Is Oregon at the Tax Crossroads?

Posted on January 17, 2010 by Russ

The Wall Street Journal editorializes on Friday that Oregon is at the tax crossroads. The Oregon Legislature, dominated by Democrats, voted to increase the state’s top personal income tax bracket to 11% from 9%; they also voted to increase the state’s business income tax to 7.9% from 6.6%. Signatures were gathered and a mail election is underway on whether or not these tax increases actually go into effect.

The Journal notes,

In the last budget, the Democratic controlled state legislature doled out a $259 million pay raise to the government work force, even as the state was facing a near $1 billion deficit. In the last three years, the state has added 25,000 new public employees while losing 40,000 private sector jobs. The union TV ads say the tax hikes are needed to preserve schools, roads and public services.

The 11% income tax rate will make Oregon’s income tax about twice as high as the national average. Businesses in Portland can move across the Columbia River to Vancouver, Washington and pay zero income tax. Oregonians used to argue they didn’t have to pay a state sales tax. But the current tax proposal imposes a first-ever “gross receipts tax” on certain retail and wholesalers. This is a disguised sales tax.

The days of unlimited tax and spend are ending. The election in Massachusetts is demonstrating the anger of Americans towards the Democrats’ tax and spend proposals. We’ll have to wait a couple of weeks to see if Oregonians send a message to their legislature about increasing taxes in a recession.

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IRS Tips on Choosing a Tax Preparer

Posted on January 12, 2010 by Russ

The IRS has come out with its annual list of tips in choosing a tax professional:

1. Check the person’s qualifications Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

2. Check on the preparer’s history Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys.

3. Find out about their service fees Avoid preparers that base their fee on a percentage of the amount of your refund or those who claim they can obtain larger refunds than other preparers.

4. Make sure the tax preparer is accessible Make sure you will be able to contact the tax preparer after the return has been filed, even after April 15, in case questions arise.

5. Provide all records and receipts needed to prepare your return Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.

6. Never sign a blank return Avoid tax preparers that ask you to sign a blank tax form.

7. Review the entire return before signing it Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

8. Make sure the preparer signs the form A paid preparer must sign the return as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

My usual rule of thumb holds: If it sounds too good to be true, it probably is.

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37 More Years for Ed Brown

Posted on January 12, 2010 by Russ

Tax protester Ed Brown received 63 months for tax evasion. You may remember that he decided to barricade himself in his New Hampshire home, fill it with weapons, and tell the government to go somewhere else. As Joe Kristan notes, “Armed holdouts are poor tax planning.” Mr. Brown got 37 years for the weapons charges. Joe Kristan has more.

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Phony Notes but Real Evasion

Posted on January 12, 2010 by Russ

If you’re ever accused of a criminal offense, and you’re under bond (bail), you should show up at your trial. If you don’t, you are certain to find yourself in even worse trouble. Add in allegedly committing tax evasion and making up your own US debt instruments and your trouble is likely to multiply. Such is the case for two Ohio dentists.

Of course, we should start at the beginning. Dr. Bruce Mrusek of Maineville, Ohio and Dr. Bradley Brennecke of Pleasant Plain, Ohio were audited in 2004. The results of that audit aren’t available, but a criminal probe opened following the audit. That in itself says all we need to know.

The problems of the dentists were deep. First, the dentists allegedly transferred assets into their wives’ names to hide them from the IRS. They then allegedly sent phony documents to the IRS to pay their 2002 – 2004 taxes. Now, they didn’t send $1,000, or $10,000, or even $100,000 or $1 million in fake payments.

They allegedly each sent over $19 billion in phony payments. According to a Department of Justice press release, the documents were labeled as “‘Secured Promissory Notes’ to the U.S. Department of the Treasury as purported payment of their tax debts.” They then asked for $9.6 billion of refunds. That takes chutzpah.

Unfortunately for the dentists, the IRS and Department of Justice lack much of a sense of humor regarding payments of fake money. They were indicted on tax evasion, conspiracy to defraud the IRS, and passing fictitious instruments. Dr. Mrusek was also accused of filing false business tax returns. They were released on bond, with the trial set to start on Monday.

But the dentists didn’t show up for their trial. The US Marshals office had no trouble finding the dentists, and they were arrested. They found their way to court today.

The dentists face very lengthy prison terms if found guilty, fines in the millions, and restitution.

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For Sale With Mold

Posted on January 12, 2010 by Russ

Mold inside a building can be a major health issue. Unfortunately, California’s Board of Equalization is housed in such a building. The 24-story building is in a prime, downtown Sacramento location. But leaks and mold abound, and the $15 million that would have fixed up the building has grown into $68 million today. Assemblyman Dave Jones (D-Sacramento) and Senator George Runner (R-Lancaster) are carrying a bill to move the BOE and for the BOE to sell or lease the building.

Of course, would you want to buy a 24-story building filled with mold?

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A Layover of 33 Months

Posted on January 11, 2010 by Russ

In July 2006 I reported on David Carruthers. Mr. Carruthers needed to fly from London to San Jose, Costa Rica. No nonstops were available, so he flew through DFW. The 2-hour layover ended up being 33 months. Mr. Carruthers happened to be an executive at BetOnSports.com, an Internet sportsbetting company. While that was legal in the United Kingdom and Costa Rica, it was (and is) illegal in the United States.

Mr. Carruthers was arrested. His plea bargain deal finally concluded last week; he was sentenced to 33 months at ClubFed for violating federal wagering laws (primarily the Wire Act). Since Mr. Carruthers’ arrest online gambling hasn’t slowed down, but online gambling executives no longer fly through US airports.

