When Tax Fraud Is Admitted in a Civil Arbitration Proceeding Known As a Television Court Show

It’s time to look at another television court show. As readers know, I have addressed tax issues in 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, When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case, Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?, and Tax Might Be Boring, But the Underlying Facts Often Are Not.

This latest examination of a television court show is happening thanks to reader Morris. He directed me to this Judge Pirro episode from . Most of the facts were very evident despite disagreement on one point, but what wasn’t clear was the basis for the plaintiff’s claim because the case never reached that point.

The plaintiff and defendant knew each other because they had worked together as servers for several catering events. The defendant mentioned to the plaintiff that she, the defendant, was not going to file a federal income tax return because she had earned less than the filing threshold. She had mentioned on more than a few occasions that she had two children, and that her boyfriend/fiancé was not the father of the children. It is at this point that the parties disagreed. The plaintiff testified that the defendant proposed that the plaintiff claim the defendant’s children on the plaintiff’s tax return, causing a tax savings/refund (the facts aren’t clear on that point) that would be shared by the parties. The defendant denied making that proposal but insisted she only told the plaintiff to “check the procedure,” whatever that means. However, the defendant admitted that she provided the plaintiff with her children’s social security numbers.

The plaintiff filed her federal income tax return, claiming the defendant’s children. It appears that the IRS paid the plaintiff a refund and then requested repayment, because at some point it noticed that there was a problem with the return. What is clear is that the IRS asked the plaintiff for corroboration with respect to the children, specifically, birth certificates and school letters. The plaintiff asked the defendant for those items. Though unclear, it appears that the defendant did not provide those items to the plaintiff. The plaintiff sued the defendant for breach of contract, though it isn’t clear what constituted the breach. The case did not get to that point.

Judge Pirro made it clear to the parties that what they did was federal tax fraud. The plaintiff claimed children who were not hers, and the defendant made that possible by providing the plaintiff with the social security numbers of the defendant’s children. When the plaintiff claimed that she did not know it was fraud to claim someone else’s children, and that “people claim other people’s kids all the time.” To that remark, Judge Pirro said, “They do?” and the plaintiff replied, “Well, in New York they do.” Judge Pirro responded, “Really? Who do you know that does that?” and the plaintiff declined to identify anyone due to “privacy.” Judge Pirro rejected that excuse, and said, “Do you know why? Because it’s illegal.” Eventually Judge Pirro threw out the plaintiff’s suit, because courts do not enforce illegal contracts.

There are several lessons to be learned from this case. First, once a person files a federal income tax return, they should continue to file even if their income is below the filing threshold. This lets the IRS know that the person has not died, and also makes it more difficult for identity thieves to file under the person’s name. Of course, it also would have made it even easier for the IRS to notice the fraud committed by the plaintiff in this case. Second, claiming children on a tax return when the requirements of the Internal Revenue Code are not met is wrong. It is fraud. Even if a person doesn’t end up convicted of a crime, it can wreck their credit report, impair their employment prospects, and make their life miserable.

Reader Morris asked, “Does Judge Pirro have a legal obligation to send the video or transcript to the IRS Criminal Division?” That is a great question. For any law faculty reading this who are teaching the Legal Profession course (or its equivalent) and who need exam question ideas, this case and the question posed by reader Morris is worth considering. What is the answer? It depends. On most television court shows, the judges are not acting as judges even though some have been judges in the past. They are acting as arbitrators, dealing with cases that are removed at the parties’ consent from the judicial system to binding arbitration that is marketed as a courtroom proceedings. The judge on the television court show might be a former judge, but also could be a former or active attorney, or law school professor. Several have no legal background. Are these “judges” legally required to report the admitted crime? It depends on the nature of the crime, the existence of statutes requiring mandatory reporting, including mandatory reporting by any person serving in a particular capacity. Beyond the issue of being legally required to report the crime, they may be ethically required to report the crimes, particularly if they are active members of the state bar. Again, it depends on state and federal statutes, ethics codes for active and retired judges, ethics codes for active and retired attorneys, and similar provisions.

If reporting is legally or ethically required, the next question is identifying the person or office to which the information should be reported. Again, it depends on the crime, the jurisdiction, and whether there are in place procedures for reporting that must be followed. In many instances, if the information is reported to the wrong office, that office will forward it to the appropriate authorities or advise the reporting person where the information should be reported.

The interesting twist in this particular Judge Pirro episode is that the IRS already suspected, or knew, that tax fraud had been committed. I am guessing that it figured this out when two children showed up on a tax return that was filed by a taxpayer who was not the taxpayer who had claimed the children for the previous taxable year. Knowing that, the only practical question is whether the existence of the arbitration, as evidenced by the video, must be brought to the attention of the IRS Criminal Division or the US Attorney. Why not? There is downside to not reporting it and no downside to reporting it. It is publicly available, and it would not surprise me if the IRS accessed the video sooner than any reporting information would reach it, thought that is not a reason to not report it.

Does Judge Pirro have an ethical obligation to alert the IRS Criminal Division or the US Attorney? I don’t know. I don’t know if she is still subject to New York’s code of conduct for judges. I don’t know what provisions exist in the contracts that the parties enter into with the show’s producers. I don’t know if any of the staff of the show are active or retired members of the bar who have an obligation to report it. And that raises more interesting questions. Do all of the active and retired attorneys who watched the show when it first aired have an ethical obligation to report the crime? What about those who watch the video at some much later date when the IRS cases against the parties have been closed? What about any viewer who sees reporting the crime as an opportunity to pick up a whistleblower reward? Does the fact that the video is publicly and widely available suggest that the answer is different from what it would be if knowledge of the crime was obtained through channels not open to the public?

Reader Morris also asked, "Why are people so stupid they admit tax fraud on national television? Why would you come to court and admit to a federal crime?" I don't think I need to answer these questions. They answer themselves. Yet I will succumb to the temptation and reply, “It’s another indication of how flawed the American education system has become when it’s a matter of understanding government, public policy, crime, citizenship responsibilities, and critical thinking.”

Does Anyone at the IRS Read This Blog?

Reader Morris contacted me with this message, “Maybe the IRS reads your blog posts.” He reminded me of a commentary on this blog from March of 2020, Fortune Cookies and Taxes and pointed me in the direction of a story on Bloomberg Tax from December of last year.

My March 2020 commentary addressed an experience reader Morris had when he went to his “regular Chinese restaurant,” and found in his fortune cookie a message, “Tax tip # 8 Travel could be considered a business expense. Even that island vacay. TaxAct Surprisingly legal. Start for Free: TaxAct.com” Doing some research, I discovered that marketing firms are purchasing space on the flip side of fortune cookie slips to print their messages.

The story that reader Morris shared with me explained that the IRS Director of Stakeholder Liaison announced at a conference that the IRS would be using space on the flip side of fortune cookie slips for messages to taxpayers. Fortune companies are making the space available to the IRS without charge. The IRS plans to provide tax advice, including reminders about deadlines. I suppose the last thing someone wants to put into their brain at mealtime is taxation, though I am confident that some people are thinking about deductions when they pay for a meal.

As for the suggestion from reader Morris that perhaps the IRS reads my blog posts, maybe that happens. But I doubt that my post in March of 2020 generated the IRS fortune cookie plan. My guess is that a professional marketing/PR type of company approached the IRS or was approached by the IRS Tax Outreach, Partnership, and Education Team, and someone suggested making use of the fortune cookie messaging approach.

Now if links to this blog or posts on this blog begin to show up on fortune cookie slips carrying the IRS logo, I will want to know. Then I can revisit the question that I asked in the title to this post.

Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension

This commentary isn’t about tax law, legal education, the First Amendment, religion, genealogy, theology, music, model trains, or chocolate chip cookies. It’s about that “and law generally,” mentioned in this blog’s subtitle.

It’s about a sad example of financial illiteracy and the sort of incomprehension that generates disagreements and unnecessary litigation. It comes from a television court show. 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, and When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation.

In this Judge Judy episode – Season 21, Episode 245 – the plaintiff sued the defendant to compel the defendant to put a headstone on the grave of the plaintiff’s grandson. The grandson and the defendant were engaged and had lived together for at least a year. The story begins when the plaintiff took out life insurances policies on the lives of her four grandsons. When asked by Judge Judy why she did that, the plaintiff explained that she and her husband were getting older and if something happened to them they wanted their grandchildren to have some money. It was evident that Judge Judy was as puzzled as I was, because protecting the grandsons from something happening to their grandparents would be accomplished by life insurance on the lives of the grandparents, not the grandchildren.

Then, when the one grandson and the defendant became engaged, the plaintiff changed the beneficiary on the life insurance policy on that grandson to the defendant. Sadly, that grandson then took his own life. The insurance company paid proceeds to the defendant. The defendant paid the cost of the funeral, though it wasn’t clear whether the defendant offered to do so or did so at the request of the plaintiff. The plaintiff took the position that she had the right to dictate how the defendant used the proceeds but Judge Judy pointed out that there was no contractual obligation giving the plaintiff that right.

The plaintiff was upset that the defendant had not purchased a headstone. The defendant explained that a headstone was already in place, paid for by the grandson’s father and his wife, who was the grandson’s stepmother. The plaintiff complained that her grandson’s name on the headstone was incorrectly spelled. The defendant provided a photograph of the headstone, with the name correctly spelled, and Judge Judy pointed out that the plaintiff’s father and stepmother apparently had caused the headstone to be corrected.

At that point, Judge Judy asked the plaintiff, “Are you satisfied?” but the plaintiff said, “No.” Judge Judy asked, “So why are you here?” The plaintiff responded, “I want a headstone on my grandson’s grave.” Judge Judy replied, “There is a headstone.” The plaintiff came back with a claim that the name was misspelled. Judge Judy rejected that assertion, asking the bailiff to show to the plaintiff the photograph of the headstone with the name correctly spelled. Judge Judy asked, “So what do you want?” The plaintiff stated, “I want a headstone with my grandson’s full name.” Judge Judy read the name from the headstone and asked, “Did he have more names than those?” The plaintiff replied, “We wanted the stone to include ‘loving grandson, . . . ‘” and at that point Judge Judy cut her off and dismissed her case.

I wonder who convinced the plaintiff and her husband to purchase life insurance on the lives of her grandsons, when there was no indication that she and her husband were dependent on the grandsons for financial support. Parents sometimes purchase term insurance on their children to cover the cost of funerals and burials, but because the chances of a child dying are very low, those policies are very inexpensive and usually expire when the child attains majority or can be turned over to the child at that point. I wonder if some salesperson saw an opportunity to sell four insurance policies by convincing the plaintiff and her husband that they needed to do so. Sad.

The plaintiff’s inability to understand that someone other than the defendant had paid for a headstone and her insistence that the defendant purchase one is bewildering. It is sad. The plaintiff’s misunderstanding of the facts and their significance, even after the judge explained it several times, is troubling. It’s sad.

What is “Gross Taxable Income” for Federal Income Tax Purposes?

A few days ago, reader Morris pointed me to this story about the use of “Friends Of” organizations to circumvent the denial of charitable contribution deductions for donations to foreign entities. What caught the eye of reader Morris was the article’s background explanation of the charitable contribution deduction: “The value of donations to qualified U.S. charities can be deducted from your gross taxable income.” What, asked reader Morris, is “gross taxable income”? He noted that he had never seen that term in the Internal Revenue Code. Nor had I. But perhaps I missed something.

So I did a bit of research. I looked at the text of the Internal Revenue Code to see if the term “gross taxable income” was in it. It turns out that the search function returned results from the entire law.cornell.edu site, so I narrowed the search to the U.S. Code, and the outcome was, as expected, zero.

Curious, I then widened the search to include state statutes and eight results popped up. So if the term is used, surely it must be defined? I poked around a bit. I could not find anything from the law.cornell.edu search so I turned to google. What an eye opener.

When I entered the term “gross taxable income” into google, it returned 53,800 results. Not having the time or the desire to look at all of them, I did some spot-checking and learned that the term is used in the tax systems of some foreign countries, including the Philippines, Finland, India, and Australia. For purposes of understanding why someone would use the term “gross taxable income” when explaining the United States federal income tax system, I did not need to examine the use of the term in the tax systems of other countries.

I then looked more closely and noticed that several American states use the term “gross taxable income” in various instructions to their tax forms. Pennsylvania even used the term “federal gross taxable income” in its 2017 Instructions to its Form PA-40 in describing how to handle amounts on a Form 1099-R. More on that in a few paragraphs.

That gave me an idea. I googled the term “federal gross taxable income” and got 63 results. The first result was a link to the text of proposed legislation in Montana. Proposed section 28 refers to “federal gross taxable income as defined in section 1” but when I examined section 1 I discovered there was no definition of that term. My first thought? Sloppy drafting. I looked at more of the proposed legislation Section 34 refers to “federal adjusted gross taxable income” but doesn’t even give a cross-reference let alone a definition. Leave out the word “taxable” and it makes sense, but that’s not the case.

Further research showed that the term “federal gross taxable income” was used in some state judicial opinions. Did the courts get that term from the briefs submitted by the parties? I didn’t see any references to statutes. So perhaps they were borrowing the term from revenue department instructions or commentaries written by those who are confused about federal tax terminology.

Then I got another idea. I went back to the law.cornell.edu web site and searched the Code of Federal Regulations. I wasn’t expecting anything but to my surprise there was one result. In an example in section 1.6041-1(f) of the regulations the term appears:

(f) Amount to be reported when fees, expenses or commissions are deducted -

(1) In general. The amount to be reported as paid to a payee is the amount includible in the gross income of the payee (which in many cases will be the gross amount of the payment or payments before fees, commissions, expenses, or other amounts owed by the payee to another person have been deducted), whether the payment is made jointly or separately to the payee and another person. The Commissioner may, by guidance published in the Internal Revenue Bulletin, illustrate the circumstances under which the gross amount or less than the gross amount may be reported.

(2) Examples. The provisions of this paragraph (f) are illustrated by the following examples:

EXAMPLE 1.

Attorney P represents client Q in a breach of contract action for lost profits against defendant R. R settles the case for $100,000 damages and $40,000 for attorney fees. Under applicable law, the full $140,000 is includible in Q's gross taxable income. R issues a check payable to P and Q in the amount of $140,000. R is required to make an information return reporting a payment to Q in the amount of $140,000. For the rules with respect to R's obligation to report the payment to P, see section 6045(f) and the regulations thereunder. (emphasis added by me)

How could this be? My guess: The drafter made an error and used the phrase “includible in Q’s taxable income.” A reviewer marked up the draft by inserting “gross” and using strike-through for “taxable” but something in the formatting went haywire, a not unusual event when multiple people work on one document. And no one caught the result, which was the addition of “gross” and the non-removal of “taxable.” Nowhere else in the Code of Federal Regulations did the term appear. Nor was any definition provided. The example was picked up verbatim in Chief Counsel Memo 20133501F.

I shared my findings with reader Morris. He, too, is curious, and he soon replied to tell me that he searched google scholar federal courts and found 163 results. Like me, he didn’t have time to read all of the cases but selected a few to examine. Though he found the term “gross taxable income” being used, he did not find a definition. In some instances the court was simply repeating the use of the term as appearing in arguments made by the parties, and in at least some instances the courts used the term “gross income” when reacting to the parties’ arguments. In other instances it appears courts were paraphrasing stipulations without correcting the language of the parties.

He did share an observation, that many of the cases dealt with transactions before the enactment of the Internal Revenue Code of 1954. He asked if it was possible that the term was used before being abandoned in the 1954 statute. Good question. I tried to answer the question, and I failed to discover any use of the term “gross taxable income” in earlier statutes.

After I shared that with reader Morris, he then referred me to an article that offers a sort of definition of “gross taxable income.” The article, titled “Gross vs. Net Income in the United States” explains:

Understanding Taxable Income

It’s vital to understand these differences between gross vs net income when it comes to doing your taxes.

While you start off calculating the taxes you owe or are owed by the IRS with your gross income minus your deductibles, it’s important to remember your gross income is not the same as your taxable income.

Not all income streams that make up your gross income are taxable, for example. Things like inheritance, gifts, and life insurance payments aren’t taxable.

Gross taxable income is instead called adjusted gross income (AGI) after you’ve subtracted tax deductibles like Child, Education or Earned Income Tax Credits.

When you are working out your AGI, the IRS gives you the option of taking the standard deduction based on your family status (single, married, or head of household) or you can itemize your tax-deductibles. Itemizing your tax-deductibles might reduce your tax bill more.

In the end, your gross income might be far less than your taxable income or AGI.

My goodness! If this were an exam answer in a basic federal income tax course it might earn a D because a few concepts seem to come through the misuse of terminology, for example, the warning that “it’s important to remember your gross income is not the same as your taxable income.” But it’s “deductions” not “deductibles.” But to claim that not all income that make up gross income are taxable is to assume that income goes into gross income. The point of an exclusion is that the excluded item is not included in gross income. Then comes the whopper. “Gross taxable income is instead called adjusted gross income.” What? Where does the author get this nugget of misinformation? Worse, the author claims that adjusted gross income is “after you’ve subtracted deductibles like Child, Education or Earned Income Tax Credits.” That is so wrong. Credits are NOT deducted in computing adjusted gross income or in computing taxable income. Credits are not “deductibles” nor are they deductions. And if that’s not sufficiently erroneous, try the mathematically impossible “your gross income might be far less than your taxable income or AGI.” How? How can one go from a particular amount of gross income to a larger amount of adjusted gross income or taxable income? What would be added? So, no, this article does not provide any insight into the origin of the term “gross taxable income.”

And it gets worse. Reader Morris directed me to a case study in its VITA program materials. In that case study, which is simply an example, the material states that “The formula for calculating the allowable portion of a deduction is: (Gross taxable income subject to U.S. tax / Gross income from all sources) x Deduction = Allowable portion of deduction.” Curious, I used google to see if the term “gross taxable income” appeared elsewhere in the VITA program material. It appears one other time, in the summary of the lesson preceding the case study:

Summary
This lesson showed how to:
Identify the correct standard deduction
Determine when to allocate the standard deduction
Calculate the allowable portion of a taxpayer's standard deduction
For Puerto Rican taxpayers who do not itemize, the standard deduction must be allocated based on total gross income from all sources (including Puerto Rico source income).
To calculate the allowable portion of a taxpayer's standard deduction, use:
The Worksheet for Puerto Rico Filers with Exempt Income under Section 933 Who Do Not Itemize Deductions, or
(Gross taxable income /gross income from all sources) x standard deduction = Allowable portion of the standard deduction

Aside from the fact that the term “gross taxable income” is not used in the lesson until it reaches the summary, the term is used in the formula even though the formula does not reflect the prefatory language. That language states that the standard deduction is allocated using gross income. Yet the formula uses the term “gross taxable income” though that term is nowhere else defined or used except in the case study example that follows.

Reader Morris then directed me to a recent article that uses the term (once). The sentence reads, “The term "gross income" has been interpreted for this purpose to mean ‘gross taxable income,’ specifically excluding tax-exempt income, which separates this from the legal concept of fiduciary accounting income.” Interpreted by whom? Curious, I looked to see if perhaps I had missed something in the trust tax area. So I looked for “trust’s gross taxable income.” In this commentary, the following sentence appears: ”When calculating the income distribution deduction, DNI is computed only with items of income and allowable deductions included in the trust's gross taxable income (Secs. 651(b) and 661(c)).” Aha, a clue. Perhaps the term is in the cited Code sections. No, it is not. The text of section 651(b): “(b)Limitation on deduction. If the amount of income required to be distributed currently exceeds the distributable net income of the trust for the taxable year, the deduction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not included in the gross income of the trust and the deductions allocable thereto.” No mention of “gross taxable income.” How about section 661(c)? Here’s the text: “(c)Limitation on deduction. No deduction shall be allowed under subsection (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross income of the estate or trust.” Again, no mention of “gross taxable income.” The same sentence with the citations to sections 651(b) and 661(c) also appears in this article.

Reader Morris then directed me to this web site, which in two places stated that “The 1099 Form will reflect gross taxable income. . .” So off I went to see if I could find the term “gross taxable income” on a Form 1099. I found a variety of commentaries that used the term in connection with a Form 1099, but in most instances claiming that a particular amount on the Form must be reported in gross taxable income even though that term was not on the form. For example, this commentary, in describing a Form 1099-SA, states in several places that the taxpayer would need to “include [an amount] in gross taxable income.” Yet the Form 1099-SA does not include the term “gross taxable income.” Perhaps the confusion arises because the Form 1099-R has an entry for “Gross distribution” and a separate entry for “Taxable amount.”

Perhaps the confusion arises from the sort of sentence found on this web site. It states, “Section 61(a) of the Internal Revenue Code provides that gross (taxable) income includes ‘all income from whatever source derived.’” Actually, section 61(a) defines gross income. It does not define something called “gross (taxable) income.”

Precision matters. When drafting legal documents, whether statutes, regulations, judicial opinions, contracts, wills, or any other writing, and a word or phrase is used that does not exist in the language or that is being used other than in its common meaning, definitions are required. Otherwise, confusion abounds, mistakes are made, litigation ensues, and unhappiness and frustration afflict people. Has anyone using the term “gross taxable income” in the federal income tax context provided a citation to its statutory or regulatory definition?

How Not to Enact Infrastructure Taxes

About a week ago, reader Morris directed me to story about a proposed tax. Thanks to being busy with other things, it’s just now that I can elaborate on my reply to reader Morris. My response to him was brief, and included this sentence: “It is a stupid idea.” Now I have time for the longer response.

The proposal, made by a member of Pittsburgh’s city council, would impose a one percent tax on college and technical school tuitions and medical bills in the city. Would the proceeds be used to help pay tuition for students from economically deprived backgrounds? No. Would the proceeds be used to help defray medical costs incurred by low-income individuals? No. The proceeds would be used to fund infrastructure. The tax would apply to the amount of medical bills before reduction by insurance payments.

Now, funding infrastructure is not a stupid idea. It’s necessary, and as readers of this blog know, I support increased in infrastructure funding because if infrastructure fails, people die, people are injured, the economy suffers, and the nations spirals even faster into disaster.

The question is who should pay for infrastructure? The answer is simple. It should be funded by those who use it and those who benefit from it. Of course, everyone benefits from infrastructure, so the challenge is figuring out how to apportion the cost of infrastructure among the population. Singling out two groups of people, many of whom are not in a position to handle a one percent increase in their living costs, is the stupid part of the idea. The outrageous part of the idea is imposing a one percent tax on someone’s $100,000 cancer treatment invoice even though insurance covers the entire $100,000.

One critic of the bill, Pittsburgh’s city controller, suggests that the proposal should be ditched and replaced with some sort of tax or user fee on non-profit medical facilities and higher-education institutions. If infrastructure in the city is funded with a tax from which those institutions are exempt, the controller’s idea has validity. But what about other non-profit institutions in the city? Why not include them? Why focus on institutions providing two of the most essential services required by people, that is, education and health? Why exempt non-profit institutions that are providing other essential services such as environmental protection? And why exempt non-profit institutions providing services that aren’t as essential as health?

Another critic suggested that the proposal was unworthy of support but at least served as a conversation starter. In all fairness, perhaps that was the goal of the council member who introduced the bill, though there are better ways to start conversations. At least now that council member has a way to ease out of the predicament in which he finds himself.

On top of the policy and fairness question, there is the not-so-slight legal obstacle. The tax is in the form of a sales tax, and a second-class city in Pennsylvania, which is how Pittsburgh is characterized by the legislature, has not been given authority to enact a sales tax.

