Tax break long coveted by utilities threatened by reform

(Bloomberg) U.S. utility owners from Duke Energy Corp. to NextEra Energy Inc. are warning investors that their earnings may take a hit from tax reforms being floated in Washington.

At risk is a provision corporations have enjoyed for years. It gives utilities the right to deduct what can be considerable tax expenses because of the billions of dollars of debt they take out to build massive power projects. Republicans in Congress have proposed ditching this deductible while cutting corporate tax rates. President Donald Trump has suggested a cap.

It’s a move that Morgan Stanley said could cut earnings by as much as 8.5 percent depending on the utility owner, adding that Wall Street has “largely discounted” the idea when it’s too premature to rule out. NextEra said the elimination could contribute to a cut in earnings of 10 cents to 15 cents a share, and Chief Executive Officer James Robo stressed in a call with investors that it’s important for lawmakers proposing tax reforms to “get it right.”

Utilities are particularly dependent on the deduction because of the heavy debt loads they carry to pay for power plants and transmission lines. Its elimination would hit an industry that, facing weakening power demand, is consolidating and seeking financing for multibillion-dollar takeovers. The proposal also threatens to shrink dividends that investors have come to rely on during times of market volatility, and trade group Edison Electric Institute warned it could lead to higher utility bills.

The Trump administration will address questions “when the tax plan is finalized,” White House spokeswoman Kelly Love said by e-mail Feb. 17. The office of Republican House Speaker Paul Ryan, who is pushing a tax-overhaul plan that would kill the deduction, deferred comment to the House Ways and Means Committee.

Emily Schillinger, a spokeswoman for the committee, said utilities would benefit from a lower corporate tax rate and a provision that’d allow them to immediately expense investments under a House plan. Lawmakers understand the “special circumstances of regulated utilities and are working to ensure that the provision on deductibility of interest is crafted in a way that will accommodate those circumstances,” she said.

Hardest Hit

Should the deduction be eliminated, regulated utilities may be able to recoup expenses from their ratepayers as a cost of service. It’d probably hit their corporate owners the hardest, paring back the cash they have available for dividends, said Jaimin Patel, a credit analyst for Bloomberg Intelligence.

Ryan’s tax plan has drawn intense opposition. Senate Majority Whip John Cornyn has said a key part of the proposal is “on life support” and that lawmakers need to look for other options. While there’s as yet no tax reform bill in Congress, Wall Street analysts including Wolfe Research LLC and Morgan Stanley have pressed utility executives for the potential impact.

Important Deduction

Duke Energy said in a call last week that it could see a 5 percent hit to earnings by 2021 from the House Republican tax plan. That assumes a corporate tax rate of 20 percent and that it won’t be able to deduct interest on new and refinanced debt. The loss could approach 7 percent should all interest deductions be eliminated, the company said.

Duke’s Chief Executive officer Lynn Good described the deduction as “extremely important.” A better tax policy, she said, “would be to retain that interest deductibility and allow us to continue deploying capital and expensing that capital for tax purposes over a longer period.”

PPL Corp. and Entergy Corp. have also said putting an end to the deduction would affect their earnings.

While earnings could be reduced by about 10 cents a share should the interest deduction be eliminated, PPL might “largely mitigate” the impact by increasing capital spending or shifting more debt to the U.K., which accounts for about half its business, Chief Executive Officer Bill Spence said in a Feb. 1 earnings call.

– Jim Polson and Mark Chediak

Taxpayer sues Howard Stern over IRS phone call broadcast

A taxpayer whose private call with an Internal Revenue Service employee inadvertently aired live on Howard Stern’s Sirius XM radio show is now suing the shock jock, along with the federal government.

Judith Barrigas, a taxpayer from Sandwich, Mass., called the IRS service center in May 2015 with a question about her tax refund. She reached IRS agent Jimmy Forsythe, who was on the other line calling into Stern’s radio show. Somehow the lines got crossed and listeners heard Forsythe’s conversation with Barrigas, while Stern and his co-host Robin Quivers joked about the call concerning Barrigas’s payment plan (see Howard Stern airs taxpayer phone call to IRS). The IRS had applied Barrigas’s tax refund to pay her outstanding debts from 2011 and 2012, even though she complained she already had a repayment plan set up with the Service.

“I’m learning so much,” said Stern. “I feel like I’m in math class and I’m flunking because I don’t know one thing he’s saying. I think I’m going to bail on this guy. By the way, this is the most boring job ever. I’d rather live in my parent’s basement if I had to do that. I’d give out all the wrong information. All right, dude, later!”

