Friday, January 29, 2021
Recently, according to this story, a tax return preparer pleaded guilty to filing fraudulent tax returns as part of a much larger scheme. To understand what had happened, I found the Department of Justice news release describing the indictments and the scheme.
The story begins with race, ethnic, and gender discrimination. In 1997, a group of black farmers filed a class action against the U.S. Department of Agriculture (USDA), claiming that they had been discriminated against when they applied for farm credit, credit servicing, or farm benefits from the USDA. At about the same time, additional class actions making similar allegations was brought against the USDA by groups of Hispanic farmers and female farmers. The lawsuits were settled with an arrangement through which farmers who could demonstrate they had applied for participation in a USDA program and believed they had been discriminated against could make a claim for financial relief. If the claim was successful, an award of $62,500 was paid, split between the claimant, who would receive $50,000 and the IRS, which would receive $12,500 as withholding credited to the claimant.
According to the indictment, from 2008 until 2017, five defendants allegedly solicited people to file false claims asserting they were discriminated against when they tried to get assistance from the USDA for their farming operations. The indictment alleged that 192 false claims were made, almost all of which were successful, generating more than $11.5 million in payments that should not have been made. The claims were false because the claimants either were not farmers, or had not suffered discrimination.
One of those charged, an attorney, would deposit the claim checks into his law firm trust account, and issue a check from that account to the claimant in an amount reduced by the attorney’s fee. The fees were limited to $1,500 for each claimant. The attorney split the fee with four others who were charged. Those four are sisters who recruited the claimants and also demanded and received money from those claimants. The amounts received from the claim constitute gross income that should have been reported on the claimant’s income tax return. According to the indictment, the four sisters arranged for yet another person charged in the indictment, a tax return preparer, to prepare income tax returns for the claimants. Allegedly, the tax return preparer falsified the tax returns to create a tax refund, with the falsified items totaling more than $4.6 million. The indictment also alleges that three of the sisters also filed false tax returns and laundered money through the purchase of various properties, and through payments on a student loan for the daughter of one of the sisters. The daughter also was indicted. The Department of Justice also filed a civil case for forfeiture of some of the properties purchased by the sisters.
The indictment lists 106 charges against one of the sisters, 109 against the second, 114 against the third, and 90 against the fourth. The daughter faces 8 counts. The attorney also faces 8 charges. The tax return preparer? One count. The trial of those who have not pleaded guilty was scheduled to begin this week.
Of all the commentaries I have posted about tax return preparers, in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation 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, and Tax Return Preparation Indictment: From 44 To Three, this story probably is the most complicated of the bunch. Yet somehow the tax return preparer faced only one count despite filing at least 82 fraudulent returns. The preparer received $550 for each return. That’s not much compared to the price now going to be paid. It could have been much more, had there been 82 counts alleged in the indictment. I am guessing, though I could be wrong, that at some point the preparer cooperated with those investigating the situation.
Wednesday, January 27, 2021
Cooke asks, “Why do a growing number of people hate the Northeast? Why has Connecticut lost 100,000 more residents than it’s picked up over the last five years?” He responds, “This is why.” Now, if by “this” he means the mind-boggling administrative and bureaucratic incompetence, the badly designed systems that don’t let the Department of Motor Vehicles share information about vehicle registration and de-registration with local tax collectors, the lack of online appeals processes, or the need to ask four times to get an answer, he makes a good point. On the other hand, the headline to his opinion piece, perhaps written by an editor, claims, “This absurd tax is the very reason people are fleeing the Northeast.” The tax itself is not what bothered Cooke and presumably bothers others. The implementation of the tax almost certainly does. Yet it is a small tax, which ought to be classified as a fee, but that’s another issue, one I have discussed many times. Is the tax absurd? No, and if it were a fee, it still would not be absurd. Motor vehicle use imposes a cost, ranging from the need for repair and maintenance of highways to noise and pollution, and charging vehicle owners is not an inappropriate way to recover those costs.
