The IRS spent $4.1 million on a single internal conference in Anaheim, reports the Treasury Inspector General for Tax Administration. Sure, it’s easy to mock the IRS for conferences, or for silly dance videos, though I find it reassuring to see that there are people in the IRS who have a sense of humor.
What bothers me is the priorities it shows. For tax pros in Iowa, the best thing the IRS does is its Practitioner Liaison program. Not only does our liaison do an excellent job of alerting us to processing problems during filing season and cutting through red tape, but she puts on well-attended and popular conferences that have to help the IRS get better-prepared filings.
Yet the Practitioner Liaison office is continually nickled and dimed. There is always pressure to limit travel to outlying towns. Our liaison has had to fill in for other states when their positions have been left vacant. It just seems wrong that the IRS can find $135,000 for speakers to inspire agents in Anaheim, but not to fill the gas tank of someone in the field in Iowa doing useful and popular work.
It also doesn’t help the argument that the IRS just can’t afford to answer its phones or process exempt organization applications.
This practice made news in the state when a local news crew focused on two strip clubs, Deja Vu Showgirls of Rancho Cordova and Gold Club Centerfolds, found to have received thousands of dollars in tax breaks – without doing anything different from before. Those clubs benefited from their existing locations and were not lured to the area by the promise of tax incentives; additionally, their hiring practices weren’t influenced at all by the tax breaks. That isn’t the point of the credit, according to Sen. Hill and his supporters.
No, the point of the tax credit is to enable politicians to take credit for “creating jobs” by taking your money and giving it to somebody else.
Longtime readers know that The Tax Update has no use for any “economic development” tax credits. These credits are generally paying companies to do what they would have done anyway — in this case, to disrobe. At least these credits went for something people want, and there’s no questioning the stimulative effect.
But I think Proposition 13 was a horrible policy choice. It devastated local government autonomy. Local governments in the United States have been the most efficient, effective, and democratically responsive means of providing public services. But that effectiveness is contingent on having an independent source of revenue. When the state finances local government services, it is almost assured that those services will not be provided at levels demanded by citizens.
Not your corporate welfare. Just ours. Iowa Senate taxwriters have been eloquent in criticizing the corporate welfare famously doled out to fertilizer companies over the last year. It turns out, though, that not all corporate welfare is bad, to them. Just that proposed by the other party. The Senate Ways and Means Committee advanced a set of its own welfare programs yesterday, including:
SF 238, which would provide a 30% tax credit (subsidy) “for persons who construct, install, and place in service an electric vehicle facility or a natural gas vehicle facility.” So if you buy a Chevy Volt, Senate Ways and Means wants to pay 30% of the cost of installing special plug-ins.
SSB 1240, which “increases to $50 million from $45 million the amount of historic preservation and cultural and entertainment district tax credits.” These are a cash cow for well-connected developers and rehabbers.
SF 205, which opens up an existing program to divert withheld employee taxes “to create economic incentives that can be directed towards business.” The bill “removes the requirement that an employer…be located in an urban renewal area.” In other words, it makes it just another “incentive” slush fund to pay people to be our friends.
So it’s not a principled opposition to business subsidies. They just want different ones.
Far better to get the state out of the subsidy business and make the tax system good for everyone — not just those with the pull and the consultants to game the system. Far better to enact The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
The article takes for granted that the costs the regulations will impose will exceed the benefits:
Knowledgeable tax return preparers—who are reminded each year through education requirements to conduct effective due diligence on small businesses—can have a much greater impact on compliance than IRS auditors.
That makes an unwarranted assumption: that the IRS can create “knowledgeable tax return preparers.” It can’t. It can make people fill out paperwork, go through the motions of paying for CPE, and take meaningless open book literacy competency tests, but it can’t make anybody competent.
The IRS has limited resources. Semi-literate South Florida grifters are stealing billions through fraudulent refunds. Yet the IRS seems to think its problem is honest preparers.
Finland will lower the corporate rate to 20 percent in 2014, down from the current rate of 24.5 percent (and 26.0 percent in 2011)…
Finland plans to pay for part of the rate cut by boosting the effective investor tax rate on dividends paid by companies listed on the Finnish stock exchange.
Why not instead create a full dividends-paid deduction. It would eliminate the need for a rate preference for dividend inocme while eliminating the destructive double-tax on corproate earnings.
Film tax credit scams are big news in the U.K. right now. An Irish actress, Aoife Madden, yesterday received a 54-month sentence in her role in scamming a U.K. film tax credit scheme. Irish Times reports:
The group successfully claimed £1.5 million in film tax breaks after they said they intended to make a film titled Landscape of Lives with a £19 million budget, funded by Jordanian backers.
Once they were arrested two years ago, the five hurriedly produced a film called, ironically, Landscape of Lies for just £90,000, which went on to win a Silver Ace award from last year’s Las Vegas Film Festival.
The film, which starred former EastEnders actor Marc Bannerman and Andrea McClean, told the story of a former British soldier’s attempts to discover the truth behind his friend’s murder in an apparent mugging.
Before suspicions had been aroused, Madden’s London film company, Evolved Pictures, told revenue and customs that millions had been spent on Hollywood A-list actors and film crew when it lodged a value added tax repayment application for £1.48 million. It received more than £1 million.
Lost in the coverage is Iowa’s pioneering role in film tax credit scams. A little-known film producer from Minnesota came here and showed the Brits just how it’s done:
Take Iowa. A start-up called Polynation Pictures came looking for backing for a sci-fi flick so lame it would have embarrassed Ed Wood. With a financing scheme worthy of Max Bialystock, the con these folks pulled was nearly as inept as the film they made, but Iowa’s film office was too starry eyed to notice.
