Taxable Talk

It’s time again to be considered for that most prestigious of awards, the Tax Offender of the Year. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

Coming in second was Mark Leitner. Mr. Leitner felt that the government shouldn’t lean on him, so he filed liens against the government…to the tune of $48.489 billion from seven individuals involved in prosecuting him. Mr. Leitner is not enjoying that money (those liens were, as you would imagine, quashed); instead, he’s spending some time relaxing at ClubFed.

Coming in third was Norma Coronel. Ms. Coronel gave birth to one child in December 2002. However, she thought that she could do better on her tax return by claiming she gave birth to 19 children…all at once. That truly Bozo tax fraud got her the joy of repaying, with interest, the over $300,000 she received from the IRS.

I’m giving a dishonorable mention to the IRS Automated Underreporting Program (AUR). I’ve had several clients who have responded to notices from the AUR group, and the AUR group, when writing back, helpfully notes that they’ve reconfigured the amount that the clients allegedly owed. The trouble is that the AUR group ignores the correspondence from the client, and simply restates the amount owed. I’m going to be sending Nina Olson, the National Taxpayer Advocate, a letter on this issue; I’ll post a copy of the letter in the blog in the coming weeks.

This year’s winner has a proud history; indeed, without them we likely wouldn’t be here. I’m talking about the United States Congress, who have moved up from being runner-up the past two years. Congress, especially the Senate, forsook its duties. Consider the budget passed by the US Senate…but that would be problematic as the US Senate didn’t pass a budget in 2009 or 2010 and waited until the closing days of December to actually pass one. However, these are minor issues in comparison with the major problem: The needless and horrible complexity of the US Tax Code.

Nina Olson, the National Taxpayer Advocate, has noted the problem year after year in her reports to Congress. For example,

The National Taxpayer Advocate on numerous occasions has identified the complexity of the tax code as the most serious problem facing taxpayers and urged Congress to simplify it. In this section, we discuss the sources and impact of code complexity and the practical obstacles to simplification. In an accompanying legislative recommendation later in this report, we outline principles and proposals that we encourage Congress to consider as it explores tax reform options.

In 1986, Congress simplified the Tax Code. It’s high time again for another round of simplification. Consider one of my areas of practice, dealing with individuals with foreign financial accounts. Not only do those individuals now have to file an FBAR (Form TD F 90-22.1), they must repeat that information on Form 8938 (if they have sufficient foreign financial accounts). I don’t blame the IRS for this duplication. Rather, I blame Congress. Congress enacted the laws requiring these forms; it is Congress that needs to enact laws that would simplify the Tax Code.

I’d like to see a simple, fair Tax Code. This is likely one of the few issues where the Tea Party protesters and the Occupy Wall Street protesters would agree. Again, consider Form 8938. The instructions note that the estimated average time to complete this form is one hour, five minutes. And that’s just one form. No wonder I’m not worrying about my employment.

I’d like to be put out of a job–at least, on the tax preparation side. Realistically, I doubt that will ever happen: There will still be plenty of complex corporate and business returns that need completion.

Today, taxpayers who do not have simple situations–and that’s millions of Americans–have tremendous difficulties completing tax returns on their own. Albert Einstein stated that, “The hardest thing in the world to understand is the income tax,” and that was over 60 years ago! The situation today is far, far worse and the blame is squarely with Congress. Unfortunately, 2012 is an election year and I believe there’s zero chance of anything coming out of this Congress. Indeed, President Obama has shown no inclination at simplifying the Tax Code. We likely need new leadership in Washington to ease the pain of all Americans.

And that’s a wrap on 2011. Everyone have a safe, happy, and healthy New Year. I’m sure I’ll find plenty of other Bozos to write about in 2012.

President Obama released his jobs bill on Monday. You needn’t read it; it has no chance of passing the House.

Back in July, President Obama stated he’s all for compromising.

Either way, I’ve told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress -– and a compromise that I can sign. I’m confident we can reach this compromise. Despite our disagreements, Republican leaders and I have found common ground before.

Well, it’s election time so who needs compromise? Apparently, not President Obama:

Obama’s top political adviser David Axelrod said Tuesday that the administration was unwilling to break up the president’s $447 billion jobs plan if Republicans were only receptive to passing certain elements.

“We’re not in a negotiation to break up the package. It’s not an a la carte menu. It’s a strategy to get this country moving,” Axelrod said Tuesday on ABC’s “Good Morning America.”

