Tuesday, November 29, 2022
Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad
Today I read a Philadelphia Inquirer story about a tax return preparer, and then re-read part of the story to make certain I had seen what I thought I saw. According to the story, a New Jersey woman was sentenced to 159 months in federal prison and ordered to pay $565,091 in restitution for her role in a conspiracy to file fraudulent income tax returns using stolen identities. What made me re-read part of the story wasn’t the identity theft, the filing of false returns, the receipt of undeserved refund checks, and the hiring of people to cash the checks, because at this point those misdeeds aren’t novel. What caught my eye was the number of fake tax returns the group filed. The schemers filed more than 3,300 fraudulent tax returns for 2013 alone. The woman who was sentence cashed 13 of the checks, each of which for an amount exceeding $5,500. She also provided some of the runners involved in the scheme.
It's unfortunate that each guilty member of the conspiracy hasn’t been sentenced to one month in prison for each fraudulent return. Even one week for each fraudulent return could cause other would-be fraudsters to think twice about getting involved in this sort of antisocial conduct. The sentence handed down to this woman amounts to about one and a half days in prison for each fraudulent return. And what of the more than 3,300 people whose lives have been turned into misery because of the identity thefts?
Thursday, November 24, 2022
One Day of Thanksgiving, A Year of Thanks
As I stated the past nine years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.
So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:
- I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
- I am thankful for all the people who continue to help update the multiple family trees I develop, maintain, update, and publish.
- I am thankful for the cousins I have met through FTDNA, ancestry, and 23andme, who I did not know existed, and for the opportunity to get in touch with cousins who I knew existed but with whom I had no contact until they showed up on one or more of those genetic genealogy sites.
- I am thankful that my congregation’s choir has been able to continue singing, still using masks, and was able to present a concert for All Saints Day though not on that day.
- I am thankful that we continue to gather in the sanctuary for worship, and, yes, that I continue to ring the narthex bell.
- I am thankful for having had the opportunity to continue teaching a law course, this time back in a classroom.
- I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
- I am thankful that awareness of what needs to be done to fight ignorance and corruption is growing and that more steps in that direction are being taken.
- I am thankful my health is holding steady.
- I am thankful that life for many is beginning to resemble what it was before a pandemic overspread the world.
- I am thankful for people being willing to read the things I write.
Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.
Saturday, November 12, 2022
Alleged Ignorance of the (Tax) Law: A Justification or an Excuse?
According to the reports of the trial, “McConney testified that Trump Org.’s tax consultant from Mazars, Donald Bender, never told him the practices of underreporting taxable income were illegal,” though he also “acknowledged that Bender told him that he ‘wasn’t a fan’ of the practice of issuing bonuses using 1099 tax forms when they could be booked as part of annual compensation from the Trump Corporation and taxed using a W2 tax form.” Interestingly, in about “2011, Bender advised McConney to stop cutting a bonus check to an in-house lawyer at the company because they could lose their law license for receiving it as an independent contractor, but McConney testified that he never questioned whether the illegality of how they handled bonuses would apply to anyone else.” McConney explained that he and other Trump Organization accounting personnel stopped these practices in 2017 at about “the time that a tax consultant conducted an internal review for Trump Org. and President Donald Trump took office.”
Is it sufficient for a corporate controller to rely on an external tax consultant’s alleged failure to point out the illegality of what the controller is doing, whether or not the controller is acting at the direction of higher-ups? I think not. According to RoberHalf, “Candidates for controller jobs should have a minimum of a bachelor’s degree in accounting or business, but preferably an MBA. They should usually have at least seven years of experience in the accounting field, and some public accounting experience is often required.” According to accounting.com, a controller should “Earn a Bachelor's Degree . . . in accounting or finance, . . . Obtain a Master's Degree, . . . like a master's in accounting or an accounting MBA, . . . Take the CPA Exam, . . . Earn CPA Licensure, . . . Obtain Professional Accounting Experience, . . . [and] Pursue Employment as an Assistant Controller.” Similar or identical advice can be found in educational, career planning, and employment web sites.
Based on this advice, a controller should have an education, licensure, certification, and work experience that includes exposure to basic tax principles. Business and accounting education includes exposure to basic tax principles. It’s one thing for someone whose education and career are not focused on tax to rely on tax professionals’ advice for the tax aspects of complex international transactions, but it doesn’t require an LL.M. (Taxation) degree to know that treating an employee as an independent contractor, providing false residence information, and underreporting employee income are illegal. Those principles are taught in business and accounting programs. The tactic of blaming others for one’s own misdeeds, whether in the form of alleging someone else did the wrong act or in the form of alleging that someone else failed to prevent the commission of the wrong act, has become a feature of present-day culture, perhaps fueled by a widespread parenting technique of making children feel good by telling them that their misdeeds are the fault of others.
There is a fine line between a justification and an excuse. Both terms often are used interchangeably in common conversation but in law there are technical differences. A justification is a claim that the act occurred but that the act should not be punished because it is consistent with societal principles. An excuse is a claim that the act occurred but that the person committing it should not be held responsible because of circumstances beyond the person’s control.
There is no way that underreporting income, misreporting income, and misstating facts on a tax return can be justified. Nor should an excuse based on blaming someone else for something that the actor knew or should have known be accepted as relieving the actor from responsibility. Blaming someone else isn’t justification. It’s an excuse, and in this instance it’s an unacceptable excuse.
