Wednesday, March 03, 2021
When the Congress classified stimulus payments as tax-free for both federal and state income tax purposes, it did so by providing that the payments are excluded from gross income. However, that language does not prevent the sort of problem facing Oregon taxpayers. There are five other states that permit deduction of federal income taxes, namely, Alabama, Iowa, Louisiana, Missouri, and Montana. It appears that the same problem exists in those states, but I haven’t seen anything similar to what Oregon has publicized nor did a quick search using several search term variants turn up anything.
There is a bipartisan sentiment among Oregon legislators that this result is unfair. Whether an amendment to the state’s tax law can happen quickly enough is unclear. Some Oregon taxpayers have already filed their tax returns.
Conceptually, the fix would be easy. Rather than subtracting their actual federal income tax liability, Oregon taxpayers would subtract the federal income tax liability that they would have had if they had not received a stimulus payment. Pragmatically, the fix would require Oregon taxpayers to prepare, in effect, a pro forma federal income tax return for the sole purpose of calculating what their federal income tax would have been. Though that is fairly easy with tax preparation software, it is unclear how quickly tax software companies could publish updated software, including software for taxpayers who already filed their returns to file amended returns. And pity the folks who are still preparing tax returns manually.
The fault does not lie with the Congress. Even if it had used language that not only excluded stimulus payments from gross income but also provided that the receipt of a stimulus payment should not cause an increase in federal or state income tax liabilities, Oregon taxpayers would still be required to compute that fictional federal income tax liability predicated on no stimulus payment being received. The fault is simply inherent in the mechanics of allowing a deduction for federal income taxes paid by the taxpayer.
Edit: Reader Morris found the Alabama legislation that fixes the problem in Alabama. His search was more successful than my quick search.
Monday, March 01, 2021
What drew my attention was the phrase “voluntary tax.” It struck me as oxymoronic as a “voluntary stop sign,” or a “voluntary speed limit.” It struck me as another misuse of the word “tax,” just as major league baseball refers to the payment imposed on clubs with payrolls above a specified limit as the “competitive balance tax.” It’s not a tax because it is not imposed by a government or governmental agency.
Taxes are mandated payments. It is true that a person can “voluntarily” pay a higher tax by failing to claim deductions or exemptions, but that doesn’t make the tax voluntary. It is true that taxpayers can make voluntary payments to the U.S. Treasury or a state revenue department In addition to their tax liability, but those are contributions or donations, not taxes.
Curious, I wondered if the folks in Iowa were the only ones to use the phrase “voluntary tax.” They’re not. For example, as explained in this Saline County, Arkansas, FAQ, Arkansas permits localities to enact “voluntary taxes.” Saline County has enacted three of these “voluntary taxes.” The Voluntary Animal Care and Control Ordinance explains: “There is hereby levied an annual Voluntary Tax in the amount of $5.00 per every tax statement for personal property in Saline County for the purpose of establishing animal control services in the unincorporated areas of the County,” and that “The Saline County Collector is hereby directed to include on the annual tax statement mailed to each personal property owner in the County the Voluntary Tax for animal control services. Upon receipt of the statement, the personal property owner may choose whether or not to pay the Voluntary Tax.”
They can call the $5.00 fee a tax, but it is not a tax. It is a solicitation for a donation. It is no different from the letter sent by charities that ask for money, which a person can chooise whether or not to pay. It is not unlike the somewhat misleading “invoices” that are mailed by certain vendors and marketing firms that contain fine print stating, “this is not a bill, it is an offer to provide services.” What’s wrong with that? Those who are not sufficiently schooled in the methods of marketing might instinctively write a check for what appears to be an invoice from a business or for what appears to be a mandatory payment to a government or governmental agency.
Why not call it what it is? It is a voluntary donation or a voluntary contribution. Calling it a tax is misleading, and is an erroneous use of the word tax.
Friday, February 26, 2021
Of course, if the income tax is repealed, the state faces a choice between reduction of services, increases in other taxes, or some combination of both. At a virtual town meeting, the governor was asked about reducing services and replied, “No chance on the planet. . . . A decrease in services – ridiculous.” He added, “My goal is to lower your taxes, now. There is a million different ways this can be done.” I wish someone had asked him to list the million ways to reduce taxes without reducing services.
So that means repeal of the income tax requires increases in other sources of revenue. The governor explained what he would do to raise $2.1 billion in lost revenue. He would increase the sales tax by something between 1.5 and 1.9 percentage points, from 6 percent to 7.5 to 7.9 percent. He would increase taxes on tobacco and soda. He was open to raising taxes on liquor. He would increase severance taxes on coal, oil, and natural gas. He suggested “there could be an unspecified tax on some professional services.” He suggested a new tax, which he inadvertently called a wealth tax, but then explained it would be a luxury tax, something akin to a sales tax on the purchase of items costing $5,000 or more, other than homes and cars. He opposed raising the gasoline tax.
The governor then paraded out the usual litany of why reducing or eliminating taxes is a wonderful accomplishment. “It will drive job opportunities beyond belief. It will drive the ability for wages to increase substantially, it will help our schools, it will drive up property values.” He also claimed that eliminating the income tax and replacing it with increases in other taxes would reduce the “net tax burden” for state residents. All that it would do would be to shift the tax burden from some residents to other residents. More on that in a moment.
