Weekly Post
Senator Unveils Proposals for International Tax Reform
WASHINGTON, D.C. (NOVEMBER 19, 2013)
BY MICHAEL COHN
Senate Finance Committee chairman Max Baucus, D-Mont., has released the first in a series of discussion drafts for overhauling the Tax Code, with the first set of proposals focusing on international tax reform.The proposal details ideas on how to reform international tax rules to spark economic growth, create jobs and make U.S. businesses more competitive. Additional tax reform discussion drafts will be released later this week.
Baucus and his counterpart in the House, Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee, have committed to drafting comprehensive tax reform legislation this year after making joint appearances around the country this year to listen to taxpayer concerns. However, the prospects for passing a tax reform package appear increasingly unlikely in the current atmosphere of partisan rancor and gridlock in Congress. But 2013 is seen as a better year to try to enact a tax overhaul than 2014, when lawmakers will be focused on the elections.
“Over the past three years, the Finance Committee has examined every aspect of the tax code in an effort to fix a broken system,” Baucus said in a statement. “Through hearings, option papers and blank slate proposals, we’ve received input from key stakeholders and nearly every member of the Senate. These discussion drafts are the next step. They represent proposals collected throughout this process and provide a path forward on tax reform. Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideas worth exploring.”
Reactions from House Lawmakers
Camp issued a statement of support for Baucus’s tax reform discussion draft.
“Today’s release of Chairman Baucus’ international tax reform draft underscores the ongoing conversation about how we can fix our broken tax code so that America is a more attractive place to hire and invest,” camp said in a statement. “This is a critical debate that must take place if we are going to get our economy back on track. I applaud Chairman Baucus for his continued commitment to advancing tax reform forward amongst his Senate colleagues.”
The ranking Democratic member of the Ways and Means Committee, called for consideration of the proposals. “Senator Baucus has put forth some interesting ideas that need serious consideration,” said Rep. Sander Levin, D-Mich. “As reflected in his draft, tax reform must be driven by policy, not by rate targets. I agree with Senator Baucus that tax reform should raise significant revenue. As Ways and Means Democrats have repeatedly said, the only path to the needed enactment of tax reform is a bipartisan one in both the House and Senate.”
While not a final plan, the staff discussion drafts aim to spur a conversation about areas where Republicans and Democrats may be able to reach agreement on how to fix the broken tax code. Baucus is also looking for additional feedback from stakeholders and the American public as he continues his work to overhaul the Tax Code. Feedback on the international tax reform discussion draft is requested by Jan. 17, 2014 and comments can be sent to:mailto:tax__reform@finance.senate.gov.
The discussion draft released Tuesday focuses on overhauling the international tax system. Many of the major features of the current international tax system were created in the 1960s, Baucus’s office noted, and address a world that no longer exists. The complexity and uncertainty in the U.S. tax code puts America at a disadvantage in the global economy and stifles competition.
Baucus believes tax reform should motivate businesses to bring jobs and money back to the U.S. The discussion draft outlines proposals to make the U.S. more attractive and competitive for multinationals to invest and create jobs, reduce incentives for U.S. companies to move jobs or the entire company overseas, end the trapped cash problem, allowing foreign profits to be invested in America again, make it harder for multinationals to shift profits to tax havens, which reduce our ability to invest in U.S. infrastructure, education and other vital initiatives.
Accounting Firms Weigh In
“As with the President’s framework for tax reform and Chairman Camp’s options for tax reform, Senator Baucus’s discussion draft on international tax reform, released today, contributes to the growing consensus that our international tax rules need to change,” said Manal Corwin, national leader of the International Tax practice of KPMG LLP and former deputy assistant secretary for tax policy for international tax affairs at the U.S. Treasury Department. “While there are design differences in the various approaches offered by the Administration, Chairman Camp, and Senator Baucus, significantly, all three approaches reflect concerns about and incorporate mechanisms to help address base erosion. Senator Baucus’s discussion draft proposes to adopt a minimum tax on offshore earnings to help address base erosion and profit shifting (offering two alternative design approaches for implementation). The concept of adopting a minimum tax on offshore earnings was also a key feature of the President’s framework for tax reform.”
Eric Solomon, co-director of Ernst & Young’s National Tax practice in Washington, D.C., also sees value in the Baucus’s discussion draft. "Senator Baucus's proposal is the product of tremendous time and effort over the past two years,” he said. “Laying that groundwork is a prerequisite for proposing successful tax reform. Passing tax reform will require commitment and leadership at all levels of government. The discussion draft would fundamentally shift the way US businesses pay taxes on their foreign operations. The US has the highest statutory corporate tax rate in the world. In order to meet Senator Baucus's stated goals of making US businesses more competitive globally, there needs to be a substantial reduction in the tax rate.”