Stern began yelling, “Jimmy!” to try to get the IRS employee’s attention, but Forsythe couldn’t hear him. Quivers told Stern, “If he’s working, we can’t interrupt him.”

Barrigas spoke with Forsythe for 45 minutes about a potential misapplication of her tax refund, according to the New York Post, although only a short portion of the call aired on satellite radio before Stern disconnected it.

Barrigas’s phone number was announced during the call, and some of Stern’s listeners tried calling and texting her to let her know about her private call being aired. She filed suit Monday against Stern and his program for invasion of privacy and negligence, claiming the incident led to difficulty sleeping and eating. She also claimed she has “had difficulty finding employment in her field, as the wide airing and publication of her private tax matter has affected her employment search negatively.”

She is also suing the government under the Federal Tort Claims Act for unlawful disclosure of her tax return, according to the Hollywood Reporter, which has posted the full complaint. The complaint names the IRS as the relevant agency, accusing it of violating a section of the tax code that prohibits dissemination of tax returns and the personal information of a taxpayer, and for negligence and intentional torts.

The Stern show did not immediately respond to a request for comment.

Mnuchin secures Senate confirmation as Treasury Secretary

(Bloomberg) Steven Mnuchin was confirmed as U.S. Treasury secretary, filling the role of chief spokesman for the dollar and steward for the Trump administration’s economic priorities.

The former Goldman Sachs banker won in a 53-47 Senate vote on Monday in which only one Democrat broke ranks and supported Mnuchin. He was sworn in Monday night by Vice President Mike Pence at the White House.

After several delays in the Senate vetting process, Mnuchin is expected to push ahead quickly with top administration goals to dismantle financial regulations and slash taxes. Almost immediately, he’ll be immersed in preparing for the expiration of the debt limit suspension and his first meeting of G-20 finance ministers and central bank governors in Germany, both coming up next month.

Mnuchin will play a leading role should President Donald Trump start any economic confrontations—with China, for example—as the new administration seeks a more balanced approach with countries that run large trade surpluses with the U.S. While he pledged on the campaign trail to designate China a currency manipulator, Trump has since backpedaled on those remarks and Mnuchin has indicated such a label can only be applied if warranted.

“Our nation’s financial system is truly in great hands with him,” Trump said at the swearing in ceremony. “We are going to have no problem.”

Mnuchin has already sent signals on America’s long-held dollar policy, telling the Senate a strong dollar is important over the long term and that it’s currently “very, very strong.”

During his confirmation hearing, Democrats forced Mnuchin to defend his record running OneWest Bank, a mortgage lender accused of shoddy foreclosure practices during the financial crisis and which he later sold for a profit. He also faced questions about using a Cayman Islands entity to avoid paying taxes, an accusation he denied.

The 54-year-old former Goldman Sachs executive and Hollywood financier has no previous government experience. He led Trump’s fundraising efforts during the campaign. Trump and Republicans in Congress are counting on his 17 years of experience at Goldman Sachs and six years as a regional banker to unlock economic growth.

“At Goldman Sachs, I had tremendous experience in both the financial markets and in technology—I think both of those are very important things and expertise for a Treasury secretary to have,” Mnuchin said during his Jan. 19 confirmation hearing. “I’ve been in the investment business and, more importantly, I’ve been a regional banker” who has lent money and has trading experience.

– Saleha Mohsin

 

Private company executive optimism skyrockets after election

Private company confidence in the U.S. economy has climbed sharply in the wake of the presidential election, according to a new survey from PricewaterhouseCoopers.

PwC’s quarterly Trendsetter Barometer survey found that before the election private company optimism about the U.S. economy was at 38 percent in the third quarter, but after the election, optimism among executives jumped to 59 percent in the fourth quarter. Optimism about the world economy rose from 23 to 31 percent.

“The optimism levels really shot up after the election,” said PwC Trendsetter Barometer leader and partner Ken Esch. “You can see it in the change between the third quarter and the fourth quarter. That increased almost 20 percent. But even more dramatically in the fourth quarter surveys, the surveys that were completed before the election were about the same as they were in the third quarter. They were about 38 percent, but after the election 70 percent of the survey respondents were optimistic. So there was a dramatic change as of that election date.”

