Extension: 90 Day Extension to Pay Taxes

Treasury Secretary Mnuchin announced today that individual taxpayers will now get a 90 day extension of time (through what Excel tells me is Tuesday, July 14, 2020) to pay 2019 income taxes, up to $1 million owed. Corporate filers will get the same period of time to pay up to $10 million in taxes owed.  During the period of time from April through July 14, taxpayers will not be subject to additional interest and penalties on amounts due for 2019. Individuals and businesses will still have to file their income tax returns by April 15, unless they file a request for extension. As usual, if taxpayers are getting a refund, they may not want to extend the deadline to file their income taxes. Secretary Mnuchin said that the delay will free $300 billion of liquidity in the economy.

The Oregon Department of Revenue earlier stated that it will automatically connect to the extended filing and payment dates for individuals. The IRS has not yet ruled on whether it will extend the deadline for 2020 first quarter estimated tax payments. This extension is in addition to the proposed $850 billion stimulus package that is before the Senate.

For more information, see Bloomburg’s article on this.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Think about 2018 Taxes Now!

We’ve had a lot of questions from clients about the impact of the Tax Cuts and Jobs act on normal, working Americans. IRS did a clumsy job with implementation, although in their defense the TCJA probably raised more questions than it answered. Also, one of the most surprising effects will be felt by taxpayers who live in high tax jurisdictions and who itemize their deductions.

A combination of factors may mean a higher bill.

Three things are conspiring against us to create a perfect storm of annoyance and large tax payments.

  • First, IRS came out with new withholding tables that may have significantly under-withheld for a large part of 2018. The General Accounting Office says this snafu will have an impact on approximately 73{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of US taxpayers.
  • Second, Oregon is a jurisdiction with a relatively high personal income tax rate. In 2018, you can only deduct $10,000 state tax (income plus property) on your income tax return if you itemize. So, if you pay $8,000 in state income tax and have $5,000 in property taxes, you can’t deduct the full $13,000 on your Federal schedule A. You can only deduct $10,000.
  • Finally, many of us did not adjust our exemptions on Form W-9 after the TCJA passed. While some folks will not be itemizing their deductions this year, due to the increase in the standard deduction, the combination of the first two factors may mean that you have a stiff bill to pay on April 15 (and not a moment sooner!!!!!).

We also wanted to encourage folks to reach out to their CPA early this year. Get your organizers completed and shoe box of receipts assembled early and to your tax preparer. We have heard from our friends who prepare personal income tax returns that the complexity of the 2018 tax season will mean that some shops don’t have enough people to do the work. If you wait too long, you may end up doing your return yourself! (I may be the only one out there who finds that entertaining).

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Ballot Measure 104: Oregon Gets Down & Dirty With What It Means To Raise Revenue

Vote - Oregon Ballot Measure 104

All summer we have been talking about the fallout from the Supreme Court’s decision in South Dakota v. Wayfair. We analyzed the opinion when it came out; we looked at the initial state responses in August; and we looked at one of the early Federal proposals in September. It’s been an exciting ride!

One of the things we’ve come to realize is that the Wayfair decision signals a convergence of the disparate state nexus thresholds for different types of tax. Correctly or not, the Commerce Clause and Due Process nexus thresholds for sales tax and income tax regimes are converging around the idea that a taxpayer needs to have “minimum contacts” with a taxing jurisdiction and must “purposefully avail” themselves of the jurisdiction’s economic market. Thanks to Public law 86-272 (codified at 15 USC §§ 381-384), nuance still exists in the areas of sales of solicitation of sales of tangible personal property. Also, the requirements of internal and external consistency help limit the deleterious impact of having thousands of taxing jurisdictions each doing their own thing.

The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Because there are all of these limitations and restrictions on a state’s ability to tax activity within its borders (however that may be defined), states in the last few years have been relying more and more heavily on “fees.” The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Much like obscenity, jurists tend to think that they should be able to identify a fee when they see it (apologies to Justice Stewart). However, it’s not that simple. A fee payment may be defined as a “fixed charge” or “a sum paid or charged for a service.” From practical perspective, what this means is that specific line items in a governmental budget need to be tied to a charge or schedule of charges. Taxes, on the other hand, are typically understood to be general assessments to pay for government services. Taxes are subject to constitutional limitations. It remains to be seen if the same restrictions apply to fees.

The Oregon Constitution, Article I, §32 states: “No tax or duty shall be imposed without the consent of the people or their representatives in the Legislative Assembly; and all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax.”  At Article IV, §25(2), the Oregon Constitution states: “Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” Courts have generally limited the impact of this to legislation defined as tax increases. There are no corollaries for fees. Certain things, such as state level professional licensure and county inspection services seem directly tied to benefits provided in a way that would be difficult to capture with what we commonly think of as a tax. The bigger issue comes when a fee looks a lot like a tax assessment in disguise.

