Saturday, March 25, 2023
When Tax Officials Break Bad
Shortly after he received the letter, and while serving as a commissioner in charge of the Revenue and Finance departments, Byron received payments from the unnamed company. The payments were made every other week for about a year, amounting to a total of roughly $40,000. In January 2020, Byron was elected mayor of Wildwood. On or about May 4, 2020, federal law enforcement officials interviewed Byron, and he admitted receiving the October 2017 letter and the $40,000. He stated that he did not file tax returns for 2017 and 2018 because he did not have the funds to pay the taxes he owed.
In July of 2020, Byron aided and advised his accountant in preparing and presenting federal income tax returns for 2017 through 2019. The 2017 and 2018 returns reported his income from serving as a commissioner of Wildwood but not the payments from the unnamed company. Thereafter an information was filed charging Byron with violating Internal Revenue Code section 7206(2) charging him with two counts of willfully aiding and assisting in the preparation and presentation of fraudulent tax returns to the IRS for calendar years 2017 and 2018. Yesterday he pleaded guilty to the charges.
My first reaction when reading the press release was, wow, a tax official failing to file tax returns, and then filing false returns. I wonder if the fact Byron served as a tax official will have an impact when it’s time for sentencing. That remains to be seen.
Thursday, March 09, 2023
Tax Season Brings Tax Misinformation
Put simply, if that question was posed on a basic federal income tax exam and the student provided the answer found on the website, the student would earn a very low grade. Why?
The website claims that “AGI includes all forms of taxable income, such as wages, interest, dividends and capital gains.” That is an incorrect statement. AGI includes all forms of GROSS income. Even if a taxpayer has zero taxable income, the taxpayer almost always has AGI.
The website then claims that “It [AGI] also includes specific types of tax deductions like alimony payments and IRA contributions.” To the contrary, AGI is computed by SUBTRACTING, not including, certain specified deductions.
The website continues, “The Internal Revenue Service (IRS) uses AGI to determine an individual's tax bracket and whether they're eligible for certain tax breaks.” A taxpayer’s tax bracket is based on TAXABLE income, not AGI.
The website then poses another question, “What is modified adjusted income?” and responds, “Modified Adjusted Gross Income (MAGI) is a critical metric to determine an individual's eligibility for certain tax credits and deductions. You can calculate it by adding any deductions taken out into your AGI before calculating it, such as student loan interest, foreign earned income exclusion and deductions for traditional IRA contributions.” The answer is partially correct but omits the inclusion in MAGI of certain specified income that is excluded from gross income and thus is not included in AGI.
The website explains how to calculate AGI as follows: “The first step to calculating your adjusted gross income is to gather all your relevant income information, including any wages, salaries, tips and other forms of income. Once you have all this information, you'll need to add it and subtract any deductions you're entitled to. This final number, after calculations, will give you your AGI.” AGI is NOT computed by subtracting “any deductions you’re entitle to” but by subtracting only SOME of the deductions to which the taxpayer is entitled, that is, the deductions allowable in computing AGI, which are some, but not all, deductions.
It gets worse. The website claims, “Note that you can take a few different types of deductions when calculating your AGI. The most common is the standard deduction, fixed amount you can deduct from your income.” This sort of response by a student in a basic federal income tax class would be a red flag suggesting the student has failed to grasp the most fundamental principles of the course (and of federal income tax law). The standard deduction is NOT subtracted when computing AGI but is subtracted FROM AGI.
The website claims, “Once you have your AGI, you can calculate your taxes owed or eligibility for tax refunds.” That is wrong. After computing AGI, the taxpayer subtracts the standard deduction or itemized deductions to compute TAXABLE income. It is from TAXABLE income, not AGI, that tax liability is computed.
The website then poses and answers another question. It asks “What is AGI on your W-2?” and replies “Adjusted gross income on a W-2 form is an individual's total income after certain deductions are removed. This amount can include wages, salaries, tips, commissions and self-employment income as employers report to the IRS on Form W-2.” A Form W-2 does not report AGI. It reports GROSS income and it can report amounts that may or may not generate a deduction that may or may not be allowable in computing AGI.
The website further claims, “It [AGI] also includes taxable social security benefits or pensions, tax-exempt interest income and other items of income (like alimony received).” That list would be correct but for the inclusion of tax-exempt interest, which by definition is excluded from gross income and thus is not included in AGI.
After having suggested how to compute AGI (see above, where the website states, “The first step to calculating your adjusted gross income is to gather all your relevant income information, including any wages, salaries, tips and other forms of income. Once you have all this information, you'll need to add it and subtract any deductions you're entitled to. This final number, after calculations, will give you your AGI.”), the website then provides a different explanation: “To calculate your AGI, start with your total income from all sources, then subtract any adjustments to income. Adjustments to income include things like moving expenses and contributions to an IRA.” The new phrase “total income” perhaps refers to gross income but perhaps not. The term “adjustments to income” presumably refers to deductions allowable in computing AGI, but it is a different articulation from the first computation explanation provided by the website.
