Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

“Have you no decency, sir?”

  •    
  • mike   

During the late 1940s and early 1950s, the United States was consumed with the fear called the “Red Scare”. The byline was “A communist under every couch.”

J. Edgar Hoover, the director of the FBI, kept extensive dossiers on prominent celebrities and politicians, who he suspected had communist connections.

The House UnAmerican Activities Committee conducted hearings, including Hollywood celebrities. Many were terrified of being subpoenaed to testify. Celebrities who were suspected or accused of having Communist connections were blacklisted and were unable to find work, including prominent names like Orson Welles and Charlie Chaplin.

Senator Joseph McCarthy conducted hearings in the Senate’s Subcommittee on Investigations. His influence and aggressiveness in conducting the hearings was so great that they are still remembered as McCarthyism.

McCarthy conducted a series of televised hearings from March through June, 1954, called the Army-McCarthy hearings. The United States Army accused McCarthy and his chief counsel, Roy Cohn, of preferential treatment to G. David Schine, a former McCarthy aide and friend of Cohn’s. McCarthy counter-charged that this accusation was in bad faith and in retaliation for his investigations of suspected communists and security risks in the Army.

Before of the hearing on June 9, 1954, Senator McCarthy made an agreement to not raise the association of Fred Fisher, a member of the Joseph Welch’s law firm, Hale and Dorr, with the National Lawyers Guild while at Harvard Law School. The National Lawyers Guild had been called “the legal mouthpiece of the Communist party” by U.S. Attorney General Herbert Brownell, Jr. Joseph Welch was chief counsel for the U.S. Army.

Senator McCarthy raised that association during the hearing that was broadcast on national television.

Joseph Welch dismissed the association as a youthful indiscretion, and attacked McCarthy for naming the young man before a nationwide television audience without prior warning or a previous agreement to do so.

Welch responded, “Until this moment, Senator, I think I have never really gauged your cruelty or your recklessness. Fred Fisher is a young man who went to the Harvard Law School and came into my firm and is starting what looks like a brilliant career with us. … Little did I dream you could be so reckless and so cruel as to do an injury to that lad. It is true he is still with Hale and Dorr. It is true that he will continue to be with Hale and Dorr. It is, I regret to say, equally true that I fear he shall always bear a scar needlessly inflicted by you. If it were in my power to forgive you for your reckless cruelty, I would do so. I like to think I am a gentleman, but your forgiveness will have to come from someone other than me.”

When Senator McCarthy pressed the issue, Joseph Welch responded, “Have you no sense of decency, sir, at long last?”

From that point, Senator McCarthy lost the upper hand in his arguments and the public opinion of the American public turned against him.

On December 2, 1954, the Senate voted 67-22 to censure McCarthy, effectively eradicating his influence. On January 3, 1955, Senator John L. McClellan of Arkansas replaced McCarthy as chairman of the Subcommittee on Investigations.

Following the censure of Joseph McCarthy in the Senate, the prestige of the House UnAmerican Activities Committe declined in the House of Representatives. By 1959, the committee was denounced by former President Harry S. Truman as the “most un-American thing in the country today.”

Thanks to the courage of Joseph Welch facing down Senator Joseph McCarthy, the Red Scare was defused. The suspicion and fear of McCarthyism was replaced with the optimism and hope of John F. Kennedy’s presidency.

Stock Market’s Down! Convert to Roth Now?

  •    
  • mike   

The weak stock market might be an opportunity for taxpayers who want to convert their taxable traditional retirement accounts to tax-free Roth accounts.

On Monday, April 21, 2025, the S&P 500 sank 2.4%. The index at the center of many 401(k) accounts has retreated 16% below its record set two months ago.

The other stock market indexes, bond prices (including U.S. Treasury bonds) and the dollar have also fallen.

Reasons for the market weakness might be uncertainty as a result of President Trump’s imposition of tariffs of 145% to 245% on imports from China, broad-based 10% tariffs on other imports, and more tariffs on imports from other countries after a 90-day pause, together with his threat to fire Federal Reserve Chair Jerome Powell. Firing Chairman Powell threatens the independence of the Federal Reserve, which helps stabilize world financial markets.