Monday, October 31, 2022
Two Not Very Amusing, But Scary, Halloween Tax Challenges
In recent days, reader Morris has directed my attention to two stories that bring both tax and Halloween into play. One is from thirteen years ago and the other is from three years ago, yet neither caught my attention until reader Morris pointed them out.
In a discussion on HauntWorld, someone using the name Front Yard Fright posed this question and background:
I do not charge admission to my haunt (I'm zoned residential so I can't) so what I do is ask for a donation from everyone who enters. If people ask how much admission is, I say it's a $6.00 donation. It's not required, but we ask for $6.00 and do our best to get it out there that it IS in fact a DONATION, and is not required. A portion of my donations actually go towards a local humane society.Front Yard Fight explained that he asked his question because “there's a haunt near me that REALLY wants me shut down. He's called the city and has done a lot of messing with me. It was mentioned that he may come after me with the IRS about not paying taxes.”My question for you guys is, would I have to pay taxes on these donations? Logic says no, but you never know!
Answers offered to Front Yard Fright included (1) no because it is a donation, (2) no provided the money goes to a charity and no charitable contribution deduction is claimed, hedged with “I would call your state tax office,” (3) yes, it is income, but deduct your expenses, and (4) treat it as a business, reporting the income and expenses. Other responses did not offer answers but what could best be described as sympathy.
So what is the answer for federal income tax purposes? Setting up a business appears to be prohibited by the zoning rules, though a closer look at the locality’s ordinances would be required. Not knowing the location, that’s not something I can do. It appears that Front Yard Fright does this every year, so it might make sense to treat this as an activity not engaged in for profit subject to section 183. If donations exceed expenses, the excess would be included in adjusted gross income, but if the excess is contributed to a charity then unless the standard deduction is utilized, the net effect on taxable income would be zero. If expenses equaled or exceeded donations, the excess would not be deductible but the impact on taxable income would again be zero.
What about other taxes? It depends on the locality. Is there a state income tax? Does it have the equivalent of section 183, directly or through using federal adjusted gross income as a starting point in the computation? Is there a state or local sales tax? Does it apply to these sorts of donations? Is there a gross receipts tax? Are these donations considered gross receipts? Are there other possibly applicable taxes? Are there de minimis exceptions? Perhaps Front Yard Fright is in New York State and hasn’t yet been haunted by what happened in the second story.
In a Lexology summary of a New York case, Hollis L. Hyans of Morrison & Foerster LLP describes the outcome in Matter of Ronald J. Doherty, Jr. Doherty was doing business as Eerie Production, operating a haunted attraction in Buffalo, New York. Doherty charged $23 to enter five separately themed haunted houses constructed out of temporary walls and containing various props and animations, along with actors hired to dress as ghouls, vampires, and killer clowns and “scare forward” people going through the attractions.
The Department of Revenue audited Doherty for the years 2010 through 2013 and imposed a sales tax on the entrance fees and on certain purchases. The audit was resolved without any reference to years after 2013. Doherty requested an advisory opinion, and the Department issued one stating that sales taxes were due on the admission charges. When a second audit was conducted with respect to 2014, Doherty asked for another advisory opinion, and again the Department issued one that reached the same conclusion.
Doherty took the matter to an administrative law judge, who concluded that the charges were taxable because Doherty operated a place of amusement, which are taxable under the sales tax law. The exception in place for amusement devices did not apply. Doherty appealed to the New York State Tax Appeals Tribunal. Doherty argued that his operation was not taxable because a previous case had held that the sales tax did not apply to sales of tickets for Ferris wheels, merry-go-rounds, and coin-operated games, and that his operation was within that exception because his haunted houses contained devices such as a dentist’s drill, a chainsaw, a CO2 gun, electric and pneumatic systems operating things such as animated snakes, an airbag, a gravity tilt bridge, vortex tunnels, and simulated ceiling drops. The Tribunal pointed out that customers paid to enter a space where they were entertained by actors to put on a show. It compared Doherty’s operation to peep-show booths held by the Court of Appeals to be places of amusement and not amusement devices. The Tribunal affirmed the decision of the administrative law judge.
In the commentary, Hyans points out that although the distinction between a taxable place of amusement and a nontaxable amusement device depends on the facts, the critical element in Doherty’s situation was that the patrons were not paying for a ride on a device or, I would add, to use a device, but as Hyans notes, they were paying for the “experience of being scared and entertained by live actors employing props and animated devices.” I also will add that perhaps a good bit of sales tax litigation and tax planning challenges could be avoided if sales tax laws did not make razor-thin distinctions between places of amusement and amusement devices or between “candy” and “food and food ingredients,” as I described in Another Halloween Treat? I Think Not, or between candy made of flour and candy not made of flour, as I described in When Candy Isn’t Candy.
Tuesday, October 25, 2022
The Death of Trickle-Down Theory in the United Kingdom: Will Americans Learn the Lesson?
We know that supply-side trickle-down economic and tax policy is a failure. It has failed. Miserably. Though its advocates occasionally write to me, claiming that I am wrong, that I don’t understand reality, that I have no clue about economics, and that I would be best served by supporting the desire of the wealthy for even more money, I continue to reject that nonsense. Study after study, for example this one from the London School of Economics that examined not one but 18 countries that have yielded to the demands of the oligarchs, demonstrate, as I pointed out in High Quality Tax and Economics Research Exposes Money Addiction, “tax breaks for the wealthy increase income inequality by sizeable amounts but have no significant effect on economic growth or employment.”
