Wednesday, September 30, 2009

IRS Updates Travel Expense Per Diem Rates
September 30, 2009

On Wednesday, the IRS released Revenue Procedure 2009-47, which is its annual update to the substantiation rules for business travel expenses when an employer provides a per diem reimbursement allowance. It sets the per diem rate for travel to high-cost localities and for travel to other localities in the continental United States.

The revenue procedure covers situations in which an employee incurs lodging, meal and incidental expenses or just meal and incidental expenses (M&IE) while traveling away from home on business. It does not cover situations in which an employer provides an allowance to pay for the employee’s lodging expenses but not meal and incidental expenses.

The revenue procedure sets the general federal M&IE rate at $59 for the continental U.S. (CONUS) and at $65 for locations outside the continental U.S. (OCONUS).

For taxpayers using the high-low substantiation method, which includes lodging, the per diem rate is $258 for travel to any “high‑cost locality” (as defined in the revenue procedure) or $163 for travel to any other locality within CONUS.

The new high-cost localities (at least for certain dates) this year are Monterey, Calif.; Denver/Aurora, Colo.; Bar Harbor, Maine; Conway, N.H.; Glens Falls, N.Y.; Lake Placid, N.Y.; and Hershey, Pa. The following localities have been removed from the list: Crested Butte/Gunnison, Colo.; Silverthorne/Breckenridge, Colo.; and Palm Beach, Fla. The complete list of high-cost localities is in section 5.03 of Revenue Procedure 2009-47.

Taxpayers do not have to use the methods described in the revenue procedure if they maintain adequate records to substantiate actual expenses. The revenue procedure is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only that are paid to an employee on or after Oct. 1, 2009, for travel away from home on or after Oct. 1, 2009. However, a payor who used the substantiation method of section 4.01 of Revenue Procedure 2008-59 (which is superseded by Revenue Procedure 2009-47) for an employee during the first nine months of 2009 may not use the high-low substantiation method in Revenue Procedure 2009-47 for that employee until Jan. 1, 2010. Also, a payor who used the high-low substantiation method of Revenue Procedure 2008-59 for an employee during the first nine months of calendar year 2009 must continue to use the high-low substantiation method for the remainder of calendar year 2009 for that employee.

Monday, September 28, 2009

Some States Push to Ban Mandate on Insurance
Published: September 28, 2009

ST. PAUL — In more than a dozen statehouses across the country, a small but growing group of lawmakers is pressing for state constitutional amendments that would outlaw a crucial element of the health care plans under discussion in Washington: the requirement that everyone buy insurance or pay a penalty.

Approval of the measures, the lawmakers suggest, would set off a legal battle over the rights of states versus the reach of federal power — an issue that is, for some, central to the current health care debate but also one that has tentacles stretching into a broad range of other matters, including education and drug policy.

Opponents of the measures and some constitutional scholars say the proposals are mostly symbolic, intended to send a message of political protest, and have little chance of succeeding in court over the long run. But they acknowledge the measures could create legal collisions that would be both costly and cause delays to health care changes, and could be a rallying point for opponents in the increasingly tense debate.

“This does head us for a legal showdown,” said Christie Herrera, an official at the American Legislative Exchange Council, a group in Washington that advocates limited government and free markets, and which on Sept. 16 offered guidance to lawmakers in more than a dozen states during a conference call on the state amendments.

So far, the notion has been presented in at least 10 states (though it has already been rejected or left behind in committees in some of them), and lawmakers in four other states have said they will soon offer similar measures in what has grown into a coordinated effort at resistance. (Arizona, which has placed the amendment on its ballot in 2010, seems the furthest along)

Here in Minnesota, like in many of the other states, the move to amend the State Constitution is being driven by a handful of Republican lawmakers.

“All I’m trying to do is protect the individual’s right to make health care decisions,” said State Representative Tom Emmer, a Republican. “I just don’t want the government getting between my decisions with my doctors.”

The first efforts actually predate the Obama administration and the current federal health care debate. Proposed constitutional amendments began cropping up after 2006, when Massachusetts passed a sweeping state law meant to create nearly universal health coverage for residents. Elsewhere, some leaders — opposed to the possibility of insurance mandates, government-run systems or rules barring people from paying for their health care procedures — began suggesting constitutional amendments to block such measures from their own states.

In Arizona, with help from Dr. Eric Novack — an orthopedic surgeon who says his intent was not “some grand secessionist plot” but merely a health care overhaul with protections for individuals’ rights — an amendment first went before voters in 2008. The idea lost, but by fewer than 9,000 votes among more than two million cast. This year, Arizona’s Legislature, dominated by Republicans in both chambers, voted to send the question back to the ballot in 2010.

Few in the public seemed focused on health care a year ago, those involved in Arizona’s ballot question said, but the recent debate over a federal overhaul has changed all that, and proponents of the amendment believe that will improve its chances both in Arizona and in other states, where similar efforts have taken root.

The federal proposals, though, have also changed the potential fallout if such amendments were to pass.

Clint Bolick, litigation director at the Goldwater Institute, a conservative research group based in Arizona that favors free enterprise, and who has helped lead Arizona’s efforts, said he believed the inevitable “legal clash” — if the federal government adopts a health care law and if states change their constitutions — was winnable for the states.

Although the Constitution’s supremacy clause ordinarily allows federal law to, in essence, trump a state law that conflicts with it, Mr. Bolick said that was not always the case, depending on “the strength of the state interest.” Mr. Bolick said he viewed two recent Supreme Court cases, related to an education question in Arizona and a utility district in Texas as indications that the current court might be open to such a state claim.

But several other legal experts said they saw little room for such a challenge. “States can no more nullify a federal law like this than they could nullify the civil rights laws by adopting constitutional amendments,” said Timothy Stoltzfus Jost, a health law expert at Washington & Lee University School of Law.

Mark A. Hall, a law professor at Wake Forest who has studied the constitutionality of mandates that people buy health insurance, said, “There is no way this challenge will succeed in court,” adding that the state measures seemed more “sort of an act of defiance, a form of civil disobedience if you will.”

Even Randy E. Barnett, a Georgetown Law professor who has written about what he views as legitimate constitutional questions about health insurance mandates, seemed doubtful.

“While using federal power to force individuals to buy private insurance raises serious constitutional questions, I just don’t see what these state resolutions add to the constitutional objections to this expansion of federal power,” Professor Barnett said.

In Minnesota, even before the prospect of a court clash, Mr. Emmer appears to have an uphill battle ahead. Before voters can consider amending the state’s constitution, Mr. Emmer needs approval from the Legislature, which is dominated by Democrats. He has offered the Health Care Freedom Act in years past, but it has never made its way to a vote, and Margaret Anderson Kelliher, the Democratic speaker of the House who is also among the wide field of candidates for governor, said last week that she doubted it stood much of a chance this time either.

“Most legislators are interested in improving the health of Minnesotans, and how to do more health care reform,” Ms. Kelliher said. “No one thinks the answer is a states’ right movement.”

Still, Mr. Emmer, who is a candidate for governor, says he is hopeful. He emphasizes that such an amendment — regardless of court battles over a federal plan — would certainly spare Minnesotans from the potential downsides of some future state health care plan.

And this whole amendment notion, he said, would not prevent anyone from taking part in a federal health program; it would merely block people from being forced to do so.

Of legal experts who discount the states’ chances of trumping a federal plan, Mr. Emmer seemed unconvinced.

“They’re essentially saying that state constitutions are meaningless, and I disagree,” he said. “And tell me where in the U.S. Constitution it says the federal government has the right to provide health care? This is the essence of the debate.”

Emma Graves Fitzsimmons contributed reporting.

Sunday, September 27, 2009

More tax cases vs wealthy, U.S. banks
By Kim Dixon Kim Dixon – Sat Sep 26, 5:33 pm ET

CHICAGO (Reuters) – The U.S. government is stepping up prosecutions of wealthy individuals dodging taxes through off-shore accounts, with new cases expected to be made public "every couple of weeks," a top government attorney said on Saturday.

U.S. officials have been sifting through about 250 client names obtained through a February settlement of a criminal probe against Swiss banking giant UBS AG, alleging the bank illegally helped U.S. taxpayers hide funds offshore.

That effort, along with an amnesty program encouraging tax evaders to turn themselves in, is speeding prosecutions, one of the top U.S. lawyers working on the cases at the U.S. Justice Department said.

"You can expect a few every couple of weeks," Kevin Downing, a senior attorney in the tax division of the Department of Justice told an American Bar Association tax conference.

On the sidelines of the conference, Downing also told Reuters that U.S. banks that helped U.S. clients hide money off-shore are a target.

"The folks in the United States that we get information on are obviously the easiest ones for us to pursue," he said.