For example, when the City of Tigard decided that it wanted to enter into a massive water project with the City of Lake Oswego, it was able to enact a rate increase in the guise of a fee to pay for that project. What this meant in practical terms was a hypothetical, impoverished baby lawyer who had only paid $85 every other month for water/sewer service now had to pay that same amount every month. When that hypothetical baby lawyer contacted the City of Tigard to ask why this wasn’t funded through a separate property tax assessment, which would have been more appropriate, she was told that the City didn’t have to go that route so it didn’t. As an aside, it was a pretty facile and not very satisfying answer to provide to a beleaguered, hypothetical baby tax lawyer.

Oregon’s Nonconformity

This long-simmering issue has come to a head in the debate over Ballot Measure 104 (“Measure 104”), on the November 6, 2018 ballot. This would add a definition to the Oregon Constitution’s §25 of “raising revenue” to include changes to tax exemptions, credits, and deductions that result in increased state revenue, as well as the creation or increase of state taxes and fees. Interestingly, the impetus for this measure doesn’t seem to be primarily fee increases. Rather, it was Oregon’s nonconformity with the Tax Cuts and Jobs Act’s addition of IRC 199A, which in most cases decreased the effective tax rate on pass through entities.

A recent article by Oregon Public Broadcasting highlights some of the issues associated with Measure 104, including the challenges involved in our system of conformity to the federal definition of taxable income. The authors correctly highlighted the issue that an opt-out of a federal tax exemption could be construed in Oregon as legislation to raise revenue. Therefore, the legislation specifically opting-out of the federal exemption may be seen as revenue raising and subject to a 3/5 majority approval requirement.

Proponents of Measure 104 have argued that politicians have created a climate that is not friendly to taxpayers because it is not predictable how much a taxpayer will have to pay over to state government from one year to the next. Opponents of Measure 104 have made a variety of arguments that mostly seem to come back to “if you pass this, it will tie the hands of legislators to do what needs to be done.” It may be that both sides are correct. At the end of the day, Oregon voters will have to decide how much they trust the politicians (that they elected) to protect both their wallets and the various things that the state does.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Grounded: Delinquent Tax U.S. & International Travel

Delinquent tax debt can now potentially ground U.S. taxpayers from international travel

Starting this year, The Internal Revenue Service (IRS) and U.S. State Department have teamed up in a manner that may affect the future travel plans of certain taxpayers that owe a large amount of money to the Treasury. In late 2015, President Obama signed the Fixing America’s Surface Transportation Act (FAST Act) to address long-term funding for surface transportation infrastructure planning and investment. Embedded deep in the law is Section 32101, which requires the IRS under § 7345 of the Internal Revenue Code (IRC), to notify the State Department of taxpayers certified to have “seriously delinquent tax debt”. Upon certification from the IRS, the State Department is then required to deny a passport application for such individuals and also potentially revoke or limit passports already issued to said taxpayers.

The IRS issued Notice 2018-01 on January 16, 2018 to explain the criteria for which taxpayers qualify and how they plan to enforce the new law.  Under § 7345(b)(1), a “seriously delinquent tax debt” is an unpaid legally enforceable, and assessed federal tax liability of an individual, greater than $51,000, subject to inflation and for which:

  • A notice of lien has been filed under IRC § 6323 and the Collection Due Process (CDP) hearing rights under IRC § 6320 have been exhausted or lapsed; or
  • A levy has been made under IRC § 6331.

The IRS calculates this $51,000 federal tax liability threshold based on an aggregate of the total amount of all current tax liabilities for all taxable years. Even if a taxpayer does not owe over $51,000 for one year, they could still end up targeted under IRC § 7345 if the total federal tax they owe across all years exceeds $51,000. This figure also includes any penalties and interest, which can accumulate rather quickly.

Taxpayers that qualify as having “seriously delinquent tax debt” but have entered into alternative arrangements with the IRS to pay should not be too concerned. IRC § 7345(b)(2) provides exceptions to taxpayers that have agreed to:

(1) An IRS-approved installment agreement,

(2) An offer in compromise accepted by the IRS,

(3) A settlement agreement with the Department of Justice, or has

(4) A pending due process hearing or,

(5) Requested innocent spouse relief

Taxpayers in Currently Not Collectible (CNC) status, in a bankruptcy proceeding or are currently in the process of obtaining one of the five exceptions also are excluded.

Before denying a passport, the State Department will first wait 90 days after receiving certification from the IRS about a taxpayer’s seriously delinquent tax debt. This time allows the taxpayer to try to resolve any erroneous certification issues, pay the full tax debt, or enter into one of the above alternative payment arrangements with the IRS. Meeting any of those requirements will require the IRS to reverse the certification within 30 days and provide notification to the State Department as soon as reasonably possible.

