Saving Retirement in the Face of America’s Credit Crises?

An idea currently being pitched is to nationalize everyone’s 401(k) account. The logic goes something like this: Financial Markets are volatile, if you measure from the high water mark to the low point of the markets it appears the world is coming to an end, therefore the government must intervene. (Sarcasm mine)

The government intervention comes in the form of having people to trade in their existing 401(k) for a Guaranteed Retirement Account (GRA). The GRA would pay a guaranteed return of 3%. So people would trade an investment vehicle that has averaged returns of around 10% since 1978 for a guaranteed return of 3%.

The examples used indicate someone with $50,000 in a 401(k) could trade that in for an additional $500 per month from Social Security upon retiring. One problem with this is that if a retiree passes away within 8 years 4 months of retirement the government keeps the excess in its own coffers whereas in a 401(k) account the retiree’s heirs receive the money.

Historically speaking, an investor that contributed $1,667 per year since 1978 would see his 401(k) grow to over $182,000. (I used 1978 because the author claims the 30 year experiment with 401(k) accounts has been a failure. $1,667 is used because the author uses a principal of $50,000 in the example.) This includes losing almost 40% of the overall value in the current year. To be sure the GRA is the name implies would gave a guaranteed return. Instead of losing 40%, retirees would have gained 3%. However, the increase of 3% would only bring the value to $81,000. In this scenario, a retiree would have traded over $100,000 for stability. That would be a terrible trade. A disciplined approach to 401(k) contributions doesn’t seem to be a failure.

Another issue I take with the author is her disregard of 401(k) history. She makes the assertion that 401(k) accounts are cheaper for employers but earn subpar returns. Obviously, the returns from well diversified 401(k) accounts are better than 3%, but she makes this statement as if 401(k)s were designed by employers who no longer wanted to fund defined benefit plans. However, 401(k)s were actually the result of demands by employees who didn’t want to spend 40 years of their lives with one company in order to receive a retirement even if the employee didn’t have to fund it.

My guess is that instead of trying to save retirement in the midst of a crises, these advocates are just using the fear of uncertainty to move the financial markets closer to socialism.

How Can a Man Who Doesn't Even Know How Many Degrees He Holds Be Expected to Understand the Tax Code?

The St. Louis Post-Dispatch reports that Joe Biden committed a common tax error while criticizing John McCain's tax plan. Biden used average health care costs of $12,000 per year to give an example of the effects of the McCain proposal of a $5,000 credit.

According to the Post-Dispatch, Biden said $7,000 would still be taxable. This indicates Biden is confusing tax credits with tax deductions. A credit reduces a tax liability dollar for dollar. A deduction reduces taxable income before the tax rate is applied.

A taxpayer in the 25% bracket would incur tax of $3,000 on $12,000 of taxable income. The $5,000 would be applied directly to the tax liability. Biden, apparently, would incorrectly deduct $5,000 from $12,000 income and then apply the tax rate. Fortunately for Biden, Delaware has the highest per capita rate of CPA's in the United States.

As bad as that is, it gets worse. It seems that Biden believes that McCain is making economic sense and that is bad for America! (Video is here at 5:25).

Obama-Biden's new slogan: Vote for us, the party that believes Economic Sense is Bad for America!

Read My Lips: Disagreeing Politicians Aren't Lying Politicians

There is a kerfuffle brewing in the political world concerning proposed tax policies of the Presidential candidates.

In Obama's acceptance speech, he promised to give tax cuts to 95% of working people. McCain says that President Obama will raise everyone's taxes.

Now it seems commentators are calling McCain a liar. While it is difficult to defend any politician when called a liar, it seems illogical in this instance to use the moniker.

For McCain to be a liar, he would have to say Obama will raise taxes while he knows not only that Obama promises to cut taxes but will also be able to cut taxes.

Twenty years ago, a Presidential candidate asked Americans to read his lips. He promised no new taxes in his acceptance speech. By the logic used today, anyone who said the lip-reading President would raise taxes would be a liar. During his administration, however, George H.W. Bush did allow for tax increases.

So it is far too soon to know if McCain is a liar or a prophet.

It's As If I Don't Exist

I have either been Terminated or Totally Recalled!

In a posting that discusses taxation of 501(c)4 organizations (civic organizations devoted to charitable, educational or recreational purposes), Linda Beale goes off on a tangent. I traded posts several times on it and had an entry that remained for about 12 hours. Then, all of a sudden my final post disappeared. I don't believe I was rude or obnoxious but I have all of the entries saved. You can read all entries but my final one here.

Here is my final response:

Linda

I am not a ‘fan’ of smear campaigns, but I am rather fanatical about the 1st amendment. From this post and others similar in nature, I am inclined to believe that you wish these people weren’t allowed to say what they have to say and that the tax code may be a viable way in which to shut them up. Otherwise, in issues like this you may balance your opinion with equal criticism of PAC groups such as Brave New PAC which disputes much of John McCain’s POW experience. As an aside, I believe Philip Butler, the man who served with McCain and used in the ad poses a serious problem for Obama. Whether true or not, I believe many Americans will find Butler’s ad in poor taste, but I would rather Butler have the freedom to state his claims.

