Tax Update Blog: July 2007 Archives
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MISSING THE TAX BLOG BOAT
July 31, 2007
Tax Analysts is still struggling with this "blog" thing. Six or seven years into the blogging era, Tax Analysts still doesn't have an in-house blog. It's a shame, really, because they have a stable of some of the best tax commentators around. A free-for all discussion amongst Tax Analyst's contributors of Lee Sheppard's strange but provocative attack on deferred compensation ($link), with Ms. Sheppard figuratively swatting back criticism with her Fendi handbag, would be great fun. (My short take: Ms. Sheppard is trying to solve a corporate governance problem with the tax law; it's been tried, it's not working, so she wants to do it more and harder). But while the Wall Street Journal has figured out how to charge for core content while still sponsoring free blogs, Tax Analysts still hasn't taken the plunge.
A piece today indicates that State Tax Analysts, while aware of this "blog" thing, still doesn't get it. In his State Tax Merry-Go-Round column, Billy Hamilton laments the state of state tax blogging ($link):
I am a little disappointed with the state tax content in blogs, but I'm getting used to the situation -- the great American preoccupation with the federal income tax. Of course, I realize it is the major tax event in most people's lives, but I have to think that with 70 million blogs, there is room for one or two that summarize state tax happenings and comments on some of the more important issues in an up-to-the-minute way. I would love to see what Bill Fox is thinking on a given day. Or Rick Pomp. Or Harley Duncan at FTA for that matter. I will not, however, hold my breath until I see it.
Such a blog would not displace publications like this one. Tax professionals are always going to need a source that carries both tax news summaries and more detailed analysis, something that the transitory nature of blogs aren't equipped to handle. But I'm betting the Internet is here to stay, and in the vast reaches of cyberspace there ought to be as many sites for people interested in state taxes are there are for people interested in Justice League of America comics. I am not asking for Harry Potter levels of interest, just a nice warm, cozy place where state taxes are the focus on the Web.
I talked to a few tax professionals -- both public and private -- about my idea -- a state tax blog -- but to no avail.
Actually, there is a blog that discusses state tax policy issues almost every day. It's name would seem to give it away: the Tax Policy Blog. The article mentions it only in passing, and not by name. Right now there is no other place like it for regular state tax policy coverage in the blog world. It doesn't look as though Mr. Hamilton has spent much time reading it.
Mr. Hamilton seems to not appreciate a key strength of blogs: you blog what you know. For example, he says:
The Wandering Tax Pro site (http://www.wanderingtaxpro.blogspot.com/index.html) is maintained by a tax professional in New Jersey. It does have some interesting commentary on New Jersey income and property taxes that would be useful if you lived in New Jersey.
That's a feature, not a bug. A Jersey guy is going to have a lot more to say about how property taxes actually work on the ground than somebody talking about property tax theory from an Arlington, Virginia office park.
Mr. Hamilton does notice the Tax Update in passing:
There is another CPA site run by Roth & Co. in Des Moines (http://www.rothcpa.com), probably your one-stop shop for corn-themed mailbox installation deduction strategies.
Whatever that means. Regular readers here (Hi, Mom!) know that we talk state tax policy here regularly, especially during the Iowa legislative session. Corn-themed mailbox installation deductions, though? Haven't covered that one.
If Mr. Hamilton wants some serious state tax blogging, he could organize some of us flyover-country bloggers, or maybe aggregate our posts. Or maybe he can shake Tax Analysts out of its blogging torpor and get it done under their banner. That would be a state tax blog worth checking out.
CORRECTION TO ORIGINAL POST: The Tax Policy Blog is mentioned, though not by name, as a blog linked by the TaxProf. The original version of this post said it was mot mentioned at all. My apologies.
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BLOG ROUNDUP
July 31, 2007
A few notable tax and business blog posts today:
The California Tax Attorney Blog has a good introduction to IRS Guidance.
Don't Mess With Taxes rounds up the various state sales tax holidays. Don't forget Iowa's is Friday and Saturday; here is the Iowa Department of Revenue's sales tax holiday page with the details. The basics:
* Exemption period: from 12:01 a.m., August 3, 2007, through midnight, August 4, 2007.
* No sales tax, including school and local option sales taxes, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.
* The exemption does not apply in any way to the price of an item selling for $100.00 or more.
* The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer
The Iowa Banking Law Blog has the latest on new Bank Secrecy Act rules.
And don't forget to check out IowaBiz.com every day. Good recent posts include Brett Trout on trademark basics, Rush Nigut on electronic discovery (no, it's not what happens the first time you stick a fork in a socket), and Mike Sansone on owning your own name, or at least its internet address.
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BACK AT THE NEW HAMPSHIRE STANDOFF
July 30, 2007
The LA Times visited convicted tax evaders Ed and Elaine Brown at the fortified house where they are holed up, refusing to report to federal prison to serve their sentences.
"Show me the law!" says Ed, a trim 64-year-old with a silver mustache, whose forehead crinkles when he gets heated. The Browns stopped paying income taxes in 1996. They say the Constitution and Supreme Court decisions support their claims that ordinary labor cannot be taxed. But a judge ruled against them in January, convicting the Browns of conspiring to evade paying taxes on $1.9 million in income from Elaine's dentistry practice.
Now, the Browns say they're in a battle for freedom, and it just might end in bloodshed right here, in a towering turreted house with 8-inch-thick concrete walls and an American flag fluttering over the double-car garage. They have garnered national support, with blogs devoted to news about the standoff and supporters regularly showing up on the couple's doorstep with groceries.
Government and law officials have cut off power, Internet, house phone, cell phone, television and mail service to the couple's 110-acre compound. But their house is equipped with solar panels, a watchtower, a satellite dish and a stockpile of food.
They cut off their internet? Well that explains everything. We showed them the law back in January, but their lack of internet access must have kept them from reading the Tax Update. They say they'll end the standoff if someone will just show them the law requiring them to pay income taxes. We hope one of the people dropping off groceries will print out our post and deliver it to the Browns; that should clear up this whole misunderstanding.
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PARDON ME IF I DON'T HOLD MY BREATH FOR THIS TO HAPPEN
July 30, 2007
Perhaps inspired by the Scooter Libby case, an effort is afoot to secure a presidential pardon for singer Ronald Isley:
Def Jam record execs are using their marketing wares to drum up support for an executive presidential pardon for the beloved member of The Isley Brothers family and singing group.
Last September Isley was sentenced to three years in prison on five counts of federal income tax evasion. IRS agents said Isley, 65, who had pleaded "not guilty" on all counts, had assets in the millions at the time of his indictment and had gone to great lengths to hide them in different bank accounts and by signing them over to relatives.
