The Last of the Airline Industry Bankruptcies?

AMR Corp., the parent company of American Airlines, filed for Chapter 11 bankruptcy on Tuesday. With the exception of Southwest, all major US airlines have filed for bankruptcy protection following the September 11, 2001 terrorist attacks. American was the only holdout, until now.

Although no single factor is to blame for the company’s failure, American cited high fuel prices and expensive labor contracts as contributing factors. Most of the day-to-day operations (at least from the consumer’s point of view) will remain the same. The company will continue to honor tickets and even frequent flyer credits. The flight schedule may be trimmed during the reorganization process, but not in any dramatic way according to the airline.

With the other airlines already out of their bankruptcies and making money I’m sure some are wondering what took American Airlines so long. However, maybe this is a testament that the bankruptcy laws are working properly; allowing a company to languish just long enough so as to be sure that bankruptcy is truly the last resort.

FTB vs. BOE

Navigating your way around the IRS can be a formidable task, one that many prefer to leave in the hands of their tax attorney or other tax practitioner. However, practitioners agree that the California equivalent — the Franchise Tax Board (FTB) — is even worse. In general, the California rules tend to be tougher than the federal rules and the FTB personnel tend to be more difficult and steadfast in enforcing their rules.

One specific complexity in California has to do with the procedure for appealing a tax case. Some states have a state tax court serving as the proper venue after a case has been appealed to the limits at the administrative level, which mirrors the federal process and Federal Tax Court. But, of course, California does things differently. Once you have exhausted your options administratively, there is nowhere to go except the State Board of Equalization (BOE). The BOE consists of fiveelected members that functions like a court, but is not a court. This article from Robert W. Wood further describes the “quirkiness” of the California BOE.

IRS E-File

Since a growing number of Americans are filing their returns electronically, there is no room for error in IRS computer systems. The IRS must be relentless in its pursuit of excellence with regard to all aspects of the Modernized e-file system. Attention to system security, capacity, and performance accuracy are paramount.

 

~ J. Russell George, Treasury Inspector General for Tax Administration

 

Don’t Delay Filing Taxes

My internet connection is just a bit slower today and I wonder if it is due to all the Cyber Monday traffic. I’m going to make today’s post short. I don’t want you to stop what you’re doing — our economy needs you to continue making your online purchases. But take just a moment to think about your taxes.

We are creeping up on the end of the year and it’s a good time to assess where you stand with your federal taxes. Do you anticipate owing taxes for 2011? Many people will owe, and as a result, some will delay filing their tax returns. Don’t delay. File your return on time even if you know you are going to owe and even if you know you can’t pay. There are always options available to you if you cannot pay, and it is not worth the headache to incur additional penalties and interest associated with failure to file.

Talk with the attorneys at Montgomery & Wetenkamp about your tax resolution options.

How Far are We from Major Tax Reform?

Lawmakers are proposing drastic tax policy changes that could have a substantial impact on regular taxpaying Americans and their access to tax relief. According to tax lobbyist, Kenneth Kies, we could expect a major tax code revision by 2013 under the following conditions:

  1. Republicans would have to maintain control of the House
  2. The president would need to bring around conservative lawmakers
  3. Ideally it would be a Republican president with a more moderate tax reform agenda

Kies likes Newt Gingrich for this task. He does not see the time spent on tax reform now to be a waste of time, even what may have been done by the (failed) super committee. Some of what is done now could be laying the groundwork for real reform in the months and years to come.

Madoff’s Unnecessary Tax Payments

We often hear about people trying to get out of paying taxes that they are legally obligated to pay. I blog about tax crimes all the time. But seldom do we hear about somebody paying taxes that are not owed as part of their fraudulent scheme.

Bernie Madoff went to great lengths to ensure that his fraud would not be exposed. He and his firm paid some $326 million in taxes on behalf of foreign investors in connection with the sale of securities. The only problem is Madoff’s firm never purchased or sold any securities on behalf of foreign investors.

Legitimate firms pay taxes. This much Madoff understood. Perhaps Madoff was thinking that by paying as much as he did, it would eliminate any doubt about the legitimacy of his operations.

I believe that the payments made to the IRS falsely identified the funds as income tax withholding in order to give the investment advisory arm of Bernard L. Madoff Investment Securities LLC (BLMIS) an air of legitimacy and to avoid inquiries . . .

~ Irving Picard, trustee acting on behalf of Madoff’s victims

Picard struck a deal with the IRS today whereby the IRS would refund the $326 million. This will help offset some small fraction of the losses suffered by Madoff’s victims.

The IRS “Pendulum”

If we were to step back and take a look at the history of IRS collection efforts (wage garnishment, bank levy, seizure of assets, etc.), we would see that it has not been consistent in its use of all available collection tools.

