You Get Your Money’s Worth

Posted on April 5, 2006 by Russ

The Government Accountability Office (formerly known as the General Accounting Office) (GAO) released a study yesterday titled, “Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors.” The study was also mentioned in today’s Wall Street Journal (paid subscription required).

The study showed that 10 out of 19 sample returns, side income that the preparer was told about wasn’t reported. Many preparers missed opportunities to save taxes on returns. None of the firms surveyed were named. Other errors found included unwarranted refunds (of over $1500), and unwarranted extra tax (of over $1500). Only two states, California and Oregon, require licensing of paid tax preparers.

The National Association of Enrolled Agents has been pushing for mandatory registration and licensing of all paid tax preparers. Legislation to accomplish that is inching its way through Congress.

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Mom and Dad Said I Didn’t Have to Pay Taxes

Posted on April 4, 2006 by Russ

No joking, that’s the argument a taxpayer used in Tax Court. Joe Kristan of Roth Tax Updates has the humorous details here. This Tax Court case is yet another entry in the “Don’t Try This Yourself” log. When you’re an adult, you get to make your own decisons; blaming your mother and father just doesn’t work. Being disowned by your parents is not a valid excuse to not pay your taxes.

Case: Gillings v. Commissioner, T.C. Memo 2006-65

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Protestor Strikes Out

Posted on April 3, 2006 by Russ

Many years ago, when I was running west coast operations for a telecommunications company, my office manger approached me with a problem. “There’s a gentleman out here who’s perfect for the in-house tech job, but he’s handed me these sheets for his W-4.” I looked at the sheets and realized that they were (what I now know as) typical tax protester stuff, claiming he wasn’t a citizen of the United States but a citizen of California, and thus exempt from US taxes. My office manger continued, “He refuses to fill out the W-4.”

That company had a policy that until all the employment paperwork had been completed, an employee couldn’t start working. I went to the potential new hire and told him, after introducing myself, “You can either fill out a W-4 or we’ll find someone else.” He protested, and I cut him off, telling him that we were a business and didn’t have time for tax shenanigans. He left and we found someone else.

Today the Tax Court looked at the case of a tax protestor. He submitted similar documentation in his job as a car salesman. He filled in his tax return for two years with all zeroes. The IRS didn’t find this as humorous as you and I would. Neither did the Tax Court. After admonishing the protestor for the error of his ways (and warning that he faced a penalty if he advanced the same groundless arguments in the future), the Court found for the IRS.

You can find the Tax Protestor FAQ here.

Case: Paikowski v. Commissioner, T.C. Summary 2006-48

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Stupid Sales Tax Tricks, California Style

Posted on April 3, 2006 by Russ

You’re a business owner, and you’ve just won a nice contract with the State of California. Don’t forget to add sales tax.

Yes, if you’re selling to the State of California, you must charge California sales tax. Let’s look at this logically, based on a $10,000 sale to a state agency.

We’ll assume that the sale is made in Orange County (sales tax rate of 7.75%), resulting in sales tax of $775.00. You collect $10,775, keep $10,000, and then remit $775 back to California. The Board of Equalization collects the money, and then turns it over to the General Fund. The General Fund allocates the money to the appropriate state and local agencies, including the agency that you sold to.

Wouldn’t life be simpler if the state were exempt from state sales tax? You could argue that local and state agencies wouldn’t benefit from the sale. However, the real beneficiaries of California’s policy are the bureaucrats administering sales tax. California’s rules increase their workload and lead to more employees. If California were to exclude government sales from sales taxes, sales tax revenues would go down, of course. But so would expenses.

In the end it would be a wash (as far as direct revenues and expenses). However, because you would need fewer employees to administer the Board of Equalization, and a bit less time for companies to prepare their quarterly reports to the BOE, costs would decrease and productivity would increase.

What are the chance of this happening? Just about zero.

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Reiner Resigns; Baca Supports Vegas, Denver & Phoenix

Posted on March 31, 2006 by Russ

Rob Reiner resigned as head of the First-5 Commission on Wednesday, as more pressure mounts to do a thorough investigation. Indeed, as the Chronicle story notes, both Democrats and Republicans believe something’s fishy with how the Commission spent money raised through the cigarette tax.

Meanwhile, Los Angeles County Sheriff Lee Baca and other law enforcement officers came out in support of Proposition 82, the help Las Vegas, Phoenix, and Denver Initiative (aka the tax the wealthy for mandatory pre-school initiative). Support for Proposition 82 has fallen to 52 percent, which is about 30 percent higher than it should be if voters realized the economic consequences. There’s still no word if the Nevada Development Authority will sponsor advertisements supporting Proposition 82.

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M Madness

Posted on March 31, 2006 by Russ

I live and work in beautiful Orange County, California. Several years ago the voters of this county passed a 0.5% sales tax increase to fund transportation issues (such as the widening of Interstate 5 through Orange County). That sales tax increase expires at the end of 2011. The Orange County Transportation Authority (OCTA) administers the tax, and has been running a somewhat blatant advertising campaign in support of renewing Measure M. Just one little problem: that’s probably illegal.

No matter what your view is on Measure M, it’s irrelevant; it’s illegal (under California law) for a government agency to publicly campaign for a proposition. And as the Orange County Register noted in an editorial, the OCTA issued an 8-page campaign mailer an 8-page informational brochure praising the benefits of Measure M. Sort of sounds like the campaign for pre-schools that Rob Reiner ran. You can see the ad/brochure here.