The governor then admitted, in response to a question, that the goal of his plan is to “give people from other states in that upper income bracket an “incentive” to come and settle in West Virginia.” It seems to me that enticing someone to move to a state requires more than low or lower taxes. It requires a state that has high quality education, a clean environment, reliable power sources, sufficient water and food supplies, excellent medical care and health facilities, adequate highways, bridges, and tunnels, top-notch cyber infrastructure, and programs to reduce poverty, crime, addiction, and disease.
The current West Virginia income tax is a progressive tax. It imposes higher rates as income increases, though the rates are low in comparison to most other states and the federal income tax. On the other hand, the taxes that the governor wants to increase are regressive taxes. They take a higher portion of a lower income person’s income than they take from a higher income person’s income. The so-called luxury tax won’t make up the difference, because any wealthy person who did decide to move to West Virginia would have the means to make those purchases elsewhere. The proposed luxury tax, like a sales tax, is rather easily avoided by those intent on doing so.
So the proposal is just another piece of the grand plan to free the wealthy from tax burdens and impose the cost of civilization on the poor and working class, to push them in the direction of serfdom as much as possible. What continues to boggle my mind is the willingness of those being oppressed economically to vote for those making their economic condition increasingly worse. It reminds me of the person who exits through the wrong door on the Wilkos show. And then eventually regrets it, when it’s too late to prevent the ensuing tragedy.
Wednesday, February 24, 2021
Does eliminating the discount increase tax revenue? Perhaps. With the incentive to pay early removed, taxpayers who focus on cash flow and rate of return analyses will wait until the last minute to make the payment. That disadvantages the city in two ways. First, it reduces cash flow during the month when early payments would be flowing into its coffers. Second, it deprives the city of the opportunity to earn interest on the cash that is received early. The latter factor is small, because the city is unlikely able to earn back in one month the one percent that it otherwise would have, in effect, paid by allowing the discount. According to the city, the increased early cash flow sparked by the discount helped but not enough to justify keeping the discount in place. In fact, the city has concluded that eliminating the discount will increase tax revenues by roughly $6 million as it attempts to deal with a $750 million pandemic-induced deficit. In addition, eliminating the discount is projected to increase revenue for the budget-constrained school district by about $7 million.
Though taxpayers who manage their own real estate tax payments now have no incentive to pay early, those who pay through mortgage companies will lose out because mortgage companies tend to pay real estate tax bills quickly. Because the taxpayer, and not the mortgage company, is the one who loses out with the discount being suspended, there is no incentive for mortgage companies to wait until the due date to pay the tax.
The question that remains is whether other jurisdictions that offer real property tax early payment discounts will see what Philadelphia has done and follow suit. Though some of these localities are not trying to cope with budget deficits or are dealing with deficits nowhere near the size or proportionality of what is afflicting Philadelphia, the only reason not to suspend or eliminate the discount is the risk of political backlash. It remains to be seen if there is any political backlash in Philadelphia, and, if so, what effect it has.
Monday, February 22, 2021
Recently, reader Morris alerted me to a brief story about Samuel Adams, number 24 in the list of 25 Fascinating Tax Facts written by Stacy Conradt for MentalFloss. According to the write-up, entitled, “FOUNDING FATHER SAM ADAMS WAS BAD AT COLLECTING TAXES.” Adams wasn’t “terribly interested” in the job of tax collector though he was elected to be Boston’s tax collector. He overlooked “tax debts from people having financial or medical difficulties, which made him a bit like Robin Hood to working class Bostonians.” Under the law at the time, any taxes not collected by the tax collector became the personal liability of the tax collector. Adams racked up a substantial debt, tried to collect some of the unpaid taxes, but without much success. His friends, who had the resources, paid off the debt. According to his Wikipedia biography, his turning of a blind eye to taxes owed by those with financial problems “increased his popularity among those who did not pay,” and eventually he “emerged as a leader of the popular party, and the embarrassing situation did not lessen his influence.”
So reader Morris captioned his email to me with these words: “possibly a worse tax collector than Joel Greenburg [the former Seminole County tax collector]?” My answer is no. Adams failed to collect taxes, but considering those unpaid taxes would become his debt, he technically wasn’t breaking the law except to the extent he did not pay the debt. Letting people off the hook because of their financial or medical problems reflected a blend of empathy and reality. In contrast, the former tax collector in Seminole County 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, trying to arrange for an attack on county computers to obtain a ransom, and using taxpayer funds to make personal purchases. He also settled lawsuits brought by employees who alleged sexual harassment, racial discrimination, and First Amendment violations. The difference is stark. Even if the two situations were plotted on the same graph of zero to 100, and I’m not convinced they should be on the same graph, Adams would rate perhaps a 0.1 and the Seminole County fellow, assuming the allegations are true, a 100.