Longtime observers of our federal tax system note sagely that there are recurrent pendulum swings.  For some years, the IRS will be encouraged to collect, collect, collect, and inevitably be admired for its toughness perhaps earning an accolade: ruthless.  Then, after a few too many citizens have rugs pulled from under them, Congress and the Executive Branch will rebuke the IRS.  Telling the IRS how mean and inappropriate it is, Congress will cut back on the agency’s authority and make it play nice.

~ Robert W. Wood, Forbes Contributor

Wood goes on to explain that the pendulum swung to the far “NICE” side in the late 1970s. Then it swung back to the “RUTHLESS” side by the 1990s. Then back to “NICE” in the late 1990s. So is there any question where we stand today?

 [T]he pendulum has again swung the other way.  The economy is hurting, revenues are declining and wells are drying up.  Facing budget cuts and revenue shortfalls everywhere, the IRS is on a mission to collect, collect, collect.

~ Robert W. Wood, Forbes Contributor

Wood sees the IRS getting tougher on criminal investigations and even regular collection cases. For example, primary residences and retirement accounts have always been “fair game” technically, but in reality the IRS usually doesn’t have the heart to take them. Not now, according to Wood. See full story here.

The 4809 “Informational” Letter Campaign

Throughout the month of November, tax preparers across the nation will be grumbling about having received IRS Notice 4809, some under their breath, and some publicly.

One of the gripes I am seeing is that people don’t appreciate feeling like the target of some IRS sting operation. The letters were meant to be informative, but the tone of the letter comes across a little accusatory and condescending.

Funny how 4809 is indicative of a broader problem with our nation’s tax system, one which the Commish touched on in his recent speech to an audience at Harvard’s Kennedy School of Government. Much of his speech focused on the need to simplify the tax code:

[M]aking the tax code less complex is the single most important thing that could be done to improve taxpayer service and boost compliance.

~ IRS Commissioner, Douglas Shulman

 

Changes to the tax code, even for the goal everyone agrees on – simplicity – are hard because inevitably it means more money for some and less for others.

~ IRS Commissioner, Douglas Shulman

The problem is that “to simplify” usually means “to generalize,” and when you generalize, some people get the shaft. I think that’s what the Commish is saying here. These 4809 letters are no different. The IRS could have made this campaign very complex: it could have conducted extensive research to determine which tax preparers are complying with the law and which are not. The Service could have spent a huge amount of time and money on this project. But instead the IRS decided to simplify and send them out in a “shot gun” strategy to all return preparers who may ever remotely encounter the issues that they wanted to emphasize. In the process, some top notch, extremely competent return preparers are going to be insulted and offended. And, unfortunately, many of those who should be paying attention to the contents of these letters will toss them aside without giving them a second thought.

What we have these days is a tax system that tries to be tailored to every individual and situation, but it’s way too complex. As policymakers consider making drastic changes to the tax code, hopefully they can achieve the desired simplicity without lumping everyone together unfairly.

IRS Advisory Committee Recommends Big Change to Installment Agreement Guidelines

The IRSAC (Internal Revenue Service Advisory Committee) released its annual report today. IRSAC is composed of 28 non-IRS members divided into four subgroups. Two of the subgroups (Wage & Investment and Small Business / Self-Employed) recommended changes to the Streamlined Installment Agreement Program.

An installment agreement is normally available to taxpayers who are unable to pay their tax debt in full. A Streamlined Installment Agreement (SIA) is available to taxpayers with aggregate unpaid balances of $25,000 or less, so long as the monthly installment will pay off the entire balance within 60 months. The SIA is granted without managerial approval, without the need to divulge financial information to the IRS, and in many cases, without the need to file a Federal Tax Lien. The $25,000 threshold has been in place since 1998.

The IRSAC Wage & Investment and Small Business / Self-Employed subgroups identified “repeater” balance due taxpayers as a major problem. To alleviate this problem, they recommended increasing the SIA dollar threshold to $50,000 and pushing more taxpayers to set up their installment payments through direct debit arrangements with their bank.

I think it is wise to increase the SIA dollar threshold because it will open up additional options to taxpayers who cannot pay their back taxes in full. However, I’m not sure this will have any meaningful impact on the “repeater” problem. Taxpayers unintentionally stack liabilities year after year when they do not have the means to pay their current-year taxes and their prior-year taxes simultaneously. A $50,000 debt would require a payment of $1,000/month (for 60 months), taking into account the daily accruals of interest on the account. Increasing the SIA threshold to $50,000 would do more to alleviate this problem if the IRS also agreed to increase the length of these agreements beyond 60 months.