"So anybody in the U.S. ... the U.S. banks helping U.S. clients set these offshore accounts up, we are doing the same thing," in going after them, he said.

In August, UBS AG agreed to disclose the names of 4,450 American holders of secret accounts at the bank, ending a related lawsuit that has begun to show cracks in Switzerland's prized banking secrecy.

"The UBS case has been a great success for the government," Downing said. "It is not an anomaly. It is the beginning of what is now a resource-intensive," process of going after other banks and countries.

The government has secured six guilty pleas so far in its effort, including one on Friday, where a New Jersey man pleaded guilty for failing to report about $6.1 million he had held in a UBS AG Swiss bank account.

On a parallel track to the UBS case, the government last Monday extended a temporary amnesty program by three weeks to October 15, to encourage wealthy Americans with undeclared assets abroad to come forward.

Those taking part in the amnesty program pay reduced penalties and generally avoid criminal prosecution.

Downing also said the government has "made a lot of headway" in dealing with foreign banks, Downing said. "Let your clients know if they think it's just UBS they are mistaken," he told the group of tax lawyers.


The UBS case and its ramifications dominated many discussions and spiced up what would arguably be a dry conference on taxation.

One moderator began his presentation, noting "this is not going to be about UBS," though often the subject crept back in.

Another government lawyer working on the cases said the publicity of the UBS cases has engaged juries.

"In today's environment when we are seeing criminal tax cases and prosecutions on the front pages of the newspapers almost daily ... the message is getting out," Jeff Neiman, an assistant U.S. attorney for the Southern District of Florida where much of the UBS cases are playing out, said.

Juries are paying attention and becoming more sympathetic, he said, "especially in these tough economic times."

Georgia bank is 95th U.S. failure of 2009
By John Letzing, MarketWatch

SAN FRANCISCO (MarketWatch) -- Atlanta-based Georgian Bank was closed by regulators on Friday, marking the 95th U.S. bank failure of the year as the credit crunch continues claiming victims.

Georgian Bank had $2 billion in assets and $2 billion in deposits as of July 24, according to the Federal Deposit Insurance Corp.

Columbia, S.C.-based First Citizens Bank and Trust Company Inc. has agreed to assume the failed bank's deposits, the FDIC said in a statement.

The FDIC estimated that the cost of the bank's failure to the federal deposit insurance fund will be $892 million.

Georgian Bank is the 19th Georgia bank to fail this year.

John Letzing is a MarketWatch reporter based in San Francisco.

Thursday, September 24, 2009

Seniors' hopes, fears at center of health debate
The Associated Press
Thursday, September 24, 2009; 9:58 PM

WASHINGTON -- For the moment, the health care fight is all about older folks.

Democrats agonized Thursday over how to soothe worried seniors but decided one idea was too risky because it could antagonize the powerful drug industry whose support is critically needed for President Barack Obama's broader overhaul.

The Senate Finance Committee defeated a Democratic amendment that would have gradually closed the coverage gap in the Medicare drug benefit at the expense of drug makers. Nonetheless, another proposal to shield seniors in Medicare private insurance plans from benefit cuts remained alive.

Thanks to Medicare, virtually all seniors have reliable insurance coverage - and most are happy with it. But with Democrats planning to finance an overhaul by cutting $500 billion from Medicare and Medicaid, many seniors are worried their benefits will be devalued. Republicans have seized on the issue, forcing Democrats to scramble.

In its third day of deliberations, the committee voted 13-10 to reject an amendment by Sen. Bill Nelson, D-Fla., that required drug makers to rebate $106 billion over 10 years to the government for medications used by low-income Medicare beneficiaries.

Three Democrats, Bob Menendez of New Jersey, Tom Carper of Delaware and Chairman Max Baucus of Montana, joined Republicans in voting against the proposal. Menendez and Carper warned that the amendment could undermine support for Obama's push to cover the uninsured.

The drug industry signed on early to Obama's goal, pledging $80 billion in savings over 10 years, including a 50 percent discount for seniors who fall into the "doughnut hole" coverage gap. Squeezing the drug companies for even more proved to be too threatening to the fragile political coalition Obama is trying to hold together.

Menendez told senators that Nelson's amendment "may very well undermine the essence of this agreement" and "put us in a position that makes it very difficult to move forward."

Pharmaceutical companies are major employers in the home states of Menendez and Carper. The White House lobbied against the amendment, senators said, underscoring the industry's clout.

Carper said after the vote he had received no direct warning from the drug companies that they would abandon the deal if the amendment passed. "I know I would," he added. "I'd say, 'Take a hike.' "

Meanwhile, another Nelson amendment would preserve extra benefits such as eyeglasses and dental care for many seniors currently enrolled in Medicare private insurance plans. The private plans now get a bonus that Democrats want to cut.

"I don't think it's a good thing to go in and tell senior citizens, 'What you have now, you have to give up,' " said Nelson. "That is a nonstarter."

The Finance Committee is the last of five congressional panels to debate health care legislation that is atop Obama's domestic agenda. While the bill omits several provisions backed by liberals, Baucus hopes to hold support from all Democrats on the panel, and perhaps pick up support from Republican Sen. Olympia Snowe of Maine.

Snowe has yet to disclose her intentions, and while she sometimes sided with fellow Republicans, she also has voted with Democrats at other points.

At its core, the bill is designed to expand health insurance coverage to millions of people who lack it, employing a new system of federal subsidies for lower-income individuals and families and establishing an insurance exchange in which coverage would have federally guaranteed benefits. Insurance companies would be prohibited from refusing to sell insurance based on an individual's health history, and limits would be imposed on higher premiums based on age.

At the same time, Baucus - in keeping with Obama's wishes - drafted legislation that would reduce the skyrocketing rate of medical spending overall. The bill's price tag is about $900 billion over a decade.

Legislation already has cleared three committees in the House, and the leadership is slowly piecing together changes that could lead to a vote next month.

House Democratic leaders were groping for consensus Thursday as they worked to merge the legislation into a single bill to bring to the floor. They hope to finish by next week but plenty of issues were still unresolved, from whether to strengthen measures to prevent illegal immigrants from getting government-funded coverage, to the shape of a new public insurance plan that would compete with private companies.

A showdown over the public plan was expected Friday in the Finance Committee. Sens. Jay Rockefeller, D-W.Va., and Chuck Schumer, D-N.Y., said they would press for a vote on an idea that has become a rallying cry for liberals. Baucus pointedly omitted a government option from the plan he put before the committee, saying such an option couldn't pass the Senate. But liberals are eager to prove him wrong.

"Even though the public plan may be an underdog in the Senate Finance Committee, don't count it out," Schumer said.

The government option continues to enjoy support from about two-thirds of Americans, according to a CBS News/New York Times poll released Thursday. The survey also found that Obama's health care publicity blitz has failed to dispel questions about his plan, but nonetheless Americans by 52 percent to 27 percent say he has better ideas for revamping health care than Republicans do.

Baucus had wanted to finish work on the bill this week, but that's unlikely.


Associated Press writers Alan Fram, Erica Werner and David Espo contributed to this report.

Democrats Close Ranks to Defend Health Bill's Cuts

WASHINGTON -- Democrats on the Senate Finance Committee closed ranks Wednesday in the face of Republican attacks over proposed Medicare cuts at the heart of health-care legislation.

The second day of debate in the influential panel underscored the political difficulties ahead for the health bill, which would wring big savings from Medicare to help finance President Barack Obama's goal of expanding health coverage to tens of millions of uninsured Americans.

Sen. Baucus presides over a session on health-care overhaul legislation on Tuesday.

"Medicare shouldn't be the piggy bank," Sen. Jon Kyl (R., Ariz.) said during a debate that featured frequent partisan sparring between senators. "The reduced costs fund a new entitlement," Mr. Kyl said. "They don't help seniors who rely on Medicare."

In mostly party-line votes, Democrats rejected a series of amendments from Republicans to trim the Medicare cuts, including a proposal by Mr. Kyl to wipe them out entirely.

The sweeping bill would cut federal health spending by more than $400 billion over 10 years, most of it by reducing payments to a range of health providers under Medicare, the health program for the elderly. The money saved would go to expand eligibility for Medicaid, the federal-state heath program for the poor, and create new tax subsidies to help low- and middle-income families purchase insurance.

The backbone of the bill's proposed Medicare cuts is a measure that would squeeze $124 billion over a decade out of Medicare Advantage, a program for seniors getting health benefits through a private insurer rather than directly from the government.

The bill would force the insurers to bid competitively to run the plans, a change from current law. Most Democrats contend that the government overpays private insurers to administer the plans. On a 14-9 vote, the committee rejected an amendment by Sen. Orrin Hatch (R., Utah) that would have weakened the proposed changes to Medicare Advantage in the bill.

