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Blanche Lark Christerson
Managing Director, Senior Wealth Planning Strategist
Tax Topics
2014-01
01/29/14
And the beat goes on…
Last fall’s 16-day government shutdown ended with legislation that President Obama signed in the wee
hours of October 17 th . Under that legislation, a bipartisan committee hammered out a budget agreement by
mid-December; Congress approved the agreement, and President Obama signed it into law. House and
Senate appropriations committees then began drafting spending bills – on which they compromised: H.R.
3547, the “Consolidated Appropriations Act, 2014,” passed both the House and the Senate with comfortable
bipartisan majorities; it became Public Law 113-76 on January 17 th , when President Obama signed it. The
Act allocates $1.012 trillion, is over 1500 pages long and funds the government through September 30, 2014
(the end of the current 2014 fiscal year).
The Act restored some of the funding cuts otherwise dictated by the “sequester,” which was born of budget
legislation (and the debt ceiling crisis) in August 2011. It covers discretionary spending for all government
agencies, and has nothing to do with mandatory spending, such as Social Security. In other words, for
example, the Act covers national defense, commerce, the judiciary and what are referred to as “financial
services,” which includes the IRS. Although overall appropriations are up slightly for financial services from
last year’s enacted level, the $11.289 billion appropriated for the IRS is about 4% less than last year, and
continues a downward trend in IRS funding.
Under the Act, the IRS will have new quarterly reporting requirements with respect to some of its spending,
and must abide by some pointed directives, including maintaining training programs to cover items such as
“taxpayers’ rights, dealing courteously with taxpayers, cross-cultural relations, ethics and the impartial
application of tax law.” An additional $92 million is potentially available to the IRS to supplement certain
areas of its budget, but not until the IRS Commissioner first provides a spending plan for those dollars, none
of which can be used to support any provision of the Affordable Care Act (ACA, which is also known as
“Obamacare”). The IRS also cannot make a video unless it is pre-approved by the Service-Wide Video
Editorial Board, nor can the Service use any of its funds to target citizens who are exercising their First
Amendment rights or to target groups for “regulatory scrutiny based on their ideological beliefs.”
In other words, the budget takes note of recent issues that have reflected poorly on the IRS, including the
Service’s enhanced scrutiny of politically conservative groups that were seeking tax-exempt status as
501(c)(4) social welfare organizations, and the disclosure of certain training videos that spoofed several old
television shows and were deemed wasteful. John Koskinen, the new IRS Commissioner, has many
challenges ahead of him, including restoring public confidence in the agency and boosting employee morale.
National Taxpayer Advocate
Nina Olson has been the National Taxpayer Advocate since 2001. She heads up the Taxpayer Advocate
Service (TAS), which was created in 2000, and is an independent organization within the IRS. Ms. Olson
and the TAS are the taxpayer’s “voice at the IRS.” The TAS is designed to help taxpayers navigate issues
with the IRS when the usual channels have failed; in addition, Ms. Olson regularly focuses on larger issues
within the IRS and the tax system itself, and recommends solutions. Her year-end Annual Reports to
Congress are thorough and thoughtful, and in part, detail what she views as the most serious issues facing
taxpayers.
Ms. Olson’s 2013 Annual Report was released on January 9, 2014, and, as always, is interesting reading.
One of the critical issues Ms. Olson focuses on in this report is that the IRS “desperately” needs more
funding to serve taxpayers and increase voluntary compliance. Ms. Olson presents some compelling
statistics to support this statement. In fiscal year 2013, for example:
• The IRS received about 109 million phone calls; only 61% of the callers seeking a customer service
representative got through, and those who did had to wait an average of 18 minutes before speaking
with someone.
• The IRS received about 8.4 million letters from taxpayers responding to proposed adjustments to their
tax accounts; it was unable to respond to 53% of this correspondence within its target timeframes.
• The IRS continues to reduce (and sometimes eliminate) services at its nearly 400 walk-in sites; the
Service will only answer “basic” tax law questions during this current filing season (January through
April), and will not answer any of those questions beyond April.
Ms. Olson also notes that since fiscal year 2010, the IRS workforce has declined about 8%, and that its
training budget has been “slashed” from about $172 million to about $22 million, a “staggering” 87%
reduction. “Thus,” she says, “the IRS not only has fewer employees than four years ago, but those who
remain are less equipped to perform their jobs.”
Ms. Olson calls the recent IRS budget cuts “shortsighted and counterproductive” for several reasons: 1) our
system relies on voluntary compliance, and the harder it is for taxpayers to get answers, the less likely they
are to comply; 2) the IRS is a money-maker: in fiscal year 2013, it collected roughly 90% of federal revenue
– or about $2.86 trillion on an appropriated budget of about $11.2 billion (an average return on investment of
255:1); of those revenues collected, some 98% were paid timely and voluntarily, with only 2% coming from
enforcement actions. “In fiscal terms, to be blunt, the mission of the IRS trumps the missions of all other
federal agencies.”
At his confirmation hearing last December, IRS Commissioner John Koskinen voiced similar sentiments:
I don’t know any organization in my 20 years of experience in the private sector that has said “I think I’ll
take my revenue operation and starve it for funds to see how it does.” The IRS will have 11,000 fewer
people working during this upcoming filing season while processing the largest number of returns in its
history. I don’t care how efficient you become, that is not a recipe for success or improved compliance
and taxpayer service.
Tax Topics 01/29/14 2
In a nutshell…Tax collectors are never popular. Yet if the IRS lacks sufficient funds to do its job properly,
that means fewer dollars all around for all federal programs, including national defense, Social Security and
Medicare – and for reducing the deficit. Perhaps, as Ms. Olson suggests, Congress should change the way
it approaches the IRS’s budget and fund the IRS at whatever level Congress believes will “maximize tax
compliance, particularly voluntary compliance, with due regard for protecting taxpayer rights and minimizing
taxpayer burden.”
