Taxable Talk

From the TaxProf Blog, a Washington Post story shows that the IRS spends 60% of its funds for a tuition reimbursement program on administrative expenses. That's 40% for tuition reimbursement. The IRS, of course, reminds us taxpayers that "Charities scams are high on 2005 dirty dozen tax list." Hmmm, maybe the IRS can add its own name to the list and we'll have a baker's dozen on the 2005 list.

Hat tip: TaxProf Blog

Dick Murphy, mayor of San Diego, announced that he is resigning effective July 15th. His resignation is a direct result of San Diego's abysmal financial condition, as I noted earlier.

Suppose you're in court testifying in a civil case. You're asked what your income is. You tell the truth (of course, you're under oath) that you make $200,000. No problem, right?

Unless your tax return says you made $14,885. And the IRS discovers your testimony. Even I could probably get a conviction for tax fraud (and I'm not an attorney). And, to make matters worse, you're a "juicy" target, a former politician.

So it goes for the former mayor of Azusa, a Los Angeles suburb. Stephen Alexander was convicted on Friday of tax fraud and faces up to three years in federal prison when he's sentenced in June. The story appears in the Los Angeles Times (one-time registration required).

Yet another headline that says it all. Apparently (and allegedly), the ex-voodoo chief failed to pay $1.7 million in taxes related to her practice from 1998-2003. I didn't realize that profession was so lucrative....

No, that's not my wish; rather, it's director Rob Reiner's. Today he announced a proposal to increase the normal maximum California tax bracket from 9.3% to 11% (anyone earning more than $1 million would pay an additional 1%). The new tax bracket would begin at $400,000 for individuals and $800,000 for couples. The money would be earmarked for mandatory preschools for every four-year old. A brief synopsis of the story can be found here (one-time registration required).

While pre-school, according to a Rand study, does increase the likelihood of a child being held back a grade, would decrease child abuse, and would increase high school graduates, this proposal would cause (1) small companies to have yet another reason to leave California; (2) more large companies would choose not to locate new operations in the state; and (3) more high-worth retirees would leave. I won't argue the benefits from pre-school. However, I know what the costs of the plan will be. It's likely that the voters will decide this in June 2006.

As reported by the Orange County Register in this story (free registration required), Orange County faces a potential $80 million deficit if a firefighters union sponsored proposal passes on next year's ballot.

Much of the problem has to do with local pensions, a problem that is plaguing the City of San Diego. Several articles have been written (here, here and here) about their pension problems, which threaten to drive the City of San Diego towards bankruptcy.

To say that government pensions are generous is an understatement. A friend of mine worked for 25 years in a neighboring county. She retired and now receives about 60% of her final salary, every year. Assume you work for 25 years in private industry. Will you receive a pension at 60% of your final salary? Will you receive health care while you're retired?

The only defense I can make for the pensions is that government workers do not make as much while working as people in private industry. But that's the only defense I can make. Meanwhile, county supervisors (and city councils) tend to sign pension agreements that later generations can't afford.

Forever.

That may not seem reasonable, but California has no statute of limitations on collections of tax-related debt. That means that 30 years from now you could receive a letter from the state saying, "You didn't file so pay us $25,000."

Indeed, during the recent amnesty, California sent several such letters, as detailed in this article. Do you know where your 1984 tax return is?

While the state has four years to challenge anything on the return (the IRS has three; these dates being from due date of the return or date of filing, whichever is later), the Franchise Tax Board is extremely aggressive. Too aggressive. The solution, unfortunately, is to keep everything forever. At least until the law changes.

The headline says it all.

From the Chicago Tribune, this story (one-time registration required) details the sordid details, which include:

- The strip clubs owner, Michael G. Wellek, had $12 million in cash (in bags) seized in 2003 from his clubs;

- The government says Wellek owes $11 million in taxes, penalties and interest (to be resolved in Tax Court later this year); and,

- Wellek's attorney has the line of the day, "its unfortunate if these gentlemen are in the circumstances of not having reported it on their income-tax return." Well, that's what tax fraud is: not reporting income you earned on your return.

The proposal that would have legalized Internet poker sites based in North Dakota was crushed in the North Dakota senate 44-3, as reported by the Grand Forks Herald. As Senator Carolyn Nelson noted, "There are at least three federal laws out there that make this legislation suspect." Additionally, the US Department of Justice sent North Dakota a letter informing them that the proposed legislation violated US law. Don't expect any state to pass pro-Internet gambling legislation in the near future.

Next up on the Internet gambling front is the WTO decision on the US appeal of Antigua's complaint regarding US anti-Internet gambling regulations. That decision is due out later this week.

Answer: When it's proposed by our Democratic led legislature.

As reported in various news stories (here, in the Los Angeles Times (one-time registration required)), Democrats are proposing to lower California's gasoline tax. (As you may remember, earlier this year the State floated the proposal to add a "per-mile" tax to increase gasoline tax revenues.) The actual package would:
(1) Decrease gasoline taxes by $0.11/gallon
(2) Increase sales taxes temporarily by 0.25%
(3) Increase gas tax over the next ten years by $0.04/gallon
(4) Decrease the sales tax if the Federal estate tax increase in 2010-2011 actually happens. (The California estate tax is tied to the Federal. Thus, an increase in the Federal estate tax will increase revenue to California.)

I haven't read the legislation (as you might imagine, I'm a bit busy this time of year); I'll look at it in a week or two. But frankly the Republican comments that this looks like a Rube Goldberesque scheme to increase taxes appear dead-on accurate.

There's a couple of cliches I can think of to describe Tony Serra, who pled guilty to tax fraud, again. First, history repeats itself. And second, if at first you don't succeed, try, try again.

Of course, Mr. Serra, who describes the government's action as "political" has not paid taxes since 1991. I'd describe the action as late in coming.

Hat tip: Roth & Company Tax Updates

Forbes Magazine's cover story is on tax fraud—specifically, the Son of Boss shelter-scheme. I'll post a link to the article when it hits the web (in about two weeks). Until then, a good rule of thumb: if it sounds too good to be true, it probably is.

The Franchise Tax Board arrested Jon Gunderson, the owner-operator of Outdoor Media Group, Inc., a California billboard company. Mr. Gunderson allegedly invented phony transactions to alleviate $53 million in tax he would have owed the state. Mr. Gunderson is being held on $5 million bail in Riverside.

Sometimes you just can't win. Indeed, for local attorney Albert M. Graham, he was faced with a dilemma. His bookkeeper embezzled money from him. And that bookkeeper was the one who aided in your keeping of income away from the prying eyes of the IRS. What do you do?

Mr. Graham called the police. The net result was nasty for all concerned: the bookkeeper was arrested, fired, and Mr. Graham recovered much of the money; Mr. Graham sued his accountant because he didn't detect the embezzlement; and the IRS went after Mr. Graham because he didn't report all of income. The Tax Court ruled that Mr. Graham is liable for fraud penalties for understating his tax liability.

Hat tip: Roth & Company's Tax Updates.