It’s simple. During sentencing for tax evasion, just question the judge’s credentials and the US government’s right to make you file a tax return. The judge involved, Walter Rice of Ohio, said it best, “Why are you doing this to yourself? You’re putting yourself in prison. Why?”
The defendant, Walter Maken, will have thirty months to think over his answer. And he’ll have to fork over $42,000 in taxes, plus penalties and interest.
Coverage: Dayton Daily News.
While I was off this past week, the Tax Reform Panel came out with two proposals that are similar. The two proposals would:
1. Eliminate state and local tax deductions for individuals. Given that a large percentage of the US population lives in high-tax states (such as California), this isn’t going to pass.
2. Limitation on deducting health insurance. This is another non-starter given the high cost of health insurance. I do understand the panel’s reasoning (if taxpayers feel more pain, they will do more to lower health insurance costs) but I find a hard time seeing this passing.
3. Elimination of the Alternative Minimum Tax (AMT). This will be applauded by all.
4. Increasing charitable deductions; changing charitable deductions to excess of 1% of AGI. This makes both economic and political sense.
5. Changes to deductibility of mortgage interest; credit instead of deduction; limitation on amount. This is a political non-starter (see item #1 above). The proposed rules are complex, and will change the cap from $1 million of purchase-based interest (as a Schedule A deduction) to the maximum amount of FHA interest (will vary depending on location), to be taken as a credit. This will strike at higher-income taxpayers, and will, thus, be politically unpopular.
6. Change many deductions to credits. As best as I can tell, this will not change many taxpayers’ taxes, but could have a small positive impact to low-income taxpayers.
7. Lower the number of brackets from six to four; lowest individual bracket at 15%; highest at 32%. I believe that Democrats will not like the idea of lowering the top tax bracket. This proposal does not have a huge impact. Remember, the panel had to make these reforms “revenue neutral.” The big cut is the elimination of the AMT. This item is window dressing.
8. Changes to retirement plans, savings plans, etc. The changes, which will be difficult to pass, would change popular plans (such as IRAs) into refundable credits. This will aid low-impact taxpayers, but would disrupt an entire industry that has been built up around IRAs and similar programs. I doubt this will be implemented.
9. Two alternative individual plans: Either 8.25% on capital gains and interest taxed at regular tax rates or 15% on capital gains, interest, and divdends. The first plan exempts dividends (if I read it correctly) for individuals, ending double-taxation on dividends. The second plan continues the double-taxation on corporate investments but corporations can expense their investments. I need to read more about these plans to determine both their feasiblity and the chance of passage.
Overall, I think these plans will be buried in the political wastebasket. Perhaps the panel had good intent, but there’s too much in these plans that is political suicide for too many members of Congress.
There have been many comments about these plans. Roth Tax Updates posts about the first alternative individual plan here. Tax Professor Daniel Shivaro comments here. The New York Times comments here. Professor Maule has his comments, and they’re not positive.
In just a few weeks, California voters will go to the polls to decide several key propositions. Among these are two that definitely could impact taxes: Propositions 76 and 77.
Proposition 76 would impact California budgeting system. State spending would be limited based on an average of recent revenue growth. Given that California has had a sustained budget deficit (our elected Democratic legislators haven’t met much spending that they would oppose), I feel that this ballot proposition should be carefully considered. You can find the arguments in favor here and the arguments against here.
Proposition 77 would change how the redistricting is done in the state. If you’ve ever looked at how district lines are drawn, you know that it’s gerrymandering to the max. Personally, I’d prefer our legislators to draw fair lines so that we would see a couple of incumbents actually have to fight for their jobs (almost every legislative district in the state is considered “safe” for the incumbent) but I think there’s no chance for this happening. Take a look at the arguments for and arguments against.
There are a number of other propositions on the ballot that you should examine; these impact prescription drugs, utility regulation, unions, and abortion. You can find information on these in your sample ballot or on the Secretary of State’s website here.
Finally, if you live in the 48th Congressional District (as I am) don’t forget that we will be voting to determine the successor to Christopher Cox as our Congressman on December 6th.
Also, I should note that I will be traveling this coming week so the next post may not be until Thursday.
Well, 48 pennies.
Most tax software rounds off numbers to whole dollars. Indeed, the IRS suggests taxpayers do this in their instructions to Form 1040: “You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.” This seems fairly straightforward, no?
Well, most of the time it does. But what happens when a taxpayer makes an installment plan agreement, and pays what’s due, but rounds what he owes to whole dollars? In the case decided by the Tax Court, a taxpayer agreed to make two payments of $13,348.24. He made the payments on the dates agreed to, but rounded his payments to the nearest whole dollar (two payments of $13,348.00). The IRS sent a notice of delinquency—the taxpayer owed 48¢ in taxes plus a penalty of $175.44 and interest of $264.08. After a Collection Due Process Hearing that apparently went nowhere, the case ended up in Tax Court.
I am not making this up.
I wonder whether anyone at the IRS can explain why you would spend several hours attempting to collect 48¢. As the Tax Court notes, “We must decide this dispute even though the cost of the parties’ pursuit of their principles will far exceed the amount in dispute.” There are, after all, plenty of taxpayers who abuse the system, for amounts that are thoursands (and millions) of times larger than 48¢. If you get the feeling that I think the IRS made “a colossal blunder” (as the taxpayer in this case put it), you’re correct. But I digress.