The website continues with another question. It asks, “What can you use AGI for on a W-2?” and replies, “AGI calculates an individual's total tax liability for the year. It can also be used in determining eligibility for specific deductions or credits.” As already pointed out, AGI is not the amount used to compute tax liability.
The website provides this advice, “You can use AGI on a W-2 form when applying for financial aid, as most colleges and universities require applicants to provide their AGI from the previous year.” When a school or a bank or other institution asks for AGI, it needs to see AGI from a Form 1040 or variant, not wages from a Form W-2. The Form W-2 would not include the applicant’s income from interest, dividends, trust funds, and other sources.
The website provides additional advice: “Any money you take from a retirement account is considered taxable income and affects your AGI.” That statement fails to take into account the fact that there are some retirement plan withdrawals that are not included in gross income.
The website provides even more advice: “Any Social Security benefits you receive are counted as taxable income and added to your AGI calculation.” This is wrong for two reasons. First, only a portion of Social Security benefits are possibly included in gross income, and in some instances all of the benefits are excluded. Second, benefits that are included are included in GROSS, not taxable, income, and may or may not generate taxable income depending on the amount of the taxpayer’s deductions.
The website shares this whopper: “Remember that not all forms of income are taxed or included in your AGI calculation. Financial gifts and lottery winnings, for example, are not included.” Lottery winnings ARE included in gross income and thus contribute to the computation of AGI.
And there is more from the website: “You can also reduce your AGI through credits, such as the child tax credit.” Credits reduce TAX LIABILITY (and perhaps generate a refund). Credits are NOT subtracted from AGI nor are they subtracted from taxable income. This is another of the most fundamental principles of the basic federal income tax course (and the federal income tax law) failure to understand causes the student to earn the lowest possible grade in the course.
In explaining “How to lower your AGI” the website shares this advice, “You could invest in a retirement account to reduce your taxable income and lower your AGI, or you could deduct expenses from your income. This includes things like business expenses or medical expenses.” Medical expenses are NOT deductible in computing AGI. They are deductible as itemized deductions to the extent they exceed the applicable floor.
The website then shares this advice: “Here are some other strategies for lowering your AGI: Make charitable donations. * * * Take advantage of tax credits. Take the standard deduction.” Charitable contributions are NOT deductible in computing AGI. They are deductible, subject to various limitations, as itemized deductions. As already pointed out, tax credits reduce tax liability and do NOT reduce AGI. The standard deduction is subtracted FROM AGI and is not part of computing AGI and thus does not reduce AGI.
Finally, some good advice from the website, “For more information regarding AGI and your taxes, it's best practice to consult with your tax advisor or the Internal Revenue Service (IRS). The IRS website also contains helpful information and guidance for taxpayers.” Even better advice would be, “Ignore this website and go directly to your tax advisor or the IRS website.”
The website attributes what it contains to “ENTREPRENEUR STAFF.” The disjointedness of the writing, the two different “definitions” of AGI, the numerous errors, and the lack of precision suggest that perhaps the article was written by some sort of chatbot or other artificial “intelligence” software. If that is the case, and if it is true that, as I read in various sources, artificial “intelligence” will take over more and more of our lives, I worry.
In the meantime, it becomes increasingly urgent that people check and verify whatever they hear, see, or read, because misinformation is becoming more and more abundant. Whether it grows from carelessness, laziness, ignorance, or deliberate malfeasance affects how it can be combatted but doesn’t change the need to be very careful when listening, watching, or reading what gets published.
Yes, tax season brings tax misinformation. Perhaps I should say tax season brings increases in tax misinformation, because tax misinformation shows up throughout the year. Sad.
Wednesday, February 22, 2023
The Tax Consequences of Being Paid to Go On a Date (Reprise)
Reader Morris, though, focused on the tax consequences, presenting a list of questions. Some of them, such as state income tax consequences and what is required under the tax law of Austria are beyond my expertise and I’m not going to try to become an expert on those topics. I’ll leave that to others.
Reader Morris first asked if he was correct in concluding, from reading MauledAgain posts, that the amount received or to be received by Fonda is gross income for federal income tax purposes. Indeed, he is correct because she is being paid for rendering a service. It would surprise me if it wasn’t gross income for purposes of states with income taxes. Reader Morris was referring to a post from almost a dozen years ago, The Tax Consequences of Being Paid to Date.
Reader Morris asked if this would be wage compensation reported on a W-2. I don’t think so. She isn’t becoming an employee of the tycoon. She is operating as an independent contractor. That leads to the next question from reader Morris. Should she file a Schedule C? She should if she is engaged in the trade or business of accepting payment for going on dates. If it’s a one-time situation, then the payment would be reported as miscellaneous income. But then reader Morris asked what the tax consequence would be if the tycoon paid for her transportation, hotel, and other expenses. Those amounts would also constitute gross income. That leads to a question I posed to myself. Would she then be permitted to deduct these costs? If she could show she was in a trade or business, then these would be deductions, subject to the usual limitations, on Schedule C. If she could not show she was in a trade or business, then she should be permitted to deduct these expenses as incurred for the production of income.