Notably, Sen. Olympia Snowe (R., Maine) sided with Democrats on the issue. She also sided with Democrats to defeat a Republican amendment that would have stripped from the bill a proposal to empower a special commission to recommend, and enforce, certain Medicare cuts. Democrats hold out hope that the Sen. Snowe will eventually support the broader bill.

Democrats said the spending cuts would eliminate Medicare waste and wouldn't erode the benefits that seniors receive. Senate Finance Committee Chairman Max Baucus (D., Mont.) said "not one red cent" of the proposed savings would come from benefits. He and other Democrats argued that Medicare is on a path to fiscal insolvency, perhaps as soon as 2017, and that paring spending would strengthen it for the future.

"If you want Medicare to go broke, just don't deal with that reality," Sen. Kent Conrad (D., N.D.) told the panel.

The struggle over the issue dramatized the political risks for the president's party a little more than a year from midterm elections in which control of Congress will be up for grabs.

The latest Wall Street Journal/NBC News poll revealed deep skepticism among Americans over the age of 65, a key voting bloc, about the health initiative, which has yet to reach the floor of either the House or the Senate. The poll found that seniors disapproved of the president's handling of the issue, 49% to 45%. The survey also found that 15% of seniors believe the president's plan would result in better health care, while 37% feared it would get worse.
[Growing Problem chart]

Vice President Joe Biden held a forum with senior citizens Wednesday in Silver Spring, Md., where he highlighted a new report by the Department of Health and Human Services showing that the health overhaul will cut seniors' prescription drug costs and waive fees for preventive services like colonoscopies.

"We will protect seniors -- not burden them with out-of-pocket costs," Mr. Biden said.

The broader legislation, estimated by the nonpartisan Congressional Budget Office to cost $774 billion over 10 years, would create a new national "exchange," through which individuals and small businesses could purchase insurance, and would establish a network of nonprofit health cooperatives to provide low-cost competition with private insurers.

The bill would require nearly all individuals to purchase insurance but would create new assistance for the needy to meet the mandate.

Beyond the spending cuts, the bill would raise $348.8 billion in new revenue, including a new levy on insurance companies that sell high-value health policies.

Write to Greg Hitt at and Janet Adamy at
Printed in The Wall Street Journal, page A6

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NOTE: Senator Max Baucus has amended his health plan proposal, see

The amended proposal carries a 10 year cost of approximately $900 billion. Below are excerpts from the link above:

The most significant would sweeten the subsidies for individuals and families with incomes up to four times the government's poverty level - $43,320 for individuals and $88,200 for a family of four. In addition, Baucus called for lower out-of-pocket medical costs for some lower-income families, and recommended making it easier for those who cannot afford the coverage offered by employers to qualify for federal subsidies so they can purchase individual policies.

To hold down costs for older consumers, he also reduced the ability of insurance companies to charge more for coverage on the basis of age, from five times the base rate to four times.

Baucus also decided to reduce the penalty for families who defy a proposed mandate to purchase coverage, from $3,800 to $1,900.

Additionally, he rewrote the bill stating that individuals who currently have coverage against catastrophic medical costs need not purchase more comprehensive insurance.

The revisions would significantly alter a proposed tax on high-cost insurance policies, a measure that has drawn particular opposition from organized labor and liberal Democrats. Baucus said he would exempt from the tax policies sold to "high risk" workers, such as fire fighters.

At the same time, he raised the level of the tax to recoup some of the revenue that would otherwise be lost.

Nearly half the Democrats on the committee had served notice they would attempt to revise the proposed tax, and Baucus' decision there and on the subsidy levels was a bow to political reality as he tries to push his bill through the panel.

According to information distributed by the committee, he also incorporated a half-dozen changes backed by Snowe, on a variety of issues, on issues ranging from small businesses to Medicaid.

Medicare and Gag Orders
Maybe Senate Finance Chairman Max Baucus should put a gag order on Douglas Elmendorf too. On Tuesday, the Congressional Budget Office director told Mr. Baucus's committee that its plan to cut $123 billion from Medicare Advantage—the program that gives almost one-fourth of seniors private health-insurance options—will result in lower benefits and some 2.7 million people losing this coverage.

Imagine that. Last week Mr. Baucus ordered Medicare regulators to investigate and likely punish Humana Inc. for trying to educate enrollees in its Advantage plans about precisely this fact. Jonathan Blum, acting director of a regulatory office in the Centers for Medicare and Medicaid Services (CMS), said that a mailer Humana sent its customers was "misleading and confusing to beneficiaries, who may believe that it represents official communication about the Medicare Advantage program."

Mr. Blum has also banned all Advantage contractors from telling their customers what Mr. Elmendorf has just told Congress. Mr. Blum happens to be a former senior aide to Mr. Baucus and a health adviser on the Obama transition team.

Meanwhile, we have the case of the Association for the Advancement of Retired Persons (AARP), and its fanciful Medicare claims. The self-styled seniors lobby is using all its money and influence to cheer on ObamaCare, even though polls show that most retired persons oppose it. AARP has spent millions of dollars on its TV ad campaign and bulletins and newsletters to its members, including eight million direct-mail letters over Labor Day. The AARP Web site claims that it is a "myth" that "health care reform will hurt Medicare," while it is a "fact" that "none of the health care reform proposals being considered by Congress will cut Medicare benefits or increase your out-of-pocket costs."

So why hasn't AARP also come under CMS scrutiny? Could that be because AARP, which markets its own branded Advantage plans with United HealthCare that have 1.7 million enrollees, is a reliable liberal ally? Certainly its claims are "misleading and confusing"—given that in this instance it is empirically untrue, unlike Humana's attempt at edification. Seniors might even think AARP's falsehoods represent official communication about the Medicare Advantage program. But don't expect Mr. Baucus or CMS to impose its gag rule on the AARP's pro-ObamaCare advocacy.

We don't think AARP should be muzzled in a political debate, but neither should the insurance industry—especially by an influential Senator getting favors from his crony in a supposedly impartial regulatory agency that has enormous power to harm or destroy private companies. Seniors have a right to know how they may be affected by Washington's health-care planning.

So, for the record, CBO's Mr. Elmendorf says that cuts to Medicare Advantage "could lead many plans to limit the benefits they offer, raise their premiums, or withdraw from the program."

Printed in The Wall Street Journal, page A20

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House passes bill stopping Medicare premium hikes
WASHINGTON (AP) — The House voted overwhelmingly Thursday to eliminate monthly premium increases for millions of Medicare patients next year.

It voted 406 to 18 to send the bill to the Senate, which is expected to act soon.

Lawmakers said older Americans shouldn't have to pay higher Medicare Part B premiums because they are not expected to get a cost of living increase from Social Security.

The vast majority of Medicare recipients already are exempt from Part B premium increases because of a hold-harmless provision that kicks in when there is no increase in Social Security.

Still, several million would face monthly premium increases of $8 to $23, without congressional action. The standard monthly premium is $96.40 this year.

House Majority Leader Steny Hoyer of Maryland, in a rare break with fellow Democrats, voted against the measure, saying it would mainly help wealthy Medicare recipients.

"If we take care of everybody, we won't be able to take care of those who need us most," Hoyer said.

NOTE: Wealthy Medicare recipients pay a higher monthly premium than $96.40, as much as $308.30 per month, see

Wednesday, September 23, 2009

IRS to Require 1040 E-filing by Tax Preparers
The Treasury Department’s Inspector General for Tax Administration has released a report recommending that the IRS seek mandatory electronic filing of individual tax returns by paid preparers, and legislation is being readied to write such a requirement into law.

TIGTA also recommended in the report that the IRS use readily available scanning technology to convert paper returns into electronic files. The IRS employs up to 5,000 individuals during filing season to enter data from paper-filed tax returns into its databases.

TIGTA's report found that the error rates for paper-filed returns are considerably higher because of transcription errors by IRS employees. Most paid preparers already use electronic software to prepare returns, even those who file returns on paper, TIGTA found, and state tax agencies use readily available software to scan paper returns rather than transcribing taxpayer data.

The report concluded that requiring tax preparers to e-file tax returns could result in a 26.9 percent increase in e-filing. Using scanning technology would allow the IRS to convert 13.2 million paper tax returns into electronic format.

TIGTA recommended that the IRS work with the Treasury Department to seek approval of legislation mandating e-filing for all paid preparers and begin using scanning technology to convert paper tax returns into electronic files. The IRS told TIGTA that it is seeking legislative authority from Congress for mandatory preparer e-filing as part of its fiscal year 2010 budget request. The IRS also said it is pursuing the use of scanning technology.

