Friday, April 09, 2021
Reader Morris pointed out that I had written, “The American Rescue Plan Act of 2021 amended Internal Revenue Code section 85 to provide that the first $10,200 of unemployment compensation is excluded from federal gross income if the taxpayer’s adjusted gross income is less than $150,000.” He directed my attention to a revised IRS instruction and explanation publication that begins, “If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, . . .” His implicit question was why the difference between the phrase I used, “adjusted gross income,” and the phrase the IRS used, “modified adjusted gross income.”
In my reply to reader Morris, I first shared the text of the amendment to section 85 made by section 9042 of the American Rescue Plan Act of 2021:
SEC. 9042. SUSPENSION OF TAX ON PORTION OF UNEMPLOYMENT COMPENSATION.I noted to reader Morris that the statute does not use the term “modified adjusted gross income.” Instead, it defines adjusted gross income by reference to certain other Internal Revenue Code sections. I invited reader Morris to compare section 86, which deals with taxation of social security benefits:
(a) In General.—Section 85 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
“(c) Special Rule For 2020.—
“(1) IN GENERAL.—In the case of any taxable year beginning in 2020, if the adjusted gross income of the taxpayer for such taxable year is less than $150,000, the gross income of such taxpayer shall not include so much of the unemployment compensation received by such taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200.
“(2) APPLICATION.—For purposes of paragraph (1), the adjusted gross income of the taxpayer shall be determined—
“(A) after application of sections 86, 135, 137, 219, 221, 222, and 469, and
“(B) without regard to this section.”.
SEC. 86. Social security and tier 1 railroad retirement benefitsProbably thinking it would simplify things, the IRS decided to “rewrite” the statute by using the term “modified adjusted gross income” to describe the result of using the different definition for adjusted gross income provided in section 85(c)(2). Though this “rewrite” or this different way of describing the computation rules might be an improvement, It also poses a danger. Someone looking at the term “modified adjusted gross income” might think that the term refers to one computational concept, when in fact that is not the case. A close look at the definition of the term in section 86 and the definition of recomputed adjusted gross income in section 85 reveals differences.
* * * * *
(b) Taxpayers to whom subsection (a) applies
(1) In general. A taxpayer is described in this subsection if—
(A) the sum of—
(i) the modified adjusted gross income of the taxpayer for the taxable year, plus
(ii) one-half of the social security benefits received during the taxable year, exceeds
(B) the base amount.
(2) Modified adjusted gross income. For purposes of this subsection, the term “modified adjusted gross income” means adjusted gross income—
(A) determined without regard to this section and sections 135, 137, 221, 222, 911, 931, and 933, and
(B) increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.
Does it need to be this complicated? Not necessarily. The reason that there is a need for recomputing or modifying adjusted gross income is to get a measurement of a taxpayer’s income that is closer to economic income than is adjusted gross income. Adjusted gross income reflects a long list of exclusions, so that a taxpayer with substantial economic income might have an adjusted gross income that is much lower. Because Congress uses adjusted gross income as a benchmark to determine whether a taxpayer’s economic situation is “low enough” to warrant access to gross income exclusions intended to assist those with “low income,” it can bring within the exclusion taxpayers with high economic income. To block those taxpayers from taking advantage of the exclusion, Congress creates another benchmark.
The complexity could be reduced by eliminating many of the exclusions, particularly those subject to some sort of adjusted gross income limit, and in turn lowering tax rates for taxpayers with lower incomes. Not only would that reduce complexity by removing the words and efforts required to determine if an exclusion applies, it would also simplify the need to play with adjusted gross income definitions because there would be fewer exclusions requiring a redefined adjusted gross income and fewer adjustments needed to reflect exclusions in the process of redefining adjusted gross income for purposes of computing the exclusion.
Wednesday, April 07, 2021
Reader Morris posed these questions: “Was the man accused of stabbing a fake tax preparer, a ghost preparer, an unlicensed tax preparer, a licensed tax preparer, etc.? How would you describe the stabber? Do we have enough facts to describe the accused stabber? Does it matter what you call the stabber?” My response included the following points. First, we don’t know if the perpetrator held himself out as a tax return preparer and was engaged in the business of preparing taxes or if he simply helped in some minor way. We don’t know if there was an agreement in place for payment or whether the expectation of payment arose from some internalized sense of expectation. We don’t know if the perpetrator was licensed as a tax return preparer. No, we don’t have enough facts. Nor does it matter what terms are used to describe the perpetrator.
But if we assume the perpetrator was a tax return preparer, that is, he did enough to assist the victim to be treated has having contributed to the filling out of the return, the story brings up the flip side of the situation described in my previous post. Yes, it’s shocking to learn that a tax return preparer assaulted a client. It’s shocking in part because it is rare. Yet the flip side, unfortunately, is not so rare. Clients attack tax return preparers, for a variety of reasons, particularly unhappy with the bad news received from the preparer. Clients expecting a large refund don’t want to learn that their refund is small or non-existent. Clients expecting a refund don’t want to learn that they need to pay additional taxes.
