MauledAgain

Reader Morris alerted me to proposed legislation in North Carolina that would eliminate state income tax on bonuses up to $2,500 and overtime pay. The benefit would be provided in the form of a deduction, according to the language of the bill.

The reasoning behind the legislation is that it would encourage employees to work extra shifts, and help employers fill vacant positions. Of course, if the reason someone isn’t working extra shifts is because of other responsibilities, such as caring for family members, pursuing an education, or engaging in community service, a tax break might not move the needle enough to change the person’s schedule.

Putting aside the question of whether this legislation would further the goals stated by the sponsors, it creates a new tax game. It would be rather easy for employees and employers to reduce compensation by $2,500 and replace it with a $2,500 bonus. That thought popped into my head several sentences into reading the article, and so I wasn’t surprised to read, deeper into the article, that Timothy Vermeer, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation observed that “You might not see more productivity from certain professions, you may just see a shift of how they are compensated.” Indeed.

There may be less of a game to play with overtime pay, because the proposed legislation limits the tax break to “overtime compensation pursuant to sections 206 and 207 of the Fair Labor Standards Act.” Section 206 provides for a minimum wage, so it appears to me that no portion of the minimum wage compensation could be converted into overtime or bonus pay. Section 207 provides that overtime pay is required at not less than one and one-half times the regular pay rate if the employee is employed for more than a specified number of hours per week (which varies by industry). It is unclear to me if an employer can specify a lower number of hours as the threshold for overtime pay and thus shift some compensation into overtime pay classification. To avoid paying extra amounts the employer would need to do some computations to determine how many hours to shift.

This proposed legislation is yet another theory that, if enacted, will not work well when it encounters practical reality. There will be employees in a position to shift the classification of their compensation without adding shifts. As Vermeer noted, “There’s really not a good economic reason for treating those different classes of income differently.” And he noted that there are employees who not receive bonuses or overtime pay, and I wonder if in some instances the particular employment situation makes those types of pay either impossible or impractical.

I have no doubt that this legislation, if enacted, will simply create another tax game. It will be a game that is not needed and that would be harmful.

They call it the The Death Tax Repeal Act of 2023. It was introduced recently as a bill in Congress. If enacted, it would repeal the estate tax and the generation-skipping tax, and make conforming amendments to the gift tax.

Why this bill? According to its sponsors, the legislation is needed because “the death tax is lethal to many of America’s family-run businesses and farms.” The current estate tax applies when the taxable value of the estate exceeds $12.92 million. An estate that exceeds that amount almost certainly has a gross value exceeding that amount. What percentage of family farms and family businesses are worth more than $13 million? According to the Tax Policy Center, of the nation’s 2.7 million estates in 2017, only 5,200 owed estate tax. That’s 0.2 percent. And of the 5,200 estates, only 50 were family farms and family businesses. That’s less than one percent of estates paying estate tax, and less than 0.02 percent of all estates.

So who benefits from a repeal of the estate tax? About four dozen family estates and businesses, and more than 5,100 oligarchs, private equity investors, and other ultrawealthy individuals.

So why does legislation benefitting 5,000 ultrawealthy individuals get so much support from Republicans in Congress? The answer is simple. Those members of Congress owe favors to the wealthy individuals who fund their campaigns and in some instances provide other things to them.

So how does this sort of legislation get sold to the public? The sponsors of this legislation know that if they simply told America that they were proposing a tax break for 5,000 ultrawealthy individuals each year, a majority of Americans, who are far from wealthy and pay a larger proportion of their income and assets in taxes than do the ultrawealthy would balk. So to make the “sell,” the sponsors wrap their gift to their wealthy donors as something necessary for small family farms and businesses. Yet the legislation would not help 99 percent of those small family farms and businesses, because those small family farms and business already pay no estate tax.

The advocates of giving the ultrawealthy a tax-free life introduce legislation of this sort every session of Congress. They tried in 2021. They failed. They probably will fail this time. But if Americans who aren’t wealthy and who are unhappy about their economic situation keep voting for candidates who toss them crumbs while opening the doors of the Treasury to the ultrawealthy the sponsors of this sort of legislation will eventually win. Their donors will win. The unhappy economically non-wealthy will suffer even more. And the apostles of the ultrawealthy will continue telling the afflicted that their sorrow is caused by others, deflecting blame away from themselves.