I don’t object to your word choice. I only mentioned it because language such as ‘anti-progressive’ ‘right-wing’ ‘Bush regime’ ‘Rovian’ ‘swift boat’ are typically used by people who haven’t exercised a ‘careful weighing of the facts’. Yet you write of William Ayers of the Weatherman as if that organization is your garden variety civic organization. You also stress ‘long ago’ in an apparent attempt to minimize the impact of the Weatherman though from Ayers own statements he is unrepentant and believes the group didn’t go ‘far enough’. You then feel it necessary to state that Obama has in no way indicated that he thinks violent action against the US is appropriate. That’s a relief. The terminology you chose leads me to believe that you are left of center, have long ago decided to back the Democratic nominee and will be critical of any tactics from those who oppose that nominee. All of that is perfectly acceptable, but again doesn’t ‘reflect a careful weighing of the facts’.

Specifically as for Swift Boat Veterans for Truth and others similar the IRS issues will always be of facts and circumstances. It could be argued that the Swift Boat Vets didn’t intend to engineer an election but to directly refute John Kerry’s 1971 testimony in which he said, “they had personally raped, cut off ears, cut off heads, tape wires from portable telephones to human genitals and turned up the power, cut off limbs, blown up bodies, randomly shot at civilians, razed villages in fashion reminiscent of Genghis Khan, shot cattle and dogs for fun, poisoned food stocks, and generally ravaged the country side of South Vietnam”. It certainly seems Kerry may have ‘smeared’ them 33 years prior and they were only responding in a manner to educate people that they did not in fact commit the crimes of which Kerry accused them.

Once again, I appreciate your blog and find your non-political posts informative (I actually find your political posts both entertaining and informative, though not for the reasons you intend). I am, however, inclined to believe you have long ago made up your mind about this Presidential race as well as many other issues. Rather than drawing a conclusion from the information present, you seek to find information to support that conclusion.

Regards – Dave.

I don't know. It doesn't seem to be out of line. Here is a list of 501(c)4 organizations that have been accused of engaging in political campaigns on behalf of or in opposition to candidates for public office that Ms. Beale chose not to mention: MoveOn.org, Democratic Leadership Council, Brave New PAC, The Media Fund, America Coming Together and America Votes.

Tax Credits are Not Tax Cuts

95% of working families can expect a tax cut under Presidential candidate Barack Obama's tax plan. Obama has not been very specific about the mechanics.

In 2006, taxpayers in the 5% tax rate paid on average of $362 in taxes for the year. People in the 10% bracket paid on average of $519. These figures were derived from IRS statistics.

If he cut these rates to zero, it would only save this group of taxpayers $362 and $519, respectively. My guess is instead of a cut in the tax rate, he will propose targeted tax credits. Which means Obama will really be advocating spending increases.

Form 1040, page 2, shows a series of non-refundable (lines 47-55) and refundable (lines 66a and 68) credits. These include child care, elderly, education, energy credits and others. A simplified explanation of tax calculation would be to sum your income, subtract your exemptions and deductions to arrive at taxable income. Apply the tax rate schedule to your taxable income to calculate your tax liability.

Tax liability is your total amount of tax. To determine, your refund or tax due subtract tax credits and taxes already paid (typically through withholding). Every dollar of tax credit reduces your tax due be a dollar.

If, however, instead of subtracting from taxes owed your amount of credits, you paid the full amount of taxes owed and at another time from a different bureaucratic agency (Department of Earned Income Credit?) received a check for the amount of the credit everyone would recognize it for what it is....welfare....disguised as a tax cut!

Reasonble people could certainly argue the benefit of any and all of these credits. However, these can't be argued to be tax cuts but increases in federal spending. And my guess is Barack Obama's plan won't result in any real tax cuts.

I Don't Know Tax Law, I Just Write It.

Charlie Rangel, chairman of the House Ways & Means Committee, the committee that has the responsibility of writing tax laws, has failed to report $75,000 in income.

The New York Times reports that this poses a political embarrassment for Rangel. I'll say.

Maybe the Democratic Messiah can spin this into a campaign slogan. "Vote for us. We'll cut 95% of people's taxes and the rest can do like us and not report your income!"

Increases in Tax Revenues Aren't Tax Increases

People on a search to find something to destroy Vice Presidential nominee Sarah Palin are grasping at straws when they surmise that she must be a tax & spend bureaucrat such as this:

"Sarah campaigned in Wasilla as a “fiscal conservative”. During her 6 years as Mayor, she increased general government expenditures by over 33%. During those same 6 years the amount of taxes collected by the City increased by 38%."

Quote by Alaskan resident Anne Kilkenny

What Kilkenny fails to mention is that Wasilla grew from a population of 4,028 to 7,025 estimated for 2003 (Alaskan Department of Commerce and Economic Development). That’s a population increase of 74%. And the city only increased collected taxes by 38% and spending only increased by 33%. That means that each resident saw their tax burden cut drastically. The Democrats should have nominated someone with this kind of experience.

I guess this proves Gov. Palin correct; Community Organizers such as Anne Kilkenny truly don’t have any responsibilities, especially to the truth!

Tax Cuts for All!

I will, listen now, cut taxes -- cut taxes -- for 95 percent of all working families. - Barack Obama's Acceptance Speech.

No specifics were given on how this would work. But 95% of working families means everyone earning about $700,000 and less will receive a tax cut according to Internal Revenue Service statistics.

I think Obama really thinks he is the tax cut Messiah.

Capital Gains Elimination?

During last night’s acceptance speech from Barack Obama, I heard many generalities with few specifics. I may have heard a different speech than Keith Olbermann. Obama did give one specific proposal regarding taxes. He promised to eliminate capital gains taxes for the small businesses and the startups that will create the high-wage, high-tech jobs of tomorrow. This was an odd statement for a few reasons.

