Colorado: Let’s Implement a 1207800% Marginal Tax Rate!

May 25th, 2023

Consider two taxpayers who enjoy gambling; both are single and residents of Colorado.  Both are amateur gamblers who earn $100,000 of wage income and rent.  Joe Unlucky broke dead even in his gambling, winning $299,000 (using the session method) and losing $299,000.  When he files his 2022 tax returns, he has a federal refund of $3,238 and a Colorado refund of $490.

Larry Lucky fared a little better: He had $301,000 of gambling winnings and $301,000 of gambling losses.  When he files his 2022 tax returns, he has the identical federal refund of $3,238.  However, he owes Colorado a whopping $11,632.  What caused Larry to have a ridiculous marginal tax rate of 606.1% on the additional $2,000 of gross winnings?

For 2022, Colorado implemented a $30,000 reduction in itemized deductions for taxpayers whose Adjusted Gross Income exceeds $400,000 and who itemize their deductions.  (The reduction is $60,000 if married filing jointly.)  Larry faced this; Joe didn’t.  Larry ends up with that 606.1% marginal tax rate on $2,000 of “winnings!”  Remember, Larry broke even so he really didn’t win anything.

I could have made this illustration even more ridiculous.  It truly is a hard cliff: If Joe had $300,000 of wins and losses he would have refunds of $3,238 from the IRS and $490 from Colorado; if Larry had $300,001 of wins and losses he would have the same federal refund of $3,238 but would owe Colorado $11,588.   That’s an insane marginal tax rate of 1,207,800% on the additional dollar of income!

Hard cliffs cause taxpayers to make decisions that are correct for themselves but bad for the economy.  Consider if Larry and Joe had their own businesses, each earning around $400,000 a year.  Assume both have net income of $399,000 right at year-end and have the opportunity for an additional $2,000 of net income.  There is no circumstance where it makes sense for them–if they reside in Colorado–to obtain that income in the year; they would be facing a tax rate of more than 100%.

Proposals like what passed in Colorado sound good, feel good (let’s tax the rich), but end up with perverse economic results.  Hopefully the Colorado legislature will fix this for the future.

Posted in Colorado, Gambling | No Comments »

Why Were California Returns Extended Again from May to October? (A Theory)

May 8th, 2023

Back in January, severe winter storms impacted California.  Much of the state was declared a federal disaster area; these declarations are always county-by-county.  As of today, only two counties in California (both in the northeastern corner of the state) are not federal disaster zones.  The IRS rightly extended tax filing deadlines from April 18th to May 15th.

But on February 24th the IRS announced that they were again extending California deadlines from May to October.  Why was this done?  The announcement doesn’t specify a reason, and almost all other disaster zones didn’t get this treatment.  For example, victims of the horrific tornadoes in Mississippi are looking at a July 31st deadline.  Indeed, Broward County (Florida) was just declared a federal disaster zone due to massive flooding in April; their tax deadline was extended only to August 15th.  I have a theory, and it has nothing to do with taxes and everything to do with politics.

President Biden recently formally announced he’s running for reelection.  (It’s been clear for a while he’s running.)  One of his biggest rivals in the Democratic Party is California Governor Gavin Newsom.  Governor Newsom recently toured other states and gave the impression (at least, to me) that he’s considering running for President.  Meanwhile, California faces a budget crisis–there’s at least a $22.5 billion deficit.  And that figure likely understates the problem: the tech industry is not doing well, and that (a) drives personal income tax collections in California (the top 1% of taxpayers pay about half the state’s personal income tax, and many of that 1% are technology industry executives) and (b) personal income tax collections make up about two-thirds of California tax collections.

Suppose you were running for reelection and you wanted to make sure a rival couldn’t run against you.  A budget crisis right at the time the rival would be announcing his candidacy would sure hurt him.  California was forced in January to extend its own deadlines for tax filing to May (state law mandates conformity to federal disaster extensions).  Delaying payments five more months would cause problems to California’s finances–and given the current state of the tech industry might kneecap a rival from running.  (When the IRS extended the deadline to October, California did conform.)  All good political reasons for delaying the deadline another five months.  Of course, the IRS is supposed to be an apolitical organization; however, one thing I’ve learned from the Lois Lerner scandal is that most political appointees within the IRS absolutely, positively look at the political spin on almost everything they do.

Now, I have no proof of what I’ve written.  It’s a theory (some might even call it a conspiracy theory).  It does, though, conform to the facts of the situation and there’s no evidence that I can find to refute my theory.  I hope I’m wrong about it, but like investigators looking at a troubling situation I suspect I’m correct.

