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.