Corporations don’t have a preferential capital gains rate. Corporations are taxed on capital gains at regular tax rates to a maximum of 35%. So if he is eliminating the capital gains rate on small businesses, is he essentially reducing the tax rate to zero? What defines ‘small businesses’? The interesting thing is startups and small businesses rarely have capital gain transactions, regardless of the tax implications. Capital gains only arise from selling capital assets. Small businesses generally earn income from selling services or inventory. Both of those occurrences generate ordinary income and would not benefit at all from Obama’s buzzword banter.

Back in March, Obama said capital gains rates needed to be raised. He said he would not go higher than Bill Clinton’s 28% rate, but mentioned 20% and 25%. Does this mean that Obama believes individual savers should pay more in capital gains while businesses should pay nothing?

If reducing or eliminating capital gains for businesses would create jobs, wouldn’t reducing or eliminating capital gains for individuals create economic growth. It certainly did in the 90’s when the Republicans reduced the rates from 28% to 20% through the Taxpayer Relief Act of 1997. That directly led to 3 straight years of superb growth.

My cynical side says that the Democrats know the evidence is overwhelming that low capital gains rates lead to economic growth which actually leads to higher tax revenues. This, however, is an issue that they cannot go toe to toe with Republicans and win. So, they decide to use the ‘Cut Capital Gains’ terminology. That way when properly challenged on their proposal to raise capital gains taxes, they can reply ‘No. We’re going to cut capital gains taxes’, even though it is meaningless.

Now, I’m all for low capital gains. But I’m more in favor of politicians not using smoke and mirrors to hide tax increases like Obama advocated in March with a ‘tax cut’ that doesn’t exist because nobody will qualify for it.

The World's Oldest Profession Collides With the 2nd Oldest Profession

James Smith of North Carolina pled guilty yesterday to tax evasion. The government charged Smith with mischaracterizing his transactions with Soft Touch Promotions, a prostitution ring. He deducted the payments as business deductions and classified them as meals and entertainment and advertising.

Now, I can see where someone might classify this as entertainment. But in that scenario you would only be able to deduct half of the $700 per hour charge and you would need to document who accompanied you and the purpose. I really don't want to think about any meals Mr. Smith was eating.

But Advertising? Unless Mr. Smith has a Red Clay Industries tattoo in a place only visible when the clothes come off, that seems destined to be discovered under audit. Although, since the Charlotte Observer says he is in the construction industry, maybe he felt it necessary to show off his wood.

I'll Gladly Give You a Tax Credit Today for a Mortgage Tomorrow

I don't think Wimpy actually had anything to do with the lastest tax reform coming out of Washington. What is being packaged as a tax credit to spur activity in the housing market amounts to an interest free mortgage for up to $7,500 to be repaid over 15 years.

CNN has brief summary with comments from the usual suspects such as National Association of Realtors. I will comment on this in more depth very soon, but I certainly feel that what Congress is doing gets more and more bizarre everyday.

The Job

It may not be long before this is a common sight.

http://www.youtube.com/watch?v=3XGJq8wrw5I

Sin Tax

This Wall Street Journal Op-ed tells of the trouble the State of Maryland is having balancing the budget on the backs of smokers.

In 2007, Maryland's legislature raised the cigarette tax to $2 per pack. Now that cigarette sales have plummeted by 25% the state is in fiscal crisis again. Many people would conclude this is a good sign and that behavior modification is the ultimate purpose of 'sin taxes'. The problem is that instead of 25% fewer cigarettes being consummed, most likely these cigarettes are being brought across neighboring state lines where the price can save as much as $15 per carton.

The Maryland lawmakers have now made it a crime to bring more than two cartons of cigarettes into the state that weren't purchased in Maryland. This blatantly says that Maryland isn't so much concerned for the health and well-being of its citizens as it is in making money on people's destructive habits.

Maryland isn't the only jurisdiction to encounter this problem, but it illustrates the problem with these taxes. Are state and local governments trying to keep Americans from sinning or just trying to become a financial partner in such behavior?

All the Incorrect Tax Information That's Fit to Print

If your tax accountant ever worked for the New York Times change accountants as fast as you can! This correction (You'll probably want to bookmark this site. It's humor is priceless) indicates that people at the Times don't understand the difference between gross sales and net taxable income.

An article on Wednesday about a Government Accountability Office study reporting on the percentage of corporations that paid no federal income taxes from 1998 through 2005 gave an incorrect figure for the estimated tax liability of the 1.3 million companies covered by the study. It is not $875 billion. The correct amount cannot be calculated because it would be based on the companies paying the standard rate of 35 percent on their net income, a figure that is not available. (The incorrect figure of $875 billion was based on the companies paying the standard rate on their $2.5 trillion in gross sales.)

So, the paper publishes an article to rally the anti-corporate troops about industrial titans who make money hand over fist without paying any taxes. Then follows that with a correction essentially saying 'Never mind, we have no idea how to compute taxable income.' I'm sure there's no agenda here.

Your Honor, That Money I Paid to Have an IRS Agent Killed was a Deductible Business Expense and I Intend to Prove It!

Randy Nowack of Florida reasoned it would be cheaper to pay $10,000 for murder than $300,000 in taxes. If convicted, he could face 20 years imprisonment and a fine of $250,000. Apparently, that information wasn't factored into this menace's decision model.

Enquiring Minds Want to Know

According to the Cincinnati Enquirer, a tax examiner with the IRS has been arrested for illegally accessing personal information of 197 celebrities and professional athletes.

Examiner John Snyder was caught when authorities audited who was accessing personal and tax information stored on a federal database. Snyder had access to the database but had no legitimate reason to view individual taxpayer accounts.

If convicted of improperly accessing IRS data, Snyder could serve up to a year in prison and a $250,000.