Changes afoot in New York?
On January 21, 2014, New York’s Gov. Andrew Cuomo (D) introduced his comprehensive Executive Budget
for New York’s 2014-2015 fiscal year. The budget has a number of tax reform proposals, including
“modernizing” New York’s estate tax law and closing what it refers to as the resident trust “loophole.” Here
are a few highlights of this draft legislation:
• Estate Tax. For decedents dying on or after April 1, 2014, New York would begin lowering its top estate
tax rate of 16% (this currently applies to taxable estates just over $10 million), and increasing its $1
million estate tax exclusion amount; by April 1, 2017, the top estate tax rate would have dropped to 10%,
and the exclusion amount would have reached $5.25 million. As of January 1, 2019, that exclusion
amount would be indexed for inflation using the “cost of living adjustment,” defined as the percentage by
which the consumer price index (CPI) for 2018 exceeds the CPI for 2012; as of January 1, 2020, the
cost of living adjustment would be the percentage by which the CPI for 2019 exceeds the 2018 CPI; in
2021, the adjustment would be the percentage by which the 2020 CPI exceeds the 2018 CPI, and so
forth, in subsequent years. In addition, as of April 1, 2014, resident New York decedents would have to
include “adjusted taxable gifts” (see below) made on or after that date in their New York gross estates if
they were New York residents when they made the gifts; non-resident New York decedents would not
include such gifts in their New York taxable estates unless the gifts were of real or tangible property
located in New York, or of intangible property used in a New York trade or business.
Comments. The memorandum in support of this legislation states that New York’s estate tax is
“woefully out of date,” and that it gives wealthy New Yorkers an incentive to leave the state. In part, the
legislation would address this problem by lowering New York’s estate tax rate, and eventually raising its
estate tax exclusion to the federal basic exclusion amount, which it cites as $5.25 million, indexed for
inflation. Indeed, thanks to inflation-indexing, the basic exclusion amount was $5.25 million in 2013, and
in 2014, it is $5.34 million – meaning that in 2014, a married couple can protect up to $10.68 million from
federal gift or estate tax, assuming they haven’t made any prior gifts that used up some of this exclusion
(these are the “adjusted taxable gifts” referred to above). Thus, New York’s draft legislation targets a
number ($5.25 million) that is already stale. Nevertheless, the legislation would start indexing the New
York exclusion for inflation as of 2019; presumably, its CPI references would successfully match New
York’s exclusion to whatever the federal exclusion then is.
In addition, including certain lifetime gifts made on or after April 1, 2014 in the New York estate tax
computation could definitely increase a decedent’s New York estate tax, which generally doesn’t reflect
those gifts. It goes without saying that a New Yorker currently contemplating a significant lifetime gift
might want to complete that gift prior to April 1, 2014, given this draft legislation. But New Yorkers who
haven’t yet made such gifts might be reluctant to do so – they may not want to, and may not even be a
New York resident at death.
• The resident trust “loophole.” The memorandum in support of this legislation explains that it would
make two “improvements” to the taxation of trusts. First, it would tax distributions of trust income
accumulated in prior years (“accumulation distributions”) to New York beneficiaries of non-resident trusts
(generally, trusts created by someone who was not a New Yorker) and of tax-exempt resident trusts
(generally, trusts created by a New Yorker that are exempt from New York income tax because they
Tax Topics 01/29/14 3
have no New York trustees, no property located in New York, and no New York-source income).
Second, the bill would eliminate a “loophole” that allows so-called incomplete gift, non-grantor trusts
(“INGs” or “DINGs,” if the trusts are created in Delaware) to completely avoid New York income tax; it
would do so by making the trust a “grantor trust” for New York income tax purposes – meaning that the
creator of the trust would be taxable on the trust’s income for New York purposes, even though the
creator is not taxable on that income for federal purposes. Although these proposals would be
retroactive to January 1, 2014 if enacted, some transition rules would apply: accumulation distributions
paid before June 1, 2014 would be exempt, and the ING rules would not apply to income from a trust
that is liquidated before June 1, 2014.
Comments. This proposed legislation reflects recommendations from the Trusts and Estates section of
the New York Bar Association that were included in the November 2013 report from the Tax Reform and
Fairness Commission. According to the bill’s supporting memorandum, the provisions would increase
tax revenues by $75 million in fiscal year 2014-15, $225 million in fiscal year 2015-16, and $150 million
annually thereafter. In other words, these proposals are perceived as money-makers. Yet whether that
would indeed be the case remains to be seen: wealthy New Yorkers seem unlikely to view these
changes as “improvements” to the taxation of trusts, but rather, as another reason to move out of New
York.
January and February 7520 rates issued
The IRS has issued the January and February 2014 applicable federal rates: the January 7520 rate is 2.2%,
an increase of 0.20% (20 basis points) from December’s 2.0% rate. January’s mid-term rates are also up
slightly, and are: 1.75% (annual), 1.74% (semiannual and quarterly), and 1.73% (monthly). February’s 7520
rate continues to climb: it is 2.4%, and the February mid-term rates are also up: 1.97% (annual), 1.96%
(semiannual and quarterly) and 1.95% (monthly). December’s mid-term rates were: 1.65% (annual), 1.64%
(semiannual and quarterly), and 1.63% (monthly).
Blanche Lark Christerson is a managing director at Deutsche Asset & Wealth Management in New York
City, and can be reached at blanche.christerson@db.com.
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