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For an investment return that tops those offered by hedge funds, insurance firms or Wall Street banks, baby boomers should look to Social Security.

That’s right: The same math that is driving Social Security costs higher can provide fat returns for people approaching retirement. All you need is a way to make ends meet while delaying the start of Social Security benefits from age 62 to as late as 70.

Sure, those who defer will miss a bunch of checks in the early years—but then will lock in bigger payments for life. This trade-off can be calculated as an investment return, just like a bond yield.

I asked John Shoven, director of the Stanford Institute for Economic Policy Research and author of numerous books and studies on Social Security, to perform such an analysis. The numbers might come as a surprise.

Consider an unmarried man in average health, age 62—the youngest age for starting retirement benefits. His payoff for waiting until age 67 to collect is the equivalent of buying a long-term bond that pays 3.2% a year. For a woman, all else held equal, it’s a 4% yearly return, according to Mr. Shoven and his research partner, Sita Slavov at Occidental College.

Here’s the whopper: For married couples, if the higher-earning spouse delays payments from age 62 to 70, but at age 66 begins collecting spousal benefits from the lower-earner’s plan (as Social Security allows), the return is like owning a 7% bond.

Not just any bond, either. The fictional alternative would have to be government-guaranteed and provide periodic inflation adjustments. And the income would have to be tax-free for most recipients.

The closest real-world investments are Treasury inflation-protected securities, or TIPS. They’re government-backed and inflation-adjusted, but they’re subject to federal (but not state and local) tax. Ten-year TIPS on Thursday paid minus-0.21%. That’s not a misprint; bond rates are so low that investors are paying to own TIPS just to get the inflation adjustment.

Put differently, a 7% annual return for delaying Social Security payments is for many investors better than a bank certificate of deposit that pays more than 10%, considering the inflation adjustment and tax advantages.

Social Security wasn’t designed to offer such generous terms to those who wait. Amendments in 1956 and 1961 gave participants a choice to collect benefits as early as 62 rather than wait until full retirement age, then 65. The formula determining payment size made collecting early as good a deal as waiting, says Gary Burtless, an economist and Social Security specialist with the Brookings Institution, a think tank.

Two things changed. Life expectancies have soared since the 1960s, while interest rates have collapsed. Insurance companies, which sell annuities that can turn savings into lifetime payments, monitor both factors to keep their terms competitive and profitable, says Robert Fishbein, vice president and corporate counsel at Prudential Financial

.

But for Social Security to adjust, Congress must act. The plan’s current math uses a return assumption that dates to 1983. It assumes investors can easily find risk-free investments that pay 2.9%—after inflation. As the aforementioned TIPS yields suggest, the actual rate now is below zero.

“We look at long-term averages, not short-term swings in interest rates,” says Stephen Goss, chief actuary at the Social Security Administration. The reward for delaying benefits might look generous next to today’s low rates, he says, but rates should eventually normalize to higher levels.

Some retirees find advice on when to start Social Security benefits confusing. That’s because even a ballpark calculation must consider not only factors like gender, marital status, income and health, but also long-term changes to life expectancies and short-term changes to interest rates.

For now, the deal remains sweet. The plan’s trustees say there is enough cash to pay full benefits through 2036 and three-quarters of benefits thereafter, and Mr. Goss says such deadlines historically have served as a call to action for Congress.

Members of both parties are considering legislation to rein in costs. “We clearly have to make changes to things like the retirement age to keep the program affordable,” says Sen. Tom Coburn (R., Okla.), the ranking member of the Finance Subcommittee on Social Security, Pensions and Family Policy.

Future changes aside, with interest rates this low, delaying benefits is a good idea for just about anyone of average health. There are only a few exceptions, according to Mr. Shoven and Ms. Slavov. A single 62-year-old man of average health should delay until 69, not 70. Given his life expectancy, 69 is the age that maximizes his “net present value” of estimated payments, as a Wall Street analyst might say.

The lower earner in a two-earner household doesn’t get much benefit delaying past 66. Social Security also provides benefits to spouses, and in some cases participants can collect both regular and spousal benefits. Most eligible couples should start collecting spousal benefits at 66, according to Mr. Shoven and Ms. Slavov.