Another question that pops up is the impact of tax provisions affecting income earned abroad. Because I am not an expert in the U.S.-Austria tax treaty, I’m not in any position to determine if there are provisions that would provide her with an exclusion, or with a credit to the extent she would be required to pay tax to the nation of Austria or a subdivision thereof.
What I do know is that this set of facts would generate an interesting exam question in several different tax courses, including the basic course, a tax policy course, and courses dealing with the taxation of international transactions.
Friday, February 10, 2023
IRS Comes to the Rescue of the Congress, Again
Though I consider the California payment to be in the nature of a credit, the IRS today issued guidance in which it treated most state payments of the sort made by California to be within the general welfare exclusion. It technically concluded that it would not challenge the taxability of these payments. Its rationale was that the complicated fact-specific nature of determining the treatment of these payments is outweighed by the “need to provide certainty and clarity for individuals” now filing tax returns. The IRS also noted that because this issue exists only for the 2022 taxable year, if a taxpayer does not include the payment in gross income it will not challenge that omission. However, the IRS also noted that in some states, the payments clearly constitute state tax refunds and thus are includable in gross income to the extent required under application of the tax benefit rule.
Perhaps technically the IRS is incorrect with respect to some or many, or even all, of these payments. Perhaps, as I argued, they should be subject to the tax benefit rule or treated as the payment of a refundable credit. However, given the exigencies of time, the need for guidance during tax season, and the inability of the Congress to focus on practical problems in a consistent and efficient manner, the IRS has done the best it can do. The fact that its conclusion is essentially favorable to taxpayers will preclude taxpayer complaints, though whether the issuance of this taxpayer-favorable guidance will temper the common perception of the IRS as “the enemy” is questionable. Once again, a problem created by the Congress and in no small way by state legislatures has been resolved by the IRS. That's not the way a well-functioning democracy ought to work.
Wednesday, February 08, 2023
Tax Season Brings Out a Question (Which I Try to Answer), But It Also Brings Misinformation
After looking at the first article, and then examining the article linked to the words “two IRS tax codes ("second article"), it is possible that the author of the first article meant to refer to two Code sections because there are two Code sections mentioned in the second article (written by the same author), specifically, sections 61 and 139. But that lack of clear articulation isn’t the only problem.
Even if the reference is to two Code sections, another problem is the use of the phrase “IRS tax code.” Why? Because there is no such thing. There is an “Internal Revenue Code” for which the acronym is IRC. The acronym for the Internal Revenue Service is IRS. Yes, there is only a one-letter difference between the two acronyms but precision matters. For those interested in my previous reactions to the use of the oxymoronic phrase, “IRS Code,” see An Epidemic of Tax Ignorance and the earlier commentaries cited therein.
Another problem shows up in the second article’s summary of an article written by a CPA ("CPA article"). Whether the summary is correct is something I cannot determine because there is no link to the CPA article (see UPDATE below). The second article claims that the CPA suggested that the refund would be excluded “under Internal Revenue Code (IRC) section 61(a), the General Welfare Exclusion.” However, section 61(a) is not, nor does it contain, the general welfare exclusion. The general welfare exclusion is an IRS interpretation of the tax law. Whether the general welfare exclusion applies is something the IRS needs to determine.
UPDATE: Someone sent me a copy of the CPA article quoted by the second article, though I have no link for the CPA article to share. The CPA article does NOT state "under Internal Revenue Code (IRC) section 61(a), the General Welfare Exclusion." It correctly describes section 61, and then in the following sentences described the administratively developed general welfare exclusion. So the author of the first and second articles misquoted the CPA article.
The author of the first and second articles, those he interviewed, and several others have concluded that the refund is not “taxable for federal income tax purposes.” What they mean, of course, is that the refund is not included in gross income. Whether something is taxable is different from whether it is included in gross income because something in gross income can be offset by a deduction or generate tax liability that is reduced or eliminated by a credit.
After being pressured, the IRS has promised to issue guidance. How should this payment be treated? There are a variety of possibilities, but it seems to me that the refund the equivalent of a credit. According to California’s eligibility requirements, the refund isn’t available to Californians who did not file state income tax returns. If treated as a reduction of California state taxes, it should be treated as any other state income tax refund. That is, it is included in gross income to the extent it offsets state income taxes that generated a tax benefit. Thus, for example, California taxpayers who did not deduct California income taxes on their federal income tax returns ought not be required to include the refund in gross income. If they did take a deduction, then some calculations need to be made to determine if, and to what extent, the refunded tax generated a federal income tax benefit. What about California taxpayers who did not pay California income taxes but received the refund? In that case, the payment is equivalent to a refundable credit. The IRS has previously taken the position that refundable credits are included in gross income to the extent they exceed the taxpayer’s state income tax liability. It also took this position in ILM 201423020, in which it pointed out that the possibility of a refundable state credit being excluded under the general welfare exclusion. One of the requirements to fit within that exclusion is that the credit “be for the promotion of the general welfare (i.e., on the basis of need.” The California refund in question was made available to all taxpayers with California adjusted gross income under $500,000, with no requirement of showing need. Surely at least some taxpayers receiving the payment were not in need. As a practical matter, truly needy taxpayers are in tax brackets that generate zero federal tax liability, that is, most if not all of them will see the amount included in gross income offset by the standard deduction, and if not, resulting tax liability offset by various credits.