Isley had unpaid taxes between the years 1997 and 2002 of $3.1 million. U.S. District Judge Dean Pregerson in Los Angeles called Isley a "serial tax avoider."
If he gets one, I hope he invites Scooter Libby over to his place, if only to find a way to include him in the picture on this album cover. The mind boggles.
Prior Tax Update Isley coverage:
ISLEY BROTHER TO ACCEPT LONG-TERM GIG?
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BALOONFEST CARNIVAL
July 30, 2007
The annual Indianola Balloon Classic is taking flight. You can celebrate in air-conditioned comfort at your favorite blog carnival!
The Carnival of Personal finance is across the pond this week at the U.K. blog Plonkee Money. Don't miss InsureBlog's discussion of, er, skip days at work. Don't tell the staff.
Meanwhile, the Carnival of the Capitalists is rocking at BusinessPundit.com.
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I WOULDN'T BE CAUGHT DEAD IN THAT JOB
July 29, 2007
From the TaxProf:
Stiff Named Deputy Commissioner of IRS
The IRS has announced that Linda Stiff, currently Deputy Commissioner for Operations Support, will become Acting Commissioner of the IRS upon Kevin M. Brown's departure to become COO of the American Red Cross (blogged here).
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TAX FRAUD: IT WORKS, UNTIL IT DOESN'T
July 28, 2007
It can be so tempting. Your company has made some money this year, and you'll need to pay some extra taxes. Your wife wants some remodeling done at home. What if you have the company pay the remodeling contractor and call it "repairs"? The bigmouth at the golf course says that's how he afforded his new house. You get a deduction, and you have domestic harmony. A great deal.
Until you get caught.
Standard IRS business examination procedures include reviewing paid invoices for possible personal expenses improperly deducted as business expenses. If that's happening and the IRS does show up, chances are pretty good they'll find it.
A Wisconsin businessman just learned this lesson the hard way.
Sheldon Lasky was CEO of Sadoff & Rudoy Industries, LLC, a Wisconsin scrap metal recycler. From 1999 through 2003 he had $876,772 in personal expenses paid and deducted by the company, without including the payments in his income. The IRS caught up with him, and yesterday he pleaded guilty to one count of tax evasion.
IT'S NOT JUST JAIL TIME
It appears likely that Mr. Lasky will serve 18-24 months in prison under the federal sentencing guidelines, the way I read the plea agreement. Unfortunately for him, serving time doesn't pay his taxes. The plea deal specifies that he will have to make good $351,753 in taxes, $263,814 in civil fraud penalties, and $285,733 in interest. That only covers the federal taxes; Wisconsin tax officials are likely to also be in touch with Mr. Lansky.
The Moral? Having your business pay your personal expenses to evade taxes is a bad idea, and the more you do it, the worse it gets.
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HAPPY BIRTHDAY, TAX PROF!
July 28, 2007
Paul Caron, the blogging titan behind the TaxProf Blog, turned 50 yesterday. Happy Birthday!
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LOOPHOLES? OR LOWER RATES?
July 27, 2007
Quotes from yesterday's Treasury conference on business taxation:
"I'd trade the research credit in a minute for a simpler, lower rate," said Safra Catz, head of Oracle.
"I'd happily trade all credits for simplification and lowering the rates," said Frederick W. Smith, CEO of FedEx.
Lowering rates would open up a much larger volume of equity investments in the U.S.," said Martin Feldstein of Harvard University.
Via Tax Analysts ($link)
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'NOT GUILTY' DOESN'T MEAN 'NOT TAXABLE'
July 27, 2007
The Tax Prof notes the acquittal of tax-protesting lawyer Tom Cryer on criminal tax charges. The Tax Girl has also noted this.
Whenever a tax protester wins wins acquittal on criminal tax charges, tax protesters say it "proves" that "there is no law" requiring them to pay taxes. By the same logic, the O.J. Simpson acquittal proves there is no law against multiple homicides. All it really proves is that you sometimes get a strange result from a jury.
As Fed-Ex pilot Vernice Kuglin learned, though, beating the rap still leaves you on the hook for your taxes. The same goes for Mr. Cryer.
And if any readers think "You do taxes for a living. Of course you believe this - it's in your interest" - think about this for a second. If this stuff actually worked, I would sit down with my biggest clients and work out a deal - I would say the magic words, they would never pay tax again, and in turn, I would get 5% of their income for life. I'd retire a rich man that afternoon. It would beat the heck out of working tax seasons. Don't you think any number of practitioners would do the same thing?
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TAX UPDATE AS TAX DICTATOR
July 27, 2007
The blogger at Asymmetrical Information who styles himself as "Mindles H. Dreck" has a fine idea:
1) The core of my proposal is to make cash dividends tax-deductible to the paying entity in exchange for eliminating the preferred treatment of dividends and capital gains to individuals. All dividend and capital gains income would be taxed at the current marginal rate. However,
2)In order to continue investment incentives of the current structure, lower the corporate tax rate to 15%, but dramatically simplify the corporate tax code by eliminating special timing differences. Capital expenditures should be 100% deductible.
3) Make all forms of compensation and benefits other than ERISA plans taxable to the recipient.
Mr. Dreck's plan has several elements of the plan I would impose were I Tax Dictator. I too would make dividends deductible, but dividends paid to non-profits would be subject to an excise tax withheld at the source, so that all business income would at least be taxed once. Fair's fair.
I would only lower the top corporate rate to 15% if that's where the top individual rate was - and as your Tax Dictator, I pledge to do so! Kiss all your deductions goodbye, though. No state tax deduction, no mortgage interest deduction, no charitable deduction. No research credits, no rehab credits, no economic development credits. Oh, and no AMT.
15% would also be the bottom rate, by the way, for everyone, once income exceeds my benevolently generous dictated exemption. Having the same rate all around simplifies life by eliminating incentives to shift income around, or to multiply taxable entities to take advantage of lower rates.
I'm not sure what Mr. Dreck means by his third proposal. Is he talking about deferred comp? Or tax-free fringes, like medical plans? My dictatorship wouldn't much worry about deferred comp, because deferred income to an employee is also deferred expense to an employer. But there would be no more tax-free fringes. You can buy health insurance yourself, or your employer can buy it for you, but you will pay the same tax.
And capital expensing? Only if it doesn't get in the way of my low-rate crusade. If I can get rates down to 15%, businesses can live with keeping depreciation schedules.
Less progressive? Steeply progressive taxes don't keep the rich from getting richer; they just create an industry of financial engineers to game the system. If all those smart people were busy doing something useful instead, the world would surely be a better place.