But what surprised me was Cooke’s description of tax life in his new state of residence, Florida. A photo caption accompanying his commentary states, “As a stark contrast to the northeast, Florida officials and state offices are a pleasure to deal with.” Though perhaps he did not write that, it surely was culled from what he did write, specifically, “In Florida, where I now live, every interaction I’ve had with the government has been a pleasure. The DMV is efficient and useful. The sales tax office genuinely tries to help. Even toll operators give you the benefit of the doubt.” I am guessing he did not encounter the Seminole County tax office back when it was making the bureaucracy encountered by Cooke in Florida look good, a Florida mess I described in a series of posts about the former Seminole County, Florida, Tax Collector, starting with A Reason Not to Run for Tax Collector (or Any Other Office)?, and continuing through Perhaps Yet Another Reason Not to Run for Tax Collector, Running for Tax Collector (or Any Other Office)? Don’t Do These Things, When Behaving Badly as a Tax Collector Gets Even Worse, Tax Collector Behaving Badly: From Even Worse to Even More Than Even Worse, What Qualifications Are Needed to Be a Tax Collector?, The Legacy of Misbehaving Tax Collectors, Lengthening the List of What Not to Do As a Tax Collector, and The List of What Not to Do As a Tax Collector Has Become Even Longer. I wonder how Cooke will react when he hears stories from Seminole County residents who describe a tax collector who has been accused of stalking and impersonating a political opponent, impersonating a student, manufacturing fake IDs using information from drivers’ licenses surrendered to his office, sex trafficking a minor using information accessed through his office, spending public funds on a private enterprise he had formed, openly carrying firearms while wrongly claiming to be a revenue officer, making a traffic stop while driving his personal vehicle, trying to produce fake concealed weapons permits, asking a friend to hold the county’s computers hostage, and using tax revenues to make personal purchases and to pay lawyers to defend against these accusations. In other words, incompetence, bungling, corruption, and every other sort of misfeasance and malfeasance, including the ones of which Cooke complains, can be found anywhere. I offer another reason people flee the Northeast for Florida, and other states close to the Equator, one with much more impact than a $150 vehicle tax. They are tired of being cold, shoveling snow, and slipping on ice. Of course, there is a trade-off. Alligators, crocodiles, snakes, monster insects, hurricanes, and inadequately funded schools, to mention some of the criticisms shared by residents and former residents of Florida, are a price some are willing to pay to find warmth. It’s not just a tax thing, and it almost certainly isn’t a matter of a small vehicle tax (in substance a small vehicle fee) is the deciding factor. In all fairness, Cooke did not blame that tax for his decision to move, but he did add it to the list of reasons he is glad he moved to Florida.
Monday, January 25, 2021
According to this Department of Justice news release, a Pennsylvania resident working as a tax return preparer in Newark, N.J., admitted that he helped prepare 44 fraudulent tax returns from 2014 through 2016. When indicted, he was charged with three counts of aiding and assisting in the preparation of false and fraudulent tax returns. Those not familiar with how the criminal justice system works might ask, “Why only three?” The answer is complicated. Prosecutors evaluate the strength of the case they can make with respect to each fraudulent return. They evaluate the marginal utility of piling on additional counts. They might have an indication of whether, in a particular situation, the number of counts affects the probability of a guilty plea. They may have reduced the number of counts in exchange for cooperation that helped them find and charge others involved in the same or related activity. It’s a good example of how theory, charging the preparer with 44 counts, must yield to practical reality, 3 counts gets the message across and generates a sufficient sentence. That’s not true in all situations but apparently something to that effect was in play in this one.
Friday, January 22, 2021
Over the years, I have noted the headline dilemma in various posts. For example, in How to Fix a Broken Tax System: Speed It Up?, I suggested that the headline of the Philadelphia Inquirer story that broke the news about a decision by the Philadelphia Board of Revision of Taxes to to accelerate the process of reassessing then state senator Vincent Fumo’s home, which said, “Fumo home tax leads to change,” was probably the victim of space restraints, and should have read, “Fumo home tax leads to meaningless change.” In "Taxing Lawyers" Taxes This Tax Lawyer's Brain, I explained that the article capped by the headline, “Is Schwarzenegger Serious About Taxing Lawyers?” was not about taxing lawyers or singling out the legal profession, but was a story about the governor’s proposal to extend the sales tax to professional services. In When Taxpayers Claim Credits To Which They’re Not Entitled, Who Loses?, I explained why I would have rewritten the headline, “Bogus Electric Vehicle Tax Credits May Be Costing IRS Millions” was misleading because it should have been written as “Bogus Electric Vehicle Tax Credits Harm Honest Taxpayers.”
The other day I noticed a headline that caused me to pause. According to the headline of this story, “Biden expected to raise corporate tax rate, add tax on book income.” Of course, anyone who understands civics knows, the president cannot raise tax rates. The president, a president-elect, or, actually, anyone who wants to do so, can PROPOSE an increase or decrease in tax rates, a tax on book income, a new deduction, the repeal of a credit, or any other change. But making the change is within the purview of the Congress. The story itself explains that the “Biden Administration will likely revisit” the 2017 tax legislation, tells readers to [e]xpect the top corporate tax rate to rise,” describes a “new tax on book income,” and finally mentions a “proposed 10% surtax” on foreign production profits, and a “proposal” to disallow deductions related to moving jobs and production overseas. Language matters. Writing about proposals as though they are in effect or will be in effect is misleading. The use of the words “proposed” and “proposal” when describing some suggested tax changes but not others reinforces the impression that some of the changes are already in place and ready to go. There is no guarantee that any of the Biden proposals will be enacted in the form suggested, and it is possible that some are rejected by the Congress.
How would I have written the headline, without going beyond the allotted space? Simply, “Biden to Congress: Up corporate tax rate, add tax on book income.” Actually, my version of the headline is a wee bit shorter. And it’s much more accurate.
Wednesday, January 20, 2021
First, what is the wheel tax? It is a vehicle registration fee that many people call a “wheel tax.” The state of Wisconsin permits local jurisdictions, whether villages, towns, cities, or counties, to add an amount to the regular annual registration fee imposed on vehicles. There are 13 counties in which the so-called wheel tax has been enacted, ranging from $10 to $30.
Second, this amount is not computed based on the number of wheels. Whatever amount a locality chooses to impose is a flat amount, determined without regard to the number of wheels. Why the word wheel is used in calling it a wheel tax is puzzling. It is not a tax on things with wheels, because it does not apply to baby strollers, wagons, and bicycles.
Third, the amount collected must be used for transportation related purposes. In the county referenced in the question posed to the television station, it is used for road repairs.
Fourth, the amount collected makes, and has made, a difference. One county enacted a $10 add-on in 2015, which expired at the end of 2019, and used it to eliminate a deficit in its road winter maintenance fund. During the four years in question, the fund went from a negative balance of more than $1.2 million to a positive balance of almost $400,000.
Fifth, the state resorted to this approach because the property tax receipts used to fund the roads were not keeping pace, especially as new roads were built. Jurisdictions began to borrow money. That requires taxpayers not only to pay taxes to repay the loans but also to pay interest in the loans.
Sixth, is the amount being charged best described as a fee or as a tax? It is an amount charged for a specific purpose, namely, transportation, and is imposed on those making use of the transportation facilities. Yet it isn’t tied directly to use. In some ways it resembles, and in other ways it does not resemble, the so-called “wheel tax” in Indiana, which I described in Wheeling and Dealing the Wheel Tax, because what is charged in that state is arbitrary, as I explained:
The tax on passenger vehicles, which almost always have four wheels, is $25. The tax on motorcycles, which have two wheels, is $12.50. My immediate reactions was, “That’s $6.25 per wheel.” But I was wrong. The tax on commercial vehicles, which can have as few as four and as many as eighteen, or perhaps more, wheels, is $40. I would have expected some sort of sliding scale, so that a ten-wheeled truck would be subject to a $62.50 tax. And what about recreational vehicles, which can have as few as four, or as many as ten wheels? The tax is only $12.50. And personal trailers, which usually have two, but sometimes four, wheels? Again, $12.50.So is the amount charged in Wisconsin a tax or a fee? A little more than five years ago, in Tax versus Fee: Barely a Difference?, I wrote:
Though a variety of definitions and distinctions have been suggested over the years, I distinguish a fee from a tax by identifying a fee as an amount paid in exchange for a service provided by a government directly to the person making the payment. Thus, for example, the amount charged by a township for trash pick-up is a fee. The amount charged by a state government or agency for the use of a toll highway is a fee. The amount charged by a local government for filing a zoning variation application is a fee. On the other hand, amounts paid to a government that bring indirect benefits, such as an income tax, is not a fee. A portion of what is paid in federal income tax funds national defense, which in turn provides a benefit to citizens, but there is no one-on-one relationship between the amount of tax paid that ends up financing national defense and the value of military protection afforded to a particular individual or business. Sometimes the line is blurred. The township in which I live charges a storm water fee, but it is a flat amount regardless of the size of the lot or the amount of storm water discharged from the property into the storm sewer system. Is it truly a fee? Yes, in the sense that the township provides a system for removing storm water back into the creeks. No, in the sense that a person who diverts most storm water into on-site tanks nonetheless pays the fee, which makes it more difficult to describe the payment as one made for a direct service.The Wisconsin “wheel tax” is much like the storm water fee I described. A true fee would reflect the relative damage done to roads, and thus reflect the number of axles, the number of wheels, weight, or some combination, similar to what one encounters when being charged a toll to use a highway. On the other hand, it is not a tax, because it is not imposed on people who do not own vehicles. When the property tax, paid by property owners whether or not they own vehicles, is used for road repairs, it lives up to its character as a tax. Yet, ultimately for the person paying, calling it a fee or a tax doesn’t change the amount being forked over. In So Is It a Tax or a Fee?, I provided the following insight:
So what is it? A tax or a fee? Apparently, it’s whatever the politicians want to call it as part of the process of putting spin on what they are advocating. Of course, it would make much more sense to be transparent and honest. The problem with transparency and honesty is that it gets in the way of political power play, and exposes covert political deals for what they really are. And apparently the same sort of labeling is applied to people to fit the accusations that some people want to make. Expediency trumps integrity in post-modern America.I wrote that in the context of Republicans voting for tax increases by tagging things as fees and thus wiggling around promises not to vote for new or increased taxes. What matters is not what the charge is called, but what it is used to finance. That is why people asked the question posed to the television station, and they were able to get an answer.
Monday, January 18, 2021
The most recent television court show that I watched, episode 84 of Judge Judy’s 25th season, introduced tax in a manner not relevant to the issue being litigated. The plaintiff owns a trucking company and contracted with the defendant to drive one of the company’s trucks. The plaintiff gave the defendant driver a debit card to use if and when necessary for truck repairs. The plaintiff alleged that the defendant used the card for personal expenses and provided proof of the unauthorized use. The defendant offered no evidence that could rebut the allegations. The testimony and documentation on this issue consumed most of the episode, but isn’t relevant to how tax entered the picture.
The defendant wiggled around the allegations. He offered no evidence to demonstrate that the use of the card was for authorized expenditures, and though he alleged he used the card for repairs, he had no invoices, no other documentation, and no witnesses to support his position. Instead, his defense was that the plaintiff paid him in cash, did not issue a Form 1099, and does not maintain paperwork for his drivers. The plaintiff interjected that the defendant was an independent contractor. The defendant replied that he could not be an independent contractor because he did not own the truck.
Judge Judy dismissed the defense as irrelevant. She entered judgment for the plaintiff in the amount of withdrawals and payments made with the card that were unrelated to the driving of the truck.
The defendant’s approach to the litigation is an example of whataboutism. Rather than providing evidence to prove that the use of his debit card was for authorized purposes, other than his own self-serving testimony, the defendant tried to sidetrack the proceedings by making claims about alleged improper behavior by the plaintiff that had nothing to do with the use of the debit card. Perhaps the defendant has watched and learned how this whataboutism reaction has been used in the political arena. Or perhaps he watched and learned, and even used it, as a child, following the pattern of response offered by some children who, when confronted by their parents about improper behavior, make claims about something done by a sibling.
Had the defendant alleged that other drivers had been permitted by the plaintiff to use company debit cards for personal purposes, the success of that defense would depend on what was demonstrated by other facts, such as the details of the contracts with those other drivers, but it would have been rational in the sense of focusing on alleged inconsistency in the position taken by the plaintiff. There is a difference between making a comparison to someone else’s behavior in order to focus on inconsistency, and simply making an allegation about unrelated behavior by another person. Of course, the inconsistency might be justified, and thus not an adequate defense, but at least it requires examination. On the other hand, there is no point in examining allegations resting on mere whataboutism, which is why Judge Judy did not inquire into the truth or falsity of the claims made by the defendant about the plaintiff’s tax compliance.
The difference between allegations resting on inconsistency and allegations that are mere whataboutism is narrow and nuanced. Too many people, including politicians and other public figures, as well as some commentators, do not grasp that difference. And thus, attempts to resolve a situations are delayed or sidetracked, often intentionally, by the use of whataboutism as a deflective defense. Judge Judy would have none of it. It would serve the nation well if everyone else followed her approach to claims based on whataboutism.
Friday, January 15, 2021
Now it appears that another tax break, this time at the state level, has gone unused. It’s not because taxpayers refrained from claiming it because of adverse consequences, but it was a tax break for which apparently no individuals qualified, or if they did, they either chose for some reason to ignore it or did not realize it existed. According to Arizona Department of Revenue, “for four consecutive fiscal years that no individual taxpayers have claimed the income tax credit for qualified employment of recipients of temporary assistance for needy families.” The Department explained that under section 43-224 of the Arizona statutes, individual taxpayers will no longer be eligible for that credit starting in 2021. Corporate taxpayers will continue to be eligible for the credit. The termination of the credit becomes fully effective when the legislature enacts the technical corrections legislation submitted by the Department of Revenue.
Curious, I searched for the statute in question. It provides as follows:
43-224. Individual and corporate income tax credits; annual report; termination of unused creditsI wonder, but I am not about to try to research, whether there are any federal credits or deductions, or for that matter credits or deductions in other states, that have gone unclaimed by taxpayers for one or more years. Similarly, I wonder if any other states have provisions similar to Arizona’s section 43-224. What I really would like to see is an automatic repeal provision for tax breaks based on promises that are not fulfilled, coupled with a “give back” requirement for those tax breaks.
A. On or before September 30 of each year, the department shall report to the directors of the joint legislative budget committee and the governor's office of strategic planning and budgeting on the amount of individual income tax credits and corporate income tax credits that were claimed in the previous fiscal year.
B. Except as provided by subsection C of this section, if, in any four consecutive reports under subsection A of this section, an individual or corporate income tax credit was not claimed by or allowed to any individual or corporate taxpayer, the director of the department of revenue shall:
1. Terminate the recognition and servicing of that credit for taxable years beginning from and after December 31 of the year in which the fourth report is issued.
2. Issue a public announcement, including on the department's website, of the termination of the credit under authority of this section.
3. Notify the governor's office of strategic planning and budgeting, the president of the senate, the speaker of the house of representatives, the joint legislative budget committee and the legislative council.
4. Include the repeal of all statutes relating to the terminated credit in technical tax correction legislation for enactment in the next regular session of the legislature. If the legislature fails to enact this legislation, the director shall rescind the termination of the credit.
C. The director may not terminate under subsection B of this section the recognition and servicing of any income tax credit that is subject by law to preapproval by the Arizona commerce authority unless over any period of four consecutive calendar years both of the following conditions occur with respect to the credit:
1. The department has not received notice of preapproval of any applicant or project for the credit from the Arizona commerce authority.
2. In the report issued under subsection A of this section, the credit was not claimed by or allowed to any taxpayer.
Wednesday, January 13, 2021
But if for some reason, a person did not receive a stimulus payment that they should have received, the person can claim the recovery rebate credit on their 2020 federal income tax return when they file in 2021. The IRS explains the credit in this statement. However, in the same statement the IRS explains, “The Recovery Rebate Credit is figured like the 2020 Economic Impact Payment, except that the credit eligibility and the credit amount are based on the tax year 2020 information shown on the 2020 tax returns filed in 2021.” That means that a person filing as single in 2019 who had adjusted gross income of $73,000 but who has adjusted gross income in 2020 of $110,000 will not get the credit even though they would have received the stimulus payment had the IRS managed to send it last month or this month.
Yet if the taxpayer did receive a stimulus check because 2019 adjusted income was low enough, but 2020 adjusted gross income was high enough to entitle the taxpayer to a lower, or no, stimulus payment, the taxpayer is not required to return the difference. Guaranteed, many taxpayers are going to be confused, and I daresay some tax return preparers will be challenged when trying to explain to their clients what is happening.
For a preview, take a look at the recovery rebate credit worksheet on page 59 of the DRAFT of Form 1040 instructions from the IRS. This is an example of why some people dread filing tax returns and others, albeit few, find it to be fun.
Monday, January 11, 2021
The hostel, operated by the Friends of Chamounix Mansion, is owned by the city of Philadelphia, to which the hostel pays an annual $1 rent. The hostel argues that it is not a hotel because it is a hostel, but the city poited out that other hostels in the city pay the tax, and notes that section 19-2401(5) of the ordinance enacted by Philadelphia to add to the hotel occupancy tax includes in the list of establishments treated as hotels “any place recognized as a hostelry.” After the city sent an invoice for more than $500,000 in back taxes and the hostel refused to pay, the city went to its Tax Review Board, which decided it had no jurisdiction. And that is how the dispute ended up in the Court of Common Pleas.
In that previous post, I wrote, “So this should be an easy case. . . . The tax applies to hostels and the organization admits it is a hostel.” The statutory language is clear, even though it leads to a questionable result. I suggested that the Friends of the Chamounix Mansion should ask City Council to enact an exception, though noting that such a move would open the door to a parade of exception seekers.
Now comes news that a Philadelphia Common Pleas judge has ruled that Philadelphia’s attempt to collect the taxes is invalid. The judge wrote that the tax applies to payments for “the use or occupancy by a transient of a room or rooms.” Thus, according to the judge, because the hostel charges visitors by the bed, not by the room, and provides the beds in dormitory-like group settings, the tax does not apply. The judge also held that after the hostel alleged it had not been notified by the city that it planned to assess the tax retroactively, the city failed to prove that it had provided the proper notice.
Dismissing the attempt to collect the tax because of a failure to provide proper notice makes sense. However, it only applies to the years in question and has no effect when and if the city attempts to collect the tax for other years. But the conclusion that charging by the bed and not by the room somehow causes the hostel not to fall within the statutory definition of hotel does not make sense. The hostel is a building. It is open to the public. It charges money for sleeping accommodations. The statute applies to establishments such as summer camps. Summer camps often house attendees in dormitory-type rooms, and charge by the bed. If the hostel is not within the statute, neither is a summer camp. Yet the statute clearly applies to summer camps, nor is it limited to the listed types of establishments because it uses the phrase “such as.” As of the time I am writing this, the judge’s opinion has not been published, and it remains to be seen whether it will be, because very few Philadelphia Common Pleas Court opinions are published. It would be helpful to learn if the judge found some other statute that limited the definition of hotel to establishments that charge by the room and not by the bed, or some other statute that provides an organization that admits it is a hostel is not subject to a tax that applies to hostels.
In my previous commentary, I noted, “My guess is that when the ordinance was enacted, no one was paying attention to what was happening in a mansion owned by the city and rehabilitated by the Friends of Chamounix Mansion.” Thus, the entire situation is another instance of legislative failure. We’ve seen quite a bit of that lately, at multiple government levels. We’ve seen too much of it.
Friday, January 08, 2021
Now comes a report of more bad news for tax return preparers who are thinking that fraudulent return preparation is an easy way to make quick money. According to this news release from the Department of Justice, a tax return preparer in Newport News, Virginia, has been sentenced to 27 months in prison for preparing false tax returns. The preparer owned a tax return preparation business that she ran not only in her home but also in hotel rooms. Over a five-year stretch ending in 2018, she put fraudulent credits and deductions on returns in order to increase her clients’ refunds. On top of that, she did not sign the returns as preparer, so that the returns appeared to be self-prepared by the taxpayers. And if that wasn’t enough, she did not go over the completed returns with her clients before they signed. And, as the bonus cherry on top, she did not give her clients copies of the returns even when they asked for them. She filed more than 400 false returns, creating at least $700,000 in refunds to which the taxpayers were not entitled.
A list of what tax return preparers should do includes, among other things, filling out returns accurately, review the return with the client, sign as preparer, and provide a copy to the client. It's almost as though the preparer in question looked at such a list and intentionally ignored each item. That’s a recipe for the outcome experienced by this tax return preparer and that looms on the horizon for others who imitate what she did.
Wednesday, January 06, 2021
An important aspect of life is learning from one’s mistakes. An equally important aspect is learning from the mistakes of others. But apparently the Republican governor and legislators of Mississippi either haven’t been paying attention or are simply so beholden to the handful of wealthy individuals who benefit from tax cuts that they are pursuing an unwise dream, the repeal of the state income tax.
According to this story, the governor plans to ask the legislature to phase out the personal income tax. Four years ago, the state enacted legislation that phases out the 3 percent bracket by 2022. The current governor was lieutenant governor when that law was passed.
The governor claims that the state “could be more competitive” if it also eliminates the 4 percent and 5 percent brackets. In effect, that would eliminate the state income tax. The governor calls the income tax “one huge speed bump to long-term economic growth and recovery.”
The lieutenant governor, also a Republican, cautions that no one should rush into the repeal because of the economic uncertainty arising from the pandemic. He noted that the state needs resources to increase teacher pay and to strengthen state services. He pointed out that eliminating the income tax would reduce revenue by hundreds of millions of dollars of revenue that the state would need to “make up” somehow. That means either reducing state services significantly or increasing or enacting a different type of tax. And here is where the nonsense begins. Supporters of the income tax repeal claim that repeal would create more economic activity, creating revenue growth, presumably in other taxes. That fantasy has never played out in any jurisdiction in which the trickle-down theory and supply-side economics have driven tax policy. The lieutenant governor noted that Mississippi would need a “tremendously profitable” year to make up the lost revenue, pointing out that the state hasn’t had that sort of growth. Though tax repeal advocates would claim that the slow growth is due to taxes, careful analysis would demonstrate that high growth requires things that cost money, such as quality education, reliable and adequate infrastructure, and affordable health care.
After looking at Mississippi’s tax rate schedule, the problem is obvious. The 4 percent rate kicks in at $4,000 in 2021 and $5,000 in 2022, and the 5 percent rate kicks in at $10,000. That lumps working class taxpayers in the same category as multi-millionaires and billionaires. One of the organizations supporting the repeal, a group dedicated to limited government, claims that repealing the income tax would give Mississippi workers more money to spend, arguing that “increased consumption in the economy drives new jobs and higher wages.” That argument supports the idea of eliminating the income tax for the poor and increasing it for the wealthy. Why? The wealthy plow relatively little of their money into consumer goods and services. On the other hand, to apply the top rate to someone with relatively little income makes no sense.
Opponents of the proposal are pointing the the Kansas experience, about which I’ve also written numerous commentaries. Simply put, when Kansas reduced its income tax rates substantially, it ended up in economic agony. And that was without completely repealing its income tax. As one opponent noted, investing in education would make Mississippi “more livable.” Indeed. Long-term investment in education, infrastructure, and health care is a much more solid foundation for growth than is the superficially appealing tax cut approach.
Monday, January 04, 2021
For decades, sports franchise owners who pretend to be poor have sought tax breaks that ultimately burden those who aren’t wealthy. Casino owners have jumped into the tax break buffet. And now comes news from the Philadelphia Inquirer of a tax break pumped out to the developer of a water park in Atlantic City, New Jersey. The tax break consists of an annual rebate of as much as $2.5 million in sales tax revenue generated by the water park for 20 years, along with tax breaks on materials used to build the park. Who approved the tax break? The Casino Reinvestment Development Authority.
According to the mayor of Atlantic City, the tax break is a “true game-changer.” I’m not sure what qualifies as a false game changer. Perhaps realizing that the tax break simply shifts the tax burden to the residents of Atlantic City, most of whom are far from wealthy, or to the residents of New Jersey? The mayor is excited because Atlantic City is dominated by gambling and wants to focus on family attractions. He claims, “If you build it, they will come.” Then, fine, build it, people pay to use the water park, and the owner of the water park makes money. So why is the tax break needed? There are two possible reasons. The first is that not enough people will show up to make the water park profitable, so the owner of the water park, working with the Casino Reinvestment Development Authority, decides that taxpayers, including those who don’t use water parks, should provide the financial resources not provided by the water park customers. Why not raise admission fees? The answer is that increased admission fees would reduce the number of customers. In other words, the project is financially unfeasible. The second is that the water park would be profitable, but a tax break would make it even more profitable, just another manifestation of the disjointed world in which we live, a world in which profits are never sufficient.