The recommendations are part of TIGTA’s audit of the IRS’s efforts to modernize the way it processes paper tax returns. “The recommendations in this report are not made lightly,” said TIGTA Inspector General J. Russell George in a statement. “The IRS has tried four times since 1988 to replace its paper return processing system but has had little success. In these difficult economic times, the IRS must seek practices that more efficiently and effectively serve the American people."

According to the report, the IRS continues to receive large numbers of paper-filed individual income tax returns despite a continued growth in e-filing. In 2008, the IRS received 156.3 million individual tax returns, of which 66.4 million (42.5 percent) were paper-filed.

Tuesday, September 22, 2009

CA financial crisis

The Sacramento is publishing a series of articles on the financial crisis facing the State of California, by reporters Steve Wiegand and Phillip Reese:

From Sunday, September 20, 2009
Going Broke: State's a wreck – can it be fixed?
Since Prop. 13, California officials have had an aversion to tax hikes

From Monday, September 21, 2009:
Going Broke: State officials spread loot like Santa, expert says
Spending limits may be too scary for state's voters

From Tuesday, September 22, 2009:
Going Broke: Do-it-yourself lawmaking often a budget buster

FDIC May Borrow From Banks
Published: September 21, 2009

WASHINGTON — Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.

Under the law, the F.D.I.C. would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Bankers worry that a special assessment of $5 billion to $10 billion over the next six months would crimp their profits and could push a handful of banks into deeper financial trouble or even receivership. And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay.

Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.

“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” said Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America, a trade group representing about 5,000 banks. “It is much better for perceptions than having the fund borrow from somewhere else.”

Ultimately, officials say, the deposit insurance corporation could settle on a plan that replenishes the insurance fund by doing some of both: borrowing from healthy banks to shore up the shorter-term liquidity needs of the fund, and imposing a special fee on banks to increase the longer-term capital level of the fund.

Since January the F.D.I.C. has seized 94 failing banks, causing a rapid decline in the deposit insurance fund. Despite a special assessment imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)

The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.

Officials say that the F.D.I.C. will issue a proposed plan next week to begin to restore the financial health of the ailing fund.

There is no consensus among the five board members, consisting of Ms. Bair, two other F.D.I.C. officials, and the heads of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Others may propose novel ways to replenish the fund, for example, by asking the banks to prepay the premiums that they were planning to make next year.

Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks.

Monday, September 21, 2009

CA tax panel proposal
California tax commission proposals at a glance
By The Associated Press
Posted: 09/20/2009 01:20:19 PM PDT

Recommendations for reforming California's tax structure from the Commission on the 21st Century Economy:

— Personal Income Tax: Replace the state's existing progressive income tax structure (10.55 percent for millionaires) with a flatter structure. The two rates would be 2.75 percent for individuals earning up to $28,000 a year or $56,000 for joint filers, and 6.5 percent for incomes above that amount.

The standard deduction would be $22,500 for individuals and $45,000 for joint filers. Deductions would be limited to mortgage interest, property taxes and charitable contributions.

— Sales and Use Tax: The state's portion of the sales and use tax would be phased out over five years by reducing it 1 percentage point each year. Local sales taxes would remain in effect.

— Corporate Tax: This business levy would be eliminated.

— Business Net Receipts Tax: At the heart of the commission's proposal would be a plan to replace the sales and corporate taxes with a business net receipts tax, to be imposed on all companies doing business in the state.

The tax would be calculated by subtracting a firm's purchases from its gross receipts. The commission defines gross receipts as payments a business receives from all sources, such as the sale or exchange of property, the performance of its services or the use of its property or equipment. A yet-to-be-determined tax rate would be applied once the business's purchases are subtracted from that total.

Commissioners have said the tax rate could be around 4 percent.

They say switching to such a model would capture service sectors that are currently not taxed, such as legal, engineering or accounting services. Critics worry it could be challenged in court and drive up the cost of doing business in California, making the state less competitive.

A group of tax policy experts suggested the commission consider simply expanding the state sales tax to services while at the same time creating a tax exemption for certain business purchases, such as office furniture or factory equipment.

The exemption would be an incentive for the business community to support broadening the sales tax to auto repairs, haircuts and other services currently not taxed, their letter stated.

— Rainy Day Fund: The panel recommends increasing the target amount the state sets asides in reserve, from 5 percent to 12.5 percent of the state's general fund. The governor could tap the fund only when revenue is insufficient to provide spending at last year's level, adjusted for population and inflation changes.

Also see

This statement caught my eyes, "The top 1 percent of income earners, for example, pay roughly half the state's personal income taxes."

According to a draft of the plan, the state's personal income tax structure would be flattened and taxes on the wealthy would be reduced. The state sales and corporate taxes would be replaced with a new business levy that taxes net receipts.

The commission is recommending a simpler income tax to replace California's more progressive structure, in which people who make more, pay more—up to 10.55 percent for millionaires. The commission is recommending just two rates: 2.75 percent for individuals making up to $28,000 a year and couples making $56,000, and 6.5 percent for those making more.

Personal income taxes would account for about 31 percent of state revenue under the new tax structure, rather than the current 44 percent.

Some question whether that shift represents good public policy. While 62 percent of taxpayers will receive a $4 tax cut each year, millionaires will receive a tax break estimated at $119,000, said Jean Ross, executive director of the California Budget Project, a Sacramento-based nonprofit that advocates for lower- and middle-income families and has analyzed the plan.

"This is taxing groceries to finance tax cuts for millionaires and taxing child care so oil companies don't have to pay a corporate income tax," Ross said.

Taxpayers would be allowed to deduct mortgage interest, property tax and charitable contributions, as they are now, but not health care or child care expenses.

In place of the state sales tax and corporate tax, the commission will recommend a new business tax similar to one that some commissioners say is used in Europe.

The so-called "business net receipts tax" is the centerpiece of the commission's plan. It would apply to all companies doing business in the state, including sectors that are not taxed today. That would include legal, engineering and accounting services.

A business's net tax receipts would be calculated by subtracting its purchases from all its incoming payments. A yet-to-be-determined tax rate—perhaps 4 percent—would be applied to the net amount.

Commissioners wanted to find a way to get tax income from the service sector. Taxing net receipts seemed the best way to accomplish that, according to comments during recent hearings.

Commission Chairman Gerald Parsky said the panel did not have enough time to explore all the options, but he emphasized the need for major changes and urged lawmakers to do additional research.

"This Legislature should get a signal from a broad cross section of people that business-as-usual is not acceptable," he said.

Critics worry the new business tax will hinder startup companies that rely on research credits in their first years when they aren't profitable and hurt all businesses by eliminating traditional deductions for wages and benefits.

The tax might be subject to a legal challenge on constitutional grounds because all firms that do business in the state would be subject to the tax even if they are not headquartered in California.

"I am especially troubled by eliminating the corporate income tax, in existence for more than 70 years and used by 90 percent of the states, and replacing it with a totally new, regressive tax, never seen before in either California or the world," wrote Richard Pomp, a commissioner appointed by Democrats.

Michigan, which relies on auto manufacturing, is the only state with a form of the business tax being proposed. A group of tax policy experts wrote a letter urging the commission to look for alternatives, such as expanding the state sales tax to the service sector.

A spokesman for Schwarzenegger said administration officials would reserve comment until they had reviewed the recommendations.

Here is the Los Angeles Times sensational headline for its editorial:
A flat-wrong flatter-tax plan,0,6267313.story

Saturday, September 19, 2009

Two Irwin Union Bank failures bring 2009 total to 94
By John Letzing, MarketWatch

SAN FRANCISCO (MarketWatch) -- Two Irwin Union Bank subsidiaries in Kentucky and Indiana were closed by regulators Friday, bringing the total number of U.S. bank failures this year to 94 and punching an $850 million hole in the federal deposit insurance fund.

The Federal Deposit Insurance Corp. said that Irwin Union Bank and Trust Co. in Columbus, Ind., and Irwin Union Bank F.S.B. in Louisville, Ky., were each closed.

Irwin Union Bank and Trust Co. had $2.7 billion in assets and $2.1 billion in deposits as of Aug. 31, the FDIC said. Irwin Union Bank F.S.B. had $493 million in assets and $441 million in deposits as of Aug. 31.

Hamilton, Ohio-based First Financial Bank /quotes/comstock/15*!ffbc/quotes/nls/ffbc (FFBC 8.31, -0.05, -0.60%) has agreed to assume the failed banks' deposits. First Financial Bank said in a statement that assumption of the Irwin Union Bank subsidiaries brings with it 27 banking centers in nine states.

The effect on the subsidiaries' parent, bank holding company Irwin Financial Corp. /quotes/comstock/13*!ifc/quotes/nls/ifc (IFC 0.48, -0.02, -4.00%) , was not immediately clear. An external spokeswoman for the company was unable to comment. Shares of Irwin Financial tumbled more than 50% to 22 cents a share in late trading.