While the majority of private company executives were not expecting Donald Trump to win the presidential election, 70 percent believe it will benefit their business, while 66 percent anticipate it will benefit the overall economy. For the PwC survey, BSI Global Research interviewed 300 business leaders of large privately held companies with an average of $400 million in revenue.

The survey found that 78 percent of the private companies plan to increase their operational expenditures over the next 12 months, a post-recession high.

“Companies are continuing to invest in their business,” said Esch. “Even though the economy has not been growing as fast as they would like, that operational spending metric is one that we watch closely. We are seeing that they’re continuing to spend, even though there are headwinds in the economy.”

Of the private companies surveyed, 47 percent of the executives said they plan to hire in the next 12 months, up from the post-recession low of 39 percent in the third quarter.

“We’re happy to see that more companies are planning to hire, but wages are still stubbornly low,” said Esch. “We haven’t really seen the increases in wages that you might expect coming out of a recession, building into an environment where the unemployment rate is low.”

Even though the U.S. Bureau of Labor Statistics and the payroll company ADP have both reported some wage growth as the labor market tightens, Esch believes wages have remained relatively stagnant.

“What we’re seeing in the report is that the wages are only expected to increase about 2 percent over the prior period, which is probably lower than you might expect in an economy that’s growing more strong,” he said. “Some of that may be attributable to the number of people who maybe are not working but are of able body, for reasons unknown to us. If you look at the labor force participation rate, for example, it’s near historic lows, even though our unemployment rate is around 4.7 percent, which many people view as full employment. Until more people join the workforce and are actively participating, you may see continued wage stagnation.”

Despite the low levels of wage growth, companies are pushing for greater productivity. PwC found that 90 percent of the private companies in its poll said productivity is a top priority, up from 76 percent a year ago. Companies are investing more money in automation and robotics to boost productivity.

“We’re definitely seeing increased spending in the area of automation,” said Esch. “I think that is a function of the increased operational spending out there. So it’s technology and automation to boost productivity, and maybe not hiring as many people to get the work done. There’s a very steady theme out there of cost cutting, so they’re looking to do more with less.”

PwC didn’t poll respondents specifically about Trump’s policies, but it did hear in interviews about their expectations.

“We did hear from participants out there that they were optimistic about the new president,” said Esch. “It was surprising to many within the survey, just like we’ve seen within the broader population. Many felt it was going to be a positive development for their business as well as the overall economy. Some of the things that they cited were tax reform and reduced regulation.”

One of his clients is a company that manufactures goods in the U.S. and avoids outsourcing to foreign companies.

“They’re really performing that manufacturing operation here, and they’re very excited about what they’re hearing from Washington about tax reform,” said Esch. “They see that as a potentially significant reduction in their effective tax rate. And they feel that will give them opportunities to continue to invest in their business above what they’ve done in the past.”

Ten things you need to know about passport restrictions on delinquent taxpayers

In late 2015, Congress passed the Fixing America’s Surface Transportation Act, a law that, among other things, helps the IRS collect larger tax debts. Included in the FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.

The law was effective on the day Congress passed it, but given the complexity of implementing it, the IRS needed time to work out the details. Now, the IRS is ready to start the program in late March.

For most people, the passport restrictions remain a mystery, largely because Treasury regulations haven’t been published that explain how the IRS will conduct the program. Recently, the IRS provided some early indications of how it will administer the program. The IRS hasn’t updated its Internal Revenue Manual, and the State Department hasn’t provided any information on specific passport rules. The IRS promises more information in the next few months.

Here are the 10 most pressing questions and answers about the upcoming passport restrictions.
1. What is the new passport-restriction program (IRC Section 7345)?

IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can deny, revoke, or limit use of the individuals’ passports until they get into good standing with the IRS.

2. Why did Congress create passport restrictions?

In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.

The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.

3. Who is affected?

The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.

Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:

  • A lien filed, and all administrative remedies for lien relief have lapsed or been denied; or,
  • A levy issued.

There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:
· People who are in an IRS installment agreement to pay their taxes. Based on IRS data, most taxpayers affected by passport restrictions will avoid or release the restrictions by establishing installment agreements with the IRS to pay their tax bills. In 2015, taxpayers established almost 3 million installment agreements.

Right now, it’s unclear whether the IRS will allow other types of agreements to release taxpayers from passport restrictions. Two other arrangements the IRS could allow include deferred payment because of economic hardship (called currently not collectible, or CNC, status), or partial-pay installment agreements

But it’s unclear whether the IRS will count people in these agreements as being in good standing, because the agreements don’t cover the entire tax bill. It’s also unclear whether the IRS will allow taxpayers to get back into good standing with extension-to-pay agreements, which give taxpayers 60 or 120 days to pay their tax bills in full. If the IRS does allow extensions-to-pay to release taxpayers from seriously delinquent tax debt status, this could mean a simple fix to passport restrictions.