It will be interesting to see how the IRS interprets the law. I am confident that the Congress will do absolutely nothing in terms of providing an answer by amending the Internal Revenue Code. Whatever the IRS decides will not constitute an “IRS Code” but will be part of its administrative interpretations, which are subject to judicial review and which Congress could change if it chose to do so.
Tuesday, February 07, 2023
Misleading Tax Information Can Get People in Trouble
Much of what was in the article was not news to me, because it summarized information that had been passing in front of my eyes for the past few months. But when I reached this sentence, I stopped and read it a second time to make certain I was seeing what I thought I was seeing: “Also, a new PayPal and Venmo tax rule about needing to pay taxes on transactions of $600 or more is put on hold until 2024 due to taxpayers not being ready for it.”
That sentence suggests that no one needs to pay taxes on PayPal and Venmo transactions until next year. It suggests that transactions completed in 2022 are not taxable. But that’s not what the $600 rule addresses. The $600 rule deals with the requirement that PayPal and Venmo send Forms 1099-K to those who enter into transactions on those platforms. Whether a transaction generates gross income is independent of whether a Form 1099 (or a Form W-2) is sent or is required to be sent. For example, a person who wins $300 in a lottery has gross income even though a Form 1099-MISC must be sent only if the person wins $600 or more. Thus, for example, if a person sells an item on PayPal for $450, and paid $50 for that item, the person must report $400 of gross income even though PayPal does not send, has not been required to send, and will not be required to send, any sort of Form 1099.
It is easy to see that someone reading the sentence that caught my eye might conclude, “Oh, good, I don’t need to report income received through one of these platforms.” Of course, even before this sentence appeared, many people thought that was the case, or perhaps knew it was not the case but chose to not report the income because they figured the IRS would not know about the transaction. The revenue shortfall caused by people not including the gross income from these transactions on their income tax returns is what led a majority of members of Congress to enact a requirement that these transaction platforms send Forms 1099-K for transactions of at least $600 rather than the previous threshold of $20,000.
The bottom line is simple. Gross income is gross income and must be included on income tax returns. Whether it is taxed, that is, whether it causes additional income tax liability depends on whether there are deductions and credits that offset its impact. People who do not understand this basic tax concept, which should be but rarely is taught in the K-12 system, will get into trouble if they read that sentence and conclude they do not need to include on their income tax returns the gross income from transactions on PayPal, Venmo, and similar platforms.
Friday, February 03, 2023
A New Twist to the Mileage-Based Road Fee
I hadn’t addressed the mileage-based road fee for more than a year because not much has happened that warrants examination. What has been written during that time period hasn’t added much to the discussion, and often consists of sharing the same arguments for and against the mileage-based road fee.
But now there is a new twist. In A Better Way to Pay for Roads, Tom Giovanetti of the Institute for Policy Innovation adds a wrinkle to the issue that needs attention. Though there are times I disagree with Giovanetti, in this instance I’m with him until the latter part of his essay. Giovanetti points out that using liquid fuel taxes to fund highway maintenance and repair is becoming increasingly difficult for the same reasons others have advocated for a change. More and more vehicles don’t use liquid fuels, and those that do are using less because of improvements in fuel efficiency. So Giovanetti, agreeing with those of us who advocate for the mileage-based road fee, writes, “It’s time to start talking about phasing out fuel taxes and phasing in usage taxes. It simply makes sense that those who put the most stress on our transportation infrastructure and who profit from the roads have a proportional share in paying for them.” Agreed.
And now I get to where I disagree with Giovanetti. He writes
This change need not be onerous or intrusive for the average driver. For one thing, it would be politically expedient to exempt personal vehicles and limit usage fees to commercial vehicles. And logical too, as commercial vehicles belong to businesses that profit directly from the roads.Why do I disagree?Furthermore, businesses already keep track of miles driven by their commercial vehicles. So it wouldn’t require onerous new, invasive reporting requirements. Ironically, the reason businesses track mileage is because it is a tax-deductible expense.
First, commercial vehicles and vehicles used for business are not the only vehicles that benefit from using roads. Vehicles not being used for commercial or business purposes should not get a free ride. Imagine the reaction if a township that charges a trash pick-up fee only charged businesses but picked up residential trash for free. That's just not appropriate.
Second, there are vehicles used for both business and non-business purposes. If the fee were limited to vehicles used solely for business purposes, an exemption for multi-use vehicles would invite owners of business vehicles to turn them into multi-use vehicles. Closing that sort of loophole would require keeping track of business mileage and denying the exemption if the business mileage is more than a specified percentage of total mileage. That requires the sort of complicated record keeping Giovanetti wants to avoid.
