Thursday, May 27, 2010

IRS Sees Need for More Tax Information Reporting
Washington, D.C. (May 27, 2010)
By WebCPA Staff

IRS Commissioner Douglas Shulman defended the increased amount of information reporting that the agency will be expecting from businesses in the next few years.

“The technology revolution changed information reporting for both business and the IRS and creates opportunities and challenges for both of us,” he said during a speech Thursday before the American Payroll Association and the American Accounts Payable Association. “The better use of technology translates into better use of data – extracting knowledge and intelligence. So, we must invest in technology to keep up with new legislation, regulations and strategies in a more complex and interrelated global tax system.”

Businesses that accept credit or debit cards, or other electronic payments, will be subject to new information reporting requirements, he noted (see Get Ready for a Blizzard of 1099 Forms).

“Beginning in 2012, payment processors will be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year,” said Shulman. “This will help improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.”

Shulman explained that at the end of the year, banks will begin sending businesses a 1099 form reporting the dollar figure from credit and debit card purchases made by customers at their establishment. An identical information document will also be sent to the IRS. When the business owner or tax practitioner fills out the business’s tax return, they have to segregate the credit and debit card sales from cash sales, and the new report will make it easier to do so, according to Shulman. The IRS will be able to see if the credit card dollar figure reported on the tax return matches the bank’s information return, and also see if the amount of revenue from credit cards makes sense in the context of firm's overall business.

“The information we receive is an important window into underreporting,” Shulman noted. “It can also help us better understand tax compliance and trends in different industry sectors.”

Congress also recently imposed basis reporting requirements for publicly traded securities, he noted. Under current law, a broker is required to file with the IRS annual information returns generally showing only a customer’s gross proceeds from certain transactions. The same information is furnished to taxpayers to help them file accurate and complete returns.

However, the Government Accountability Office estimates that as many as 7 million taxpayers – more than one in three who sold securities – may have misreported capital gains and losses, and approximately half of them did so because they misreported their basis.

“This new provision – effective Jan. 1, 2011 – will go a long way to reducing this problem and making things easier for investors,” said Shulman. “I don’t know about you, but I have spent far too much time digging through old records, trying to find the basis for securities I sold. I think investors…and I count myself one …will welcome getting this new, easy-to-understand information from their brokers. Basis reporting can also help us work smarter. As the GAO points out, knowing the basis for taxpayers’ security sales will allow us to get a better bead on taxpayers’ income for security sales through our document matching program. In other words, basis reporting creates knowledge.”

Congress also recently passed another new information reporting provision, he added, requiring expanded information reporting on payments made from businesses to corporations, and on payments businesses make for goods. The new information reporting requirement applies if businesses pay a single entity $600 or more per year in aggregate for these types of transactions, starting in 2012.

“While businesses do not need to file information returns on these payments until January of 2013, business groups – particularly those that represent small businesses - have raised concerns about the burden that this new provision may impose,” said Shulman. “I want to assure the business community that the IRS will look for opportunities to minimize burden and avoid duplicative reporting. That is why we will be spending the next several months soliciting input from businesses of all types and sizes before proposing regulations to implement the law. We will also look to service providers who help those businesses understand and adapt to new laws and regulations, to help us craft a process that is as efficient as possible. We know that there is no ‘one-size-fits-all,’ so we want to hear your ideas."

To streamline implementation and minimize the burden, the IRS plans to use its administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards, Shulman added. “These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well,” he said. “So, whenever a business uses a credit or debit card, there will be no new burden under the new law."

However, Shulman argued that the IRS needs enhanced information reporting tools to combat tax evasion and abusive tax avoidance, especially among banks, wealthy individuals and offshore activities in bank secrecy jurisdictions. He noted that one of the most important developments in international information reporting was the enactment this year of the Foreign Account Tax Compliance Act, which creates more transparency in the offshore financial market.

Some of the key elements include encouraging the reporting of U.S. citizens’ worldwide income by withholding 30 percent on payments for foreign financial institutions, unless they identify and report the U.S. citizens who own the accounts. U.S.-owned accounts would have to include accounts beneficially owned through shell foreign entities. In addition, U.S. taxpayers will be required to report on their tax returns offshore assets worth an aggregate of $50,000 or more. “This is in addition to existing law that requires the filing of a so-called FBAR form if the aggregate of their foreign accounts is over $10,000,” Shulman noted. “As you can see, this is a significant and meaningful step towards combating U.S. tax evasion, bank secrecy and other illicit financial practices.”