While Rob Reiner has suffered the consequences of his actions, it’s uncertain whether the OCTA will. Hopefully, the Legislature and the Orange County Board of Supervisors will tell the OCTA to spend their money on improving the freeways and not on glitzy campaign literature informational brochures.

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CTEC: A Bit Behind The Times

Posted on March 30, 2006 by Russ

CTEC, the California Tax Education Council, released a press release reminding taxpayers of the automatic extension available (Form 4868). The press release noted that the extension, which is an extension of time to file, not pay, is for four months.

Well, that used to be correct.

This year the automatic extension is for six months, a rare case where the IRS is matching how California has handled extensions.

Somehow it seems appropriate that the agency that regulates some California tax preparers (CTEC regulates all preparers in California except EAs, CPAs, and attorneys) isn’t aware of the rules.

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States Where Gambling Is a Bigger Gamble

Posted on March 28, 2006 by Russ

Let’s say you went to the casino last April, and were lucky, and won $1,000. Last August, you went to the casino, and you weren’t so lucky, and you lost $1,000. What are the tax implications?

For federal taxes (IRS), you have $1,000 of other income (line 21 of Form 1040) and a $1,000 itemizable deduction on Schedule A (not subject to the 2% AGI limitation on itemized deductions). For federal tax purposes, this will likely have few implications for many Americans.

However, let’s suppose you live in Illinois. Illinois’ state income tax is more of a gross receipts tax—there is no deduction allowed for gambling losses. For the amateur gambler, you have $1,000 of gambling income in Illinois.

There are nine states that treat gambling in this manner. Here is a list of the nine states that gamblers should avoid residing in:

    Connecticut
    Illinois
    Indiana
    Massachusetts
    Michigan (first $300 exempt)
    Minnesota*
    Mississippi
    Ohio
    West Virginia

Interestingly enough, Connecticut, Illinois, Indiana, and Mississippi all have casino gambling.

Minnesota is unique (as far as I can tell). Minnesota’s standard income tax allows deductions for gambling losses. However, its’ AMT does not, causing anyone with significant gambling losses to fall into Minnesota AMT. If anyone knows of any other states that don’t allow gambling losses to be deducted on the state AMT, I’d love to know.

I’ll point out that there are several states that don’t have any state income tax (or just tax interest and dividends): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. That’s one less form (or set of forms) to complete each year.

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Breast Tax

Posted on March 26, 2006 by Russ

If you’re a plastic surgeon, and you use breast implants as part of your work, do you have to pay sales tax on the implants you use?

Yes, in Alabama.

The Alabama Department of Revenue recently took a doctor to task for not paying use tax on the breast implants he was using in his surgery practice. (Use tax is when the user is required to pay the equivalent of sales tax when the seller doesn’t charge sales tax. Almost all states have use tax laws. For example, that book you bought on Amazon tax free—well, you’re probably supposed to pay use tax on it. Indeed, many states have added a “use tax” line on their income tax forms.)

Alabama considers “…doctors, as members of a learned profession, are not making retail sales when they provide or supply tangible property to their patients incidental to their professional services. Hamm v. Proctor, 198 So.2d 782 (Ala. 1967); Haden v. McCarty, 152 So.2d 141 (Ala. 1963). However, the use or consumption of the property by the doctors in providing the services in Alabama is clearly subject to Alabama use tax.” So those stitches, bandages, and, yes, those silicone implants are taxable.

California appears to be headed in the opposite direction. The Board of Equalization ruled on February 1st that cosmetic medical treatments, including Botox and silicone implants, should be exempt from sales tax.

But one state taxes cosmetic surgery—New Jersey. Specifically exempted from the New Jersey ordinance are reconstructive procedures. However, cosmetic dentistry is taxable. Teeth whitening is specifically cited as taxable. Would orthodontia be taxable? I can imagine a sales tax auditor peering into some childs’ mouth, seeing how bad the overbite is. “Your son only has a 40% overbite, so you must pay sales tax.” But I digress….

Of course, when I read the Alabama story, I remembered the wonderful Chesty Morgan. Humorously, Chesty tried to deduct the implant surgery as a medical deduction (subject to a 7.5% AGI limitation) and lost in Tax Court. But the judge allowed her to deduct the surgery as an unreimbursed business expense (subject to a 2.0% AGI limitation).

So, the moral of this tale is that if you’re a plastic surgeon in Alabama, you’d better charge sales tax on those silicone implants or you could be busted.

Thanks to the NAEA for alerting me to this story.
Link: Alabama Administrative Law Judge Ruling

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Vegas to CA: Humorous Ads Score

Posted on March 25, 2006 by Russ

I previously wrote about Las Vegas’ attempt to draw more businesses from California. A few days ago I saw one of the ads: A giant peanut crushed a Californian, akin to California’s huge tax burden crushing a business. One Los Angeles television station, KABC, has refused to run the ads, citing an anti-California theme and offensiveness.

KABC is correct. The ads are anti-California, but they’re hardly offensive. Accurate is a better statement, especially when you compare the extremely offensive (high) tax burden in California to the non-offensive (low) tax burden in Nevada.

I haven’t seen another ad that the Nevada Development Authority has run. It features a poker game between California business and Las Vegas business. According to the Las Vegas Review-Journal, the Las Vegas business gets three aces and a “No state personal income/corporate tax card” while California gets an anti-business card. Las Vegas moves all-in while California folds.

The Nevada Development Authority has $5.5 million in marketing dollars to spend. But their most important bit of marketing is out of their hands—the results in the California June primary on Proposition 82, which would increase California’s already offensive tax burden.

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