Corporate Tax Lobbyists
While Baucus believes tax reform as a whole should raise significant revenue for deficit reduction, the international tax reform discussion draft is intended to be long-term revenue neutral. “We need to bring our tax system into the 21st century and make the U.S. more competitive,” he said. “That’s what tax reform can do—it can help America overcome the competitiveness crisis that’s driving businesses and jobs overseas.”
The RATE Coalition, a group lobbying for lowering the corporate tax rate, insisted that revenue from closing loopholes should go toward lowering overall tax rates. Co-Chairs Elaine Kamarck, a former White House adviser to President Bill Clinton and Vice President Al Gore, and James P. Pinkerton, a former White House domestic policy adviser to Presidents Ronald Reagan and George H.W. Bush, issued their own statement on the progress of comprehensive tax reform.
“Leaders in both parties agree on the need for comprehensive tax reform," they said. "The RATE Coalition supports their efforts to move forward on legislation that lowers the corporate rate to an internationally competitive level and simplifies the code. The 113th Congress has always been the best opportunity to pass true reform and that remains the case. As talks on tax reform progress it is important that negotiators understand that closing loopholes is key to fundamental reform, though they should be included only as part of a tax reform agreement. Revenue directed at anything else will imperil a future agreement and impede America’s ability to compete in the international marketplace.”
Another corporate lobbying group, the LIFT America Coalition, was more critical of the initial discussion draft. “The Senate Finance discussion draft released today represents yet another milestone in the long overdue effort to overhaul America’s international tax laws, yet instead of moving the United States closer to a more competitive tax system, the draft’s provisions actually take the nation further away from the pro-growth, pro-jobs business tax reform that American companies and workers are seeking,” said the group.
A different corporate lobbying group, the Alliance for Competitive Taxation, also panned the proposals. “While we are encouraged by Chairman Baucus’ continued commitment to pass comprehensive tax reform, we are concerned that the international reform ideas in the staff draft undermine the stated goals of creating jobs, generating growth, and making America more competitive around the world,” the group said in a statement. “The chairman has recognized how today's uncompetitive tax code is already leading to the loss of U.S. companies. Unfortunately, many of these proposals would put the U.S. tax system even more out of line with the rest of the world. We are concerned that this staff proposal, if enacted, would make a bad system worse with anti-competitive measures that favor foreign companies and would result in even more foreign acquisitions of American businesses and an even greater loss of U.S. jobs.”
Baucus's office said that additional tax reform discussion drafts will be released later this week. They include proposals to streamline and reduce overly burdensome and costly tax administration rules, and to reform cost recovery and accounting. The discussion drafts are based on bipartisan ideas and incorporate bills introduced by both Republicans and Democrats.
Weekly Post
The Internal Revenue Service released the annual cost-of-living adjustments Thursday affecting dollar limitations for pension plans and other retirement-related items for tax year 2014, allowing taxpayers to contribute up to $17,500 to their 401(k) plans in 2014.
In addition, the IRS announced Thursday that it is modifying the “use or lose” rule for health care flexible spending arrangements, permitting a carryover of up to $500 to provide greater flexibility to plan participants (see Treasury Relaxes 'Use or Lose' Rule for Flexible Spending Accounts). The agency also issued the annual inflation-adjusted tax rate schedules and other changes in tax benefits for 2014 on Thursday (see IRS Adjusts 2014 Tax Rates for Inflation).
The IRS added that some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment, but there will be changes in some pension plan limitations.
• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.
• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.
• The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
• The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.
Here are some details on both the unchanged and adjusted limitations:
Section 415 of the Tax Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
Effective Jan. 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) has increased from $205,000 to $210,000. For a participant who separated from service before Jan. 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2013, by 1.0155.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.
The Tax Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2014 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $17,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $205,000 to $210,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $17,500.
The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) has increased from $205,000 to $210,000.
The Tax Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2014 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $59,000 to $60,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,625 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $44,250 to $45,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $29,500 to $30,000.
The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.
The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.
The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,066,000 to $1,084,000.
It’s the time of year to again start thinking about expiring tax provisions. Usually the first thing that comes to mind is the alternative minimum tax, but this particular issue was “fixed” in January of this year by the fiscal cliff bill. That still leaves a number of expiring provisions, according to Robert Kerr, senior director of government relations at the National Association of Enrolled Agents.