What would happen if someone wanted to start a necessary business in Atlantic City? Would the person get tax breaks for twenty years? Would the person get tax breaks on the equipment or services that are purchased to start the business? I doubt it.
The history of the project is interesting. In 2014, the Showboat Casino closed. It was purchased by the water park developer in 2016 and reopened as a non-gambling hotel. Three years later he proposed resuming gambling activities in the hotel, and obtained preliminary approval to seek a casino license. If approved, it would be Atlantic City’s tenth casino. It is unclear whether the casino license will be pursued. The water park is proposed for vacant land next to the Showboat. A previous attempt to build a water park, sought by a different developer, fell apart when financing could not be obtained. The same developer also tried unsuccessfully to build a water park in the environs of Atlantic City. Eight years ago, a third group proposed a water park in the city but it, too, failed.
As I wrote in It’s Not Just Sports Franchise Owners Grasping at Tax Breaks: “Here is how truly free capitalism, which doesn’t exist in this country, works. A developer proposes a project. If it’s a home run, investors flood the developer’s inbox and voicemail. If it’s a pretty good idea, enough investors show up. If an insufficient number of investors or investment dollars show up, then it’s a project not worth pursuing.” [Water parks] are not essential functions of society and do not deserve tax breaks, especially when taxpayers are lining up at food banks, facing eviction, and losing jobs. Public dollars, that is, money paid by taxpayers, should be put into facilities and projects over which the public, not oligarchs, have control. The price for public money, whether tax breaks or kickbacks of fees, should be public control.” So, It seems to me that someone who wants to build a water park should run the numbers. If the numbers pan out, financing should be available. If financing is not available, it’s a good indication that the project doesn’t have a promising future. If the only way to make the project work is to ask taxpayers to pay more in order to give tax breaks to the proponent, then the taxpayers should be given the opportunity to answer a referendum question, “Are you in favor of tax breaks in the amount of [whatever], to be granted for a period of [so many years], to be provided to [name of proponent or developer]?” I am confident the tax break seekers would recoil at the thought of making the tax break dependent on a taxpayer referendum.
Friday, January 01, 2021
The reader asked if the parent has rental income, pointing out that the parent owns the property and has the legal right to rent the property. The reader suggested that under Lucas v. Earl, 281 US 111 (1930), the parent should not be able to assign the rental income to the child. Yet the child is doing all of the work to generate the rental income, and the parent is not giving up anything or being inconvenienced. The reader wondered if the transaction should be treated as a loan of the property by the parent to the child.
My response is that the child is acting as the agent of the parent. The parent owns the property. The parent can end the arrangement whenever the parent chooses to do so. The leeway granted to the child in terms of handling the specific details of renting out the property doesn’t shift ownership of the property or the income it generates from the parent to the child any more than leaving the details of a brokerage account investments to the broker causes the account income to shift from its owner to the broker. The rental income is the parent’s, the rental expenses are the parent’s, and whatever net income the parent permits the child to retain is a combination of compensation to the child for his rental agent activities, which is a fact question, and to the extent the net income exceeds reasonable compensation for the child’s services, a gift by the parent to the child. So the parent’s adjusted gross income would reflect an amount equal to the amount of the gift, reflecting gross income equal to the rental income, deductions equal to the rental expenses and the compensation to the child. Presumably, the child acts as an independent contractor, so the parent would not have any employer withholding obligations.
The reasoning behind my response reflects what would happen if the parent entered into the same arrangement with an unrelated third party. The twist would be that to the extent the third party kept all of the net income, the facts would indicate that the entire net income kept by the third party was compensation to the third party. Of course, to the extent that amount exceeded a fair market value compensation amount, the parent would not enter into the same arrangement, which is further support for concluding that when the arrangement is with the child, the excess kept by the child is a gift by the parent to the child.
I pointed out that the numbers could be tricky. Suppose that the depreciation on the property exceeds the net cash income. Because of the parent’s use of the property (presumably the days of use in July and August exceed the greater of 14 or 10 percent of the rental days) section 280A would block any loss (except to the extent somehow interest and taxes alone exceeded the net rental income). But that would not change the tax treatment of the amounts kept by the child, nor would it diminish the parent’s rental income.
Treating the arrangement as a loan of the property simply complicates matters, because it would require a determination of deemed rent paid by the child to the parent, and would not prevent the parent from having some sort of rental income. There probably are better ways to handle the arrangement. For example, the parent and the child could enter into a partnership, with the parent contributing the property and the child contributing services. That would permit some of the net income to be reported by the child rather than by the parent. The arrangement as described does not have sufficient indicia of an intent to create a partnership. Another example would be transfer of the property to the child, with a reserved right of occupancy. Whether the transfer should be a gift, a sale, or a part-gift-part-sale, and the other details of the transfer, depend on the particular facts and circumstances of the parent’s financial and tax situation, whether the child is an only child, and similar concerns.
