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.