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Friday, May 31, 2019

Growing U.S. Gig Workforce Exposes Outdated Tax System

For the past several years I've spent a lot of time on tax issues - federal, state and local, for the gig economy. While at the ABA Tax Section meeting in DC this month, I co-presented on this topic and participated in a podcast on the topic for Bloomberg Tax.  Here is the link.

A few reform suggestions I have:
  • Remove the de minimis filing threshold for From 1099-K for third-party settlement organizations such as Uber, Lyft, Airbnb and Paypal. This ensures everyone receiving a payment from someone else through these platforms gets a reporting form. That makes it easier for tax compliance for the gig workers because the document can feed into their tax prep software. Yes, they need to make adjustments to the gross receipts shown on the 1099-K but the platforms can help by making those adjustments (such as for the platform's fees, returns, etc) easy to find on the taxpayer's platform account. Yes, this causes a hassle for non-business folks selling household junk on eBay at a loss, but the IRS should create a schedule for reconciling reporting forms. This will help all taxpayers and the IRS, well beyond the eBay example.
  • Congress needs to clarify worker classification rules and ideally, work with states to have just one classification system for all laws. It is crazy that within a state or a federal legal system or between federal and state laws, a worker might be a contractor for one law but an employee for another.
  • Laws need to change to make it easier for gig workers to save for retirement and other needs. Tax dollars benefiting employee fringe benefits (including the exclusion for employer-provided health insurance) and retirement benefits can be reduced to free up funds to benefit all workers whether they are employee or contractors.
I hope you enjoy the podcast.

For more, please also see a State Tax Notes article, Failure to Innovate: Tax Compliance and the Gig Economy Workforce, 5/6/19, by Caroline Bruckner and me.

What do you think?

Tuesday, May 21, 2019

TCJA Guidance Report from TIGTA

On May 14, TIGTA released a report, Status of the Office of Chief Counsel's Issuance of TCJA Guidance. It reviewed the process for issuing guidance on the 100+ provisions of the Tax Cuts and Jobs Act (P.L. 115-97; 12/22/17). It also lists the guidance issued through the end of March (83 items) and what is expected from that date (95 items). A good amount of this includes Treasury Decisions, meaning final regs of the numerous proposed regs issued so far. Here is the detail of what they still plan to issue:

44 Treasury Decisions
35 NPRMs
 4 Revenue Rulings
 6 Revenue Procedures
 4 Notice
 1 Announcement
 1 Undetermined

Appendices to the report list the specific topics of the guidance.

This is a lot of guidance. Practitioners and taxpayers are likely to raise issues on some of the items, as they have with earlier guidance. That could lead to further changes.

Will it all be done by time 2019 tax returns are due?  Probably not and new issues will arise. It's a difficult process as many of the TCJA items are complex such as the international provisions, the business interest expense limitation and the changes for tax-exempt entities. Some of the regulations issued are over 100 pages long! There are many new definitions, limitations, safe harbors, special rules and more.

To get a sense of how long guidance can take, consider that we still have some temporary regulations from the Tax Reform Act of 1986, such as Reg. 1.163-8T and 1.469-5T (issued before 11/20/88 so not subject to the 3-year expiration date of section 7805). Also, on March 26, 2019, proposed regulations were issued under sections 301, 356, 368 and 902. The explanation of these regulations states that they are needed to "update existing regulations under section 301 to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988"! [REG-121694-16 (3/26/19)]

Is there an easier way so we don't have to wait so long and have uncertainty as to how some provisions work or have taxpayers taking differing positions, unfortunately with little risk given the low audit rates? I think much of the complexity could have been avoided. For example, for the qualified business income deduction of section 199A, don't include the limitation for "specified service trades or businesses" as it isn't needed and only affects high income individuals. Don't have so many loss and deduction limitations. Instead, see if just one can work. 

What do you think?

Tuesday, May 14, 2019

12th Anniversary of This Blog

I started this blog on May 14, 2007 as a way to share ideas and generate discussion on ways to improve our tax systems. My focus is to discuss and propose ideas to enable our tax laws to reflect the way we live and do business today and to reflect principles of good tax policy.

Upcoming over the next several months leading to the election, I plan to start a presidential series to discuss tax proposals of candidates, questions we should be asking of candidates regarding taxes, and suggesting ideas for improving our tax systems. I expect a lot of this will also include a look at the $1.4 trillion of spending that is buried in our tax system via tax expenditures - that is, special deductions, exclusions, rate and credits that are not crucial to the particular tax and mostly just result in higher tax rates and usually, subsidies for taxpayers who don't need them.

For example, California Senate Kamala Harris has once again proposed the LIFT Act (S. 4, Livable Incomes for Families Today) the Middle Class Act). It offers a tax credit of up to $3,000 per year ($250/month) ($6,000 if married filing jointly), based on earned income.

I think many people first react saying - why? That's a lot of money.

But, consider what the tax break is for a high income individual today with a $1 million grandfathered mortgage on their first (and/or second home) generating an interest expense deduction of about $40,000. Let's say this person also has health insurance paid by his/her employer of $15,000 (tax free), and $3,000 of tax-exempt interest income.  Let's say this person is in the top rate of 37%. The value of these deductions is $21,460 or almost $1,800 per month.  Even if this person had a marginal rate of 35% or 32% the subsidy received just for these tax breaks is more than what LIFT offers.