Remember that Section 7345 and the IRS have not specifically stated whether CNC status, partial-pay installment agreements, or extensions to pay count as exceptions for taxpayers who would otherwise be considered individuals with seriously delinquent tax debt. We should expect more clarity about these options in the near future.

· People who have settled their debt through an offer in compromise or Justice Department agreement. Taxpayers who may qualify and can pay an offer in compromise settlement should consider applying now to get the process started before passport restrictions start in March. However, this won’t be a common exception; in 2015, taxpayers submitted about 67,000 offers in compromise, and the IRS approved only 27,417.

· People who appeal a levy through an IRS collection due process hearing. Congress wants to allow taxpayers to finish appealing their cases before the government imposes passport restrictions. As such, taxpayers who are arguing a levy action through a CDP hearing won’t be certified as individuals with seriously delinquent tax debt until their hearings are completed.

Levies are normally triggered after taxpayers receive a final notice of intent to levy (usually, IRS letter LT11 or L1058). Taxpayers must file for a CDP hearing within 30 days of receiving this notice. CDP hearings are an effective last step for taxpayers who want to get in good standing with the IRS by establishing a payment agreement or contesting the taxes and penalties.

· People who request innocent spouse relief (Form 8857). This won’t be a common exception. The most recent IRS data from 2003 to 2006 shows that taxpayers file only a few thousand Forms 8857 annually, to get relief from a joint tax debt.

Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.

4. What will happen to the person who owes seriously delinquent tax debt?

Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department.

The State Department then has the authority to deny issuance or renewal of a passport, or fully restrict or limit its use. The State Department will notify the taxpayer in a separate letter about the passport restrictions.

Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.

However, when taxpayers are applying for or renewing a passport, the FAST Act requires the State Department to deny the passport to any individual with seriously delinquent tax debt. Per the IRS Web site, before denying the issuance of a passport, the State Department will hold the passport application for 90 days to allow the taxpayer to:

  • Resolve any erroneous certification issues;
  • Pay the tax debt in full; or,
  • Establish a payment alternative with the IRS

Taxpayers won’t get a similar grace period for resolving the debt before the State Department revokes a passport.

5. How can taxpayers get their passport restrictions lifted?

To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.

After taxpayers get into good standing, the IRS will send the decertification list to the State Department, which then lifts the passport restrictions. The IRS will also reverse the certification within 30 days.

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS.

Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).

Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer.

7. Can taxpayers appeal their seriously delinquent tax debt certification?

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.

Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent.

For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.

8. What if taxpayers don’t think they owe the tax?

Here, taxpayers are in a pickle, because time is of the essence. For example, if the IRS assessed tax on an unfiled return (that is, the IRS filed a return for the taxpayer, called a substitute for return), or through a completed audit or underreporter inquiry, there’s not much the taxpayer can do to quickly contest the tax assessment and remove the seriously delinquent tax debt certification. Filing an original return or contesting the tax through IRS administrative options or courts may take a long time.

To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.

Again, recent IRS changes to installment agreements for people who owe between $50,000 and $100,000 may also help. These rules streamline the process to set up an installment agreement and would help cut down on the wait time to get passport restrictions lifted.

9. Is there an expedited process to remove passport restrictions?

Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. After the service removes an individual’s certification, the IRS must notify the State Department within 30 days to release passport restrictions. If the tax debt is determined to be erroneous, the IRS has an undefined “reasonable time” to notify the State Department. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.

10. What can a seriously delinquent tax debtor do to avoid passport restrictions?

Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.

Next steps for taxpayers affected by passport restrictions

Owing taxes without being in an arrangement with the IRS to pay them has bad consequences for any taxpayer. That’s why all taxpayers, regardless of passport restrictions, should arrange to pay their unpaid balances.

Starting in March, taxpayers who think that they may be subject to passport restrictions because of tax debt can call the National Passport Information Center at (877) 487-2778.

And taxpayers who want to avoid or remove passport restrictions should contact a tax professional or call the IRS to set up an agreement on their balances right away: (855) 519-4965 for domestic calls, (267) 941-1004 for international calls.

CPA, Taxes, Bookkeeping, Payroll, Accounting Services, Insurance

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