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.

Posted in IRS, Tax Preparation | Tagged | 1 Comment

Licensing of Tax Preparers Is Coming

Posted on January 4, 2010 by Russ

The IRS announced this morning that it will soon require registration and exams for most tax preparers who are not regulated. The report in the Wall Street Journal notes that the changes “will take several years to implement and will not be in effect for the 2010 filing season.” Attorneys, CPAs, and Enrolled Agents will not be impacted by this new requirement (they will remain subject to their current licensing procedures).

I’ll link to the IRS press release when it becomes available.

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Can You Lend a Hand? And a Few Billion Dollars?

Posted on January 3, 2010 by Russ

California remains in financial trouble. The state faces a $21 billion deficit. Meanwhile, the economic news doesn’t appear particularly good.

First, a judge in Alameda County (Oakland) rejected some of the furloughs implemented by Governor Schwarzenegger. The ruling impacts about 40,000 state employees out of over 200,000 impacted by the furloughs. California will appeal the ruling; there is a strong likelihood the ruling will be stayed until the appeal is heard.

Next, Governor Schwarzenegger was among many state governors noting that the health care proposals would add to California’s troubles. The Governor told Nancy Pelosi (D-CA) that the measure, if passed, would add $3 to $4 billion to the state’s deficit. Of course, given that the majority of Americans are opposed to the measure it will likely be passed by Congress in the next few weeks.

Finally, the Governor and legislative leaders will lobby the Obama Administration for aid. They’ll be looking for either money given directly to the government, or the ability to not match federal funds for certain programs.

There’s no chance of tax increases passing. Has California finally reached the point where the clock strikes midnight and the fiscal reality that you can’t spend more than you bring in occurs? Or will we see lots more budget gimmicks in 2010? After all, we’ll be using a 30%-40%-0%-30% for estimated payments for California income taxes in 2010. We can always go to 30%-69%-0%-1% for 2011….

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1099 Time

Posted on January 3, 2010 by Russ

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your computer (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing is easier than electronic filing.

We should all probably enjoy this year and next year vis-a-vis 1099s. It looks like the corporate exemption for 1099s will end in the near future, and that means more paperwork for businesses and more work for tax professionals.

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2009 Tax Offender of the Year

Posted on December 31, 2009 by Russ

There were, as usual, several deserving individuals for the 2009 Tax Offender of the Year. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

Coming in a close second to our winner was the 1st session of the 111th United States Congress. This Congress, dominated by Democrats, managed to take the art of spending to new heights of lowness. Budget sanity? Who needs that! Our children, grandchildren, and great-grandchildren will be paying for Congress’ largess.

In third place was James Traficant. Mr. Traficant, just out of ClubFed for ten felonies including tax evasion, will be running for Congress next year. The pride of Youngstown, Ohio figures to have a good shot at being in the 112th Congress.

The other nominee was our friend Wesley Snipes. Mr. Snipes is appealing his three misdemeanor tax evasion convictions. While some of Mr. Snipes’ actions were Bozo, he is now promising to pay any tax he owes and that’s definitely not a Bozo action.

To find our winner we must head to Northern California. Mare Island used to be a naval shipyard. Today, it’s been redeveloped into a variety of uses. One of those uses was for storing wine. Mare Island is also a National Historic Landmark.

That seems mundane, but Mare Island is in Vallejo, conveniently close to Napa Valley and the heart of California’s wine industry. Mark Anderson, then a City Commissioner in nearby Sausalito, capitalized on this by starting a wine storage facility utilizing a warehouse at Mare Island early in this century.

But things started going wrong. By 2005, the Marin County District Attorney was investigating Mr. Anderson; he was accused in February 2005 of selling some of the pricey bottles of wine that he was supposed to be storing and using the proceeds for his own good. That’s fraud and embezzlement if true. That case is still pending. He allegedly used the proceeds to support an extravagant lifestyle.

Concurrently, Mr. Anderson’s business was being evicted from the warehouse. Apparently none of the proceeds from the alleged fraud and embezzlement were diverted to paying the bills for the warehouse.

To add insult to injury, Mr. Anderson was being investigated for tax evasion. Illegal income is just as taxable as legal income. With the noose tightening as the calendar turned to Fall, Mr. Anderson faced a dilemma.

There are options available. Finding a good attorney and challenging the charges is one good option. Perhaps bankruptcy would be a possible solution. Yet another options would be to tone down the lifestyle.

One option that you and I would never consider is to burn down the wine storage facility. Committing arson would only compound his troubles, and given Mare Island’s status would be yet another federal offense.