Separately, the Treasury Department announced Thursday that the U.S. and 16 other countries in the Organization for Economic Cooperation and Development signed a protocol to the Convention on Mutual Administrative Assistance on Tax Matters, in order to bring the existing Convention into conformity with current international standards for the exchange of information for tax purposes between national revenue authorities.

The protocol provides for the full exchange of information on request in tax matters without regard to a domestic tax interest requirement or bank secrecy laws, such as those that have delayed the sharing of information on UBS’s bank customers with U.S. authorities. The proposed protocol also provides updated rules regarding the confidentiality and permitted uses of exchanged information as well as the level of detail that countries must provide when making a request for information. In addition, the Protocol permits countries that are not members of the OECD or of the Council of Europe to become parties to the Convention, subject to unanimous consent by the existing parties.

The final English version of the unsigned protocol can be viewed here.

The entire prepared remarks by the IRS Commissioner can be viewed at,,id=223835,00.html

Sunday, May 23, 2010

Stocks are safer than bonds, fund manager says
Chris Davis: Investors should be worried about bond bubble
By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) -- The investment move that has made consumers most comfortable since the market crisis of 2008 is about to become the investment folly of the 2010s.

That's according to Chris Davis, head of the Davis Funds. He said recently that bonds are an emerging bubble, destined for a fall over the next decade, just as investors have been throwing virtually all of their available cash into bonds so that they could sidestep the pain in the stock market.

"The only real bubble in the world is bonds," Davis said, at the CFA Institute annual meeting. "When you look out over a 10-year period, people are going to get killed."

While Davis may not be a household name to many investors, he represents a long and storied brand in the fund business, a third-generation fund manager whose firm runs $65 billion in assets, and whose management acumen is widely hailed as being a model of sound thinking.

Thus, if you are one of the investors contributing to those record bond-fund inflows, his message should be terrifying.

Davis did not predict an immediate implosion in the bond market -- he said it might hold up well for up to two years -- but he said he believes a fall is inevitable.

"When you have deficits this high and rates this low, something has to give," he said, "and I don't think you can look at this and think the deficits are going to give any time soon."

Rising-rate environments are bad for bond funds because bond prices fall when rates go up. A bond fund must "mark to market" at the end of each day, meaning it prices its securities as if it was selling them. Thus, when bond prices fall, bond funds suffer.

That's hardly a new thought; in fact, plenty of attendees and experts at the CFA conference were thinking the same thing -- that there's way too much debt in the world and that it's time to pay the piper.
Stocks as safe haven

Davis's point, however, was a bit different. He suggested that the problem for most investors is that they are looking at bonds as a safe haven when, in current conditions, the safer place is actually stocks. He wasn't advocating a "buy, buy, buy" bull-market mentality -- he did not suggest average investors dump all bond funds or go whole-hog into stocks - but based his comments on the numbers, specifically on yields.

Davis said the current dividend yield on stocks is roughly 3%, about the same or a hair less than what an investor can get on bonds. Looking at your investment as "funding an enterprise," Davis urged looking at the "earnings yield," which goes beyond the dividend payout to include what the business itself keeps.

When examined that way, he said that investing in bonds when the government is so deep in the financial hole is much riskier than buying a stock like Nestle, "which has a 7.5% earnings yield, where it is reinvesting half of that money in the business and pays the other half to you in dividends."

Further, corporate yields tend to adjust automatically to inflation, through the price increases that big companies can pass along to customers, whereas bond yields lose ground if inflation returns to the market.

"If people got their statement and looked at the dividend yield and earnings yield, they might do things differently right now," Davis said. "But you have to be able to numb yourself to changes in stock prices, and most people can't do that."

Here's where his dire forecast for bonds comes back to roost. Most investors seek bond funds for safety, income and stability. While bonds will likely remain safe, bond funds that get hammered when the rate picture changes will not feel very stable or secure; instead, they will be acting more like stock funds. And since the income component from a bond fund is not likely to be any better than the dividend stream cast off by a fund buying high-quality stocks, there's a real case to be made that it will be stock funds, over time, that provide a lot of what investors are expecting when they buy bond funds.