Most retirees miss out on the juicy returns for delaying benefits. The most popular age to begin collecting is 62. Many retirees simply need the money. But low-income workers approaching retirement should try especially hard to wait, even if it means working longer, says Prudential’s Mr. Fishbein, because this might be the best investment deal they’ll see.

The wild card is health. Retirees with life-shortening illnesses might be better off collecting early. Determining how each illness affects the equation is beyond the scope of this column, but Mr. Shoven offers a rule of thumb: “If you’re healthy enough to work at 62, you should probably wait as long as you can to collect.”

—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

Corrections & Amplifications

The 10-year TIPS yield was minus-0.21% as of April 19. The figure was mistakenly given as 0.21% in an earlier version of this article.

A version of this article appeared April 21, 2012, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: How to Beat Government Bonds—Using Social Security.

The Internal Revenue Service announced last week additions to its Fresh Start program for struggling taxpayers. The new features include penalty relief for the unemployed and expanded installment-payment options. The agency began the Fresh Start program in 2008.

The penalty relief for unemployed taxpayers is for “failure to pay” levies, which the IRS says are one of the biggest expenses financially distressed taxpayers face on a tax bill.

The relief grants a six-month grace period to pay taxes to those who have been unemployed for at least 30 consecutive days during 2011 or in 2012 up to this year’s April 17 filing deadline. The same grace period applies to self-employed workers whose business income fell 25% or more in 2011.

Taxpayers who qualify for this break do not have to pay tax owed for 2011 until Oct. 15, 2012. Ordinarily, payments this year are due by April 17, with unpaid balances subject to a penalty.

The relief isn’t available to joint filers whose income exceeds $200,000 or single filers with income greater than $100,000. The 2011 balance due of income tax can’t exceed $50,000. To get the benefit, taxpayers must file Form 1127A (
www.irs.gov/form1127
).

The IRS also is allowing more taxpayers to qualify for a “streamlined” installment agreement in an effort to make it easier to catch up on back taxes.

The ceiling for such agreements has been doubled, to $50,000, with no financial statement required. Taxpayers who owe $50,000 or less may enter into an installment agreement to pay the IRS over a series of months or years; the maximum term is now six years, up from five. Penalties are reduced, although interest continues to accrue on any outstanding balance. A taxpayer must agree to monthly direct debit payments, and he or she will still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F).

—Laura Saunders

Total Return Blog

WSJ.com

Lower Fees

The Obama administration announced last week another initiative to allow more homeowners to refinance, this time by dropping fees on federally insured mortgages that have prevented some borrowers from taking advantage of ultralow interest rates over the past year.

The latest changes will reduce fees to refinance loans backed by the Federal Housing Administration through what’s known as a “streamline” refinance.

Those refinances are reserved for FHA borrowers who are refinancing into another FHA-backed mortgage, and they don’t require borrowers to verify income, employment and credit. They also don’t require a new appraisal, which means underwater borrowers can refinance.

But many borrowers who took out FHA-backed loans several years ago haven’t been able to do a streamline refinance because FHA insurance premiums have increased sharply over the last two years. As a result, while interest rates have dropped to a level that would normally spur lots of refinancing, the higher FHA premiums have offset those savings and many borrowers haven’t taken advantage.

The latest changes seek to address that problem. The FHA will drop upfront insurance premiums that borrowers must pay from 1% of the loan balance to .01%. The FHA also will drop annual premiums from 1.15% of the loan balance to 0.55%.

There is one catch: The new streamline refinance fees only apply to borrowers who took out loans before June 1, 2009.

—Nick Timiraos

Developments Blog

WSJ.com

Maximize Capital Gains

If you’re a stock or mutual-fund investor, you probably know that investments held for more than a year and sold for a profit are subject to lower tax rates as long-term capital gains.

But what you might not realize is that more than just stock and mutual-fund shares are eligible for favorable capital-gains tax treatment. Among them:

Securities options held as personal investments.

Stock of closely held corporations.

Collectibles held as personal investments, such as baseball cards, stamps, rare coins and art.