With securities prices down, this could be a great time to make a Roth conversion.

What if securities prices fall even more? Timing financial decisions is problematic. Securities prices could fall even more if Trump actually fires Chairman Powell and goes ahead with many of Trump’s proposed tariffs that have been “paused.” Securities prices could improve if Trump reconsiders these threats and proposals and decides to not go ahead with them. Or, something else could happen. We just don’t know what will happen in the future.

We do know prices have already fallen, creating a potential opportunity to save taxes with a Roth conversion.

Why make a Roth conversion?

  1. After a short waiting period, most earnings and appreciation inside a Roth account are tax-free. . The earnings and appreciation inside a traditional retirement account are tax-deferred until distributions are made. (There is an exception for “unrelated business taxable income” that doesn’t apply to most taxpayers.)

2. Distributions from a Roth account after age 59 1/2 are tax-free, and so are many distributions before age 59 1/2. Distributions from a traditional retirement account in excess of any non-deductible contributions are generally taxable.

3. There are no required minimum distributions for a Roth account during the lifetime of the account owner (unless the retirement plan specifies otherwise.) Required minimum distributions generally must be made from a traditional retirement account when the account owner reaches the “applicable age”, currently age 73.

4. When the account owner dies after the required beginning date (April 1 of the year after reaching the “applicable age”), required minimum distributions must be made to the beneficiaries of a traditional retirement account. Since there is no required beginning date for Roth accounts (except Designated Roth Accounts of some employer plans), required minimum distributions don’t apply for most inherited Roth accounts. (Inherited Designated Roth Accounts can be rolled over to beneficiary Roth IRA accounts to avoid having to make required minimum distributions.) (Both traditional and Roth retirement accounts are subject to the requirement to be distributed by the end of the tenth year after the death of the account owner, with some exceptions.)

5. Distributions to beneficiaries from inherited Roth accounts are generally tax-free. Distributions to beneficiaries from inherited traditional retirement accounts are generally taxable, except for the recovery of any nondeductible contributions.

Since required minimum distributions don’t qualify for Roth conversions, taxpayers who have reached their required beginning date MUST TAKE THEIR REQUIRED MINIMUM DISTRIBUTION FOR THE YEAR BEFORE MAKING A ROTH CONVERSION.

A Roth conversion is currently taxable. Planning to have the cash available to pay the income taxes relating to the conversion is critical. You might want to consult with a tax consultant or financial planner to estimate in advance what the tax will be and decide how much to convert.

There can be other “side effects” of a conversion. For example, the additional income can reduce itemized deductions for medical expenses and can result in higher Medicare premiums. Get advice to “look before you leap.”

Now that tax return filing season is over, it’s tax planning season. Whether to make a Roth conversion during 2025 should be a topic on the agenda for a tax planning meeting for everyone who has a traditional retirement account.

Will U.S. income tax laws become suggestions?

  •    
  • mike   

There are a lot of reasons to question the viability of the federal income tax system during the Trump administration.

President Trump HATES the federal income tax system and suggested he might repeal it during his 2024 Presidential campaign. He would prefer to replace it with “simple” tariffs. But tariffs simply can’t generate as much revenue as the income tax system for funding the federal government. The federal government collects about $2.2 trillion in income taxes. Imports to the U.S. for 2023 were about $3 trillion. When tariffs are imposed, that import number will fall. There isn’t enough scope to raise the same revenue with tariffs. (And, incidentally, tariffs shift the tax burden from high income individuals, who spend less of their income, to the poor and middle class, who spend most of their income.)

Meanwhile, Trump’s speeches have confused many taxpayers about their obligations. While working at a CPA firm this year, I heard some of the clients thought the IRS was being disbanded and they no longer had to file an income tax return.

That simply isn’t true. If you study the budget proposals in Congress, income taxes are still scheduled to provide most of the revenue for federal programs, notably the Department of Defense.

The IRS is one agency that hasn’t been eliminated by the Trump’s Department of Government Efficiency (DOGE), although it has been seriously wounded.