Davis acknowledged that many observers are calling for the stock market to take a major and protracted downturn, so he brought up the idea of a worst-case scenario, another Great Depression, where the market basically had 25 years -- from 1929 to 1954 -- of "going nowhere."

Investors who simply made a deposit on the first of each year and rode it out, however, wound up with a 13% annualized gain over that period, thanks to dividend yields.

The problem with the flood of money to bond funds, Davis said, is that "it pushes people the way they want to go, and not the way the market might suggest they want to go. They feel better, but what they are doing is very, very dangerous."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.

Friday, May 14, 2010

Health plan will deepen federal budget deficit

Video on Federal taxes fall short of spending:

Congressional Budget Office estimates predict the health care overhaul will likely cost about $115 billion more in discretionary spending over ten years than the original cost projections.

The Congressional Budget Office expects the federal agencies to spend $10 billion to $20 billion over 10 years on administrative costs to implement the overhaul. The CBO expects Congress to spend an additional $105 billion over 10 years to fund discretionary programs in the overhaul.

The CBO estimated in March that the gross cost of the overhaul would be $940 billion over 10 years. The net cost was estimated at $788 billion over 10 years. But the group cautioned that it couldn’t make an estimate of the discretionary costs without more time and information.

The figures represent estimates as to how Congress will decide to spend money. The CBO cautions that lawmakers could decide to spend less. They would still have to respect the administration’s nonsecurity discretionary spending freeze.

The Department of Health and Human Services is expected to need $5 billion to $10 billion to implement changes in Medicare, Medicaid, the Children’s Health Insurance Program and insurance industry reforms, according to CBO estimates.

The nonpartisan CBO expects the Internal Revenue Service to spend another $5 billion to $10 billion on implementing the rules regarding premiums and cost-sharing credits.

An administration official cautioned that Congress doesn't always spend all that it is authorized to and that lawmakers would have to make other cuts to make up for any new spending they approve to stay within the budget and avoid adding to the deficit.

"The Affordable Care Act will reduce the deficit by more than $100 billion in the first decade, and that will not change unless Congress acts to change it," said Kenneth Baer, an OMB spokesman. "If these authorizations are funded, they must be offset somewhere else in the discretionary budget. The president has called for a non-security discretionary spending freeze, and he will enforce that with his veto pen."

The legislation says that the agencies would receive the funding to implement the programs through the appropriations process.

“The law establishes a number of new programs and activities, as well as authorizing new funding for existing programs,” CBO director Douglas W. Elmendorf said in the letter. “By their nature, however, all such potential effects on discretionary spending are subject to future appropriation actions, which could result in greater or smaller costs than the sums authorized by the legislation.”

Nickel and dimed by Obama's microtaxes
By Nina Easton, senior editor at large

(Fortune) -- Woven throughout President Barack Obama's health care reform act are a variety of new taxes on high earners: a 3.8% tax on interest and dividends, a 0.9% increase in the Medicare payroll tax, a $2,500 cap on pretax contributions to flexible savings accounts. Then there are new taxes on the most expensive health insurance plans and on sales of medical equipment like bedpans and catheters. The President's proposed budget is laden with assorted other goodies, including a limit on deductions for mortgage interest and charitable contributions, and a capital gains hike.

It's easy to get lost in the maze of new levies. Which is really the point, at least as a political strategy. Call it nickel-and-diming by a President who seems to instinctively understand the electoral dangers of imposing a single broad new levy -- even on people he defines as high income. (Manhattan families earning just over $250,000 -- not exactly a killing in New York City -- that means you.) Even his plan to raise the top two individual income tax rates is marketed as a rollback of unfair tax cuts under President Bush. Some of us would call it a hike.

Not long ago House Democrats were pushing a more overt "millionaire's tax." At least the intention was clear. Instead, the White House is pursuing a drip, drip, drip of microtaxes on the nearly 3.5 million households Obama considers wealthy enough to fund his government plans. And, oh, how those nickels and dimes add up. "We estimate that the health reform law will take an additional $52,000 on average from the top 1%" of earners, concluded the nonpartisan Tax Foundation. Households affected by the expiration of the Bush tax cuts -- along with other tax hikes in his budget -- will pay an additional $17,925 on average. Citizens, especially the so-called wealthy, aren't going to be happy about the onslaught of new tariffs.