Irwin Financial had disclosed in a regulatory filing on Wednesday that it was told by the Federal Reserve Bank of Chicago and the Indiana Department of Financial Institutions that they disagreed with its view of the timing and recognition of certain loan losses at Irwin Union Bank and Trust Co., requiring it to submit amended reports to the FDIC.

The failures marked the first this year both in Indiana and Kentucky. However, bank failures have become a regular occurrence since the economic calamity late last year the ensuing credit crunch.

The FDIC said the last bank closed in Indiana was seized in 1992, while last closure in Kentucky occurred in 1991.

John Letzing is a MarketWatch reporter based in San Francisco.

Thursday, September 17, 2009

Recovery Picks Up in China as U.S. Still Ails
Published: September 17, 2009

WUXI, China — Just eight months ago, thousands of Chinese workers rioted outside factories closed by the global downturn.

Now many of those plants have reopened and are hiring again. Some executives are even struggling to find enough temporary staff to fill Christmas orders.

The image of laid-off workers here returning to jobs stands in sharp contrast to the United States, where even as the economy shows signs of improvement, the unemployment rate continues to march toward double digits.

In China, even the hardest-hit factories — those depending on exports to the United States and Europe — are starting to rehire workers. No one here is talking about a jobless recovery.

Even the real estate market is picking up. In this industrial town 90 miles northwest of Shanghai, prospective investors lined up one recent Saturday to buy apartments in the still-unfinished Rose Avenue complex. Many of them slept outside the sales office all night.

“The whole country’s economy is back on track,” said Shi Yingyi, a 34-year-old housewife who joined the throng. “I feel more confident now.”

The confidence stems from China’s three-pronged effort — a combination of stimulus, liberal bank lending and broad government support for exports.

The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.

“So often China and the U.S. are mixed together as being in the same situation, and that is totally wrong,” said Xu Xiaonian, an economist in Beijing with the China Europe International Business School.

That does not mean the two nations are not connected, of course. China’s rebound in growth may slow if the American economy does not pick up. China needs the United States to buy its goods, and the United States needs China to continue to buy its debt.

This mutual dependence makes it harder for either country to let the current dispute over Chinese tires and American chicken and auto parts to grow into a trade war.

But with more centralized economic planning than the United States, China has been able to disburse its stimulus much faster, turning it into new rail lines and highways.

China’s finance ministry announced in late June that half the $173 billion in central government spending had already been allocated to specific projects. The White House said in early July that a quarter of the spending authority and tax cuts in the $789 billion American stimulus had been allocated or used.

But even more key to China’s recovery, economists say, are two other government efforts that are paying big dividends: looser lending and export supports.

The state-controlled banking system here — which breezed through the global financial crisis with minimal losses as American financial institutions reeled — unleashed $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. That money is financing everything from a boom in car sales, up 82 percent in August from a year earlier, to frenzied factory construction.

Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.

Indeed, subsidies abound at all levels of government: the Wuxi municipal government just offered up to $146,000 to each local business that increases exports in the last three months of this year.

To be sure, not all the laid off workers throughout China have been hired back.

“Some plants reduced worker numbers by 20 to 30 percent, now they hire back 10 percent,” said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, which represents export-oriented factories employing 10 million Chinese workers.

Even so, American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the seven-month period.

“We definitely see an upswing in sales orders in the second half of this year when compared to the first half,” said Gu Fung, the sales manager at the Wuxi Baolai Batteries Company.

China’s well-capitalized banking system allowed for rapid investment.

Chinese banks came into the crisis with enormous excess reserves, the result of three years of tight regulatory limits on lending to prevent the economy from overheating. When those limits were removed, and authorities urged bank executives to lend, the total value of loans outstanding shot up more in the first seven months of this year than in the previous 24 months.

By contrast, total loans and leases outstanding at financial institutions insured by the Federal Deposit Insurance Corporation actually fell $249 billion, or 3.2 percent, in the first half of this year.

Though Washington has used taxpayer money to bail out American banks, it does not have Beijing’s power to force banks to lend that money to businesses and consumers.

As much as a third of the extra bank lending in China appears to have gone into real estate and stock market speculation. But the bulk has gone into investments by companies and local governments, with tangible results.

China’s currency and trade policies, though highly effective, would be hard for the United States to emulate.

For instance, government intervention in currency markets has prevented the renminbi from moving appreciably against the dollar in more than 14 months, and has pushed the renminbi down by 18 percent against the euro since March.

Government agencies have been told not to buy imported goods with money from economic stimulus programs unless no domestic alternative is available. Washington has imposed a less restrictive rule, misleadingly known as “Buy American,” requiring that construction materials for the stimulus program be bought from any of the 39 countries that have agreed to free trade in government procurement — which China has not.

Still, China’s stimulus efforts could be sowing the seeds of future distress. With so much money washing into the system so fast, regulators have voiced concerns about corruption in government investment projects.

Cheap cash has a way of inflating bubbles — just ask Wall Street — that could damage China’s economy and its banks when they pop.

“You have to imagine the rigor and due diligence” that mainland banks have been showing in rushing out so many loans, said Benjamin Hung, the chief executive of the Hong Kong unit of Standard Chartered Bank.

But such concerns are so 2008.

Wednesday, September 16, 2009

Tax Time Torture Worsens
Janet Novack, 08.28.09, 6:00 PM ET

Think you've seen it all regarding ways that tax complexity can hit the average guy? That's pretty much what Claudia A. Hill, a Cupertino, Calif., tax pro, who edits CCH's Journal of Tax Practice and Procedure thought until she reviewed the Internal Revenue Service's draft forms for tax year 2009. These are the forms taxpayers will be wrestling with next April.

One that jumped out at her was the new "Schedule L--Standard Deduction for Certain Filers." The point of the standard deduction is that taxpayers with relatively simple financial lives shouldn't have to keep lots of records or fill out Schedule A for itemized deductions. Two-thirds of the 142 million individual tax returns filed for 2007 claimed the standard deduction, which this year is $5,700 for a single filer, $11,400 for a couple filing jointly, and $8,350 for an unmarried head of household. The standard deduction was created during World War II, and an IRS spokesman confirms there's never been a special schedule to claim it before.

But Congress has now created three quasi-itemized deductions that can be claimed by non-itemizers, leading the IRS to create the 21-step Schedule L, which (in draft form) contains such instructions as: "Divide Line 17 by $10,000. Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000."

With all the tax changes (some temporary) congressional representatives have made, Schedule L is hardly the only new form for 2009. "They've always done tax tinkering, but this year they've gone too far, and there's still time for them to do more before the end of the year,'' Hill worries. One new form she deems particularly problematic is the new 14-step "Schedule M--Making Work Pay and Government Retiree Credits."

This results from Congress' creation in the February $787 billion stimulus bill of a temporary $400 per worker tax credit pushed by President Obama. That seemingly simple handout required a whole new form because Congress made the credit more complicated by denying it to the better off; it phases out for singles with adjusted gross incomes of more than $75,000 and couples earning more than $150,000. (For more on this and other phase-outs, read "So What's in the Stimulus for You? Nothing!")

In addition, Congress wanted to send a $250 check to each Social Security recipient and government pensioner but didn't want those who work to collect both the $250 check and the $400 credit, necessitating still more lines on Schedule M. (Those who file a 1040 or 1040A will use the new M; filers of the 1040EZ will complete a shorter worksheet on the back of that form.)

Hill worries that some taxpayers who prepare their own returns, and some poorly trained paid preparers, won't realize that the M has to be filed. Although workers have already received the $400 as an advance, via reduced payroll withholding, they still need to claim the credit on the Schedule M, or they'll owe the $400 back. What could worsen confusion is that the first stimulus tax credit passed in February 2008 worked the opposite way--in mid-2008 the "Recovery Rebate Credit" was sent as a check to families, and they only had to worry about it on their 2008 returns if they were entitled to a bigger rebate than they got. ("See Rebate Redo.")

What about Schedule L--the itemized deduction form for people who don't itemize? It will have to be filled out by any non-itemizers who want to claim one of three special deductions. The first is comparatively straightforward: For 2009, non-itemizer homeowners can deduct up to $500 per single person or $1,000 per couple in state and local real estate taxes paid.

The second is more complicated. As part of February's stimulus, a non-itemizer who buys a new motorcycle, auto or light truck between Feb. 17, 2009, and Dec. 31, 2009, can deduct the sales tax paid on the vehicle, up to a purchase price of $49,500. But this tax break quickly phases out once a single's adjusted gross income hits $125,000 or a married couple's AGI tops $250,000.

