New Modesto tax relief announced

The City of Modesto recently announced details of a new tax relief and cash incentive program to lure businesses to downtown Modesto. The tax breaks apply variably to new businesses and existing businesses.

The new Modesto tax relief program will be available to businesses located on 10th Street between K Street and H Street; 11th Street between K Street and I Street; and J Street between 9th Street and McHenry Avenue.

New Modesto retail businesses will be eligible for a full refund of Modesto City mill taxes and local sales taxes for the first year of business. Existing Modesto retail businesses that extend their hours will be eligible for a refund of Modesto local sales tax only collected during the extended hours for one year.

The City of Modesto is also promoting cash incentives for job creation in the downtown Modesto area for both retail and non-retail businesses. Other incentives are available for new developments and physical improvements. Full details of Modesto’s business and development incentive program are available on the City of Modesto’s website.

With an overall improving economy it’s good to see local government risk a short-term loss in tax revenue for the long-term impact new businesses may bring. Hopefully for Modesto, the gamble pays off.

2014 National Taxpayer Advocate Report

It’s a little bit (ok, a lot bit) frustrating reading the National Taxpayer Advocate’s annual report to congress that was released today.  Of course my frustration is with the IRS, not the Taxpayer Advocate.  It’s pretty much the same report year after year.  The IRS is severely understaffed and underfunded, and its employees are less than qualified.  The level of service is reaching abysmal levels and still dropping.

This year the Taxpayer Advocate applauded the IRS for adopting a Taxpayer Bill or Rights administratively, but is still pushing for it to be enacted legislatively so that it really has some “teeth” and so that it becomes a permanent fixture that encourages voluntary compliance.

One point that evokes an abundance of frustration for me is the “absence of studies to determine whether existing penalties promote voluntary compliance.”  What this means in plain English is that the IRS has been punishing Americans with penalties as long as anyone now alive can remember, but the IRS has done relatively little to determine if these penalties actually work.  This is the functional equivalent of building a castle on sand or on an active volcano.  And if you think this is a minor problem, you’ve probably never had a tax debt that has tripled in size due to penalties and interest.  Furthermore, you’re probably unaware of this little factoid:

The number of provisions in the Internal Revenue Code that either authorize or require the IRS to impose penalties has ballooned from 14 in 1955 to over 170 today.

A penalty is considered effective if it promotes voluntary compliance.  In other words, a penalty (or all the tax penalties combined) should cause taxpayers who are on the fence about paying to decide that they will pay voluntarily rather than expose themselves to IRS enforced collections.  And the IRS needs to strike the right balance: not too severe and not too light.  That’s not an easy task, but the IRS does not appear to be taking it very seriously, according to the Taxpayer Advocate.  Ever heard of the IRS Office of Service-wide Penalties?  Of course you haven’t because it’s a 6-man operation tucked neatly out of sight that hasn’t answered to Congress in over 20 years.

On a positive note, I am very happy with my own direct experiences with the Taxpayer Advocate Service (TAS) recently.  I had previously been told that the TAS would not provide assistance to taxpayers without the presence of an IRS levy or threat of levy (or other adverse action).  And even then, I was under the impression that TAS may not take a case without the presence of some sort of delay.  However, I have noticed that the TAS intake department has become quite a bit more liberal.  In fact, I have a couple cases that the TAS gladly accepted where there was no financial hardship whatsoever, only delay.

IRS Doctors & Nurses

Have you seen the comments from former IRS territory manager, Michael Gregory, in a recent “Ask Me Anything” session on Reddit?  Many readers have felt dissatisfied with his answers because he seemed to be overly concerned with defending the IRS, defending Lois Lerner, and griping about underfunding.  I talk with the IRS every day and I must say that this guy is definitely “one of them.”  As a 28-year veteran, admittedly it would be difficult to remove oneself from that role and the IRS lingo, even after retirement.  But this guy went a little too far.  As one Reddit user pointed out, he almost sounded like an IRS lobbyist.  I totally agree, but let’s move on to something more substantive in his comments.

At one point Gregory compared IRS specialists to medical specialists:

The IRS has 13,200 revenue agents and about 2,000 specialists. I managed 1/4 of the country’s specialists in engineering and valuation issues, with specialization comes an added degree of due diligence and accuracy. It’s like if you go to a doctor you get referred to a specialist – the same thing is true at the IRS.

I do not disagree with this comparison.  But the problem should be obvious: there aren’t near enough specialists to go around.  Think of the ratio of 2,000 specialists to how many million taxpayers?!  Same with revenue agents (the tax doctors); 13,200 isn’t nearly enough.  So what happens is a vast majority of taxpayer accounts are handled by (to complete the analogy) the nurses of the IRS — the customer service reps.  There are too many inexperienced, undertrained, underqualified employees.  It can be very frustrating for taxpayers who reach out for help, and they just want to be able to resolve their tax issues and move on.  In many cases, if they could just get in touch with a doctor, the issue could be resolved the same day.  But in reality they often get bounced around from nurse to nurse and nothing gets accomplished.

The IRS (IRS insiders) would have you believe that Congress can throw money at this problem and make it go away, but money alone will not change it if all they do is increase the number of nurses.

