IRS expands “Fresh Start” initiative, provides penalty relief for unemployed

NEW YORK (Reuters) – Companies increased their hiring in February, shoring up expectations that the labor market’s recovery has moved into a higher gear.

Separate data on Wednesday showed wages grew much more quickly at the end of last year than originally estimated, good news for consumers, but a potential inflation problem for the Federal Reserve.

The private sector added 216,000 jobs last month, according to the ADP National Employment Report, topping economists’ expectations for a gain of 208,000.

The ADP figures come ahead of the government’s more comprehensive monthly labor market report on Friday, which includes both public- and private-sector employment.

“After two years of expansion without much gain in employment, we’re finally hitting the point where firms need to begin adding people in order to meet increased orders,” said Steve Blitz, senior economist at ITG Investment Research in New York. “There are still risks ahead, but if you could just stop the clock right where we are now, you’ve got a recovery that is gathering some momentum; it appears to be self-reinforcing.”

Economists polled by Reuters expect Friday’s report to show a gain of 210,000 in nonfarm payrolls, with a gain in the private sector of 225,000 jobs offsetting a modest decline in government jobs.

Economists often refer to the ADP report to fine-tune their expectations for the payrolls numbers, though it is not always accurate in predicting the outcome.

Daniel Silver, an economist at JPMorgan, noted that in the month of February in recent years, the difference between the two reports has been smaller and missed only by 2,000 in 2010 and 5,000 in 2011.

The ADP report showed small businesses driving the gains in February, with an increase of 108,000 jobs. Medium-sized companies added 88,000 jobs, and larger companies created 20,000 positions.

ADP’s January figures were revised up to an increase of 173,000 jobs from 170,000. The report is jointly developed with Macroeconomic Advisers LLC.

The data helped drive a rebound on Wall Street on Wednesday, a day after its worst selloff in three months, with stocks closing higher, while prices of safe-haven U.S. Treasuries eased slightly. Signs that Greece’s debt swap was advancing also cheered investors.

WAGES REVISED HIGHER

Unit labor costs, which the Federal Reserve watches closely for signs of inflation, rose at an annual rate of 2.8 percent in the fourth quarter, the Labor Department said, revised sharply up from the 1.2 percent pace it reported last month. Third-quarter wage growth was raised to a 3.9 percent pace from the previously reported drop of 2.1 percent.

Hourly earnings, adjusted for inflation, rose at a 2.8 percent rate in the fourth quarter, revised from the previously reported increase of 1.0 percent. It was the largest gain since the second quarter of 2010..

“There is no room for policy complacency on the inflation side,” said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York. “The Fed is going to be confronted with a very difficult decision on how to proceed if the economy remains on its current path, and there is no evidence of core disinflation.”

The U.S. central bank, which will hold its next policy meeting on Tuesday, has held interest rates near zero since late 2008 as part of its efforts to boost the economy. In January, it said it would likely keep rates low through at least late 2014.

The Labor Department revised up its reading on non-farm productivity growth to a 0.9 percent pace in the fourth quarter from 0.7 percent. Productivity has slowed after growing rapidly as the economy emerged from the 2007-09 recession, and analysts said the rise in unit labor costs, if sustained, could weigh on companies’ results.

Higher labor costs can hurt “job growth as employers squeeze more out of the existing labor pool as they scramble to maintain profit margins in a growth environment that remains OK, but far from robust,” said Eric Green, chief economist at TD Securities in New York.

Data later on Wednesday showed consumer credit expanded sharply in January for the fifth month in a row as Americans borrowed money to buy cars and go to school.

A report from the Federal Reserve showed total consumer credit grew by $17.776 billion in January, much more than the $10.0 billion increase analysts expected.

Once a pillar of the economy, consumers had shied away from taking on more credit-card obligations as they paid off debt that was accumulated ahead of the financial crisis.

But the recent growth in credit suggests Americans are becoming less uneasy.