Meanwhile, how is this package (which won’t pass) be paid for? Tax increases! From Roth Tax Updates,

The President has released the tax increases he wants to see as part of his “jobs” bill. They should be familiar, because he keeps proposing them:

- Taxing partnership carried interests as ordinary income

- Repeal bonus depreciation on private jets

- Take away some deductions from the oil industry — including some that are allowed to all taxpayers otherwise, like the Sec. 199 manufacturing deduction

- Cap the tax benefit of itemized deductions at 28%

In the end, this is all irrelevant. The package isn’t going to pass. The House will take what’s been proposed and will put a few things out, a la carte. The Senate will ignore it, and nothing will happen. And if the package should somehow survive the House (which it won’t), the tax increases won’t.

At a Labor Day speech in Detroit, President Obama stated, “We said working folks deserved a break, so within one month of me taking office, we signed into law the biggest middle-class tax cut in history, putting more money into your pockets.” The Washington Post’s Glenn Kessler gave this quote “Four Pinocchios.” That means it’s a whopper of a lie, of course.

Peter Pappas has more.

Governor Jerry Brown would like to increase taxes. That appears to be his message to voters. Voters have rejected several income tax increases over the past few years. It’s as if no one seems to care about the voters.

I bring this up because today is Labor Day (well, it’s still Labor Day on the West Coast as I write this). I saw today that Jimmy Hoffa, Jr. wants to “take those Tea Party Son of ****** out.” It’s nice to see that decorum still exists with organized labor. President Obama praised Mr. Hoffa, too.

I think the country could use some real hope and change, not a change back to the 1960s.

Warren Buffet penned an op-ed piece where he said the wealthy should pay more tax. The Tax Foundation, imho, opinion gets it right where Mr. Buffet gets it wrong.

Rather than repeat what the Tax Foundation wrote, I’d like to emphasize that if there comes a point where my earning more gross revenue will not cause me to make significantly more net revenue, I won’t earn more gross revenue. Back in the 1930s – 1950s, the top marginal tax rate was at least 70% (and that’s before state income tax). If I got to that level, I would turn away business: Why work for more revenue when I wouldn’t get to keep it?

And the final point that I’d like to emphasize is that nothing prevents Mr. Buffet (or anyone else) from sending more money to the federal government. You can send a check to the “Bureau of Public Debt” or pay online.

Americans for Tax Reform released their study on “Cost of Government Day.” This study looks at for an average individual in each state, how long you are working for the Government rather than yourself. On average, you’re working for the government until August 12th. That’s actually down two days from last year.

Unfortunately, not all states are created equal. Here are the bottom ten:

40. Massachusetts (August 15th)
40. Pennsylvania (August 15th)
42. Illinois (August 17th)
43. California (August 18th)
43. Minnesota (August 18th)
43. Washington (August 18th)
43. Wisconsin (August 18th)
District of Columbia (August 18th)
47. Maryland (August 20th)
48. New York (August 30th)
49. New Jersey (September 6th)
50. Connecticut (September 10th)

However, there are some states which don’t tax you as much:

1. Mississippi (July 19th)
2. Tennessee (July 20th)
3. South Carolina (July 23rd)
4. Louisiana (July 26th)
4. New Mexico (July 26th)
4. South Dakota (July 26th)
4. West Virginia (July 26th)
8. Alabama (July 29th)
8. Arizona (July 29th)
8. Kentucky (July 29th)
8. Nevada (July 29th)
8. Oklahoma (July 29th)

The end of the Executive Summary notes something that needs to be taken to heart by Congresscritters and state legislators:

Barriers to an earlier COGD remain. As of this writing, a deal to raise the debt limit in exchange for significant spending reform has not been reached. As the country exhausts its nearly $15 trillion in borrowing authority, the evolving debt debate represents an unprecedented opportunity to shift the paradigm of government spending. If it fails to do so, the forecast for future Cost of Government Days looks bleak.

The full report is well worth your reading.

…Nothing much happened, right? (I’m ignoring that AAA/AA+ thing, of course.)

The IRS announced that Form 8939 for estates for 2010 will be due on November 15th. However, the form has yet to be released.

Joe Kristan noted that the Wesley Snipes strategy didn’t work (again), this time in nearby Bakersfield. A Mark DeVries didn’t like the results of his audit, and among his other brilliant ideas he sued the IRS Revenue Officer and Revenue Agent handling the case…for $50 million (plus punitive damages). As Joe noted,

Suing your IRS agent for “libel, slander, nuisance, intentional and negligent infliction of emotional distress, trespass, conspiracy and imposition of a constructive trust” hasn’t worked yet. Perhaps a less confrontational approach to IRS exams would have been wise.

Peter Pappas noted that low taxes lead to economic growth. Well, I knew that but a lot of people in Washington don’t.

Phil Hodgen is running a series on PFIC’s. If you deal with them, it’s a must read.