Why advocates of this foolish theory persist in clinging to their beliefs when it is clear that the theories don’t work puzzles me. Is it simply a belief that this approach to national tax policy increases the chances of each of these acolytes to join the ranks of the wealthy? Is it fear of change? Is it fear of losing clients?
So in the current atmosphere of economic panic, as inflation soars, rather than turning to the cause of inflation, such as the half of inflation fueled by corporate price gouging, populists are returning to that failed policy of cutting taxes for the wealthy. There is a lesson to be learned from what happened in the United Kingdom. After being named prime minister, Liz Truss announced that her cure for that country’s inflation mess was to eliminate the top income tax bracket, without providing any alternative source of revenue or spending cuts. If this sounds familiar, it ought to remind people of the mess created by Reagan, Trump, and their comrades in oligarch subservience when they delivered tax cut gift after tax cut gift to the wealthy in whose circles they played.
So what happened in the United Kingdom? When the announcement was made, that nation’s stock markets plunged, the value of the British pound against the dollar fell precipitously, financial institutions roared with criticism, and the Bank of England had to step in to prevent further collapse. The finance minister resigned, and shortly thereafter, Liz Truss stepped down as prime minister.
There is good news and bad news in these developments. The bad news is that there still are people in and close to political power clinging desperately to trickle-down economic and tax policy. Again, I ask why. Fear of change? Desire to become wealthy? Fear of losing political funding from the wealthy? The good news is that the people and institutions of the United Kingdom recognized the danger and reacted before the failed policy was implemented. This limited the damage that otherwise would have occurred.
According to this report, there are those who think that what happened in the United Kingdom is the “last gasp” and “death knell” of trickle-down economic and tax policy. Perhaps that’s the case in the United Kingdom, but I’m not so sure it’s the case in other places, such as the United States, where repressive regressive politicians dangle tax cuts for the wealthy as a carrot for middle-class and poor voters, too many of whom are so easily duped into thinking that they will benefit from something that widens income and wealth inequality and does nothing to reduce inflation. Perhaps I should mention that inflation will probably drop if the price gougers take control of enough legislatures after using inflation fears as a way to put into office politicians dedicated to cutting taxes on the wealthy and on corporations.
What, then, is the solution? As several experts interviewed in that report point out, the key to economic growth is to put investment into the middle class, and, I would add, the poor. What is needed is funding for quality education (not indoctrination), infrastructure, housing, technology, and cyber defense. Doing this creates jobs. How do we know that? It is what is happening at the moment in this country, with the passage of legislation doing those very things, while unemployment drops to near-record and record lows. Isn’t it sad that those who voted against that legislation are now claiming credit for supporting it, that is, lying as usual, while hiding their intentions to reverse that legislation when and if they return to power. They may not be learning the Truss lesson, but hopefully American voters are.
Monday, October 17, 2022
When a Tax PIN is Used Without Permission
The show that popped up today was episode 26 of Judge Judy’s season 22. The plaintiff sued the defendant, who was his girlfriend while he was in prison. He claimed that without his permission she used his credit cards for herself, took his federal and state tax refunds, and took some of his personal property.
The defendant explained that she obtained the plaintiff’s credit cards and personal property when the plaintiff’s lawyer gave her various items, such as the plaintiff’s wallet, including his credit cards, a watch, and some jewelry. Defendant claimed she gave the wallet to one of the plaintiff’s friends, and later gave other things to another of plaintiff’s friends. The plaintiff explained that he asked his friends to get his property after the defendant wrote a letter to the prison superintendent that caused the plaintiff to decide that she should not be custodian of his property. He also claimed that she wanted him to marry her, but she disagreed and claimed that it was the plaintiff who proposed to her, but the plaintiff denied having done so.
The defendant admitted to using the plaintiff’s credit cards to make purchases for herself. After reviewing the credit card bills, Judge Judy determined that the defendant made many more purchases for herself than the two transactions she had admitted. Judge Judy pointed out that the defendant, in her answer, claimed that the plaintiff planned on filing for bankruptcy and thus told her to use her credit cards. Judge Judy noted that if, knowing this, she used the credit cards, she was a co-conspirator in defrauding the credit card company.
The defendant claimed that the plaintiff gave her his tax PIN in order to let her get his tax refunds, which amounted to about $1,600. The defendant produced evidence from prison officials summarizing their recordings of the plaintiff’s phone calls with the defendant, in which he gave the defendant PINs. The plaintiff explained that the PINs he gave the defendant were for prepaid debit cards.
Other testimony from the defendant, including her attempt to explain why she had put her cable bill in the plaintiff’s name at her home after he asked her to cancel the subscription, caused Judge Judy to tell the defendant that she was a “hustler.” Judge Judy held for the plaintiff, awarding him the requested $5,000 (which included not only the tax refunds but also the credit card charges).
If the plaintiff did not give the defendant his tax PIN, how did she get it? I don’t know. All I can do is to guess, that it was somewhere in his wallet or in his other belongings. Or perhaps it was the same PIN he used for the debit cards and the defendant took a gamble.
The underlying issue isn’t so much the transfer of PINs and credit cards. It’s a matter of deciding who to trust with that information when it is necessary to find someone to trust with that information. I leave others who have the requisite skill sets to write about identifying who to trust and how to minimize the risk of breaches of trust.