Personal residences (including vacation homes). In this case, the 15% maximum rate generally applies to gains beyond what you can exclude (not pay tax on) under the $250,000/$500,000 home-sale gain exclusion. But a 25% maximum rate applies to gains triggered by certain depreciation deductions claimed against your property.

Vacation time-share interests.

Personal-property items (not collectibles), such as jewelry, furniture, lawn mowers.

Rental real estate owned by an individual, partnership, limited-liability company or S corporation.

Land held as an investment by an individual, partnership, limited-liability company or S corporation.

The right of a tenant to receive a lease-cancellation payment when the tenant is an individual, partnership, limited-liability company or S corporation. This applies if you were renting property and the landlord cancelled your lease.

— Bill Bischoff

SmartMoney.com

The Aggregator, edited by Cristina Lourosa-Ricardo, features news and commentary from The Wall Street Journal and other publications. Email: cristina.lourosa@wsj.com

By MICHAEL RAPOPORT

Along with its outside auditors, StoneMor Partners L.P.

discovered flaws in 2006 and 2007 in the way it reported some of its revenue, and the cemetery owner and operator restated its results.

Had the errors occurred under the new JOBS Act, they may have never been brought to light.

Once President Barack Obama signs the JOBS act in the Rose Garden today, the clock will start ticking for the U.S. Securities and Exchange Commission to come up with rules that regulate the industry, Emily Chasen reports on Markets Hub. Photo: Reuters/Kevin Lamarque.

That is because the act, which President Obama signed into law Thursday, allows some smaller, newer public companies to avoid outside audits of their so-called internal controls, like the one conducted for StoneMor. The waiver is one of many JOBS Act changes that ease regulation, with the intent of helping small enterprises raise capital and avoid costs.

The act was aimed at concerns that small companies are overly constrained by regulation, particularly the Sarbanes-Oxley law passed a decade ago in the wake of the scandals at Enron Corp. and WorldCom. Mr. Obama said the act will “help entrepreneurs raise the capital they need to put Americans back to work.”

Critics of the JOBS Act, which stands for Jumpstart Our Business Startups, say that easing regulations will lead to more financial problems and fraud, and make it more difficult for investors to detect those issues.

Before the JOBS Act, all companies except the smallest had to have their outside auditors weigh in annually on whether their internal controls were “effective.” The JOBS Act allows “emerging growth companies”—those under $1 billion in revenue, public less than five years and under certain market capitalization thresholds—to be exempt from that requirement, as well as from a variety of other accounting and disclosure rules.

Tim Yost, StoneMor’s chief financial officer, says it is important that a company has sound controls. But a weakness in those controls, he said, “may not necessary indicate an overall weakness in the company.”

The Bristol, Pa. company’s issues were related to making sure that revenue was correctly booked when burial vaults were installed. The flaws were corrected, and in fact the company’s restatement actually increased its revenue and profit for the year.

An analysis for The Wall Street Journal lends some support to the JOBS Act’s detractors. The analysis, by AuditAnalytics.com, suggests that since 2004, when the Sarbanes-Oxley requirement for internal-control inspections took effect, 104 companies that have had issues with their anti-error, anti-fraud procedures, including StoneMor, would have been exempt from auditor scrutiny of those procedures if the JOBS Act had been in effect at the time.

The review doesn’t mean the JOBS Act would have led to missed problems at 104 companies. Not all flaws with a company’s internal controls lead to financial problems, and many such problems could be found even if outside auditors aren’t required to look. Under the JOBS Act, companies will still have to have their own management assess internal controls and disclose any weaknesses they find, as they do now.

Also, even though an auditor review won’t be required for emerging-growth companies, they may still get internal-control audits voluntarily to show investors a clean bill of accounting.

But to the extent eligible companies take advantage of the legislation’s provisions, investors may not find out as much in the future about companies’ ability to prevent financial errors and fraud.

In turn, some companies’ financial problems may go undetected. Internal-control problems are “often indicators of material errors in financial reports,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “Those come with a significant cost to investors.”