A huge segment of the country has always felt overtaxed. In 1938, when taxes were roughly 17% of income, a Fortune survey found that nearly half of all Americans thought they paid too much relative to what they got in return. That number was remarkably similar -- 46% -- when Gallup asked the question last year, as taxes were eating up roughly 30% of our paychecks. We can presume, moreover, that those who actually pay federal income taxes -- a record 36% do not -- will be especially irked by politicians who want them to send more of their hard-earned money to Washington.

In recent years Democrats have enjoyed a reputation as the most trusted party on tax questions. That is now changing, with Republicans gaining the upper hand in the latest NBC News/Wall Street Journal poll. Obama's tax hikes fuel the mood shift. But the White House's ambitious spending also plays a role: Americans think half their money is wasted by government.

This is a dangerous political environment for President Obama as he faces his next big economic challenge: what to do about a national debt scheduled to balloon to 77% of GDP in the next decade. It's hard to microtax your way out of that one, and it's far from clear that this administration has the stomach for massive cuts to entitlement programs. He can keep squeezing revenue out of the rich, but the top 1% of earners already pay more in federal income taxes than the bottom 95% combined.

That, of course, is why some politicians are floating the idea of a value added tax (VAT) -- an embedded sales tax that hides all those nickels and dimes along the production chain. It's a big revenue raiser that offers the illusion that people won't really notice a little tax here, a little tax there.

But all that loose change adds up to hundreds and thousands of dollars. Upper-income earners are stirring tax revolts this election year, despite White House efforts to suggest that its collection of taxes won't be quite so painful. If Democrats pursue a VAT that adds to the tax burden of average Americans, the middle class will sit up and take notice too. And that adds up to a big headache for Democrats -- in 2010, 2012, and beyond.

Monday, May 10, 2010

Changes to Medicare Advantage

Our recent column about the impact of new health-care legislation on Medicare prompted many readers to ask about the specific effects on Medicare Advantage programs, which currently cover about a quarter of Medicare recipients.

With Medicare, individuals must choose one of two paths: original fee-for-service Medicare, or a federally subsidized private Medicare Advantage plan, which typically operates like a health-maintenance or preferred-provider organization.

Over the next 10 years, the new health-care law will divert some $132 billion from Medicare Advantage, according to a recent report by George Washington University's Department of Health Policy. This has sparked concern that these plans may reduce benefits, raise premiums, or both.

But the impact is likely to vary from plan to plan. Medicare currently pays Medicare Advantage plans an average of 13% more than the cost of covering the same beneficiaries under traditional fee-for-service Medicare. After the cost cuts are fully implemented, Medicare Advantage plans will still receive slightly more -- about 1% extra overall, according to George Washington University.

But depending on whether Medicare costs in your county are high or low, your plan could receive anywhere from 5% less to 15% more than the average cost of original Medicare in your area. (Plans in low-cost areas are generally rewarded with reimbursements that are more generous relative to local Medicare costs.)

The spending cuts will phase in over time. This year, no cuts will be made. In 2011, payments will be frozen at current levels. Starting in 2012, the cuts will phase in over two to six years, says Paul Precht, director for policy and communications of the nonprofit Medicare Rights Center. Plans slated for the steepest reductions will experience the longest transition times, he adds.

Under the new system, Medicare Advantage plans that perform well on certain quality measures will receive modest bonuses -- to be used, in part, to provide extra benefits. To see how your plan measures up, go to and look up the quality ratings published by the Centers for Medicare & Medicaid Services, Medicare's administrator. Search under "Find & Compare Health Plans." (Plans receiving 3.5 to 5 stars will be rewarded.)

Starting in 2011, Medicare Advantage plans also must cap at $6,700 recipients' maximum annual out-of-pocket expenditures for services covered under Medicare. (Some PPOs will be able to impose a higher $10,000 annual limit for both in- and out-of-network services.) Currently, about one-third of Medicare Advantage plans don't have such caps.