Curious, I did a bit of research. I looked for instances of tax return preparers attacked by their clients. I found two, but did not try to create an exhaustive list of all such events. The point can be made with these two stories. According to this story, an H&R Block customer assaulted an H&R Block employee because he was “so upset about his taxes.” He “pushed his tax man to the ground and tried to choke him.“ The customer was charged with third degree assault. According to this report, a tax return preparer’s client and the client’s brother asked the preparer to meet with them at LA Fitness “to discuss the progress of client’s tax returns.” The report continues, “During (the meeting), the client and his brother attacked the victim, then burglarized his vehicle of $700 cash.”
Reader Morris quoted my statement in my earlier post, in which I wrote, “If people who wanted to be tax return preparers were required to obtain a license, would a background check on the gun-toting preparer have turned up the previous conviction? Would it have led to a denial of the license?” and then asked, referring to the truck stop story, “Would any regulation, law, or licensing requirement have prevented the stabbing?” My answer is no. Though perhaps licensing tax return preparers would push out unskilled preparers and thus reduce the number of instances in which a client is upset, licensing preparers does not regulate nor significantly affect the attitudes and behavior of their clients. Licensing is not designed to prevent crimes, as that is the role of criminal law statutes. There already are laws prohibiting stabbing.
Reader Morris observed, “Sometimes money, emotions, or being in the wrong place will override any licensing scheme.” That is very true. Yet the fact that licensing tax return preparers won’t identify violence-prone clients, it should identify, and keep out of the return preparation business those who want to be preparers but who bring a history of previous violent behavior.
Of course, a point that I often make on social media is that the underlying problem of violence reflects the sorry state of American mental health care. Identification, treatment, and prevention are insufficiently funded, inadequate in terms of outcome, and too often ignored. Dealing with these problems is not a matter of licensing. We know that because where licensing of a profession or occupation is required, it does not have any impact on whether or not a client or customer commits violence against the person who is licensed.
Monday, April 05, 2021
In a news release, the Department of Justice announced that it has filed a complain in federal court requesting that two tax return preparers in the Miami, Florida, area, and their business, be enjoined from preparing federal income tax returns for other people. In the complaint, the Department alleged that the preparers “significantly understated their customers’ tax liabilities, . . . that in reporting their customers’ itemized deductions, [the preparers] fabricated or inflated charitable deductions, medical expenses, and employee business expenses,” and that they reported “false or inflated business losses” on their clients’ returns. The two preparers allegedly prepared more than 1,900 returns during 2018 and 2019, and on average understated tax liability by thousands of dollars.
Until and unless an injunction is issued, what is to prevent an unwitting customer from walking into the preparers’ business and having a return prepared? Yes, the IRS maintains a web site where someone can get information on tax return preparers, but as the site warns, “All tax return preparers are not in this directory. This directory contains only those with a PTIN who hold a professional credential or have obtained an Annual Filing Season Program Record of Completion from the IRS.” I looked up the names of the two preparers mentioned in the Department of Justice new release and, not surprisingly, the searches came up empty.
In past commentaries I have offered some advice. In Are They Turning Up the Heat on Tax Return Preparers?, I wrote, “I will simply repeat what I have written several times in the past: ‘The lesson at the moment? Choose a tax return preparer as carefully as choosing a surgeon or child care provider. In other words, do research, talk to friends and neighbors, look at online reviews, and interview the preparer.’” I had shared that advice earlier in More Tax Return Preparation Gone Bad and Another Tax Return Preparation Enterprise Gone Bad. In Need a Tax Return Preparer? Don’t Use a Current IRS Employee, I noted, “[I]t is best to do some background checks and research just as one would do when looking for a physician or roofer.” In When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, I elaborated:
What’s a taxpayer to do? Talk with relatives, friends, and business associates. Ask them to describe their experiences with the tax return preparer that they use. Seek out a tax return preparer who has been preparing the other person’s returns for many years free of problems. Beware of the advice to use a tax return preparer who has been used only once, or even not at all. Look at reviews on various web sites. Google the name of the tax return preparer. If the preparer is a company, ask for the names of its owners and managers, and google those names. If the return that is prepared is “too good to be true,” don’t agree to its being filed, but ask for a copy and take it to another preparer for a second opinion. If it’s good to go, return to the original preparer and approve the filing. If it’s not good to go, file a complaint about the preparer with the IRS, and seek a fee refund from the original preparer.Because it is unlikely that tax return preparers under indictment and waiting for trial put “under indictment” signs in their windows or “under indictment” tags on their web sites, it is essential that clients exercise due diligence not only when seeking a new preparer but even when returning to a preparer in an earlier year.
Yet while I was thinking about these situations, I wondered about the taxpayer who neglects to look for warning signs or sees them but ignores them. Why would a taxpayer do that? Because the “deal” offered by the preparer resonates with the taxpayer’s need or desire for a bigger refund. In other words, though I have sympathy for the many victims of tax preparer fraud, who don’t realize what preparers are doing to their returns, I am concerned that taxpayers who use law-breaking preparers but who are aware or should be aware of the fraudulent return items are enabling and thus helping perpetuate the scourge of tax return preparer fraud that is contributing to the shakiness of the tax system.