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MORE ON E-FILING AND AUDIT RISK
July 26, 2007
Reader Eric Januzelli writes in response to our post on why extending and e-filing probably have little effect on your chances of being audited:
The second page of this IRS report explains why the Paper vs. Electronic question is irrelevant. As you stated in your post, IRS auditors are attracted to Schedule C losses. The agency thinks almost 60 cents out of every Schedule C dollar is unreported (Nonfarm proprietor income). Since both employees and employers report wage income (even paper filers submit a W-2), the error rate there is only 1 percent. The turning point seems to be whether income/expenses are verifiable, not how the return is filed.
When the tax gap is supposedly $345 billion, it's amusing the IRS spends its time going after Schedule C losses of a few thousand here and a few thousand there.
Why? I suspect it's for the same reason Willie Sutton robbed banks - that's where the money is. The Schedule C tax gap isn't from a few thousand taxpayers underpaying millions; it's from millions underpaying thousands.
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BIG CREDIT, LITTLE CAR
July 26, 2007
The IRS has announced (IR 2007-133) that a $12,000 alternative vehicle credit is available for the hydrogen-powered 2005 and 2006 Honda FCX:
There are only a few dozen of these critters in the wild, and only a few filling stations, so a $12,000 credit might be small consolation for a car that can't be used most places.
Now if hydrogen cars all look like the next version of this car, they might catch on:
Whether hydrogen cars have any real long term potential is another matter. And don't forget that the $12,000 tax credit does not apply for alternative minimum tax.
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IN CASE YOU COME HERE FOR THE PICTURES
July 25, 2007
Other work got in the way of posting today; I hope this picture of a beautiful old church in Spillville, Iowa makes you feel stopping by here wasn't entirely a waste of your time. Click to enlarge image.
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SHOW ME THE MONEY
July 24, 2007
"Show me the law" is a rallying cry of the tax protest set. In fact, some, like barricaded tax resister Ed Brown, say that they'll comply meekly if someone would just show them the law requiring them to pay taxes. Mr. Brown has taken it a step further: he says he'll pay $1 million dollars to the first person "who will demonstrate him the law requiring him to pay federal taxes."
As we did that some time ago, we assume that the check is in the mail. I fear, though, that we may be in line behind the IRS for Mr. Brown's millions, between his back taxes, fines, and so on. That makes Mr. Brown, in technical terms, a "turnip," as in "you can't get blood out of a turnip." I'll not spend my $1 million just yet.
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TAX BREAKS AREN'T FREE
July 24, 2007
The Treasury issued a paper yesterday raising a point too often forgotten in tax policy: targeted tax breaks are expensive.
The report listed some tax breaks that, if eliminated, would allow the top corporate tax rate to be cut to 27%, from the current 35%, with no revenue loss. They are listed below, along with their 10-year revenue impact:
Source: U.S. Treasury. Click to enlarge
The most expensive break is the relatively new Section 199 deduction, followed by the break for muni bonds and the research credit. A lower rate would fund a lot of research.
The TaxProf has a roundup.
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NO BOOK TOURS FOR 151 MONTHS
July 24, 2007
A purveyor of "common law trusts" had his practice curtailed by a judge last week when he received a sentence of 151 months for helping his customers evade more than $9 million in federal taxes.
Louis Wayne Ratfield was convicted in April on 50 criminal tax counts. From a federal press release:
U.S. Attorney Alex Acosta stated, "By fraudulently advising taxpayers that they could claim deductions for ordinary living expenses, including food, clothing, and the cost of education, Ratfield caused a tax loss to the U.S. Treasury of more than $9.3 million. The U.S. Attorney’s Office will continue to help the Internal Revenue Service to enforce our nation’s tax laws and stop fraud and abuse."
Mr. Ratfiled apparently spread his tax ideas beyond his client base, according to this report:
Ratfield wrote a book, "The Constitutional Common-Law Trust," that advises readers on how the scheme worked, according to the indictment.
Amazon.com still lists the book for sale ($29.95!), showing the author as "James Mathers," a "a psychologist and researcher." The Amazon.com description says:
This is the book that tells you everything you need to know about Pure Trusts. It is what the Big Boys use to protect their assets and pay no taxes. Used by professionals, accountants, financial managers, written for the average business entrepreneur.
Amazon.com's customer reviews are somewhat mixed. Half of the reviews (correctly) point out that the book's arguments are nonsense; the other half are proud assertions of gullibility, like this one:
I recently read this book and it deals with the best kept secret in the industry!!!! I was some what skeptical at first, but when I found out that it is perfectly legal, I couldn't put the book down! I had never heard of the "pure trust" and when I made the discovery, I was astounded! I didn't know that I could LEGALLY LOWER MY SALARY AND TAXABLE INCOME WITHOUT TAKING A PAYCUT!!!! In addition, quite a few bills I currently pay (i.e. utilities, mortgage, etc.), could LEGALLY become legitimate expenses of the pure trust!!! You HAVE to get this book to find out how! Don't believe me? How about this. It tells you why this particular type of trust is prefered by some VERY prominant people (which it even lists, by name)!
I'm always emotionally swept away by ALL CAPS!!! Sadly, some people believe this stuff. One hopes these enthused reviewers will take pause at the author's 151 months in the federal can before they ruin their own futures the pure trust way.
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INDIANA V. IOWA: THE PROPERTY TAX BOWL
July 23, 2007
Indiana is having a debate on property taxes that sounds a lot like what's happening in Iowa, according to a report at Tax Policy Blog:
Property taxes are rising in Indiana, with taxpayers in some counties (including Marion County, which includes Indianapolis) seeing their bill increase by more than 25 percent. This is naturally leading to calls for state lawmakers to ease the property tax burden. During the July 4th week, about 400 people showed up at the home of Governor Daniels to urge him to "do something."Last week, the Governor released a statement concerning the property tax debate in the Hoosier State. After acknowledging that he is dismayed at the rising property tax burden, he says:
"Let's start with the basics: property taxes pay for local spending and local borrowing. They are collected by and for local government, schools and libraries. When, as in Marion County, local spending goes up 10 percent per year, taxes are going up with it. Local assessment that claims Marion County home values grew 19 percent faster than commercial property is another obvious factor in Indianapolis' acute problem.Although the cause of the problem is local, state government has tried repeatedly over 35 years to relieve the property tax burden on Hoosier citizens. Through sales and income taxes, the state already provides more than $2 billion annually -- a quarter of total property taxes -- to subsidize local government spending. The recent legislature dedicated another half billion dollars to this purpose, and also gave localities major new flexibilities to reduce property taxes and replace them with income taxes. This new power to reduce property taxes has not yet been used in Marion or any other county."