Some of the celebrities named as victims include: Kevin Bacon, Alec Baldwin, Sally Field, Vanna White, Cincinnati Reds and Chicago Cubs players, Marvin Lewis, Penny Marshall, Randy Quaid, Tara Reid and Chevy Chase.

All the legal aspects of this dispatch make sense. What confuses me, though, is the mention of Chevy Chase. Is he still considered a celebrity?

What's 2+2?....What do you want it to be?

A recent survey by the Ethics Resource Center found that rates of misconduct are increasing and management awareness is declining in Corporate America. It also found that compliance programs are beginning to deteriorate.

At the same time, another survey has more intriguing results. Junior Achievement found that 41 percent of teens believe one must act unethically in order to get ahead. Only 22 percent of teens expressed that view in 2005

What does this all mean? Hopefully, not much. However, with rising fuel costs, intense competition and early signs of inflation, and watchdog groups beginning to look elsewhere, this may be the beginning of a perfect storm for corporate failings of an Enron or WorldCom magnitude.

We're Number 2!

According to The Tax Foundation, the United States now has the second highest corporate tax rate in the world, behind Japan.

The top ten:

Japan 39.5%
United States 39.3%
Italy 37.3%
Canada 36.1%
France 34.4%
Belgium 34.0%
New Zealand 33.0%
Spain 32.5%
Luxembourg 30.4%
Germany 30.0%

Unfortunately, the only talk I hear in this election year about corporate tax rates is how corporations aren't paying nearly enough. We'll see if the trend among European Union nations makes its way across the Atlantic.

Book Review: Vultures in Eagle’s Clothing: Lawfully Breaking Free From Ignorance Related Slavery

Actually, I’m not going to review this pile of garbage as much as I’m going to allow the plight of James Ellett speak to the usefulness of this book. The book written by Lynne Meredith claims to instruct readers how to ‘lawfully stop paying income taxes’. In 1994, Mr. Ellett read the book and in the ten years that followed read it at least one hundred times. He also spent hours researching taxes in a law library.

Upon formulating a tax strategy, Mr. Ellett filed ‘In Lieu of Form W-4’ forms from May 1996 through 2004. These forms directed his employer to withhold zero dollars from his income. So even though he earned between $64,000 and $102,000 each year from the year 2000-2003, his federal withholding was zero.

In the middle of 2004, the IRS instructed his employer to begin withholding taxes from his wages. This resulted in $8,251 being withheld on income of $73,376 for 2004. Ellett did not file federal income tax returns for the 2000 through 2004 tax years. In total, he failed to pay $64,000 in income taxes for that period.

This brings to Mr. Ellett’s most recent court decision. He was indicted on September 14, 2006 for three counts of income tax evasion for years 2000-2002. On February 2, 2007, two additional counts were added: tax evasion for tax year 2003 and misdemeanor failure to file for tax year 2004. So all told Mr. Ellett is now on the hook for five tax years.

From this point forward there is not much excitement in this case. Mr. Ellett’s main defense for not filing is that as a native of one of the 50 states who worked for a private employer, he sincerely believed that he was exercising a ‘nontaxable right’ to engage in labor. Most reasonable people would conclude that this is pure nonsense. Even Mr. Ellett conceded under cross examination that this was ridiculous as any tax professional would have disagreed with him which is why he never consulted one and that the Supreme Court has upheld the constitutionality of the federal income tax.

However, there is one point that may be worth making. After the jury found him guilty on all counts, Mr. Ellett sought a new trial on the grounds that due process required that he be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion. Essentially, Ellet was arguing that since he was never audited, he could not be prosecuted. This is where Mr. Ellett and possibly many other non-filers misunderstand the tax deficiency element of tax evasion.

A tax deficiency arises when a tax return is due but not filed. The Internal Revenue Service is not required to make a formal demand or assessment. Therefore the government is not required to obtain a civil or administrative determination prior to establishing the existence of a tax deficiency.

So any non filers or tax protesters who are reading this should do themselves a favor and file any past due returns. Otherwise, you may have the same fate as Mr. Ellett; 18 months imprisonment.

Avoiding Penalties

A recent “Fact Sheet” released by the IRS discusses tax penalties and ways to avoid them:

The most common penalties are for filing late or paying taxes late.

Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).

If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return.

Paying tax late: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

Since the penalties are lower for those who pay late than those who file late, it is wise to go ahead and either file or extend even if you can not pay the balance due. Bear in mind, however, that if you extend without making a good faith estimate of the taxes you owe, the IRS may disallow the extension. In practice, this rarely happens.

Additional Time to File

By now, most are aware that Bartow County has been declared presidential disaster area by the federal government. This gives residents until May 19th to file and pay their taxes. Some confusion was created the way the local media were reporting the additional time to file. The media reported that those affected by the tornadoes had additional time to file. This is correct. However, the regulations define an affected person more broadly than having your home destroyed.

Treasury Reg. §301.7508A-1(d)(1) identifies four ways in which taxpayers will be considered affected taxpayers eligible for postponement:

• Reside in a county that is a declared disaster area.
• Operate a business located in a county that is a declared disaster area.
• Maintain your books, records or use a tax professional whose office is in the covered disaster area.
• Relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area are eligible for postponement.

In addition to filing a tax return and paying any tax owed, the declaration provides additional time make a contribution to a qualified retirement account such as an IRA.

Here are the links for the Federal and Georgia announcements.

When Rapid Refund Just Isn't Fast Enough

A CPA in Cartersville lives by the motto that the best place for a CPA practice is beside either a liquor store or a pawn shop. For many tax pros who strictly target people who are desperate for cash, that is the case.

