Law Targets Government Contractors with Tax Debt

A law enacted in 2006 would have required governments at the federal, state, and local levels to withhold 3% of money owed to contractors with even the slightest federal tax debt.  The law is kind of in limbo at this point: it is slated to go into effect in January 2013 but lawmakers, including President Obama, are pushing to get it repealed. And it looks like it is going to be repealed despite data highlighting the widespread non-compliance of government contractors.

Arguments for the law:

  • Businesses should not be awarded lucrative government contracts if they are not going to pay their taxes.
  • It is needed to pay for Bush-era tax reductions.

Arguments against the law:

  • It assumes every government contractor is a tax cheat.
  • It will cripple some small business who simply can’t float the 3%
  • Contractors may pass the costs on to the government.
  • It would be difficult and expensive to administer.
  • Job protection is more important right now.

I have not seen the text of this legislation, but if it would require that government contractors fully pay their tax bill before getting fully paid by the government, then it seems that would also apply to contractors on installment agreements. Some installment agreements last 5 years or longer, so they would have a long time to wait for their remaining 3 percent!

World Series of Tax Reform

On October 22, 1986, President Ronald Reagan signed into law the most sweeping tax reform in United States history.  At the conclusion of his speech he said:

I feel like we’ve just played the World Series of tax reform, and the American people won.

Its been 25 years, so maybe we’re due for another win.  The consensus these days is that the tax code is a mess and we need to start over again.  But there are nearly as many opinions as there are pages to the code.  Here are just a few.

California’s New and Improved “Top 250 List”

Normally “first place” is a position that many aspire to.  Unless you occupy the first spot on California’s Top 250 Delinquent Taxpayers list.

California tax collectors (employees of the Franchise Tax Board) have a reputation for being, how shall we say this, . . . very zealous in their duties.  The FTB stops at nothing to collect overdue taxes, even rivaling the efforts and tactics of the IRS.  One of the ways California encourages tax compliance is by publishing its annual “Top 250 Delinquent Taxpayers” list on its website as a type of public shaming exercise.  Right now the winners are Halsey & Shannon Minor of Los Angeles who owe exactly $14,247,341.09 in personal income taxes.  Apparently nobody in the entire state of California owes more state taxes than they do.

But even if you’re at the bottom of the list, the consequences are the same.  And now, with the passage of AB 1421, it’s more than just the tax bill and the shame. Consequences now include having your drivers license, and possibly professional license, suspended.  Also, the list will be doubled so that it includes the top 500 worst offenders.  The author of the bill, Henry Perea, has strong words for California’s top 500:

Everyone on this list has had a chance to work with the state to resolve their tax issues but have chosen instead to bury their heads in the sand and continue to spend lavishly.

But I wonder how accurate that statement is.  According to the FTB website, the only criteria for inclusion on the list is that the taxpayer owes over $100,000 and falls into the top 250 (now 500).  The oldest tax liens were filed in 1996, but many of them were just filed last year.  At any rate, California has sent a clear message to the wealthiest taxpayers in the elite neighborhoods of LA and San Francisco.  Now they should try to get that message to the masses to make it really effective.

IRS May have to Make Do with Less in 2012

In difficult financial times, individuals are forced to take a good hard look at every single expense to make sure it is necessary.  And in the federal government, it’s no different.  Lawmakers are looking across the board at every service, program, committee, and agency.  Expenses that cannot be eliminated will be reduced as much as possible, . . . and rightly so.  Right?

What about expenses that generate revenue?  Should there be an exception?  IRS Commissioner Douglas Shulman believes that not all government expenses are created equal.  He believes that his agency should be treated differently.

The House Appropriations Committee has recently approved proposed legislation that would cut funding to the Internal Revenue Service by $600 million for fiscal year 2012 and Shulman is up in arms about it.  He has some bold words:

[T]hese budget cuts will result in a direct increase to the nation’s deficit.

~ Douglas Shulman, Commissioner of the IRS

Nice soundbite at least.  Here’s what he thinks will happen if we cut funding to the IRS.

  1. reduction in service
  2. reduction in revenue collected
  3. negative impact on voluntary compliance for years to come

As for a potential “reduction in service,” Shulman says that, in some instances (if the budget cuts are approved), it would take 5 months for the IRS to respond to taxpayers’ written inquiries and only half of those telephoning the agency would get through.  Resolution of back taxes would be slowed significantly.  I don’t know, maybe Shulman should welcome these cuts — it would allow his agency to continue providing low quality service, except now they would have a good excuse.  Read Shulman’s full letter here.

The Fake n’ Bake Tax

I spent more than a few minutes searching for an appropriate visual aid to go along with this post. I wanted to make sure it was just right.  Okay, maybe I got a little sidetracked.