This is a refreshing take on the property tax debate and should serve as a model for how lawmakers in other states respond to rising local property taxes. Too often, state lawmakers choose to swap higher state taxes for lower local property taxes, a non-solution that takes money from one pocket and puts it into another.
In Indiana, as in Iowa, the first step to controlling property taxes is to control spending. As Iowa has probably more government agencies per capita than any other state, there are plenty of places to look for economies. People sure don't seem excited about raising sales taxes here instead.
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WHAT GETS YOU AUDITED?
July 23, 2007
Mark Minassian has advice on avoiding audits at About.com. He suggests that you you can reduce your chances of getting audited in two ways: by extending your return and by filing a paper return, rather than e-filing.
His logic on extensions:
The IRS generally has three years to audit a tax return from the date it is filed. Since most businesses have a December 31 year-end, most business tax returns are filed on either March 15 (for corporations) or April 15 (for partnerships and sole proprietors). The IRS has to move quickly to select returns for audit, and since they will have a large population of returns to choose from among the March 15 and April 15 filers, it make sense to not include your business' tax returns in that group
This seems doubtful to me. I have never received an audit notice for a return filed without an extension prior to the due date for extended returns - with the exception of returns requesting refunds large enough to trigger an automatic "Joint Committee" review.
Also, extending the return date extends the three-year audit window, so there is no more urgency to get to the timely returns than the extended ones.
As best I can tell, the audits typically begin about a year after the due date, giving the IRS plenty of time to process even extended returns.
Here is the logic for paper filing:
E-filed returns can be easily data-mined and analyzed by IRS computers and it makes it all that much easier for those returns to be selected based on the IRS audit criteria. Also, since paper-filed returns must be manually keypunched into the IRS computers, it can take them up to two months to process paper returns. Any delays on the IRS end usually work to the taxpayer's advantage when audits are concerned.
There may be something to the data mining argument. Yet even with paper returns, the IRS is not without data-mining tools. Even on paper returns, the critical numbers are keypunched and available for the data miners.
Is delay helpful in avoiding audits? As the IRS return selection process is a closely-guarded secret, we can't say. Few enough returns have been audited in our practice to give a meaningful sample, but there's no obvious pattern targeting non-extended returns. I'm pretty sure there's no bullpen of auditors hanging around eating donuts and waiting for a return to be processed so they can jump on it. My own superstition is that paper filing increases the likelihood of examination just because a paper return has to be touched by human hands.
IT'S WHAT'S IN THE RETURN, NOT HOW IT'S FILED
The real key to whether a return is audited isn't how it's filed; it's what the return says. In our experience 1040s most likely to get audited are those with Schedule C income, business losses, or big fluctuations in income. Business returns are likely to be audited in a loss year. And all returns are likely to be audited if they have "red flag" items, like disclosures of controversial positions. These things dwarf any impact that extensions or e-filing have on your chances of being audited, which normally is pretty low to begin with.
In any case, if you can take a tax position that helps you and is supportable, you shouldn't worry about an audit. While they aren't fun, don't give the IRS money they don't deserve just because of the off chance that they might look at it - unless, of course, there's something else in the return that's much more troublesome.
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HOBBY LOSSES AT IOWABIZ.COM
July 23, 2007
Today is our turn to post at IowaBiz.com, a group blog for entrepreneurs. We discuss hobby losses. There's good stuff at IowaBiz daily.
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PRIVATE TAX COLLECTION: A MENACE?
July 22, 2007
Some corners of the tax blogosphere are thrilled with the efforts to shut down the private tax debt collection program. Kay Bell of Don't Mess With Taxes quotes with approval a leading opponent of the program:
"The private debt collection program is an insult to the American taxpayer and our Federal tax system," said Oversight Subcommittee Chairman John Lewis. "The collection of taxes is a core government function. It is the Internal Revenue Service’s (IRS) mission.
"We found that, in addition to taxpayer harassment, this program wastes tax dollars by paying a bounty up to 24 percent to the debt collectors. We were told by the IRS Commissioner that IRS employees could do the job more efficiently for less money. Enough is enough, we must stand up for taxpayers and we must stand up for IRS employees by ending this program."
The Tax Girl also approves of the efforts to shut down the program.
Ms. Bell, who also is a member of the Taxpayer Advocacy Panel, says testimony on collection activities before a congressional committee show that private collectors are mean:
In connection with questions about whether such private bill collectors diligently follow federal law that prohibits harassment of owing individuals, Lewis played a tape recording (you can read the transcript) of a CBE agent giving a taxpayer a hard time.
According to the material presented at that hearing, the collection company employee refused to fully identify herself but nonetheless continued to demand that the taxpayer provide a Social Security number and mailing address.
I discussed that testimony here. While views can differ, I can't see where the private caller was "giving the taxpayer a hard time." The problem for both the caller and the taxpayer was restrictions written into the private collection rules. The strict privacy rules that apply to the private collectors require them to verify social security numbers before they can even say they are calling regarding taxes. That's something people wisely are reluctant to do over the phone. This isn't a problem with private collection operations; it's a problem with making private collectors operate under restrictions that don't apply to IRS personnel.
Ms. Bell adds:
When the taxpayer finally asked for the calls to stop, the collection agency representative replied, "I'm not sure what we can necessarily do to stop that."
So if the caller was an authentic IRS employee, she would have agreed to stop calling? That doesn't sound like any collections agents I've encounterd.
The most compelling argument that opponents of private collection raise is that the IRS is more efficient. For example, Tax Girl says the private debt collection program is:
...allowing private debt collectors to pursue the collection of taxes even though it is more expensive and is expected to collect fewer tax dollars. Government at its finest, no?
That's not so clear. Senator Grassley says the marginal cost for each dollar collected by IRS collection personnel is around 26 cents - which is higher than what the private agencies charge. It's hard to believe that whan the fully loaded costs of an IRS employee are considered - including an aggressive union, generous pension, civil service protection, and full benefits package - that public is cheaper than private.
It's also hard to believe that privacy and service concerns make private debt collection impossible. We all entrust private concerns with critical confidential information every day when we use an ATM, buy with a credit card, take out a loan, or go to the doctor.
Critics of private collection seem to consider the IRS as the gold standard for confidentiality and customer service. Anybody with much experience with IRS collections folks can tell you that they aren't necessarily customer-friendly or unfailingly polite. In fact, the private collectors score much higher on customer satisfaction surveys (94%) than real IRS agents (63%). Considering that the agency has misplaced hundreds of computers with taxpayer information, they have their own problems with keeping information under wraps.