The Des Moines Register reports on a missed opportunity for those kind of preparers. It appears a man robbed a convenience store and left behind his jacket. Unfortunately for him what was in the jacket will make it rather easy for police to find him.

Police found the jacket — and, in a pocket, a W-2 form they are sure belongs to the man.

The line at Jackson Hewitt must have been really long for this to have been his best option for cash. Hopefully, he knows that all income from whatever source derived (illegal and legal) is taxable income and he budgets taxes for the $115 that he stole.

Ten Things to Consider When Selecting a Tax Pro

From SmartMoney.com is a list of 'Ten Things Your Tax Preparer Won't Tell You'

The first point is a Big Name Won't Necessarily Mean Better Service. This seems rather obvious. In an industry that that hinges on presonal relationships, how can you expect to get qualified guidance and service from a part-time worker in a kiosk at Wal-Mart?

The General Accounting Office found that 'nearly all the returns prepared for us were incorrect to some degree' at the big chain retail tax places. Last year, Jackson Hewitt was accused of cheating the government out of $70 million with fraudulent tax returns mainly using phoney businesses. In the CPA community, the tax outfit in green is known as 'H&R Crock' because it relies almost solely on part-time seasonal labor with only a crash course educational training program.

In coming days a few of the other points will be addressed.

Wanted: Major League Athletes in Need of Tax Services

Lenny Dykstra is being sued. That's no surprise. The circumstances surrounding the suit are surprising. As the New York Daily News reports, Dykstra is being sued by the accounting firm who prepared his 2006 tax returns. The firms claims Dykstra did not pay his bill of $111,000 for the preparation of 2006 tax returns. That's not a typo. That's One-hundred-eleven thousand dollars.

Dykstra naturally assumed the bill was an error and is willing to defend himself in court. "Somebody trying to charge $120,000 for a tax return and can't even file it on time, they've got some problem," he said. "Now they're going to get exposed. My attorney, he said he thought it was a typo when he saw the bill."

The former outfielder said he had numerous meals with his accountants and recalls paying for all of them. "Maybe they charged me for his steak and lobster, too," he said.

That's a lot of steak and lobster, even at Manhattan prices.

So in an offer to all of the professional ballplayers with Bartow County ties: Please contact me if you need any tax preparation assistance. I promise that I'll cap my fees at $80 grand.

The Cobbler's Children Have No Shoes

Jeanette Jamieson hasn't paid her Georgia state income taxes in eight years according to an AJC report.

This might not be so bad except for the following facts:

• She serves in the Georgia House of Representatives
• She serves on the House Ways & Means Committee which writes tax legislation.
• She is an accountant who owns Jamieson Accounting & Tax Services in Toccoa.

She has reached a settlement with the Georgia Department of Revenue to pay $45,734 by March 15th. Her excuse for nonpayment is that her public responsiblities have distracted her from taking proper care.

Maybe she advises her clients in the same manner as the old Steve Martin Saturday Night Live skit:

How to Make a Million Dollars and Not Pay Taxes

"First, make a million dollars. Next, don't pay taxes. Then when the government comes wondering why you haven't paid taxes remember these two words. They are very important. Say, "I Forgot!"

The GREAT Plan; Back from the Dead

I'm not even sure what to make of this at this point. Glenn Richardson in my opinion is the biggest pain in the neck in the state of Georgia. He proposes a tax plan claiming to be revenue neutral to get ri of certain property taxes. The plan looks anything but revenue neutral as proposed and appears to have next to no support. Then it starts looking like the littel engine that could after passing a House subcommittee.

The final statement of the AJC report makes it look like this bill is heading for either a backroom deal or for Richardson to bully his way to passage.

However, Lt. Gov. Casey Cagle, the Senate's president, has for months criticized Richardson's proposal to swap property taxes for charging a sales tax on more goods and services.

Also, the Senate's Republican leadership generally follows Gov. Sonny Perdue's lead on legislation, and he too opposes Richardson's plan.

Stay tuned. Apparently, this isn't going away quietly.

If Your CPA Has a Nickname, Find a New CPA.

Two former partners in a national CPA firm are under investigation for a tax-shelter operation using phony businesses. The greatest part of this article is that one earned the nickname ‘Dr. Poof’ because of his ability to make taxes go ‘Poof!’ Here is the report:

Two area tax advisers used sham companies and nonexistent chicken farms to shelter their clients’ income from hundreds of millions in taxes, government lawyers alleged Thursday.

In separate but related civil suits filed in federal court, the IRS said that Allen R. Davison of Overland Park and A. Blair Stover Jr. of Platte City and Beverly Hills, Calif., sold numerous fraudulent tax-avoidance schemes to wealthy investors. The agency’s lawyers asked a federal judge in Kansas City to permanently bar the men from giving tax advice or representing clients before the IRS.

The complaint cited a press account as stating that Davison’s clients and colleagues referred to him as “Dr. Poof” because of his reputation for making taxes go away.

Both complaints alleged the men helped wealthy clients evade income taxes through elaborate fraud schemes using bogus corporations and Roth individual retirement accounts.

“The amount of tax loss caused by Davison’s promotions is incalculable but likely in the hundreds of millions of dollars,” the complaint against Davison stated.

Neither Davison nor Stover could be reached for comment Thursday. But Stover’s attorney, Mark Thornhill, called the allegations “plain wrong” and said they “appeared to come from a disgruntled former business partner.”

“Moreover,” he said, “these allegations relate to transactions that occurred years ago. We are perplexed.”

