Los Angeles County Assessor John Noguez finds himself facing more felony counts in the ongoing bribery/tax evasion scandal rocking the Los Angeles County Assessor’s Office. The new charges relate to three more building where Mr. Noguez and consultant Ramin Salari allegedly took bribes to lower the building’s assessments. Both Mr. Noguez and Mr. Salari pleaded not guilty to the new charges.
The last time I wrote about this scandal was last October. The preliminary hearing is set for January.
The IRS is part of the Executive Branch of government. The Executive Branch can’t write law–they can issue regulations based on laws passed by the legislative branch (Congress) and then only when Congress authorizes it. There’s an issue percolating in the courts which is likely going to cause a huge headache throughout the country: tax credits for federal health care exchanges.
Today, a federal court judge in Washington denied the Administration’s request to stop a lawsuit challenging the IRS’s interpretation of the ability to give tax credit subsidies on federal health care exchanges. US District Judge Paul Friedman denied a preliminary injunction but did order the case tried on an expedited basis; he said that he expects to issue a ruling by February. Earlier this year a judge in Oklahoma also denied an Administration dismissal request in a similar case. There are two other cases filed on this matter.
Jonathan Adler of the Volokh Conspiracy notes the issue succinctly:
The IRS rule contravenes the plain text of the PPACA, as the statute only authorizes tax credits (and subsidies) for the purchase of insurance in an exchange “established by a state” under Section 1311 of the law…Supporters of the IRS rule claim that Congress could not have intended that Americans in dozens of states would be unable to obtain tax credits to help them purchase insurance. They’re right. Congress intended for every state to create its own exchange, as PPACA supporters said time and again, but states refused. Now that their assumption has been proven wrong, this does not provide an excuse to rewrite the plain statutory text.
This matters because in tax when a statute says “x,” it’s “x.” A good example of this is some of the ludicrous ways the Alternative Minimum Tax impacts individuals. Judges have stated in their rulings that these make no sense but because it’s written into the statute, there’s no choice on this matter: Until Congress changes the law, they’re stuck. I expect the same thing to happen here. Of course, Congress could change the law but the chance of that happening is equivalent to the chance of snow in Las Vegas in July.
Assuming that this suit is successful, it will strike at the heart of the mandates in the law. Assuming this ruling comes in February, there will be even more of a mess with the law. The ObamaCare rollout has hardly been something one could call “smooth.” Proponents have been hopeful that the light they’re seeing is the end of the tunnel. To me, it looks like an oncoming train.
Just the news that every tax professional wants to hear: The 2014 tax season (2013 tax returns filed next year) will be delayed one to two weeks. It appears the start date for processing will be sometime between January 28th and February 4th (instead of January 21st).
The IRS gives as the reason the government shutdown and I have no doubt they’re correct. In prior years, I remember that all IRS computer systems going down on Columbus Day weekend (which is a federal holiday) to begin updating the IRS computer systems for the next year’s filing season. This didn’t happen this year as the employees who would have done that work weren’t working. So I do think the IRS is behind, and that this is a direct result of the shutdown.
This will be the second straight tax season that begins late. The just concluded tax season began late because Congress didn’t enact needed legislation until January 1, 2013. Unfortunately, there’s a chance that the upcoming tax season could be delayed even further if the government shuts down again. The current funding will run out on January 15, 2014. I don’t expect that to happen…but we’re dealing with Congress and, well, we’ve seen them in action (or is it “in inaction”) before.
One of the more humorous (to me) aspects of the Loving case was hearing the IRS argue that it has no means of disciplining rogue tax preparers. That’s just not true. If I deliberately prepare a bad return, I can be sanctioned and penalized. If I prepare a series of bad returns, the Department of Justice can attempt to have me barred from preparing federal tax returns. As noted at the end of one of the two press releases I’m linking to in this article, “In the past decade, the Justice Department’s Tax Division has obtained more than 500 injunctions to stop tax fraud promoters and tax return preparers.”
Anyway, Tobias Elsass had two businesses that prepared tax returns: Fraud Recovery Group Inc. and Sensible Tax Services Inc. As the DOJ noted, “The Court found that Elsass and Fraud Recovery Group have continually and repeatedly promoted a nationwide scheme falsely informing their customers that they were entitled to claim large theft loss tax deductions, and then preparing the tax returns that improperly claimed such deductions.” If you have a casualty loss you are absolutely allowed to claim a deduction for it (subject to income restrictions)…but you must actually suffer a loss. It appears that Mr. Elsass skipped that minor detail in preparing clients’ returns. I’ll let the DOJ take it from there:
The opinion notes that hundreds of theft loss deductions claimed on tax returns prepared by Elsass and his companies were improper, because the financial losses they sought to deduct were merely the result of company mismanagement instead of criminal conduct – as Elsass knew. Elsass and his companies were also aware that the Internal Revenue Service (IRS) was disallowing such claims, but filed similar claims for other investor customers in any event, in the hope that the later filings would escape IRS scrutiny…
The court also determined that Elsass had intentionally engaged in “incompetent or disreputable” behavior not becoming a tax professional. Based on the record before it, the court found that Elsass seemed “perfectly willing to lie and deceive, even to the extent of possibly committing perjury, in order to advance his own interests.” Accordingly, the “sheer magnitude and variety of the Defendants’ transgressions” made permanent injunctive relief appropriate.