Advantage plans will be barred from charging higher copayments or coinsurance rates for certain services, including chemotherapy, than patients would pay under original Medicare.

Also starting in 2011, Medicare Advantage participants who want to switch to another Advantage plan will have to do so in Medicare's six-week annual election period from Nov. 15 to Dec. 31. Previously, participants also were permitted to make a switch between Jan. 1 and March 31 of the following year.

Write to Anne Tergesen at
A Wall Street Journal reader commented as follows:
This is a good overview of what the future holds for Medicare Advantage. The question that readers should ask for their own personal situation; is it better to stick with the traditional Medicare Supplemental Insurance plan vs. a Medicare Advantage plan. Given the looming premiums increases in Medicare Advantage, the Medicare supplement may be the better choice in many areas. Of course specific premiums and benefits will be the determining factor. For information on both follow the links to for specific plan information in your area.
To understand Medicare Supplemental Insurance, see

Thursday, May 6, 2010

Health care law's massive, hidden tax change
By Neil deMause, contributing writerMay 5, 2010: 11:00 PM ET

NEW YORK ( -- An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.

The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

"It's a pretty heavy administrative burden," particularly for small businesses without large in-house accounting staffs, says Bill Rys, tax counsel for the National Federation of Independent Businesses.

Eliminating the goods exemption could launch an avalanche of paperwork, he says: "If you cater a lunch for other businesses every Wednesday, say, that's a lot of information to keep track of throughout the year."
The paper trail

Why did these tax code revisions get included in a health-care reform bill? Welcome to Washington. The idea seems to be that using 1099 forms to capture unreported income will generate more government revenue and help offset the cost of the health bill.

A Democratic aide for the Senate Finance Committee, which authored the changes, defended the move.

"Information reporting improves tax compliance without raising taxes on small businesses," the aide said. "Health care reform includes more than $35 billion in tax cuts for small businesses ... indicating that during these tough economic times, Congress is delivering the tax breaks small businesses need to thrive."

The new rules could drastically alter the tax-reporting landscape by spotlighting payments that previously went unreported. Freelancers and other independent operators typically write off stacks of business expenses; having to issue tax paperwork documenting each of them could cut down on fraudulent deductions.

More significantly, the 1099 trail would expose payments to small operators that might now be going unreported. If you buy a computer for your business from a major chain retailer, the seller almost certainly documents the revenue. But if you buy it from Tim's Computer Shack down the street, Tim might not report and pay taxes on his income from the sale.

The IRS estimates that the federal government loses more than $300 billion each year in tax revenue on income that goes unreported. Using 1099s to document millions of transactions that now go untracked is one way to begin to close the gap.

While all but unnoticed at the time -- a Pennsylvania business group issued the first warning last October as the idea emerged in draft Senate legislation -- the 1099 rule changes began sparking attention in the blogosphere in the last week. The libertarian Cato Institute called it a "costly, anti-business nightmare"; Rep. Dan Lungren, R-Calif., introduced legislation last week that would repeal the new 1099 requirements.

The notion of mailing a tax form to Costco or Staples each year to document purchases may seem absurd to small business owners, but that's not the worst of it, tax experts say.

Marianne Couch, a principal with the Cokala Tax Group in Michigan and former chair of a citizen advisory group to the IRS on small business and self-employed tax issues, thinks the bigger headache will be data collection: gathering names and taxpayer identification numbers for every payee and vendor that you do business with.

But she also sees a silver lining in the new law.

Her firm already recommends collecting tax data on all vendors, since the IRS requires that you have it on hand at the time of the transaction, not just at tax-filing time. And eliminating the corporate and goods exemptions at least means that businesses will no longer have to pour over every transaction to determine if it needs a 1099. The new rule is simpler: If it crosses the $600 threshold, it's in.

"There are probably going to be some hiccups along the way, because systems will need to be redesigned," says Couch. "But overall I believe it will make compliance on the payor end a lot more streamlined and easier."

In any case, the final impact of the law won't be known until the IRS issues its regulations on the new law, which aren't expected to arrive until sometime next year. The IRS has not yet commented on when it will release regulations or schedule public hearings, and an agency spokesman was unsure when it will do so. The new requirements kick in January 1, 2012.