Put another way, if the first thing that turns up on a google search is “This tax return preparer is great, saved me thousands, got me a huge refund,” don’t stop. Keep looking. That first discovery could have been posted by a friend or associate of the preparer, or even by the preparer. If doing research on a physician can include the name and the word “malpractice,” a search to check on a preparer can include the name and the words “indictment,” “charged,” “alleged,” and “pleaded.” Be careful out there in tax return preparation land.
Friday, April 02, 2021
Yet as complex as a particular income tax system might be, things get even more complicated when multiple tax systems are in play. In the United States, not only must taxpayers deal with a federal income tax system, they also must face state income tax systems in most states. Some taxpayers are subject to more than one state income tax system if they live in one state and work in another. Add to that local tax systems and taxpayers’ heads understandably spin, even if a tax return preparer is doing the heavy lifting.
An example of this complexity can be found in the recent changes to the tax treatment of unemployment compensation. Until this year, the basic rule was simple. Unemployment compensation was included in gross income for federal income tax purposes. Some states also included unemployment compensation in state gross income though others did not tax unemployment compensation. Though the existence of two different rules, taxed and not taxed, creates complexity, it’s nothing like the complexity that has shown up for tax year 2020.
The American Rescue Plan Act of 2021 amended Internal Revenue Code section 85 to provide that the first $10,200 of unemployment compensation is excluded from federal gross income if the taxpayer’s adjusted gross income is less than $150,000. States that automatically conform to the federal tax law automatically adopt this change though a state legislature can choose to amend state income tax law to ignore the exclusion or to cause it to apply to more or less than $10,200. States that already did not include unemployment compensation in gross income are unaffected by the federal change. States that do not conform to federal tax law and states that conform to the Internal Revenue Code as of a particular date earlier than March 11, 2021, and that tax unemployment compensation will continue to do so. It appears that the $150,000 adjusted gross income limit applies in states that adopt the exclusion by conformity, but if a state legislature adopts the exclusion, not only might the amount of the exclusion be different but there may or may not be an adjusted gross income limit and if there is one it might be different from the federal limit. At least one state that does not conform to the federal tax law is administratively permitting an exclusion matching the federal revision. And on top of this, the IRS changed the instructions for computing the limit, causing taxpayers and tax return preparers to learn new rules in the middle of tax season.
So, for example, for 2020, the first $10,200 of unemployment compensation is excluded from gross income in Iowa. In Rhode Island, unemployment compensation will continue to be taxed. Because state rules are changing and some states have not yet finalized their positions on the issue, I am not providing a state-by-state listing, and will leave that to the various commercial publishers that are doing so.
In an increasingly mobile society, the existence of separate rules in 50 states, the District of Columbia, and territories imposes friction on business and commerce. When the nation’s population was relatively isolated, and people’s employment and businesses generally confined to one state, it did not matter much that different states had different rules. Times have changed. Though it is understandable that states would want to impose different rates of taxation, to define income differently makes it difficult for taxpayers to find any sort of consistency in the concept of gross income or taxable income. All states agree with the federal income tax principle that the receipt of loan proceeds does not constitute gross income because the recipient is not wealthier. But unemployment either is income, and ought not income either be taxed or excluded from taxation on a consistent basis? Differences in the answer to that question creates complexity. That complexity is made worse when the rules change, and change with respect to amount that can be excluded, and change with respect to the adjusted gross income limit on the exclusion.
The major point is that the existence of multiple applicable tax systems compounds complexity orders of magnitude beyond the complexity created by any one tax system alone. Though most tax professionals understand this problem, most taxpayers tend to focus their complaints about tax complexity on the federal system even though some state tax systems alone are at least as complex as the federal system. States that conform to the federal system without date limitation minimize this complexity but do so in the face of criticism that they are “giving up independence” or “relinquishing sovereignty to Washington, D.C.” States that do not conform to the federal system or that do so subject to a date limitation impose additional compliance costs on their taxpayers for the sake of some abstract sense of “independence.” Though the voters in such a state can support or reject that approach when they go to the polls, the nonresident taxpayers do not have representation in the legislature in such a state.
Tax complexity is undesirable, much of it is unnecessary, too much of it arises from political rather than public benefit pressures, and a good bit of it could be reduced or eliminated through careful consideration and review of federal and state income tax laws. To paraphrase what I wrote in Tax Filing Deadlines: Theory and Practice in the connection with the extension of the federal filing deadline, “Though advocates of states’ rights champion the notion that states can serve as ‘living laboratories’ for experimenting with various public policy initiatives, the reality of modern life is that the interconnection among states is so tightly wound that” having a half dozen or more approaches to the taxation of a particular transaction does more harm to taxpayers than the cost to of conforming to the federal system.
Wednesday, March 31, 2021
When I titled the last post “Tax Return Preparer Fraud Extends Beyond Tax Returns” I didn’t think I would need to title the next tax return preparer commentary as I have. Yes, now comes news of a tax return preparer whose bad behavior went far beyond fraud. According to this report, a tax return preparer in Houston, Texas, was caught on camera “pulling out a gun on several of her clients.” During the chaos, one of the clients was injured. The preparer was, at the time of the report, in jail.