The Franchise Tax Board has a new amnesty program (aka “Voluntary Compliance Initiative 2″). This program is for taxpayers who avoided California tax through either Offshore Financial Arrangements or Abusive Tax Avoidance Transactions. Filing period for this amnesty runs through the end of October. Taxpayers who sign up for this amnesty must file amended returns, sign a participation agreement, and pay all tax, penalties and interest by the end of October. Note that the Noneconomic Substance Transaction Understatement Penalty, the Accuracy Related Penalty, the Interest Based Penalty, and the Fraud Penalty are removed with this amnesty; however, the Large Corporate Understatement Penalty (if applicable) and the Amnesty Penalty cannot be waived.

Finally, I feel relaxed and ready for ten days of tax work to be squashed into the rest of the week. Yes, I enjoyed my vacation.

As most of you know, a second federal court judge has ruled the Health Care Law that passed last year is unconstitutional. Judge Rodger Vinson didn’t just rule that the mandate that health insurance must be bought is stricken; rather, he struck down the entire law. While the Obama Administration is publicly stating the law will continue to be enforced (and, in theory, either Judge Vinson or the 11th Circuit Court of Appeals could issue a stay to Judge Vinson’s ruling), as of now the law is void.

What next for the tanning tax? Or the numerous other tax provisions in the legislation that impact individuals? How about the business tax provisions?

I’m not an attorney, but the Volokh Conspiracy has some good posts up on this, though they aren’t really looking at the tax consequences (but do look at the constitutional issues in depth). As I was writing this, I noticed that Joe Kristan was asking the same questions.

My best guess is that the 11th Circuit will stay the decision until they review it. And it sure looks like this case is bound for the Supreme Court (perhaps in 2012 or 2013).

So if you’re a tanning salon should you stop collecting the 10% excise tax on tanning? I’ll probably have an answer in a couple of weeks but that answer could easily change between now and 2013.

The City of Miami has had financial difficulties, and faced a large budget deficit. The economy in South Florida isn’t doing well, so raising taxes would be a last resort, right?

Of course not–it’s the first choice. Mayor Carlos Alvarez proposed a 14% property tax increase, and Dade County Commissioners approved the increase (Miami and Dade County share government). Voters were not amused.

Bankrolled by automobile dealer Norman Braman, citizens forged a recall effort. This terse announcement in the New York Times notes that there will be a recall vote early in 2011. People aren’t happy about tax increases, and that’s especially true when the economy is down.

The real villain in South Florida (and in California) are wages for public employees. I’ve said this before, but it bears repeating. When I was growing up, public employees didn’t make a lot of money but did have generous benefits and pensions (pension relative to their salaries). Today, many (most?) public employees make better salaries than comparable employees in private industries, have better pension, and better benefits. That’s not sustainable, and there’s no way this can continue–in South Florida or in California.

Jerry Brown is basically saying the same message as Mayor Alvarez did: Either raise taxes or I’ll have to cut what the state (of California) does. There’s an alternate solution, but that’s not what his constituency wants, and that’s to cut pay and benefits for state employees.

Meanwhile, Miami also has possible corruption problems. Mayor Alvarez may not be around to see the end of this investigation, though.

After huffing and puffing and bloviating some more, Congress passed the compromise measure extending the Bush Tax Cuts for two years. It will be signed by President Obama in the next few days. Here’s what’s in and out and what this means for you.

1. All of the current (2010) marginal tax rates will remain unchanged through 2012.
2. The Estate Tax will be at 35% for estates above $5 million for 2011 and 2012.  As of now, the Estate Tax will move back to 55% on estates above $1 million for 2013.  The estate tax adds portability of the $5 million estate tax exemption; as noted in Joe Kristan’s post, this will add work for tax professionals–many estates which otherwise would not need to file an Estate Tax return will have to.
3. The AMT patch has been added for both 2010 and 2011 (but not 2012).  The AMT exemption for 2010 will be $47,450 for individuals and $72,450 if married filing jointly.
4. The bill lowers the social security tax on employees by 2% (to 4.2% from 6.2%) for 2011 only.  The employer portion of this tax will remain at 6.2%.
5. Most of the tax breaks that needed to be extended were extended for2010 and 2011.  These include the R&D credit, the teachers’ tax deduction of $250, and credits on energy efficient appliances.  One tax break has vanished, though: You can no longer deduct property tax paid unless you itemize your deductions.
6. This makes 2010 tax planning like most years.  In my most recent newsletter I wrote, “…[T]his year is the first time in the last twelve years where I’m advising many clients to move income into the current year rather than deferring income into the following year.  That’s because income tax rates are definitely going up, and this year you likely want to consider paying more in tax.”  This is no longer true.  Thus, the normal rules apply: In general, you should accelerate deductions and defer income. If you think you will be hit with AMT this may not be the case, and you should contact our office to discuss your specific situation.

So Merry Christmas, taxpayers, and enjoy the gift that Congress has left in your stockings for the New Year.