Meanwhile, the DOJ asked that another preparer in Mississippi be barred from preparing tax returns. Danee Aikens’ Comprotax Service is accused of falsely increasing household help income so that the Earned Income Credit could be taken and that phony education credits were included on clients’ returns. The DOJ believes the loss to the government could exceed $7 million from this case.
I’m all for the IRS and DOJ going after the dirty underbelly of my profession. They have tools to do so…as they themselves pointed out at the end of both of these press releases.
The Bay Mills Indian Community (Tribe) has a reservation on Michigan’s upper peninsula. The tribe decided to open a casino in Vanderbilt, Michigan–over 100 miles from the reservation. Is that legal?
The tribe purchased the land and argues that since they purchased it with trust funds, it becomes tribal land and a casino can be placed on the land. The tribe also believes it to be immune from lawsuits (sovereign immunity). The State of Michigan disagrees. The case will be heard on December 2nd; a decision should be rendered by next summer. This case will go a long way in deciding on what the limits are to Indian casinos in the United States.
44 days isn’t much time. It’s about a month and a half. Yet in the bizarre world of the Affordable Care Act (aka ObamaCare), it’s a big deal. Over the coming weeks I’m going to be looking at various provisions in light of the current law and the current difficulties–perhaps impossiblities–of individuals to actually sign up and obtain a policy. Consumer Reports is suggesting that perhaps a solution to signing up is to wait a while–at least a month; hopefully by then the software glitches will be gone.
Anyway, back to the point of this post, 44 days. Nancy Pelosi famously said, “But we have to pass the bill [ObamaCare] so that you can find out what is in it.” Well, there are some interesting deadlines in ObamaCare:
December 15th: Date you need to be enrolled by for coverage to take effect on January 1, 2014 [1];
February 15, 2014: Date you must have coverage by in order to be exempt from the Individual Mandate Tax; and
March 31, 2014: Final date to enroll for calendar year 2014.
The Obama Administration was unaware that someone who enrolls on February 16, 2014 will be subject to the individual mandate penalty tax until it was pointed out to them. The penalty for 2014 is $95 or 1% of Adjusted Gross Income, whichever is greater. I suspect for much of my client base the 1% of AGI will be greater, perhaps far greater than $95. Consider an amateur gambler who has $100,000 of gambling wins and $100,000 of gambling losses and who makes $100,000 of salary. He’s looking at a $2,000 penalty. Still, given the cost of health insurance under ObamaCare that might be a more financially prudent choice.
But do be aware that the true deadline is February 15th, not March 31st. It’s yet another quirk in the law.
[1] It is unclear if dates that fall on weekends–December 15th falls on a Sunday–cause the deadline to be extended a day. As best as I can tell, the answer to that is no…but I did not read the 3,000 page legislation.
It’s an off year for elections, but Coloradans have a chance to help neighboring states: Amendment 66 on the state ballot would increase taxes in Colorado. Colorado’s current income tax is a flat 4.63%; the ballot initiative would increase this to 5% on the first $75,000 of income and 5.9% above that. Shock of shocks, the initiative is supported by teachers…because they want pay increases because they want better education for children through lower class sizes and better paid trained teachers.
The initiative only increases individual income taxes, but today most businesses are flow-through entities. These are partnerships, LLCs (my business is an LLC), and S-Corporations. They pay taxes on the individual level and generally not on the corporate level. What happens when taxes goes up? Let’s put it bluntly: It’s not good for the economy overall. Private industry is far more efficient than the government, so when taxes go up, overall the economy suffers. The Tax Foundation today released a report that mirrors my thinking on this.
The voters of Colorado will get to decide this on November 5th.
One of my clients a few days ago asked me jokingly–she’s been a client for years, so I know when she’s joking, “If I had a stream of illegal cash income, do I have to declare it on my tax return?” Of course you do–illegal income is just as taxable as legal income. From as far back as Al Capone to others more recently, such as Johnny Ray Taylor, the government has found that crooks who make illegal income tend to also not report that income; sometimes its easier to get the crook for tax evasion than the underlying offense.
Everyone’s heard of Al Capone, but who is Johnny Ray Taylor? Well, Mr. Taylor is a resident of nearby Henderson whose main source of income appears to have been pimping. Indeed, he’s apparently going to soon plead guilty state felony charges of pandering and living off of prostitution. Back in May, Mr. Taylor pled guilty to one count of tax evasion. On Wednesday he was sentenced to 25 months at ClubFed, must make restitution of $117,559 to the IRS (what he earned as a pimp), and will then have three years of supervised release. It is likely that Mr. Taylor will be able to serve his state charges concurrently with his time at ClubFed.