With additional funding enacted by Congress, the IRS grew from about 79,431 employees to 102,309 during the Biden administration. With increased staffing, taxpayers who called the IRS saw a decrease from 28-minute wait times a few years ago to about 3 minutes during the 2025 tax season.

That additional $80 billion funding has since been cut to $40 billion, most of it already spent.

DOGE layoffs plus about 20,000 IRS employees who accepted the administration’s deferred resignation offer will reduce the IRS’s staffing to about 60,000 to 70,000 employees.

Three IRS Commissioners have resigned since the beginning of the year, most recently because of disagreement with the Trump administration’s plan to use IRS records to track undocumented aliens living in the United States for deportation.

When they learned that IRS records were no longer confidential, some undocumented aliens decided not to file a 2024 federal income tax return.

The leadership for modernizing the IRS has also resigned, since funding for their efforts has been eliminated.

Decreased staffing means decreased enforcement. Decreased enforcement leads to decreased compliance and decreased tax collections.

Taxpayers see less risk of not complying with the tax laws.

This year, federal income tax return filings fell by nearly 1 million (about 1.1%) and about 200,000 more taxpayers have filed extension forms, compared to last year. (Natural disasters, including the Los Angeles wildfire, also contributed to the decrease in 2024 income tax returns filed by April 15.)

Decreased staffing also leads to more frustrated taxpayers, who won’t be able to get their IRS questions answered and problems resolved.

On February 19, 2025, President Trump issued Executive Order 14219, Ensuring Lawful Governance and Implementing the President’s “Department of Government Efficiency” Deregulatory Initiative, which suspended issuing new regulations by government agencies, including the IRS.

The IRS recently issued Notice 2025-23, withdrawing final regulations issued during January, 2025, making basis-shifting via partnerships “transactions of interest” and requiring special disclosure of these transactions. These transactions are a way to shift the tax basis (cost for sold assets or tax deductions) from non-deductible items, such as corporate stock, to tax deductible items, such as equipment.

The American Institute of Certified Public Accountants complained the regulations were too complicated. Of course, these artful tax-dodging structures are also complicated, generating substantial fees for tax advisors.

Instead of cleaning up the regulations, the IRS is withdrawing them, so these transactions no longer have to be disclosed, and these abusive taxpayers can go on their merry way, avoiding paying income taxes. The Treasury estimated last year that the transactions could potentially cost taxpayers more than $50 billion over a 10-year period.

The withdrawal of these regulations is an indication of a reduced IRS commitment to enforcing our tax laws. In other words, our tax laws might become merely “suggestions”, inviting “aggressive” tax positions and “substantial compliance” for matters such as properly documenting charitable contributions and business expenses.

After all, no one is looking!

Are tariffs a form of “corporate welfare”?

  •    
  • mike   

On Wednesday, March 2, 2025, President Trump announced a series of “reciprocal tariffs” on imports from about 90 countries, in addition to a baseline 10% tariff on imports from all countries.

(Notably, a retaliatory tariff isn’t being imposed on imports from Russia, and a 10% retaliatory tariff is being imposed on Ukraine. Trump says there are no imports from Russia to impose tariffs on because of sanctions relating to the war in Ukraine.)

The baseline tariff is scheduled to be effective at 12:01 a.m. on April 5, 2025 and the other reciprocal tariffs are scheduled to be effective at 12:01 a.m. on April 9, 2025.

The U.S. reciprocal tariffs were determined to be about half of “tariffs charged to the U.S.A., including currency manipulation and trade barriers.” This “unfair advantage” is roughly the trade deficit (imports from a country exceeding exports to the country from the United States) divided by total imports from that country. (CNBC.com, “How did the U.S. arrive at its tariff figures?”, April 3, 2025.)

For example, the U.S. trade deficit for China was about $295.4 billion and total imports from China were about $438.9 billion, resulting in an “unfair advantage” of 67%. Half of that would be a U.S. tariff for goods from China of 34%.

Many of the countries with very high “unfair advantages”, like Vietnam (90%), Cambodia (97%), and Bangladesh (74%), have poorer populations who can’t afford high-priced goods from the United States. These countries are being harshly penalized by President Trump’s tariffs, essentially because of their high poverty rates.