The ruckus was filmed by Marquita Boyle, a client of the preparer, who went to the preparer’s office after she learned she was being audited by the IRS. She went to the preparer’s office to “look over her paperwork after noticing some discrepancies” between what was on the return and the information she had given the preparer. When she arrived, the preparer was arguing with other clients. The preparer pulled out a gun, cocked it, and pointed it at another client who was upset about a refund. At some point the preparer was blocking the door with the gun, so Boyle decided to pull out her phone and record what was happening “because she didn't know what else to do.” When the preparer noticed that Boyle was recording, she grabbed the phone, hit Boyle on the head with it, and tried to delete the video. The preparer then threw the phone at a file cabinet and the phone slid across the floor. However, deleting a video on an iPhone simply moves the video to another folder, so eventually Boyle was able to recover it.
Law enforcement had been called, and when officers arrived they arrested the preparer. She was charged with “multiple charges, including aggravated robbery and assault.” In 2012, the preparer “was sentenced to more than four years in federal prison for her part in a multi-million dollar heist at an ATM servicing company.”
In the meantime, “Boyle was taken to the hospital in an ambulance.” From the accompanying video, she seems to be alright though she did mention some eye and headache problems. Boyle explained that she still needs to deal with the IRS audit and resolve her tax issues.
If people who wanted to be tax return preparers were required to obtain a license, would a background check on the gun-toting preparer have turned up the previous conviction? Would it have led to a denial of the license? Of course, tax return preparers are not licensed, and attempts to license them meet with opposition grounded on concepts of free enterprise, free markets, individual liberties, and distaste for government regulation. There also is the question of whether any tax return preparer licensing should be overseen by individual states or by the federal government. And if a federal license were required to prepare federal returns but a state license to prepare state returns, it could indeed create the sort of mess that those who oppose regulation use as examples of why regulation supposedly is bad. Perhaps a private group could license preparers in a manner similar to how the AICPA enrolls accountants, but that solution would probably increase what preparers charge and would not remove from the marketplace preparers who are not licensed, nor would it persuade people to refrain from using unlicensed preparers.
Monday, March 29, 2021
According to the report, almost 900 vehicles from 14 states and the District of Columbia participated, driving nearly 3.13 million miles across 42 states and Canada. If the hypothetical fee had been in place, the average driver would have paid an additional $7.50 per month compared to the gasoline tax. This is a consequence of both assumed administrative costs of phasing in and administering the fee and the effect of imposing the same fee on all vehicles regardless of fuel efficiency. An ideal mileage-based road fee would adjust not only for vehicle weight but also for fuel efficiency, to account for both the structural impact of road use and the environmental impact of road use.
The surveys revealed that participants’ concerns about privacy dropped 49 percent from the pre-pilot survey to the post-pilot survey. Privacy concerns are one of the most frequently cited reasons given by those who oppose or are leery of the mileage-based road fee. Of course, concerns about a mileage-based road fee onboard module disclosing a person’s location seem unwarranted considering that almost everyone walks around with an iPhone or similar device that constantly tracks location or makes it possible to identify location after the fact. Those who continued to worry cited concerns about the onboard module letting law enforcement know they were speeding.
The report also includes much more information, so I recommend those interested in the concept read the report. The report, and the results it provides, dovetails with the points I have been making for years in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, Mileage-Based Road Fee Meets Interstate Travel, and If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?>.
The report, in suggesting how to create support for a shift from traditional highway funding sources to a mileage-based road fee, notes that “Change is Hard.” Indeed. Most people, but for the most adventuresome, resist change. Examples abound. Someone tries to introduce a child, spouse, companion, or friend to a new food and very often the resistance is met with phrases like, “Try it, you’ll like it.” And often, the person tries it, and discovers that, indeed, they do like it. Change is hard because of the fear of the unknown, the comfort level of the known, and the lack of confidence in the ability to adapt.
What the Coalition’s surveys and focus groups demonstrate is that a person’s perception often changes when the person moves from an observer or a theoretical contemplator to a participant. That’s not news. What is news is the groundwork that these pilot programs are building. I suggest that there should be more pilot programs, throughout the nation. Instead of 800 participants, there should be thousands and tens of thousands. As participants share their reactions, which surely will parallel those of the participants in the pilot project of which I was a part, others will become less resistant, less afraid, and more willing to try it to see if they like it. It works that way with new restaurants, new ice cream flavors, new fashions, and new movies. It should work that way with the mileage-based road fee. Try it. You might find out, probably will find out, you like it, and like the improved transportation infrastructure it provides.
Friday, March 26, 2021
The editorial listed the requirements for an alternative to current gasoline tax funding. Specifically, the “funding can’t be regressive, must raise more money than the gas tax, and not disincentivize a move to electric cars.” The editorial then claimed that most of the options, such as a “miles-traveled tax” poses the challenge that it “won’t bring in out of state dollars like the pumps in Pennsylvania’s gas stations do.”