The profound reason for the opposition to private collection is seldom mentioned, but seems obvious. The private collectors are non-union, and the National Treasury Employee Union sees them as a dangerous threat. It's no coincidence that the NTEU is leading the charge against private collection. As public employee unions are major political donors, they can summon powerful Congressmen to their aid.
Most IRS employees are certainly dedicated and effective professionals. It's no slur on them to explore whether private collection of some tax debts might make sense. Given the size of the tax gap, and the unending demands on IRS resources by Congress, it only makes sense to see if the private sector can take some of the load. It would be a shame if the private collection program were killed before we have an opportunity to see if it can work.
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BAND OF BLONDES
July 20, 2007
Lunchtime entertainment at Nollen Plaza in Des Moines today. Sunny, 76 degrees.
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YOUR TAX MONEY SUBSIDIZING BIG COMPANIES
July 20, 2007
The economic development folks were crowing this week over new "jobs created" by tax giveaways to Principal, Cargill and Target, among others.
Press releases, of course, are the primary thing created by economic development tax credits. The releases claim all the credit for the "jobs created" by the tax credits. There's no mention of how many jobs would have been "created" without the subsidies, or acknowledgement that the jobs were really "created" by the companies, not the Department of Economic Development.
The biggest omission, though, are the jobs that are lost to make these subsidies. The businesses that don't get these subsidies help pay for them with extra taxes - which means they have less money to "create" jobs. Individuals pay extra taxes to subsidize the tax giveaways - so they have less money to create jobs by patronizing businesses in their own community. And nobody will hand out a press release every time Iowa's high tax rates that pay for these subsidies cause a business to move out of Iowa or not move here in the first place.
It's hard to fault the companies that they took these subsidies; when somebody wants to give you money, it's normal and healthy to take it. Yet we need to remember what's really happening here: Iowans and businesses across the state are paying extra taxes to lure and subsidize well-connected corporations - often, their competitors. It's a loser's game.
UPDATE: In a fair world, the Iowa Department of Economic Development would also have to issue a press release every time this happens:
DAKOTA DUNES -- Malloy Electric announced plans Tuesday to move its Sioux City operations across the Big Sioux River to Dakota Dunes.
The Sioux Falls-based firm, a national leader in electrical and power transmission industries, said it intends to build a 75,000-square-foot industrial service center at the planned community in southeast South Dakota.
The 67 employees at Malloy's two facilities in Sioux City would relocate to the new Dunes center following its scheduled completion in late 2009.
Iowa tried:
Marty Dougherty, the city of Sioux City's economic development director, said the city and state of Iowa offered Malloy an incentive package valued at $2.2 million. The offer included 14 acres, at no cost to the company, in the city's airport business and income tax breaks from the state's new targeted jobs program, designed to help Sioux City compete for jobs with neighboring South Dakota, which has no individual or corporate income tax.
Hmmm. Targeted jobs tax credits... or no tax to start with? How did they ever decide?
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MISSING A SECOND CHANCE
July 20, 2007
An Ottumwa doctor got a rare second chance to fight his tax liability in Tax Court. But when opportunity knocked, the doctor didn't answer the door.
The IRS assessed Said Jumaa $159,289 in tax, plus another $57,000 or so in penalties. The normal time for fighting the assessment in Tax Court had expired, but Mr. Jumaa got another chance when it turned out that he never received the IRS deficiency notice.
Unfortunately, Mr. Jumaa's entire argument (argued without an attorney) was:
This letter is in response to the motion filed for summary judgment. I would respectfully ask that this judgment not be granted to the respondent. As I am currently in the process of addressing all the concerns and the requested documents asked by the respondent.
The judge didn't find this sufficient:
Petitioner filed petitioner's response to respondent's motion over six months ago. The Court has given petitioner ample time to establish his claim that respondent's motion should not be granted. He has failed to do so.
The IRS can now levy Mr. Jumaa's accounts.
The moral? "Physician, heal thyself" is bad advice when it comes to taxes and litigation.
Cite: Jumaa, T.C. Memo 2007-192.
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PATENTLY WISE
July 19, 2007
The House Judiciary Committee has approved a proposal to outlaw tax patents. This makes so much sense, it's hard to believe it's starting to advance through Congress. Let's hope it keeps moving.
Hat Tip: The Tax Prof.
Prior Tax Update Coverage of Tax Patents:
PAY YOUR TAXES ON TIME! (PATENT PENDING)
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SENATOR BROWNBACK AND THE LITTLE GOOD BOOK
July 19, 2007
Kansas Senator Sam Brownback floats a tax proposal as part of his foredoomed presidential campaign. It will land with a thud like a dull axe.
The candidate starts by declaring his undying hatred for the tax law:
People often laugh when I say on the campaign trail that the tax code should be taken behind the barn and killed with a dull axe. In fact, one man in Iowa was so excited by this proposal that he presented me with an axe before I finished my remarks (fittingly, I was speaking in a barn).
He goes on to say that he reads a trimmed-down version of the Bible:
Today's tax code -- which is sixteen times longer than the Bible -- is unpredictable, manipulative and hinders the economic growth that generates more prosperity for all Americans.
Um, no, the Code is not. Like the Bible, it can fit in one volume, but like the good book, it is often broken in two for convenience. That can only mean that the Senator goes with the Readers Digest version of the scriptures.
The Senator didn't come to praise the tax code, but it turns out he doesn't plan to bury it either:
That is why I propose an optional flat tax that would exist alongside the current code. This approach does not gore any of the tax code's sacred cows and it could actually be enacted into law. An optional flat tax would generate economic growth and be vastly more transparent, simple and family -- friendly than the current code.
We already have that. It's called the alternative minimum tax. Unfortunately, it's not optional.
It's hard to picture a less promising approach to tax reform than to start a brand new tax law on top of the old one. In real life, it would mean everybody would do their tax two ways (or three, if you count AMT, which you should).
The tax law needs reform sure enough. The way to do it is to broaden the base by eliminating special interest loopholes and credits, and to lower the rates so people will have less incentive to carve new loopholes. Adding a new code to the old code isn't going to break Senator Brownback from the pack of also-rans.
A recent edition of the Internal Revenue Code. Sam Brownback's version of the Bible is 1/16 as big.
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AUGUST 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED
July 19, 2007
The IRS has issued (Rev. Rul. 2007-50) the minimum interest rates for loans made in August 2007:
-Short Term (demand loans and loans with terms of up to 3 years): 5.00%
-Mid-Term (loans from 3-9 years): 5.09%
-Long-Term (over 9 years): 5.31%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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CAVALCADE!
July 19, 2007
The new Cavalcade of Risk is up at The Sentinel Effect. The Cavalcade is a roundup of insurance and risk-management blog posts.