But that’s exactly what he did. He set fire to the warehouse, and 92 million bottles of wine and the entire warehouse burned to the ground. Many wineries lost all of their stored wine. Some wineries went out of business and many wine collectors lost everything.

What did it gain Mr. Anderson? Perhaps four years of semi-freedom. But that freedom ended on November 16, 2009 when Mr. Anderson pleaded guilty to 19 counts, including arson and tax evasion. Federal prosecutors will recommend a sentence of 15 years, 8 months at ClubFed. Mr. Anderson, age 61, is not in good health; even this reduced sentence is likely equivalent to a life sentence.

It’s a sad story, with an ending that hurt an entire community. Unfortunately, instead of making what good could have been made of a bad situation Mr. Anderson made a bad situation far, far worse. For that he wins our award as the 2009 Tax Offender of the Year.

While I’m hopeful that 2010 will be a year when this award is not given, I’m realistic. Every year it seems that there’s yet another horribly Bozo tax offender.

That’s a wrap for 2009. I wish everyone a Happy, Healthy, and Safe New Year.

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What’s Good for the Goose Is Good for the Gander

Posted on December 30, 2009 by Russ

If you move and don’t notify the IRS, bad things can happen. The IRS can send to your last known address a Notice of Deficiency. Even if you don’t receive it, it will be considered received if it was sent to your last known address.

Today the Tax Court looked at the opposite situation. What happens if you do let the IRS know of your new address and the IRS sends a Notice of Deficiency to your old address?

The case the Court looked at involved an Estate Tax Return. The IRS elected to examine the Estate Tax Return and notified the fiduciary. The fiduciary was forced to move offices and let the IRS Revenue Agent know verbally of his new office address. The IRS also discovered the fiduciary’s home address.

This all occurred in the late 1990s. Eventually the IRS decided to issue a Notice of Deficiency. That notice was sent on December 8, 1999 to the old (bad) address. It was returned as undeliverable. When the 90-day period to contest the Deficiency expired (on March 7, 2000), the IRS assessed the deficiency, tax, and penalty against the Estate. Eventually, the Estate discovered this and filed a Tax Court Petition in 2008.

The question the Court faced was simple: Should the IRS have mailed the Notice of Deficiency to the new address? The Court noted,

The estate argues that respondent knew at the time the deficiency notice was issued that the estate’s address had changed, and that respondent therefore failed to use reasonable care and diligence in mailing the deficiency notice to the estate’s last known address. We agree. Information that the Commissioner knows or should know through use of his computer system is attributable to the Commissioner’s agents. Abeles v. Commissioner, supra at 1030; Buffano v. Commissioner, supra. Respondent’s revenue agent informed the estate’s examiner on May 20, 1999, only six months before the deficiency notice was issued, that respondent’s computer records listed the Crown Point address as a new residential address for Mr. Keenan. We find that the examiner knew of the estate’s new address at the time he issued the deficiency notice to the estate.

The Court noted that had the IRS mailed the Notice to both the old and new addresses the Notice of Deficiency would have been valid. However, because the IRS didn’t use reasonable care the Notice of Deficiency is invalid. Thus, the Estate doesn’t owe the IRS anything.

Yet another reason to document everything you do with the IRS. The IRS is supposed to use reasonable care and diligence. When they don’t and the taxpayer challenges the deficiency the taxpayer will win.

Case: Estate of Paul Rule v. Commissioner, T.C. Memo 2009-309

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That’s Entertainment!

Posted on December 30, 2009 by Russ

When I last wrote about James Traficant, the former Congressman who went to ClubFed after being convicted on ten counts of tax evasion, bribery, racketeering, and obstruction of justice, Mr. Traficant was debating whether or not to run for Congress next year. Well, the wait is over.

Yesterday, Mr. Traficant attended a meeting of the Biz Society in Youngstown, Ohio. He told the meeting, “I’m going to run.” The only question is which of three districts he will run in: the 17th, 16th, or 6th Congressional Districts (in Ohio). The 17th encompasses Youngstown and surrounding areas in the Mahoning Valley; the Akron/Canton area is in the 16th District; and Poland, Boardman, and Columbiana County are in the 6th District. Mr. Traficant is circulating nominating petitions in all three districts.

Mr. Traficant hasn’t decided if he’ll run as a Democrat, Republican or Independent. He doesn’t plan on raising much money (that’s probably a good thing given his prior legal troubles).

Scott Harker, who has co-authored two books with me, lives in Youngstown. He believes that Mr. Traficant will win if he runs; Mr. Traficant is still extremely popular in Youngstown. “I want to get these suckers!” Traficant thundered. “You are being addressed by a very bitter guy.”

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