Don Whalen, director of research at AuditAnalytics.com, says that even though companies will still have to assess their own internal controls, they could be less likely to detect and disclose problems without auditors looking over their shoulders. “You’re not going to be quite as attentive if you’re not worried about someone catching your mistake,” he said.

A broad bipartisan group of lawmakers as well as the Obama administration supported the bill as vital to helping small businesses and start-ups grow and, in the process, create jobs. The White House says it will “monitor closely” the measure’s implementation to ensure it achieves its aims.

—Andrew Ackerman contributed to this article.

Write to Michael Rapoport at Michael.Rapoport@dowjones.com

A version of this article appeared April 6, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Investors’ Prying Eyes Blinded by New Law.

It is one of life’s conundrums: If we hate paying taxes, then why do we consistently overpay them, collectively lending Uncle Sam some $300 billion year after year—interest free?

This year, as in previous ones, about 75% of individual taxpayers will receive federal income-tax refunds, with the average refund totaling around $3,000. From a purely economic standpoint, this makes no sense.

“All a tax refund is, is the government saying to you, ‘You’ve overpaid and here’s your change,’ ” explains Charles Enis, an accounting professor at Penn State University.

The rational thing to do, he says, is to pay just enough taxes throughout the year—via withholding and quarterly estimated payments—to avoid owing a penalty at tax time, and then pay any balance due when you file your return. (The minimum required payment is typically the lesser of 90% of the current year’s tax or 100% of the preceding year’s tax.) That way, you get an interest-free loan from Uncle Sam instead of Uncle Sam getting an interest-free loan from you.

But that is not what most of us do. Why not?

One possibility is that we are indeed acting rationally because, with interest rates so low, there’s not much opportunity cost to parking some money with the government for a while; it wouldn’t have earned any interest to speak of anyway. History shows, however, that we overpay our taxes in both high interest rate environments and low ones.

Another theory is that we find it too confusing or difficult to “zero out” our tax bills by, for example, decreasing the amount we have withheld from our paychecks. But at least one study has shown that even when taxpayers believe they could adjust their withholding relatively easily, they are still hesitant to do so.

No, it turns out we may actually prefer getting tax refunds. Why? Because they pay emotional dividends.

For one thing, they free us from worry and uncertainty, according to Donna Bobek Schmitt of the University of Central Florida, who has studied the issue. It is never pleasant to have to write a check at tax time, but it is especially unpleasant if the bill is unexpected or unexpectedly large—and even more so if we don’t have the cash to pay it. So, to avoid any unpleasant surprises, we err on the side of caution and overpay throughout the year, engaging in a form of forced savings.

Apparently, we don’t trust ourselves to set aside money in advance to pay our taxes—with good reason. In a survey for Capital One Financial, only one-quarter of respondents who owe taxes this year had set aside cash specifically to cover the cost.

Then there is the rush we feel from getting a refund, an experience akin to putting on your spring jacket for the first time in a year and finding a $20 bill in the pocket. We frame it as income. A windfall. (Same goes for owing less tax than expected; we frame it as a gain.)

In fact, research by Mr. Enis shows taxpayers are so addicted to this adrenaline rush that those who discover during tax filing season that their refunds will be smaller than hoped (or their tax bills higher) are more likely to open traditional, tax-deductible IRAs or add to existing ones to goose their refunds (or lower their tax bills). Is it any wonder why most IRA contributions are made between Jan. 1 and April 15?

And what of taxpayers whose refunds end up being larger than expected? They are more likely to open savings accounts or certificates of deposit or to buy U.S. savings bonds, according to an ongoing study of low- to moderate-income taxpayers by J. Michael Collins and Nilton Porto at the University of Wisconsin.

No matter what their size, refunds clearly pay big dividends in the way of spending enjoyment. It seems we view money differently if it comes in a big chunk like a tax refund than if it is dribbled out in smaller amounts, as is the case when you decrease your withholding to give yourself more take-home pay each week.

According to Ms. Schmitt, we enjoy getting a tax refund more than having the extra money in our paychecks because we are more likely to spend the refund on a vacation or a new TV (Yay!) but more likely to use the extra money each week to pay bills (BOR-ing.).

