Here's a roundup of the biggest tax stories of the year 2011.
Payroll Tax Holiday
Employees paid 4.2% of their wage income in Social Security taxes, down two percentage points from the normal 6.2% rate. (Self-employed persons paid 10.4% instead of 12.4% on their net earnings.) This temporary reduction in Social Security taxes was originally designed to be a one-year provision for 2011, but was recently extended to the first two months of 2012. Looking back, this was the first change in the Social Security tax rate since 1990, when the rate changed from 6.06% to 6.2%. (Source: SSA.gov)
Budget and Tax Reform that Wasn't
A special Congressional committee was convened to find ways to reduce the federal deficit through a combination of spending and tax reforms. The committee did not find enough consensus to have their legislative recommendations considered before the full Congress. Many headlines lamented the "failure" of the deficit committee to achieve consensus, but tax information publisher CCH emphasized a positive spin on this situation, saying that "Congress initiated a national conversation on the pros and cons of tax increases, tax reform, and deficit reduction, which will frame tax proposals for 2012 and beyond."
The IRS implemented a heavy-handed "amnesty" program that raised at least half a billion dollars from Americans who had not previously disclosed the existence of bank and financial accounts held abroad. The IRS also began implementing FATCA legislation, which among other things requires banks outside the US to disclose the identity of their U.S. clients to the IRS or face disincentives in the form of mandatory withholding on all financial transactions connected with the U.S. The results of FATCA so far has been disastrous, with many financial institutions outside the U.S. now refuse to accept Americans as clients. Attorneys Phil Hodgen and John Townsend blogged extensively about the IRS's offshore voluntary disclosure initiative -- the "amnesty" program that was severely criticized by the advocacy group American Citizens Abroad for the aggressive actions taken by the IRS. Canada's finance minister Jim Flaherty in an open letter chastised the IRS's crackdown for "causing unnecessary stress and fear among law abiding hardworking dual citizens." Dick Harvey, who helped the IRS craft the new legislation, has published an insightful behind-the-scenes look at FATCA.
Adoption Tax Credit Made Refundable, IRS drags feet on issuing refunds
The adoption tax credit was made a fully-refundable tax credit, resulting in many adoptive parents being eligible to receive significant refunds from the IRS. The IRS used its audit authority to screen all incoming adoption credit tax returns, which resulted in long waits for refunds and repetitive inquiries from IRS agents asking for the same documentation over and over again, as revealed in the many, many comments left of my blog.
H&R Block prevented from acquiring TaxACT
The Department of Justice prevented H&R Block from acquiring 2nd Story Software, the publishers of TaxACT. The DOJ cited concerns over market competition and pricing, and a judge agreed to block the acquisition. Had the acquisition occurred, H&R Block would have owned two of the three most popular consumer-oriented tax preparation programs.
Regulation of Tax Preparers
The IRS began implementing provisions to regulate the tax profession. The IRS now requires tax professionals to register with the tax agency to be issued a tracking number (preparer tax identification number or PTIN). The IRS also developed a competency test for tax preparers who are not certified public accounts, enrolled agent or attorneys. Tax preparers will have until the end of the year 2013 to pass the test. The IRS also mailed some rather scary-sounding letters to tax professionals, suggesting that the preparers have filed tax returns with possible inaccuracies, and warning preparers of possible visits to their offices during the busy tax season.
Repeal of expanded Form 1099-MISC reporting
Form 1099 reporting would have been expanded starting with the year 2011, but this provision was repealed in 2011. Prior to repeal, businesses and rental property owners would have been required to report to the IRS payments totaling more than $600 to any person or business for the purchase of any goods or services. The expansion of Form 1099-MISC reporting was originally enacted in 2010 as part of the health care reform law. The expanded information reporting provision was repealed in 2011, leaving the original reporting requirements intact.
Tax Strategies No Longer Patentable
Congress enacted the America Invents Act, which prohibits the issuing of a patent for any strategy designed to reduce taxes. At least 161 tax strategy patents has been issued by the US Patent and Trademark Office, according to Forbes.
New 1099 for Credit Card Payments
Credit card processors are now required to report the amount of sales income processed through a merchant account. This requirement to report credit card sales was enacted in 2008 as part of the Housing Assistance Tax Act, the same law that gave us the first iteration of the first-time homebuyer tax credit. During 2011, the IRS developed the new Form 1099-K, instructions, and published final regulations for credit card processors. These new 1099-K forms will first be issued in early 2012 for the 2011 tax year.
Community Property Treatment for Domestic Partners in 3 States
In mid-2010, the IRS chief counsel's office determined that domestic partners in California, Washington and Nevada must follow their state's community property laws when reporting their income and deductions for federal tax purposes. This determination overturned the IRS's earlier position regarding domestic partners. This ruling took full effect in 2011, the first tax year that domestic partners in those three states were required to follow the new rules. The New York Times quotes taxpayer advocate Nina Olson as saying the new reporting mechanism is "ridiculously complex." Domestic partners overall face higher tax bills and higher compliance costs compared to similarly situated heterosexual married couples, according to CNN.
IRS Goes Mobile
The Internal Revenue Service launched its first-ever smart phone application, IRS2Go, for tracking tax refunds.
IRS Lays Off 5,400 Employees
Due to budget constraints, the IRS is laying off about 5,400 employees in response to Congress reducing the tax agency's annual budget. The job losses are expected to "affect internal IRS operations and analysis," reports BusinessWeek.
More year in review articles from fellow tax bloggers: