Friday, June 16, 2023
The Mileage-Based Road Fee: Simpler, Fairer, and More Efficient Than the Alternatives
The proposed North Carolina legislation seeks to deal with funding issues by enacting or tinkering with five different taxes and fees. It would increase the electric vehicle registration fee from $140.25 to $180. It would impose a new $90 annual registration fee on hybrid vehicles. It would amend the sales tax so that it applied to the entire purchase price of a vehicle rather than to the first $66,667. It would enact a new tax on ride-share companies, charging 50 cents for exclusive rides given to one person and 25 cents for shared rides, increasing each year in tandem with the state gasoline tax. It would permit the state to authorize six, rather than the current three, toll road projects based on private-public partnerships.
Would it not be easier, simpler, and most importantly, fairer, to charge vehicles according to the wear and tear they impose on highways rather than enacting and tinkering with five different taxes and fees? Because I’ve written extensively about the superiority of a mileage-based road fee as a solution to the transportation funding issues exacerbated by the advent of electric vehicles, I will simply point out that one criticism of the mileage-based road fee, that it is too complicated to implement, not only is unsupported by the experience of states trying it on a trial basis but also encourages setting aside that fee in favor of the truly complicated and difficult-to-implement hodgepodge of stopgaps such as those contemplated by the North Carolina legislation. Why should people using ride-share vehicles be hit with a tax when people riding in other vehicles don’t share in that burden?
Too often politicians lack the courage to solve a problem directly and efficiently because they are unwilling to help citizens understand what needs to be done and why it needs to be done. They find it easier to enact and amend existing laws in the hope that they can avoid pushback by acting in ways that make their changes seem palatable. The long-term price that is paid for this way of legislating ends up being borne by everyone but the legislators.
Perhaps legislators in North Carolina can avoid the unfairness, inefficiency, and complexity of the proposed legislation and step to the forefront of the transportation funding changes that this nation needs. Perhaps. But don’t hold your breath.
Wednesday, June 07, 2023
Do Tax Breaks Overcome the “I Wouldn’t Do That for a Million Dollars” Barrier?
This morning, listening to news radio, I heard a report that prompted me to dig up this pending Pennsylvania legislation. The proposed bill would provide a tax credit to individuals who enter the teaching, nursing, or policing professions. The impetus for this proposal is easy to identify. Teachers, nurses, and police officers are leaving their professions, through retirement or resignation, at much higher rates than people are entering those professions. Once again, legislators think that the solution is to throw tax breaks in the direction of the problem.
Many times I have heard, and I’m confident readers have heard, a variation of the exclamation, “You couldn’t get me to do THAT even for a million bucks.” And though sometimes enough financial incentives will prompt people to do things they don’t want to do or would prefer not to do, such as cleaning septic tanks and sewers, there are some things that most people would not do no matter the money.
There is a reason people are abandoning professions such as teaching, nursing, and policing. It’s not the money. It’s the lack of respect, the lack of consideration, the lack of support, and the lack of social pressure to mitigate the problems that make life in those professions miserable. Will a few dollars cause someone to enter the teaching profession or cause a teacher to change their mind and continue teaching in a dilapidated building filled with rowdy students who don’t hesitate to disrespect teachers and even bring violence into the classroom, to say nothing of the intruder who thinks schools are a good place to work out their psychological issues with military-grade weapons? Will a few dollars cause someone to enter the nursing profession or cause a nurse to change their mind and continue nursing in a short-staffed medical facility lacking supplies and visited by a patient who assaults personnel? Will a few dollars cause someone to enter the policing profession or cause a police officer to change their mind and continue policing in a society that has more concern for the criminal than the victim, in a judicial system that puts criminals back on the street before they are rehabilitated, and who are too often in situations where they are outnumbered.
It is easy for legislators to vote for a tax break and claim that they have “taken steps to solve a problem.” It is difficult, and requires political courage, to vote for legislation that focuses on the root causes of the problems. That political courage is easier for legislators to find when people generally stand up and advocate solutions that address those root causes, resisting the influence of the monied lobbyists and those who hesitate to hold people accountable for their actions. And to the extent that money is an issue, and it is in some segments of those professions, then the answer is to raise salaries and benefits, dealing with the issue directly instead of using a more complicated round-about paperwork-filled tax break approach.
Monday, May 29, 2023
Indeed, Freedom Is Not Free
So this Memorial Day, I will simply edit what I wrote two years ago in The Price of Freedom Is Much More Than Taxes. I wrote that commentary to expand the scope of my previous essays on freedom, which had focused on the fiscal aspects of freedom. In particular, I had addressed the connection between the payment of taxes and the things people take for granted as part of their “freedom.” Back in 2011, I had written, in Free, Freedom, Fees, and Taxes, that “In order for a person to have something for free, someone else must pay.” I had written that claim in connection with the conundrum faced by New Jersey beach towns facing opposition from visitors to the enactment of beach fees. I asked, “But when tourists use a beach for free, requiring lifeguards, safety patrols, litter removal, public restrooms, parking, and other amenities, who pays? Should 5,000 pay for the freedom of 295,000?”
So shifting from the fiscal aspect of freedom to a more general perspective:
Consider an example. The person who claims that they are free to drive 30, 40, 50 miles per hour over the speed limit – and if you think that isn’t happening, I invite you to take a ride on the roads I travel – can end up imposing the cost of that “freedom” on the people they kill and injure when they learn, too late, that there are reasons a person should not, and cannot, drive at 95 miles per hour on a road subject to a 55 miles per hour speed limit. Similar examples can be based on drivers who run red lights, who drive while under the influence, or who operate muffler-less off-road vehicles on public highways at all hours of the night.I return again to the notion that freedom is not free. There is a price to be paid. A price paid in lives, in blood, in time, and in money. Those who pay in time and money but not in lives and blood surely owe a debt to those who shed blood and gave up their lives. And those who aren’t paying at all, for them we pray that they be enlightened.Too often, those who claim that this unregulated “freedom” is sacrosanct point to the arrival of Puritans in what is now Massachusetts. They are idolized as seekers of freedom, trying to escape religious and political persecution. Yet when they arrived in the Massachusetts Bay Colony, they immediately started acting in the same manner as had their tormenters, in turn suppressing those whose religious beliefs or political positions conflicted with those set down by the Puritans. The contrast with Pennsylvania, also settled by victims of religious persecution, but where those of diverse origins and religions were welcomed, is startling. I didn’t learn this in school because it isn’t taught in this manner, nor is this lesson noted. I learned this when I did the research to write the biography of Thomas Maule of Salem, reading not only his works and those of others, both in his day and thereafter, but also studying the social and cultural environment in which his fellow citizens, of a different religious persuasion, acquitted him of the seditious libel charges brought by Puritan authorities who resented being tagged as hypocrites. And they truly were. Seem familiar? Today the nation is being tormented by “freedom lovers” who are trying to prevent Americans from learning the truth about the hypocritical Puritans whom they not only worship but whose hypocrisy they emulate and imitate.
The question at the moment is what sort of “freedom” will this nation embrace? To ignore this question is to dishonor those who fought and died for freedom, because answering the question incorrectly makes the price they paid a price paid in vain. Will the model be the “freedom” to escape torment and persecution only to torment and persecute others? Or will the model be the “freedom” to welcome those with different perspectives while refusing to adopt the methods of those from whom freedom was sought?
Indeed, freedom is not free. It comes with a cost. The cost is more than monetary. The cost can be the reduction of speed, the stopping at a red light or stop sign, the obedience to the yield sign, the ceasing of the 1 a.m. fireworks, the toning down of the party noise at 2 a.m., the picking up of the pet’s poop, the use of a trash or recycling container rather than the gutter when disposing of trash, the extinguishing of the cigarette when in a closed space or close to others, the use of words rather than weapons when in a disagreement, telling the truth, and learning to think critically.
Freedom is not free. It disappears when the cost, whether in lives, taxes, or proper behavior, no longer is paid. Memorial Day means little if the freedom for which the fallen fought is disregarded, abused, or limited to fewer than everyone. The cost of freedom is much more than taxes.
Friday, May 26, 2023
Supreme Court Puts An End to a Bad Tax Practice
Yesterday, the United States Supreme Court handed down a decision, , Tyler v. Hennepin County, Minnesota that involved a similar practice in Minnesota in which the excess of the sales price over the delinquent taxes was not returned to the property owner. In this instance the property owner challenged the practice under the Takings Clause of the Fifth Amendment to the U.S. Constitution and under the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution. The district court dismissed the property owner’s challenge for failure to state a claim, and the Court of Appeals for the Eight Circuit affirmed the decision. The Supreme Court granted certiorari, and held that the property owner plausibly alleged that the retention of the sales surplus violated the Takings Clause. The Court explained that a government cannot take more from a taxpayer than is owed, and that this principle has its origins at least as far back as the Magna Carta, and that most states had statutes adopting this principle. Minnesota did not provide a way for the property owner to recover the excess in the case of delinquent real property taxes even though it did provide for return of the excess when property was seized on account of delinquent income taxes and personal property taxes. The Supreme Court rejected Minnesota’s argument that the property owner did not have a property interest in the excess sales proceeds because she constructively abandoned her home by failing to pay the property tax.
The outcome is not, to me, surprising. The obvious impropriety of what Minnesota and the other states have been doing is apparent from the fact that the Supreme Court’s opinion was unanimous, something that doesn’t happen very often these days. What is surprising are the decisions of the district court and the Eighth Circuit.
In Who Gets Surplus Proceeds From a Tax Sale?, I described the retention by the state or local government of the sales proceeds as “unconscionable.” It should not have required a Supreme Court decision to make it clear to states and localities that retaining the excess sales proceeds is wrong. The Supreme Court got it right and it’s now time for states that permit retention of excess sales proceeds to amend their statutes.
Wednesday, May 24, 2023
A Different Sort of Tax Fraud Scheme
The father and son reported these winnings on their tax returns. To avoid the tax liability, they claimed fake gambling losses to offset the winnings. The net effect was that no federal or state income taxes were collected on the lottery winnings involved in the scheme. The defendants caused $6 million in federal income tax to go unpaid.
The father and son were each convicted of one count of conspiracy to defraud the IRS, one count of conspiracy to commit money laundering, and one count of filing a false tax return. Another son of the father had already pleaded guilty for his part in the scheme and awaits sentencing. The father was sentenced to five years in prison and the son to 50 months in prison.
It is unclear if or to what extent Massachusetts is dealing with the state income tax revenue lost because of the scheme. The state lottery commission is revoking and suspending the lottery licenses of the more than 40 lottery agents identified as having participated in the scheme. It also is unclear if the persons who sold the lottery tickets at a discount reported the amounts they received though it is doubtful they dd so, and it also is unclear if the IRS and the Commonwealth of Massachusetts are taking steps to identify these individuals.
The special agent in charge of the IRS Criminal Division in Boston noted that the father and the two sons had chosen to engage in a decade-long scam rather than “using business savvy and skill to build a legitimate multi-generational business.” Perhaps it was easier, physically and intellectually, to throw together the illegal scheme than to endure the challenges of starting a legitimate business. Perhaps psychologists can elaborate, though professionals have been trying, for generations, to figure out why some people turn to crime rather than engage in appropriate behavior.
Thursday, May 11, 2023
Another Instance Illustrating Why Using the Tax Law to Influence Behavior is Unwise and Inefficient
At the end of yesterday’s commentary I provided my answer to the question from reader Morris, who had directed my attention to the story. He had asked, “Is this the first tax break revoked due to stinky odor.” My response was that “I don’t know of any other instance in which a tax break was repealed because a taxpayer failed to eliminate stinky smells.”
Today, reader Morris followed up by directing me to this story. The story doesn’t address the question about tax break revocations on account of failure to eliminate or reduce smells, because it involves a failed attempt by the city of Kalamazoo, Michigan, to enact a tax break that imposes that condition.
According to the story, the Kalamazoo City Commission enacted a tax break for the expansion of a very large paper recycling and production factory provided that it make efforts to reduce smells coming from the factory. However, the state of Michigan told Kalamazoo that it does not permit tax breaks that are contingent.
The situation involves more than bad smells. According to the story, people living near the factory have been experiencing health issues. The state of Michigan is investigating “the prevalence of asthma in the neighborhood” of the factory. There has been one instance of someone with asthma dying at the age of 17. The area also evidences a “14-year life expectancy gap.”
These stories illustrate the problem with trying to use tax laws to deal with issues that aren’t tax issues. As readers of MauledAgain know, I consider the use of the tax law to deal with issues that should be handled by government departments and agencies other the IRS or a Revenue Department to be unwise and inefficient. If there are, for example, bad smells coming from a building, that problem should be handled by the federal, state, or local agency responsible for property use, zoning, and nuisances. If there are, for example, adverse health consequences caused by a person’s or company’s activities, that problem should be handled by the federal, state, or local agency responsible for health care.