…
The $767,250 production Polynation Pictures proposed eventually came in at $3.7 million. This was achieved in part with preposterous expenses. Producers claimed they paid $1,350 to rent six orange road cones. The use of two 6-foot ladders supposedly cost the company $900 (a bargain, as Polynation claimed to have spent another $900 to rent a single 8-foot ladder). Among production necessities was a new Mercedes. The partners set up an array of separate companies and used them to bill themselves extravagantly for work supposedly done on the picture. These were presented to Iowa as “deferred payments”—to be paid if the movie made money (which the enterprise was sure to do when Iowa handed the tax credits over). The only thing missing was a staged rendition of “Springtime for Hitler.”
Polynation mastermind Wendy Weiner Runge received 10 years for her star turn in the film credit program.
The film credit program was touted as a way to make Iowa a leader in the film world. And, in a way, it did.
You might be interested in this interview with Ms. Madden about her role in the film, knowing what we know now. She said this:
This project has been a crazy but wonderful challenge!! I’ve always wanted to produce a feature, and have a number of projects in development, but this was the one I just wanted to lift off the page. I think the biggest challenge was sourcing finance, which is no surprise for an independent film company. We were extremely lucky to find international investors and lobby them to back the project, but this was a lengthy process and has always been a challenge.
A challenge, yes, but I’m not sure they turned out lucky.
Snatching defeat from the jaws of victory. Now that the courts have saved the IRS from itself by shutting down the misguided preparer regulation system, the Senate rides to the rescue to screw everything up again, Accounting Today reports:
The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
The IRS can’t answer its phones. Its pockets are being picked to the tune of billions by semi-literate South Florida grifters. And the Senate thinks that preparers are the problem? Preparer regulation is a market-share enhancement program for the national franchise tax prep outfits; the rules were written by a former H&R Block CEO. If Senators Baucus and Hatch want to re-enact these anti-competitive and useless rules, it just shows who they really represent. (Via Going Concern).
It just doesn’t work. The “Tax Honesty Movement” got excited a few years back when Louisiana attorney Tom Cryer was acquitted on criminal tax charges. For example:
The Internal Revenue Service has lost a lawyer’s challenge in front of a jury to prove a constitutional foundation for the nation’s income tax, and the victorious attorney now is setting his sights higher.
“I think now people are beginning to realize that this has got to be the largest fraud, backed up by intimidation and extortion and by the sheer force of taking peoples property and hard-earned money without any lawful authorization whatsoever,” lawyer Tom Cryer told WND just days after a jury in Louisiana acquitted him of two criminal tax counts.
There’s just one problem with the idea that this struck a death blow to the income tax: he still owes the taxes. Even though he’s dead. Being aquitted in a criminal tax case doesn’t make it legal to not pay taxes any more than the O.J. Simpson acquittal legalized multiple homicides in Brentwood.
The Tax Court yesterday ruled that Mr. Cryer owes taxes, interest and civil fraud penalties for tax years for which he didn’t file income tax returns. From the Tax Court:
In essence, Mr. Cryer claimed that the income he received during the tax years at issue from certain “sources” was taxable under Louisiana law, but not under Federal law. In United States v. Clayton, 506 F.3d 405, 412 (5th Cir. 2007), the Court to which an appeal would lie in this case, cited and followed its prior unpublished opinion holding that “the argument that income derived from sources within the United States” is not taxable under Federal law is “patently frivolous” and “absurd”.
The moral: No matter how convincing they are on the Internet, “Tax Honesty” arguments don’t work. They will not keep the IRS from taxing you. When “winning” means staying out of jail but paying 75% civil fraud penalties, you set the bar for victory too low.
If “carried interest” were really just a loophole it would not need such an elaborate fix. In fact, it is based on fundamental principles of partnership taxation.
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
They accompany the article with this photo of the “Field of Dreams” — an unwitting illustration of the problems of Iowa tax policy. The Governor last year signed a proposal giving a special sales tax exemption to a private athletic complex being built around the field, made slightly famous in the Kevin Costner movie. It’s special carve-outs like this that make for high rates and complicated taxes all around.
State leaders ballyhooed the plan as a way of moving from old-style industry to new.
Despite tens of millions of dollars in state investment, the promised 3,000-plus jobs didn’t appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn’t boffo. That’s a bust. The studio has defaulted on interest payments on state-issued bonds, and the guarantors—the state’s already stressed pension funds—may wind up holding the bag. “In retrospect, it was a mistake,” conceded Robert Kleine, the former state treasurer who signed off on the plans in 2010.
He doesn’t neglect Iowa’s film fiasco:
Iowa ended its motion-picture subsidies in 2010, after officials misused $26 million in state money, leading to criminal charges. According to a 2008 investigation by Iowa Auditor David Vaudt, 80% of tax credits issued under the state’s film-subsidy program had been issued improperly (to production companies that weren’t even spending the money in Iowa, for example).
Two film credit recipients are now serving 10-year sentences on theft charges arising from the program. That’s fine, but I really want to see a groveling public apology from the Governor who signed the program into law, the “economic development officials” who turned the keys to the state treasury over to a former Walgreens photo desk clerk in charge of the program, and to the legislators — all but three out of 150 — who voted the moronic program into existence.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.
Good thing the IRS can redirect the employees who had been assigned to the preparer regulation program to do something useful, now that the courts have shut down that futile enterprise. The IRS can’t stand their good fortune, though; Tax Analysts reports ($link) that the IRS is appealing the court decision.