The claim that the mileage-based road fee does not “bring in out of state dollars” is bizarre. That would happen only if the state imposed the mileage-based road fee only on state residents, an approach not currently taken, for example, with respect to tolls. There is no reason to treat the mileage-based road fee differently from tolls. Instead of paying gasoline taxes, out-of-state drivers would be paying the mileage-based road fee. Perhaps the writer(s) of the editorial think that a mileage-based road fee would apply to Pennsylvania residents not only for miles driven within Pennsylvania but also for miles driven outside Pennsylvania. If that is the case, then the fee would generate more revenue, because currently Pennsylvania does not collect gasoline tax when Pennsylvania residents purchase fuel while in other states. Worse, if Pennsylvania were to charge its residents a mileage-based road fee for miles driven outside the state, and Pennsylvania residents also are charged a similar fee by other states when they are in those other states, there would then be a double taxation problem requiring some sort of complex adjustment to provide some sort of credit and also, perhaps, some sort of reciprocity agreement with other states similar to the income tax reciprocity agreements currently in effect.
For more than 16 years, I have been explaining, defending, and supporting the mileage-based road fee in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, and Mileage-Based Road Fee Meets Interstate Travel.
As I wrote in Mileage-Based Road Fee Meets Interstate Travel, “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.” Thus, it is premature for the editorial writer(s) to jump to the conclusion that a mileage-based road fee would raise less revenue than does the gasoline tax. That conclusion conflicts with the charge given to the Commission to find a way to prevent additional revenue decreases and to increase transportation funding. It also presumes that if the Commission recommends a mileage-based road fee it would not charge out of state drivers for using the state’s highways. One wonders if the comment by the editorial writer(s) is intended to sow the seeds of opposition to a mileage-based road fee. Combining that opposition with the dislike of the gasoline tax raises the question of what the editorial writer(s) would propose as a solution to the decreases in gasoline tax revenues.
Wednesday, March 24, 2021
So what happens when the IRS extends the April 15 filing deadline? It did so in 2020 because of the pandemic. It has done so again, this year, because of the many changes in the tax law enacted in early 2021 but affecting 2020 returns. One answer is that people have more time to gather 2020 information, and tax return preparers have more time to learn about the changes and work on their clients’ returns.
But there is another issue. Most states require taxpayers to compute state income tax liability by starting with federal adjusted gross income and making adjustments to reflect the differences between federal tax law and the state’s tax law. A list of states with this conformity can be found in this Tax Foundation article.
So how can a taxpayer file a state income tax return by April 15 if the federal tax return isn’t ready until sometime after April 15 and, this year, before May 17? They would need to guess, and then perhaps, and perhaps almost certainly, file amended state income tax returns.
That is why states are following the federal lead on the filing deadline. Without trying to examine all of states with individual income taxes based on federal adjusted gross income, I have noticed that the filing deadline has been extended to May 17 (or even later) in California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Maine, Maryland, Missouri, Montana, North Carolina, and Utah, to name some. The list is growing so don’t rely on this paragraph as complete.* Even Pennsylvania, which does not conform to the federal tax law, has extended the deadline to May 17. Why? Because even though the computation of Pennsylvania taxable income does not begin with federal adjusted gross income, the items that are included in Pennsylvania gross income are most easily calculated by looking at those same items as reported on the federal return.
Though in theory states can set their own filing deadlines, and a few actually have regular deadlines later than April 15, as a practical matter, states would generate much misery for taxpayers and tax return preparers if they set deadlines earlier than April 15 or whatever temporarily extended deadline is set for federal income tax purposes. As of the time I am writing this, there are at least a dozen states in which the deadline remains April 15, though some are considering or taking steps to extend it, and the others probably will also join in, perhaps even by the time this post is published.
Though advocates of states’ rights champion the notion that states can serve as “living laboratories” for experimenting with various public policy initiatives, the reality of modern life is that the interconnection among states is so tightly wound that setting a state income tax filing deadline earlier than the federal deadline is impractical notwithstanding whatever theory is used to buttress states’ rights claims. Thus, as a practical matter, the IRS sets the earliest date that an income tax filing deadline can be set in any state. If it turns out that one or more states do not change their April 15 deadline, the consequences of nonconformity with respect to the filing deadline will be apparent very quickly. It’s not pleasant when substantial numbers of taxpayers in a state end up needing to file amended returns.
*There is a list at this lifehacker.com web page, though whether and how often it will be updated isn’t noted, a comment asks about the District of Columbia, and the links are to news reports and not, as I have done, to the official announcement.
Monday, March 22, 2021
According to a Department of Justice news release, a South Florida tax return preparer has been charged by criminal information with wire fraud arising from his scheme to obtain 118 Paycheck Protection Program loans for himself and accomplices. The criminal information alleges that the 118 loan applications asked for more than $2.3 million in loans. On each application the preparer provided false information about the applicant’s previous ear income and expenses and submitted false tax forms with the applications. Before being caught, he and his accomplices allegedly received more than $975,000 in loans because of the fraud.
PPP loan application fraud is widespread. According the news release, more than 100 defendants have been prosecuted in more than 70 cases brought by the Department of Justice. More than $65 million in cash procured through fraudulent PPP loan applications has been seized, together with real estate and “luxury items” bought with the loan proceeds. This does not include prosecutions brought by other offices.
It is unclear whether this is the first PPP loan fraud indictment or criminal information involving a tax return preparer. No, I have not tried to dig up every indictment or criminal information alleging Paycheck Protection Program loan fraud to see if any involved a tax return preparer. There are more than a hundred, probably more. Instead, I searched in a different way and did not find anything.