Of course, there are more people who would qualify for the S. 4 credit than there are folks in the top tax brackets.

But, I hope this illustrates questions we should be asking (such as why are we providing large subsidies to those who don't need them, and how much could rates be lowered if we cut back on tax breaks). Also, is the monthly credit the best way to go? What are the costs to administer? How can technology make this all a more efficient process.

If you have suggestions or questions, please post them here.

Thank you for reading this blog!

Monday, May 6, 2019

Taxpayer First Act and IRS Free File Program

H.R. 1957, the Taxpayer First Act, passed in the House on April 9, 2019, includes several provisions intended to improve IRS operations and taxpayer services. One that has received a good amount of media attention is a prohibition that the IRS can't create its own tax prep and filing software.  When I first heard that I was puzzled as I did not see that prohibition in the bill.

But, in looking more carefully, I was reminded of something I always remind my students of - don't overlook what might appear to be unnecessary language and information in parentheses. Sec. 1102 of the House passed bill states that the Treasury Department shall continue to operate the "IRS Free File Program as established by the Internal Revenue Service and published in the Federal Register on November 4, 2002 (67 Fed. Reg. 67247), including any subsequent agreements and governing rules established pursuant thereto."

Well, when you look at that page in the Federal Register, you'll see on page 67249 in the middle column in the bottom half of the page, the following:

"During the term of this Agreement, the IRS will not compete with the Consortium in providing free, on-line tax return preparation and filing services to taxpayers."

I don't know if the IRS has any plans to compete with the many software companies providing tax preparation services, but how broadly might that prohibition be interpreted?  And why tie the IRS hands at all?  A few years ago, the IRS started working on what it calls the IRS Future State. This provides taxpayer with online accounts where they can see their returns and documents and perform many functions, likely also paying their taxes. Might any of this software be prohibited?

Some people think the IRS isn't capable of creating anything too advanced technology-wise as it is a government agency. I disagree. Certainly, it needs funding for any technology modernization. Let's remember that the Internet started from the government's ARPANET project launched in 1958 and this July 20 is the 50th anniversary of men landing on the moon and returning!  That's a lot of government technology.

On 5/6/19, Senators Grassley and Wyden sent a letter to IRS Commissioner Rettig noting concerns with the recent news reports that allege "deceptive advertising practices and practices involving search-engine manipulation by some of the private-sector participants" in the Free File program. They want to receive updates from the IRS as they review the program and how to improve it.

What do you think?

Monday, April 29, 2019

Tax, Tokens and the Blockchain - H.R. 2144 of 116th Congress

Introduced on April 9 2019, the Token Taxonomy Act of 2019 (H.R. 2144) would “amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”
The proposed di minimis exemption is worded as follows:
“(a) In General.—Gross income shall not include gain from the sale or exchange of virtual currency (as defined under section 408(m)) for other than cash or cash equivalents.
“(b) Limitation.—
“(1) IN GENERAL.—The amount of gain excluded from gross income under subsection (a) with respect to a sale or exchange of virtual currency shall not exceed $600.
“(2) AGGREGATION RULE.—For purposes of this subsection, all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as one sale or exchange.
“(c) Inflation Adjustment.—In the case of any taxable year beginning in a calendar year after 2018, the dollar amount in subsection (b) shall be increased by an amount equal to—
“(1) such dollar amount, multiplied by
“(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in subparagraph (a)(ii) thereof.
Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.”
Sec. 10(c) of H.R. 2144 provides:
“Reporting Of Gains Or Losses.—The Secretary of the Treasury shall issue regulations providing for information returns on transactions in virtual currency (as defined under section 408(m)) for which gain or loss is recognized.”
Proposed new §408(m) defines virtual currency as: “For purposes of this subsection, the term ‘virtual currency’ means a digital representation of value that is used as a medium of exchange and is not currency (within the meaning of section 988).”
Also see sponsor Rep. Davidson’s press release of 4/9/19 on the proposal.  It addresses the token and blockchain aspects of the proposal but not its tax proposals.
Observations/Queries: How broad are the reporting regulations intended to be? More should be specified in the bill.  For example, are the sponsors aiming to be sure exchanges that exchange virtual currency for other virtual currency or U.S. dollars issue a reporting form?  Or is this broader and any merchant would be issuing a report that it received virtual currency and the value it assigned to it (generally, the selling price of the goods or services exchanged)? Also, how broad should a $600 exclusion for gain from transactions be applied?  After all, $100 of bitcoin in 2010, was worth about $4.3 million in fall 2017.  And it is still worth a lot today.  The exclusion would incentivize these holders to only purchase goods and services from merchants who take bitcoin and to never spend more than $600 at a time. This would enable them to exclude the gain although it might take a long time to fully exclude the gain on that $100 cost basis of bitcoin. A policy goal of an exclusion is to simplify tax reporting by not having to figure out the gain or loss when virtual currency is used to buy low-value items.  The foreign currency exclusion at Section 988(e) is $200. Why not use that same amount for virtual currency? Also, consideration should be given to not allowing the exclusion for bitcoin acquired before a specified date due to the tremendous inherent gain that exists in it that arguably defeats the policy reason for a de minimis reporting rule. Also, I suspect including all of this highly appreciated virtual currency will make this bill cost too much and possibly not get enacted, when it can provide a helpful benefit to avoid tracking small gains and losses that might many times be less than $5.
For more on virtual currency and blockchaing, please visit my website on these topics.

What do you think?