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Posted in California, IRS | No Comments »

Why You Use Certified Mail When Mailing Items to Tax Agencies

April 26th, 2023

My mother passed away last year (after a long and fruitful life).  I filed her final tax returns–and money was due to both the IRS and California.  I could not use IRS Direct Pay, nor could I have the funds debited from my bank account; thus, I mailed checks (and vouchers) to the tax agencies.  I sent these on Monday, April 17th using certified mail.

Today, Thursday, April 26th, the IRS payment was received (it has not cleared my bank account yet, but should in the next day or so).  Yes, it took nine days to be received.  Here’s the tracking for it:

As to why it sat around for four days in Cincinnati, you’ve got me.  No matter, because the payment deadline is a postmark deadline I’m fine and my mother’s tax to the IRS for her final return was timely paid.

Meanwhile, Sacramento is a lot closer than Cincinnati; you’d expect the payment to California to have already been processed.  Well, no:

The payment’s been somewhere in Sacramento since April 19th and is still somewhere other than with the Franchise Tax Board (FTB), California’s income tax agency.  Again, I have no answers for the postal service’s ineptitude but sooner or later (perhaps that should be later or later) the payment will make it to the FTB.  Because I mailed it certified mail–and have that proof–even if the payment is lost I’ll be fine.

Each of these envelopes cost $4.78 (total) to mail; that’s $4.15 more than first class mail.  The late payment penalty and interest would be in the hundreds of dollars for each of these payments.  If I had not mailed these certified mail, I could be looking at those penalties. (Yes, the tax agencies are supposed to look at postmarks but I’ve received plenty of mail without postmarks.)

There’s one other issue: The IRS (and other tax agencies) need to lengthen the time period for responding to notices.  These mail delays are typical–and the IRS needs to build in current realities to mailed responses to notices.

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Posted in California, IRS | Comments Closed

Bozo Tax Tip #1: Everyone Gets the Employee Retention Credit, Right?

April 14th, 2023

“Russ,” a client began, “Don’t I qualify for that Employee Retention Credit (ERC) that I keep hearing about?”  I told him he didn’t–his business grew during the Pandemic and he didn’t meet the requirements.  Yes, it’s not free money for everyone–you had to qualify:

Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:

All my client’s business did was grow during the pandemic.  Sure, he retained his employees but he didn’t meet the basic standards.  Indeed, the IRS highlighted this in their “Dirty Dozen” of tax schemes.  As the IRS noted,

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

Yes, not everyone qualifies.  And some of these ERC mills will take your money–lots of it–up front and keep it if you don’t qualify!  As usual, if it sounds too good to be true it probably is.

That does it for the 2023 Tax Season Bozo Tax Tips.  Please, don’t do them.

I’ll be back at the end of April with an update on the first part of the 2023 Tax Season.

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Posted in IRS | Comments Closed

Bozo Tax Tip #2: Cash Isn’t Taxable

April 13th, 2023

I haven’t run this Bozo Tax Tip in a few years, but it reared its head again just a couple of weeks ago (as you read this). A new client came into my office for the preparation of his tax return. Everything went smoothly, and an hour or so later his returns were complete and electronically filed, he had his copies of the returns, and the Bozo festivities (unknowingly to me) were about to begin.

He asked me if I’d take cash. “Sure,” I replied.

The client then handed me an amount exactly 10% less than the amount of the invoice. “This way you don’t have to report it—after all, it’s cash so there won’t be any record.”

“Cash income is just as taxable as any other source,” I replied. “I’m ethical, and I report all my income.”

“Oh, come on,” he replied. “When I was self-employed everyone did that.” Thankfully, my client is currently not self-employed.

“Well, that’s a good way to get in trouble. That’s called tax evasion. I don’t need to get myself involved in that, and neither does anyone else today.” I pointed out to my client the number of business owners who have done what he thought was ‘normal’ who are now residing in ClubFed. It’s amazing how many owners of Gentlemen’s Clubs (which are definitely cash businesses) get in trouble, thinking that they only have to report some of the income.

My client, after some prodding, came up with the other ten percent of the fees, and he ended up (hopefully) a little wiser. You needn’t worry about this: Just report all of your income on your tax return. But if you want to live on the Bozo side of life, skip reporting the cash…until one day you find out that really was a Bozo move.

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Posted in Tax Preparation | Comments Closed

Bozo Tax Tip #3: We Don’t Need No Stinkin’ Basis

April 12th, 2023

If there’s one issue in tax that tax professionals have trouble explaining to clients it’s basis. Your basis in an entity is, generally, the total of your investment in an entity plus income it generated less any distributions from it. If you’re an investor in a business, you can only take losses up to the amount of your basis. Sounds simple, right?