But does it really matter whether this is the first such instance of a tax return preparer engaging in this specific type of fraud? No. What does matter is whether other tax return preparers will learn of this preparer’s situation and step back from initiating or participating in this sort of fraud, or any fraud for that matter. There also needs to be a stop to people asking tax return preparers to help them file fraudulent tax returns or fraudulent loan applications.
Friday, March 19, 2021
The two stories aren’t about tax fraud. They’re about cheating and misrepresentation in other contexts. What particularly struck me was the revelation of who was involved in the unacceptable behavior.
According to one of the stories, a Pensacola, Florida, woman was charged with hacking a high school computer system in order to alter the votes so that her daughter would be elected prom queen. The daughter also has been charged with participating in the scheme. Worse, the woman who was charged is an assistant principal at an elementary school. Somehow, someone figured out that with more than a hundred votes coming from the same IP address something was wrong. Sure enough, that IP address was tracked to the woman’s phone. By the time the hacking was discovered, the daughter had already been crowned homecoming queen.
In the other story, a woman in Bucks County, Pennsylvania, in an attempt to force several girls from her daughter’s cheerleading squad, faked photos and videos of those girls engaged in illegal activities. She anonymously sent the photos and videos to the coaches of the cheerleading squad and to the girls, urging the girls to commit suicide. Police figured out the source of the photos and videos after being contacted by the parents of one of the victims, who was receiving harassing messages from an anonymous number. During the investigation, the parents of two more girls reported similar messages. Authorities traced the phone number through a website that sells phone numbers to telemarketers, and then tracked the number to an IP address to the woman’s computer. In this instance, the daughter was unaware of what her mother was doing, but surely she now knows. One of the parents suggested that he thinks the mother did what she did in response to he and his wife telling their daughter “to stop hanging out with” the woman’s daughter because of concerns about the daughter’s behavior.
So the question for me is a simple one. How can we expect children to grow up knowing that fraud, whether manifested by lies, cheating, manipulation, or other sorts of misrepresentation, is wrong when they see a parent engaging in that sort of activity, and are in some instances encouraged or even compelled to participate? If someone grows up thinking that it is acceptable to lie and cheat, to commit fraud and deception, how can we expect that person to tell the truth and to file fraud-free tax returns, let alone engage in truthful business practices and honest political campaigning?
In Clues into the Root Causes of Tax Fraud?, I wrote, “Perhaps it is inevitable that some people will lie, commit fraud, and make misrepresentations.” I deliberately used the word “perhaps” because it does not need to be so. Children are born without the ability to lie or cheat or deceive. They learn those behaviors, from a variety of sources. Unless those influences are counterbalanced by parents and teachers, the child will continue down a path of deception and manipulation until and unless consequences are encountered, and too often those consequences are a mere bump in that path. Attempts to steer the child in the correct direction are obstructed by, as I wrote, “[t]he willingness of those who hear or read lies, fraud, and misstatements to accept them, to ignore them, or to republish them” because that behavior “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.”
So what happens if the mothers in the story stay on a path of truth? A daughter doesn’t become prom queen. The mother teaches the daughter how to lose, and to lose gracefully. She teaches her daughter how to change so that she has a better chance of winning honestly the next time she enters a contest or race or other competition. So what happens if the mothers in the story stay on a path of truth? A daughter learns that her behavior drives away friends. The mother teaches the daughter how to behave appropriately so that friends’ parents don’t cut off the relationships because of the daughter’s behavior.
Hopefully, these two daughters learn a lesson when they realize that their mothers’ behaviors led to arrest and probably conviction and even worse consequences. Perhaps the mothers get back on the correct path. Hopefully if any of them decide to become tax return preparers their names won’t show up in indictments.
How sad. The only way to keep children from growing up to be fraudsters, con artists, and cheaters is to set the correct example.
Wednesday, March 17, 2021
The announcement by the Department of Transportation that it has entered into agreements with respect to the nine bridges has triggered an outcry of opposition from commuters, truckers and trucking companies, and, interestingly, state legislators. The biggest concern, of course, is cost, though there also are predictions that the tolls would force traffic onto alternative roads not subject to tolls. The legislator who chairs the state Senate’s Transportation Committee explained, according to this report, wants to stop the plan or at least require legislative approval before it is implemented. He “questioned whether the process used to approve the department’s plans were really envisioned by a 2012 law that created it,” and the “we see how PennDOT is attempting to use this for this size and scope of this large of a plan, and in my opinion, the legislation's intent may not have been of this size and scope back then.” Here’s some free advice for the legislator and those he claims support his position. Read Act 88. Find any limitation on the size, scope, or dollar amount of any of the projects.
