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Fiscal Cliff, Tax Reform and Lame Ducks

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The ballots have been cast. The election is over and now the work of legislation begins. The question in Washington is this. Can the Democrats let the Fiscal Cliff hit and blame it on the Republican Congress? If they do, its the “old” Congress that technically won’t be in office next year.
Scenario 1
So, here’s what the lame duck could look like. The House will pass yet another budget. The Senate will sniff at it, pooh, pooh it and say its too extreme and they won’t deal and by the way, won’t propose one of their own. They let the Bush Tax cuts expire and the Government falls off the Cliff, the Bush era tax cuts expire, the markets tumble, real estate values plummet near military bases and government establishments and general mayhem erupts. Both sides blame each other.

Scenario #2
The House passes a budget with a few nuggets for the democrats, the Senate gets it, sniffs at it and passes one of their own which is DOA in the house. It goes to Committee and the House send in a Turk Committee of Ryan and Cantor, the Senate sends Schumer and Kerry. After a week of non-productive meetings, the President comes back from vacation and asks to meet with the Committee. He calls Ryan and Cantor every name in the book, things break down and we fall off the cliff.

Scenario #3
Senators Begich, Landreau, Franken, and Udall (CO) and Kay Hagen meet with Collins, Hutchinson, Brown and Lugar and agree to vote cloture on any filibuster of the budget bill, a new Gang of 8 with three lame ducks and several at risk in 2014 in possibly red mid term states. And something gets passed which neither the democrats nor the Republcans like.

All we can say is the end of 2012 will be interesting and scarry. Don’t forget the Winter Solstice Mayan Prediction. The world ends on December 21. Of course that should be right about the time Congress adjourns for the year.

We’re back

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After a lot of summer activities, we’re back at it. Congress is trying to get in and out of town as fast as humanly possible. It is therefore clear that there will be no tax legislation except for perhaps small ad-ons that lobbyists get into the law. So, be prepared for a year-end panic as Congress and the President “negotiate” the next tax law.

2013 and the new tax from the health care law.

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Starting in 2013, unearned income will bear an extra 3.8% surtax. This includes capital gains. This means that one should probably consider taking capital gains in 2012 to avoid this law. This also means that perhaps sales to family members using self cancelling installment notes, might be advisable in 2012 and recognizing the gain in 2012 even though you don’t yet have the cash. With the real estate market still recovering slowly at best, its a good year for intrafamily sales since fair market values are low.

Tax Uncollectible?

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Section 5000A of The Affordable Care and Patient Protection Act (aka Obamacare), reads as follows:
“(g) Administration and procedure
(1) In general
The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.
(2) Special rules
Notwithstanding any other provision of law—
(A) Waiver of criminal penalties
In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.
(B) Limitations on liens and levies
The Secretary shall not—
(i) file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section, or
(ii) levy on any such property with respect to such failure.”

Read clearly, the Government cannot prosecute you for wilflully refusing to pay the tax. But it can prosecute you for filing a false return. Thus, taxpayers will. if they can figure out whether they fall into the category of being liable for the tax, be subject to possible criminal penalties if intentionally file a false return. So, you can’t lie on the return, however, they can’t prosecute you for innocent mistakes. And there are exceptions to the Act and calculations that will need to be made (yet another schedule to attach to your 1040). So, assuming that you report the tax on your return, what if you refuse to pay? The law is clear, the Service cannot enforce the tax by lien or levy or penalty. So, they cannot assess failure to pay penalties, they cannot assess wilful failure to pay penalties, they cannot garnish your wages, and they cannot put a lien on your house. They can call you and they can presumably offset against your tax refund. It will be interesting to see if the Government can offset against other government payments like social security. Normally it can’t. So, that will be an area of potential litigation. Now be forewarned there are some tricks up the Government’s sleeve here. First, when you send in a payment for your 1040, the government can apply it however they want to apply it unless you specify what it can be used for. Thus,if you intententionally do not want to pay the tax you would who have to not on the check that the payment is going to income taxes only, not to penalties under Section 26 USC 5000A. Otherwise, you send in your check net of the mandate payment and the service first applies it to the mandate and sends you a bill for the other taxes due. But assuming you do this, the Government would have to jump through a lot of hoops to collect the tax. And the Supreme Court has already ruled that the Anti-Injunction Act does not apply to the 5000A penalty. Thus, if the Government did try to set off against other Government payments to collect the tax, you could theoretically go to the US District Court and get an injunction to stop them if you have grounds for an injunction and you would also have the right to sue for refund should they grab enough to fully pay the tax. The Government still would have a right to sue you on the deficiency and convert it to a judgment and then collect it as a judgment, but again the prohibition in the Statute would then raise a whole set of issues as to whether compulsion that can be used to collect a judgment can be used to collect this tax. In other words, there is a tax which the Government can’t really collect, but might with a lot of effort and money be able to somehow get a right to collect it, maybe. Further the Code section puts the money in the Treasury and not to insurance pools and the like, so it won’t keep the premiums down for those who do buy insurance. This provision is unprecedented in many ways, and a penalty that the IRS can’t enforce by the usual means of terror is just one of those ironies.

When a Mandate is a Tax and yet isn’t a Tax.

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Like many in this Country, the Supreme Court opinion today has many scratching their heads. The Court ruled that the “individual mandate” is a tax in the form of a penalty. The Court seemed to dance around the Constitutional Prohibition against Direct Taxes by saying this wasn’t a direct tax. I liken a “direct tax” to the definition of pornography, basically the Court views it as you’ll know it when you see it. So, the mandate stands and will be collected by the IRS when people who don’t have insurance file their individual income taxes. But the Court then threw everything into the mixer by saying that the “Anti-Injunction Act” does not apply to this “tax”. The “Anti-Injunction Act” essentially says that the collection of tax cannot be restrained . However in this case, if a person doesn’t buy insurance and doesn’t pay the tax, he could in theory get an injunction against its collection until the efficacy of the assessment is determined by the Court. Thus, I can forsee lots of business for Tax lawyers seeking injunctions against the IRS to prevent collection of this tax claiming all sorts of defenses (including perhaps insolvency, lack of intent (since penalties generally require “wilfulness”), incorrect amount on the assessment, or lack of Section 6320, 6330 due process before collections actions including disagreements as to collection alternatives. Thanks to the Supreme Court for giving the Tax bar a shot in the arm.