Most surprising to note, however, is that the IRS is not required to notify the taxpayer that they plan to certify their tax debt to the State Department. A taxpayer will likely only find out about the certification after it has already happened. The Taxpayer Advocate Service (TAS), an independent office within the Internal Revenue Service that represents the interests of taxpayers, has wholly criticized this process, citing the potential of infringing on Constitutional due process protections because the taxpayer does not have the option to contest the certification before taking place. They also question whether 90 days is enough time for taxpayers to resolve their tax liabilities, likely because taxpayers with seriously delinquent tax debt over $51,000 have more complicated issues that cannot always be resolved quickly.

Domestic travelers may also want to pay attention to whether their home state is in compliance with the REAL ID Act. This federal law passed during the Bush Administration established new federal standards for state driver’s licenses and ID cards that can be accepted by the federal government for “official purposes”, including boarding commercially operated airline flights. As of the last few years, the Department of Homeland Security has ramped up implementation of the new requirements and currently full enforcement will begin tentatively on October 1, 2020. Theoretically, if a taxpayer’s driver’s license or ID card did not meet the new federal standards, they may be required to show alternative identification that meets the new requirements. The only form of identification that currently meets the REAL ID standards for many taxpayers is a U.S. Passport. Currently, all 50 states are either in compliance or have been granted extensions but many states have passed resolutions against implementing identification cards in compliance with REAL ID.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Annual Gift Tax Exclusion Remains at $13,000 for 2010

 

 Late in 2009, the IRS announced that the annual gift tax exclusion will remain unchanged in 2010 at $13,000. Under the Tax Code, this amount is adjusted based upon the Consumer Price Index. The annual gift tax exclusion amount was last changed at the beginning of 2009 when the amount increased from $12,000 to $13,000. 

If a gift is less than the exclusion amount, then (i) no gift tax will be due, (ii) no gift return must be filed, and (iii) the donor’s lifetime gift-tax exemption (currently $1 million) is not reduced. This is one of the few “free Bingo spots” in the Tax Code.

The gift tax exclusion amount applies on a per-donor, per-donee basis. This means that a married couple can make gifts to a single donee equal to $26,000. For example, a married couple with two children can make gifts totaling $52,000 per year. 

For cash gifts, the amount of the gift is equal to (not surprisingly) the amount of cash given. However, for gifts of property (both real property and personal property), the value of a gift for this purpose is based upon the fair market value of the property on the date the gift is made. Often, gifts of property have significant estate planning benefits (more on these issues in a later blog article).

I welcome your comments and questions!

You are not as poor as you think you are.

One of the most surprising revelations that many of my clients experience is the fact that estate/inheritance taxes will be due upon their death, unless they do some planning.  These clients have been convinced that estate/inheritance taxes only affect the rich, and since they do not perceive themselves as rich, they have nothing to worry about.

What these clients don’t realize, until our initial meeting, is what all is included in their taxable estate.  The asset most often left out is proceeds from life insurance.  If you have a million dollar life insurance policy, and you also have other assets, you will pay inheritance tax in Oregon, which has only a $1 million exclusion.

The second asset most often forgotten is retirement plans.  These amounts are not only included in your taxable estate, and therefore subject to the estate tax, but they are also, without proper planning, potentially subject to income taxes.

The third asset that people seem to forget when calculating their taxable estate is equity in their real property.  This one may seem more surprising than the others, but it happens quite frequently.

Fourth, there are assets that client’s have received from their parent’s estate planning, such as family limited partnership interests, that they tend to forget about.

For those who don’t relish the idea of paying more taxes than is required (and I have yet to meet someone who does),  I recommend having a long discussion with your estate planning attorney about what is included, and what the estate tax exemptions are currently (see earlier posts about changes in the federal estate tax exemption).

Taxes on Health Insurance Premiums: A New Kind of “Trickle-Down”?

Effective September 28, 2009, a new bill passed by the 2009 Oregon legislature imposes a new tax on what a legislative staff summary refers to as a “specified group of health insurers.” In particular, the new law assesses a 1% tax upon the gross amount of premiums earned by health insurance providers. The stated purpose of the new tax is to provide health insurance to low income children – a commendable objective.

As the popularity of insurance companies is probably not high, most people might not have a great deal of sympathy for the plight of the newly taxed. However, the tax has already begun to “trickle down” to the rest of us. I’ve recently read a copy of a letter from a CEO of a major Oregon health insurance provider to a customer. Noting the new tax’s impending effective date, the letter pleasantly informs the small business insurance customer that “your premium rates will be adjusted to reflect the new 1 percent tax.”

However, the “trickle” does not stop with the small business. The owner of that business will now need to make a difficult decision as to whether to raise prices, absorb the cost, cut costs of other employee benefits, or pass the additional costs on to employees. You get the idea – the tax lands upon small businesses and their employees at a time when many such businesses are stretched to the breaking point (assuming they’ve made it this far in the recession).

Is this really the intended consequence of the new policy? I welcome your comments and questions.