Among them, Kerr noted, are the deduction for state and local sales taxes; the deduction for mortgage insurance as qualified interest; the above-the-line deduction for qualified tuition and related expenses; the above-the-line deduction for certain expenses of elementary and secondary school teachers; the Work Opportunity Tax Credit; the increase in expensing and the expansion of the definition of Section 179 property; the Research and Experimentation Tax Credit; and the 15-year straight line cost recovery for qualified leasehold, restaurant and retail improvements.
Every year the alternative minimum tax was at the head of the list of things that needed fixing, observed Kerr. “Each year that we didn’t have a fix, we had a growing number of people on the AMT bubble. It created a ‘whale tail’ when you paid for the patch. Since the increase in cost to pay for the patch wasn’t linear, it was exponential. It didn’t grow gently. Probably the piece that got our attention was there were some 20 million potentially affected out of the total population of taxpayers.”
There are a number of reasons that less attention is being paid this year to the extenders, Kerr indicated. “One reason is that AMT is no longer the engine that drives the extender train,” he said. The other is the overall legislative environment this year—the budget, the sequester, the shutdown, and talk of tax reform. At least the Ways and Means Committee had visions of managing the extenders within the context of tax reform.”
“The net is that we’re sitting here with 10 legislative days left in the year, and we don’t have any word on the extenders except for the notion that they will be included in the El Dorado of tax reform,” he said. “My take on that is tax professionals desire stability and predictability above all else, and the current state of affairs on extenders provides us with neither.”
Will Congress act before the end of the year to extend some or most of these? Will they all expire, only to be resurrected retroactively during the filing season—or in 2015? Or will they just expire, period?
“None of us should be surprised if we find ourselves in precisely the same situation as at the beginning of 2013, and proceed all the way through 2014 without knowing which ones will be retroactively extended,” said Kerr.
IRS Systems Faulted for Identity and Access Management Security
Taxpayer data is vulnerable to inappropriate use, modification or disclosure, perhaps without being detected, according to a new government report that found problems with the Internal Revenue Service’s technology for configuration management and identity and access management.
The report, from the Treasury Inspector General for Tax Administration, reviewed the IRS’s compliance with the Federal Information Security Management Act, of FISMA, and found the agency to be compliant in most areas. However, it cautioned that until the IRS takes steps to fully implement all 11 security program areas covered by FISMA, taxpayer data will remain vulnerable.
Under the FISMA legislation, the Offices of Inspectors General are required to perform an annual independent evaluation of each federal agency’s information security programs and practices. The report released Monday by TIGTA presents the results of its FISMA evaluation of the IRS’s information security program for fiscal year 2013.
Based on the evaluation, TIGTA found that nine out of 11 security program areas were generally compliant with the FISMA requirements. In addition, six of the nine security program areas included all of the program attributes specified by the Department of Homeland Security’s fiscal year 2013 Inspector General Federal Information Security Management Act Reporting Metrics, including continuous monitoring management, risk management, a plan of action and milestones, contingency planning, contractor systems and security capital planning.
Three of the nine security program areas, while generally compliant, were not fully effective due to one program attribute that was missing or not working as intended. These areas were incident response and reporting, security training, and remote access management.
However, two of the 11 security program areas were not compliant with FISMA requirements and did not meet the level of performance specified by the DHS’s FY 2013 Inspector General Federal Information Security Management Act Reporting Metrics due to the majority of the DHS-specified attributes being missing or not working as intended. These were in the areas of configuration management and identity and access management.
TIGTA did not include recommendations in the report, and no response from the IRS was included either.
New Post Weekly
2014 Tax Season to Start Later Following Government Closure; IRS Sees Heavy Demand As Operations Resume
WASHINGTON–The Internal Revenue Service today announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government closure.
The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4.
The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.
About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.
“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”
The IRS will not process paper tax returns before the start date, which will be announced in December. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.
IRS processes, applications and databases must be updated annually to reflect tax law updates, business process changes, and programming updates in time for the start of the filing season.
The IRS continues resuming and assessing operations following the 16-day closure. The IRS is seeing heavy demand on its toll-free telephone lines, walk-in sites and other services from taxpayers and tax practitioners.
During the closure, the IRS received 400,000 pieces of correspondence, on top of the 1 million items already being processed before the shutdown.
The IRS encourages taxpayers to wait to call or visit if their issue is not urgent, and to continue to use automated applications on IRS.gov whenever possible.
“In the days ahead, we will continue assessing the impact of the shutdown on IRS operations, and we will do everything we can to work through the backlog and pent-up demand,” Werfel said. “We greatly appreciate the patience of taxpayers and the tax professional community during this period.”