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Traficant: Let’s Abolish the IRS

Posted on January 10, 2010 by Russ

Convicted felon and former (and possibly soon-to-be) Congressman James Traficant hit the airwaves. Mr. Traficant was on the radio in Cleveland. While he still hasn’t decided which Congressional race he’ll enter, he did call himself a “bitter man.”

CQ Politics said his targets included everything from the current administration and Congressional leadership, the Federal Reserve, foreign aid, and the Tax Code. Mr. Traficant would like to abolish the IRS and replace our current Tax Code with a flat tax.

As my friend Scott, a resident of Youngstown, continues to state that Traficant will win, we’re likely to hear his trademark “beam me up” in the future. There will be at least one very entertaining Congressional race in Ohio this year.

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Educated in Tax Fraud, Not Education

Posted on January 10, 2010 by Russ

Sometimes you just don’t need to embellish a story. The former Education Dean of the University of Louisville pleaded guilty last Friday to nine charges of embezzlement and tax fraud. Robert Felner embezzled $1.7 million from the University of Rhode Island, and followed that up by embezzling $570,000 from the University of Louisville. He tried to embezzle another $270,000 from Louisville, too. He did manage to pilfer $88,000 from the Rock Island, Illinois County Counsel on Addiction.

Adding to his problems, he forgot to pay $490,000 to the IRS. Scott Cox, Mr. Felner’s attorney, noted, “They had a very strong tax case against him.”

Mark Hebert, a spokesman for the University of Louisville, told the Associated Press, “I don’t think there are a whole lot of tears being shed on the University of Louisville campus today. He blew it.”

Mr. Felner’s plea bargain calls for him to serve 63 months at ClubFed, and make restitution of $2.2 million to the Universities and County Counsel.

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What’s $2 Trillion Among Friends

Posted on January 9, 2010 by Russ

From the Financial Times comes word that there are $2 Trillion worth of unfunded pensions at just the state and local level in the United States. The Financial Times article relies on a study by Orin Kramer of New Jersey’s pension fund.

The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.

“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”

Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.

This has huge implications for American taxation, and for residents in states and localities impacted by this (including California):

  1. Would the elected officials attempt to fix the unfunded pensions by decreasing benefits, decreasing eligibility, increasing taxes, or just ignore the problem?
  2. Would local officials declare Chapter 9 Bankruptcy? (Bankruptcy is not allowed for states.)
  3. Would individuals in impact locales move to avoid higher taxes?
  4. What impact will this have on public employee unions?

If you see a mess on the horizon, you’re dead-on accurate. Add in lots of problems on the state level, a very low return on lots of investments (which hurts pension funding), and extreme resistance to higher taxation and you end up with a Grade A disaster.

Some of the time the light at the end of the tunnel is the end of your problems. Here, I think it’s the oncoming train.

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More on Tax Preparer Licensing

Posted on January 6, 2010 by Russ

I was at an audit this afternoon at the Laguna Niguel IRS office. The return (prepared by an unenrolled preparer) had gross errors. Frankly, any competent preparer should have caught these errors. Unfortunately, the individual who prepared the original return was anything but competent.

This is an example of the problem the IRS wants to cure by forcing preparers to meet basic competency standards. Is this a good thing or a waste of time and money? I think it’s basically a wash.

First, here’s what the IRS is proposing:

  • All preparers except CPAs, Enrolled Agents, and attorneys will need to meet basic competency standards through passing an exam;
  • Such preparers will also need to take 15 hours of Continuing Education annually; and
  • Not all preparers in a firm will need to pass the exam.  Apparently, firms can have “non-signing” preparers who prepare the returns but are not allowed to sign them.

First, is there a problem? Yes, there are a lot of unscrupulous preparers out there. My experience with my client (and some other clients) show that many preparers will happily put down deductions and credits that the taxpayer doesn’t qualify for.

But I’m in California, a state where all preparers are already required to be licensed. Mr. Unscrupulous (the individual who prepared my client’s original return) had, in theory, a license from the California Tax Education Council (CTEC). Mr. Unscrupulous had to take a 60-hour course and pass an exam. Yet Mr. Unscrupulous still couldn’t figure out that an individual several years removed from college isn’t eligible for an education credit available only to individuals in their first two years of college.

I do think it will get rid of the lowest level of tax riff-raff. Those individuals will see the handwriting on the wall and get out of tax preparation. In that sense, it’s a win.

Unfortunately, I also think that Joe Kristan is correct in his criticisms of the plan. It will hurt some small tax preparation shops. I don’t think it’s as bad as Joe makes out, though. I’m a solo practitioner and have to be licensed (as an Enrolled Agent); I have not had any problems.

Joe’s other criticisms are accurate. Consumers will see an increase in price (basic economics tells us that). Enrolled Agents may get hurt in this. There’s some work going on behind the scenes so that the designation given to currently unenrolled preparers makes them seem like a lower-level preparer. We’ll see if that occurs or not.

There is one point that Joe and I agree on completely.

The real problem is Congress. A simple tax law without fraud-inviting refundable credits wouldn’t have preparer problems. At the very least, we should require Congresscritters to face the consequences of their own work. Every one of them should be required to prepare their returns themselves in a live (and archived) webcast. If they use software, their screens should be visible on the webcast. What about their privacy? They make us give them all of our personal information, so fair is fair.

I have yet to meet a tax professional who is happy with the current state of the Tax Code.

One last comment about the IRS plan. The IRS expects to begin to implement this in 2011. I expect delays and a very lengthy implementation schedule. The IRS announced plans to privatize the Special Enrollment Examination (the exam that allows an individual to become an Enrolled Agent); it took two years before that actually occurred. While something may begin in 2011, I expect this process to take the better part of the new decade.

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