Tuesday, October 04, 2022
When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns
The latest case that got my attention is one deserving of comment. According to Department of Justice news release issued yesterday, a tax return preparer has been penalized for violating a permanent injunction that prohibited him from filing, preparing, or helping to prepare federal tax returns for other people. In May of 2021, the United States sued the preparer, alleging that he prepared returns for customers that fraudulently understated customers’ tax liabilities, overstated their refunds, or both. He allegedly overstated withholdings, invented deductions, and included credits that customers were not entitled to claim. In September of 2021, the preparer consented to the permanent injunction.
In July of 2022, the United States filed a motion asking the court that issued the injunction to hold the preparer in contempt for violating the injunction. The United States alleged that the preparer used the preparer tax identification number assigned to his cousin to “covertly prepare at least 305 tax returns for customers in 2022 in violation of the injunction.” The motion also alleged that at least some of those returns included fictitious deductions and credits. Before the court held a hearing, the preparer stipulated that the United States could prove those facts by clear and convincing evidence, consented to an order finding him in contempt for continuing to prepare returns in violation of the injunction, and agreed to pay $213,500. On September 29, 2022, the court entered an order holding the preparer in contempt. It also ordered him to surrender the fees he had collected, and to reimburse the United States for its investigatory and injunction enforcement costs.
Without access to the order, I cannot determine if the $213,500 that the preparer agreed to pay represents the fees that were collected, the costs incurred by the United States, or a combination of both. If any of that amount represents fees, it is unclear if they will be returned to the customers or forfeited to the United States. The customers for whom these false returns were filed will need to file amended returns, and unless they do that themselves, which is unlikely, they will need funds to pay another preparer to fix the mess. If no part of the $213,500 finds its way to the customers, then presumably they would need to file a civil suit against the preparer, though that also requires funds and might not be successful if the preparer is incapable of paying civil judgments.
There is a saying that doing the same thing over and over and expecting different results is insanity. Though people debate the identity of the person who first offered this definition, it certainly is relevant to the case of the preparer who violated the injunction. He filed false returns, got caught, and was subject to an injunction. What did he think was going to happen when he once again started filing false returns? Worse, because his own preparer tax identification number had been taken out of service, he used someone else’s, which added to the list of violations. The press release doesn’t mention whether the cousin knew or did not know that his number was being used by the preparer who was subject to the injunction. Hopefully not, because if the cousin was in on the misuse the cousin also would be facing charges. Not knowing the cousin’s name there’s no way to check on that at this moment.
It's bad to do something wrong. It’s worse when getting caught and being subjected to punishments and restrictions. What’s worst is doing a repeat, because the punishments and restrictions will themselves get worse. Don’t mess with injunctions.
Friday, September 30, 2022
When Tax Troubles Never Go Away
Now comes a Philadelphia Inquirer story that explains Fumo is now facing federal income and gift tax troubles. On Monday, the United States Tax Court will hear Fumo’s petition to set aside an IRS notice of deficiency seeking roughly $3 million in back income taxes and penalties. The IRS asserts that Fumo received economic benefit from the transactions that were at the root of his 237-count criminal conviction 13 years ago. Examples provided by the IRS include “overpaying his Senate staff while using them as personal servants and campaign foot soldiers, and * * * hiring a taxpayer-paid private eye to investigate political enemies, an ex-girlfriend, two strippers and even his own son,” along with “other abuses.” The IRS notice of deficiency also includes penalties for “exploiting the South Philadephia nonprofit he created, the former Citizens Alliance for Better Neighborhoods, tapping its money to pay for political polls, a stealth lawsuit against a legislative enemy, a campaign to protect the ocean view at his shore home, for tools and consumer goods, and more.” In another proceeding, he IRS is seeking more than $300,000 in unpaid gift taxes on a transfer from Fumo to his son, which Fumo contends was not a gift.
Fumo’s lawyer claims the IRS position is “fundamentally flawed because the money in question went to people other than Fumo.” The lawyer gave as an example roughly a quarter of a million dollars paid to pollsters and “not Fumo,” but taxpayers can have gross income even when payments go to a third party if in turn the taxpayer benefits from something done by the third party.
Though the notice of deficiency was issued in 2012, while Fumo was in prison, an assortment of delays, including the pandemic, has let the suit stagnate for a decade. Those sorts of delays are not unusual in the American justice system. Hopefully the trial doesn’t take a decade, even though the IRS has listed 80 witnesses it plans to call to testify. Sadly, ten of the 80 have died since the memo was filed and the IRS intends to use their testimony preserved in transcripts from the criminal trial.
If the IRS succeeds, the outcome will put Fumo in a difficult financial position. During the criminal investigation he surrendered his $900,000 annual salary and position as a member of a law firm. The conviction cost him not only prison time but also his $100,000 state pension and his law license. He was required to pay roughly $4.5 million in restitution. His net worth, estimated to be $11 million when he went to prison, has fallen to $3 million. A few weeks ago, he put up for sale the 29-room mansion that was the subject of those real property tax woes. The asking price is almost $4 million.
