From a reader:

Subject: 2006 Tax Law

 

Thanks for a link to the new tax law. The following item was a shock:

New law, IRC §6049(b)(2): Effective for interest paid after December 31, 2005, the payment of tax exempt municipal bond interest of $10 or more must be reported to the recipient and the IRS on a 1099.

Good grief; the noose tightens [retroactive to the January 1, 2006 coupon payments] for items which are not taxable. I wonder which of our masters sneaked in that provision.

My reply:

One of the many insane aspects to how our rulers draft tax laws is the fact that despite constant real world proof that lower tax rates result in higher overall revenues, they persist in using static analysis numbers that assume lower rates will lower revenues. 

There is also a rule that, whenever possible, any new tax law has to be revenue neutral. This send those financial geniuses scrambling all around for any little bit of new revenue they can find to offset the expected costs.  This often ends up with assorted provisions to plug up suspected “tax leaks.”  This new law has a good assortment of those, especially the expansion of the Kiddie Tax to cover children under 18 instead of just 14.

I haven’t read all of the background info on this new tax law; but I tried to think of the potential revenue justification for the new muni interest reporting rule.  If you look at the worksheet for computing taxable Social Security benefits, tax exempt interest income is added in to the calculation of gross income to see if the individuals qualify as evil rich and subject to the tax.  Our rulers’ staff flunkies probably figured being able to match up 1099s for this income will generate a few million dollars in new revenue by catching evil rich senior citizens who fail to pay enough tax on their SS benefits.

Thanks for writing.

Kerry Kerstetter

Follow-up:

Thanks for your swift & incisive reply.

When those “staff flunkies probably figured being able to match up 1099s” they probably over looked the accrued interest paid on purchase that is paid buy the buyer to the seller which is going to put the 1099s out of balance OR is the IRS going to start requiring non-issuer sellers to report accrued interest received & buyers to report accrued interest paid? I buy munis 6 times a year & usually have to pay some accrued interest to the seller, so there are potentially 6 items that  won’t agree with the 1099s sent to the IRS.

Next up for the IRS? They will require all buyers of securities to report their purchases in detail, sort of an anticipatory Schedule D.