Note that the sales tax deduction can also be claimed by itemizers who deduct income tax, but not those who deduct sales tax, on their Schedule As, forcing the creation of an 11-line worksheet on the back of Schedule A, where Schedule B for interest and ordinary dividends used to reside. That meant the separation of A&B into two forms.

The third non-itemizer, itemized deduction? It's special provision passed last year that provides generous tax deductions to non-itemizers who claim losses from federally declared disasters occurring in 2008, 2009 and 2010. But to stake their claim, they'll have to fill out an additional form, 4684.

For copies of 2009 draft tax forms, see

Standard Deduction Isn't So Standard Anymore
Janet Novack, 09.21.09, 12:00 AM ET

Ever since World War II taxpayers have been able to use the standard deduction, a shortcut that gives them some value for deductions that would otherwise have to be itemized. Two-thirds of filers avail themselves of the convenience, which this year is $5,700 for a single and $11,400 for a couple filing jointly. All too simple. Now they are going to work a little harder for their writeoff.

For 2009 returns certain filers will have to fill out a separate form, meaning the standard deduction isn't so standard anymore. They'll need to complete a new 21-step Schedule L. The reason this is necessary: A tax-incentive-crazed Congress has created three super-deductions, goodies that are available to nonitemizers. The draft of L has such gems as: "Divide Line 17 by $10,000. Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000." The three deductions, all temporary, are for real estate taxes, sales taxes on a new motorcycle, car or truck and casualty losses in a federally declared disaster. The casualty deduction requires filing Form 4684 as well as Schedule L.

Another new form, "Schedule M, Making Work Pay and Government Retiree Credits," must be filled out by itemizers and nonitemizers alike. It's needed to claim the $400 temporary credit (for single workers earning $75,000 or less and couples earning $150,000 or less) that was part of February's $787 billion stimulus.

Claudia Hill, a Cupertino, Calif. tax pro who edits CCH's Journal of Tax Practice & Procedure, worries that some folks who do their own tax returns as well as some poorly trained paid preparers won't even realize they have to fill M out, since the credit was supposedly paid through lower withholding from paychecks. It gets worse. Before taxpayers even start the 14-step Schedule M, they'll need to complete an 8-step worksheet to make sure combat pay and self-employment income are counted as credit-eligible earnings and prisoner pay and deferred compensation aren't. Plus, older folks who both work and collect Social Security were sent $250 checks by mail, which they must now deduct from any $400 credits they're due.

History isn't encouraging here. The 2008 "Recovery Rebate Credit" was figured wrong on 21 million tax returns.

Senator Max Baucus' health plan proposal

WASHINGTON – Sen. Max Baucus on Wednesday brought out the much-awaited Finance Committee version of an American health-system remake — a landmark $856 billion, 10-year measure that starts a rough ride through Congress without visible Republican backing.

The bill by Baucus, chairman of the Finance Committee, would make major changes to the nation's $2.5 trillion health care system, including requiring all individuals to purchase health care or pay a fine, and language prohibiting insurance company practices like charging more to people with more serious health problems.

"This is a unique moment in history where we can finally reach an objective so many of us have sought for so long," Baucus said. "The Finance Committee has carefully worked through the details of health care reform to ensure this package works for patients, for health care providers and for our economy."

Consumers would be able to shop for and compare insurance plans in a new purchasing exchange. Medicaid would be expanded, and caps would be placed on patients' yearly health care costs. The plan would be paid for with $507 billion in cuts to government health programs and $349 billion in new taxes and fees, including a tax on high-end insurance plans and fees on insurance companies and medical device manufacturers.

The bill fails to fulfill President Barack Obama's aim of creating a new government-run insurance plan — or option — to compete with the private market. It proposes instead a system of nonprofit member owned cooperatives, somewhat akin to electric co-ops that exist in many places around the country. That was one of many concessions meant to win over Republicans.

In other ways though, including its overall cost and payment mechanisms, the bill tracks closely with the priorities Obama laid out in his speech to Congress last week.

Baucus is still holding out hope for GOP support when his committee actually votes on the bill, probably as early as next week.

The measure represents the most moderate health care proposal in Congress so far, compared to legislation approved by three committees in the House and the Senate's health panel. Obama's top domestic priority is to revamp the health care system to provide coverage to nearly 50 million Americans who lack it and to rein in rising costs.

The bill includes provisions to keep illegal immigrants from obtaining health coverage through the new insurance exchanges, and to prevent federal funds from being used to pay for abortions except in cases of rape, incest, or if the life of the mother would be endangered. It's all but certain that the Baucus provisions will not be the last word on either of those volatile issues.

The bill would set up a verification system to make sure people buying insurance in the exchanges are U.S. citizens or legal immigrants. Social Security data would be used to verify the identities of U.S. citizens, and Homeland Security Department files would be used to check legal immigrants. The bill would impose penalties for fraud and identity theft.

While only legal U.S. residents would be able to buy coverage through the exchanges, illegal immigrant parents would be able to get insurance for their U.S. born children.

The bill would prohibit abortion from being included in any minimum benefits package, except in dire cases. It would not interfere with state laws restricting abortion. However, plans in the exchange could offer unrestricted coverage for abortions, provided that no funds from government subsidies are used to pay for them.

Wednesday's bill release follows months of negotiations among Baucus and five other Finance Committee senators dubbed the "Gang of Six" — Republicans Chuck Grassley of Iowa, Mike Enzi of Wyoming and Olympia Snowe of Maine, and Democrats Kent Conrad of North Dakota and Jeff Bingaman of New Mexico.

In the end, Democrats believe Snowe may be the only Republican to support the bill, though she wasn't ready to commit her support Tuesday night. "Hopefully at some point through the committee process we can reach an agreement," she said.

The bill drew quick criticism from Republican leaders.

"This partisan proposal cuts Medicare by nearly a half-trillion dollars, and puts massive new tax burdens on families and small businesses, to create yet another thousand-page, trillion-dollar government program," said Senate Minority Leader Mitch McConnell, R-Ky. "Only in Washington would anyone think that makes sense, especially in this economy."

Many liberals also have concerns. Some wanted Baucus to include a public option, while others fear that, in his effort to hold down the price of his bill, Baucus didn't do enough to make health coverage affordable to working-class Americans. Sen. Jay Rockefeller, D-W.Va., a member of the Finance Committee, said Tuesday that he couldn't support the bill in its current form.

Baucus' plan aims to make health insurance more affordable for self-employed people and those working for small companies, who now have the biggest problems in getting and keeping coverage.

People insured through large employers would not see major changes, but some of their health care benefits would be nicked to help pay for the cost of the plan. The Baucus proposal would limit to $2,000 a year the amount people can contribute to flexible spending accounts, which are used to cover copayments and deductibles not paid by their employers. That provision would raise $16.5 billion over 10 years.

Everyone covered through an employer would learn the full costs of their health benefits, which starting next year would be reported on employees' W-2 tax forms. Although family coverage averages about $13,000 a year most workers don't know how much their employer is paying.

Not carrying insurance could result in a steep fine, as much as $3,800 per family, or $950 for an individual. People who can't afford their premiums would be exempted from the fine.

The plan proposes a $6 billion annual fee on health insurance providers, which would recoup some of the profits the companies expect to make from millions of new taxpayer-subsidized customers.

Democratic leaders are aiming for votes in the full House and Senate this fall.

For more see

Tuesday, September 15, 2009

Insurance tax may not hit just top executives
Kathleen Pender
Sunday, September 13, 2009

In his speech on health care reform last week, President Obama endorsed a plan to charge insurance companies a "fee" on their "most expensive policies."

In other words, Obama likes the idea of taxing what have been termed gold-plated, or Cadillac, health plans.

This concept, which has been kicking around for years, is not in any of the health reform bills, but it is in the 18-page "framework" for health reform that Senate Finance Committee Chairman Max Baucus, D-Mont., submitted to the bipartisan Gang of Six senators last week. Baucus is likely to include it in the bill he plans to introduce this week, if it can overcome certain concerns.

While the plan appears to target top executives who pay virtually nothing for health care, it could hit many lesser-paid people, especially union members.

It's unclear whether the plan's main goal is to raise revenues to pay for health care reform or to discourage overly generous health care. The more it does of the latter, the less it will do of the former.

The Baucus plan would impose a 35 percent excise tax on policies that cost more than $8,000 a year for singles and $21,000 a year for families. It would apply to self-insured plans (offered by employers that pay for claims themselves) and group policies, but not to plans sold in the individual market. The tax would apply to the amount of the premium over the threshold.

The threshold would be indexed for inflation, but the plan did not say what rate would be used. A higher threshold would apply for the first three years in the 17 highest-cost states.

The plan doesn't say when the tax would take effect, but it is assumed to be 2013 because that's when the revenues will be needed to pay for new health care spending.

