IRS Spends $80 Million with Credit Cards: Legitimacy of Purchases Cannot be Verified

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Yet another TIGTA audit has brought to light deficiencies in the Internal Revenue Service. This time the problems relate to the use of IRS-issued credit cards that are made available to certain IRS employees. Purchases on these cards are supposed to be tightly regulated. But TIGTA found that many of the restrictions on these cards have been ignored, and management has failed to take corrective action when violations have been found.

The cards are meant for purchases under $3,000 — purchases over this amount are governed by a separate set of internal controls. Furthermore, card purchases must not be made without prior managerial approval. TIGTA found significant violations in both areas. The $3,000 limit rule is regularly circumvented by splitting up purchases into two transactions. Improper credit card purchases are not always detected because the IRS lacks sufficient management controls. Instead of asking for more funding and more staff for collections, the IRS really needs to keep a better eye on how they are spending the money they do have.

TIGTA’s review covered the period of September 2007 – March 2009. Here are the key stats:

  • 4,270 credit card holders within IRS
  • 1,024 approving IRS officials
  • 16 different IRS business units
  • 174,000 purchases
  • purchases totaling $80 million

One Perspective on Cain’s 9-9-9 Tax Plan

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At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase. . . . Mr. Cain’s tax plan stands out as exceptionally ill conceived.

~ Bruce Bartlett, former George W. Bush economic policy adviser

IRS Will be Watching EITC Claims More Closely in 2012

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The Earned Income Tax Credit (EITC) is a refundable credit for low to moderate income households. It is a very desirable form of tax relief because it actually puts money back in their pockets . . . if they qualify.  The problem is that over the years the IRS has also paid out in circumstances where the taxpayer doesn’t really qualify. In fact, in 2009 over 26 million people received nearly $59 billion through the EITC.

In an effort to promote more accuracy (and less fraud) in connection with EITC, the IRS is likely going to make it a requirement that all paid tax preparers include Form 8867 with all returns that include the credit. Right now it is a proposed regulation still awaiting public comment and final approval. In years past, tax preparers were required to complete this form (to prove their due diligence) and retain it in case of audit. But under the proposed regulation, paid tax preparers would be required — beginning January 1, 2012 — to actually file the form along with the return.

TAS No Longer Taking Simple “Delay” Cases

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The Taxpayer Advocate Service (TAS) — that independent organization within the IRS whose mission it is to assist taxpayers — announced that it no longer has the manpower to assist taxpayers where the only complaint is IRS delay. Taxpayers must go elsewhere for real tax relief.

TAS groups its cases into two broad categories: (1) Economic Burden and (2) Systemic Burden. They will continue to handle all Economic Burden cases, but the following “systemic burden” issues will be remanded to the IRS:

  1. Processing of Original Returns
  2. Unpostable/Rejected Returns
  3. Processing of Amended Returns
  4. Injured Spouse Claims
According to the TAS, delays associated with these 4 issues are typically due to the IRS being overloaded with work. And the way they see it, it makes no sense to push the problem off on them, who are also overloaded with work. So, the TAS will temporarily not be helping taxpayers with these specific issues. Of course, a systemic issue could be causing (or about to cause) an economic burden, and in that case, the TAS will hear it. Full details here.

Extension on CA State Taxes Ends October 17th

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The California Franchise Tax Board (FTB) issued a news release on Friday reminding Californians of the extended tax return deadline and also siting some interesting statistics.

Like the IRS, the California tax authority does cut some slack for procrastinators. And like the IRS automatic extension, the California version also comes to an end on October 17th. Sometimes the tax relief most needed is just some more time. The FTB tries to make it as convenient as possible to both file and pay your state taxes.

Filing CA Taxes

  • ReadyReturns (partially completed returns just waiting for the taxpayer to complete online)
  • CalFile free e-file program
  • other free or fee-based e-file services listed on FTB’s website
  • view wage & income information online with MyFTB Account

Paying CA Taxes

And now for the statistics. This year over 1.5 million Californians requested an automatic extension and will have to file by the October 17th deadline. This actually eases the burden on the state in April by spreading out the work a little more evenly throughout the year. By now California taxpayers have filed more than 14.7 million personal income tax returns of which 11.7 million were e-filed. Also, the state has issued 9.5 million refunds totaling $8.1 billion.

Denmark’s “Fat Tax”

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It’s bad enough that the tastiest foods are always so bad for you, now in Denmark they are getting more expensive too.

Beginning October 1st Denmark initiated it’s new “fat tax,” which increases the price of certain foods by 16 krone (about $3) per kilo of saturated fat. It is expected to have a substantial impact on the price of everyday staples such as milk, cheese, bacon, and butter. The Danish (the people and the pastry) are not thrilled. These traditional goodies are said to be made with generous amounts of butter:

Although the government approved the tax by an overwhelming majority, the people of Denmark and others have made the following arguments in opposition to the tax:

  1. Negative impact on organic dairy farmers
  2. No distinction in the law between fat in whole foods, processed foods, or even fast food
  3. The government passed the tax to increase revenue, not to improve the health of the Danish
  4. May have unintended consequence of driving people to purchase cheaper, less healthful foods
  5. A fat tax should focus on cutting trans fats, not saturated fats
  6. Many people will still eat the same things they ate before the tax
I guess the upside is that tax relief and weight relief will now come in the same package.

