By Laura Saunders
The new year could bring important changes to the tax landscape.
Here are several issues that will affect how much taxpayers owe for
2015 and beyond:
Federal tax policy
There is serious talk of overhauling the federal tax code.
"There appears to be a consensus" on making changes, says Stephen
Baxley, a tax specialist at Bessemer Trust--though it isn't clear
if Congress will agree on the details.
The details matter when it comes to the individual income tax.
Attempts to improve the system, such as the plan from outgoing
House Ways & Means Chairman Dave Camp (R.-Mich.), often aim to
simplify the code by applying lower tax rates to a broader base of
income, without affecting overall revenue.
If lawmakers want to go that route, they face hard choices.
Lowering rates means cutting or eliminating popular tax breaks,
such as deductions for mortgage interest and charitable donations,
to offset lost revenue.
The tax breaks that cost the government the most often serve
policy goals. For example, breaks encourage retirement savings and
support employer-based health coverage.
That makes tinkering with them painful for many taxpayers. "The
losers are likely to be people who make the most use of existing
tax breaks," says Dave Kautter, who follows tax policy for
accounting firm McGladrey in Washington.
Despite those hurdles, lawmakers have an incentive to strike a
deal in advance of the 2016 presidential election, experts say.
Serious overhaul proposals could emerge by late spring. Change,
if it actually comes, would likely need to happen by year-end or
early in 2016, says Mr. Kautter. "After that, the election could
complicate things," he says.
Secret offshore accounts
The U.S. campaign against offshore tax evaders is expanding. In
late December, Bank Leumi Group became the first Israeli financial
institution to admit that it helped U.S. taxpayers hide money
abroad. It agreed to pay $400 million and to name more than 1,500
account holders.
Among other things, the bank helped customers evade U.S. taxes
by making loans using Bank Leumi's U.S. affiliate, collateralized
by assets abroad, according to court filings. In effect, the
clients could use offshore accounts to obtain capital in the U.S.
while keeping the accounts secret from U.S. officials, according to
the filings.
Bank Leumi also admitted sending private bankers to the U.S. to
meet secretly with clients at hotels, coffee shops and parks to
discuss their holdings.
The bank said in a statement that the agreement with the U.S.
government removes "a cloud of uncertainty that has weighed
heavily."
"This agreement is a major development in the push against
undeclared foreign accounts, and we're likely to see further
expansion in 2015," says Scott Michel, a lawyer with Caplin &
Drysdale in Washington who wasn't involved in the case.
Also last month, the Internal Revenue Service obtained a court
order seeking to identify U.S. taxpayers who it says may have
evaded taxes using a Panama-based firm, Sovereign Management &
Legal Ltd.
According to its website, the company offers a range of offshore
services. For example, its "Panama Corp. & Foundation
Combination" promises "asset protection, complete privacy, and
potential tax deferral." Also offered are "Anonymous Offshore
ATM/Debit Cards."
The company didn't respond to requests for comment.
The court order obtained by the IRS doesn't seek information
directly from Sovereign Management & Legal, according to the
U.S. Department of Justice. Instead, the order authorizes the IRS
to issue summonses to eight U.S. firms that made deliveries or
money transfers to or from Sovereign on behalf of U.S. customers
for records identifying those customers.
"The IRS views the use of Panama corporations to add a layer of
secrecy as egregious conduct that often indicates tax evasion,"
says Jeffrey Neiman, who led the federal prosecution of a major
offshore case in 2009 and is now a lawyer in Fort Lauderdale,
Fla.
Since the campaign against secret offshore accounts began, more
than 45,000 taxpayers in an IRS limited-amnesty program have paid
more than $6.5 billion in taxes, interest and penalties.
Expatriate tax issues
The U.S. campaign against offshore tax evasion also has raised
difficult issues for 7.6 million ordinary American citizens living
abroad.
Unlike most countries, the U.S. taxes nonresidents on world-wide
income. There are limited offsets for double taxation as well as
complex reporting requirements with severe potential penalties. For
decades the law generally wasn't enforced, but it is now.
As a result, "many Americans abroad are finding it virtually
impossible to have bank accounts, save for retirement, and make
investments--all the normal activities of financial life," says
David Kuenzi, an investment adviser with Thun Financial in Madison,
Wis., who has many clients abroad.
Now expats see a ray of hope. A December report by the
Republican staff of the Senate Finance Committee calls for major
change.
"The United States needs to rethink its taxing rules for
nonresident U.S. citizens," the report says. One option: tax
long-term nonresidents on income from U.S. sources instead of
world-wide income, it says.
The proposal's future is unclear, but its appearance is
noteworthy, experts say. "Until now, this issue was completely
ignored by policy makers," Mr. Kuenzi says.
Expired provisions
As of Jan. 1, a one-year extension of dozens of tax provisions
expired. If that sounds familiar, it's because Congress didn't
renew these provisions for 2014 until mid-December, giving
taxpayers about two weeks to use them.
The expired provisions include: the popular individual
retirement account charitable-transfer provision, a benefit that
allows IRA owners who are 70 1/2 and older to donate IRA assets
directly to charity; a deduction for state and local sales taxes
instead of income taxes; tax relief for mortgage-debt forgiveness;
and enhanced depreciation benefits for businesses.
If past is prologue, lawmakers will renew the provisions for
2015--but only at the last minute.
Email: taxreport@wsj.com