the past.
- Federal tax reform - over 25 hearings on the subject were held by the Senate Finance Committee and House Ways and Means Committee. I'm sure they learned a lot, but a lot of it were obvious things about complexity and burdens on small businesses. It is time now to take all of this testimony, identify goals for reform, and start writing legislative language.
- The continued rollout by the IRS of the regulation of paid return preparers including the exam that 1040 preparers who are not active CPAs, attorneys or Enrolled Agents must pass to continue to be eligible to prepare 1040s. I have been including this topic even in my updates to CPA groups because I think they are going to soon have clients asking them if they are a "Registered Tax Return Preparer" so they need to know what that even means.
- I think we are going to see a major reduction in the number of special tax credits, deductions and exclusions ("tax expenditures") to help pay for a lower corporate tax rate and to pay for keeping some rate cuts for individuals and to help pay down or multi-trillion dollar deficit and debt.
- 2011 actions may lead Congress to finally enact legislation to effectively overturn the 1992 Quill decision to allow states with the right kind of simplification measures in their sales tax to collect sales tax from remote vendors. I think the bill that will be taken up is S. 1832 - the Marketplace Fairness Act which is supported by Amazon and California BOE chair Horton. States are in need of revenue and the feds can't offer much assistance due to its one revenue problems. So, passing S. 1832 will be one way to help get money to states because compliance by vendors will be much higher than the very low compliance by consumers self-assessing use tax.
What do you think?