Third, a sentence in Giovanetti’s essay suggests that he is drawing a distinction between trucks and other vehicles, as he points out the foolishness of proposed legislation permitting larger, heavier (and may I add, more dangerous) trucks. I suppose Giovanetti is focusing on tractor trailers, but I doubt he would exempt other types of trucks, such as box trucks, cranes, cement carriers, bucket trucks, and even pickup trucks. Yet pickup trucks, for example, are often used solely for personal purposes. Should all pickup trucks therefore be exempt, including those used exclusively for commercial and business purposes? And what about vans, RVs, and buses? Where would they fit into Giovanetti’s proposal? The same challenge with respect to pickup trucks also exists with respect to these vehicles.
In short, it makes little sense to separate vehicles on the basis of commercial and non-commercial use. Of course, Giovanetti is suggesting that big trucks cause more wear-and-tear on roads, and he is correct. Yet the mileage-based road fee takes into account not only mileage but the weight and class of the vehicle. So the proposal I and others have made already identify and solve the problem Giovanetti mentions.
There is another interesting twist. Any proposal that would limit a road usage fee to business miles would put some taxpayers in an interesting situation. They would want to report as much business mileage as possible in order to maximize deductions for federal, state, and local income tax purposes. But they would want to reduce business mileage in order to reduce the amount of the road usage fee. If some sort of business-only fee were enacted, it would be interesting to analyze what taxpaying business drivers do to work through the competing tax planning cross-purposes that they would face. That question can be left for the future, because it very well may never materialize and hopefully will never be enacted.
Though I am critical of Giovanetti’s commercial-only road fee proposal, I appreciate that he supports the idea generally. I’m also glad that he is giving it careful thought and has put is commercial-only idea on the table so it can be discussed. Doing so helps fine-tune the mileage-based road fee proposal.
Tuesday, January 24, 2023
A Procedural Twist on Dealing with Fraudulent Tax Return Preparers
This time, in U.S. v. Simmons (behind a paywall), the court faced a procedural question in connection with the federal government’s attempt to prevent tax return preparers from continuing to engage in their activities. The government sought both a preliminary injunction and a temporary restraining order (TRO) against the defendants, specifically, two preparers and their tax return preparation business. The government alleged that the defendants, who prepared more than 2,000 individual tax returns each year, had been repeatedly filing false returns on behalf of customers who did not know what the preparers were doing. IRS audits of some of the customers revealed hundreds of thousands of dollars of tax deficiencies.
On January 17 of this year, the government filed a motion for a preliminary injunction and a TRO. Though in this instance both the injunction and the TRO would order the defendants to not do something, the procedural requirements attached to each are different. That is what the court needed to analyze. The preliminary injunction would prohibit the defendants from preparing tax returns until the substantive case was decided, that is, until the court determined if the defendants were in fact engaging in the fraudulent return preparation that the government alleged. The TRO would prevent the defendants from offering and providing tax preparation services when tax season opened on January 23. Issuing an injunction requires the submission of briefs and presentation of arguments at a hearing, and that takes time. A TRO takes immediate effect and would prevent the defendants from acting as preparers while the injunction was being considered.
The court attempted to determine if the defendants would agree to a TRO while briefing and arguments on the injunction request were underway. The defendants’ attorney explained that they would consider agreeing to a TRO prohibiting them from engaging in specific activities but not to an injunction prohibiting them from being tax return preparers. The government argued that limited injunctive relief would be inadequate considering the evidence presented with respect to the defendants’ activities.
Though the defendants claimed that they had made significant efforts to “correct errors in their tax return preparation,” the government demonstrated that the defendants had not made any changes with respect to many other practices in their business. The court agreed that the government had demonstrated that the defendants had understated their customers’ tax liabilities by filing returns on which the defendants took positions they knew or should have known lacked substantial authority and that they had acted either willfully or with reckless disregard of the law. The court also pointed out that the defendants had previously been subject to enforcement penalties that put them on “full notice of the consequences” of their conduct.