Back to the drawing board they must go. It will be interesting to see what the next proposal turns out to be.

From Cold Calling to Student Response Systems

I return to the study conducted by Kathryne M. Young, an Assistant Professor in the Department of Sociology at the University of Massachusetts, Amherst, and an Access to Justice Faculty Scholar at the American Bar Foundation, which I first mentioned in Saying Goodbye to Law School Grading Curves?. Young published the results, along with her methodology and examples of the interviews underlying the study, in Understanding the Social and Cognitive Processes in Law School That Create Unhealthy Lawyers, 89 Fordham L. Rev. 2575 (2021). The study was undertaken to understand the effect that law school education practices contribute to the higher-than-average rates of depression, anxiety, substance abuse, and other mental health problems that afflict lawyers. The study concluded that several aspects of how law is taught contribute to the problem. Two of those aspects pose challenges that I addressed early in my law teaching career. The other day I described grading curves. I now turn to “cold calling.”

Cold calling is not unique to law schools. Any time that a teacher calls on a student who has not asked to be questioned, the student is encountering cold calling. In any environment, whether fifth grade, an undergraduate history course, or a law school course, being called on and thus asked to respond in front of one’s classmates and the teacher can be intimidating. For someone who is prepared, there can be doubt about how the response will be received and there can be a general anxiety about speaking in front of others, especially in a classroom setting. For those who are not prepared, it can be excruciating, and downright awful. So it’s no surprise that cold calling contributes to anxiety and worse.

For me, cold calling generates a mixed reaction. I can think of reasons it is inefficient and perhaps ineffective, as well as being harmful. Yet I also can think of reasons it is helpful and sensible. I will explain.

When I started teaching law school, I engaged in cold calling. That’s what most of my law school professors did, though I was keenly aware of its adverse impact. So I permitted students, as have and as do other faculty, to respond with “not prepared” or “pass” and then proceed to someone else. But often, rather than admitting a lack of preparation, or even avoiding responding when prepared, a student would answer in a way that indicated the student was not prepared. Though some faculty, especially years ago, would “stick with” that student through a frustrating exchange of “Socratic method” questioning, I was among those who tried to determine if the student was prepared and needed help refining the nuances of the response or was trying to wing it. I would stick with the former but move on from the latter. Of course, all of this took time, and ultimately reduced the coverage of the course. Thus my reaction that cold calling is inefficient, and in some instances ineffective.

It was during this first year of teaching law school that a student approached me and asked that I not ever call on them. This wasn’t the typical just-before-class-request to spare a student that day because of something awful that had happened to the student or the student’s family or friend. This was a request to be exempted permanently from cold calling. I asked why. The answer was along the lines of “I am terrified speaking in front of more than one person.” I asked, “What will you do when you are in a courtroom, or a deposition, or at a meeting with several senior partners and associates in the firm?” The answer, “I won’t be doing litigation nor working for a law firm.” “What will you be doing?” “Something else.” So we talked about lawyering in corporate counsel offices, in government positions, as a judge’s law clerk, but the student thought that there was some place that a lawyer could simply read cases and write memos without interacting or speaking with more than one person. I decided to accommodate the student, even though I was confident that the student, like any lawyer, would encounter the equivalent of cold calling in the future. Judges ask questions. Senior partners come into offices, or call, or show up on Zoom, and ask questions.

So I ended up relying on volunteers. I always welcome questions and responses from volunteers, though admittedly that leads to some students actively participating and others remaining silent and passive. There is the danger that one or two or a handful of students will dominate any discussion, so special care must be taken to go first to the student whose hand is raised for the first time ever or for the first time in a while.

Some faculty try to reach a middle ground by telling a small group within the class that they will be “up” for the next class or the next two classes or the next week. Though this lets the rest of the class breath a sigh of relief, and perhaps even put aside concerns about doing the required reading before class, it still puts those within the group on the “hot seat,” and that is no less stressful. In other words, whether or not a student knows that the cold call is coming, the anxiety exists. The anxiety isn’t only “will I be called on?” but also “what will the question be?” and “will I answer well enough to avoid embarrassment, ridicule, or some other adverse impact?”

I found what I think is the solution, or I should say that what I think is the solution was presented to me by now Dean Paul Caron, he of the TaxProf blog. Many years ago, he introduced me to what were then called “clickers” and what has evolved into what are student response systems. Yes, the technology has taken us from hand-held devices pointed at infrared receivers mounted on the wall – a story for another day – to students using digital devices to respond over the internet. By using student response systems, I can ask the same question simultaneously of all students, not just one. Students can respond without revealing their identity or their answers to other students. The responses tell me whether I need to invest more time in the issues raised by the question or can move along to the next set of issues. Sometimes I am surprised, and learn that what I thought students understood wasn’t, or that what I thought was stumping the students generated correct responses from all students. Most students enjoy seeing the results, whether to find out how everyone fared or to learn the answers to warm-up questions such as “Do you have a will?” or, in years past, “Have you prepared your own tax returns?” And, of course, the array of answers permits me then to invite students to explain why they selected that answer.

Granted, when lawyers appear before a judge, whether in person or remotely, they won’t be using these response systems. The same can be said of the other situations in which lawyers find themselves. But what I think happens is that as students use the response system and realize that, yes, they DO know the answer and they DO understand the material, their confidence builds. As confidence builds, anxiety decreases. The goal of education, in any field, is not only to help students acquire knowledge and understanding, but also to help them build confidence. The use of student response systems, a component of a broader formative assessment approach that I started using despite opposition and long before it became all the rage in segments of legal education, might not guarantee confidence growth in all students, but it helps and surely is an improvement over what once was and in some instances still is.

Polyworker: A New Word for the Occupation Box on the Federal Tax Return?

Someone reading this post’s caption probably reacts as did the spellchecker. What is a polyworker? Is it even a word? It is now. So, too, is “polywork.” An article that popped up late last week describes the formation of Polywork, described as “a new professional social network that has been created for people who do more than one type of work and cannot be defined by a single job title.”

According to the article, a study by the Polywork network “reveals that nearly half of young professionals (47 percent) consider themselves people who ‘polywork’ doing an average of five different types of work – with one in ten (11 percent) saying they currently do more than ten types of professional work at the same time.” Technically, I think “at the same time” doesn’t mean at the same moment, but during a period of time. The article gives examples by describing the activities of several people. One person “does more than five different types of professional work across multiple countries including software engineering, public speaking, writing, podcasting, investing, advising, and mentoring.” Another “has three different types of work on the go at once: producing a musical; managing his technology investments; and running a non-profit company.” This person added, “Modern working attitudes and flexible technology allows my generation to juggle a multitude of things in a way we’ve never been able to before.”

The study by the Polywork network revealed that “[t]he majority of 21 to 40 year-old professionals (81 percent) say the pandemic has changed their attitude towards work forever with 45 percent saying they would not consider doing one single type of work for life, but would choose to polywork instead. Three quarters of all young professionals (72 percent) say virtual ways of working have opened up more work possibilities in the last 12 months compared to previous years.” It also discovered that “[o]ver half of all 21 to 40 year-olds (55 percent) said an ‘exciting’ professional life is more important to them than money with 62 percent saying the opportunity to learn more skills, more quickly through different types of work is more rewarding than professional ‘security’.” Reflecting on this, the founder of the Polywork network explained, “There is a new generation of professionals who do more than one type of work both in their regular job and outside of it, and they no longer feel a single job title reflects what they do or who they are. During the pandemic people have re-evaluated what they want to do, which in turn has accelerated the trend of polywork, using technology to connect with different and varied opportunities, whatever and wherever they may be. We do not see this trend disappearing, not least because Gen Z and Millennials see a variety of work as a way to achieve a more exciting life.”

When I read the article, two thoughts entered my mind. The first was a question. Will increasing numbers of tax professionals engage in polywork? For example, will tax professionals who only prepared tax returns begin doing other tax-related activities? Will tax litigators do other things? The answer is easy. It was my second thought.

My second thought on reading the article was simple. Polywork is not new. Perhaps technology makes it easier for some people to polywork. Perhaps technology permits polyworkers to increase the number of work activities in which they are engaged. But polyworking has been with us for as long as there have been workers. Many tax return preparers also do tax planning. Many tax litigators also do tax advising. Some practicing lawyers also teach as adjunct faculty members. The list is long. By its very nature, tax involves polywork. So, too, does law. And surely those in other professions can share similar lists. I have known people in my parents’ generation, including my parents, who fit the definition of “polyworker.” It’s not a new concept. What’s new is the increasing numbers of polyworkers and the extent to which technology makes it easier to engage in multiple activities.

What made me think that polywork is not new is my own experience. There have been, and are, weeks when I can find myself teaching a class, writing a blog post, giving tax or legal advice, preparing tax returns, writing an article or book about tax, mentoring a student asking about a particular career path, doing my sexton tasks at the church, designing and programming computer assisted tax education modules, and preparing and offering a CLE program. Fear not, over the past few years I have backed away from or scaled down several of those activities. The Polywork network was “created for people who do more than one type of work and cannot be defined by a single job title.” I first encountered that challenge years ago when I had to decide what to put in the “occupation” box on the federal tax return. I learned that the box, in paper or digital form, is too small for “law professor, lawyer, author, programmer, tax return preparer, church sexton.” So I wonder, will “polyworker” now begin showing up in the occupation box on the federal tax return?

The Tax Gap, Like Greed, Is on Steroids

Perhaps people were surprised or even shocked when various reports, including this Reuters article, shared the testimony of the IRS Commissioner given to the Senate Finance Committee that the tax gap approaches and possible exceeds $1 trillion annually, a substantial increase since the last official estimates in 2011 through 2013 of a $441 billion annual shortfall.

The tax gap is the difference between what taxpayers should be paying if they were in full compliance with the tax law and successful in avoiding mistakes and what taxpayers actually pay in taxes. Note that the tax gap in question is the federal income tax gap, and surely states, especially those whose tax liability computations start with federal gross, adjusted gross, or taxable income, have their own income tax gaps.

I was not surprised by the Commissioner’s testimony. In , Tax Gap Becoming a Tax Chasm, I noted that “The tax gap for calendar year 2003, the latest year for which sufficient statistical information is currently available, is $1.0417 trillion.” My guess is that the tax gap in 2018, 2019, and 2020 probably exceeds not only $1 trillion but $1.5 trillion. What does surprise me is the willingness with which authorities accept the low figures reported by the IRS. For example, in Closing the Federal Tax Gap , I noted that in 2006, three years after the Bureau of Economic Analysis had computed the $1 trillion figure, the National Taxpayer Advocate issued a report pegging the annual tax gap as “somewhere between $250 to $300 billion.” I suppose the IRS is caught between a rock and a hard place. It could report the higher number in an effort to encourage Congress to stop cutting its budget and restore its ability to ramp up audits and foster compliance. But reporting that higher number poses the risk that Congress and others would judge the IRS as unworthy of any funding by treating it as the cause of the tax gap.

Much paper, ink, and digital bytes have been dedicated to discussion of the tax gap and proposals for dealing with it. I have no intention of trying to write a treatise about the tax gap. I simply will review some of the things I have written about it over the years. In Tax Gap Becoming a Tax Chasm, I noted:

One must wonder what motivates noncompliance. Perhaps some psychologists will conduct surveys to determine if it simply greed, or a growing rebellion in which people are "voting with their feet" by appropriating unto themselves their own special tax break that they cannot get through the Congress because they lack the clout of the lobbyists who have managed to reduce the tax on capital gains to extremely low levels. How much of the noncompliance is simple ignorance, stupidity, carelessness, or confusion? How much of the gap arises from people trying to hide information about the activities generating the income?

Some people may not realize they are contributing to the tax gap, because they are making good faith efforts to comply with an absurdly and unjustifiably complex income tax system. Others know full well what they are doing when they engage in "pay cash, pay less" schemes, launder money, or simply fail to file. I suppose this reflects our culture, for surely it resembles what one finds on our highways: drivers who try to comply and succeed, drivers who are ignorant, stupid, careless and confused, and drivers who think they are so much more important than or better than everyone else that they flaunt whatever rules get in the way of their own self-centered approach to life.

A fun calculation is to determine how much tax has not been paid on the tax gaps for 2002, 2001, 2000, and earlier years, add interest and penalties, and imagine what happens if Treasury had the ability to collect the total amount due. The shock to the world economy might be staggering. We'll never know, because Treasury lacks the ability to collect even a minute fraction of this amount. Why? Because Congress has not implemented a system that ensures all taxpayers pay their fair shares.

Until Congress does two things, the tax gap will continue to grow, and the ultimate outcome might be far worse than the impact of quadrupled prices for oil and gas, shortages of concrete, or devastating hurricanes. Congress must reform the income tax system so that it is easy to understand, inviting of compliance, and difficult to evade. Congress must also put in place safeguards that prevent noncompliance and punish tax evaders. Ideally, a well-designed system that prevents tax evasion will reduce the number of tax evaders and thus reduce the need for prosecution of tax evaders. Law enforcement could then redirect more resources to the prevention of, and prosecution of, other crimes.

In Closing the Federal Tax Gap, I shared these thoughts:

The tax gap fascinates me and frustrates me. * * * I'm both fascinated and frustrated by the willingness of people to avoid their legal responsibilities. Of course, that fascination and frustration is not limited to tax avoidance devotees but also the behavior of those who violate a variety of rules and regulations.

* * * * *

[The National Taxpayer Advocate’s] report points out that when taxable transactions are properly reported to the IRS, the rate of tax collection exceeds 90 percent, but when payments are not reported compliance drops to a range of 20 to 68 percent, depending on the type of transaction. Sometimes reporting does not occur because people are noncompliant. Sometimes reporting does not occur because it is not required. * * *

[The National Taxpayer Advocate] recommends expanding the list of transactions that must be reported. This is the sort of suggestion that makes one wonder why it wasn't done decades ago. The answer is easy. As [the National Taxpayer Advocate] points out, tax revenues would climb if every taxable transaction was subject to reporting requirements. That, however, would be an onerous burden. * * *

I add that compliance is enhanced when withholding takes place, because withholding shifts the tax payment and not just information to the Treasury.

A year later, in Closing the Tax Gap Requires Congressional Introspection, I described a GAO report, "TAX COMPLIANCE Multiple Approaches Are Needed to Reduce the Tax Gap." I described the report thusly:

The report concludes that the tax gap "has multiple causes and spans different types of taxes and taxpayers." Accordingly, "Multiple approaches are needed to reduce the tax gap. No single approach is likely to fully and cost-effectively address noncompliance since, for example, it has multiple causes and spans different types of taxes and taxpayers."

Three major approaches are considered:

1. Simplifying or reforming the tax code.

2. Providing the IRS with more enforcement tools.

3. Devoting additional resources to enforcement. Minor approaches include "periodically measuring noncompliance and its causes, setting tax gap reduction goals, evaluating the results of any initiatives to reduce the tax gap, optimizing the allocation of IRS’s resources, and leveraging technology to enhance IRS’s efficiency."

The report points out that billions of dollars of the tax gap could be avoided if the tax law were simplified or fundamentally reformed. It explains, for example, that the IRS "has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap."

Unfortunately, the report then concludes that "these provisions serve purposes Congress has judged to be important and eliminating or consolidating them could be complicated." Even fundamental reform, in which tax preferences are limited and "taxable transactions are transparent to tax administrators," is "difficult to achieve." The report provides an almost irrefutable axiom, that "any tax system could be subject to noncompliance." Finally, it provides another difficult-to-rebut observation: "Withholding and information reporting are particularly powerful tools."

I criticized the report because it presupposed Congress as a whole does not even know what is in the tax law though some individual members are aware of whatever provision they championed. I also questioned why members of Congress caved in to the lobbyists whose clients oppose the expansion of reporting and withholding and who misrepresented attempts to increase withholding by falsely describing the effort as a “new tax.” I then explained:

Left to instinct, most people would prefer to pay no taxes, and exist as beneficiaries of others. History teaches that most of those who can grab have done so, and that many who could not exerted themselves to find ways to do so. The tax gap is a reflection of some unintentional errors and lots of intentional evasion. Careful intellectual reasoning, though, teaches us that civilization requires taxation, economic principles tell us that taxation should be efficient, common sense tells us it should be simple, and ethical principles tell us that it should be fair. It takes leadership to persuade the civilized world why it makes no sense, in the long-run, to behave in ways that generate tax gaps. Fraudulent behavior by taxpayers contributes to the tax gap. So, too, does the way in which Congress does business. Ought not the Congress take the first step in leading by example? Until the Congress understands that the way it does business encourages the non-filers, the protesters, the illegal tax shelter promoters, and the rest of the noncompliant population to act in ways that undermine the tax law and fuel the rapid growth in the tax gap, talking about closing the tax gap is not much more than rhetoric. Yes, I talk and write about it, but I've not undertaken the responsibility that members of Congress have sought and accepted. If they don't think they can or want to fix the problem, no one will stop them from returning home.

Shortly after I wrote those words, I received a letter from Senator Max Baucus, chairman of the Senate Finance Committee, and Senator Charles E. Grassley, ranking member of that committee, in which they asked for "suggestions on ways to improve compliance with our tax laws, including specific recommendations to reduce the tax gap." I described my response in Congress Invites My Ideas for Improving Tax Compliance and Of Course I Respond, and I included in that posting a copy of the letter I sent to the Congress. I do not republish it today because a quick click on the preceding link should suffice. In summary, I pointed out that a six-prong approach is required, namely, making tax education a part of high school curricula, simplifying the tax law, increasing reporting, expanding withholding, funding increased and improved audits, and strengthening the ability of the Department of Justice to prosecute tax crimes. I closed that day’s post by telling readers “I will let you know if I receive a response.” I did not. I did not receive a direct response. Nor have I seen the Congress respond by taking steps to deal with a rapidly ballooning tax gap.

Almost a decade later, in Tax Compliance and Non-Compliance: Identifying the Factors, I reacted to yet another report from the Taxpayer Advocate. The report focused on characteristics of so-called high-compliance and low-compliance taxpayers. I noted:

Some of the findings are not surprising. According to the survey underlying the report, high-compliance taxpayers are more trustful of government, appear to be more intent on minimizing mistakes on their tax returns, viewed government positively, are more likely to rely on tax return preparers, and were motivated by moral concerns and deterrence. Low-compliance taxpayers are less trustful of preparers, are less likely to follow a preparer’s advice when using a preparer, tend to think that other taxpayers have negative views of law and the IRS, are suspicious of the tax system, and are more likely to consider the tax system unfair. All taxpayers viewed the tax law as complicated.

Other findings struck me as unexpected. Low-compliance taxpayers are “more likely to participate in local organizations.” They also asserted that they had a moral duty to report income accurately. Non-compliance is higher among sole proprietors of construction companies and real estate rental firms than sole proprietors of other types of businesses.

Though the IRS explains that geographic location is not a factor in selecting returns for audit, the survey results revealed that low-compliance taxpayers were clustered in specific areas. Towns and neighborhoods near San Francisco, Houston, Atlanta, and the District of Columbia, including Beverly Hills, California, Newport Beach, California, New Carrollton, Maryland, and College Park, Georgia, were among 350 communities in which low compliance taxpayers were clustered. In contrast, very few of the 350 communities were in the Midwest or Northeast. What about high-compliance taxpayers? The top of the list consisted of the Aleutian Islands, West Somerville, Massachusetts, Portersville, Indiana, and Mott Haven, a neighborhood in the Bronx.

It did not take long for stories about the Taxpayer Advocate’s report to focus on the nature of the identified communities. For example, an MSN report noted that the low-compliance clusters were in very wealthy neighborhoods. A Yahoo news story put the conclusion in its headline, “IRS Report Shows Many of Biggest Tax Cheaters Live in Wealthy Areas.”

The Taxpayer Advocate report does not disclose whether the low-compliance taxpayers in these clusters were high-income individuals, but it is safe to assume that at least a significant number of them were. Yet what sort of conclusions can be drawn? Is it possible that most low-income taxpayers are not low-compliance taxpayers because they don’t have much income to begin with, and thus no income to hide? Is it possible that because most low and middle income taxpayers realize most of their income from wages subject to tax withholding they have far fewer opportunities to cheat on their taxes? It would not surprise me to discover that someone will argue that the wealthy do cheat more, but would reduce their cheating if their tax rates were lowered. As logical as that proposition might sound, to the extent that greed and money addiction energize every sort of tax reduction attempt, whether lobbying for special breaks and low rates or taking the cheater’s route, it is unlikely that anything other than a zero percent tax rate will satisfy these folks, and even that probably is not enough.

And then, again almost a decade later, I drew attention to a major cause of the tax gap. In Tax Noncompliance: Greed on Steroids, I described the news revealed in a report by the Treasury Inspector General for Tax Administration issued a report, High-Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the Internal Revenue Service:

The news is bad.

After pointing out that the tax gap – the shortfall between what the law requires taxpayers to pay and what taxpayers are in fact paying – is estimated to be $441 billion for 2011, 2012, and 2013, the report reveals that $39 billion is due from taxpayers who fail to file tax returns. Most of this shortfall is attributable to “high-income nonfilers.” The Inspector General determined that although the IRS is developing a new approach to dealing with nonfilers, it has not yet implemented that approach, and when implemented, it will be “spread across multiple functions with no one area being primarily responsible for oversight.”

Worse, the Inspector General determined that for taxable years 2014 through 2016, 879,415 high-income nonfilers failed to pay roughly $45.7 billion in taxes. Of those 879,415 high-income nonfilers, the IRS did not pursue 369,180 of them, accounting for an estimated $20.8 billion in unpaid taxes. Of the 369,180 were not put into the queue for pursuit of the unpaid taxes and the cases for 42,601 were closed without further action. The other 510,235 of the 879,415 high-income nonfilers “are sitting in one of the Collection function’s inventory streams and will likely not be pursued as resources decline.”

Even worse, because the IRS works on each tax year separately rather than combining cases when a taxpayer fails to file for more than one year, it “is missing out on opportunities to bring repeat high-income nonfilers back into compliance.” Of these high-income nonfilers for 2014 through 2016 that the IRS failed to address or resolved, the top 100 owed an estimated $10 billion in unpaid taxes. The Inspector General has proposed seven changes to deal with these problems, but the IRS agreed in full only to two of them, partially agreed with four, and disagreed with one. The IRS objected to putting the nonfiler program under its own management structure.

Here and there a failure to file arises from an understandable problem, such as a taxpayer falling ill without anyone realizing it in time, or developing dementia or similar mental impairments. Sometimes the failure to file arises from financial setbacks for taxpayers who don’t realize that in those situations it is best to file and indicate the inability to pay. Some instances of failure to file are expressions of principled protest against specific government policies. A significant portion reflect a deep greed rooted in a taxpayer’s perception that they have no obligation to contribute to society, with the failure to file and pay almost always defended as a justified expression of the taxpayer’s anti-tax philosopy.

Is it any wonder that so many people are enraged? Though there are many ingredients fueling social unrest, an important one is the growing sense among Americans that they are fools for complying with tax laws when “high income nonfilers” are “getting away with it.” Would it be a surprise if more taxpayers choose not to file, knowing that the IRS lacks the resources to chase them down? This sort of mob mentality is no less likely to spread among taxpayers as it can spread among crowds encouraged to break other laws.

Though it is easy to suggest that Congress needs to wake up and provide sufficient funding to the IRS, especially because every dollar invested returns roughly seven, but the Congress is incapable of doing this. Enough of It is controlled by the anti-tax, anti-government crowd that it lacks the ability to do what needs to be done. Until the makeup of the Congress changes, the tax gap will persist and even increase, adding to the growing deficit that threatens to cause havoc more catastrophic than what currently afflicts the nation. The greed that is fueling the income and wealth inequality contributing to so many of the nation’s problems is growing as though on steroids, and needs to be neutralized expeditiously.

We are at a tax system breaking point. We are here because the worst offenders have persuaded the non-offenders and the minor offenders that any effort to put an end to the shenanigans of the worst offenders will produce the most harm for the non-offenders and the minor offenders. Here is a helpful analogy. Underfunded highway troopers driving vehicles that are too slow to catch the “rocket ship” drivers instead focus on the speeders who are 5, 10, or 15 miles per hour over the limit. When a proposal is made to purchase high-end chase cars for the troopers so that they can catch, ticket, and even arrest the worst speeders, the lobbyists for those “entitled to speed without restriction because of freedom, freedom, freedom” characters persuade the majority of drivers, who are either not speeding or speeding just somewhat, that the proposal will cause the authorities to arrest the compliant drivers and confiscate their vehicles. What’s evil is the lobbying message. What’s sad is the fact that it works way too often. It is time to stop worrying about the specks and to start dealing with the logs.

In the Tax World, Signatures Matter But How Many Taxpayers Fully Understand What That Means?

A recent U.S. Court of Federal Claims case, Brown v. United States, demonstrates what not to do when it is time to sign an amended tax return. The taxpayers, George P. Brown and Ruth Hunt-Brown, filed a claim for tax refunds with respect to their 2015 and 2017 federal income tax returns. The returns for those years were filed, respectively, on March 7, 2016, and January 23, 2018. Both returns were signed electronically. On October 3, 2018, the IRS received the taxpayers' first amended tax return for 2015, claiming a $7,636 refund. This 2015 amended return did not contain the taxpayers' signatures, but was signed by their tax return preparer, John Anthony Castro, without the required power of attorney form. On the same day, the IRS received the taxpayers’ amended tax return for 2017, claiming a $5,061 refund. This return also was not signed by the taxpayers, but by Castro, also without the required power of attorney form.

On November 15, 2018, the IRS issued a Letter 916C, indicating that it could not consider the taxpayers' 2015 refund because "[their] supporting information was not complete." On that same day, Mr. Castro faxed to the IRS the required power of attorney form, intending to give three individuals -- himself, Tiffany Michelle Hunt, and Kasondra Kay Humphreys -- the authority to represent taxpayer George Brown before the IRS for 2014 through 2018. The power of attorney form was not signed by George Brown but by Tiffany Michelle Hunt.

On January 14, 2019, the IRS received the taxpayers’ second amended tax return for 2015, claiming the same $7,636 refund as claimed on the first amended return. Again, this amended return was signed by Mr. Castro but not by the taxpayers, and it was not accompanied by a power of attorney form. On April 26, 2019, the IRS issued a Letter 569 (DO), proposing to disallow the 2015 and 2017 refunds. On May 28, 2019, Mr. Castro submitted a Request for Appeals Review for 2017 on behalf of the taxpayers.

On June 10, 2019, the taxpayers filed their original complaint with the Court of Federal Claims, asserting refund claim for 2015. On June 25, 2019, they filed their first amended complaint, also for 2015. On September 5, 2019, they filed their second amended complaint, expanding their lawsuit to 2016 and 2017. On May 15, 2020, the United States filed a motion to dismiss, arguing that the court lacked jurisdiction over the complaint because the taxpayers had failed to "verify, under the penalties of perjury, the 2015 and 2017 administrative claims for refund on which they base this suit" and failed to properly authorize a representative to sign on their behalf. On June 12, 2020, the taxpayers filed a response to the motion to dismiss, asserting that the IRS waived the taxpayer signature requirement by fully investigating the merits of plaintiffs' claims. On June 29, 2020, the United States filed a reply, contending that the doctrine of waiver is inapplicable to the taxpayer signature requirement and that, even if it were, the taxpayers had not satisfied its required elements. The court held oral argument on October 20, 2020.

The court explained that in order for it to have jurisdiction over the refund claim, the taxpayer must first duly file a claim for refund or credit with the IRS. To be duly filed, the claim must be “verified by a written declaration that it is made under the penalties of perjury.” This requirement can be satisfied “when a legal representative certifies the claim and attaches evidence of a valid power of attorney.” The court noted that the taxpayers had failed to sign the amended returns on which they based their claims for refund, and that those returns were not accompanied by a power of attorney demonstrating that Mr. Castro had the authority to sign on the taxpayers' behalf. The power of attorney form subsequently filed by Mr. Castro failed to include the taxpayers’ signatures.

The taxpayers conceded that they had not complied with the requirement of a written declaration, but argued that the IRS waived that requirement when it investigated the merits of their refund claim. The United States replied that the doctrine of waiver does not apply to the taxpayer signature requirement, and if it did, the elements of waiver had not been satisfied. The court explained that the Supreme Court has held that the waiver doctrine applies to regulatory but not statutory requirements. The signature requirement, though set forth in regulations, also is required by sections 6061 and 6065 of the Internal Revenue Code. The taxpayers argued, in effect, that because the regulations repeat the statutory signature requirement, the requirement became a regulatory requirement and no longer is a statutory requirement. They also argued that the statute does not create a signature requirement. The court concluded that the requirement is statutory and cannot be waived. Thus, the court did not address whether the requirements of a waiver had been met. It also noted that reaching the opposite conclusion “would be inconsistent with the tax code's purpose as the ‘IRS's requirement that taxpayers sign under penalties of perjury enables the IRS `to enforce directly against a rogue taxpayer.’” The court granted the motion to dismiss.

Though taxpayers need to review returns prepared by a third party before signing them, to make certain that the returns do not contain false information and do not omit relevant information, to what extent are taxpayers required to demand or request that a tax return preparer give them the opportunity to sign amended returns? If the tax return preparer replies that the preparer can sign under a power of attorney, how much responsibility does the taxpayer have to make certain that the power of attorney is properly completed and signed? How much tax procedure must taxpayers know and understand when a tax return preparer is doing the work? To what extent must taxpayers become the supervisors of tax returns preparers? Interestingly, the court noted that it had addressed the signature requirement in two earlier cases, both involving taxpayers for whom Mr. Castro had been the tax return preparer.

It is easy to propose that taxpayers should know that they must sign every original and amended return or that they must sign a power of attorney permitting someone else to sign the returns. But as a practical matter, how can taxpayers be educated with respect to these requirements? Are they taught these things in the K-12 educational system? Do they enroll in post-secondary-education courses that teach these things? I daresay most taxpayers do not understand or understand only to a limited degree not only the signature requirements but the need for the power of attorney to be properly completed. The answer is that the tax return preparer or other advisor has the responsibility to make certain that the returns and other documents comply with all requirements, particularly those likely to be beyond the understanding of the taxpayer client. These issues add to the long list of reasons taxpayers need to select their tax return preparers carefully, especially when it is tempting to make the choice based on cost, promises of increased refunds, or similar reasons. One thing that taxpayers can do is to check for a preparer’s professional credentials, starting with this explanation from the IRS, and making use of this Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, though further exploration of online reviews and advice from other professionals is advisable.

So It’s Not a Tax Case But It’s a Great One

When I write about a television court show, I react to episodes that involve tax in some way or at least have some sort of tax angle. This time the America’s Court episode did not involve tax. Nor did it involve the First Amendment, legal education, music, model trains, chocolate chip cookies, genealogy. Perhaps, of all the things I profess to write about, at least occasionally, it involves, in some remote way, religion and theology. As in, perhaps, don’t do this.

The plaintiff, Samantha, began with the following story. She had been dating the defendant, Paul. She let Paul use her car while she was out of town. She returned to discover that Paul had been in an accident with the car, and that the car had been damaged. Her insurance paid for the repairs except for a $1,000 deductible that the plaintiff had to pay. Samantha and Paul agreed that Paul would pay half of the deductible, $500, to the plaintiff. Paul had not yet paid $500 to the plaintiff. The plaintiff then learned additional information that caused her to decide to sue Paul for the entire deductible.