Separate reports on the housing market, which along with the labor market is one of the biggest obstacles to a self-sustaining economic recovery, suggested the sector is continuing to scrape along the bottom.

Home prices fell 1.0 percent in January, the sixth straight month of declines as sales of cheaper distressed properties took a toll, data analysis firm CoreLogic said.

Compared with January of last year, prices were down 3.1 percent. But excluding distressed sales, prices rose 0.7 percent in January and were off just 0.9 percent on a yearly basis.

Applications for U.S. mortgages to buy homes rose last week though demand for refinancing sagged, the Mortgage Bankers Association said.

(Reporting by Leah Schnurr, Additional reporting by Richard Leong in New York and Lucia Mutikani in Washington; Editing by Jan Paschal)

Business executives still report a cautious approach to hiring over next 12 months, AICPA survey finds 

Eighth Circuit affirms S corporation shareholder’s compensation was not reasonable

By Sally P. Schreiber

February 24, 2012

The Eighth Circuit affirmed the District Court for the Southern District of Iowa’s decision that an S corporation shareholder’s $24,000 salary was not reasonable compensation and that the $91,044 salary determined by the government’s expert witness was (David E. Watson, P.C., No. 11-1589 (8th Cir. 2/21/12)).

At issue is a common strategy of paying a small salary to an S corporation shareholder providing services to the corporation to minimize the amount of employment taxes that must be paid. In this case, Watson was a CPA with an advanced degree and 20 years’ experience who formed an S corporation that, in turn, became a partner in his accounting firm. Watson was “employed” by his S corporation. In each of the two years involved in the case, 2002 and 2003, Watson received a salary of $24,000 from the S corporation, but also received distributions of $203,651 and $175,470, respectively, that were not subject to Federal Insurance Contributions Act (FICA) taxes.

In challenging the IRS’ determination that an additional amount was subject to FICA, Watson claimed that the IRS’ expert witness (a certified business valuation analyst) was not qualified to provide the testimony that he gave and that the amount determined to be wages was erroneous. The Eighth Circuit concluded that the expert witness was qualified, rejecting Watson’s argument that, when the expert changed his opinion of the value of Watson’s services after reading Watson’s deposition, it showed that the expert was incompetent.

The court then examined Watson’s compensation, explaining that special scrutiny must be given to salaries paid to employees who control a corporation. Watson argued that no statute, rule or regulation required minimum compensation to be paid. According to the Eighth Circuit, however, the issue was not whether some minimum compensation must be paid, but whether the compensation paid was reasonable. Reasonable compensation analyses apply not only when the issue is whether a salary may be deducted as an ordinary and necessary business expense, but also when the issue is whether payments are wages subject to FICA tax.

The Eighth Circuit affirmed the district court’s holding that an additional $67,044 was subject to FICA tax, noting the lower court’s finding that Watson was a very experienced CPA who worked full time at his firm, one of the most successful firms in town (gross earnings over $2 million a year), and that $24,000 was an excessively low salary for someone of his experience and expertise.              

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.

More from the JofA:

President signs payroll tax cut extension bill; new Form 941 released

WASHINGTON (Reuters) – Home resales rose to a 1-1/2-year high in January, pushing the supply of properties on the market to the lowest level in almost seven years in a hopeful sign for the housing sector.

The National Association of Realtors said on Wednesday existing home sales increased 4.3 percent to an annual rate of 4.57 million units last month, the fastest pace since May 2010.

It was the latest indication the housing market may be coming off the floor. While economists attributed some of the rise to unseasonably warm winter weather, they also said it signaled genuine improvement.

Sales were up across all four regions of the country, with the West recording the biggest gain — an 8.8 percent increase.

“At least some of the improvement in the last few months could have reflected milder winter weather, but for the most part, it seems that the housing sector may have turned the corner,” said Guy Berger, an economist at RBS in Stamford, Connecticut.