Accordingly, to allow for briefing and a hearing on the request for an injunction, the court declined to decide that question, but issued a TRO prohibiting the defendants from acting as tax preparers. The TRO expires on February 3, when the decision on the injunction is expected. To appreciate the scope of the TRO, consider its scope:
The Court enters this temporary restraining order enjoining Defendants, individually and doing business as Simmons Tax, their officers, agents, servants, employees, and attorneys, and anyone in active concert or participation with them, directly or indirectly, from:The lesson for misbehaving tax return preparers is that despite their right to hearings and trials to ascertain their innocence or guilt, the fact that those hearings and trials take time will cause the federal government to request that the preparers in question be shut down until those hearings and trials are conducted and final determinations are made. Though in theory this may be a harsh result if the preparer ends up being found innocent, in practice the Department of Justice and the IRS don’t bring charges against prepares until and unless they have an open-and-shut cases. Unfortunately, no matter how many misbehaving preparers are identified and closed down, others are popping up just as quickly.1. Preparing or assisting in the preparation or filing of federal tax returns, amended returns, and other federal tax documents and forms for anyone other than themselves;
2. Advising, counseling, or instructing anyone about the preparation of a federal tax return;
3. Owning, managing, controlling, working for, or volunteering for an entity that is in the business of preparing federal tax returns or other federal tax documents or forms for other persons;
4. Providing office space, equipment, or services for, or in any other way facilitating, the work of any person or entity that is in the business of preparing or filing federal tax returns or other federal tax documents or forms for others or representing persons before the IRS;
5. Advertising tax return preparation services through any medium, including print, online, and social media;
6. Maintaining, assigning, transferring, holding, using, or obtaining a Preparer Tax Identification Number (PTIN) or an Electronic Filing Identification Number (EFIN);
7. Representing any person in connection with any matter before the IRS;
8. Employing any person to work as a federal tax return preparer other than to prepare or file the federal tax return of one of the Defendants;
9. Referring any person to a tax preparation firm or a tax return preparer, or otherwise suggesting that a person use any particular tax preparation firm or tax return preparer;
10. Selling, providing access, or otherwise transferring to any person some or all of the proprietary assets of the Defendants generated by their tax return preparation activities, including but not limited to customer lists; and
11. Engaging in any conduct subject to penalty under 26 U.S.C. § §6694, and 6695, or that substantially interferes with the administration and enforcement of the internal revenue laws.
Tuesday, January 10, 2023
Cutting Off the Tax Revenue Nose to Spite a Political Face
The Family and Small Business Taxpayer Protection Act repeals the IRS funding increase provided by the Inflation Adjustment Act enacted last year. Not surprisingly, that IRS funding increase, intended to provide resources to crack down on tax-evading oligarchs and their ilk, was immediately criticized by the supporters of tax cheaters through the use of lies. As I discussed in Fear Mongering, Tax Style, the opponents of cracking down on wealthy tax cheaters falsely claimed that the increased funding would underwrite IRS actions against people with incomes under $400,000 and small businesses, and falsely claimed that it would permit the IRS to hire 87,000 additional agents. In my commentary I explained why those claims were lies, and why they find “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.” Supporters of the funding repeal not only presented the same false claims but added their intention to expand the Trump-era tax legislation that was marketed as financial relief for the middle class but that in fact funneled riches into the coffers of the starving oligarchs.
Worse, the Congressional Budget Office issued an analysis of the legislation that demonstrates its impact on the federal budget. According to the analysis, the funding repeal would cut federal spending by $71 billion (in reduced IRS funding) but generate a reduction of $186 billion of lost revenue. Thus, federal budget deficits would increase by $114 billion over a ten-year period. The CBO estimate of lost revenue is on the low side, considering that a dollar of IRS funding brings in five to ten times as much revenue. Coming from a political party that for years has opposed deficit increases, other than when it comes to funneling money to oligarchs, one must wonder what is the true motivation for the legislation. Perhaps it’s simply an attempt to protect campaign donors from the reach of the IRS.
Of course, the same anti-IRS crew has plans to offset the additional tax cuts for the wealthy that they intend to enact. They have put Social Security and Medicare in their sights. Anyone who pays attention to life knows that Social Security and Medicare are vital for the poor, necessary for the middle class, and of little effect on the financial position of the wealthy. So why does this minority of the minority proclaim it is working for the poor and middle class while acting for the benefit of the wealthy? The answer is simple. They mask their true intentions because if they were to reveal their true intentions the outrage would toss them out of power. Instead, they bank on the ignorance of some, they rely on the apathy of others, especially those more concerned with foisting their social views on everyone else, and they count on the support of their campaign donors.
It is unlikely that this most recent legislation, the pride and joy of the anti-tax crowd and hailed by it as the vanguard of the latest chapter in the assault on government, will become law. It is unlikely to pass the Senate and if it did, it would be vetoed by the President. That probably does not worry the advocates of rule by the minority of the minority, because they’re just warming up for January 2025. And they’re likely to succeed, until and unless enough Americans figure out who their political friends actually are. Here’s a clue. It’s not the people intending to, and trying to, tear down what protects the financial well-being of the vast majority who are not wealthy.
Thursday, January 05, 2023
Is a Statewide Beach Tag Fee in New Jersey a Good Idea?
Spadea begins by expressing his general support for user fees, noting that those who use a “product, service or location” should pay at least part of the cost of providing or caring for those products, services, or locations. He then suggests that the fees charged for “a few hours enjoying the beach and the ocean” are too high. He notes that without beach fees, the cost of maintaining the beaches would fall on local homeowners and retailers. As often is the case with user fees and sometimes with taxes, the issue isn’t whether they should exist but how much they should be.
Spadea contrasts the New Jersey situation, which is seasonal, with Florida, which has year-round beach use. In Florida, taxes on hotel rentals ensure that at least some of the cost of beach maintenance is borne by tourists, that is, non-residents who use the beaches. He notes he has not seen much maintenance on the beaches of the Outer Banks, nor has he seen lifeguards, whereas in New Jersey the beaches are cleaned daily and lifeguards are stationed every few blocks.
