Thursday, April 27, 2023

A New Tax Game? 

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.

Wednesday, April 19, 2023

Bad Tax Proposal Wrapped in Manipulation 

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.

Tuesday, April 04, 2023

Can Tax Return Preparers Learn from the Misdeeds of Other Preparers? 

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.

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