Legislators who are unwilling to take the heat for blocking donors and supporters from conducting inappropriate operations find it easier to try using tax systems to change that behavior. That approach, in the long run, doesn’t work, as evidenced by the ever-growing list of tax breaks intended to make life better. If tax breaks did the job, there would be no need to continue piling on more and more tax breaks. Imagine those who are caught for committing bank robberies being told that they would be given money or a tax break if they stopped robbing banks. Would bank robberies stop? Would the recipients of these tax breaks retire from a life of crime?
The underlying problem is that we now live in a world in which everything has been or is being monetized. Money has always been an idol for some, and now it’s becoming an idol for many. Parents paying children to eat vegetables, governments paying factories to stop spewing bad smells, legislators paying people to make sensible health decisions, the list gets longer and longer. Until we return to a culture in which things are done because they are the right thing to do rather than a culture in which it takes money to get people to do the right thing, civilization will continue to decline. To the extent using tax law to control behavior adds to the problem, it needs to stop.
Wednesday, May 10, 2023
Corporation’s Compliance with Tax Break Conditions Stinks
In 2021, the city of Mishawka, Indiana, granted tax breaks to the Wellness Pet Company, which makes pet food. The tax breaks were intended to help the company expand the factory and install equipment to reduce or eliminate the odors emanating from the plant.
During the past two years, only three percent of the improvements to real estate contemplated by the city and the taxpayer were made. Only 20 percent of what was intended with respect to personalty was accomplished. When asked, the company was unable to explain when it anticipated making the improvements on which the tax breaks were conditioned. According to the city, the parent company chose to expand operations in other locations rather than in Mishawka. The company did install odor abatement equipment but apparently it does not work well enough. Reader Morris let me know that he was near the site and the odor was foul.
So a few days ago, the city’s council voted unanimously to repeal the tax breaks. It remains to be seen if the company cries foul and sues the city.
So to answer the question from reader Morris, I don’t know of any other instance in which a tax break was repealed because a taxpayer failed to eliminate stinky smells.
Wednesday, May 03, 2023
These Problems Won’t Be Solved By Tax Breaks
In response, Republicans in the Pennsylvania Senate rejected the idea. Instead, they want to reduce Pennsylvania’s corporate and personal income tax rates. They profess a desire to bring “big businesses” into the state. One Republican noted that there are shortages in other industries, mentioning “bus drivers, EMTs, correction officers, and CDL drivers.”
None of this makes any sense. Yes, there is a problem. No, neither the governor’s proposal nor the Republicans’ desires fix it.
Many of the people leaving the professions in question, or refraining from joining them, are doing so for reasons far more important than money. Yes, income helps, though tax credit that might not exceed $1,000 or $1,500 for most people in those professions isn’t going to tip the scales, especially for people who say things like, “Even for half a million dollars I wouldn’t stay in (or keep) this job.”
Of course, reducing tax rates for corporations doesn’t do a thing to increase employment in the policing, teaching, or nursing industries. Nor would it solve the problem in other industries. Reducing the personal income tax rate also doesn’t solve the problem, and worse, provides the best financial benefits to those most unlikely to be found in the affected professions. Bringing “big businesses” into the state not only fails to provide more police officers, teachers, nurses, EMTs, and others, but would increase the demand for police officers, teachers, nurses, EMTs, and others.
Before parading out solutions such as tax credits, tax breaks for corporations, or reducing tax rates, political leaders need to identify WHY people are leaving professions such as teaching and nursing, and declining to become teachers and nurses. As I’ve often commented, there are problems that tax breaks do not and cannot fix.
People don’t want to work in professions that are disrespected. People don’t want to work in industries that are neglected by politicians. People don’t want to work in jobs that are unnecessarily dangerous. People don’t prefer jobs in which they are overworked, and when staff shortages fuel that decision, the problem grows exponentially. People don’t want to be employed in situations that wreck work-life balance. People don’t like jobs where they get insufficient support and ineffective training. People don’t want to work in companies that are stacked with incompetent supervisors.
Money won’t fix those problems. In fact, money has caused or aggravated many of those problems. But as long as society has become a place where everything has been or is being monetized, staffing shortages will get worse. Education quality will decline. Health care services will become even more inadequate. Crime will continue to escalate.
What the politicians have done and have been doing isn’t working. The answers lie beyond tax.
Thursday, April 27, 2023
A New Tax Game?
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.
Wednesday, April 19, 2023
Bad Tax Proposal Wrapped in Manipulation
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.
Tuesday, April 04, 2023
Can Tax Return Preparers Learn from the Misdeeds of Other 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.
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.
