Taxable Talk

Lurching its' way through the Legislature is SB757, introduced by Christine Kehoe (D-San Diego). The bill has an innocuous title, "The Oil Conservation, Efficiency, and Alternative Fuels Act." It is an efficient bill—if passed, this analysis indicates that 80,000 jobs would leave California. Luckily, the Governator is likely to veto this legislation.

As the analysis (an article in the San Jose Business Journal) notes, just a few years ago a similar piece of legislation passed the Legislature. The one difference between the two bills is that the prior bill required a study. Both want a 15% reduction in fuel consumption. The study showed that any of the following could cause such a reduction:

- A $0.50/gallon increase in the gasoline tax
- Pay at the pump auto insurance, at $0.48/gallon
- A $0.02/mile driven tax
- A $3500/purchase tax on SUVs, mini-vans, and trucks

The bill is about to reach the Senate floor. If you're a Californian, tell your State Senator how you feel about the bill. Indeed, a look at the analysis provided by the Office of Senate Floor Analysis, including the list of supporting organizations (8), and the list of organizations in opposition (22), show that the usual suspects (Sierra Club, etc.) support the bill while business, agricultural, and taxpayer groups are against the bill.

In the June (2005) issue of the Journal of Accountancy, Eva Lang wrote an article entitled "Would You, Could You, Should You Blog?" The article gives good background if you're considering starting a blog. Unfortunately, Ms. Lang gets my credential wrong (I'm an EA, not a CPA) but that's the only blemish in an otherwise excellent article.

According to a report in the Tax Analyst, the IRS will close some taxpayer assistance offices. The Wall Street Journal reported that 70 offices will be closed in order to handle a 1% drop in funding for taxpayer assistance. Unfortunately, that will drive more taxpayers to call the IRS where there is a 50% chance you will get a correct answer to your question.

In the same article in the Tax Analysts, IRS Commissioner Mark Everson notes that he'd like to see any firm that sends tax work overseas be required to notify taxpayers of that fact. It is unclear, though, whether the IRS has the power to make such a disclosure regulation.

In eWeek Magazine, the Florida Department of Revenue's (FDOR) computer system, "SUNTAX," is highlighted. The system is modern, integrated, and allows FDOR agents to quickly access records across the system. By all accounts, a successful project that replaced several antiquated systems. You can find the article here. (Note: Article is on page 34 of the pdf file—the file is the entire May 23rd issue.)

On the other hand, there's California's Franchise Tax Board (FTB). Now, some of the systems of the FTB are integrated; however, many are not. As I previously wrote in "Bad Paperwork from the FTB", I received a notice requiring my company to enroll in California's electronic payment system because estimated tax payments from my company have exceeded $20,000 or total tax liability exceeded $80,000. There is only one problem: Neither occurred.

So I telephoned the EPS office. They directed me to the payments office. When I finally spoke to someone who could access the cause of the problem, it appears that someone made a tax deposit into "my account" of over $200,000! When I explained that it wasn't me, they promised to get back to me.

Yesterday, I heard back from EPS. They agree that I probably didn't make the deposit and that my company need not enroll in EPS. ($200,000 of taxes is quite a bit more than what my company pays in annual California taxes.) But they couldn't figure out who made the deposit.

The good news is that the two departments within FTB talk to each other. The bad news is that they don't have access to all the records that they should.

According to published reports, several Senators plan on introducing legislation to repeal the AMT (Alternative Minimum Tax). While every tax preparer I know would jump for joy if this happens, the chances are about the same as it snowing tomorrow here in Irvine. The problem: Eliminating the AMT would cost the US Treasury about $600 Billion.

Oh, it could be made revenue neutral—just increase some other taxes. Oh yeah, that's really going to happen.

Before I say that it won't happen, I should point out that the bill does have bi-partisan support. Still, I think the snowballs win here.

The Treasury Department revised the new Circular 230 rules yesterday. The changes, detailed here, make some minor clarifications to the new rules. They also correct a problem that would have occurred with text-based emails (the requirement that the font size of the disclaimer be larger than the other text has been eliminated, along with the requirement for bold text).

While the changes are for the better, mothering doesn't work and I remain generally unhappy with the new rules.

Yesterday, the Tax Court decided Slojewski v. Commissioner. In this case, the respondent (Slojewski) and the IRS settled before a scheduled trial in Tax Court. A hearing to finalize the matter was scheduled a month later. All seems well.

Then Slojewski's counsel decides that the deal is no longer good, and petitions the court to have it overturned. Once you enter into a settlement, it takes extraordinary events to have it overturned. As the court stated, "[P]etitioner has not shown that there was a lack of formal consent, mistake, fraud, or some similar ground for vacating the stipulation of settlement, nor has he cited any ground or precedent that would support his motion to vacate our order and decision."

Moral: Once you settle, it's hard to get out.

For those of you in California, a warning. The Franchise Tax Board is having some computer issues, at least based on paperwork that my clients and I have recently received. One client recently received a two page bill from the FTB stating, on page 1, that they did not make certain required payments and owed around $1,500. They then listed, on page two, the total charges: over $80,000. When I called the FTB they couldn't figure out what was wrong (the $1,500 appears accurate, but why their computer is adding an additional $78,500 was a mystery).