So it’s perplexing when the government comes after you for bilking them out of ‘hundreds of thousands of dollars’ if it happened years ago. My favorite part of this is later in the article when it is revealed who the ‘disgruntled former business partner’ is:

Disgruntled former clients facing tax audits also filed suit in Nebraska and California, alleging in one case that they likely owed “millions of dollars” in back taxes and penalties.

Clients who adopt tax avoidance strategies that the IRS later finds improper must pay the taxes owed and penalties, even though they were taking someone else’s advice.

What a great way of looking at things! A tax professional peddles fraudulent tax schemes that fall apart leaving the client on the hook for unpaid taxes, penalties and interest, but that testimony should be discounted because the clients are just ‘disgruntled former partners’!

We also learn that the nickname ‘Dr Poof’ may be unwarranted as client V. Cheryl Womack explains:

“It made a lot of sense for me to have somebody here. And I paid plenty of friggin’ taxes. I never got mine ‘poofed’ away.”

A classy lady indeed!

IRS Tax Preparer Survey

This week I participated in an Internal Revenue Service survey. The IRS has been conducting these random surveys for several years now in the professional tax preparer community. I was asked a few ‘Qualifying Questions’ and apparently passed.

The first segment of questions concerned the volume of tax returns I prepared as well as the type and what percentage of those returns are e-filed. I was then asked about responding to notices clients receive from the IRS. One questioned posed was, ‘Who is to blame for notices concerning non-payment or late payment of tax, the IRS or the taxpayer? Without analysis I went with my gut and blamed the IRS. It probably isn’t accurate, but it is always more fun to blame the government.

To expound a little on taxpayer notices that are received in the mail, oftentimes those are generated by a computer because of a technical match (or mismatch). What I see with more frequency is brokerage firms submitting 1099s for interest, dividends or stock transactions with incorrect information. Certainly that isn’t the IRS’ fault for generating an official notice but it’s hardly the taxpayer’s either.

I do have an anecdote about incorrect notices being issued. This past summer a client received a notice and I immediately called the IRS to get additional information. The IRS’ response was ‘We haven’t actually processed the documents this notice regards. Sometimes those notices are automatically generated before we investigate the corresponding return.’ That one would probably be the IRS’ fault.

The final line of questioning was in regards to accuracy and ethics of paid preparers. The question that sticks out most in my mind was, ‘what percentage of paid preparers would you say knowingly prepare incorrect returns to reduce a client’s tax liability?’ I made the comment that I felt there were some shysters in my town before I gave a percentage. I finally said 50%. I may be low.

In future posts I hope to compile a list of the craziest things I have personally seen professionals do to reduce a taxpayer’s tax liability.

Random Information on the Economic Stimulus Rebate Payments

• IRS will begin sending taxpayers their payments in early May.
• A payment schedule is expected to be announced shortly
• Taxpayers who requested direct deposit for their 2007 federal refund will have their stimulus payment direct deposited.
• The payment amount will be the amount of tax liability on the 2007 tax return up to a maximum of $600 for individuals and $1,200 for joint filers.
• Taxpayers with no tax liability but at least $3,000 of qualifying income will be eligible to receive a payment of $300 for individuals and $600 for joint filers
• Qualifying income includes Social Security benefits, Railroad Retirement benefits, Veterans’ benefits and earned income.
• Dividends, interest and capital gains income is not included when determining qualifying income.
• Many low income people who may not normally be required to file a tax return must file a 2007 return in order to receive a payment.
• Recipients of Social Security, Railroad Retirement benefits and Veterans’ benefits should report the nontaxable amounts on line 14a of Form 1040A or line 20a of Form 1040.
• Taxpayers who have already filed but did not report the amount of benefits received should amend the return by filing Form 1040X.
• The Social Security Administration and Department of Veterans Affairs are working with the IRS to ensure that recipients are aware of this issue.
• Payments to higher income taxpayers will be reduced by 5 percent of the amount of AGI above $75,000 for individuals and $150,000 for joint filers.
• Individuals must have valid Social Security Numbers to qualify for the stimulus payment. Both taxpayers must have a valid Social Security Number for jointly filed returns.
• Children must have valid Social Security Numbers to be eligible as qualifying children.
• Filers who use an Individual taxpayer Identification Number issued by the IRS to file their returns are ineligible
• Individuals who can be claimed as dependents on someone else’s return are ineligible.
• Taxpayers who file Form 1040-NR, 1040-PR or 1040-SS are ineligible
• The IRS will continue to send payments until December 31, 2008.
• Taxpayers that move their residence after they file their 2007 tax return should file a change of address card with the U.S. Postal Service as well as Form 8822 with the IRS.
• Two informational notices will be mailed by the IRS advising taxpayers of the stimulus payments.
• The IRS will not call or send e-mails about the stimulus nor will it ask for financial information.
• Taxpayers who receive calls or e-mails seeking financial information should notify the IRS at phishing@irs.gov.
• Stimulus payments will be subject to offset against outstanding tax and non-tax liabilities similar to tax refunds.
• Stimulus payments will not negatively impact any income-based government benefits, such as Social Security benefits, food stamps and other programs.
• Stimulus payments will not be taxable.

Busiest Tax Season Ever

If your CPA or tax professional seems on edge right about it may be with good reason. The IRS announced recently that it expects anywhere from 10 to 20 million more returns to be filed this year then ever before. The main reason for this anticipated is the Economic Stimulus Rebates.

The act bases all rebates on returns filed for tax year 2007. Even people whose income in the past was such that a return was not required to be filed may be eligible for the rebate. However, in order to receive that rebate these people will need to go ahead and file. This would include people who receive Social Security benefits, Railroad Retirement benefits and Veterans’ benefits.