It would be even better if Congress stopped using the IRS as the Swiss Army Knife of public policy. Given the agency’s new mandate to take care of our health insurance, their performance at the job of actually collecting taxes is only going to get worse.
Preparers gone bad. Accounting Today rounds up the week in preparer fraud, including a guy in New Mexico who, while serving time for identity theft-related charges, has been hit with 56 counts of fraud and embezzlement. That would be overachieving in underachieving.
Durango man pleaded guilty to tax evasion this week in federal court in New Mexico.
Hak Ghun, 62, is facing 12 to 18 months in prison after signing a plea agreement with the U.S. Attorney’s Office. He also will be required to pay $249,567 in restitution to the Internal Revenue Service.
The man was accused of embezzling from a company that had received investments from the Navajo Nation. For those who don’t get the old TV show reference, here you go.
The TaxProf Reports:IRS Whistleblower Office Issues Annual Report to Congress. It looks like ratting out tax cheats could be lucrative. Changes requiring the IRS to issue more awards were enacted in 2006, and it appears that the whistleblowers have done well. In 2012, for example, 128 awards were paid totalling $125,355,799, according to the report. That works out to nearly $1 million each.
Awards may well be one of the most effective ways to enforce the tax law, as well as one of the most creepy. They make every disaffected employee a potential IRS mole. Sure, it may make employment awkward for the whistleblower, but $1 million cash can be very consoling.
But before you go racing to the IRS, consider this sobering news from the report: From 2008 through 2012, whistleblowers reported 33,064 cases to the IRS, but awards were paid only 630 times. That means about 1 in 50 claims cashed out. Because the IRS collection process is slow, some more of those claims will get paid out, but the great majority won’t.
The moral? If you have a Valentines Day date, be careful how much of your tax life you share. Love is one thing, but cold hard cash is something else entirely.
I’ll start that diet right after I finish this cheesecake:
A federal court in Cleveland has barred MAI-designated real estate appraiser Michael Ehrmann and his firm, Jefferson & Lee Appraisals Inc., from preparing property appraisals for federal tax purposes, the Justice Department announced today. Judge Dan Aaron Polster of the U.S. District Court for the Northern District of Ohio signed the civil injunction order against Ehrmann and Jefferson & Lee Appraisals. The defendants consented to the injunction without admitting the allegations against them.
Federal law allows a taxpayer in certain limited circumstances to claim a charitable deduction for the value of a conservation easement donated to a qualified organization. The easement’s value must be determined by a qualified appraiser. According to the government complaint, Ehrmann’s appraisals repeatedly overstated the value of conservation easements placed on historic properties, including the Book Cadillac Hotel in Detroit and the Powerhouse Building in the Flats District of Cleveland.
The tax law is very touchy about the rules for appraisals. The obvious potential for abuse shows why.
A sad story from Buffalo. A tax preparer scammed his own clients, reports buffalonews.com:
Elizabeth Wopperer lost everything. She lost her business. She lost $40,000 in cash. And by the time it was all over, she found herself filing for bankruptcy.
On top of all that, the IRS now wants the money that was stolen from her.
The man she blames is going to federal prison for up to 30 months, but that won’t return the cleaning business she was forced to sell or pay the taxes she now owes because of his fraudulent actions.
What happened?
Mangione, the operator of a North Tonawanda payroll and tax preparation business, was supposed to pay federal income taxes on behalf of his clients but didn’t.
He chose instead to pocket some of the money, which means Schunke, Wopperer and several others are still on the hook for those taxes.
There’s no reason to give money to your preparer to pay your taxes.
The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
That’s why proposals to increase the earned-income credit are pernicious. The phase-outs of the benefits as incomes rise punish taxpayers for improving their lot.
Meanwhile, somewhere an ID thief is trying to get cash from an ATM with a peanut butter sandwich. TBO.com reports:
A 6-year-old pupil at Symmes Elementary School in Riverview was asked to take her homework out of her backpack, according to Cpl. Bruce Crumpler of the Hillsborough County Sheriff’s Office.
The girl reached into her bag and pulled out a baggie containing 52 debit cards, Crumpler said.
The cards, which can be used as accounts for depositing tax refunds are commonly used by people who use stolen personal identities to file tax returns to obtain fraudulent refunds.
Maybe she’s the little princess of tax fraud. Meanwhile, the same TBO.com has an update on Rashia Wilson, who allegedly proclaimed herself the “Queen of IRS Tax Fraud:”
Wilson may not have been the biggest player in Tampa’s income tax fraud explosion, but she was one of the most brazen — “flashy,” a sheriff’s investigator called her, “in your face about it.”
The affidavits show Wilson even had a picture of herself with a cool smile on her face, wearing an oversized jewel-encrusted pendant spelling out her first name as she held bundles of cash.
“YES I’M RASHIA THE QUEEN OF IRS TAX FRAUD,” reads a May posting on her Facebook page described in the affidavits. “IM’ A MILLIONAIRE FOR THE RECORD SO IF U THINK INDICTING ME WILL BE EASY IT WONT I PROMISE U!”
Easier than she thought, apparently. She has been indicted on 57 federal tax fraud charges for collecting $1.3 million through fake tax returns, apparently claiming earned income credits and refundable education credits. That should make the politicians think twice before they expand these fraud-ridden credits, but it won’t.