Feds Say CA Pot Shops are Just Fronts for Illegal Trafficking

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Today the US Attorneys announced that they are cracking down on marijuana dispensaries in California, not because they are illegal under federal law (although they are) or because they are not paying their taxes.  No, the real problem is that many of them, as they are currently operating, are illegal under California law.

Federal prosecutors have evidence that many of the pot dispensary storefronts are just that —fronts for illegal drug trafficking operations. They say that these operations have reached levels that were never intended when medical pot was legalized back in 1996.

Here’s what makes them illegal:

  • large-scale commercial operations
  • drug trafficking across state lines
  • owners reaping huge profits
  • non-medical usage of product

Not all pot shops in California fit this description, and that’s why only certain shops are being targeted by the feds. But today’s announcement was certainly meant to shake things up in an industry that was never meant to become an industry.

Can Greece Improve its Tax Morale?

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One of the reasons Greece has had such a difficult time raising revenue is because tax evasion is sort of their national pastime.

In Greece the “tax gap” (the difference between what should be paid by taxpayers and what actually gets paid) is about 1/3 of total tax revenue. About 28% of all business in Greece is conducted outside of the tax system (“under the table”). And the cost of tracking down so many tax cheats is astronomical. All other factors being equal, Greece spends 4 times what the US spends on tax collection efforts.

One author believes that this culture of tax evasion is the result of poor enforcement practices and low “tax morale.” See The New Yorker article “Dodger Mania” by James Surowiecki.

Enforcement

  • tax collectors in Greece frequently accept bribes
  • tax laws have too many loopholes and are not applied fairly
  • even when tax cheats are caught, justice comes very slowly in backlogged tax courts

Tax Morale

  • the people of Greece doubt their government will spend the tax revenues judiciously
  • since the rich and prominent members of society avoid paying taxes, the burden falls on those who can afford it least
  • citizens in any country tend to pay if they see others paying, but if they see others cheating then the tendency is to cheat (paying taxes seems to be a social animal)

It’s easy to see how these problems are related. Low tax morale leads to difficulties with enforcement, and enforcement problems lead to poor tax morale. The morale issues will probably work themselves out over time as long as Greece really cracks down on enforcement. Maybe they should start putting away famous tax evaders like the IRS has done here; that would send a strong message.

Feds Threaten to Shut Down CA Pot Shops

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It seems the recent IRS audit of Harborside Health Centerwas only foreshadowing of something bigger. The tax problems were the least of their worries.

Several California marijuana dispensaries received love letters this week from the US Attorneys Office demanding that they shut down in 45 days or face criminal charges. Pot dispensaries operate legally under California law, but they are in violation of federal drug laws, and we all know which law prevails in situations like these.

Letters also went out to landlords graciously giving them the option of evicting their pot-selling tenants or risk seizure of their property by the federal government. Those who have followed this power struggle for the last few years are not surprised by what is going on; they see it as the United States simply following through on its threats.

Those who operate pot dispensaries understand that only a limited segment of the population will accept the position that they provide an indispensable service to society. Instead they focus on all the tax dollars that they have generated over the years. Even so, I think they’re wasting their breath. The feds have sent a very strong and clear message lately, through multiple agencies, including the FBI, IRS, DEA, even the EPA.

See full AP story here.

There should be more information tomorrow because the US attorneys are supposed to make a special announcement.

Weed Wars in Oakland, CA

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Oakland’s Harborside pot dispensary has a nifty slogan: “Out of the Shadows, Into the Light.” It’s actually a pretty good description of what the Internal Revenue Service has done with their tax returns recently.

Ever since California legalized marijuana for medical purposes, pot shops here are thriving . . . but not if the IRS can help it. The IRS recently audited the 2007 and 2008 returns of Oakland’s Harborside Health Center and hit them with a $2.4 million tax bill. It sounds like a lot of money, but Harborside’s is a huge dispensary with 84 full-time employees and gross revenues of $22 million a year. And what really inflated the tax bill is the IRS’s disallowance of their business expenses. Well, the IRS did allow them to deduct the cost of “medicine” purchased (that’s what Harborside calls it on their website), but nothing more. The IRS’s position is based on an old rule forbidding business expense deductions for operations that traffic in illegal drugs.

I have no idea why the IRS would question the legitimacy of this joint knowing they are the official 1st place winner of the coveted 2011 High Times Medical Cannabis Cup.

Harborside is fighting the audit and publicizing their good deeds, like the fact that they are pumping all kinds of money into the local economy. On Friday, September 30th, Harborside made a ceremony out of its $360,000 city tax payment as if it were some kind of voluntary contribution.

** I can’t take credit for the clever title of this blog post. The Discovery Channel will be airing a reality show based on the Harborside drama called “Weed Wars.”