What is the rationale for tariffs on imports from other countries?

The purpose of tariffs is to “protect” U.S. businesses and U.S. workers from “unfair” low prices of imports, partially due to lower wages paid workers in other countries. President Trump says he is trying to encourage moving production to the United States and building factories in the United States that will hire American workers.

What seems like a “benefit” to some (U.S. companies that charge higher prices and U.S. workers paid higher wages) is a “cost” to others (American consumers who would otherwise pay lower prices.)

For example, according to the American Apparel and Footwear Association, about 97% of clothing sold in the United States is imported, mostly from China. Rebuilding the infrastructure for that industry would require a major investment by U.S. companies, and the technology to do so isn’t readily available in the United States. (NCES.com, “What percent of clothes are made in other countries?” June 20, 2024.)

The tariff tax is not paid by foreign producers, it’s paid by American importers, who will probably mostly pass the cost on to consumers. The penalty for foreign producers is reduced sales because of higher prices in the United States marketplace.

So, one way of looking at tariffs is as a subsidy or “corporate welfare” favoring U.S. businesses and workers paid by American consumers.

Want to vote? Get a U.S. Passport

  •    
  • mike   

President Trump issued an executive order on March 25, 2025 requiring proof of citizenship for voters in U.S. federal elections.

Here’s a link to the order. https://www.whitehouse.gov/presidential-actions/2025/03/preserving-and-protecting-the-integrity-of-american-elections/

“Documentary proof of United States citizenship” includes a copy of:

  • a United States passport;
  • an identification document compliant with the requirements of the REAL ID Act of 2005 that indicates the applicant is a citizen of the United States;
  • an official military identification card that indicates the applicant is a citizen of the United States; or
  • a valid Federal or State government-issued photo identification if such identification indicates that the applicant is a United States citizen or if such identification is otherwise by proof of Unites States citizenship.

This order is controversial and will probably be contested by the states in the courts. As I understand it, the states are supposed to determine how to qualify citizens for voting in federal elections.

Whether or not the executive order holds up, I highly recommend that U.S. citizens should get a U.S. passport. It’s not just for traveling. It is official proof of U.S. citizenship. You generally can apply for a U.S. passport at a U.S. Post Office.

Remember, U.S. passports expire and must be renewed.

A Real ID is a good substitute for a passport, but it doesn’t have the same weight for proof of citizenship. A U.S. passport can be used as proof of citizenship when applying for a Real ID.

The enforcement for Trump’s effort to deport illegal aliens seems to be largely based on racial profiling.

If I was a nonwhite U.S. citizen or English was my second language, I would carry my U.S. passport at all times in case identification is requested by an ICE agent. I would also get U.S. passports for minor children, and keep copies of the passports in a safe, but accessible, location, in case they are lost or stolen.

(U.S. permanent residents and other noncitizens should also carry their identification at all times to show legal alien status.)

It’s not pleasant to have to prove citizenship or legal status, but it can help avoid unpleasant situations, like being arrested and imprisoned or deported without due process.

“Just in case”, get a U.S. passport or check when yours expires.

FinCEN Cancels Requiring Business Ownership Information Reports for U.S. Owners Only

  •    
  • mike   

After more than a year of controversy and confusion, the Financial Crimes Enforcement Network (FinCEN) is issuing an interim final rule cancelling the requirement to file Business Ownership Information Reports when an entity registered with a Secretary of State only has U.S. owners.

When an entity has foreign owners, only the ownership information for the foreign owners will have to be reported.

When the interim final rule is published in the Federal Register, these will be the due dates for foreign-owned entities:

  • For entities registered before the date of publication, 30 days after that date.
  • For entitles registered after the date of publication, an initial BOI report must be filed within 30 calendar days after receiving the notice their registration is effective.

Here is a link to FinCEN’s release announcing the change. https://www.fincen.gov/news/news-releases/fincen-removes-beneficial-ownership-reporting-requirements-us-companies-and-us

How IRS employees helped eliminate a $250,000 tax bill

  •    
  • mike   

Here is the story of one of my biggest “taxpayer wins”. The names and amounts have been changed for confidentiality.