How many lawyers does it take to lose a tax case? 15. At least that’s how many lawyers were listed on the losing side yesterday in Bank of New York Mellon Corp., a Tax Court case disallowing foreign tax credits in a tax shelter case. Six lawyers are listed on the IRS side, for a total of 21. The losing side was led by former IRS Chief Counsel B. John Williams. If nothing else, the legal expense deductions should take a bite out of the losing side’s tax bill. The TaxProfhas more.
Iowa’s push for a 4.5% optional flat tax — which I call an “alternative maximum tax” – puzzles David Brunori ($link)
Many liberals in Iowa are complaining that a flat tax wouldn’t require the rich to pay their fair share, whatever that means. But a lot of those people seem more interested in soaking the rich than in helping the poor. Personally, I am much more in favor of reducing the tax burdens on the poor and dispossessed than I am in making rich people suffer.
I think a flat income tax with few deductions (and a sizable exemption for low-income people) is the way to go. I’m unsure why the state would continue its horribly complicated personal income tax system that benefits return preparers, tax lawyers, and tax accountants.
It’s because of a peculiarity of Iowa politics. The powerful lobbying group Iowans for Tax Relief opposes a repeal of the Iowa deduction for federal taxes paid. ITR has shown that it can provoke successful primary challenges of Republican legislators who displease the Muscatine-based lobby. Yet significant rate reduction is impossible if the deduction is retained. Making the lower rate an “alternative” rather than a replacement appeases Muscatine, though at a cost in incoherence.
Will we see a revival in enforcement of the accumulated earnings tax? The obscure depression-era tax on C corporations that retain cash in excess of their “needs,” as second-guessed by the IRS, is rarely asserted. With left-side economists like Paul Krugman asserting that corporate cash-hoarding is one reason why the economy remains weak, don’t be surprised if his friends in the Obama administration try to revive enforcement of this archaic and foolish penalty tax. (Via Tyler Cowen).
As the chart below shows, mandatory spending represents the majority of the federal budget, and the part that has grown most dramatically in recent years. Mandatory spending was about 10 percent of GDP for most of the 30 years prior to 2008. It leapt to 15 percent of GDP in 2009 and now remains at 13.1 percent. It is projected to increase to 14.1 percent of GDP by 2023. Meanwhile, discretionary spending, on programs like defense, roads, and other infrastructure, is on a steady decline. Discretionary spending is now 8.3 percent of GDP and set to go to a 50 year low of 5.5 percent of GDP by 2023.
No spending is really “mandatory.” Congress and the President can always change the “mandatory” programs. And they will, or we will face fiscal disaster and crushing taxes.
Shock! David Osterberg doesn’t like the 4.5% flat Iowa Income tax proposal! State Tax Notes tracked down former Senate Candidate and Cornell College Econ Prof* David Osterberg for his views on the proposal to create a flat 4.5% income tax in Iowa alongside the current income tax. Not surprisingly, he doesn’t like it ($link):
The founder and executive director of the Iowa Policy Project said a Republican-sponsored House bill to create a flat personal income tax option would shift more of the tax burden to low-income residents.
But David Osterberg said he is not too concerned because he doesn’t think the proposal has a shot at passing the Senate, where Democrats hold a majority…The proposal is “part of this ideology that says we somehow have to take care of the top 1 percent and things will be good,” Osterberg said. “I don’t think low-income people believe that — we sure don’t.”
State Tax Notes also tracked down Tax Foundation Economist Elizabeth Malm:
“Iowa’s current income tax system has nine brackets, with rates ranging from 0.36 percent of income to 8.98 percent of income,” Malm said in an e-mail to Tax Analysts. “In 2012, this made Iowa the fifth highest top income tax rate in the country, among those states that levy PITs.”
Without additional information, Malm declined to say whether the plan is regressive. She did say, however, that the proposal would fail to simplify the tax code because it keeps the current system intact.
“I’m guessing the rationale behind allowing taxpayers to choose between the two systems is to ease concerns that the flat 4.5 rate would hit low-income individuals harder,” Malm said.
Wrong guess. The rationale is almost surely to avoid provoking the powerful lobby group Iowans for Tax Relief, which holds sacred the current Iowa individual deduction for federal taxes paid. Proposing the flat tax as an alternative, rather than a replacement, finesses that problem — but at the cost of adding more complexity. In this form, the flat tax is what I call an “Alternative Maximum Tax.”
*Disclosure: I once borrowed his shotgun at Cornell. It had dust bunnies in the tubes.
No matter your views on government, there is no justification for asking the poor to pay more than the rich. I do not favor dramatically increasing the tax burdens on the wealthy, particularly income tax burdens. But there are a lot of policies that can be enacted that could even the playing field. Broader base consumption taxes, less reliance on excise taxes, and larger income exemptions for low wage taxpayers would go a long way.
None of these are incompatible with lower top tax rates.
We have seen considerable evidence of tax return preparers who do not understand the tax laws or who intentionally misapply them (in the home office deduction, etc.). It is imperative that those who assist others in preparing tax returns demonstrate minimal competency in the tax law as demonstrated by the qualifying exam.
The “qualifying exam” is open book — really more of a literacy test. The IRS can make preparers show they can read. They can’t make them competent. When you consider the Big 4 tax shelter scandals, and the hopeless complexity of the tax law, it’s funny to say that the problem is really “people who do not understand the tax laws.”
But not hotirsagent.com? I guess there really are stupid easy ways to earn internet money. A Kansan found one, but then got in trouble by not paying his taxes. KFDI.com reports:
Dallen Harris, 39, pleaded guilty to one count of tax evasion. He reported a taxable income of a little more than $164,000 in 2010, when it was actually more than $1 million.
