Sin Taxes: An Opposing Viewpoint

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I came across an article that expresses an interesting take on “sin taxes.”

Proponents of sin taxes (taxes on cigarettes, alcohol, soda, fatty foods, etc.) talk about public health benefits, but isn’t that still about money at the core?  What I mean is, sick people run up big hospital bills, some paid by taxpayers through government services and some paid by the public in the form of higher insurance costs.  If we can encourage people to avoid harmful foods and substances, then we can (according to sin tax proponents) reduce public health costs.  Right?

Not so fast, says David Callahan with Huffington Post.  If sin taxes are all about money, then the whole concept is flawed.  The analysis is simple: most people who abuse their bodies die more quickly.  They need medical care like anybody else, but presumably for a shorter fraction of their lives.  It’s the “healthy” people who incur higher medical costs in the long run as their bodies slowly break down during old age.

The analysis is simple, but it’s the conclusion that gets tricky.  Callahan is not suggesting that sin taxes are pointless because they can result in a healthier population, which can result in higher medical costs in the long term.  That’s just a little macabre — he’s not saying that.  He’s saying that the effects of sin taxes are inconclusive and need to be studied more, that’s all.  And until there is conclusive evidence that they are effective, we should probably stand in favor of tax relief.

Tax Humor

Taxes, tax attorneys, tax policy — not very funny stuff.  This is about as good as it gets.  I found it in the comments of an article I read this morning.  Somebody who goes by “Auldphart” offering his ideas for raising more revenue in this country:

Anyone who has carpeting in their house would have to pay a carpet tax.  How about a thumb tax?  Then there’s that old standby, taxing people’s patience.  If you have one or both your legs, you’d pay a shin tax. People with both legs would naturally pay twice as much.  People who have flat tires would have to pay a flat tax.  Progressives would have to pay a progressive tax, while Republicans would have to pay a regressive tax.   People leaving the country to avoid taxes woud be charged an egressive tax.  People who frequent gymnasiums would be charged an exercise tax.  Those eating at McDonald’s could be hit with something called a bigmaca tax.  Finally, people with Lyme disease or Rocky Mountain Spotted  Fever would be subject to a tick tax.

The IRS "Lock-In" Letter

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It is common for self-employeds to fall behind on their estimated tax payments and find themselves stuck with insurmountable tax debt.  As a tax attorney, I see this all the time.  However, even W-2 employees can owe taxes at the end of the year if they claim too many allowances on their Form W-4.

The IRS is big on “voluntary compliance” — in other words, they initially rely on the taxpayer to figure out how much to have withheld for taxes during the year and how much he/she owes when taxes are filed.  But the IRS can also come back and audit you if they believe there were errors on your tax return.  Similarly, the IRS can force you to claim a lower number of allowances if they believe you are not having enough federal taxes withheld.  They do this by way of the “lock-in letter.”  The IRS lock-in letter instructs the employer to withhold federal income taxes at a specified higher rate and prohibits them from accepting a W-4 that reduces that rate.  Of course you may dispute the lock-in rate and get it changed . . .  with IRS approval.

Do You have Reasonable Cause?

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Sticking your head in the sand and trying to ignore your IRS tax debt can be costly. The most obvious problem is penalties and interest, which causes the debt to increase with every passing day.

And it is not as easy as you might think to get the IRS to disregard (or “abate”) the penalties. The IRS will consider penalty abatements if the taxpayer is able to show reasonable cause; however, this is a pretty high standard when it comes to tax obligations. Reasonable cause exists when the taxpayer exercised ordinary business care, but still failed to comply with their tax obligation (i.e., usually filing and/or paying late).

In its analysis of “ordinary business care” the IRS is supposed to weigh all applicable facts and circumstances, including the following:

  • taxpayer’s reason for non-compliance
  • compliance history
  • length of time
  • circumstances beyond taxpayer’s control

Death, serious illness, and natural disasters are typically some of the strongest “excuses” for building a penalty abatement case. Forgetfulness is almost always a losing argument. Most of the time it makes more sense to seek tax relief through other channels because penalty abatement is often a dead end road.

Starbucks: How Evil Are They Really?

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If you haven’t heard about Starbucks’ tax problem, here is a very brief synopsis.  A Reuters story broke last week which outed the popular coffee chain for having paid only £8.6 million on sales of  £3 billion in Britain since 1998.  And then people were outraged when Starbucks offered to come clean by paying £20 million over the next two years, as if they are in a position to simply offer whatever they feel is a fair amount.

#1 – How dare Starbucks avoid paying taxes at this time of extreme belt-tightening all across Europe! If multinational corporations would just pay their share in taxes, then the UK and other European countries wouldn’t be in such bad shape.

#2 – How dare Starbucks think they can just throw out a figure they determine is fair when regular tax payers must pay everything they owe plus penalties & interest on top of the original tax debt!