The tenor of the report was weakened somewhat by a sharp downward revision to December’s sales data to show only a 4.38 million unit sales rate rather than the previously reported 4.61 million unit pace.

A brightening economic outlook, marked by a strengthening labor market and buoyant factories, is giving the housing market some lift. Confidence among homebuilders is near five-year highs and they are breaking more ground on new housing projects.

Residential construction is expected to contribute to growth this year for the first time since 2005.

Robert Toll, executive chairman of luxury homebuilder Toll Brothers, welcomed that progress even as his company announced a surprise quarterly loss on Wednesday.

“Since the new home industry is coming off several years of historic low levels of production, we are encouraged by the recent improvement,” he said in a statement.

The data did little to lift U.S. stock market sentiment, with shares ending down after weak data on European business activity. Prices for U.S. government debt rose on concerns Greece might not be able to avert a messy default even with a fresh bailout.

The dollar rose against a basket of currencies.

INVENTORY DWINDLING

The U.S. housing market had been held back by an overhang of unsold homes, but steady sales gains are helping to whittle down supply.

The inventory of unsold homes on the market fell 0.4 percent to 2.31 million last month, the lowest since March 2005. That represented a 6.1 months’ supply at January’s sales pace, the lowest since April 2006 and down from 6.4 months in December.

A supply of six months generally is considered ideal.

While inventories tend to fall in winter and the decline last month could also be reflecting delays in the process of bringing foreclosed properties to the market, there is some real improvement underway.

The homeowner vacancy rate, which is closely correlated to the month supply, fell to 2.3 percent in the fourth quarter of 2011 from 2.4 percent in the prior three months. The rate peaked in 2008.

“This vacancy rate is consistent with a glut of about a half a million houses,” said Patrick Newport a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

“At the current pace, eliminating the overhang should take less than two years, but will probably take longer, because it is concentrated in a few high-unemployment states.”

The median home sales price in January fell 2 percent from a year ago to $154,700. That was the lowest since November 2001. Other data on Wednesday showed demand for home purchase loans fell last week, despite mortgage rates holding near historic lows.

The Federal Reserve, which has suggested a number of ways other policymakers could step in to help the beaten-up market, is considering purchasing more mortgage-backed securities to drive mortgages rates even lower.

But some economists are skeptical that would do much good.

“I don’t think the problem in the mortgage market is high interest rates or availability of liquidity. The problem is lack of jobs and very strict lending standards,” said Sung Won Sohn, an economics professor at California State University Channel Islands.

Distressed properties, foreclosures and short sales, which typically occur at deep discounts, accounted for 35 percent of overall sales last month, up from 32 percent in December.

A third of pending existing home sales contracts were canceled, the NAR said. Investors bought 23 percent of homes in January, with first-time buyers accounting for a third of the transactions.

“We expect the spring selling season to show some improvement, but we believe it risks disappointing relative to market expectations,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York.

(Editing by Chizu Nomiyama)

Supreme Court: Filing a false tax return can lead to deportation

By Sally P. Schreiber

February 22, 2012

The U.S. Supreme Court issued a decision Tuesday holding that a conviction under Sec. 7206 for willfully filing a false tax return (or for aiding and abetting filing a false tax return) is an aggravated felony that can result in deportation.

Kawashima v. Holder, S. Ct. Dkt. No. 10-577 (U.S. 2/21/12), involved a Japanese resident alien couple who were appealing their deportation under 8 U.S.C. §1227(a)(2)(A)(iii) as aliens who had been convicted of an aggravated felony based on their convictions under Sec. 7206. The couple argued that 8 U.S.C. §1101(a)(43)(M)(i), which defines “aggravated felony” for these purposes, required that the offense of which they had been convicted involve fraud or deceit. Because Sec. 7206 does not contain fraud or deceit as a formal element of the crime, the couple argued that their conviction was not an aggravated felony.