Harris’ income came from Internet domain names, according to court ecords from a related civil forfeiture case in federal court. The government is seeking to forfeit Harris’ houses, cars and bank accounts in that case. The domain names included celebritysextape.tv, adultkingdom.net, Porntesters.com, hardcorefilms.tv, celebritynakedpic.com and sextape.com.
No, I won’t link to any of those. It doesn’t sound like they need any help generating traffic anyway.
In short, I propose putting a 50% surtax — or maybe it should be 75%, I’m open to discussion — on the post-government earnings of government officials. So if you work at a cabinet level job and make $196,700 a year, and you leave for a job that pays a million a year, you’ll pay 50% of the difference — just over $400,000 — to the Treasury right off the top. So as not to be greedy, we’ll limit it to your first five years of post-government earnings; after that, you’ll just pay whatever standard income tax applies.
Plus make them wear clown clothes to work. (Via the TaxProf)
About 3.5 million Californians have migrated to other states over the past two decades. Almost anywhere they chose to go would allow them to enjoy greater returns on their labor. Is it really surprising that athletes like Mr. Mickelson might be keeping an eye on the leaderboard?
It would be surprising if they didn’t.
Kyle Pomerleau and William McBride: EITC Awareness Day (Tax Policy Blog)
Research has shown that the EITC is associated with higher workforce participation among certain populations. However, Casey Mulligan’s research shows there is no free lunch here, since the EITC creates disincentives to work over the income range in which it phases out (roughly $20,000 to $50,000). And because the EITC is one of many overlapping anti-poverty programs, such as unemployment insurance, they all add up to huge disincentives to work among the poor.
And some Iowa politicians want to increase the Iowa EITC, making it a bigger poverty trap.
Recognize and acknowledge that the purpose of the federal income tax is to raise the money necessary for the administration of the government and government sponsored programs. It is not to be used to “redistribute income” or as a method for delivery of social welfare and other government benefits.
If that principal were vigorously applied to the tax law, the 1040 would fit on a postcard.
Climb in the Cavalcade! Worker’s Comp Insider hosts the latest Cavalcade of Risk roundup of insurance and risk-management posts, including Insureblog on the Curly Bulb Menace.
Jason Dinesen, Taxpayer Identity Theft, Part 11. In which the IRS ignores the change-of-address filing and mails a long-delayed refund to the wrong address.
What is his real rate? He will be paying a real federal rate, considering the itemized deduction phase-out, of 40.788%. His California rate will be an insane 13.3%. That will be deductible on his federal return, so the net combined income tax rate is about 48.662%,
But there’s more! Golfers are independent contractors, so they have to pay self-employment taxes. That rate is 3.8% in 2013, but 1.45% can be deducted on the federal return, so the net is about 3.19%. That gets his rate up to about 51.856%, or so.
In 2011, Lefty’s combined rate worked out to about 42.589%. That means his effective rate increased by about 9.266%. But that understates it. Think of Phil Mickelson as a business. His after-tax profit on a given income level has taken a real hit. Where after-tax income was about 57.411 cents out of every dollar in 2011, now its about 48.144%. That means his after-tax income has fallen by about 16% – nearly 1/6. Don’t think it matters? Try it sometime with your own after-tax income.
A 16% cut in margins would be a worry in any business. Mr. Mickelson is in a business where he can boost his margins by nearly 8% with a moving van. He’d be an odd businessman indeed if he didn’t give the idea serious consideration. And he will have plenty of company.
My concern is more for the EA [Enrolled Agent] name itself. I really fear that EAs are getting pushed further and further to the margins. We’ve always been on the margins, so how much further can we be pushed?
The problem is, there’s no good solution for how to enhance and protect the EA name, because there’s so few of us.
So again, where do EAs fit in? There’s just not a good answer or good solution.
I thought the RTRP designation was a mortal threat to the EA brand. Enrolled Agents have to pass a much harder IRS-administered test and more rigorous CPE than the RTRPs would face. Yet few people know what an enrolled agent is. If IRS wants to improve the caliber of tax preparers, they should give more publicity to the existing EA designation and make it more desirable. But that doesn’t help them expand their power over all preparers.
Robert D. Flach proposes a voluntary Registered Tax Return Preparer designation. I have no problem with a voluntary branding, and if Robert and other unenrolled preparers can make a brand of it, more power to them. I don’t see it happening, though, as it would do nothing for the big franchise preparation companies, who already have their own brands.
Republicans want to use revenues from base-broadening solely to reduce rates. Democrats want to use revenues from base-broadening solely to raise revenue. (The quote in the title of this post is from senior Obama advisor David Plouffe.)
We will never be able to begin the tax reform process in earnest until Republicans and Democrats settle their differences on the total amount of revenue the federal government can collect. It was actually Bowles and Simpson who outlined the process: First, you settle on a number for the amount of revenue you want to raise (if any). In their case the amount of revenue was $800 billion over 10 years (using a different baseline). Second, you broaden the base as much as possible. The money from base-broadening is first devoted to deficit reduction and whatever is left over is used for rate reduction.
That requires agreement on how much we can afford to spend. Until that answer changes from “MOAR!” it won’t be enough.
Iowa’s legislators get $800 million to play with for Christmas. Naturally, many of them think they can spend it better than those of us who gave it to them, based on a Des Moines Register report today quoting a bunch of prominent state politicians.
For example, Joe Bolkcom, Iowa City Democrat and Chair of the Senate Ways and Means Committee:
“We have a silent crisis in the number of kids and the number of our children living in poverty in our state,” Bolkcom said. “One of my top priorities will be addressing that crisis as a matter of tax policy. We need to use some of this tax surplus to make a substantial boost in the earned income tax credit.”