My guess is that when these arrangements occur, neither the parent nor the child thinks about the tax and other consequences. There is a conversation, the idea makes sense to the parent, the parent agrees, and off goes the child to list the property for rent. And if something goes awry, tax or otherwise, disputes will arise. For example, who gets sued and is ultimately responsible if a hazard on the property causes physical injury to a tenant? Who is listed as owner on the property insurance policy? Ultimately, it’s not just a tax issue, and the assistance of legal counsel is highly recommended.
Wednesday, December 30, 2020
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.
Monday, December 28, 2020
On more than a few occasions I have explained why demand-side economics makes much more sense, and why supply-side economics makes no sense. In The Expensing Deduction is an Expensive and Broken Idea, I reacted to a proposal “to deduct all expenditures related to the operation of their business in the United States” with this explanation:
However, it nonetheless amounts to nothing more than a windfall tax break for those businesses, chiefly large enterprises that are buying equipment. Giving a tax deduction for an expenditure that already is being made surely is not an incentive to make that expenditure. The solution to job creation is not supply-side, but demand-side. Some members of Congress understand this. Others don’t, continuing to drop raw eggs on the concrete floor from three stories up, in the belief that the eggs won’t break.In Does Repealing the Corporate Income Tax Equal More Jobs?, I explained why repealing the corporate income tax does not create jobs. I explained:
There currently are corporations drowning in cash, and they aren’t hiring. Why? A business does not hire unless it needs employees. Acquisition of cash is not a reason to hire. A business hires if it needs employees. It needs employees if it has more work to do than its current employees can handle. Those situations arise when the gross receipts of the business increase. That happens when customers spend more. Customers do not spend more unless they have both resources and either a need or desire for the goods or services being sold by the business. That happens when money is infused into the hands of consumers. In other words, what works is demand-side economics. Eliminating the corporate income tax does not increase demand.In Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I reacted to a letter written by almost four dozen New York millionaires supporting an increase in New York state income taxes applicable to millionaire income. I wrote:
What motivates these millionaires is the realization that, in the long run, insufficient tax revenue erodes the infrastructure on which the economy rests, an economy that generate the income and wealth held by the millionaire and billionaires. Similarly, as the number of “New Yorkers who are struggling economically” increases, there is a decrease in the amount of purchased goods and services, in turn harming the overall economy. Put simply, though these millionaires did not articulate it in this manner, a healthy state economy, just like the national and global economies, depends on demand-side activity. The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.In Kansas Demonstrates Again Why Supply-Side Economics Fails, I reviewed my earlier commentaries on the supply-side disaster in Kansas, and noted. “Apparently belief in failed supply-side economics dies hard.”
Of course, from time to time, advocates of supply-side economics and trickle-down nonsense write to me, claiming that I am wrong, that I don’t understand reality, that I have no clue about economics, and that I would be best served by supporting the desire of the wealthy for even more money. Why these acolytes of foolish theories persist in clinging to their beliefs when it is clear that the theories don’t work puzzles me. Is it simply a belief that this approach to national tax policy increases the chances of each of these acolytes to join the ranks of the wealthy? Is it fear of change? Is it fear of losing clients?
And in this atmosphere of diehard adherents of supply-side theory clinging desperately to their dreams, along comes a study from the London School of Economics that puts the final nail in the coffin of trickle-down nonsense. According to the study, tax breaks for the wealthy increase income inequality by sizeable amounts but have no significant effect on economic growth or employment. Though my focus has almost always been on United States taxation, the researchers at the London School of Economics looked at data from 18 countries, including the United States. They examined economies from 1970 through 2020.
Consistent with what I have argued, the study demonstrates that cutting taxes on the wealthy does not cause the wealthy to create jobs, just as a separate study showed that “income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work.” One of the researchers explained, “Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.” Another added, “Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.”
As I have previously noted, it's tough watching people go back for seconds and thirds at the buffet table when other people aren’t even getting a decent meal. Claiming that heaping more food onto the buffet table will solve the problem is clever by too much. In Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I also wrote, “The concern is not that the writing is on the wall for outdated trickle-down economic theory. The concern is that some people are unable to read that writing or to understand what it means or why it is there.”
To me, the study is yet more proof that what we need is a repayment tax, which I explained in Learning About Wealth Taxes By Watching What Happens in Argentina, and A Better Alternative to a Wealth Tax? It is time for the folks who broke the promises they made to get tax breaks pay back what they grabbed. It is time for the advocates of supply-side economics and trickle-down theories to admit they have been wrong and to redeem themselves. It is time for those addicted to money, for the billionaires and multi-millionaires whose thirst for even more wealth can never be sated, to get into economic rehabilitation. It is time for intervention.