Friday, February 19, 2021
Yet the consequences of being charged with tax fraud can be serious long before the question of guilt is resolved. A recent story in the New Castle News of Lawrence County, Pennsylvania, provides an example. The head coach of the boys’ basketball team at Kennedy Catholic High School resigned “for personal reasons” after he was charged with tax evasion. He has been accused of underreporting income from a company co-owned with his wife. The alleged amount of unreported income for the three-year period from 2016 through 2018 exceeds $2.7 million.
What happens if it turns out that the underreporting was a mistake? What if the tax return preparer or tax software used by the coach failed to properly record the income in the appropriate place? What if the coach didn’t look closely at the return before it was filed? These circumstances would suggest negligence, which carries steep penalties, but would not be a criminal act. My guess, of course, is that the prosecutors have sufficient evidence to demonstrate that it wasn’t a question of mere negligence. But suppose the coach is found not guilty? Can he get his job back? I doubt it. Yet would he permitted to retain his job until, if at all, he was found guilty?
If criminal prosecutions could be resolved in a short period of time, my question would not be as serious. If the outcome could be determined in a matter of days or weeks, an accused person could either retain the job until, if at all, the person was found or pleaded guilty, or could take a leave of absence. Unfortunately. The time between an indictment or information and the final resolution of a criminal case, even when there is a guilty plea, can take months or even years. Can an employer endure having an employee over whom the shadow of an indictment is hanging? Most employers answer that question in the negative.
When a person decides to engage in tax fraud on a massive scale and is weighing the risks and perceived advantages, there is more to take into account than simply the possibility of a fine or prison term. Even if the person isn’t too concerned about reputation in the community and the reactions of family members and friends, there are the risks of job loss, removal of professional credentials and licenses, frozen assets, detention if there is a risk of flight, and disqualification for various benefits and memberships. Unfortunately, it’s not a matter of dealing with consequences after being convicted. It’s a matter of dealing with consequences when indicted, especially because acquittal doesn’t restore the status quo ante.
Wednesday, February 17, 2021
The survey result that is most relevant to the issue is what the survey report describes as “Lie #9: Lying on a tax return.” According to the report, “13.4% of Americans fudge their tax numbers.” The results indicated that “men are more likely to do so than women (15.1% to 11.7%).” Why is it that, as the report tells us, “Parents of young children are much more likely to fib on taxes than people without kids, 25.6% to 5.8%.” The Self Financial folks think that it is because “Many parents see the responsibility to their children as their most important duty, more so than their obligation to pay taxes,” sharpened by the high expense of raising a child. The report also notes that “Older people are slightly more likely to lie on their taxes than their younger counterparts, with 13.9% of Baby Boomers admitting it, compared with 12.8% of Gen X, 9.9% of millennials, and 7.2% of Gen Z.” The Self Financial folks think that this reflects older people trying to live in fixed incomes feeling “justified” in meeting basic needs before paying taxes.
Geographically, the survey discovered that the cities with the highest percentage of people making misstatements on tax returns were San Francisco-Oakland-San Jose, CA (25.3%), Birmingham, AL (20.7%), and Houston, TX (20.3%). On the other hand, the cities with the lowest percentage of people making misstatements on tax returns were Boston, MA (4.8%), Philadelphia, PA (6.3%), and Seattle-Tacoma, WA (8.5%). These results raise questions that researchers can explore, to discover what sorts of social, cultural, or other factors are in play to generate such widely different results.
Perhaps it is inevitable that some people will lie, commit fraud, and make misrepresentations. Though one remedy is to educate people in ways that help them understand the long-term disadvantages of doing so, another remedy is to make certain that lies, fraud, and misstatements are met with consequences. The willingness of those who hear or read lies, fraud, and misstatements to accept them, to ignore them, or to republish them enables those who lie, commit fraud, and make misstatements, and that in turn puts these behaviors on an upward spiral of even more of that behavior. Accepting or ignoring these misdeeds because it is too much trouble to object and deliver consequences, or because rejection and consequence would get in the way of the recipient’s need for power, money, or other goals, is nothing more than participation no less dangerous that the behavior of the liars and fraudsters. Accepting a falsehood because it fits with one’s dreams, or is what a person wants to hear, is a recipe for future difficulties and regret. I learned as a child it is best to tell the truth and then argue about the situation rather than lying, getting caught in the lie, and undergoing far more punishment. I suppose there are people who have not had that sort of education. How sad.
Monday, February 15, 2021
The reassessment conducted in 2020 by Delaware County involved two steps. The first was redetermining the fair market value of each property, a process that included proposed valuations and the opportunity to appeal. The second was redetermining the tax rate so that the total revenue raised by the reassessment could not change. That was separate and apart from any annual increase in the rate, to be determined after the reassessment computation was complete.
The reassessment was ordered by the Delaware County Court of Common Pleas, following a Pennsylvania Supreme Court decision that addressed challenges to the county’s existing assessments and its appeals process. State law requires that taxation be uniform, but that requires reassessing all properties to make certain that the rate of tax applied to properties is the same. That doesn’t happen when one property is assessed at fair market value and another is assessed at the assessed value determined at some previous time. This situation arose because many properties were reassessed only when they were sold. This meant that properties that had been owned by the same person or entity for many years was assessed much more below market value.