The couple also argued that clause (i) of the statute did not apply to them because it requires “fraud or deceit in which the loss to the victim or victims exceeds $10,000,” language that the couple argued was not intended to apply to tax crimes, especially in light of 8 U.S.C. §1101(a)(43)(M)(ii), which defines a separate, different crime of tax evasion under Sec. 7201 in which the loss to the government exceeds $10,000.

The Supreme Court, in an opinion by Justice Clarence Thomas joined by Chief Justice John Roberts and Justices Antonin Scalia, Anthony Kennedy, Samuel Alito, and Sonia Sotomayor, held that the crime of willfully making and subscribing a false tax return and the crime of willfully aiding and assisting the preparation of a false tax return are deportable offenses under clause (i) because they necessarily entail deceit.

The Supreme Court also rejected the couple’s argument that clause (i), if read together with clause (ii), should not apply to tax crimes, in particular because clause (i) addresses “loss to the victim,” whereas clause (ii) involves “revenue loss to the Government.” The Court explained that the inclusion of Sec. 7201 as a specific aggravated felony in clause (ii) did not mean that it was the only tax crime that Congress meant to invoke, but that Congress added clause (ii) to ensure that tax evasion would be included as an aggravated felony subject to deportation.    

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.

More from the JofA:

WASHINGTON — Continued high unemployment, the recent debt-ceiling circus and the stock-market swoon have left Americans more pessimistic about the economy than at any other time this year, according to a new McClatchy-Marist poll.

Last week, 68 percent of adults surveyed about the economy said they felt the worst was yet to come. That’s the highest percentage since the question was first asked last September. It’s also a 15 percentage-point spike from the number who felt that way in July.

That jump in pessimism about the economy extends to personal family finances. Only 25 percent of adults expect their finances to improve in the coming year, down from 28 percent in July. And 26 percent expect their own economic situations to worsen in the coming year, up from 20 percent in July.

The number of people who expect their personal finances to stay the same continues to hover around 50 percent of respondents.

The pessimism is fueling a continued decline in consumer confidence in the wake of the nation’s credit downgrade and the largest weeklong stock market free-fall since 2008. After climbing every month for nearly two years, consumer spending declined in June, the Commerce Department reported last week. And the nation’s economic recovery probably will take longer than previously projected, the Federal Reserve reported this week.

The McClatchy-Marist poll found that most Americans — 59 percent — still think that the economic conditions were something President Barack Obama inherited. But even those numbers slipped from 63 percent in April and 61 percent in June. Conversely, those who blame Obama’s policies for the conditions increased from 25 percent in January to 33 percent in August, the survey found.

Not surprisingly, a majority of Republicans and tea party supporters blame Obama, while most Democrats and independent voters say the president inherited the sour economy.

METHODOLOGY:

The telephone survey of 1,000 U.S. adults was conducted Aug. 2-4. Phone numbers were selected from throughout the nation, and each region was represented in proportion to its population. Random cell phone respondents were included in the survey to increase coverage.

The survey’s results are statistically significant within 3 percentage points. The poll includes 807 registered voters. Results for these respondents are statistically significant within 3.5 percentage points. The margin of error increases when both groups of respondents are cross-tabulated.

Read more: http://www.mcclatchydc.com/2011/08/11/120356/americans-are-feeling-worse-about.html#ixzz1Upc4lAGO

Legislation recently passed by the Senate will help crack down on mortgage fraud and make that crime a felony. Senate Bills 43, 44 and 249-253 will also:

• Increase penalties for counterfeiting or forging real property deeds;
• Extend the statute of limitations for prosecution from 6 to 10 years; and
• Increase penalties for violating the notary public law.

The package of bills gives law enforcement the right tools to fight this ongoing and costly crime. The legislation has been sent to the House for consideration.

Homeowners who believe they may have been a victim of mortgage fraud should file a complaint with the Attorney General’s Consumer Protection Division at 1-877-765-8388.