Tax philosophies
Some people believe that employees should pay income tax on the value of medical coverage they get from their employers, or at least on the value over a certain amount, as they do for group life insurance.

But rather than taxing employees who receive Cadillac coverage, the tax in the Baucus plan would apply to insurance companies that sell or administer such plans.

"It's hard to sell a plan that taxes people, some of whom are in the middle class," says Mark Luscombe, principal tax analyst with CCH. "If he puts the tax on the company, it's an easier sell. We all think the cost would be passed on anyhow."

Linda Havlin, a partner with Mercer Health & Benefits, says the tax plan originally targeted executive policies that might cover 100 percent of the employee's deductible, co-insurance and even some care that is normally excluded. But these plans have been fading away, especially during the recession, she says.

The plans most likely to be hit by the Baucus tax are union plans where workers traded pay for benefits, plans for older workforces and those in high-cost areas, she says.

Average premiums
Today, most plans are well below the thresholds in the Baucus plan. In 2008, the average annual premiums for employer-sponsored health insurance were $4,704 for single coverage and $12,680 for family coverage, according to a study by the Kaiser Family Foundation.

The Segal Co. says the average premiums for a sample of union plans it consults with are $5,150 for singles and $13,359 for family coverage.

A study by the conservative Heritage Foundation, using data from the government's Medical Expenditure Panel Survey, estimates that average premiums in 2010 will be $8,034 for singles and $14,298 for families.

By 2013, when the tax presumably would take effect, many more plans would go above the limit as inflation pushes premiums up. How many more depends on whether the tax would be indexed to overall inflation or to medical inflation, which has been much higher.

There is talk that the union plans could be exempted from the tax, at least until their current contracts run out. But without unions, significant tax revenues would be lost.

How much money?
The Baucus plan does not say how much the tax would generate. A spokeswoman for the finance committee refused to confirm media reports that put it between $150 billion and $200 billion.

Obama said the tax would encourage insurers "to provide greater value for the money." But if insurers simply cut premiums below the tax threshold and also cut benefits, employees will be no better off and tax revenues will disappear.

This plan does not reform health care or the tax system, says Ed Haislmaier, senior research fellow with the Heritage Foundation. "We have a system today where you get generous tax breaks if you get health care through your employer. The larger your tax bracket, the bigger your tax break," he says. "We would scrap that and replace it with a system that says you get a tax break no matter where you get health insurance and it would be the same amount no matter how much you make."

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at Read her blog at

This article appeared on page D - 1 of the San Francisco Chronicle

Education tax credit sweetened,0,6813339.column
The incentives have been bumped up to as much as $2,500 per student and are now available to families earning up to $180,000. But the tax break is good only through 2010.
By Kathy M. Kristof Personal Finance
September 13, 2009

Parents: Save those education receipts.

For the first time -- and for a limited time -- upper-middle-income parents will be able to take advantage of huge tax breaks for paying college bills.

This is thanks to a law that temporarily supplants the Hope Tax Credit with the far more lucrative and inclusive American Opportunity Tax Credit.

What's this law and how can you take advantage of it?

The American Opportunity Tax Credit is one of several generous tax breaks that were passed into law in February as part of the American Recovery and Reinvestment Act, aimed at stimulating the U.S. economy.

It provides a federal income tax credit equal to 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000 in expenses per student for qualified families.

That's a total of up to $2,500 in tax credits per student. It also bears mentioning that tax credits are far more valuable than tax deductions because credits reduce your tax on a dollar-for-dollar basis. Deductions just reduce the amount of income subject to tax.

However, this break is available only for 2009 and 2010. After that, the American Opportunity Tax Credit expires.

Who can claim the credit?

Three criteria determine whether you qualify:
  • You must be paying higher education expenses such as tuition, fees, books and supplies for a student who is seeking a degree, certificate or credential and attending school at least half time.

  • The student must be you or a qualifying dependent, such as a spouse, child or stepchild.

  • Your income must not exceed certain thresholds.

Single filers are eligible for a full credit unless their "modified adjusted gross income" exceeds $80,000 and for partial credits if they earn less than $90,000, at which point they are no longer eligible to claim the credit.

Married couples can get the full credit with up to $160,000 in income and a partial credit with up to $180,000 in modified adjusted gross income.

What's modified adjusted gross income?

That's an important question. It starts with adjusted gross income, which is all your earnings -- wages, tips and investment income -- minus contributions to workplace benefits and retirement programs such as 401(k) plans, dependent care accounts and health savings accounts. Modified adjusted gross adds in some relatively rare sources of tax-free income, such as income earned overseas. For most people, "modified adjusted gross" is simply adjusted gross income.

Why is that such an important question?

Because you can manipulate your adjusted income by boosting your contributions to workplace benefit plans or self-employment retirement plans.

If your income exceeds these thresholds, Santa Barbara tax specialist Jennifer MacMillan suggests you look carefully at reducing that figure by contributing as much as possible to qualifying plans. It can make a huge difference in your tax liability, she adds.

A family of four earning $170,000, with two children in college, for example, would lose 50% of the American Opportunity Tax Credit if they did nothing. Because they would get two credits -- one for each child -- they'd lose out on $2,500.

If each parent put $5,000 into deductible retirement accounts, it pushes their modified adjusted gross under the threshold, generating another $2,500 in tax credits.

By doing this, they'd also reduce their taxable income, which, assuming a combined federal and state income tax rate of 30%, would save them $3,000 more. The bottom line: Saving an extra $10,000 in retirement plans returns $5,500 in tax savings.

Can my child claim the credit, if I can't meet the income thresholds?

Yes. But you would not be able to claim your child as a dependent, so this would work only for college students and graduate students who have significant other income and are largely able to support themselves.

Can I use the credit to recover the cost of room and board at college?

No. Qualified expenses are tuition, fees, books and supplies.

How do I claim it?

You must fill out a 29-line work sheet, Form 8863, said Jackie Perlman, a tax specialist at H&R Block in Kansas City.

This form was previously used to claim the Lifetime Learning Credit and the Hope Tax Credit, which the American Opportunity Tax Credit largely replaces for 2009 and 2010.

However, because there are a few instances when you might still try for a Hope Credit (mainly if you attend college in a Midwestern disaster zone) the form is twice as complicated as it was last year. If you prepare your own return, make sure to read the instructions carefully.

Do I need to send in tuition bills or any other evidence of my expenses?

No. Just keep them with your records, Perlman said, and keep your records at least four years.

What happens if I have college expenses after 2010? Will I still get a tax break?

Maybe. Congress could extend this break, or you might qualify for another one. However, the other tax breaks for college students in current law are not as generous, and most have lower qualifying earnings restrictions.

Monday, September 14, 2009

Tax evaders rush to beat amnesty deadline
By Kim Dixon

WASHINGTON (Reuters) - Rich Americans who have evaded taxes by hiding foreign holdings have about a week to turn themselves in to an Internal Revenue Service amnesty program or gamble they will not be caught.

U.S. citizens with undeclared assets in tax havens such as Switzerland face a September 23 deadline to reveal their holdings, pay a fine and generally avoid criminal prosecution. When that amnesty program expires, any tax cheats found by the government could face criminal prosecution.

The IRS expects to find some tax evaders soon. UBS AG, the Swiss banking giant, agreed to hand over to the IRS the names of about 4,450 secret accounts as part of a court settlement reached last month.

"This is sort of their last, best chance if they are going to get off with lenient treatment," said Evan Stewart, a regulatory lawyer at the firm Zuckerman Spaeder.

"If you're sitting there and you've sheltered $50 million from the U.S. government, are you willing to gamble with the (list of) 4,500 (names) and live in terror for a year?" Stewart said.

The IRS said that, in one week of July, about 400 individuals turned themselves in under the amnesty program. That was four times higher than the number of tax evaders who stepped forward in all of 2008, according to the agency.

The IRS declined to provide any other figures about participation in its amnesty program.

IRS Commissioner Doug Shulman warned investors with money or securities in overseas accounts to step forward before the deadline.

"Once the Swiss government turns over names, all bets are off," he said when announcing the UBS deal.

It appears to be working.

"They are all terrified," said Ken Rubinstein, who handles such cases in New York.

Under the UBS settlement, the bank agreed to first hand over the names of 500 clients within about two months to Swiss authorities, who will review them before sending the list to U.S. officials. The remaining names will be submitted in a similar process by about May of next year.

At the same time, IRS officials have said other foreign banks are being queried for possibly helping the wealthy evade taxes, although they have declined to be specific.

Lawyers say their clients include UBS holders, but also those with funds at HSBC Holdings PLC Credit Suisse Group AG and in other offshore locations such as the Cayman Islands.

By coming forward voluntarily, individuals significantly minimize penalties.