Last Thursday, in a letter to the editor of the Philadelphia Inquirer, C. Tom Howes of Havertown complained about the county tax reassessment. There is no link to the letter because the Inquirer apparently no longer publishes on its web site the letters published in its print version, other than the replica edition on the web site that does not permit links to individual articles, letters, or other material.
Howes writes, “While our eyes have been nervously awaiting possible tax increases from Washington and Harrisburg, it turns out that our local Delaware County politicians have managed to pull the wool over our eyes and extracted the green from our purses. Their secret was a 2020 tax reassessment of county properties under the guise of more realistic values with equity and fairness.”
What Howes omits is that the reassessment was required by the Pennsylvania Supreme Court, as applied to Delaware County by the Delaware County Court of Common Please, in compliance with the Pennsylvania Constitution and Pennsylvania law. It was not ordered by, imposed by, or invented by “local Delaware County politicians.” In fact, reassessments have been undertake and are underway in other Pennsylvania counties.
Howes continues, “When they announced this action, they tried to soften the impact by claiming that any increases would be limited by law to 10%. However, as a taxpayer, I was shocked and disappointed when receiving the 2021 tax bills to find those increases failed to follow those assurances. For examples, township taxes have increased by 15.86% while the real estate taxes went up by a whopping 32.31%.”
Howes is conflating two issues. As I described, tax rates would be adjusted so that the reassessment did not change the total revenue raised by the tax. Once that step was taken, as I described, taxing jurisdictions had the option to increase the tax rate just as they had the option to raise rates in previous years. However, this rate increase was limited to no more than 10 percent. The 10 percent limitation has nothing to do with the changes in tax bills generated by the reassessment.
The percentage increases cited by Howes are a consequence of the reassessment. Haverford Township, in which Havertown is located, did not increase its tax rate for 2021, as described in this story. Nor did Delaware County increase its real property tax rate, as described in this report, which presumably is the tax described by Howes as “real estate taxes,” a term that includes the township tax that he mentions, as well as the school district tax though those tax bills are not sent until late spring or early summer. Thus, the increases facing Howes are a consequence of his property being under-assessed relative to other properties.
According to the $165,000 assessment on the property had not been increased since sometime before 2000. According to the Delaware County Treasurer, the reassessment has increased the assessment from $165,000 to $397,560. That’s quite a jump and certain accounts for the percentage increases Howes mentions. Though it is understandable that these sorts of increases are shocking, it’s also important to understand that for at least 21 years the property assessment did not increase to reflect fair market value, whereas the assessments on properties purchased during that time did reflect the purchase price, thus creating the lack of uniformity required by Pennsylvania law. So when Howes concludes by asking, “Is this the politicians interpretation of equity and fairness?” the answer is, “It is equity and fairness as required by Pennsylvania law and enforced by Pennsylvania courts."
Friday, February 12, 2021
Something is amiss. To get into these situations, a preparer must conclude that the rules don’t matter, that the rules matter but only for others, that the fraudulent return preparation activity won’t be detected, and that there will be no consequences. These aren’t cases of carelessness, negligence, ignorance, or other problems caused by preparers who want to do what’s right but stumble. Those preparers can be helped to get better because they are trying and can benefit from additional tax preparation education. The preparers who engage in generating fraudulent returns know that what they are doing is wrong, but don’t care. Unfortunately, that attitude, not caring about doing what is wrong, isn’t limited to tax return preparers cranking out fraudulent returns. In that sense, the fraudulent tax return preparation problem is simply one facet of a much bigger issue, one that reaches far beyond taxation.Reader Morris took note of my comments and suggested to me, “Maybe the problem is not enough people are being sentenced and those that are sentenced are not going to jail. Maybe the problem is the IRS is not adequately funded and are investigating fewer tax preparers.” He referred me to an Accounting Today article, “IRS investigating fewer tax preparers,” which discussed information contained in the 2020 Annual Report of the IRS Criminal Investigation Division. According to that report, investigations of abusive tax return preparers dropped from 224 in 2018 and 163 in 2019 to 140 in 2020. Similarly, recommended prosecutions dropped from 177 and 203 to 145, informations and indictments dropped from 170 and 138 to 128, and the number of preparers sentenced fell from 148 and 154 to 112. So the observation I made in Another Tax Return Preparation Enterprise Gone Bad was off the mark. I had noted, “Perhaps they are turning up the heat on tax return preparers gone bad. They being investigators and attorneys at the Department of Justice, though they usually work in cooperation with agents and auditors from the Internal Revenue Service.” Apparently that’s not the case. According to the Accounting Today article, IRS Criminal Investigation chief Jim Lee attributed the declines to a combination of new agent training and the pandemic, including impacts not only at the IRS but at the Department of Justice.
This information is relevant if, in fact, the decline in investigations and prosecutions in 2020 somehow invited more tax return preparer misbehavior. If that were the case, then as investigations and prosecutions increase, along with convictions, guilty pleas, and sentences, tax return preparation fraud should decrease. This proposition is, of course, one that finds parallels in all facets of criminal law. Does increased enforcement reduce crime? The debate over the answer to that question has raged for decades, with proponents on both sides finding and offering evidence.