Spadea then shares an idea from one of his friends. His friend argues that a person should not be required to pay additional beach tag fees to visit friends on the beach for a few minutes. The solution, he suggests, is a “universal tag that would be accepted across” all New Jersey beach towns. The tag would be sold by the state, and towns that chose to participate would receive a portion of the tag revenue collected by the state. Spadea thinks that this would increase beach tourism, in turn helping local businesses that rely on seasonal revenues to keep afloat and increasing local tax revenue.
Reader Morris asked me, “Does this beach tag fee idea make sense?” My response is the classic, “It depends.”
I set aside the claim that a statewide beach tag fee would increase tourism. Most tourists who visit the New Jersey beaches stay in one town, and though they may go to other towns for dining or gambling, most use the beach closest to where they are staying. But that’s not what generates my response.
To me, the statewide beach tag fee resembles the train passes one can purchase in Europe. A traveler intending to make multiple train journeys can purchase a pass for an amount that is less than what would be paid if each journey were purchased separately. But this makes sense only if the traveler is planning to make enough train journeys to justify the cost of the pass. A traveler intending to make one train journey would be ill-advised to purchase the multiple-trip pass.
Assuming that all beach towns opt in to the plan, which may or may not happen if a statewide beach tag is adopted, cost shifting will occur. Persons who visit multiple beaches will benefit from lower overall costs, whereas those who visit one beach will pay more than they would have paid for a single-town beach tag. There are ways of alleviating this imbalance but it would require a more complicated fee structure. Returning to the European train pass comparison, it is possible to purchase different “levels” of train passes, for example a pass good for 6 days of rail travel in a 15-day period, a pass good for 10 days of rail travel in a 20-day period, and so on. Of course, the cost increases as the scope of the pass widens. Yet what I gathered from what bothered Spadea’s friend is the notion that individuals who visit multiple beaches should not pay more simply because they are making a short trip to a beach. Perhaps I am misunderstanding the proposal, but surely Spadea’s friend isn’t suggesting that a person who purchases a ticket for one train journey should not be charged an additional amount for taking a short ride on another train.
There’s much to say in favor of a statewide beach tag system. It eliminates the inconvenience of needing to purchase a beach tag each time a person visits another beach. It streamlines the administrative burden of collecting fees and distributing tags by consolidating operations. It even helps the environment by letting a person carry one, rather than multiple, tags. It could work if structured in a way that did not shift the burden from heavy users of multiple beaches to people who are occasional visitors to one beach. And that is why I respond to the question from reader Morris with “It depends.”
Saturday, December 24, 2022
Does a Tax on Robot Value Help Retain Workers Or Is the Solution Less Simplistic?
If the suggested tax were to be imposed annually, the cost of a robot would increase significantly. But that’s not the only concern. Most employers live in jurisdictions that impose property taxes, so wouldn’t the robot-value tax simply be a duplication of the property tax?
Imagine where we would be had a similar “tax on worker replacements” had been in effect when street-cleaning vehicles with one driver replaced perhaps a dozen street sweepers, when one painter with spraying equipment replaced several or more painters using brushes, when one employee driving a snow plow truck replaced however many workers moving snow with shovels. In every instance of technological advance and replacement, the key has been to shift employee tasks. Individuals working in buggy whip factories took jobs in automobile factories. Employees of carriage making companies went to work for Fisher Body and similar companies.
As increasing numbers of robots are manufactured and placed into service, employees are needed not only to build robots, but to design them, to write programming code for them, to work in the factories that manufacture the components, to work for agencies that check the quality and safety of the robots, and to repair or reprogram robots that are misfunctioning or need to be adapted to a different use. The key to these shifts is education. The learning of new skills, especially as a person gets older, is challenging. Yet it often is a necessity, has been so throughout history, and will continue to be a requirement of progress and survival. Companies that want to manufacture and program robots, and companies that want to use them, need to retrain employees, and need to enter into arrangements with companies closing down or laying off employees because of robot replacement. Should those costs be funded by a tax on the owners of robots? On the manufacturers of robots? On the companies laying off employees? Or perhaps on the consumers of the goods and services provided by the robots, as part of a price increase that puts the burden on those who benefit from the lower costs generated by the use of robots that would be partially offset by the price increase? The analysis of how increasing replacement of human workers with robots needs to reach beyond the simplistic concept of a tax on the value of robots and examine instead the correlation between who benefits from the use of robots and the cost of retraining humans to function in a robot world.
Wednesday, December 14, 2022
The Tax Consequences of Social Media Influencing
This time I’m watching America’s Court with Judge Ross, a repeat episode from 2020 but the program doesn’t give me the episode number. The case is a breach of contract claim by a hotel against a social media influencer. The defendant, who bills herself as a social media influencer, approached the hotel and proposed that she be allowed to stay free for several night in exchange for her posting favorable commentary on social media. Because of questionable behavior by a member of hotel management, the defendant did not publish the second and third promised commentary. The hotel sued, seeking payment for the value of the hotel stay. The judge held in favor of the defendant because of the inappropriate behavior of the hotel employee. So the defendant ended up with the value of a hotel stay without paying for it, in exchange for one social media posting. Of course, my brain asked me, “What are the tax consequences?”