Then I received a notice from the FTB requiring my company (Clayton Financial & Tax) to begin making electronic tax payments because estimated tax payments from my company have exceeded $20,000 or total tax liability exceeded $80,000. There's only one problem: neither happened. The FTB is investigating and promises to get back to me later this week. (At first glance, it appears someone else made a deposit to the FTB and used my corporation number.)

So what should you do when you get paperwork from the FTB (or the IRS) and it's wrong? First, let your tax preparer know! We have special phone numbers and usually deal with well trained staff at the tax agencies. My standard procedure is upon phone resolution to send a confirmation letter to the tax agency (using certified mail, return receipt requested). This puts into writing what we discussed on the phone.

But why spend the $4.24? Well, when it's a choice between $4.24 and $78,500.00, I know which number I'll choose.

Fail, fail again.

Yes, I know that's supposed to be "try, try again." But for this story, "fail, fail again" is so much more appropriate.

From the Baltimore Sun we have the story of John Baptist Kotmair, Jr. Back in the early 1980's, Mr. Kotmair served two years for (what else) income tax evasion. One would think he would learn his lesson.

He didn't.

The Justice Department accused Mr. Kotmair and his foundation, the Save-A-Patriot Fellowship, of selling tax fraud schemes. His home study program only costs $295! What a deal! Your first year of membership in the fellowship is only $700—get it now, it won't last at this price (or any price, if the DOJ gets an injunction).

Mr. Kotmair, who is 70, probably won't get a third chance to fail. Luckily for prosecutors, Mr. Kotmair's son is active in the organization and already has one conviction to his name.

On a serious note, the usual rule applies: If it sounds too good to be true, it usually is.

Here's some text you will be seeing if you get any emails from your EA or CPA (and will probably be in every tax article you read):

This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

As a professional tax preparer, I'm governed by Circular 230 [link is to the revised rules for Circular 230 that go into effect on June 15th and requires Adobe reader]. New rules, in Sections 10.35-10.37, govern what I must state whenever I send a client a "limited opinion." According to several attorneys lecturing at the SuperSeminar, an email to a client is considered a limited opinion. Under the new rules, the language (above, in bold) must be used. It must be in bold, and in a font larger than the other text (since I use, in general, text [non-html] email, neither bold nor a larger font is possible).

This is mothering taken to the extreme.

While the intent is good—the IRS naturally wants people to pay their taxes—this will end up like The Boy Who Cried Wolf. It will soon be ignored.

Now, for material opinions, a whole other standard applies. This applies (basically) to the Big 4 accounting firms and some law firms.

Anyway, now you know my feelings about this.

This past week I attended the CSEA's SuperSeminar in Las Vegas. Normally, continuing education seminars are dreadful events—dates on my calendar that I want to avoid.

This one was very different. I learned a whole bunch of new things (which is good) and met some great people. All-in-all, a wonderful use of my time.

I'll be posting quite a few items, including the next post which is about a "mothering" rule. Next time, though, I'll take my laptop so I can post some.

Maybe it's something in the water. But somehow we must look again to what is now apparently the hotbed of tax evasion: Cincinnati, Ohio. A federal jury in Cincinnati found "expert" tax preparer Walter Daulton guilty of assisting in the preparation of fraudulent income tax returns, according to this story on etrucker.com.

Mr. Daulton, who specialized in preparing tax returns for the trucking industry, apparently advised his clients to claim expenses for the mundane. Like putting a tarp of over a truck's trailer. (Now, the cost of the tarp is a valid business expense. However, you can't deduct the value of your time when you use the tarp.)

According to the US Attorney, the goal of Mr. Daulton was to make the deductions come to a desired result, no matter whether the deductions were actually incurred. Mr. Daulton faces up to three years in prison for each of 18 convictions.

A man in Cincinnati, OH came up with a great idea (or so he thought). He decided to sell income tax evasion kits. Somehow the IRS and the Department of Justice didn't think it was a great idea. Yeah, they're a bunch of sore losers.

The Department of Justice took the man, Dana Ewell, to civil court (he did avoid criminal court, so he won one battle). According to this story in the Cincinnati Enquirer, a permanent injunction has been entered into. So the world will have to do without the Liberty Pure Trust, the Liberty Action Pack, the Organic Sovereign Freeman Compendium and the Onshore, Offshore, International Investment Opportunity.

Orange County Firefighters won their first court battle over an initiative (assuming no court losses, it will be on the June 2006 ballot) that would distribute about $80 million in taxes to firefighters that currently go to the Orange County Sheriff and the Orange County District Attorney's office. According to this story in the Orange County Register (one-time registration required), the sheriff's union will appeal. As an aside, firefighters for the Orange County Fire Authority are some of the best paid in the country. It doesn't take much thought to figure out why the firefighters want to pass this measure....

The IRS recently ruled that bonds, in order to be tax free, must be for "essential government functions" only. Bonds to help in the building of an Indian casino resort (at Fantasy Springs Casino near Palm Springs) didn't make the cut. The IRS is going to be going after the bondholders for taxes.

So what does our state legislature do? It passes, out of the Senate Revenue and Taxation Committee, SB995. This bill would grant Indian casinos tax exemption (for California tax returns) on such bonds.