But my concern isn’t simply with what I described in Fraudulent Tax Return Preparation for Clients and the Preparer, where I wrote:
It’s no secret that there are tax return preparers who do not comply with the tax laws. It’s no secret that they get caught. It’s no secret that they are indicted and either plead guilty or are convicted. Yet there are tax return preparers who continue to prepare and file false returns. Given the eventual outcome, why do they do this? Yes, there are people who think they can “get away” with a crime, but when the activity leaves a paper trail, it makes it too easy for the IRS and Department of Justice to discover the reality.My concern is why some people prefer to do what is wrong, might be or might not be deterred by enforcement, and cannot, on their own, choose to do the right thing and refrain from doing the wrong thing even in the absence of the threat of being caught and sentenced. In some instances, preparers who commit fraud do not think it is wrong and somehow justify, at least to themselves and perhaps to their clients, that there are good reasons to ignore societal norms and laws. Often, these positions are taken because of a combination of the person not receiving adequate ethical training during childhood and an intentional delivery of law-breaking encouragement from other sources. It’s a difficult issue, because whether there are instances in which breaking a law is justified is yet another question that has fueled a debate that has been ongoing for centuries. Yet there is no need to dive into that discussion when addressing the question of tax return preparation fraud. Even if someone could conjure up a justification for preparing and filing fraudulent tax returns, doing so makes such a mess of the clients’ lives that some other avenue for communicating the justification needs to be identified. For example, a tax return preparer who tries to justify the fraud because “taxes are too high” or “the client needs quick cash” can and should find other ways to protest tax rates or help clients get loans. Yet the fact that most tax return preparers take a substantial “cut” of the refunds they generate for clients through fraud suggests that their motive isn’t some altruistic concern about tax rates or client liquidity but simply another seemingly “quick and easy” means of getting money. And that is why I wrote, as quoted above, “In that sense, the fraudulent tax return preparation problem is simply one facet of a much bigger issue, one that reaches far beyond taxation.” The miserable condition of the nation’s economy, growing wealth and income inequality, increases in unemployment, and the economic and other insecurities afflicting a substantial portion of the nation’s people, the impact on the poor of the money addiction of the ultra-wealthy, and the perception that those with money can get away with, or be pardoned for, crimes, especially economic crimes, all encourage some people to turn not only to tax return preparation fraud but also to a variety of similar misdeeds, such as impersonating the IRS in scam phone calls or the fake delivery “brushing” scam.
Reducing tax return preparation fraud will be easier to accomplish if it is part of a larger attack on all types of fraud, not just the tax kind. Better yet, that larger attack is more likely to succeed if it is part of an much bigger attack on crime. Success requires more than increased enforcement, but fair, equitable, and just enforcement. So long as those with money and connections are less frequently investigated, indicted, or arrested, get lower sentences, get preferential treatment while in custody, are far more likely to receive a pardon, and can “get away with murder,” even on Fifth Avenue, at least some of those not so privileged will turn to tax return preparation fraud, to say nothing of other crimes, in an attempt to compensate for the inequalities. It is said, “If it ain’t broke, don’t fix it.” It’s too easy to forget the corollary. “If it doesn’t work, fix it.” It’s not enough to prosecute and sentence fraudulent tax return preparers. It’s absolutely necessary to prosecute and sentence, at the same rate and with the same intensity, the folks who are playing tax fraud games with orders of magnitude more dollars on much bigger stages.
Wednesday, February 10, 2021
First, perhaps in response to criticisms that the mileage-based road fee would constitute “double taxation” if the liquid fuels tax remained in place, the bill provides for a credit against the mileage-based road fee for fuel taxes. However, instead of trying to work through actual pump receipts, the bill provides:
Any fuel taxes paid in Wyoming, based on the average miles per gallon for the payer's class of vehicle, for the period immediately preceding the invoice period established in subsection (b) of this section shall be credited to the payer and reflected on the payer's invoice.In other words, the credit would be an estimate, much like the use of a per-mile automobile expense rate authorized by the IRS and some states for income tax deduction purposes. Yet it is unclear what happens if a Wyoming vehicle is driven out-of-state. Are those miles eliminated from the computation of the fee? Or is the “average miles per gallon” credit applied, with adjustments for the different liquid fuels tax rates in those other states?
Second, the bill provides that the mileage-based road fee would apply not only to vehicles registered in Wyoming but also to nonresidents. It is unclear whether the drafters of the bill are making a distinction between nonresidents with Wyoming-registered vehicles and other nonresidents. The language provides as follows:
The department may assess a road usage charge at rates established in subsection (a) of this section on nonresidents who apply or use time and mileage permits under this subsection. The department shall develop a procedure for nonresidents to apply for and use the Wyoming road usage charge program in any form provided to Wyoming resident payers. The department may develop procedures to apply road usage charge rates to out of state vehicles through the use of time and mileage permits at ports of entry.The bill contemplates giving vehicle owners a choice between a “technology based vehicle mileage metering system” presumably provided by third-party vendors and administered by a third-party commercial account manager which might also be the vendor, or “manual options.” The bill also provides that vehicle owners be given an “option that allows payment of a flat fee for a specified number of miles for a time period as prescribed by rule.” I am guessing that this provision is designed for out-of-state vehicles that enter Wyoming.