Bolkcom also favors appropriating $20 million as a state match to help secure an $87 million Federal Railroad Administration grant to establish passenger train service between the Quad Cities and Iowa City, a move he says would create hundreds of jobs.
That’s two awful ideas. As we have pointed out, increasing Iowa’s earned income credit would impose a brutal combined effective income tax rate of over 50% on low income workers — rewarding dependency and punishing taxpayers for emerging from poverty.
And for the passenger rail plan — that’s ten kinds of crazy. With the Megabus making three daily runs between Chicago and Iowa City for no more than $39.50 — and for as little as $1.50 — it’s hard to imagine a less urgent priority than pouring $20 million into a $310 million federal-state boondoggle to establish rail service that will lose millions annually selling $42 tickets for slower service.
Unfortunately, none of the politicians quoted by the Register proposes using the surplus to overhaul Iowa’s dysfunctional and business-hostile income tax. There is a better way: Lower the rates, simplify the system, repeal the job-killing corporation income tax, and eliminate the corporate welfare deductions and tax credits. In other words, The Quick and Dirty Iowa Tax Reform Plan.
The expectant crowd gathers in Ames, Iowa for the final 2012 session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School.
350 practitioners are signed up, and the coffee’s on!
Fiscal Cliff Notes
Because writing big checks in April is always popular. A few commenters have said that the Treasury Secretary can prevent Fiscal Cliff disaster by just setting the withholding tables to pretend that the tax law isn’t changing January 1. Marie Sapirie of Tax Notes says it’s not that simple ($link)
Commentators have suggested that Geithner may even be able to prospectively implement the administration’s policy of raising taxes on taxpayers making more than $250,000 per year by increasing withholding only on income above that level. That is almost certainly wishful thinking. Whatever the “most appropriate” amount of withholding to reflect the tax rates in section 1 may be, section 3402(a) does not give the Treasury secretary the power to create withholding tables that have no basis in current or recently expired law.
Of course Secretary Geither hasn’t always been big on following the tax law.
Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of… it’s own corporate bonds
Just kidding.
I don’t really know how to say this, but sorry, I lied a little bit. I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal. Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey. Instead this is, of course, a description of how the United States Social Security “trust fund” works.
Like so many things: private sector does it, it’s scandal and ruin. Government does it, it’s Tuesday.
Martin Sullivan, Capital Gains Frustration for Tax Reformers (Tax.com). His “reformers” want to increase the problems inherent in capital gains taxes by increasing them. May their frustrations endure.
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate. That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit. For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.
An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.
Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.
That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax. Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:
Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.
That’s why it’s hard to get rid of these things. Politicians point to the jobs they “create” by bribing companies to do what they would probably do anyway. They don’t have to call press conferences for all of the anonymous businesses that never come to Iowa, or that never get started to begin with, because of Iowa’s expensive and byzantine tax law.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.
Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.
Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.
If it’s worth backing up, it’s worth backing up twice.
Russ Fox, Ref Fouls Out. A group of rec-league refs set up an identity theft-based tax fraud scheme. It worked great, until suddenly it didn’t. Russ wisely points out:
All told, the four individuals involved in the scheme must make restitution totaling $200,000. As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.
These guys ran their scheme for 12 years before it blew up. The longer you do something like this, the closer your chance of getting caught approaches 100%.
There are four sessions of the school left — Muscatine, Red Oak, Sheldon and Ames. Sign up today!
Whither Wandry? The IRS made clear that the withdrawal of their appeal of the Wandry case does not mean they are going along with it.
The case involved a “defined value” formula that prevented the IRS from increasing the value of intra-family gifts for gift tax purposes. The formula said that if the IRS changed the value of the gift, the recipients would have to give part of the gift back to the donor so that the value of the remaining gift would be the amount reported on the gift tax return.
Soon-to-be-former-IRS Commissioner Douglas Shulman
Little disasters every day, courtesy Doug Shulman’s IRS. We shouldn’t be surprised that the federal government is once again making a hash out of disaster relief. They can’t even handle one-victim disasters at the IRS. Jason Dinesen has posted two more installments (9, 10) of the infuriating saga of a client’s struggle with identity theft after her husband died. From the latest installment:
I then proceeded to point out that it’s been 33 months since Brian died, 18 months since we filed the tax return, and 12+ months since we sent the original Form 14039 to the IRS. Again, can’t they use common sense and wrap this up?
The answer was, no.
Contrast that with the prompt issuance of a tax refund to the identity thief over a year ago.
Jason’s client ID theft problem was almost certainly the result of a glaring problem that has been known in the agency for years involving the use of social security numbers of recently-dead taxpayers published by the government by identity thieves. The IRS is only now taking steps to fight it, while billions of tax dollars continue to go out to the thieves annually. Meanwhile, they’ve found time to institute an expensive and futile preparer regulation scheme and power-grab. They have their priorities, after all.
One thing voters of all parties can look forward to this week is the Friday expiration of the term of Doug Shulman, The Worst IRS Commissioner Ever.
More than half of the balance due notices that are sent out by the Internal Revenue Service and state tax agencies are incorrect. If you receive such a notice send it to your tax professional ASAP.
I would love to see an accounting of how much revenue the government steals from taxpayers who write checks because they are afraid of the revenue agencies, or because the amounts are known to be wrong, but the taxpayer doesn’t think they are worth the fight.
