Within a couple of weeks, taxpayers around the country will be receiving their tax packages in the mail from the IRS and their state (and local) tax agencies. Taxpayers in Wisconsin will get a special surprise: their social security numbers will be printed on the mailing labels of their tax packages (for those receiving Form 1 packages).
Don’t Mess with Taxes has all the details.
Dan Waters, columnist for the Sacramento Bee, reports today that he’s been told that one individual paid the Franchise Tax Board $200 million in back taxes under California’s amnesty program last year.
An examination of California’s budget shows that the $200 million paid by Mr. (or Ms.) Doe represents 10% of California’s budget “reserve.” As Mr. Waters accurately notes, the top 3% (by income) taxpayers in California pay half of California’s personal income taxes. Waters notes that the tax revenues to the state are now largely determined by the capital gains of these taxpayers. And he’s right.
Furthermore, California has a structural budget deficit. The California Taxpayers Association pegs this at $5 billion. That’s a huge amount of money to overcome on an annual basis.
So with the legislature about to go into session, are we seeing proposals to fix this? Is the Governator proposing fixes? Do we hear from the Democrat majority in the State Senate or Assembly about this?
No.
Instead, I’m reading about new projects, proposals that will take money. In other words, our legislative leaders haven’t learned a thing. Samuel Johnson put it well: “Whatever you make, spend less.”
Assuming that these new proposals pass (and if both Democrats and Republicans are pushing them, they will pass), then the structural deficit will grow. And the problem will get deeper. And taxes will go up.
However, what happens if the top taxpayers decide to move to, say, Nevada? Or they don’t cash in on their investments? This scenario may be frightening to the legislative leaders and the Governator, but I think that sooner or later—sooner if this path is followed—very high income taxpayers will say “enough is enough” and move to a lower tax state.
So we’ll see if California’s legislators and governor have learned anything about budgets. I’m not hopeful.
Happy New Year, everyone. Hopefully this year will see at least one of the following: (a) no tax rate increase [1]; (b) simplification of the Tax Code [2]; (c) no mandatory California health care coverage for all [3]; and/or (d) an IRS and FTB that are easy to deal with, and honest and open to all [4].
Later this month I’m going to run a series of posts on business entities. Recently, I’ve been dealing with a number of individuals who formed their business first, and then got tax and legal advice on what kind of entity they should use. It’s much easier to do it the other way: Get professional advice and then form your business. I’ll be discussing some of the pluses and minuses of the various entity types available.
Notes:
[1] With the Democrats in charge of Congress, watch your pocketbooks. President Bush is apparently whispering words like “I’ll accept a tax increase if you give me….” I strongly believe that everyone needs to let your Representatives and Senators know your feelings about a tax increase.
[2] The chances of tax simplification passing this Congress and of it being signed by President Bush are the same as it snowing this week in Irvine: 0.
[3] The Governator has been hinting that he’d like to see some sort of mandated health coverage for Californians. I’d like to see it, too, but in a way that is not government run, government mandated, and government funded. I think that Californians—the same Californians that voted down a mandatory health care initiative—need to let their Assemblymen and State Senators (and the Governator) know how they feel.
[4] We can all dream, can’t we?
Thanks to Paul Caron of the TaxProf Blog for letting us know that the D.C. Circuit has vacated the Murphy decision. The Murphy case was the one that said that the 16th Amendment made unconstitutional taxes on the recovery of a non-physical personal injury not related to lost wages or earnings (§104(a)(2) of the Internal Revenue Code). That decision was generally criticized at the time it was issued.
So the same panel will look at the issue again in early 2007. We’ll see if they come up with the same answer or not. In the meantime, the government’s request for an en banc panel of the entire D.C. Circuit was thrown out as moot. However, expect appeals no matter which side wins at next year’s rehearing.
There’s a complete set of links available at the TaxProf Blog.
The Tax Court today once again had to look at the case of Raymond Wright. Back in 2002 Mr. Wright’s case had been reviewed by the Tax Court; the case was then appealed to the Second Circuit and remanded back to the Tax Court. Back in 2003 Mr. Wright thought he paid off his tax debt when he sent the IRS $15,550; the payoff amount came from the IRS.
The Appeals Court asked the Tax Court to review:
“(a)Whether petitioner’s 1993 tax refund was sent to him by the Internal Revenue Service (IRS) in 1994; (b) if not, whether petitioner timely received notice from the IRS that his refund had not been applied to his 1987 and 1989 tax deficiencies; (c) if not, whether petitioner’s current tax liability should be consequently adjusted by, inter alia, an abatement of interest pursuant to section 6404(e); and (d) in any case, whether the current interest abatement that petitioner had already received was correct in the light of (1) the IRS’s failure to give petitioner the appropriate withholding credits for 1987 and 1989, and (2) his June 21, 1994, payment of $6,681.22.”
The Tax Court then goes into detail about the actions of the two parties. It’s difficult to fight the government. As I’ve commented on before, the burden of proof in Tax Court is generally with the petitioner, not the IRS. Indeed, Mr. Wright was representing himself.