The treatment of out-of-state vehicles intended by the drafters is unclear. Although there is a provision for nonresidents to apply for time and mileage permits, and for the state to charge out-of-state vehicles at ports of entry, presumably with the flat fee option, the bill also provides that “fuel taxes may be set to approximate road usage per mile charges to ensure that road usage charge registered vehicles do not inappropriately share more of the burden for transportation and highway revenue.” This suggests that the drafters contemplate out-of-state vehicles that do not pay the mileage-based road fee but simply pay liquid fuels taxes while in or traversing Wyoming.
Third, certainly in reaction to the issues raised by interstate travel as described in the two previous paragraphs, the bill also directs the Wyoming Department of Transportation to “develop plans to integrate Wyoming's road usage charge program into a larger regional or national program if established and if the legislature authorizes participation in the larger program,” and provides parameters and safeguards to be observed in working out those plans.
One of the issues highlighted by implementation of a mileage-based road fee is the federal-state tension permeating American constitutionalism, law, and practice. On the one hand, states’ rights advocates see states as laboratories for experimentation, and the imposition of a mileage-based road fee by one state permits other states to observe, learn, and improve on what that state does. On the other hand, the existence of different rules in different states creates both inconvenience and legal risk for travelers. For example, someone traveling with a firearm encounters a different set of rule each time a border is crossed. Though it’s easy to adjust one’s speed when crossing into another state with a different speed limit, inserting multiple mileage-based technology units in a vehicle to comply with the specifics of a particular state’s mileage-based road fee measurement, information transmission, invoicing, and payment systems is far from easy.
Thus, I support not only states getting on board the mileage-based road fee approach, but also regional arrangements such as those mentioned in the Wyoming legislation and, more importantly, a federal benchmark setting interoperability for mileage-based road fee technology. To those who dislike and want to minimize or remove federal oversight of just about everything, I caution them that the lack of uniformity in the mileage-based road fee and liquid fuels tax environment will deter tourists from entering a state that make it inconvenient and difficult for travelers and tourists to comply with highway revenue programs. Perhaps Wyoming is trying to do what I am advocating, but the language of the proposed legislation is far from clear. Because the bill has not yet been scheduled for committee or floor action, it is possible that the language will be tweaked to clarify the answers to the questions I posed.
Monday, February 08, 2021
Reader Morris came upon another very recent tax preparer guilty plea, sending an email to me shortly before I came upon it. Apparently he, too, is amazed at the boldness and relentlessness of tax return preparers who somehow just don’t get the message. At best, fraudulent tax return preparation is a short-term money grab that exacts a long-term much higher price. To mark reader Morris’ alert spotting of this news, I dressed up the subject heading he used for his email to me to create the title for this post.
This time, according to this Department of Justice news release, a tax return preparer pleaded guilty “to aiding in preparation and presentation of false tax returns for his multi-year fraudulent tax preparation scheme.” The preparer’s father was also a tax return preparer and was filing fraudulent tax returns by claiming earned income tax credits in excess of what his clients were entitled to claim. When the IRS began investigating the father’s tax preparation business in 2011 and 2012, the son opened “Just Us Tax Services” in order to help his father continue preparing tax returns while the father was under investigation. It permitted his father to file in the name of a company different from the one being investigated. After opening “Just Us Tax Services,” the son started filing fraudulent tax returns using the same fraud techniques used by his father. Then, in 2014, after the IRS terminated the son’s tax return preparer registration, the son had an acquaintance open and register “Young’s Tax Service,” through which the son continued to file tax returns using the fraudulent earned income tax credit technique used by him and by his father. Subsequently the son merged “Just Us Tax Services” with “Young’s Tax Services.” The two companies filed fraudulent tax returns, primarily by claiming earned income tax credits in excess of what their clients were entitled to claim. This not only increased client refunds but also the fees collected by the companies.
In 2013, the father was sentenced to 30 months in prison. While waiting to report to prison, the father told his former clients that he “was turning the tax preparation business over to his son because of the criminal investigation and because of his failing health. The son has agreed to pay restitution in the amount of the total tax loss caused by his fraudulent tax return preparation, and faces not only the possibility of being required to pay interest and civil tax penalties to the IRS but also the possibility of being sentenced to as much as 36 months in prison.
Parents often teach their children a variety of skills. Parents teach their children to read, to write, to fish, to fix cars, to do carpentry, to play musical instruments, to drive cars, to grow vegetables, to sew, to operate lawn mowers and snow blowers, to cook, and to do all sorts of things that are beneficial or at least harmless fun. Yet there are parents who teach their children to steal, to forge documents, to sell illegal drugs, and to other illegal activities. Though the situation leading up to this guilty plea probably isn’t the first time it has happened, this is the first time I have observed a description of a parent teaching a child how to use a specific technique for filing fraudulent tax returns. Hopefully, it will not become a family tradition passed along to the son’s children and grandchild.
Friday, February 05, 2021
The story prompted reader Morris to ask me, What qualifications do you need to be a tax collector?” I answered him inWhat Qualifications Are Needed to Be a Tax Collector? I wrote as follows:
The short answer to his question is, “It depends.” The duties and responsibilities of tax collector depends on the language of the statute or ordinance that creates the position. In Seminole County, according to the Seminole County Tax Collector web site, the tax collector issues certified copies of birth certificates, collects the county local business tax and issues receipts for payment of those taxes, serves as agent for “performing limited permit application processing functions” for concealed weapons permits, handles title, education, and other services for vehicle dealers, provides most driving license services for county residents, sells hunting, fishing, and related licenses and permits, maintains records for those licenses and permits, and collects property taxes. In contrast, in New Jersey, according to state rules, municipal tax collectors computes and bills taxpayers, cooperates with the assessor, the board of taxation, and other financial authorities, designs and implements efficient methods of issuing bills, has a working knowledge of property tax exemptions, abatements, and deductions, and electronic data processing of tax rolls and tax billing, receives and accounts for payments of taxes, ensures proper disposition of collected funds, maintains detailed accounting records, processes electronic data related to collections, initiates and implements enforcement, assists in foreclosures, provides reports to the governing body and appropriate municipal officials, ensures compliance with all statutes, rules, regulations, and directives pertaining to municipal tax collection, and may be assigned certain secondary duties such as, but not limited to, tax search officer, collector of utility accounts, municipal treasurer, and treasurer of school monies. In New Jersey, tax collectors are not involved with issuing birth certificates or concealed weapons permits, and is not involved in supervising vehicle dealers apart from taxes.The disadvantages of piling non-tax responsibilities have increased. In another story about the duties of Florida tax collectors, sent to me by reader Morris, the tax collector of Palm Beach County explained that the number of people seeking appointments, with appointments being the only way to interact in person with tax collector office personnel because of the pandemic, has increased substantially. They are facing wait times of 45 days. Why the increase in the demand for appointments? In order to get the COVID-19 vaccine in Florida, people must prove that they are Florida residents. Two ways of doing so is to present a valid Florida driver’s license or a valid Florida identification card. And who issues those? Not the Department of Motor Vehicles. The county tax collector. There are other ways to prove status as a Florida resident, but in some situations there is no recourse but to get in line at the tax collector’s office in order to get in line for the vaccine. The first word that pops into my head is “inefficiency.” The distribution of vaccines needs to be expedited. Making a person wait for residency validation while the office that can do so is taking care of requests for certified copies of birth certificates, processing concealed weapons permit applications, handling vehicle title transfers, and selling hunting and fishing licenses, makes no sense. Emergency rooms use triage. So, too, should tax collector offices that are dealing with much more than taxes. It makes no sense. The combination of having tax collectors deal with vehicles, guns, hunting, and fishing, and tax collectors not having a triage equivalent to provide services, poses the risk of being a deadly combination.
Wednesday, February 03, 2021
Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions
According to the news release, the United States has filed a complaint asking for an injunction against two tax return preparers, both in their individual capacity and as owners of a tax return preparation business. One of the preparers started the business in 2013, and the other started working for the business in 2016. Interestingly, the complaint alleges that in October of 2019, the Civil District Court for the Parish of Orleans permanently enjoyed the owner from working as a tax return preparer in Louisiana. The complaint also alleges that the two individuals, in preparing returns, invented deductions and credits to reduce tax liabilities and also invented income to increase earned income tax credits, generating fraudulent refunds. In addition, according to the complaint, the two individuals “charged exorbitant fees for their services, often without their customers’ knowledge.” The complaint alleges that since the 2017 filing season, the two individuals filed more than 12,400 tax returns, and that they used other tax return preparers’ personal identifying information on some of the returns. One of the individuals allegedly did so “in order to avoid an IRS investigation as to whether he has complied with due diligence requirements that obligate a tax return preparer to make reasonable inquiries to ensure that a customer is legitimately entitled to various tax credits, including the earned income tax credit.” This particular individual, the complaint alleges, is subject to and has not paid penalties incurred for past violations of these due diligence requirements.
Apparently, chasing down tax return preparers who are violating the law and getting them to stop their behavior isn’t easy. In addition to prosecuting them, the Department of Justice has successfully sought injunctions against hundreds of tax return preparers who file fraudulent returns. Some preparers, as one of the individuals named in the complaint is alleged to have done, use false identifying information in order to circumvent the process used to screen for preparers who are enjoined from preparing tax returns, who are in violation of preparer due diligence requirements, or who have not paid penalties. My miscalculation was thinking that getting caught and being hit with fines and prison terms would be enough of a lesson. Apparently not.
Something is amiss. To get into these situations, a preparer must conclude that the rules don’t matter, that the rules matter but only for others, that the fraudulent return preparation activity won’t be detected, and that there will be no consequences. These aren’t cases of carelessness, negligence, ignorance, or other problems caused by preparers who want to do what’s right but stumble. Those preparers can be helped to get better because they are trying and can benefit from additional tax preparation education. The preparers who engage in generating fraudulent returns know that what they are doing is wrong, but don’t care. Unfortunately, that attitude, not caring about doing what is wrong, isn’t limited to tax return preparers cranking out fraudulent returns. In that sense, the fraudulent tax return preparation problem is simply one facet of a much bigger issue, one that reaches far beyond taxation.