Richman, Dumdum man. The story you are about to read is true. Then names have been left the same to protect the humor. CBSlocal from Chicago reports:
He wasn’t too smart about paying federal income taxes, and now Rimando Dumdum man is going to prison.
WBBM’s Bernie Tafoya reports the 44-year-old Morton Grove tax preparer, who came to the U.S. from the Philippines in 1989, owned a company called “Richman Tax Solutions.”
Apparently it’s easier for a camel to pass through the eye of a needle than for a Richman to get a tax return right. But all things are possible:
According to his plea agreement, he helped clients illegally trim an average of $1,400 from their tax bills. In all, between his clients’ returns, and his own tax fraud, Dumdum cheated the federal government out of $232,000 in all.
However, prosecutors said he likely helped clients evade $3.5 million in taxes, citing an audit showing his company falsified 99 percent of the tax returns it filed.
The way he looks out for the 99%, he should be a favorite of the Occupy people. I wonder if the 1% of his customers who didn’t get phony returns feels cheated somehow.
Des Moines has an odd “Beggars’ night” tradition of having “trick-or-treats” on the night before Halloween. That means it’s not too early for a spooky story.
Once upon a time, a man ran a payroll service in Ohio. Employers sent their money to the man thinking he was paying their payroll taxes. The man instead kept the money. From ToledoBlade.com:
Robert Sacco, the former PaySource owner accused of bilking the IRS of $26.7 million, pleaded guilty to federal felony charges before his trial was scheduled to start Monday.
Sacco pleaded guilty to conspiracy to defraud the United States by impeding the Internal Revenue Service, money laundering, and tax evasion. “This is one of the highest amounts of employment tax fraud we’ve ever seen,” said Craig Casserly, spokesman for IRS office in Columbus.
Sacco defrauded the IRS by withholding money from employees’ paychecks for taxes, then keeping the money instead of paying it to the IRS, according to Carter Stewart, U.S. Attorney for the Southern District of Ohio.
Why didn’t the employers use EFTPS, the Electronic Federal Tax Payment System, to monitor their payments on line? The man made sure they couldn’t:
Dayton-based PaySource employed 40 people. It was a co-employment company — meaning that it hired a client company’s employees, thus becoming their employer of record for tax and insurance purposes.
So the payments weren’t made under the real employers’ tax numbers, and there was no way for them to monitor it using EFTPS.
The moral? There are legitimate co-employment companies that have plenty of satisfied customers. The problem is that the format is also handy for thieves because it makes monitoring very difficult. If you are considering outsourcing to a co-employment payroll provider, it’s extremely important to do careful due diligence, and to re-do it regularly. Without EFTPS, you can’t directly verify their performance, so you have to use other ways to assure compliance. If your payroll provider doesn’t remit your taxes, the IRS will still expect you to pay them.
Sometimes a “visionary” is just seeing things. The Department of Justice yesterday announced that a “visionary” tax advisor has been enjoined from giving any more tax advice. From the Department of Justice press release:
The civil injunction order against Scott A. Waage, of San Diego, was signed by Judge William Q. Hayes of the U.S. District Court for the Southern District of California. Waage agreed to the injunction without admitting the allegations against him.
The government complaint in the case alleged that Waage, a self-proclaimed “visionary tax attorney,” promoted tax fraud schemes that helped customers evade income taxes through a concept he called “Strategic Integrated Planning.” According to the complaint, one of Waage’s schemes involved creating and using sham consulting corporations (purportedly headquartered in customers’ homes) that did not perform consulting services. Customers funneled funds to the sham companies to pay for and improperly deduct the customers’ personal expenses, the complaint alleged.
The injunction order requires Waage to give the government a list of all clients who used his tax planning or tax preparation services since 2001. Waage also must send his former clients notice of the injunction order.
That’s the problem when you use a “visionary” tax preparer who is willing to take “aggressive” positions that your everyday namby-pamby practitioner like me won’t touch. When the preparer gets in trouble because he confuses “aggressive” with “absurd,” his clients can expect the IRS to take a close look at everyone on the client list.
The special income averaging for farm and fishing income is available regardless of the economic status of the taxpayer. In the meantime, the taxpayer in Francis v. Comr., T.C. Summ. Op. 2012-7, a member of the Armed Forces not counted among the ranks of the wealthy, is stuck with a disappointing tax outcome caused by circumstances beyond his control. Why the better tax treatment for farming and fishing income and not for military back pay? Something about this nation’s tax priorities isn’t right, but those who pay attention have known that for a long time.
Should you issue a 1099-C if you have a client or customer that doesn’t pay you what they owe you? Bruce the Missouri Tax Guy and Jason Dinesen both address that today. Both posts are worth reading. Jason explains:
So unless your business is in the business of lending money, you aren’t required to issue a 1099-C to a non-paying client.
But are you prohibited from doing so? It doesn’t appear so, at least not under tax law.
What does issuing a 1099-C do? In a couple of years the IRS computers will look for debt forgiveness income on your deadbeat’s tax return and send them a notice when they don’t pay taxes on the services they received from you without paying. Peter Pappas, a Florida tax attorney blogger, says “I have seen many cases where a disgruntled ex-partner or creditor rifled off an erroneous 1099-C just to get the taxpayer audited by the IRS.”
So you get a measure of vengeance. Is it worth it? I think Jason is wise when he says:
Personally, I wouldn’t issue a 1099-C to a deadbeat client. I realize there may be some satisfaction in threatening a deadbeat and seeing them sweat. But I think it would cause more harm than good to go down the 1099-C route.
I agree. Better to bill timely before they owe you too much, and walk away if they don’t pay. Take care of your good customers and don’t waste your time on the deadbeats.