The defendant began his story with an attempt to butter up the judge by saying, “Just as I am all about hustle and grind I appreciate the hustle and grind you bring to your courtroom.”

It gets better.

The judge asked Samantha, the plaintiff, “You agreed to $500, so why are you now suing for $1,000?”

Samantha replied, “I would like to introduce my witness, Miss Bennett, a friend.” The judge swore in Miss Bennett, and asked, “What’s your role in this case?”

Miss Elliott explained, “Samantha and I met several years ago on a shoot. We became friends. We are busy so we don’t see each other often. When we got together, she told me she had been dating a guy named Paul who had four kids, but things went bad when he borrowed her car and had an accident. So I said to Samantha, ‘Wait, I was on a date with a guy named Paul who has four kids and when I was with him on a date we were in an accident.’ Samantha took out her phone, and showed me a photo of Paul, and it was the same guy!”

The judge asked, “The defendant here, Paul?”

Miss Elliott replied, “Yes.”

The judge turned to the defendant Paul and asked, “You have four children?”

Paul replied, “Yes.”

The judge asked, “You see to it they are cared for, have what they need?”

Paul again replied, “Yes.”

The judge then asked Paul, “All with one woman?”

Paul replied, “No, four different women.”

The judge turned to Paul and remarked, “Mr. [can’t remember Paul’s last name], perhaps it is time to cool down your hustle and grind!”

The judge continued by asking Paul, “So what defense do you have, if any, to the plaintiff’s claim to the full deductible?”

Paul replied, “When the accident happened, I was running errands for the plaintiff.”

The judge asked, “Is Miss Elliott an errand?” Laughter erupted among the spectators the courtroom.

The judge concluded by saying, “I’ve heard enough. Judgment of $1,000 for the plaintiff.”

Perhaps stories like this are far more common than I am imagining. Yes, I’ve heard and read stories about two women discovering they are dating the same guy, or two guys discovering they are dating the same woman, but never in the context of one woman suing the guy and then having the other woman be the witness in litigation whose testimony makes the plaintiff’s case.

And the idea that the defendant considered dating the plaintiff’s friend to be running an errand for the plaintiff is just totally preposterous. And hilarious. I suppose if the defendant had taken on a date someone who was a stranger to the plaintiff, whose presence in the vehicle was demonstrated by a photo or a police report, and who was not in the courtroom, he would have come up with some excuse along the lines of just giving a friend a ride. Sure.

Taking a Walk and Thinking About Genealogy and Tax

When I started this blog many years ago, I described it as “Prof. James Edward Maule's more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies.” Only on a few occasions have I written about connections between tax with genealogy. Nine years ago, in a series of posts, I described instances in which descendants of Thomas Maule of Salem, Mass., were involved in taxation as a tax reforming legislator (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part I), as an IRS official and Treasury official (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part II), as employees of IRS predecessor agencies (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part III), as employees of the IRS (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IV), as local tax officials (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part V), as members of local tax boards (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VI), as tax accountants (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VII), as a tax return prepare (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VIII), as members of the single tax movement (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IX), and as owner of an interest in a trust that was the subject of a tax case decided by the Supreme Court (Taxation and the Descendants of Thomas Maule of Salem, Mass., Part X).

Today I share a long story about my family history research in which tax sits on the periphery. What brought this story to mind was a thought that popped into my head during my walk the other day. Usually I walk in my neighborhood, because going outside of the neighborhood requires either walking on one of two heavily traveled roads or driving somewhere to walk in a park or on a trail. So the other day I realized I could walk in another neighborhood by walking for a hundred feet along one of those major roads. The other neighborhood is simply a dead-end road with several houses, but it provides a change of scenery. As I walked I thought to myself, “I’ve been here before. Oh, wait. Conrad Wilson lived in one of these houses.” Who is Conrad Wilson? Now to the story.

My interest in family history was sparked by a pamphlet supposedly written by my great-great-great grandfather William Maule, though decades later I learned that he funded the research and publication of the pamphlet but did not write what was in it. My father read that pamphlet to us after dinner for several nights in a row when I was about 12 years old. When I finally started digging into genealogy ten years later I was puzzled by a reference to where Thomas Maule of Radnor lived. Thomas Maule of Radnor, a son of Thomas Maule of Salem, Massachusetts, though erroneously described in the pamphlet as his grandson, came to Philadelphia with his widowed mother, married, had four children, and after his wife died, remarried, to Zillah Walker, and had seven sons. When he remarried, it was to a woman from the “Great Valley,” which today includes parts of Upper and Lower Merion Townships, Radnor Township, Tredyffrin Township, and several others further west. After their marriage, Thomas and Zillah moved to the Great Valley. The pamphlet described the location of their home as “within a few yards of the Pennsylvania Railroad, about one mile east of the Eagle Station, and directly between the Railroad and Lancaster turnpike.” It also stated that the “venerable mansion which he erected 120 years ago is still standing in a state of good preservation.” Though by the time I started researching, the pamphlet was 110 years old, I wondered if their house was still standing. In these days before google maps, I could not figure out the location, so I wrote a letter to the Radnor Historical Society. Several weeks later I received a reply from Katy Cummin, a member of the Society and, it turned out, the author of “A Rare and Pleasing Thing: Radnor Demography (1798) and Development”, which had been published several months earlier. Her book analyzes the ownership and genealogies of the owners’ families, of each property enumerated in the 1798 property census taken for purposes of the unsuccessful Federal Direct Tax, which measured value by the number and size of windows. See the connection?

Katy invited me, on my next visit home, to accompany her to the site of the Thomas Maule – Zillah Walker home. So on my next trip home, I met her, she took me not only to see where the Thomas Maule home had been – more on that in a moment – but also to see the still-standing home of his son Jacob Maule, the location of where the home of Daniel Maule, another son of Thomas Maule and my 5-great-grandfather, had been located, the location of where the widow of Thomas Maule’s son John had lived, along with several other significant Radnor properties.

She then took me to the home of Conrad Wilson, another member of the Radnor Historical Society. He had a copy of my still-in-draft-form manuscript that became my 1981 now-out-of-print and unavailable ”The History and Genealogy of the Maules”, now in updated form at my family history web site. He had the copy because I had sent a copy to Katy after I had received her letter and by the time I made my visit, a month or so later, she had shared it with other members of the Society at my request. I remember walking into Conrad’s home and thinking, “This guy is definitely into books,” as every wall in the house seemed to be filled with bookshelves crammed with books, not unlike what is now in my house. I remember Conrad telling me, “I can fill in some of the branches in your family that apparently you’ve not yet found.”

And, of course, remembering my visit and tour of Radnor, I recalled my surprise when Katy showed me where the Thomas Maule house had been located. It was in the center of what is now the town of Wayne. I realized that when in college and working for H&R Block in Wayne, I was working as a tax return preparer in a building located on what was my 6-great-grandparents’ farm. See? A second connection! The house, which had been demolished, had served for some time as the manse of Wayne Presbyterian Church. Decades later, after learning that several law school colleagues sang in an Oratorio Society based at the church, and being encouraged by several choir members at my church who where in that Oratorio Society to attend a concert, I met the director at the time, and when I noted that the Church was built on the farm of Thomas Maule and Zillah Walker, he pointed out that he, too, was a Walker descendant. We figured we are about fifth cousins.

As for the other Maule properties, the still-standing house owned and expanded by Jacob Maule (brother of my 5-great-grandfather Daniel Maule) is one-half mile away as the crow flies. The house in which the widow of John Maule (another brother of Daniel) lived was located about 1,200 feet from my house as the crow flies. Daniel Maule’s farm, adjacent to his father Thomas Maule’s farm, is about a mile from my house. And Wayne is about 2 miles from my house as the crow flies.

So even while taking walks, genealogy and tax continue to wander around my brain. And then the story ideas percolate.