As readers of this blog know, I am not a fan of these public-private partnerships. I have explained my objections to public-private partnerships and privatization of public functions in posts such as Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, Privatization is Not the Answer to Toll Bridge Problems, When Potholes Meet Privatization, and Will Private Ownership of Public Necessities Work? These public-private partnerships don’t work out well. They are the product of legislative attempts to find funding without raising taxes while generating revenue for their private sector donors, with hopes that the outcry against tolls and similar charges will be directed against the private entity involved in the project. Of course, voters can’t control, vote out, or do much of anything with respect to the private entity, whereas legislators see themselves at risk of losing the next election, something on which they focus too much. So part of me reacts with agreement that the public-private projects in question should be examined, but part of me is annoyed that the legislature which created the monster is now, and only now, beginning to understand what I warned the legislature not to do. And, of course, to claim that the problem is the Department of Transportation’s use of Act 88 rather than the Act itself is downright absurd, because everyone who understands Act 88 has concluded that the Department of Transportation’s bridge initiative is within the law. As usual, legislator politicians are trying to blame others for what they, and their predecessors, have done. Of course, if the legislature wants to amend or repeal Act 88, it can.
Granted, there is a major problem that the Department of Transportation is trying to solve. To fix the nine bridges in question will require roughly $2 billion. The Department does not have that funding. If the bridges are not fixed, one or another or two or all of three things will happen. First, people will be injured and perhaps die, and property damage will be incurred, as these bridges partially or totally fail. Second, at some point the bridges will be closed, creating even more congestion on those alternative routes than would theoretically be created by tolling. Three, funds will be diverted from other projects to fix the bridges, causing closures, deaths, injury, and property damage on the projects postponed or abandoned to fix the bridges in question.
Of course there is an answer. Again, readers of this blog know what it is. It’s the mileage-based road fee. During the past 16-plus years, I’ve been explaining, defending, and supporting the mileage-based road fee, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, and Mileage-Based Road Fee Meets Interstate Travel. Instead of dealing with the transportation infrastructure crisis in a piecemeal manner, with financial band-aids here and patchwork repairs there, the legislature needs to focus on its obligation as a collection of public servants charged with serving and protecting the state and its residents by moving transportation funding out of the nineteenth and twentieth centuries and into the twenty-first century. Transportation funding approaches that once worked no longer do, because of changes in demand for transportation infrastructure caused by population increase and density growth, shifts in vehicle technology from fossil fuel propulsion to electric, hydrogen, and other energy sources, and decade after decade of legislative failure to respond while transportation infrastructure has continued to crumble. The time has come for the legislature to pay the price for its inadequacies, and that requires more than fiddling around with a nine-bridge repair initiative.
So the answer is, yes, ultimately the Pennsylvania legislature has the power and authority to determine whether tolls can be imposed on those bridges. But the legislature also has a responsibility to provide safe and efficient non-congestive transportation infrastructure for the Commonwealth. It’s time for it to live up to its obligations and if its members cannot or will not do so, it’s time for them to step aside and let others take on the responsibility and its concomitant power and authority.
Monday, March 15, 2021
In one of those posts, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, describing criminal charges filed against a tax return preparer who was a former IRS employee, I pointed out that IRS employees are prohibited by IRS rules from “Engaging in the preparation of tax returns for compensation, gift, or favor.” According to Seattle pi story to which reader Morris directed my attention and the underlying Department of Justice press release on which the story was based, a current IRS employee did worse than prepare tax returns for others.
According to the indictment, the IRS employee filed false tax returns for taxpayers in the Memphis, Tennessee, area. The employee claimed more than $500,000 in false deductions on those returns that inflated the refunds on those returns. Somehow, the employee was able to “take a portion from the refunds and transfer the funds to her personal bank account.” The indictment also states that “Many of these [taxpayers] were unaware of the false deductions discovered on their tax returns.” So my guess is that the taxpayers received the refunds they were expecting and the IRS employee pocketed the inflated portion of the refund.
Yet the statement in the indictment that “many of the” taxpayers whose returns were altered were unaware of what was happening gave me pause. Why did the indictment not say that “all of the taxpayers” were unaware or “none of the taxpayers were aware”? It suggests that perhaps a few or some of the taxpayers whose returns were altered were, in fact, aware and perhaps even participated in the fraud. Perhaps the indictment’s language was chosen carefully because other indictments are pending.
The situation is deeply concerning. It means that even those who follow the advice of not using a current IRS employee as a tax return preparer are at risk of having their tax returns altered by an IRS employee without knowing it has happened. Unless there is more to the story, such as some sort of software glitch or other circumstances limiting the opportunity to a narrow set of returns, anyone who files a return, whether through a tax return preparer or as a self-prepared returns using software or even pencil and paper, is at risk of having their return altered by an IRS employee. Though receiving a refund different from what is expected would be a red flag, what was allegedly done by the IRS employee in question would not tip off the taxpayer that the return had been altered. Is there a solution? Would it make sense to let taxpayers look at what the IRS thinks their return contains? Would that not simply amount to building another gateway into IRS information that would create more opportunities for the hackers of the world?
In some ways, what the indictment alleges to have happened is not unlike the store employee who copies and uses a customer’s credit card information, or the hacker who obtains the same information from a web site used by someone to make a purchase. Consider how often these breaches are discovered but not disclosed to the customer. Is the IRS notifying the taxpayers whose returns were altered that their returns were altered? Is the information in the IRS database being fixed so that the risk of these taxpayers being audited for the current or future filings is not increased on account of the tampering?