What will you do with your tax refund this year? Email me your plans and I’ll share them, along with some suggestions, in my next column.

—
investingbasics.wsj@gmail.com

By PAUL SONNE And CASSELL BRYAN-LOW

Former News of the World editor Andy Coulson and former News International executive Rebekah Brooks are to appear at the U.K. government’s Leveson Inquiry into ethics and the press in London. WSJ’s Bruce Orwall discusses. Photo: AP

LONDON—Two ghosts from U.K. Prime Minister David Cameron’s past will appear this week before a judge-led inquiry into British media ethics here, setting the stage for potential political headaches just a week after the Conservative leader’s party was trounced in local elections.

The pair—Andy Coulson and Rebekah Brooks—are former British tabloid kingpins with close connections to Mr. Cameron who have been transformed from consummate insiders into political liabilities. The reason: They are at the center of a scandal over illicit reporting tactics at News International, News Corp.‘s

U.K. newspaper unit, where police are investigating allegations of voice-mail interception, bribery, computer hacking and obstruction of justice.

Agence France-Presse/Getty Images

Rebekah Brooks, former chief executive of News International, in a photo from July 2011.

Now, the media ethics inquiry, led by Lord Justice of Appeal Brian Leveson, is expected to explore the relationships Mr. Coulson and Ms. Brooks developed with Mr. Cameron and other politicians. Mr. Coulson, age 44, testifies Thursday; Ms. Brooks, 43, testifies Friday. In coming weeks, Mr. Cameron himself will testify.

Adding to the intrigue, their testimonies—which are under oath—could come alongside the release of new evidence requested by the inquiry. That has been the case for past testimonies.

The inquiry hasn’t said what evidence it requested or might reveal. But last week, the U.K. government requested and was granted advanced access to the evidence.

A spokesman for Mr. Cameron declined to comment on the requested evidence.

A spokeswoman for News International declined to comment. News Corp. owns The Wall Street Journal.

Mr. Coulson was the editor at News Corp.’s now-closed News of the World before resigning in 2007 when a British court jailed his royals reporter and a private investigator on the tabloid’s payroll for illegal voice-mail interception.

At the time, Mr. Coulson said he was unaware of phone hacking but stepped down because it occurred on his watch. Six months later he became Mr. Cameron’s top communications adviser, a post he kept when the Conservative Party leader became prime minister. But Mr. Coulson stepped down from his government position in early 2011 after police reopened a criminal probe into the tabloid phone hacking.

Ms. Brooks—also a former News of the World editor and the former chief executive of News International—resigned last summer at the height of the phone-hacking scandal.

Ms. Brooks, a former top lieutenant of News Corp. Chairman and Chief Executive Rupert Murdoch, ran the News of the World from 2000 to 2002, edited the Sun from 2003 to 2009, and then became chief executive of News International. She is part of the “Chipping Norton set,” a group of British elites that include Mr. Cameron and Mr. Murdoch’s daughter, Elisabeth, who keep homes and socialize near the Oxfordshire town of Chipping Norton.

The prime minister attended Eton College with Ms. Brooks’s husband, horse trainer Charlie Brooks, and has described him as a personal friend.

Just a few months after Ms. Brooks was appointed CEO of News International, the Sun—the unit’s influential weekday British tabloid—endorsed Mr. Cameron’s Conservatives, after years of supporting the Labour Party.

Mr. Cameron’s ties to both Rebekah and Charlie Brooks became a liability when the phone-hacking scandal mushroomed last summer, prompting Ms. Brooks’s resignation.

Both she and Mr. Coulson have been arrested in connection with the criminal investigation; neither has been charged.

A spokesman for Ms. Brooks on Wednesday said she denies wrongdoing.

Mr. Coulson didn’t return a call seeking comment on Wednesday and a spokesman declined to comment.

Ms. Brooks’s husband was also arrested in March on suspicion of conspiring to pervert the course of justice. He hasn’t been charged. Last July, at the height of the scandal, security guards at the couple’s London apartment complex found his laptop in a parking lot trash can and turned it over to police. At the time, a spokesman for Ms. Brooks called the incident a mistake.