Monday, February 01, 2021
The first, and principal point that Giovanetti offers makes sense, that is, $15 per hour is worth more in some parts of the country than in others. Why? Because the cost of rent, food, and other things varies from place to place because of geography, population density, and similar factors. Two years ago, the Pew Research Center published a study explaining this in more detail. The solution is simple. The minimum wage can be adjusted for cost-of-living just as other federal dollar amounts, such as the per diem allowance. So this is something very easy to fix. Yet even if the proposed increase in the national minimum wage were adjusted in that manner, I suspect that it would not overcome Giovanetti’s objections.
Giovanetti’s second point is one that has been repeatedly blasted across social media, probably funded by the business tycoons who want to continue getting cheap labor despite the fact that the minimum wage has not kept pace with the cost of living. Giovanetti writes, “the minimum wage was never intended to be a pay rate for adults to support themselves and a family. Minimum wages are entry level wages for entry level jobs. Lacking higher skills, workers enter employment at a relative low wage, and then as they develop skills and experience, they qualify for higher pay.” Is this true? No. The federal minimum wage was first enacted in section 206 of the Fair Labor Standards Act. Section 206(g) contains an exception that permits a lower wage for newly hired employees less than 20 years of age, which leaves the general rule in place for persons who are adults. In other words, the minimum wage was intended to apply to adults. Was it intended to let adults support a family? The minimum wage was championed by Franklin Roosevelt though many others also proposed and supported the idea. In a 1933 speech, Roosevelt explained as follows:
In my Inaugural I laid down the simple proposition that nobody is going to starve in this country. It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By "business" I mean the whole of commerce as well as the whole of industry; by workers I mean all workers, the white collar class as well as the men in overalls; and by living wages I mean more than a bare subsistence level-I mean the wages of decent living.Clearly Roosevelt was speaking of all workers, not just entry-level workers or low-skill workers. He was speaking of workers with families and workers without families to support, not just workers without dependents. The nonsense that the minimum wage was “never intended to be a pay rate for adults to support themselves and a family” has been circulating too long, and originates with business owners, and disseminated by their funded operatives, in order to protect the wealth growth of starving oligarchs. It appears to have originated in this commentary, set forth without any citation to statute, legislative history, or other proof of a bald allegation made without supporting evidence. The diminution in the study of history by Americans has been exacting, and continues to exact, an ever-increasing price. Ignorance, as I have pointed out many times, is the most costly flaw in humanity.
Throughout industry, the change from starvation wages and starvation employment to living wages and sustained employment can, in large part, be made by an industrial covenant to which all employers shall subscribe. It is greatly to their interest to do this because decent living, widely spread among our 125, 000,000 people, eventually means the opening up to industry of the richest market which the world has known. It is the only way to utilize the so-called excess capacity of our industrial plants. This is the principle that makes this one of the most important laws that ever has come from Congress because, before the passage of this Act, no such industrial covenant was possible.
On this idea, the first part of the Act proposes to our industry a great spontaneous cooperation to put millions of men back in their regular jobs this summer. The idea is simply for employers to hire more men to do the existing work by reducing the work-hours of each man's week and at the same time paying a living wage for the shorter week. [emphasis added]
Giovanetti’s third point is that increasing the minimum wage is harmful to workers. He asserts that “most economists agree that a higher minimum wage actually cuts off employment opportunities for the lowest skilled workers.” Those economists, and I doubt that “most” economists are among their ranks, seem to overlook the impact of raiing the minimum wage in places like New York City, and Seattle, and the growing support for minimum wage increases from businesses not only in terms of advocacy but also in terms of stepping up their wage rates, as described, for example, in this Economic Policy Institute report.
Giovannetti’s fourth point is that “there are some workers who simply aren’t worth $15 an hour—yet.” Perhaps that is true of workers who are under the age of 21, a notion supported by the lower minimum wage for young workers. But the ideal that some workers are worth less than $15 per hour while others rake in tens and hundreds of millions of dollars per year, in some instances not doing much of anything productive, is appalling. The minimum wage has not kept pace with inflation. That alone is justification for increasing it. It’s unfortunate that it was not set to increase with inflation from the outset.
Though I headlined this commentary with “It’s Not Tax But It’s Close,” that is a bit misleading. There is a connection between the minimum wage and the tax law, aside from the inclusion of wages in gross income. The tax law provides an earned income credit, to supplement the resources of people whose earned income is low. Why is their income low? A significant reason is the inadequacy of the minimum wage. With a sufficient minimum wage perhaps the tax law would not need to be cluttered with provisions designed to ameliorate the insufficiency of the minimum wage. Others have written about this problem, with varying positions, ranging from letting the earned income credit substitute for a minimum wage, through keeping both, to eliminating the earned income credit by providing for a decent minimum wage. At this moment, I am not digging into the specifics of those discussions as that is beyond the scope of today’s commentary.
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.