"You can end owing more than is in the account when you add up all the liabilities," said an IRS official, who was not authorized to named.

A taxpayer with about $1 million in an offshore account for six years would pay about $386,000 under the amnesty program, compared with $2.3 million under the normal regime, according to an IRS example.


The approaching deadline has created a boon for tax lawyers.

"We and pretty much every other practitioner I know are being swamped with calls from clients who have waited until the 11th hour," said Scott Michel, a lawyer who is handling about 250 amnesty cases at Caplin & Drysdale.

Michel, whose clients have accounts valued between $1 million and $10 million, but with some reaching above $100 million, said they range from sympathetic Holocaust survivors to more typical tax dodgers.

"There are some people who were just cheating on their taxes; there is no doubt about it," Michel said.

The IRS began the program in March, part of an agency-wide focus on catching tax dodgers, to help make a dent in the $345 billion tax gap -- the amount the agency estimates goes uncollected each year.

Steven Mopsick, who worked for the IRS for 30 years, said he is getting a three-day turnaround when he submits information to the IRS for the amnesty program.

After checks on a client's passport or Social Security number to ensure there are no ongoing IRS probes, and a signature confirming that no income has come from illegal sources, the IRS grants a conditional approval before even looking at the tax forms.

The agency "is interested in getting these things approved," said Mopsick, who is handling about 30 clients with accounts valued between $1 million and $2 million. "The acceptance letter says you have been conditionally approved for the program; sit tight and an agent will contact you," he said.

Several lawyers involved in the program say many of their clients are immigrants who have inherited the funds.

"The one thing that I'm noticing with some degree of surprise is how ordinary the clients are," Rubinstein said. "The vast majority of our clients are ordinary. We haven't seen many billionaires."

(Reporting by Kim Dixon; editing by Dave Zimmerman and Andre Grenon)

Saturday, September 12, 2009

Popular Medicare program targeted
By Rob Hotakainen
Published: Saturday, Sep. 12, 2009 - 12:00 am | Page 1A

WASHINGTON – Roger Raines, 66, of Sacramento is worried that he will lose access to his doctors if President Barack Obama has his way.

He has survived male breast cancer, diabetes and congestive heart failure. And he pays $480 a month to a private insurer to supplement his Medicare, getting extra benefits by enrolling in an increasingly popular program called Medicare Advantage. He doesn't want to be pushed into the regular Medicare program.

"If they cut from Medicare Advantage, I won't be able to keep my own doctors," Raines said Friday.

Fears of Medicare cuts are providing more fuel for the already hot national debate over health care. While Obama is promising to make no cuts in traditional Medicare benefits, it's clear that big changes could still be in the offing.

So far, Obama has been hazy in saying exactly how he would save billions by going after the always-nebulous waste and fraud in Medicare. But he has been very clear in saying that he wants to get rid of $177 billion in subsidies for Medicare Advantage.

"Insurance companies basically get $177 billion of taxpayer money to provide services that Medicare already provides," Obama said at a town hall meeting in New Hampshire last month. "And it's no better. It doesn't result in better health care for seniors. It is a giveaway of $177 billion."

Obama said it would make more sense to use the $177 billion to provide coverage to the uninsured than to subsidize insurance companies.

Raines is one of more than 1.5 million Californians enrolled in Medicare Advantage plans. Those plans account for 34 percent of the overall enrollment in Medicare, giving the Golden State one of the highest enrollment rates in the nation.

Overall, more than 10 million – or 22 percent – of all Medicare recipients are now enrolled in Medicare Advantage plans.

Medicare Advantage offers seniors the option to sign up with Medicare-approved but privately run plans, some structured like HMOs. Many offer extra benefits and prescription coverage beyond those provided in traditional Medicare. Premiums, co-pays and deductibles vary depending on the services provided.

The private programs became popular during the Bush administration and were designed to inject competition into the Medicare system. Many Democrats have long opposed Medicare Advantage because they view it as a first step toward full privatization of Medicare.

Critics of Obama's plan say it would be a mistake to end the subsidies for the private plans.

"These plans offer seniors more flexibility and treatment options than regular Medicare, including better preventive and coordinated care," said House Minority Leader John Boehner of Ohio. "But thanks to these cuts, millions of seniors will be forced into a government-run plan with fewer choices and lower quality care."

Listening to all the talk in Washington, Raines figures he's sure to be on the losing end if Congress adopts the president's $900 billion overhaul plan.

"I just feel that they're going to take stuff away from me to give to somebody else," he said. "That's exactly the way I feel." For starters, he said, he's skeptical that Congress and the president will ever be able to achieve much in Medicare savings by focusing on abuses in the system.

"They say they're going to pay for this by finding all these billions of dollars in fraud, which they haven't been able to do yet," Raines said. "So I don't really see any success. If they haven't found it in the last 30 or 40 years, they're not going to find it in the next 30 or 40."

Raines said Medicare Advantage has been a lifesaver, allowing him to keep the same doctors that he had before he retired as an operations supervisor for Sacramento County. He says he doubts that he'd be alive if he had been forced to go on traditional Medicare and change doctors.

And he said watching politicians debate the issue has been frustrating.

"It gives you a real sense of frustration," Raines said. "They just figure they have to do it. It's a party thing. You've got the Democrat Party that wants to do it and you've got the Republican Party that doesn't want to do it. I don't think either one really knows what's going on or what they should do."

For more info on Medicare Advantage, visit

What was missing in Obama Speech?

President Obama’s address to Congress on health care, coming after an August marked by confused messages and partisan rhetoric, had to accomplish a lot. It had to show Democrats his firm commitment to pushing through comprehensive reform this year. It had to respond to the intensifying opposition among Republicans. And it had to reassure nervous voters that change won’t leave them with less choice and less coverage.

We asked some analysts of health care politics to tell us what was good about the speech and what was missing.

* Robert Reich, former secretary of labor
* Mark McClellan, Brookings Institution
* Lisa Dubay, professor of public health
* Arnold S. Relman, professor emeritus, Harvard Medical School
* Stuart M. Butler, Heritage Foundation
* Megan McArdle, Asymmetrical Information
* Richard Huber, former chairman of Aetna
* Donald H. Taylor, Jr., Duke University

Thursday, September 10, 2009

2.6 million pushed into poverty in 2008
Median household income falls 3.6% in first year of recession
By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- The first year of recession took a toll on household incomes, drove 2.6 million more people into poverty, and cost 1 million people their employer-provided health care, the government reported Thursday.

Real median household income fell 3.6% in 2008 to $50,303, while the number of people living in poverty rose by 2.6 million to a record 39.8 million, or 13.2% of the population, up from 12.5% in 2007, the Census Bureau said. Read the full report.

The poverty rate for children rose to 19%. More than half of the 8.1 million families living in poverty were headed by a woman with no spouse present.

Median incomes adjusted for inflation were the lowest since 1997 and are down 4.4% since peaking in 1999. Median inflation-adjusted earnings for men working full time fell to $46,367, lower than they were in 1972.

Real median incomes had risen for three straight years before the drop-off in 2008. The decline in median incomes in 2008 was similar to that seen in the past two recessions, but less than in the years around the 1974 and 1982 recessions.

"The decrease in income and increase in poverty from 2007 to 2008 are just the tip of the iceberg when it comes to the effects of this recession on the living standards of Americans," said Heidi Shierholz, an economist for the Economic Policy Institute. She projected that incomes would fall a total of 9.3% from 2007 through 2010.

If Shierholz's forecast is right, in 2010 the typical household will have gone 15 years without any increase in income.

In a finding sure to resonate with the debate on health-insurance reform, the government reported that the number of Americans without health insurance at any time during the year climbed by 800,000 to 46.3 million, or 15.4% of the population. The percentage of uninsured was unchanged from 2007 and has been essentially unchanged since 1991.

The number of people receiving employer-provided health care fell by 1 million to 176 million, while the number under government-funded health-care rose by 4.4 million to 87.4 million. About 25 million have private insurance not provided by an employer.

About 21 million people worked full-time but had no health insurance.

The number of children without health insurance fell to 7.3 million, the lowest since 1987, when the data were first collected. Fewer than 10% of children were uninsured, while 20% of adults under 65 were uninsured. Fewer than 2% of people over 65 were uninsured.

"The fact that this year's numbers are not even higher can likely be attributed to the expansion of the State Children's Health Insurance Program and other state and federal government programs providing health coverage," said Georges C. Benjamin, executive director of the American Public Health Association.

Nearly half of noncitizens were uninsured, accounting for about one-fifth of the total uninsured.

Rex Nutting is Washington bureau chief of MarketWatch.

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Recession's toll: more Americans in poverty, without health insurance

Recession Takes Toll on Living Standards