Don't miss Hank Stern's coverage of the departure of U.S. Financial Life from the "high-risk" life insurance market. A person near and dear to me is insured by USFL; fortunately, existing policies will remain in force under their current terms.
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WHEN PAYING IRS, LEAVE NO ROOM FOR DOUBT
July 18, 2007
A reader sent the following:
You have stressed the importance of using certified mail because you never know when the IRS will open its mail. You may also want to stress writing the tax year on a check - even if the check is in the same envelope as the tax return.
Fred A. Windover included a check and his return in the same envelope. The amount of the check was the exact amount due on his return. The IRS applied some of the check to Windover's other past-due amounts and then later assessed penalities for not paying his taxes in full. The Tax Court ruled if a check doesn't specify the tax year, the IRS can apply the funds "in the order of priority that the Service determines will serve its best interest."
That does seem like an astounding result, but the reader is correct - the Tax Court says that if you send a check for the balance due with your year 2 return, but you still owe for year 1, they can apply the check to year 1 and hit you with late payment penalties for year 2, unless you specify on the check the year to which the payment is to apply.
The moral? If you owe taxes, write the tax year and form on your check. Better yet, e-file and have the balance due direct-debited from your bank account. That leaves no room for the IRS to lose your check or put it where it doesn't belong.
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MERLO AGES POORLY
July 18, 2007
The unbroken string of courtroom frustration for AMT-ISO victims continued yesterday in the 5th Circuit Court of Appeals. The appellate panel upheld the Tax Court's ruling that Robert Merlo could not carry back a capital loss on the disposition of stock acquired by exercising incentive stock options.
When you exercise an incentive stock option, the excess of the stock's value over its exercise price is taxable income for computing alternative minimum tax, but not regular tax. If you hold onto the stock for a year after exercise, the excess of the sales price over the exercise price is capital gain for regular tax purposes, and excluded from AMT income to the extent it was recognized on exercise.
Unfortunately for many telecom employees, including Mr. Merlo, stock can decline drastically in value during that one-year period. Mr. Merlo sold his ISO-stock that was worth over $1 million on exercise for less than $10,000. He argued that he should be allowed to carry back his AMT-only capital loss to wipe out his AMT income for the year of exercise.
The Tax Court ruled that the tax law applies the same $3,000 annual deduction limit to AMT capital losses as it does to regular tax capital losses. The appellate panel agreed.
Cite: Merlo, CA-5, No. 06-60723
Link: Prior Tax Update coverage of Merlo.
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TAX PROF: 3 MILLION VISITS AND COUNTING
July 18, 2007
Congratulations to Paul Caron and the TaxProf Blog for hitting the 3-million visit mark yesterday. Nobody does tax blogging like the TaxProf.
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LIVE ED
July 17, 2007
You may have missed the big benefit concert thrown lawt week. No, not the climate change thing; we mean the Ed Brown benefit concert.
Ed Brown is holed up with his wife in a fortified New Hampshire house after being convicted of tax evasion. Apparently the government's siege isn't airtight yet. From UnionLeader.com:
An estimated 200 people turned out for the "Live Free or Die Concert" at the Plainfield home of convicted tax evaders Ed and Elaine Brown yesterday. As of early evening, police were calling it a peaceful gathering.
About 100 cars lined one side of the Browns' half-mile driveway by early afternoon. Helicopters circled overhead as new arrivals searched for parking.
The Browns have drunk deeply of the tax protester Kool-Aid:
The Browns continue to demand the federal government show them the law that makes them liable to pay federal income taxes; a law they say does not exist. They have vowed not to serve their five-year prison sentences, and to fight back with deadly force if federal agents try to apprehend them.
As a public service, we've already shown them the law, but for some reason that hasn't ended the standoff. As you can see from the comments to UnionLeader.com piece, the tax protesters take a Humpty Dumpty approach to reading the law; it means what they say it means, never mind what every federal judge says.
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ACHTUNG! GERMANY'S TAX FREEDOM DAY WAS LAST FRIDAY
July 17, 2007
Germany's "Tax Freedom Day" - the day when the average taxpayer had earned enough to cover taxes for the year - was July 13, according to the Adam Smith Institute. That means the average German worker toils more for the government than for himself. It makes me want to thank great-great grandpa Bernard Kristan for getting out when the getting was good.
By comparision, the U.K. celebrates Tax Freedom Day on June 1, and the U.S. day is April 30. The sooner, the better!
Hat Tip: Tax The Fish.
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DICKINSON LAW FIRM LAUNCHES 'IOWA BANKING LAW BLOG'
July 17, 2007
Downtown Des Moines law firm Dickinson Mackaman Tyler & Hagen, P.C. has joined the blogosphere with their "Iowa Banking Law Blog." A must read for bankers, surely, but it also has some general interest items; the most recent post links to a Chicago Fed report on how your mobile phone may soon become your debit card.
You can reach the Iowa Banking Law Blog from the "Friends and Neighbors" section of the blogroll on the left side of the main Tax Update page.
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THE LATEST IN BIZ-NESS
July 17, 2007
You should be checking in regularly at IowaBiz.com, where every day brings a new post of interest to the entrepreneur. Today's post covers potential gaps in business and home insurance coverage. Other recent posts cover how you can use RSS feeds in your web strategy and how to get your money's worth out of your lawyer (no, it's not a lawyer joke).
The Tax Update posts at IowaBiz.com twice monthly; our most recent contribution was the immortal "What Kind of Critter is an LLC?", with free gratuitous Lara Croft reference.
Bookmark IowaBiz.com, add it to your RSS feeds, or visit it from our list of "Friends and Neighbors" on the Tax Update blogroll.
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JUDGE DROPS CHARGES AGAINST 13 KPMG DEFENDANTS
July 16, 2007
When you're thrown off the sled, usually the wolves get you. Thirteen former KPMG partners and employees cheated the wolves today.
The trial judge in the KPMG tax shelter criminal case dismissed the charges agains the 13 defendants who were affected when KPMG agreed not to pay for their legal defense to keep the firm itself from being indicted.
The case agains three other ex-KPMG employees and two non-KPMG defendants in the case will proceed to trial.
The TaxProf has a full roundup.
Link: Complete Tax Update coverage.
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MONDAY TAX BLOG ROUNDUP
July 16, 2007
Russ Fox owns the tax fraud beat today. He has fresh posts on:
A Chicago Alderman who accused of evading tax on bribes (imagine that, in Chicago);
The rejection of an appeal by a former Atlanta mayor of his tax fraud sentence;
The conviction of Canadian media magnate Conrad Black on U.S. mail fraud charges (he was acquitted of tax charges);
and more.