One of the national retail tax establishments is already trying to tap into this market by offering to file for these people for a flat rate of $35 which would then qualify the individual(s) for the rebate.

Fair Tax Rhetoric

I’ve written before about the Fair Tax, not because I oppose it but because some of the arguments offered by proponents are without basis. As Mike Huckabee’s bid for the White House draws to a conclusion, I feel the need to address one of his selling points in particular.

In campaign stops all over America, Huckabee touts the possibility that the IRS will be put out of business of the Fair Tax is established. The crowds react wildly. After all, who in this land likes the Internal Revenue Service?

But is it realistic to expect the IRS to wither away with the replacement of the income tax by a consumption tax? Remember, the IRS doesn’t create tax laws. It only enforces compliance. Certainly calculating taxes will be simpler but will enforcement be simpler?

One argument always made in favor of the Fair Tax is that it eliminates the ‘underground economy’. That is, people that are here illegally or are engaged in illegal activities will have to pay the tax just like the law abiding taxpayers. Even business owners who hire labor but don’t properly report the payments on either a W-2 or 1099 with the appropriate withholdings will now have to pay taxes as will the recipients of this ‘tax-free money’. But is this a reasonable expectation?

If it is so easy for employers to avoid proper payroll tax, why wouldn’t it be just as easy for business owners to avoid paying the fair tax? Suppose a local retailer sold goods and services subject to the national sales tax. When strangers came and shopped, those consumers were charged the appropriate amounts under law. Then when the storekeeper’s friends and family shopped, no sales tax was applied. Even worse, suppose business owners actually collect the proper amount but falsify the financial records in order to submit a lesser amount. How do the Huckabees of the world suppose the Fair Tax will operate without a tax gap? Or do supporters expect us to believe that taxpayers will be so relieved that the IRS no longer exists that everyone will freely collect and submit what they properly owe?

It simply is not true that the Fair Tax will eliminate the need for government enforcement. And if it isn’t true then it shouldn’t be said be people such as Huckabee.

There’s a Tax Scam for Everything

Wow! That didn’t take long. This alert comes from the office of the Attorney General of Texas.

ALERT
Scammers Taking Advantage of New Federal Economic Stimulus Package

Texans should be aware of a scam that has emerged in connection with the proposed federal economic stimulus package. Under recently passed legislation, the IRS will mail tax rebate checks to eligible Texans over the next few months. President Bush has indicated he will sign the package into law on Wednesday.

Several Texans recently filed complaints with the Office of the Attorney General after receiving unsolicited e-mails and telephone calls from purported IRS agents claiming that the taxpayers are eligible for “Bush refunds.” The scammers demand taxpayers’ Social Security and bank account numbers, claiming the IRS will use the information to directly deposit “rebate checks” into the taxpayers’ accounts.

This is outright identity theft fraud. The IRS does not call or e-mail taxpayers unexpectedly to demand personal information for direct deposits. Taxpayers solicited in this manner should just hang up or delete the e-mail.

Texans who have received these bogus solicitations can file a complaint with the IRS at www.irs.gov or by calling (800) 829-1040. Consumers also can report such calls to our office.

Sincerely,

Greg Abbott
Attorney General of Texas

I love how the scammers refer to the stimulus rebates as ‘Bush refunds’. It appears that even scammers want to blame Bush for something. Also, I’m glad to see that Greg Abbott is still around doing something although do you really want your state’s Attorney General’s name to be associated with a song entitled ‘Shake You Down’.

I’ll keep you posted if (when) this garbage makes its way to Georgia.

Is it still a hobby if you don’t have any fun?

From the glutton for punishment category of the US Tax Court – An Indiana man decided he was on his way to a lucrative career selling health care products for a network marketing company. He was convinced to give it a try from a couple he met at a health club. This was his first attempt at network marketing or retail sales.

Like any other multi-level marketing company, sales of the actual product are incidental to the more lucrative goal of sponsoring other people. He would then be able to earn commissions on those people’s sales. Of course, if they take the approach that sales are only incidental I’m not sure how much a commission check would actually be.

However, a funny thing happened on the way to the top of the pyramid. From the time he became involved with the company the only thing he sold was to family members. The only people he sponsored were also family members. He was able to enlist his brother and his son. Of course, the only reason they became distributors were for the discounts on the health products. In fact, his son must have only placed a single order for the discount. His son quit the sales force in the same year he joined.

In addition to his attempt to make a fortune selling health care products, the taxpayer maintained a full-time job….80 miles from his home. He commuted 80 miles each way to his main job. On some days, he would stop at parking lots along his route and place business card on windshields of cars. These business cards offered ‘The Opportunity of a Lifetime’ while listing the taxpayer’s phone number. However, the name of the company was never mentioned. The taxpayer never received a phone call from any of these business cards, which must have come as quite a shock to everyone.

Three years after becoming involved with the product, the taxpayer began sending out direct mail information. The materials he sent told recipients that he had been using the products for many months and that they had reduced the symptoms of various chronic illnesses and contributed to his ‘overall good health’. Each week, the taxpayer would collect names and addresses of 48 women in his surrounding area and send them a postcard. He would then send a second and third postcard. After that he would attempt to call these women. He would occasionally talk to a few of them for 15 or 20 minutes making his sales pitch. On the rarest of occasions, he would meet with some women personally to deliver product materials. All of this occurred while operating out of his local library. From all indication these efforts resulted in no sales.