So let’s say you invest in an S-Corp, “Losing Money, Inc.” Unfortunately, it’s name matches what’s happened year after year. You invested $10,000 years ago, and each year your share of the loss has been $3,000. It’s year four of your ownership, and you get the K-1 showing the (as usual) $3,000 loss. Your tax professional tells you, “I’m sorry, but you’re only getting $1,000 of the $3,000 loss–you used up your basis.”

The IRS has been battling this issue for a number of years. Owners of businesses are supposed to keep basis statements. Most reputable tax professionals prepare basis statements for the partnerships and S-Corporations that they prepare returns for. It remains, though, the responsibility of the owner to keep track of the basis.  The IRS wised up a couple of years ago and added Form 7203 (S-Corporation Basis Statement).   As to who must file the form:

Who Must File

Form 7203 is filed by S corporation shareholders who:

  • Are claiming a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations),
  • Received a non-dividend distribution from an S corporation,
  • Disposed of stock in an S corporation (whether or not gain is recognized), or
  • Received a loan repayment from an S corporation.

That’s pretty clear, right?  And that’s most S-Corporation owners.

We have a new client this year, and she sold the assets of her business the prior year.  She’s taking funds out of the business (it had a small loss), so there was a distribution.  The client’s long-time tax professional (he prepares the S-Corporation returns) told me that Form 7203 wasn’t required.  I noted it is (there’s both a loss and a $150,000 non-dividend distribution).  That’s two of the four reasons you are required to file the form.  We’re still waiting on the basis information (as I write this), and there’s time for her individual return to be timely filed.  However, until I obtain basis information that return is not going to be filed.

Of course, some individuals may simply ignore attaching the basis statement and play ‘audit roulette.’ That’s something else I can never advise. But if you want to enjoy the Bozo side of life, just keep ignoring your basis and take your loss year after year after year.

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Posted in S Corporation | Comments Closed

Bozo Tax Tip #4: Procrastinate!

April 11th, 2023

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2023, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t, while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download the extension form and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until May 18th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: The interest is taxable.

NOTE: If you reside in a federally declared disaster zone (for example, most of California), you have an automatic extension of time to file and pay; most Californians have until October 16th.

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Posted in California, Tax Preparation | Comments Closed

Bozo Tax Tip #5: Publicize Your Tax Crimes on Social Media!

April 10th, 2023

Social media is really, really big these days. You can follow me on Twitter. I may even update my Facebook page one of these days. Of course, I’m not a tax criminal, and my posts hopefully add knowledge for others.

Of course, where you and I won’t go the Bozo contingent is quite happy to do so. Take, for instance, Rashia Wilson. Ms. Wilson posted a wonderful picture on her Facebook page:

Rashia Wilson (Image Credit: Tampa Police Department)

In the same post, she bragged:

“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”

She’s doing 21 years at ClubFed. Oops…

A helpful hint to the Bozo tax community: Law enforcement does read social media. Indeed, the IRS will do a search of you on the Internet prior to a field examination (audit). So if you decide to go on the dark side of life, don’t brag about it online. A better course would be not to go on that dark side to begin with, but that rarely occurs to the Bozo community.

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Posted in Taxable Talk | Comments Closed

Bozo Tax Tip #6: The $0.63 Solution

April 7th, 2023

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 18th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $4.15 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About fourteen years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $4.15! And you can go all out and spend $3.35 and get a return receipt, too (though you can now track certified mail online). For another $2.10 you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

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Posted in Tax Preparation | Comments Closed

Bozo Tax Tip #7: Withhold, but Don’t Remit, Your Employment Taxes!

April 6th, 2023

This Bozo Tax Tip—and do remember, these are things you really, really, really shouldn’t try—is aimed at the business owner who is having troubles. Business owners, unlike the federal government, can’t just print money. So let’s assume our hypothetical business owner has payroll tomorrow but doesn’t have the money for everything. What should he do?

Well, one strategy is to not remit the payroll taxes. Sure, they’re “trust fund” taxes but the government can print money and I can’t, so they’ll just let it slip by. And my state government won’t care either, right?

The above strategy is likely one of two quick and easy ways to get on the road to ClubFed. The IRS doesn’t like it when trust fund taxes don’t make it to the government. The penalties are substantial. The liability goes to the owners (and check signers) of the business. IRS Criminal Investigation will investigate this. Don’t do this!

One of my clients recently was interviewed about such a case. He was paid, but apparently the IRS wasn’t. It’s not hard for the IRS to find out about this: After all, every employee is going to file a tax return claiming withholding but the IRS won’t find it. That’s exactly what happened in this case. I suspect that very soon two nice looking individuals (accountants with badges and guns; now that’s a scary thought) will be knocking on a door and saying, “You have the right to remain silent….”

Business troubles aren’t fun. However, if you don’t pay the IRS your employment taxes you will find your troubles multiplying.

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Posted in Payroll Taxes | Comments Closed

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