…for most of us who file tax returns. The deadline is Tuesday, October 15th at midnight for those on extension. That’s it–there’s no tomorrow (well, there is…but not for filing) with three exceptions (noted below). So what should you do?
1. File a return as best you can. Most true tax professionals are going to be very busy through Tuesday–you are likely on your own (unless you made arrangements; I do have a client coming in the office on Monday but he made arrangements a month ago). The IRS website is quite good; so are most state tax websites. They can help you in what you need.
2. Don’t ignore paperwork because you don’t like it! If you have a 1099 and you don’t include it on your return, the IRS computer will likely figure that out.
3. If you don’t receive a K-1 but you should have, contact the entity on Monday and see if you can get a copy. If the entity has vanished–I have a client where the K-1 issuer is out of business, and the bankruptcy trustee has not filed the entity’s 2012 returns–include what you think should be on the K-1 on your return and include a Form 8082 (Hat Tip: Joe Kristan) to explain what you’ve done and why.
4. If you can’t pay anything or everything, still file the return! If you don’t file, you will get hit with the late filing penalty…based on April 15th! It would be the same as if you had never filed the extension. That penalty can be up to 25% of the tax due on your return. File the return–it’s a no-brainer.
5. File electronically, or use certified mail, return receipt requested. Get proof of your filing. Note that the Post Office is closed on Monday for Columbus Day.
6. If it’s after the Post Office has closed, used an Automated Postal Center (available in many post offices). You can pay for certified mail from these machines, and the date-stamp of the postage will be the date when you purchase the postage. If it’s 11:35pm on October 15th when you buy the postage, it will show up as October 15th on the stamp even if the envelope isn’t picked up until the next day!
7. Three exceptions on the October 15th deadline: Individuals impacted by the flooding in Colorado have until December 2nd to file their returns. Individuals who filed Form 2350 for their extensions (this form is used for individuals taking the Foreign Earned Income Exclusion, and their Exclusion period does not end until after the October 15th extension deadline) have until the date on their Form 2350 to file their returns. And finally, individuals outside of the US on April 15th and who will be outside of the US on October 15th can request a second extension until December 15th (December 16th this year as the 15th is on a Sunday). Note that this request is not guaranteed to be accepted.
8. And don’t forget your state tax returns (if applicable).
The Tax Foundation released its 2014 State Business Tax Climate Index. In what will shock few readers of this blog, the usual suspects remain at both the top and bottom of the list.
First, let’s look at the top states–the best for business:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Washington
7. Montana
8. New Hampshire
9. Utah
10. Indiana
What do these states share? Generally, low taxes (and in the case of some of these states, no income tax). But as the Tax Foundation noted, “But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana, which ousted Texas from the top ten this year, and Utah have all the major tax types, but levy them with low rates on broad bases.”
What happens when you have high taxes, complex taxes, and non-neutral taxes? You end up in the bottom ten:
41. Maryland
42. Connecticut
43. Wisconsin
44. North Carolina
45. Vermont
46. Rhode Island
47. Minnesota
48. California
49. New Jersey
50. New York
Let’s take my home state, Nevada, and compare it with California (my old state) to see why each ranks where they do. The Tax Foundation looked at five taxes: Corporate Tax, Individual Income Tax, Sales Tax, Unemployment Insurance Tax, and Property Tax.
Nevada doesn’t have a corporate tax or an individual income tax, so the state is tied at number one for both. California ranks dead last on the individual income tax. Not only does the Bronze Golden State have the highest state tax rate, there are numerous conformity issues (with federal taxes), and a tax bureaucracy that is hard to work with. California is below average for the corporate tax. This isn’t because California is that good; rather, there are states that are far worse.
Nevada and California rank 40th and 41st respectively on sales tax. Both states have complex systems with rates that vary in different districts. Additionally, both states have fairly high sales tax rates. California significantly outranks Nevada on Unemployment Insurance Tax. Nevada’s tax rate is one of the highest; California’s is relatively low with conformity on the maximum income base for this tax ($7,000). Nevada slightly outranks California on property tax (9th versus 14th). California’s low ranking is because of limits from Proposition 13. It’s something that gives certainty and is probably the third rail of California politics.
What most observers forget is the importance of the individual income tax. Most businesses pay tax through individual income taxes, not corporate taxes. S Corporations, LLCs, LLPs, general and limited partnerships, and sole proprietorships are flow-through entities that are taxed on the individual level. States that provide low rates on individual income taxes generally do better for businesses. While California is known for its entrepreneurs (think Silicon Valley), its tax climate discourages such ventures.
And for those who think that taxes don’t matter, I’m in Nevada as a result of taxes and California’s miserable business climate. Nissan moved its headquarters from California to Tennessee, and taxes were a big factor. For both small and large businesses (and everyone in between), these issues count. The Tax Foundation’s full study is well worth your perusal.