As you can guess the taxpayer’s efforts weren’t very profitable. From 1997 to 2003, the taxpayer lost money in every year ranging from a $2,600 to $11,700 in losses. Those familiar with tax rules know where this story is going to end. The Tax Court ruled that the taxpayer did not comply with the ‘hobby loss’ rules adding that in nearly 10 years the company had no profits, minimal amount of activity and the only customers were relatives. The ruling disallowed the deduction for all of the taxpayer’s losses.

I guess he should have asked customers to 'Honk for Fonk'!

$2500 Employee Expense Deductions

There is a national tax chain claiming that they are finding taxpayers an average of $2,500 in employee expense deductions. That number seems high to me so I went to search for more information. I can't find a claim like that from the company in writing so I am lead to believe one of three things:

1. The claim is bogus.

2. The claim is made with certain exceptions to be understood or is meant to apply only to certain types of taxpayer which makes it bogus.

3. The claim includes returns with clearly falsified information.

The third scenario is interesting because this company makes most of its money from non-tax related services. Tax returns are just a vehicle to get people in the door to sell them a mortgage or insurance or some other product. Also, this company pays out millions of dollars in legal settlements and tax related penalties each year. About 6 years ago the company recieved a scathing letter from the president of the American Institute of CPAs questioning some of its practices and professionalism.

Maybe I'll have an answer shortly about the company's claim that I can discuss further. But about those people who are deducting more the $2,500 in employee expenses what kind of documentation are they able to provide? This is what comes to my mind.

Mandatory Withholding – A Historical Primer

Each year millions of Americans race for the nearest tax office to claim their refund immediately after receiving their W-2. This zero percent interest savings plan is created by two things: many people’s ignorance and the mandate that employers withhold the taxes from paychecks.

It hasn’t always been this way. The mandatory withholding provision in the tax code has been around for 65 years. In 1943, in the midst of World War II, the federal government needed a way to raise more money and to raise it quickly. It was suggested by a department store executive to break up people’s tax burden into smaller incremental payments. The executive came up with the suggestion after noticing that his customers liked paying for merchandise in installments even when the total payments were much larger than the item was worth.

When Congress enacted the mandatory withholding law most people believed it was only intended to last as long as war funds were needed. A funny thing happened on the way to pork barrel spending. Like any other organization, Congress recognizes the need for self preservation when it sees it. It recognized that taxes could be increased easier because taxpayers didn’t feel the pinch as much as if there were a large balance due in a lump sum payment.

Even today there is evidence that the federal government uses the public’s ignorance to its advantage when enacting tax law. I have posted earlier that many of the deductions available to most taxpayers really aren’t that advantageous. In regards to the total tax bill, most Americans have no idea how much they are paying in income taxes.

For most two income homes the total income tax liability is around $30,000. That’s a number that would be sure to cause anger among workers. However, if it’s withheld on a weekly basis from two spouses’ checks the $250 or so each payday isn’t noticed as much. And that is were the frustration lies. Are taxpayers gladly paying taxes because they feel the money is being used wisely in Congress and the feel comfortable with the level of taxation? Or are taxpayers so unaware of what they are actually paying in taxes that they feel no need to protest?

Obviously there is a need for taxes in order for our government to function. But Congress should not be able to hide behind its smoke and mirrors method of assessing taxes in order to raise revenues in stealth manner.

The GREAT Plan

Seems kind of odd that anything associated with tax reform would receive GREAT as its acronym, but here we are. GREAT originally stood for Georgia’s Repeal of Every Ad Valorem Tax but now only includes a repeal of Education Ad Valorem taxes. I’m not sure if school property taxes are the only taxes being repealed for practical reasons or because House Speaker Glenn Richardson liked the acronym so well he didn’t want to change.

The plan which originally proposed all property taxes to be repealed now only calls for the elimination of school property taxes. In order to recover the lost revenue needed to run local school systems, consumers would have to pay sales tax on groceries and services (both currently exempt). As Richardson explains, this would not result in a tax increase but a tax shift. Even if this is true, why would lawmakers want to impose this change?

Historically speaking property taxes are the most hated taxes of all (even income taxes). However, the reason for the hatred often has nothing to with the tax itself.

The first is that for years taxpayers have been subject to a ‘backdoor’ tax. That is that while tax or millage rates remain stable, the tax is increased because of inflation or higher appraised property values. This concern was addressed in Georgia in 1999 by the passage of Act 431. However, taxpayers either still feel ‘pinched’ by indirect tax increases or old habits are hard to break and once you develop hatred for a tax you always harbor resentment for that tax.

The second complaint is largely psychological. Many people who are subject to property taxes must pay the full amount due at one time in lump sum. Certainly, some homeowners have their taxes escrowed along with the mortgage payment. But this still leaves a larger number of people making large property tax payments than people who are required to pay income taxes in lump sum. And everyone knows when you actually sit down to write that check you know exactly how much you are paying in taxes and you don’t like. However, if every time you bought groceries, you were charged a sales tax in lieu of the property tax, over the course of a year you may not even know how much you paid. In fact paying an extra $20 per week instead of writing one $1,000 check annually may not even be noticed by many consumers.

This is one of the reservations I have about the GREAT Plan. Anytime taxes are broken down into such incremental amounts that they aren’t noticed, taxes tend to creep upward. I hope to blog fully on this subject in the future but mandatory withholding of income taxes were never intended to be permanent but Congress recognized that revenues were up in periods of mandatory withholding. It’s like buying that junk from late night infomercials: $120 is a rip-off but 4 payments of $29.99 for the same piece of trash that probably won’t work is very palatable.

It’s for this that I’m not sold on Richardson’s plan and all its GREATness.