My client, Bob, was experiencing financial difficulties. His antiques store was experiencing losses.

He was embarrassed to come to me to have his income tax returns prepared, because it would be hard to pay me.

In 2010, he sold the building that housed his store for $1,000,000 and moved the business to rented space.

Based on an information report for the sale of the building that it received, the IRS prepared its own tax return for Bob. There were no deductions for the cost of the property or the selling expenses. It made “worst case” assumptions, prepared the return for a married person filing a separate return, and taxed the gain as ordinary income with no itemized deductions or personal exemption deductions. A ballpark of the bill was $250,000. California would also eventually assess tax based on the IRS report.

IRS Collections started garnishing funds from Bob’s bank accounts.

Finally, he came to me to help with his problem.

When I prepared his income tax returns, there was no tax due!

I applied to the IRS for audit reconsideration. Remember, they had already assessed the tax plus penalties and interest.

The IRS agreed to reopen the case and audit Bob’s tax return. They accepted the tax return I prepared as filed and reduced his tax to zero.

For some reason, they didn’t eliminate the penalties for failure to file and underpayment of tax.

After some correspondence back and forth, I applied for help from the Taxpayer’s Advocacy Office at the IRS. One of the purposes of that office is to help taxpayers resolve problems dealing with the IRS. The Taxpayer’s Advocacy Office eliminated the penalties for Bob’s tax return, and he was able to recover all of the money that was garnished by the IRS.

(Needless to say, my fee for doing this was more than ten times what the tax return preparation fee would have been if Bob just had me prepare his tax returns in the first place.)

Yes, what I did for Bob was impressive.

But I couldn’t have done it without having competent and cooperative people at the IRS to work with.

Have you ever had to call the IRS with a problem or a question? It can be a frustrating experience, having to wait a long time on hold or hoping to be available when you are called back. What if there were even fewer people available to answer taxpayer calls?

The latest blow to the IRS is in the Continuing Resolution budget legislation passed by Congress and signed by President Trump on March 15, 2025 to keep the U.S. government open. The Continuing Resolution eliminates $20 billion of IRS funding previously approved by Congress in the Inflation Reduction Act of 2022.

The original appropriation was $80 billion. $20 billion was previously eliminated by Congress in other budget legislation, so only $40 billion is left. The appropriation was to be allocated over a 10-year period and was to be used by the IRS to modernize its operations, rebuild its declining workforce, and improve taxpayer compliance. As of September 30, 2024, the IRS spent about $9 billion of the funding, including about $3.7 billion for employee compensation.

Now all modernization activities have stopped and DOGE is initiating at least a 20% reduction in the IRS’s workforce after April 15 and by May 15, 2025.

430 of about 1,900 employees at the Taxpayer Advocate Service are slated to be cut, in addition to 90 employees who have already accepted the voluntary buyout offer.

With a dramatic decrease in the number of people working at the IRS, we can expect a big decline in tax audits and compliance with the tax laws and a big decline in the guidance and taxpayer support services provided by the IRS. According to Biden administration officials, the agency will conduct about 400 fewer audits of U.S. businesses and 1,200 fewer audits of high income individuals each year, which could add $140 billion to the national debt over the next decade.

After the Trump Administration guts the IRS, there will be fewer people available to help taxpayers resolve their problems. In many cases, they will remain unresolved and they might have to pay additional income taxes, interest, and penalties, or pay attorneys to litigate unnecessary disputes.

Having lost its funding for modernization, the IRS will have to continue operating with antique computer systems.

That doesn’t seem like “Government Efficiency” to me.

How do you feel about this? Let your representatives in Congress know. Remind them that, when you can’t get help from the IRS, you’ll be reaching out to them for help with IRS problems.

Consequences

  •    
  • mike   

Parents teach their children that their actions have consequences.

In physics class, we learned an action generally is associated with a reaction. These actions and reactions are described as physical laws. Among other things, we rely on them to fly airplanes and orbit space stations.

Economics describes the consequences of actions in the marketplace. Although President Trump says he doesn’t “believe in” the “laws” of economics, he can’t escape them or intimidate his way out of them.