According to his lawyer, Fumo is “tired of being a punching bag,” and “would like to move on with his life.” When asked by the Inquirer for comment on the Tax Court case, “Fumo replied by email: ‘have you no shame!!!’ ”
It is more likely than not that the outcome of the Tax Court trial will be known in less than a decade. Perhaps the case will settle. Perhaps the Tax Court’s opinion won’t be appealed. Perhaps there will be continuances. No matter, what is certain is that at least for another year or two or three, Fumo’s tax troubles will not be going away. Perhaps they will never go away.
Friday, September 23, 2022
Need a Question for the Exam in a Basic Federal Income Tax Course?
The press release announced the charging by information of Michael Garrison, accused of conspiracy to commit wire fraud, conspiracy to destroy an energy facility, wire fraud, destruction of an energy facility, and filing a false tax return. The information “alleges that * * * Garrison broke into shuttered coal-fired power plants that had been decommissioned * * * in order to steal copper wire and other metal, which he then sold to scrap yards.” Garrison allegedly failed to report the amounts received in 2020 for the scrap metal on his 2020 federal income tax return.
With respect to the charge of filing a false tax return, the press release quotes IRS Criminal Investigation Special Agent in Charge Yury Kruty as saying, “No matter the source, all income is taxable.” If indeed he said that, he is flat out wrong. The language of Internal Revenue Code section 61(a) clearly states, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” The Internal Revenue Code contains various exclusions, which provide that certain types of income are not included in gross income and thus not taxable, because something not included in gross income does not find its way into taxable income. The exception language at the beginning of section 61(a) highlights the existence of those exclusions.
So the exam question would be along these lines: “Someone says, ‘No matter the source, all income is taxable.’ Is this statement correct? Why or why not?” It would fall into the category of “question placed in the exam to determine if the student passes the course,” in contrast to the more challenging question in the category of ‘question placed in the exam to determine if the student has attained the level of an A grade.”
If you use the question, feel free to credit MauledAgain.
Monday, September 12, 2022
Numbers and Logic
The email then posed the question, “What caused your bill to change?” It provided this answer: “The weather has been similar to this time last year, and may not have affected your bill. Factors like heavy appliance use or household guests may have contributed.” The email suggested that I could reduce my bill if I would “Run your pool pump during off-peak hours to lower demand,” and “To lower your demand, use a timer on your pool pump so you can time it to only run during off-peak hours. If you have to run your pool pump during peak hours, avoid running large appliances at the same time.”
Of course, I’ve had no household guests and my appliance use is either unchanged or so little changed as to be negligible. And there is no pool.
It took me far less time to figure out the problem than it has taken me to type out this commentary. The reason my bill is more this year than the same period last year is that the cost per unit of electricity and natural gas has been increased, by that utility company, at a rate that explains the price increase.
So what is happening? I have identified three possibilities. Perhaps there are more.
The first possibility is that someone at the utility company thinks that there is a direct correlation between cost and usage that does not take into account price variations. Though one might think no one would miss that point, it does not surprise me. Recollect my many previous comments about the state of education in this country.
The second possibility is that the utility company decided that fear – your bill is jumping up – will encourage people to engage in energy saving practices. Yet why suggest to me, someone without a pool, that I need to run a pool pump during off-peak hours? Perhaps the company doesn’t know who owns a pool, a fact it could easily determine, and sent the pool pump message to everyone because it thinks pool pumps are the, or a, significant reason for excessive energy usage.
The third possibility is that the utility company wants people to think that their higher utility bills are because they have increased their energy usage and not because of rate increases. Yet rate increase notices accompany almost every monthly bill.
What puzzles me is that every month the utility company sends me a chart showing my monthly electricity and natural gas usage for the 12 preceding months, matched against “all neighbors” and “energy efficient neighbors.” I don’t know how they determine who are my energy efficient neighbors, though I’ll guess that it’s the neighbors whose energy usage falls in the bottom 10 or 20 or 25 percent of all my neighbors. My usage usually falls between “all neighbors” and “energy efficient” neighbors though in some months matching or slightly falling below “energy efficient neighbors,” with a month here or there matching “all neighbors.” Yet the company nonetheless decided to warn me that my utility bill is projected to be higher than for the same period last year.
Surely there is some logical explanation. Surely. I hope.
Wednesday, September 07, 2022
The Price of Low and Lowering Taxes
Mike Brant, the writer of the story begins by noting, “Who would've thought our ridiculously high taxes could actually cause more good than harm? Apparently, there are benefits to paying higher taxes after all.” That is a point that I have made in my posts in which I explain why the privatization of government functions rarely work out well for anyone who isn’t in on the deal. When the privatization is structured as a monopoly, the situation is even worse.
Brant notes that although in his opinion New Jersey taxes are too high, he admits that “higher taxes do allow for more benefits when it comes to quality of life.” He gives as an example a story he heard from a New Hampshire couple he met on vacation in Cape Cod. The New Hampshire couple moved to New Hampshire from a town where taxes were higher. One of the benefits they had received in their former town is that they put out their trash and the town picked it up. When they arrived at their new home in New Hampshire, they discovered that if they wanted their trash picked up they needed to enter into a contract with, and pay, a private trash removal company. The first time they put out trash, they put out a many boxes, a consequence of the trash generated by moving into a new home. The private contractor told them it was too much, and that “it was not allowed,” refusing to take anything until the amount of trash at the curb was reduced. He refused to take any of the trash. So they had to take most of the trash back into the house. The following week they had another run-in with the private contractor though exactly what triggered it is unclear from the story.