After the Leveson hearings last week, Mr. Cameron came to the defense of government minister Jeremy Hunt, who was accused of being too cozy with News Corp. while overseeing a regulatory review of its unsuccessful effort to take full control of British Sky Broadcasting Group

PLC last year.

An adviser to Mr. Hunt resigned last week but Mr. Hunt has said his own conduct was appropriate.

News Corp. executives have defended its lobbyist’s activities regarding BSkyB.

Write to Paul Sonne at paul.sonne@wsj.com and Cassell Bryan-Low at cassell.bryan-low@wsj.com

A version of this article appeared May 10, 2012, on page B4 in some U.S. editions of The Wall Street Journal, with the headline: Former Tabloid Editors To Testify at Hearing.

A pair of changes for 2011 could mean big headaches for taxpayers who report business or partnership income on their individual tax returns.

Both changes involve so-called 1099 forms, which are reports submitted to the Internal Revenue Service so it can cross-check information from different taxpayers.

Tim Foley

The first change is momentous: It requires third parties—credit- or debit-card firms, PayPal and the like—to tell the IRS about their payments to businesses. For 2011 and after, these firms must issue 1099-K forms to the IRS and the taxpayer giving the amount of such payments.

Why does that matter? This information can help the IRS flush out unreported income by small businesses. Cheating and mistakes cost Uncle Sam $122 billion a year, the IRS estimates, making it the largest single element of the $385 billion in annual unpaid taxes, known as the tax gap.

The new third-party payment information cuts two ways. It can help the IRS identify firms, such as online merchants, who aren’t reporting income at all. But it also can shine a light on businesses that are underreporting their income, such as a restaurant that does a big cash business but declares income only equal to its credit- and debit-card payments.

There is some good news on the 1099-K front: After an outcry by the National Federation of Independent Businesses, or NFIB, and other groups, the IRS recently decided to drop plans to have businesses break out 1099-K receipts on their tax forms. Doing so would have imposed a huge burden, says Chris Walters, an official with NFIB, because it involved an onerous reconciliation process.

“Grocery stores would have had to show that $15 of a shopper’s $40 debit charge was for food and the rest was a cash withdrawal, or else the IRS might think they’re underreporting income,” he explains.

But business owners shouldn’t be lulled into a false sense of security. While they won’t have to report the information on their returns, third parties must still provide 1099-Ks, and the IRS can still use those data in audits.

“Firms that might be ‘outed’ by this form should remember it’s very much alive,” says Don Williamson, a tax preparer who heads the Kogod Tax Center at American University.

***

The other potential trap: two new lines on several forms, including Schedule C (for sole proprietorships), Schedule E (landlords), 1120S (Subchapter S corporations) and 1065 (partnerships).

They say: “Did you make any payments in 2011 that would require you to file Form(s) 1099?” and “If ‘Yes,’ did you or will you file all the required Forms 1099?”

These simple-seeming questions could cause large penalties for some taxpayers.

Here is why: Firms usually are required to issue 1099 forms to providers of more than $600 worth of services during the year, unless the vendors are incorporated. That could include, for example, an accountant, a plumber, a website designer or a consultant.

In 2010 Congress stiffened the penalties on taxpayers who neglect to provide 1099 forms. The higher penalties took effect in 2011, and now the penalty for nonfiling is $100 per violation—$200, in most cases, because two forms are due, one to the IRS and one to the provider. The penalty for “intentional failure to file” is $250.

Mr. Williamson recalls one case in which penalties for multiple vendors and multiple years amounted to $35,000, even though nothing else on the return was disallowed.

By asking the two questions prominently on the return, the IRS isn’t only reminding taxpayers of their obligations but also setting a snare for scofflaws. If a taxpayer answers “no” and an audit shows he should have sent the forms, the answers could be evidence in favor of higher penalties. So “he’s hoist on his own petard,” Mr. Williamson says.

In extreme cases, he adds, it would be easier for the IRS to allege civil fraud, because the taxpayer’s answer is evidence that he or she was willfully noncompliant.

Write to Laura Saunders at laura.saunders@wsj.com

A version of this article appeared March 17, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: Traps for Small Businesses.