It’s August 15. Aren’t you glad we don’t have to re-extend tax returns any more? A few short years ago, you could only “automatically” extend a 1040 until August 15. You had to file a second extension request to get another 2 months extension, and you had to have a “good reason” for it. If you didn’t give a reason, they would deny your request, so your return would be late.
Every tax pro learned to include a boilerplate statement on the second extension form, something meaningless like “Additional time is needed to gather the information necessary to prepare a complete and accurate return.” It was really a waste of time but a potential trap. Fortunately, the automatic extension is now six months, so August 15 is just another summer day at the office.
It’s Wednesday, so that means Robert D. Flach of New Jersey Pennsylvania isbuzzing.
So tell me about your last accounting job. From Columbia, S.C., wspa.com reports:
The state Hospitality Association’s former accountant was sentenced Tuesday for stealing $500,000 from her employer.
Rachel Duncan pleaded guilty to federal tax evasion and wire fraud charges in April.
The 42-year-old was sentenced to 30-months behind bars and three years on probation. She was also ordered to repay more than $350,000.
OK, what were your other achievements on the job?
Her plea came 10 weeks after chief executive officer Tom Sponseller was reported missing.
He was found 10 days later in a storage room. He had committed suicide.
…
Prosecutors said they found sexually-oriented photos of Duncan on Tom Sponseller’s computer. But prosecutors said there is no indication he received any of the $480,000.
The last Iowa film tax credit trial went to the jury Friday, so we may see a verdict as soon as today. Chad Witter, a Bettendorf accountant who brokered transferable film credits from the filmmakers to those seeking a discount on their Iowa taxes, is charged with Fraudulent Practice, Theft and Ongoing Criminal Conduct arising out of the disastrous Iowa film tax credit program. The Quad City Times reports:
Defense attorney Richard McConville conceded that “some people did cheat” the state, but Witter was not one of them. He contended the charges against Witter were based on “guilt by association” with people previously convicted of wrongdoing by prosecutors who were under pressure to make state elected officials and policy-makers look good in the wake of the debacle.
…
However, prosecutor Robert Sand of the Iowa Attorney General’s Office said Witter played a key role in gaining the trust of former Iowa film office manager Tom Wheeler and reducing state scrutiny of invoices that included charges of $225 for a push broom, $900 for a ladder and other claims in connection with several projects where the defendant tried to minimize his involvement to appear to be “the low man on the totem pole” in schemes to defraud the state.
The stakes are very high for Mr. Witter. Two of his filmmaker clients, Wendy Weiner-Runge and Dennis Brouse, have received 10-year sentences on charges of looting the film program. The offenses he is charged with could carry an even longer sentence if he is found guilty.
While a jury will decide Mr. Witter’s guilt or innocence, those who bear the heaviest responsibility for the looting of taxpayer dollars have dodged accountability. The Iowa legislators who approved the ridiculous subsidy for Hollywood with no built-in controls by a 143-3 margin will never be forced to answer for their negligence. The Governor and his economic development director who turned the keys to the state treasury to a man whose training in managing a state agency consisted of a stint as a Walgreens photo desk clerk will never be called to explain why they left the safe open. And the media cheerleaders who were so caught up in the excitement of having starlets in town that they missed the story until the program exploded in scandal and disgrace will never have to sit before a jury of their subscribers to explain why they failed to pay attention.
Roberts concludes the mandate functions more like a tax than the “penalty” for not buying insurance the Patient Protection and Affordable Care Act labels it as, because in most cases “the amount due will be far less than the price of insurance,’’ and the IRS is “not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution,’’ to enforce it.
Because the penalty is so low as to be ineffective, it invites actuarial disaster. Because insurers can’t reject you for a pre-exisiting condition, it will be cheaper to wait until you are sick to get “insurance.”
Whether by design or inadvertence, Congress created rules that require a person to pay more Medicare surtaxes solely because he or she is married. Congress allows two cohabitating singles to each have up to $200,000 in wages without exceeding the threshold for the 0.9 percent tax. Congress penalizes them if they marry. Wages above $250,000 exposes them to the 0.9 percent tax. Similarly, two cohabitating singles each can have MAGI of as much as $200,000 without exceeding the threshold for the 3.8 percent tax. If they marry, MAGI above $250,000 exposes them to the 3.8 percent tax. Their reward for a walk down the aisle is that they could become liable for both surtaxes.
The question answers itself. “So here’s my issue. What if our politicians are giving us a health care system that is as screwed up as our tax system? I’m just asking.” (Christopher Bergin).
Here’s the problem: if you currently employ 49 people, you’re not going to be hiring that 50th guy, because that would cancel your exemption. Which means your current workforce is either going to have to work harder (to make up for that missing 50th employee), or you’re going to need to scale back even further.
The Eve of Destruction: “The Supreme Court once acknowledged that the ‘power to tax is the power to destroy.’ Let the destruction begin!” (David Windish)
But the Court rejected the White House’s main legal argument—that Congress has the authority under the Commerce Clause to require people to get insurance. It will be interesting to see how legal scholars read this in the coming weeks: Is the Court saying that tax policy is the only tool Congress has to enact certain social welfare programs? If so, it would put an already-stressed tax code under even greater pressure.
I get an Instapundit mention! No link, alas… (update: linked now, thanks Instapundit!)
Paul Neiffer:ObamaCare Survives The Supreme Court! “For now, the most immediate effect facing farmers is the imposition of the Medicare Surtax on earned income and unearned income starting January 1, 2013.”
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