President Trump and his team have conducted a series of actions in the very brief time of his second presidency, including imposing tariffs, closing down USAID, proposing to close the Department of Education, and severely reducing personnel in other departments, including the IRS and Veteran’s Affairs. Congress is working on a budget that would severely reduce Medicaid and food assistance programs.

We are seeing natural consequences of these actions that are isolating the United States and hurting U.S. businesses and residents.

The response of Canada, Mexico and China to U.S. tariffs is to impose retaliatory tariffs. China is imposing a 15% tariff on U.S. agricultural products. During President Trump’s first term, U.S. agriculture suffered billions in losses, requiring a bailout by the federal government. It’s likely to happen again. China also has suspended U.S. lumber imports and blacklisted 15 U.S. companies.

After the first Trump administration imposed tariffs on China’s goods, China shifted its trade partnerships to buy most of its soybeans from Brazil and Argentina instead of the U.S and reduce its exports to the U.S.

When USAID was shut down, millions of dollars of shipments from U.S. farms that were in the process of being shipped were left to rot, leaving U.S. farmers “holding the bag.” USAID annually buys about $2 billion in food aid from U.S. farmers. If farmers can’t depend on being paid, they won’t plan crops for USAID.

Canada has been sending about 75% and Mexico about 80% of their imports to the United States. Now both countries are seeking alternative trading partners. Canada is considering joining the European Union and selling crude oil to Europe and Japan.

President Trump’s imposing and then pausing tariffs has created confusion and uncertainty for investors. On Monday, March 10, 2025, the Standard & Poors 500 index fell 2.7%, 9% below a record set during February and erasing all the gains it made since Election Day.

Live Congressional Town Hall meetings are being scaled back or converted to “virtual” meetings after angry constituents mobbed the meetings because people are unhappy about the power given to Elon Musk as the (unelected and unapproved by Congress) head of the Department of Governmental Efficiency. They are also afraid the tariffs imposed by President Trump will lead to higher prices and that government benefits and services are being cut and will be cut further.

President Trump is insulated from these consequences, but representatives in Congress aren’t. The mid-term elections will take place in 2026. During his first term, the Republicans lost control of the House of Representatives during the 2018 mid-term elections.

If we’re still allowed to vote (President Trump has asserted control of the Federal Election Commission), unhappy constituents could seek to stop “slash and burn” government reform and isolationist foreign policies by voting Republicans out of office.

“We shall never surrender …”

  •    
  • mike   

When President Trump and Vice President Vance “bushwhacked” Volodymyr Zelenskyy last Friday, February 28, they evidently thought Zelensky’s goal was “peace”.

Their arguments were Ukraine is outmanned and outgunned by Putin, so Ukraine should accept Putin’s terms for a cease fire.

Zelensky’s goal is actually for Putin to stop his aggression against Ukraine, which he could do today.

Putin’s goal is to get more territory in Ukraine, or occupation of Ukraine, which it appears Trump and Vance are willing to give him to “stop the killing.”

The resolve of Zelensky and Ukraine to resist Putin’s aggression reminds me of this speech by Winston Churchill on June 4, 1940, shortly before the fall of France.

“We shall go on to the end, we shall fight in France.

“We shall fight on the seas and oceans.

“We shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be,

“We shall fight on the beaches.

“We shall fight on the landing grounds.

“We shall fight in the fields and in the streets.

“We shall fight in the hills.

“We shall never surrender, and even if, which I do not for a moment believe, this island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on in the struggle, until, in God’s good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old.”

Sadly, it appears countries who have been our allies can no longer rely on the commitments of the United States to defend them unconditionally. President Trump appears to be aligning with Putin.

ARGH! FinCEN extends BOI deadline AGAIN! (3/1/2025)

  •    
  • mike   

I blinked and FinCEN issued another media release on February 27, 2025 stating it will not take enforcement actions for companies failing to file or update beneficial ownership information (BOI) reports until a forthcoming interim final rule becomes effective and the new relevant due dates in the interim final rule have passed.

FinCEN intends to issue an interim final rule extending BOI reporting deadlines no later than March 21, 2025.

Watch for developments at fincen.gov/boi.

This has been the most frustrating law to follow that I can remember.

Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.