If you’re not familiar with the new tanning tax that went into effect last summer, maybe you’re the type that likes to soak up the natural sunlight which, by the way, probably causes cancer just the same, but it’s harder to regulate.  The legislation that went into effect on July 1, 2010 imposes a 10% excise tax on ultraviolet tanning services — paid by the burn victims and collected (and reported) by the burners.

TIGTA (IRS’s big brother) released a report today showing that the new tax is not generating near the amount of revenue it was expected to generate.  It was supposed to raise as much as $50 million in the 4th quarter of 2010 and $200 million this year. Instead it raised only $17.8 million in the 4th quarter of 2010 and $36.6 million during the first 6 months of 2011.  So why the poor results?  These are some possible reasons that TIGTA identified:

  • The tax was pushed through quickly and the tanning industry wasn’t prepared
  • Businesses aren’t paying and the IRS isn’t enforcing compliance like it should
  • IRS has incomplete / outdated records of applicable businesses

Read about a recent public hearing on the tanning tax here.

Read about California’s recent ban on indoor tanning for minors here.

Read about the metal umlaut here.

NJ No Longer “Film Friendly”

Movie and television producers are going to realize, if they don’t know already, that they won’t find maximum tax relief by setting up shop in New Jersey.

You probably heard about New Jersey’s governor, Chris Christie’s denial of a $420,000 tax credit for MTV’s Jersey Shore earlier this year. Christie doesn’t approve of the show because it “perpetuates misconceptions about the state and its citizens.” It’s probably safe to say that most people from NJ would prefer out-of-staters soon forget the association with Jersey Shore.

However, democrats continue to push for passage of legislation that would grant tax credits for production companies that shoot films and TV shows in the Garden State. The democrats point to a 2008 study showing that movie maker tax credits are good for jobs and good for the local economy in general. The republicans point to a 2010 study showing that movie production incentives have no such effect.

The irony in all this is that New Jersey, specifically Fort Lee NJ, is known as the birthplace of the motion picture industry. The state suffered its first hit 100 years ago when most filmmakers moved their operations to California where they could film year-round with little threat of inclement weather. Could these tax issues be the second major setback for New Jersey’s film industry?

A Tax Even the Wealthy Can’t Pay

Greek parliament approved the new controversial property tax Tuesday evening. The hope is that this will increase the country’s chances of obtaining further bail-out money, precisely 8 billion euros, and keep the country solvent. However, the government has to be willing to exchange solvency for turmoil and unrest. Experts believe this is the wrong approach, and what the people of Greece really need is tax relief and drastic trimming of the public sector.

The property tax will be devastating to normal citizens; many will not be able to pay. However, even more telling is the effect it may have on wealthy government officials. If they can’t pay it, then it’s difficult to tell who can.

I believe that the tax limits of Greek society have been exhausted. I would say they have been exhausted for some time. . . . The property I own was purely obtained through inheritance. Personally, I have never bought anything. . . .  I will be obliged to sell some of these properties. There is nothing else I can do.

~ Theodoros Pangalos, Deputy Prime Minister of Greece

See full story here.

Heightened Enforcement of 1099 Compliance

Politicians are desperately trying to increase revenue without raising taxes.  One way to do this is to beef up enforcement of the tax laws already on the books.  According to the IRS, the best place to focus these efforts is on small businesses and their tax obligations, specifically their 1099 reporting requirements.  The IRS has always had a more difficult time getting money out of the self-employed.

IRS Commissioner, Doug Shulman, recently told a Congressional committee: “the thing you have to remember about the [tax] gap is it’s like a deep shale oil reserve, it’s not money sitting there that’s easily tapped, in many ways we have tapped the easy money… the real answer, the place where we have leverage, is information reporting.”

What this means for the regular taxpayer is that the IRS is going to be furiously ramping up its collection efforts in the coming months.  The government seems eager to pour more money into the IRS.  According to Commissioner Shulman, each 1 percent improvement in compliance will produce an added $20 billion in revenues.  For more details, click here.

Is There Tax Reform on the Horizon?

Today the House passed the debt limit deal and tomorrow it is expected to be approved by the Senate. A 12-member panel will then be called and charged with the task of locating $1.5 trillion in budget savings by late November. Inevitably some of the panel members will want to overhaul the tax code to achieve this task. This would be a huge deal as the last comprehensive tax reform occurred back in 1986.

The tax deal itself does not look like it would raise taxes on corporations or the wealthy. However, the special committee could raise money by getting rid of their tax loopholes and subsidies. Rest assured, there will be no tax relief for the wealthy. If the committee doesn’t clean up the tax code, then President Obama has said he will be allowing the Bush tax cuts to expire in 2013. See the full story in Reuters.