The Tax Policy blog meanwhile has fresh stuff on how U.S. corporate tax rates measure up against worldwide rates (not well); the debate over just how much activity you need to have in a state to be taxed there; and a new AMT resource page from the Tax Foundation.
And Tick Marks has more on the state tax nexus issue.
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YOU CAN'T POP THE BALLOON SLOWLY
July 16, 2007
George Schussel had a reasonably successful tax cheating operation going at his company. He was funnelling corporate income to a Bermuda company as false expenses, and over a period of years he avoided taxes on $8 million of income.
Then he ran into a snag. He wanted to sell the company, but the phony expenses made the company look less valuable than it really was. Somehow in the selling process the tax evasion scheme came to light. The results are not good for Mr. Schussel; he was sentenced to five years in prison, two years supervised release, and a $125,000 fine. He also still has to pay his taxes, possibly with a 75% addition for civil fraud penalties.
The moral? The more you succeed at tax fraud, the bigger the hole you dig for yourself.
Taxable Talk has more.
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RETURNING TO OUR REGULAR PROGRAMMING
July 16, 2007
The Tax Update was gone Friday with the oldest child visiting a college. We're back to work today.
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I SELL DEAD PEOPLE
July 12, 2007
Now here's a new twist to tax evasion:
ANAHEIM - The former director of UCLA's Willed Body Program pleaded guilty to federal tax charges after admitting he never paid taxes on tens of thousands of dollars he made while overseeing the university's program.
Henry Reid of Anaheim was brought in by UCLA to clean up its Willed Body Program after the school was accused of mixing medical waste and animal remains with the ashes of human donors – and then dumping them in a garbage dump. But Reid was arrested in March 2007 for grand theft in connection with selling body parts donated to UCLA's medical research program for profit.
Prosecutors said that between May 7, 1999, and Feb. 26, 2004, Reid sold bodies donated to the university were supposed to be used for medical study and research to Ernest Nelson of Rancho Cucamonga, who resold them to other people. Reid made $43,000 in the scam, prosecutors said. Nelson made more than $1 million.
Sad. The guy who had the goods only made $43,000, and the middleman made $1 million. It pays to control the distribution channels.
There's no mention of what inventory method was used by Mr. Reid.
(Via the Orange County Register online edition)
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TALES FROM THE STEEL CITY
July 12, 2007
It looks like tough times to be a taxpayer in Pittsburgh. Unless you want to make a movie.
The Tax Policy Blog reports:
If you live near Pittsburgh and enjoy a drink, it appears you may be on the hit list as the County Council of Allegheny County, the home of Pittsburgh, may soon have the power to impose an extra 10 percent tax on alcoholic beverages that are served in the county.
It's enough to drive a man to drive to drink - at least to the next county. Meanwhile, Tax Grrrl reports that Pennsylvania is leaping at the chance to throw taxpayer money at moviemakers, just like Iowa:
I don’t know all of the details yet - but I do know that the package included $75 million in tax credits for producers making movies, television shows and commercials. The budget for the projects has to be at least $2 million and at least 60% of the budget must be earmarked to be spent in Pennsylvania.
Strangely, Tax Grrrl thinks it's a good thing to tax everybody else in Pennsylvania to support a specific industry. She justifies the subsidy with the standard corporate welfare handout pleading and veiled threat:
States like Pennsylvania have been searching for incentives to offer producers to compete with Canadian provinces who have been luring movie makers with promises of lower costs and taxes.
Every industry can say that. The standard movie incentive involves refundable or tranferable credits, which really means cash subsidies. There's no economic or moral justification for taxing everybody to subsidize one industry, but star-struck politicians everywhere (with one notable exception) are willing to give away their constituents' cash for the chance to meet a movie star.
Link: Tax Update coverage of Iowa Film Credits
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IRS SAYS BACKDATED OPTIONS ARE A 'TIER 1' EXAM ISSUE
July 12, 2007
The TaxProf reports:
The IRS yesterday made public a directive sent to agents in the field targeting transactions involving backdated stock options for the highest level of specialized enforcement within the Large and Mid-Size Business Division.
This can't be good news for the dozens of companies that appear to have backdated stock options to lower the exercise price and maximize income to executives.
DEDUCTION ISSUE
The directive focuses on three issues, but the issue likely to cause the most headaches is the likelihood of the loss of millions of dollars of executive comp deductions.
The tax law exempts stock options from the $1 million limit on executive compensation deductions. That allows the corporation can deduct the amount that the stock has appreciated from the time the stock option was awarded to the executive to the time the option is exercised and coverted into shares. For example, if an option is issued at $1 per share and the executive exercises it when the stock is trading at $10, he has $9 income and the corporation has a $9 deduction.
The exemption from the $1 million deduction lid only applies for option income resulting "solely" from appreciation from the grant date. If the options are backdated, it's hard to say that the option income is "solely" attributable to subsequent appreciation.
It seems unlikely that the government will consider all stock option backdating to be a securities law crime, and they may not succeed if they try.
The real breach of trust, it seems to me, is the willingness of executives to risk the loss of their companies' compensation deductions to squeeze a bit more out of their stock option programs. The $1 million compensation limit is bad tax policy, but that doesn't excuse executives who cause it to apply by backdating their own options
Now that the IRS is making backdating a priority, maybe they can engage Remy Welling as a consultant. Ms. Welling was fired for blowing the whistle when the IRS ignored option backdating on a corporate exam.
Link: Complete Tax Update coverage of backdating.
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AND THUS PASSES ANOTHER PUNDIT
July 11, 2007
State 29 throws in the towel.
Of course, this has happened before.
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DESTINY: SPECTACULAR FAILURE
July 11, 2007
Project Destiny crashed and burned yesterday. The proposal to increase the local sales tax from 6% to 7% was crushed, 85% to 15%. The promoters of the tax had a $770,000 war chest, but were overwhelmed by the opponents' $3,500.
Some proponents of the tax quoted by the Des Moines Register were apparently disoriented by the defeat. Take the mayor of Indianola:
Indianola Mayor Jerry Kelley, who promoted the tax proposal at numerous public meetings, said Yes to Destiny was partially successful because organizers managed to sign up 43 governments for the plan on how the $750 million over 10 years would have been spent. He called the cooperation "a good thing" that should continue for the area’s overall economic health.
We'll award Mr. Kelley our Little Big Horn "Partial Victory" award.
Other politicians had a more realistic assessment of the debacle:
Des Moines city leaders said the results send a strong message from residents: They do not trust governments and will not give them more money to spend. Many said the fallout from the scandal at the Central Iowa Employment and Training Consortium is still being felt.
"People just do not trust government for spending the money wisely," said Des Moines Councilman Brian Meyer.