The taxpayer had his records showing payment was made in the amount agreed to, and that he used a method that the IRS endorsed. The IRS, on the other hand, “…presented no evidence showing that penalties and interest accrued in excess of the amount petitioner paid.”
The Tax Court found that “…it was an abuse of discretion to proceed with collection activities.”
Case: Norris v. Commissioner, T.C. Memo 2005-237
The Federal Tax Code is complicated enough. As a practicing tax professional in California, it would be nice if California conformed to the Federal Code. On Friday, Governor Schwarzenegger signed AB 115, putting California into conformity with more of the Federal Code. Provision include:
· For 2005 (and beyond), California conforms to the Federal definition of qualified child, filing status, and dependency exemption;
· For 2006 (and beyond), California has a liberalized student loan deduction; and
· California conforms to IRC §179 (to $25,000)
However, California treats these provisions differently:
· No Health Savings Accounts (HSAs);
· No special PAL treatment for real estate professionals; and
· Differences in §179 treatment.
Of course, Congress is still in session (the State Legislature has recessed for the year) so there is a possibility that we’ll see more changes out of Washington.
John Rigas, founder of Adelphia Communications, and his son Timothy, were indicted on tax evasion charges. According to this article, they diverted $1.85 billion for their personal use from Adelphia. The pair has already been found guilty of fraud and face prison terms of 15 and 20 years, respectively. Both are appealing their convictions.
In another development, two of the auditors of Adelphia were charged by the SEC with professional misconduct. The two engaged in “reckless and unreasonable” conduct when they approved false Adelphia financial reports, according to this story.
For the very small business owner, the IRS will introduce in 2006 a new form, Form 944. You can view a draft version of the form here. The new form is for businesses who pay $1,000 or less in employment taxes annually. The IRS believes that one-sixth of the 6 million total Form 941 filers will be able to use the new form.
The new form (Form 944) has to be filed only once per year, saving paperwork time. In most cases, the taxes can be paid when filing the form.
As the SSA/IRS Reporter states, “The IRS believes that filing and paying employment taxes should be as easy as possible. By simplifying the process of employment tax filing, more small employers will have the opportunity to more easily comply with the law.” And I agree.
I remember watching the television show Bowling for Dollars. Chick Hearn, the late Los Angeles Lakers broadcaster, was the host. Contestants bowled a couple of frames and got paid small cash prizes based on how well they did.
Charles Lanza, of Wolcott, CT, had a better Bowling for Dollars idea. Mr. Lanza owns three bowling alleys in Connecticut and told his employees to fill bags with cash proceeds from his lanes (from everything from bowling, the arcade, and shoe rentals); bags were labeled “O” if they held $500 or “X” if they had $1000. (“O” stands for a split in bowling while “X” stands for a strike. I guess “/”, the symbol for a spare, wasn’t needed.) The cash was then delivered to him and not included on his books.
What a wonderful scheme. And no taxes to be paid on the $2 million skimmed from his business.
And then the IRS showed up.
Mr. Lanza faces sentencing in December on felony tax evasion and conspiracy charges. He’s expected to have to serve 30 to 37 months in prison (the maximum is ten years) and to pay a fine of $350,000 plus make full restitution.
A company called Derivium Capital LLC is under investigation by the IRS and the Franchise Tax Board for making loans that allegedly weren’t loans, according to Forbes.
The scheme aided taxpayers who were sitting on large stock gains. According to Forbes, “The Derivium deal called for the customer to get a loan equal to 90% of the value of his shares. If the stock went up, he could get it back by repaying the loan, with interest. If the stock went down, he could walk away and owe nothing. And, supposedly, the initial loan was not a sale and thus not taxable.”
But the IRS and the FTB think otherwise, and Derivium sits in bankruptcy. The California Corporations Commission filed suit in 2002 to stop the loans (see this link); it appears Derivium stopped its activity in California soon thereafter. Derivium’s bankruptcy filing is noted in this article in the Times-Record of Middletown, NY. The firm either used “unique and proprietary business model for marketing and administering sophisticated loan transactions” or was “a giant Ponzi scheme.”
Arbitrators so far have ruled that Derivium owes ex-clients $80 million, with many more claims filed. Of course, the bankruptcy filing may forestall those complaints, along with the problems of Derivium’s lender, Bancroft Ventures of the Isle of Man. Forbes reports that Bancroft’s directors have quit, and that Bancroft moved to Cyprus and the new directors are from Beirut.
My usual advice applies to “loans” like these: If it sounds too good to be true, it probably is. So now Derivium’s clients are looking at both tax troubles and possible loss of their loan capital.
What happens when you battle the IRS in Tax Court, but lose? You have to pay what you owe. If you don’t, you can face a lien or levy. Today, the Tax Court stepped in when a one-time loser became a two-time loser.
The petitioner in today’s case lost in tax court in 1998 for his 1991 through 1994 taxes (he also received a $500 fine for a frivolous argument). He didn’t pay, so the IRS started the levy process. The petitioner again went to Tax Court where he disputed the levy, claiming the income tax is unconstitutional. His argument, according to the Tax Court, did not contain “a scintilla of merit.” Further, “Petitioner’s groundless arguments and contumacious conduct have wasted the time and resources of respondent and this Court.” So the levy was upheld and a $2500 fine added to the bill.
