One Week To T-Day

Posted on April 9, 2006 by Russ

Tax Day is Monday, April 17th…except for some municipal taxes in Ohio that are still due on April 15th. So, at this late date, what can you do to lower your taxes?

1. Make a contribution to an IRA, if you’re eligible. You’re allowed to make a $4,000 contribution (up to the amount of your compensation); if you were 50 any time during 2005, you can make a $4,500 contribution. There are income restrictions to making an IRA contribution. For full details, see Publication 590. You have until April 17th (in most cases) to make a traditional IRA contribution.

2. Make a contribution to a SEP IRA, if you’re eligible. SEP IRAs are for the self employed. You can contribute up to $42,000 or 25% of your compensation, whichever is less. However, there’s an adjustment that must be made for the impact of self-employment tax. You can start a SEP (and contribute to a SEP) any time before you file your return, including extensions. (If you start a SEP after April 17th, you do need to have filed an extension. The final deadline is October 15th.) See Publication 560 for more information.

3. Consider the home office deduction. Many taxpayers have been scared to approach this deduction because of fear of IRS audits. Well, I strongly believe that if you’re eligible for a deduction, you should take it. Now, there are some strict rules that you must meet in order to take the home office deduction:

“You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:
– As your principal place of business for any trade or business;
– As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business.”

Still, many have avoided taking this deduction because of fear, and I don’t think that’s justified at all. You can find more information on this deduction in Publication 587.

4. Don’t rush! Consider filing an extension. If you’ve just decided to use a professional tax preparer, and you’re just now (one week before the deadline) going to him or her, he or she will most likely insist on an extension. (If not now, very, very, soon he’ll insist.) Those who have been practicing for any length of time are extremely busy in the last week of tax season, and it’s hard to squeeze a new client in before the deadline. It’s not that we won’t accept new clients; rather, we won’t be able to do a professional quality job on your return if we took you on and agreed to finish your return before next Monday. We’ll work with you to make an estimate of what you owe, generate the extension forms, and then prepare your return after the deadline.

5. Remember Your State and Local Tax Deadlines. These can differ. For example, municipalities in Ohio have deadlines of April 15th. Iowa has a deadline of April 30th. Massachusetts has a deadline of April 18th, because the 17th is a holiday. And if you send your IRS return to the Andover, MA service center, you have an extra day, too.

If you are one of the lucky few who have a scheduled appointment with your tax preparer this week, try and be organized. He’ll appreciate it, because he’s been swamped for several weeks. And it will help to get your return done quickly.

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Pork

Posted on April 6, 2006 by Russ

A man condemning the income tax because of the annoyance it gives him or the expense it puts him to is merely a dog baring its teeth, and he forfeits the privileges of civilized discourse. But it is permissible to criticize it on other and impersonal grounds. A government, like an individual, spends money for any or all of three reasons: because it needs to, because it wants to, or simply because it has it to spend. The last is much the shabbiest. It is arguable, if not manifest, that a substantial proportion of this great spring flood of billions pouring into the Treasury will in effect get spent for that last shabby reason.

Rex Stout wrote this in 1948 (And Be a Villain). It’s arguable that little has changed.

The Congressional Pig Book was released yesterday by Citizens Against Government Waste. You can find this year’s book here. Here are some of the lowlights (randomly pulled):

  1. $150,000 for the Bulgarian-Macedonian National Educational and Cultural Center in Pittsburgh, PA. I have nothing against Bulgarians and Macedonians, but this smells like pork.
  2. $600,000 for the Abraham Lincoln Bicentennial Commission. I have nothing against Abe (after all, I was born in Illinois), but I can see better uses of this money.
  3. $100,000 for the South Carolina International Center for Automotive Research Park Innovation. This center will apparently be used for auto racing research. I think NASCAR could fund this themselves.
  4. $500,000 for the Sparta Teapot Museum in Sparta, SC. Does the government need to support a teapot museum?
  5. $273,000 for urban market development in New York. The goal of this program is “garden mosaics.” I can think of better uses for that money.

I deliberately chose only items under $1,000,000. There are plenty over $1,000,000. Like $6,435,000 for wood utilization research. $1,000,000 for the Waterfree Urinal Conservation Initiative. Talk about money down the drain.

I urge you to read this list. Further, you should talk to your Congressional representatives so the amount of pork shrinks to a managable level. Go to Porkbusters and help with the cause. Remember, your tax dollars are at work!

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No Joy In Toyland

Posted on April 6, 2006 by Russ

Toys “R” Us operates in California and, of course, pays California taxes. California uses a three-part allocation formula based on unitary taxation to determine how much a corporation operating in multiple states must pay. Toys “R” Us came to the conclusion that if the sales portion of the formula included the principal amount of short-term notes, that their California tax would go down. So they filed an appeal, and took their case to court.

Toys ‘R Us lost in district court, and they appealed their claim for $4.8 million plus interest to the Court of Appeals (Third Circuit, CA). In FTB v Toys “R” Us, the main issue was whether the California rule results in an equitable apportionment formula. The Franchise Tax Board (FTB) successfully argued that if Toys “R” Us could include the principal, they could move between 11% and 28% of their annual sales to a different state by just relocating their Treasury Department.

The FTB tends go too far in its regulatory tactics and enforcement actvities; however, I completely agree with them and the Court’s decision. Perhaps principal could be included for a business that’s a financial services corporation. For a retailer, though, this doesn’t make sense.

Hat Tip: Central Valley Business Times

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Being In Jail Is a Good Excuse

Posted on April 5, 2006 by Russ

The IRS wants to place a levy or a lien against you. The IRS says they mailed the notice, but it ended up at the wrong prison (you were in Attica, but the letter was sent to Gowanda; both are New York prisons). You request a hearing. The IRS sets a date for a conference (two years later), but the IRS chooses a date while you’re in solitary confinement and attending is out of the question. The IRS goes ahead with the levy. You go to Tax Court claiming you never had your fair hearing.

The Tax Court found that the petitioner had vigorously contested all his legal problems and it was likely he never received the original notice (it did, after all, go to the wrong prison). And the IRS should have rescheduled its conference; heading to New York City while you’re in solitary confinement just isn’t possible. The Tax Court ordered the IRS to give the petitioner a fair hearing.

Case: Butti v. Commissioner, T.C. Memo 2006-66

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Swearing at the Court Isn’t a Great Idea

Posted on April 5, 2006 by Russ

The IRS puts two liens against you. You fight the case, filing a lawsuit against the Commissioner of the IRS, claiming $4.5 million in damages for slander of title, inconvenience, aggravation, and generally annoying behavior. But you lose in District Court. You file an appeal to the Court of Appeals (here, the 10th Circuit). The IRS asks for the appeal to be summarily rejected, and that you pay a penalty for making a frivolous appeal.

If you’re going to file a lawsuit against the IRS, you had better have legal grounds; being annoyed isn’t enough according to the District Court that first ruled on this case. When the petitioner, Delbert Kyler, appealed, he told the Court that the IRS, “extorts money and property,” “exploits the power of the United States for criminal thuggery,” and that the U.S. Attorney was “obviously unschooled in the legal arts … [and] expects this court to bend over backwards and kiss his … allegedly royal ass.”

You and I may be laughing. Unfortunately for Mr. Kyler, the Court just wasn’t in a laughing mood, found his appeal frivolous, and ordered him to pay the “unschooled … legal arts” practitioners of the United States Attorney’s Office their legal fees of $8,000.

Case: Kyler v. Everson, 10th Circuit

Hat Tip: Tax Professor Blog

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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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