Bingo.
Still, there is a bright side for Destiny supporters. The tax increase was approved in Dawson, Iowa, 27-12 - the only community to vote "yes." We can now look forward to Dawson becoming the cultural and bike trail capital of Central Iowa.
Location of Dawson, Iowa's new cultural mecca.
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SELLING TAX SHELTERS AS RICO VIOLATION
July 11, 2007
When you choose to go to court rather than settle, it's always a gamble. An attorney who helped sell tax shelters dreamed up by former Jenkins and Gilchrist Attorney Paul Daugerdas lost his bet last week.
William Bradley got involved in marketing tax shelters involving foreign exchange options, which makes me think it is similar to the "COBRA" tax shelter. After the shelter business tanked, Mr. Bradley was sued in a civil RICO action along with Mr. Daugerdas and other defendants. Only Mr. Bradley failed to settle. The court ruled him liable for up to $6,432,000, plus attorneys fees, under the RICO treble damages regime.
The Moral? If you're litigating against triple damages, you better feel pretty good about your case.
Link: DUCOTE JAX HOLDINGS, L.L.C
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WEDNESDAY TAX COMMENTARY ROUNDUP
July 11, 2007
A quick visit this morning to some of our favorite tax sites:
Death and Taxes has the second installment of its gift tax primer. This might be read profitably along with California Tax Attorney's Top Ten Estate Planning Mistakes.
The Tax Grrrrl is embroiled in a commentary battle with the attorney for the losing side in the recent new Murphy decision. The TaxProf has rounded up the links.
The TaxGuru notes that California may be cutting corners to seize unclaimed property.
And the Wandering Tax Pro is driven to distraction by K-1s for publicly traded partnerships, and he has an astute observation:
Why do individuals invest in limited partnerships? I doubt any of my clients that have owned a limited partnership investment over the years actually called up his/her broker and said, “I want to buy some units of XYZ Timber LP.” Individuals invest in limited partnerships because their brokers tell them to!
While I cannot say this with certainty, it is my belief that brokers receive a higher commission from selling limited partnership units than from selling traditional shares of stock.
That's my suspicion too.
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DATE WITH DESTINY
July 10, 2007
Voting appears to be heavy in today's vote on the "Project Destiny" sales tax proposal. The proposal would boost the local sales tax rate from 6% to 7%, with 1/3 of the proceeds earmarked for property taxes, and the rest to be spent by our local elected officials with their usual thrift.
Lots of yard signs are out for "No."
The "Yes" folks are relying on lots of money, lobbying their own employees, and media buys. Polls are open until 8:00 p.m.
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ARE TAX CREDITS THE KEY TO GOOD HEALTH?
July 10, 2007
Senator Tom Harkin has proposed a new tax credit for corporate wellness program:
The Healthy Workforce Act would provide a tax credit of up to $200 per employee for the first 200 employees, and up to $100 per employee thereafter, to businesses that offer comprehensive wellness programs.
The Senator's press release has this statement:
Employer spending on health promotion and chronic disease prevention is a good investment. Studies have reported a proven rate of return ranging from $2 to $10 for each dollar invested. Workplace wellness programs are also economical, averaging $30-$200 per employee.
If it's such a good deal, why does it need a tax credit? Employees would be tripping over themselves to do it anyway. Is it perhaps because... it's not such a good deal?
Like most tax credits, the benefit would go to people already are doing what the program would subsidize - in this big instance companies that have both wellness programs and good lobbyists. In honor of the proposal, we are reopening the voting on our good deed tax credit poll:
Your vote counts!
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THERE'S NO 'GOOD SON' DEDUCTION
July 10, 2007
The Tax Court yesterday ruled that a Bronx man could not deduct home mortgage interest he paid for his parents.
Unni Nair, a computer engineer at Columbia University, made eight months of mortgage payments on a house owned by his parents during 2003. Mom and Dad were probably thrilled, but the IRS was less so. The Tax Court ruled against Mr. Nair:
We conclude based on the record that petitioner made payments on his parents' mortgage merely as a way to provide support for them. While admirable, this moral obligation to support his parents does not entitle him to deduct the mortgage interest.
The Moral? Sometimes family harmony is its own reward, because it doesn't give you a tax break.
Cite: Nair, T.C. Summ. Op. 2007-116
The TaxProf has more.
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FUN WITH DEATH AND TAXES
July 10, 2007
Joel Schenmeyer has begun a series on "'Fun' Facts about the Gift Tax":
What's a gift? A "gratuitous transfer." In other words, if you give me your house, that's a gift; if you sell me your house, that isn't. What if you sell me your house for less than fair market value -- is that a gift? It depends on intent. If you intended to make a gift of the difference between what I paid and the fair market value, then that difference is a gift. If I paid less than fair market value because I'm savvy, that's not a gift.
This promises to be an excellent quick course on a complex and confusing part of the tax law.
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TAX POLICY CENTER: DON'T EXPECT THE TAX GAP TO FUND THE GOVERNMENT
July 09, 2007
The center-left Tax Policy Center has published a paper,"Reducing the Tax Gap: The Illusion of Pain-Free Deficit Reduction." This is a useful corrective to the politicians, including presidential candidates, who act as though the government could have unlimited funds if it would just bother to collect the taxes.
The paper's conclusion (emphasis added):
Additional steps can and should be taken to improve tax enforcement. These include new legislation to provide the IRS with improved enforcement tools through enhanced information reporting and budgetary support that will enable the IRS to increase its enforcement activities and sustain that increase in the long run. In addition, the IRS should continue its efforts to learn more about noncompliance through the National Research Program (NRP) and to complete its efforts to upgrade information technology. The administration has advanced a number of proposals in its fiscal year 2008 budget and members of Congress have introduced legislation incorporating these and other ideas.
While all these actions are desirable, no likely set of actions will make an appreciable dent in the long-term federal deficit or the aggregate size of the tax gap. Closing the tax gap is not the magic bullet that will enable politicians to avoid making hard choices about entitlement spending, taxes, or both.
The current political interest in the tax gap has a positive and negative side. The positive side is the renewed emphasis on the importance to the integrity of our tax system and the long run financing of government of maintaining a robust and effective tax enforcement agency and supplying it with the best enforcement tools that are consistent with reasonable reporting burdens on the private sector. The negative side is the fostering of an illusion that the tax gap represents an easy source of free money. That illusion will eventually run up against the hard political realities imposed by the budget scorekeeping process, but the sooner those realities are recognized, the better.
One huge problem is that the biggest component of the tax gap is self-employed taxpayers; there is no easy and cheap way to eliminate non-compliance in the cash economy.
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