At the theoretical level, there’s no question that the value of whatever an influencer receives in exchange for a contractual obligation to publish favorable commentary is included in gross income. Social media influencers, who operate on their own, are independent contractors and are taxed as such.
At the practical level, depending on the value of what is provided, the person or entity providing cash, property, or services in exchange for the favorable commentary may or may not issue a Form 1099. The influencer is responsible to track the amount that is received even if no Form 1099 is received. As a practical matter, influencers probably find it easier to keep track of cash, checks, and digital payments, while overlooking the value of goods and services.
Another practical problem is liquidity. It’s one thing to receive cash or its equivalent and set aside a portion to pay taxes. When a substantial portion of the influencer’s receipts consist of goods and services, the influencer may face the need to sell some or all of the goods, apart from those that cannot be sold (for example, cosmetics), in order to raise cash to pay taxes. However, that’s more easily said than done, and even if a sale can be made the sale price might end up being less than what the influencer bargained for when entering the contracts with the providers of the goods. It is possible that savvy influencers who are paid with goods and services would request a supplemental amount of cash to fund the resulting tax liability, but providers might resist because it is much easier to provide an otherwise empty hotel room or excess inventory holding a sunk cost than to dip into cash accounts.
I suppose some readers might ask, “You’re just now realizing there are tax issues with social media influencing?” My response is, “Yes, because I don’t pay attention to that side of the digital world. I’m not into advertising and marketing, other than to be on the target end of incessant emails, phone calls, and postal mail. I’m not into the clout rage. I’m not a celebrity whose talent with one activity causes people to think I’m an expert on some unrelated service or product. I’m not a celebrity wannabe desiring to make efforts persuading people to use a particular service or purchase a particular product. I doubt the world has any interest in knowing what brand shoe I am wearing or cares about which automobile dealership I prefer to patronize. I suppose some might then ask, “Isn’t MauledAgain designed to influence? Haven’t you, as a teacher for many years, tried to influence students?” To those good questions, I point out that to the extent I try to influence people, it’s not to influence them to purchase or use particular goods and services, but to influence behavior. For me, that matters much more.
Saturday, December 03, 2022
When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers
But it’s not always the preparer who is at fault. Not long ago, according to this Department of Justice press release, a jury convicted a Michigan attorney of filing five fraudulent tax returns. Were his tax return preparers at fault? Apparently not. According to the press release, the attorney, who also owned a real estate company and two medical-related companies, concealed income “from his tax preparers and the IRS” by depositing receipts into his lawyer’s trust accounts. These accounts, known as IOLTA, are used by lawyers to hold funds that belong to clients, are not to be used for any other funds, and are subject to strict regulation designed to protect clients.
The attorney was convicted of filing fraudulent individual returns for 2012, 2015, and 2018, for filing a fraudulent amended individual return for 2012, and for filing a fraudulent corporate return for one of the medical-related companies for 2015. The jury relied on evidence that the attorney did not report roughly $600,000 of income earned in 2012, $800,000 of income in 2015, $300,00 of income in 2018. Altogether the attorney failed to report more than $2,600,000 in income. Sentencing awaits.
I’m not sure if the three-year pattern of 2012, 2015, 2018 was by design or happenstance. Perhaps the usual three-year statute of limitations that apples in non-fraud situation was some sort of factor in the attorney’s thinking.
What should a preparer do when handling a client’s tax return? It is possible, as this case demonstrates, for a client to succeed in hiding information from a preparer. Preparers need to ask questions, and document the answers. Perhaps this attorney’s preparers did that. Imagine them asking, “And did you receive any other receipts or income?” and getting “No” as a response. Unless there are clues that raise suspicions, such as expenditures far exceeding receipts and income, preparers cannot search and seize the client’s records that the client doesn’t provide to the preparers. Of course, if the preparers are suspicious and are dealing with an uncooperative client, they can terminate the relationship.
Sadly, the conviction of this attorney leaves the clients in a bad spot. The challenges faced by the clients and the options for them to have their cases handled are mapped out in an article by an unrelated attorney whose firm handles the same sort of personal injury cases as did the convicted attorney. Though I leave the “how to switch attorneys” issue to commentaries by those who specialize in the impact of professional responsibility rules on personal injury cases, I did learn from the article that the convicted attorney used for marketing purposes a telephone number converted to the slogan “855-Car-Hit-U.” Clever, in contrast to the foolishness of plowing receipts and income into IOLTA accounts prohibited from receiving them.
I wonder who has the phone number “855-IRS-Hit-U” and, no, I did not and will not “dial” it. (I put “dial” in quotation marks because as its use as a verb in connection with telephone calls is fading away and has become one of those benchmarks used to guess a person’s age!)
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.