The New Hampshire couple had no other options. There is no other private trash removal company operating in the town. The town does not have a dump, so they cannot do their own trash removal. They were compelled to comply with the terms and conditions imposed by what their neighbors called “the garbage can monopoly.” They have no ability to vote the company in or out of the town. The writer of the story notes that because the town had no control over the situation, it and its residences are at the mercy of the private contractor. He explains, “It's the unfortunate side of very low taxes sometimes.” He advises New Jersey residents, “So before we go complaining too much about our taxes, be glad we don't have to worry about things like a garbage can monopoly.”
My guess is that “free market” advocates would argue that the solution is someone starting another company and offering residents a better deal, not only in terms of price but also service. Yet why has that not happened? Monopolies don’t surrender territory, unless forced to do so by government. That’s why antitrust laws have been enacted, and why they are opposed by “free market” advocates who have been successful in recent decades in taking the teeth out of antitrust laws. As I’ve pointed out many times, there’s not much free in a “free market” when that market lets monopolists and oligarchs be free to run roughshod over those who are less powerful and less wealthy. It is the government, local in this sort of situation, state or federal in others, that exists to keep the powerful from taking advantage of those less fortunate. And to do that, government requires funding.
So for the anti-tax group, or more specifically, for those who are attracted by the siren songs of the anti-tax advocates, imagine a world in which there are no taxes, and thus no government. What happens when one or perhaps two or three, or even several dozen, mega-oligarchs own and control every activity and function that affects every facet of your life? The situation in New Hampshire gives us a peek into what that sort of world would be.
Wednesday, August 31, 2022
Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension
It’s about a sad example of financial illiteracy and the sort of incomprehension that generates disagreements and unnecessary litigation. It comes from a television court show. I’ve written about television court shows many times, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, and When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation.
In this Judge Judy episode – Season 21, Episode 245 – the plaintiff sued the defendant to compel the defendant to put a headstone on the grave of the plaintiff’s grandson. The grandson and the defendant were engaged and had lived together for at least a year. The story begins when the plaintiff took out life insurances policies on the lives of her four grandsons. When asked by Judge Judy why she did that, the plaintiff explained that she and her husband were getting older and if something happened to them they wanted their grandchildren to have some money. It was evident that Judge Judy was as puzzled as I was, because protecting the grandsons from something happening to their grandparents would be accomplished by life insurance on the lives of the grandparents, not the grandchildren.
Then, when the one grandson and the defendant became engaged, the plaintiff changed the beneficiary on the life insurance policy on that grandson to the defendant. Sadly, that grandson then took his own life. The insurance company paid proceeds to the defendant. The defendant paid the cost of the funeral, though it wasn’t clear whether the defendant offered to do so or did so at the request of the plaintiff. The plaintiff took the position that she had the right to dictate how the defendant used the proceeds but Judge Judy pointed out that there was no contractual obligation giving the plaintiff that right.
The plaintiff was upset that the defendant had not purchased a headstone. The defendant explained that a headstone was already in place, paid for by the grandson’s father and his wife, who was the grandson’s stepmother. The plaintiff complained that her grandson’s name on the headstone was incorrectly spelled. The defendant provided a photograph of the headstone, with the name correctly spelled, and Judge Judy pointed out that the plaintiff’s father and stepmother apparently had caused the headstone to be corrected.
At that point, Judge Judy asked the plaintiff, “Are you satisfied?” but the plaintiff said, “No.” Judge Judy asked, “So why are you here?” The plaintiff responded, “I want a headstone on my grandson’s grave.” Judge Judy replied, “There is a headstone.” The plaintiff came back with a claim that the name was misspelled. Judge Judy rejected that assertion, asking the bailiff to show to the plaintiff the photograph of the headstone with the name correctly spelled. Judge Judy asked, “So what do you want?” The plaintiff stated, “I want a headstone with my grandson’s full name.” Judge Judy read the name from the headstone and asked, “Did he have more names than those?” The plaintiff replied, “We wanted the stone to include ‘loving grandson, . . . ‘” and at that point Judge Judy cut her off and dismissed her case.
I wonder who convinced the plaintiff and her husband to purchase life insurance on the lives of her grandsons, when there was no indication that she and her husband were dependent on the grandsons for financial support. Parents sometimes purchase term insurance on their children to cover the cost of funerals and burials, but because the chances of a child dying are very low, those policies are very inexpensive and usually expire when the child attains majority or can be turned over to the child at that point. I wonder if some salesperson saw an opportunity to sell four insurance policies by convincing the plaintiff and her husband that they needed to do so. Sad.
The plaintiff’s inability to understand that someone other than the defendant had paid for a headstone and her insistence that the defendant purchase one is bewildering. It is sad. The plaintiff’s misunderstanding of the facts and their significance, even after the judge explained it several times, is troubling. It’s sad.
Friday, August 26, 2022
Who Should Be Sued, and Where, If Employer Fails to Issue Form W-2?
The court held the plaintiff’s complaint did not comply with federal pleading rules because “his allegations do not suggest that he is entitled to relief from” the former employer. The court explained that if the employer had failed to issue a Form W-2 when required to do so, it would be the IRS that had a right to proceed against the employer by assessing penalties. According to the court, “[i]n other words, an individual citizen has no right to sue over an employer's failure to provide a W-2,” citing previous cases similarly holding. The court pointed out that it could find “no authority suggesting that money received in connection with a settlement qualifies as ‘remuneration . . . for services performed by an employee,’ such that a W-2 would issue.” And, according to the court, even if the former employer should have issued a Form W-2, the plaintiff “does not have a private right of action against his former employer for failing to provide one.” The court also noted that the plaintiff did not allege any damages or harm caused by the non-issuance of a Form W-2 by the former employer, and that the IRS provides Form 4598, “Form W-2, or 1099 Not Received or Incorrect,” to be filed if an employer fails to issue a Form W-2.