It’s not that fraud is a child of modern digital technology. Fraud and forgery have existed as long as there have been humans on the planet. But modern digital technology makes fraud both easier to commit and, in many instances, easier to detect. But preventing and detecting fraud requires both investment into cybersecurity that those addicted to the bottom line are unwilling to make and dedication to the education of programmers and engineers with the ability to design systems that are highly resistant to tampering, hacking, and fraud. And even that is not enough. What is needed most of all is investment in culture that disfavors cheating, lying, fraud, and hypocrisy and that elevates honesty, integrity, and truth. Until that happens, the risks not only of known dangers but also of unknown dangers remains high.
Friday, March 12, 2021
The latest chapter appears in this Orlando Sentinel story. In my previous commentary, I noted that Joel Greenberg was accused of “being out past his curfew” and traveling beyond a restricted travel zone by going to Jupiter, Florida, a town outside his restricted travel area. I concluded the commentary by predicting that the story “isn’t yet finished.” And indeed it wasn’t.
According to the Orlando Sentinel story, police in Jupiter, Florida, were called to the condominium of Greenberg’s mother-in-law looking for his wife. His mother-in-law called the police, explaining that he had arrived “uninvited.” She “asked that he be removed” from her condominium. His wife, who was not at the condominium, “told police that she left the couple’s Lake Mary home to ‘take a break from the stressful situation with Joel.’” How did Greenberg figure out where she went? According to the story, he “tracked her using her SnapChat social media account.” I don’t use SnapChat so I don’t know how that works, but perhaps somehow it reveals the location of a SnapChat user, either automatically or voluntarily. At that point, Jupiter police did a background check and discovered that Greenberg was on probation related to one of the charges pending against him. He was not arrested because Jupiter police were unable to contact his probation officer “to determine if he was allowed to travel to Jupiter.” Greenberg did leave his mother-in-law’s home “without incident.” Thereafter, a warrant was issued for his arrest because he violated the terms of his probation, he was put in the Seminole County jail, and ordered to remain there. Later, he was released into the custody of U.S. marshals. According to the Orlando Sentinal story, “A spokeswoman for the U.S. Marshals Service said she could not answer where Greenberg is being detained or why he was transferred out of the Seminole Jail.”
It is alarming, sad, disappointing, and bewildering that a public official, responsible for serving the public, not only behaved in ways that generated a long list of criminal charges and civil litigation, but has continued to pile on problem after problem. That he was a tax collector is what initially brought the story to my attention, though he surely isn’t representative of the thousands of tax collectors across the land, and similar situations have afflicted public officials who are not tax collectors. What puts the situation in the spotlight is the fact that tax collectors are an important “face” of governments encountered by the public, and particularly so in Seminole County where the tax collector not only collects taxes but manages a long list of other services as I’ve pointed out in previous commentaries on the matter. And, again, surely the story is far from finished.
Wednesday, March 10, 2021
A recent story from the Patriot-News shares what might be a novel account of how tax fraud was discovered. In September of 2018, police were called to the home of a married couple who were shot by their daughter’s boyfriend. Upon arrival, they noticed and followed a “trail of bloody footprints through the house to an outside pool house.” What did they find in the pool house? The found “a garbage bag of cash.” The police obtained a search warrant, and found “a large gun safe holding more bundles of cash.” The story doesn’t explain the details of what happened next, but at some point thereafter the IRS and other law enforcement authorities determined that the couple who had been shot had failed to report more than $800,000 of gross income on their tax returns. It turns out that the couple reported income from checks and credit card payments to their business, but did not report the cash receipts. At some point the couple paid the almost $300,000 of taxes that they had avoided, presumably along with interest and penalties. The husband “pleaded guilty to four counts of tax evasion” and his wife “pleaded guilty to four counts of aiding in the preparation of false tax returns.” Both were sentenced to one year in prison, and the husband also was sentenced to a year of supervised release and a $40,000 fine.
The strange twist to the story is that the daughter’s boyfriend who shot the couple was charged with aggravated assault, but the local district attorney dropped the case nine months after the shooting. According to this York Daily Record story from June 2019, the charges were dropped after the prosecution concluded it had insufficient evidence to prove the case after a judge suppressed some of the evidence. The shooter’s lawyer explained that the defense position had always rested on an assertion of self-defense in a “domestic situation.”
Monday, March 08, 2021
Now he is back in the news. According to this story, Joel Greenberg, the former Seminole County tax collector, was arrested. The first line of the story, explaining that he was arrested because “he violated the conditions of his release on bail by traveling to Jupiter,” gave me pause until I remembered that there is a town in Florida called Jupiter. Greenberg was out on bail while waiting for his federal trial. He is charged with “stalking * * *, unlawful use of means to identify another person, production of identification and false identification documents, aggravated identity theft, sex trafficking of a child and violating the Driver’s Privacy Protection Act.” He has entered a plea of not guilty to all of the charges.
In addition to traveling beyond a restricted travel zone, he also is accused of “being out past his curfew.” When Greenberg was brought into court, his attorney explained that the travel was “due to family matters.” Greenberg wanted to speak, but his attorney would not let him. That was probably a good decision.
According to the story, his “trial was set for March” but it might be delayed because Greenberg hired a new attorney. The Seminole County tax collector story isn’t yet finished.