Someone once said, “Know your enemy.” It takes education and research to do that. As long as the ultrawealthy have sufficient resources to block quality education and honest research, to hide history, to spew lies, and to package bad things in fancy wrapping paper, the sorrow of the afflicted will not end.

Here’s a piece of information that enhances America’s education and research. The supporters of tax-free lives for the wealthy are pretty much the same advocates who toss around the “Make America Great Again” slogan. And when, for them, was America “great”? For many, it was what the chief preacher of that slogan explained. He claimed, as reported in this story, that it was “during periods of military and industrial expansion at the onset of the 20th century and again in the years after World War II.” So what was the estate tax during those post-war years? Take a look at this chart. From 1942 through 1976, the estate tax kicked in at $60,000 and the top rate was 77 percent on estates worth more than $50 million. Think about it. The wealthy, when they died, faced a 77 percent estate tax rate. That is what helped keep income and wealth inequality in check. Unleashed in the 1970s, the rapid rise in income and wealth inequality lies at the foundation of the disenchantment that is fueling much of today’s economic and even cultural discord. And an estate tax repeal will do nothing but make economic inequality even worse. And that, in turn, will ramp up the discord.

I have written many times about tax return preparers who have been investigated, indicted, convicted, sentenced, or subjected to an injunction or restraining order. I have discussed these sorts of events in commentaries such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad, When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers, and A Procedural Twist on Dealing with Fraudulent Tax Return Preparers.

It would not be unusual to think that when tax return preparers see what happens to other preparers who try to get a financial advantage by breaking the law they might think twice or three times or more before trying the same thing. It would not be unusual to think that the disadvantageous outcome endured by others would deter tax return preparers continuing or entering the business. But deterrence doesn’t seem to work. Perhaps it never has worked. It certainly isn’t working now, and it’s not just with fraudulent tax return preparation that deterrence fails to work.

Here’s an example. Yesterday, the Department of Justice issued a press release, in which it described the consequences to yet another tax return preparer who thought she could get away with preparing and filing fraudulent returns on behalf of actual clients and individuals who weren’t clients but whose stolen identities were obtained and used. This preparer also decided to underreport income on her personal income tax return. In total, she evaded approximately $171,534 in income tax between 2013 through 2016.

So now this preparer faces a maximum sentence of 20 years for wire fraud, 10 years in prison for conspiring to file false claims, five years in prison for tax evasion, and a mandatory sentence of two years in prison for aggravated identity theft. She also faces a period of supervised release, restitution, and monetary penalties. That’s quite a high price to pay for increasing one’s annual income by roughly $40,000. Is it worth it? No. I wonder how many other tax return preparers will think about this when they are tempted to do the same thing. It is foolish to think that the result will be different. Yet too often they think that they are and will be smarter, more careful, more lucky, and more adept than those who preceded them in making the same bad decision.

The answer to my question posed in the title is simple. Perhaps. Though we will learn about yet another preparer who does the same thing, we most likely won’t hear about the preparer who was thinking of doing the same thing, but after learning about what happened to others, backs down and takes a different path. I do hope that more and more preparers resist the temptation even if others succumb.

The United States Department of Justice issued a press release yesterday announcing that the mayor of Wildwood, New Jersey, Peter J. Byron, admitted to aiding and assisting in the preparation and preparation of fraudulent tax returns. According to documents and testimony, Byron previously served as a commissioner for Wildwood, from about 2017 until December 2018, in charge of the Revenue and Finance departments. During about June through August of 2017, Byron sent multiple emails to the managing partner of a law firm, seeking assistance in finding a job. In October 2017, Byron received a letter on the letterhead of that law firm purporting to convey an employment offer from an unnamed company. According to the letter Byron would receive a salary for doing sales work for the company. The company was formed by the law firm managing partner in September 2017. In fact, the signature on the letter had been forged.

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.

Reader Morris directed me to a website that poses the question “What Is Adjusted Gross Income?” followed by the assertion, “Everything You Need To Know.”

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.