Should the plaintiff have sued in state court for breach of contract? That path would be possible only if the contract imposed on the employer an obligation to reimburse the employee for the cost of paying a professional to assist in filing a Form 4598 if the employer failed to issue a Form W-2. I doubt that the plaintiff’s contract contained any provision of that sort. I doubt that sort of provision has been included in any employment contract. If the failure to issue the Form W-2 is the fault of the employer’s tax professional or the developer of the payroll software used by the employer, can the employee sue that person or company? There are privity of contract issues standing in the way, and also the simple matter that the cost of litigation almost certainly exceeds the cost of paying a professional to assist with Form 4598.
Wednesday, August 17, 2022
Fear Mongering, Tax Style
So what do these people do? They turn to another tactic. They try to convince the vast numbers of unaffected people that they are affected. To do this, they need to distort reality, twist the facts, and lie. They manipulate information not to present arguments about the value or worthlessness of the activity, proposal, or decision, but to instill fear in the hearts and minds of those who in reality have nothing to fear.
The latest stunt consists of two parallel scare tactics. One is to claim that the IRS is going to go after people with incomes under $400,000 and small businesses. The other is to claim that the IRS plans to hire 87,000 additional agents. Both claims are false, but they are finding fertile ground in the hearts and minds of those who react quickly to emotions and fail for one reason or another to think critically and dissect the absurdity of the claims.
The recently enacted Inflation Adjustment Act specifically provides that the funding it provides for improved IRS audit rates is not to be used to increase audits on taxpayers with taxable income under $400,000. As a practical matter, the bulk of the tax gap that the legislation is designed to reduce isn’t generated by these taxpayers. Many taxpayers receive income as employees, reported on Forms W-2, which makes it almost impossible to underreport income. IRS computer systems engage in matching what employers report with what employees report, and because that matching program includes all Forms W-2, there isn’t much, if any, opportunity for increased audits in those situations. The same can be said for income reported on various Forms 1099. Similarly, many of these taxpayers claim the standard deduction. Even though some taxpayers with incomes under $400,000 overstate some deductions and credits, the revenue increases attainable by increasing audits of these taxpayers is a drop in the bucket. It’s not worth it to the IRS to invest in additional audits that bring in several hundred dollars. The bulk of the missing tax revenue is elsewhere.
The Department of the Treasury has denied claims that the IRS plans to hire 87,000 additional agents. The funding provided to the IRS to increase audit rates will be used to bring its employment from the current 78,000 employees back up to the 94,000 it had in 2010, and to offset the 20 percent reduction in funding that it has incurred since 2010, which led to a 30 percent reduction in tax enforcement.
Let’s do some arithmetic. The legislation increases IRS funding by $80 billion, spread over 9 fiscal years. That’s an average of roughly $9 billion a year. Some of that funding is dedicated to improvements in IRS computing facilities, to taxpayer services, and to operations support. Of the $80 billion, $45 billion is dedicated to bring enforcement back to 2010 levels. That’s an average of $5 billion per fiscal year. IRS agents earn salaries between roughly $32,000 and roughly $96,000, with a median of roughly $51,000. Of course, the cost of employing an agent includes not only the salary but also contributions to retirement plans, health care premiums, and other fringe benefits. Fringe benefits cost employers roughly 30 percent. So the median annual cost of hiring an agent is roughly $66,300. That makes the cost of hiring 87,000 agents almost $5.8 billion, and that doesn’t take into account the cost of hiring people to do the hiring, hiring people to do the initial training, and hiring people to supervise the agents. When taking those costs into account, there’s barely enough funding to make up for the employees lost since 2010. And that computation doesn’t take into account inflation, causing those costs to increase while the funding remains the same.
So should people who are complying with the tax laws be worried? Absolutely not. Who should be worried? The people whose noncompliance will be uncovered by the application of additional resources to ferret out the tax avoidance schemes in which noncompliant taxpayers engage. And those people have every reason to have tried, unsuccessfully, to block the legislation and now to whip compliant taxpayers into a frenzy to derail the plans to increase compliance among the noncompliant. Because these noncompliant taxpayers have the monetary resources to hire politicians, lobbyists, public relations spokespersons, and others to spread fear among those with no reason to be afraid, they continue to use the manipulation playbook and scare tactics.
The intensity with which these noncompliant taxpayers and their hired hands are spreading these false claims tells us quite a bit about what concerns them. Of course there is fear, and there should be, among the noncompliant taxpayers. Compliant taxpayers should ignore these howls of horror.