Yet throughout the discussion of the case, the IRS comes off as inept, deceiving, and potentially, evading the Court. Some examples from the opinion: “On December 6, 2005, despite the Court’s statement in the November 7, 2005, order that we would not be inclined to grant any continuances in this case, respondent filed a motion for continuance of trial.” “The extended proceedings of this case recounted supra have brought to light the numerous misstatements and errors made by respondent through the handling of petitioner’s 1987 and 1989 tax years.” And:
“During the appeal and remand, respondent and respondent’s witnesses recounted numerous errors regarding the handling of petitioner’s 1987 and 1989 tax years–and oftentimes neither respondent nor the witness could account for how those errors occurred. As recently as his August 28, 2006, status report, respondent essentially admitted that the IRS made mistakes regarding the computation of petitioner’s interest, including, but not limited to, quoting petitioner an incorrect payoff figure and sending petitioner an allegedly “erroneous” refund on account of respondent’s erroneous calculations and a keystroke error by an IRS employee.”
There’s plenty more in this opinion that damning towards the IRS. Suffice to say,
“Petitioner’s testimony (at both trials) was credible. He consistently testified and averred that he did not receive his 1993 refund. Respondent contended, however, that petitioner received his 1993 refund in 1995. The documentary and testimonial evidence respondent offered was contradictory, contained numerous errors, and lacked credibility. Furthermore, this contention is a concession by respondent that petitioner was correct and that respondent did not send the 1993 refund to petitioner in 1994.
There’s much, much more in this opinion. Most of the time when I read a Tax Court case, the petitioner comes off as someone who has deliberately evaded the law. In this case it appears that it’s the IRS that has had problems with the truth.
State Senator Don Perata would like all Californians to have health insurance. Having everyone covered isn’t a bad idea. Senator Perata would do this by mandating that all businesses provide health insurance for their employees (with minimum coverage guarantees), or they would have employees and employers pay into a state fund that would purchase health insurance, with the hope that the state would be able to negotiate low rates. Oh yes, and everyone would have to submit proof of coverage on their tax returns, turning the Franchise Tax Board into the policeman in this effort.
Hmmm, this looks like a tax on employers. And if it walks like a duck, talks like a duck, and looks like a duck, it probably is a duck.
The Orange County Register editorializes on this misguided measure today. And Jon Coupal, head of the Howard Jarvis Taxpayers Association, has an op-ed piece in the Metropolitan News-Enterprise today.
Read them both, and let your legislators and the Governator know your view.
If you’re going to submit phony tax returns, it’s a good idea to vary the names you use. Even poorly run tax agencies might catch on if they receive several hundred refund checks from the same address.
That bring us to the present, in the swamplands (aka New Jersey). Three individuals were arrested today for allegedly committing the largest tax fraud in the state’s history. The three defendants cashed $826,974 in refund checks, having submitted 540 allegedly fraudulent tax returns. New Jersey officials were able to stop payment on over $1,000,000 in other checks.
What made New Jersey officials suspicious? This news story indicates that the defendants used similar names and employers and common addresses. When arrested, the three defendants were found with $200,000 in cash, blank social security cards, and tax forms (including W-2 forms).
Two months ago I wrote about the owner of Club Vogue (a strip club) in Columbia, Missouri. James Andrew Yaeger, the owner, paid his lap dancers in cash, and didn’t report the income. He got caught, and is looking at a term at ClubFed. Yesterday, the General Manager of Club Vogue admitted his part in the scheme.
Dan Marcum earned about $82,000 from Club Vogue in 1999, but didn’t file a tax return according to this story. The US Attorney noted he didn’t file in 2000 and 2001 either. If you’re paid in cash, it’s just as much income as if you’re paid by a check. Although Marcum faces up to $250,000 in fines and five years in prison, he’ll likely receive a short prison term at ClubFed.
While I was in Palm Springs there was more fraud and evasion. In New York, an operator of a trucking company pleaded guilty to evading federal taxes to the tune of $2.5 million. Anthony Guido, of Pelham, New York, took his salary in cash (along with some relatives) for eight years. He’ll be spending a bit of time at ClubFed after he’s sentenced in 2007. (News story here)
Back in May, we reported on the indictment of the owners of the La Shish restaurants in Michigan. Earlier this week the wife of the owner pleaded guilty to tax evasion. Under her plea agreement, she’ll be spending about three years at ClubFed. Her husband is still a fugitive from justice. Elfat El Aouar admitted that she helped to evade about $1.5 million in taxes. (News story here)
Finally, from Pennsylvania comes another story of someone who says that you don’t have to pay the income tax. Yeah, right. Arthur Farnsworth of West Rockhill, Pennsylvania was found guilty in Philadelphia of tax evasion after admitting he hadn’t filed a tax return. The former Libertarian candidate for Bucks County Commissioner has a web site where he notes his views. Unfortunately for Mr. Farnsworth, the Supreme Court (and all the courts of appeals) has held that you must pay the income tax. Mr. Farnsworth faces up to 15 years at ClubFed and a $750,000 fine when sentenced next year. (News story here)
So the government has taken yet another bite out of crime.
Mike Finneran was the head diving coach for North Carolina State University. College athletics pays reasonably well, even for a “minor” sport such as diving; Mr. Finneran made between $60,000 and $180,000 a year.
However, that’s not what he allegedly put down as his income on his state tax returns. Apparently Mr. Finneran is a disciple of the Wesley Snipes school; the North Carolina Revenue Department says that Mr. Finneran wrote $0 as his income.
Not surprisingly, Mr. Finneran has been fired as head diving coach of NC State. Whether he’ll end up at another state institution — a North Carolina prison — will be determined in 2007.