But let’s put this in perspective.  The media fails to emphasize the fact that Starbucks isn’t doing so hot in the UK; they haven’t been making a profit.  Rents and royalties have been expensive.  Correct me if I’m wrong, but Starbucks is not being accused of doing anything illegal; they are being accused of tax avoidance (i.e., paying as little in taxes as legally required).

Kookie or Not, You Still Have to Pay Your Taxes

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In his Twitter profile, Stephen Baldwin describes himself as “an actor, author, Jesus Freak, Radio Talk Show Host, and the kookiest of the Baldwin brothers.”  Stephen, also the youngest of the Baldwin brothers, was arrested in New York yesterday for failing to address his tax problem properly.  Ok, that’s a nice way to put it.  He is being charged with failure to file (and pay) his 2008-2010 New York state tax returns.

The state of New York is without question trying to drive home a bold message here. You can’t live in NY and take advantage of the its public benefits (especially in this economic climate) and expect everyone else to pay the bills.  I am not familiar with the New York state taxing authority, but it is uncommon for the IRS to take such a heavy-handed approach with similarly-situated taxpayers.  However, the cardinal rule is that you should always file your taxes, even if you know you can’t pay.

If the Kook portion of Baldwin’s persona is responsible for getting him into this criminal tax debt debacle, then maybe the Jesus Freak will be able to set him free.  Yesterday he found time to address his followers in a somewhat penitent tweet:

Thnx4all the prayers, Been trying2 work this out4some time! Want2correct this&of course pay what I owe! Difficult situation. God is good.

New Tax on Medical Devices

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Beginning on January 1, 2013, medical device manufacturers will have to pay a 2.3% tax on the gross income from many of their products.

The excise tax is on the medical device manufacturers and importers (who) will now have access to 30 million new customers due to the health care law.

~ Treasury Department spokeswoman, Sabrina Siddiqui

I’m not sure what is meant by this statement.  She appears to be justifying the new law in hopes that these companies won’t see it as the tax problem that it is.  She appears to be saying that the new tax should not be difficult to pay since medical device makers will have so much more business under Obamacare.

The new tax does not cover over-the-counter medical products such as hearing aids, eyeglasses, or cotton swabs.  It mostly applies to devices used by doctors and nurses inside medical facilities. There seems to be some ambiguity in the law with respect to items that could be considered medical or non-medical, such as latex gloves. Job security for the tax attorney, I suppose.

Year-end Tax Tips

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Tax attorneys typically come in two flavors.  There are those who help you to avoid tax problems through tax planning.  These tax attorneys will advise you on the tax consequences of transactions and will help you to avoid paying more taxes than necessary.  And there are those who try to clean up the mess that has happened through poor tax planning.  These “tax relief” attorneys will help you with tax controversies and help you in situations where you owe taxes and cannot pay.  Our firm focuses on the latter, but today I want to pass along a few tax planning tips from Fox News writer, Kay Bell.  These are her year-end tax strategies, and they are specifically geared for what may lie ahead for us in 2013 (i.e., the “fiscal cliff”):

  1. Accelerate your income into 2012, if possible, to avoid having to pay higher taxes at a higher rate next year. However, be careful you are not illegally manipulating when you receive the income; the IRS looks at when you had a right to the income.
  2. Take capital gains in 2012 to avoid potentially higher rates.
  3. Sell major assets that have lost value (unless capital gains tax go up in 2013).
  4. Get medical and dental work done now that you can still easily claim itemized medical deductions.
  5. But some may want to defer itemized deductions until next year in order to offset potentially higher tax rates.
  6. Convert your traditional IRS to a Roth IRA

As always, these are very generic tax tips and you should consult a CPA, tax attorney, or other tax professional who is familiar with your individual circumstances before making these types of decisions.

 

State of California Holding $14 million in Tax Refunds

In these dismal economic times, so many hard-working citizens have tax debt up to their eyeballs and are desperately seeking tax relief.  It’s hard to believe there are taxpayers out there who let their refund go unclaimed or who don’t notice when it doesn’t come in the mail.  But every year state and federal taxing agencies publish data about the millions and millions of dollars in refund checks that bounce back to them due to a bad address.  Today the California FTB announced in a press release that it is holding over $14 million in refunds.

Granted, some of these refunds are so small that it is hardly worth a taxpayer’s time to call FTB and update his address.  But FTB stated that at the high end of the spectrum we’re talking about refunds in the $35,000 range.  I suppose some of these taxpayers are very wealthy and don’t need the money.  But I wonder how many of them have moved and don’t want the FTB to know their new address.  Or how many of these refunds are not claimed because the taxpayer knows they are the result of questionable tax strategies?

FTB reminds us that the best way to avoid the problem of a returned refund check is to sign up for direct deposit.