Tuesday, August 09, 2022
It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers
What caught my eye about the case of JTH TAX, LLC d/b/a Liberty Tax Service v. Stephen A. Gilbert and G-QTS, Inc. was the identity of the party proceeding against the tax return preparer. It was the franchisor, Liberty Tax Service, that sued its franchisee tax return preparer because of actions taken by the franchisee that violated both the franchise agreement and federal law. The principal transgression was the allegation that the franchisee permitted one of his employees to use the franchisee’s PTIN, a violation of federal law and thus by the terms of the franchise agreement a violation of that agreement. The franchisee did not deny allegation. The franchisor accordingly terminated the franchise agreement. The franchisor also sought to enforce a non-compete agreement that barred the franchisee from directly or indirectly preparing or filing income tax returns within the territory of the franchise or within 25 miles of the territory for two years following the termination of the franchise, and an agreement that barred the franchisee from directly or indirectly soliciting any person or entity served in any of the franchisee’s prior offices in the last twelve months of holding the franchise, for the purpose of offering that person or entity income tax preparation or filing or financial services, within the territory or within 25 miles of the territory for two years following the termination of the franchise.
Under the terms of the franchise agreement, the termination of the franchise required the franchisee to surrender to the franchisor the leases on the locations where the franchisee operated the tax return business. The franchisee refused to sign the documents required for the surrender, and changed the locks on the premises. The franchisee notified the franchisor that he intended to continue offering tax preparation services at those locations. The franchisor alleged that the franchisee removed two printers belonging to the franchisor, removed the franchisor’s “Liberty Tax” sign and replaced it with the sign of a competitor, Fast Tax, and operated a competing tax preparation at those locations. The franchisor also alleged that the franchisee took client files and other confidential information.
The franchisor sued the franchisee, claiming breach of the franchise agreements, common-law conversion, and violation of the Defend Trade Secrets Act. The franchisor requested a preliminary injunction stopping the franchisee from operating a tax return preparation service at the former franchise locations until March 5, 2024, from operating competing tax return preparation businesses within 25 miles of the franchise territories until March 5, 2024, requiring the franchisee to assign to the franchisor the leases for the former franchise locations, to refrain from interfering with the franchisor’s right to act as the lawful agency and attorney-in-fact for the franchisee for the purpose of taking necessary action to complete assignment of the leases, stopping the franchisee from causing, or attempting to cause, the changing of locks at any franchise location, stopping the franchisee from removing property from any franchise location, stopping the franchisee from using any of the franchisor’s confidential information, stopping the franchisee from entering onto or otherwise interfering with the operation of the franchisor’s franchise locations, ordering the franchisee to return all franchisor confidential information, including client files, ordering the franchisee to return the franchisor’s equipment, including printers and computers, and other property that was removed from Liberty’s franchise locations, and ordering the franchisee to provide the franchisor with a key for any new locks installed at the former franchise locations.
Put simply, the franchisor prevailed. The franchisee lost.
The lesson is simple. A tax return preparer who fails to comply with applicable law, regulations, and other requirements faces not only action by law enforcement but also by private parties, including not only client taxpayers but franchisors if the preparer is doing business under a franchise.
Tuesday, August 02, 2022
Insufficient Explanation of Estimated Tax Legislation Impacts
The Joint Committee on Taxation Distribution Table does not explain how it computed these estimated increases. It clearly states that it “[d]oes not include indirect effects.” So which tax provisions in the pending legislation cause these increases? Most of the tax provisions increase credits, extend credits, expand credits, or establish new credits. So it can’t be those provisions. Of the five revenue-raising provisions, one clearly does not apply to individuals. That’s the proposed 15 percent alternative tax on corporations with net profits exceeding $1 billion. The second is increased funding for the IRS to improve audit rates, but that provision contains an exception for taxpayer with taxable income under $400,000. The third is denial of low long-term capital gain rates on partnership carried interests. That provision, however, contains an exception that permits partners with modified adjusted gross income under $400,000 to avoid the restriction by holding the interest for three years rather than the five-year period applicable to other taxpayers. How many taxpayers with modified adjusted gross income under $400,000 own partnership carried interests? Some, but not enough to justify claiming that all or most taxpayers with income under $400,000 will be hit with tax increases. The fourth, reinstatement of the Superfund, if it affects low and middle income taxpayers at all, surely affects very few of them. The fifth, extension of the Black Lung Disability Trust Fund tax rate, is another provision that affects few, if any, taxpayers in the lower brackets.
So I’m at a loss trying to identify the provisions in the legislation that increase tax liabilities for taxpayers in the excepted categories, let alone increased by the claimed many tens of billions of dollars that some opponents of the legislation claim. I have not found anything that tags any specific provision or provisions as the cause of the increases that the Joint Committee identifies.
It’s unfortunate that the Joint Committee doesn’t share how it arrived at these numbers. It is important for Americans to know, because it would permit taxpayers, or their advisors, to determine if they are affected. I suspect that very few taxpayers in the low and middle income brackets would be among those facing tax increases. If the increases are caused by the carried interest changes, would it not be helpful to know that, so that the vast majority of low and middle income taxpayers who do not own carried interests can breathe a sigh of relief and realize that their taxes are not going to increase under the legislation?
What does this lack of information do? One consequence is that it permits opponents of the legislation to make all or most Americans think that they will be adversely affected by the legislation, because that helps the opponents drum up support for opposition even if it is based on misplaced apprehension and fear.
Perhaps the information will be forthcoming? But will it arrive in time to dispel the fear and anxiety currently being marketed?
But perhaps I am missing something. Is there a sixth revenue raising provisions? Do increased and expanded credits cause tax increases? So I invite anyone who has the answer to how taxes on low and middle income taxpayers are increased by the legislation to let me know.