Reader Morris directed my attention to a story that seemed somewhat incredible. So I did some research and discovered the story on a number of sites, including this one. According to all the reports, Jane Fonda, who is worth roughly $200 million, agreed to go on a date with an Austrian “tycoon,” accompanying him to the Vienna Opera ball “because he offered to ‘pay me quite a bit of money.’” Fonda claimed that “she needed the money to pay her bills and to support her grandchildren.” Seriously? Someone worth $200 million can pay bills without accepting money to go on a date. Perhaps she isn’t worth $200 million or even one million. So that’s why I hesitated when reading one story, thinking it to be a fabrication, until I found the story in other sources.

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.

The other day, in Tax Season Brings Out a Question (Which I Try to Answer), But It Also Brings Misinformation, I explored the uncertainty surrounding the federal income tax consequences of the California Middle Class Tax Refund. Along with others, I noted that the uncertainty would need to be resolved by the IRS because the Congress has not addressed, and surely would not address, the question.

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.

Reader Morris alerted me to this article ("first article") addressing the federal income tax consequences of the California Middle Class Tax Refund. The author writes, “Local tax professionals have said they don't think you'll owe federal taxes based on two IRS tax codes, but wanted the IRS to issue guidance.” It was this sentence that got the attention of reader Morris.

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.

When I read the newspaper, I don’t read every article. Generally, the headline lets me know if I want to read the article. In some instances the article covers a story that I’ve already read elsewhere, often on the online version of the paper, where stories often appear before they show up in the morning print version. So this morning, when I saw the headline, ”Here are 2023′s tax filing deadlines, late penalties, and tax code changes for Pennsylvanians”, I chose to read it. I had not seen it online.

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.

It’s been a while since I’ve written about the mileage-based road fee. My previous commentaries include Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, Mileage-Based Road Fee Meets Interstate Travel, If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?>, Try It, You Might Like It (The Mileage-Based Road Fee, That Is) , The Mileage-Based Road Fee Is Superior to This Proposed “Commercial Activity Surcharge”, The Mileage-Based Road Fee Is Also Superior to This Proposed “Package Tax” or “Package Fee”, Why Delay A Mileage-Based Road Fee Until Existing Fuel Tax Amounts Are Posted at Fuel Pumps?, Using General Funds to Finance Transportation Infrastructure Not a Viable Solution, In Praise of the Mileage-Base Road Fee, What Appears to Be Criticism of the Mileage-Based Road Fee Isn’t, Though It Is a Criticism of How Congress Functions, and Ignorance and Propaganda.

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.

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.

Why do I disagree?

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.

Usually when I write about misbehaving tax return preparers, I am sharing news of an investigation, an indictment, a conviction, a sentencing, or some combination of the foregoing. I have discussed these sorts of events in commentaries such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad, and When It Comes to Fraudulent Tax Returns, It's Not Always the 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:

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.

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.

How many people will understand what actually is happening in the House of Representatives, now that a very tiny minority of a national minority has managed to take over what it intended to be a representative legislative body? The first legislative act of the House of Representatives was the passing, by a totally partisan vote, of the Family and Small Business Taxpayer Protection Act, which, of course, does not protect families or small businesses. Who does it protect?

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.

Reader Morris directed me to a commentary by New Jersey 101.5 talk show host Bill Spadea, suggesting a state-wide “universal” beach tag fee to replace the individual beach tag fees imposed by dozens of New Jersey beach towns.

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.”

MIT has released a recent study by MIT economists with the tagline, “Should we tax robots?” The study isn’t suggesting that robots be required to file tax returns. Instead, it suggests “that a tax on robots should range from 1 percent to 3.7 percent of their value.” The reasoning is that the tax would give employers “incentive to help retain workers” as well as to replace the “dropoff in payroll taxes when robots are used.”

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.

Though there wasn’t a tax issue mentioned, a television court show presented facts that caused me to wonder about what actually is happening for tax purposes in the sort of transaction at play in the case. Yes, 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, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, and When a Tax PIN is Used Without Permission.

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.

When it comes to the filing of fraudulent tax returns, it’s often the preparer who initiates the scheme, in most instances leaving the client unaware of the malfeasance or brought into it on the assurances of the preparer, viewed by the client as more knowledgeable about taxes. More than once I’ve advised people to be careful when choosing a preparer. I’ve written about the woes of misbehaving tax return preparers in commentaries such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, and Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad.

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!)