Audit Resistant Partnerships on the Rise

The IRS generally can include returns filed within the last three years in a tax audit.  There are exceptions, but the IRS normally does not go back further than three years.  What you may not know is that the IRS has the same amount of time to audit large partnerships.  According to a recent report from the Government Accountability Office (GAO), it takes the IRS about 18 months of preparation and fact finding before they can even begin this type of audit.  GAO considers a partnership large if it has more than 100 partners and $100 million or more in assets.

The GAO report underscores the necessity of tax reform.  There are some 20-year old provisions, such as this one, that don’t make sense anymore.  Large partnerships can be very complex, with multiple tiers of partners, making it very difficult to determine where to start.  Many of today’s large partnerships are finance and insurance firms, and it’s great for them, but the IRS really hasn’t been able to effectively audit them.

This problem has become more acute in the past 10 years or so since the number of pass-through entities such as partnerships has been on the rise and the number of corporations has been declining.  Very interesting statistics from GAO:

The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.

Rolling Stone on Taxes

I read a lot of tax-related articles and they come from a variety of sources, but it is not every day that I find one in Rolling Stone.  I have to say that the article entitled “The Biggest Tax Scam Ever” by Tim Dickinson is very good; a very detailed scholarly piece about big corporations avoiding billions of dollars in taxes right under our noses.  I enjoyed the story, but I didn’t love that it came out of Rolling Stone.

I can tell I’m feeling the urge to do one of those “When I was a kid…” rants, but I’ll try to refrain.  I know that Rolling Stone has always published political-type “news” stories.  In fact, some would probably say its political writers are more skilled at what they do than their music staff is at picking the best music (here I refer specifically to the fact that Rolling Stone did not initially give Led Zeppelin favorable reviews — obviously a serious mistake, and one that cannot really be forgiven, even after all these years).  However, when I used to read Rolling Stone (in the 1980s) I seem to remember it being mostly a music and pop culture magazine with serious topics scattered here and there.  These days the publication looks like it is being written for an audience that is well, MY AGE!  *facepalm*

I tend to think of it this way.  When a Burger King employee gets off work and goes out to dinner, the last thing that person wants to eat is Burger King.  And the last thing I want to read about when I pick up a music magazine after work is taxes.  Am I the only one!?

Valley Braces for Hidden Gas Tax

There is something ominous coming our way in January 2015; something that has been called a “hidden gas tax.”  Those are three horrifying words.  Most consumers would agree that fuel is taxed enough already and fuel prices are certainly high enough already.  But that is what Californians have to look forward to in January 2015 if nothing can be done to delay it.  It sounds awful, and I think it really could be awful, but is it really a tax at all?

The Modesto Bee describes a cap-and-trade rule “that would require energy companies to purchase greenhouse-gas emission credits for transportation fuels beginning Jan. 1.  The costs of those credits will likely cause the price of gasoline and diesel to go up 12 to 17 cents a gallon – and potentially more, depending on demand for credits in state auctions.”  It sounds like the price of gas is anticipated to go up as a consequence of the mass purchase of emission credits.  Ok, but that’s not a tax!

Assemblyman Henry Perea of Fresno is requesting a three-year delay on said rule as it applies to transportation fuels.  He says that the constituents in his jurisdiction (the Central Valley) would be particularly hard-hit by an increase in fuel prices.  The Bee article states that residents of towns like Modesto often have to drive farther for their business or trade and they have older, less fuel-efficient vehicles compared to folks on the coast.  Also, valley residents spend a larger percentage of their income on gasoline, according to studies.  I don’t dispute the studies, and I certainly would support any reasonable initiative aimed at curbing gas prices, but have you been to San Francisco lately?  Don’t they burn almost as much gas sitting in traffic as we do driving down highway 99?

Tax debt case is the next frontier for free speech regulation

According to recent news reports, across the pond in Europe, the European Union’s highest court has ruled that people have the right to be forgotten, even on the internet. The case at issue stems from a tax debt once allegedly owed by Attorney Costeja González who wanted the world to forget an article published by La Vanguardia about tax collection efforts taken against him. The tax enforcement efforts included the seizure of his home and resulted in a 1998 Spanish news blurb that was 36 words long specifying that his home was being repossessed to pay off debts. His legal efforts to obtain anonymity have resulted in infamy.

Proof that a tax debt will follow you, the news blurb at issue was a google search result when completing a google search for Mr. González. Apparently microfiche no longer exists in Europe and google lost its battle that search results containing links to the article regarding Mr. González’s tax problems violated his right to privacy and that people have the right to be forgotten. Hopefully the floodgates have not been opened too far to extend to a complete shutdown of the internet. If it does, I’m not shocked to learn that a taxing authority was to blame.  

Supreme Court to Hear Case on IRS Summons Power

If the IRS, as part of a tax audit or examination, wants something from the taxpayer, they tend to ask nicely only once.

Sometimes it is difficult to hand over the books and every last financial detail to the IRS.  It can be somewhat like letting a stranger into your bedroom; even if you have nothing to hide, you don’t want them there.  Also, document requests can be quite burdensome.  Some items cannot be retrieved or compiled without expending inordinate amounts of time and money.  Lastly, the information sought by the IRS can sometimes appear to bear very little relevance to the issue(s) at hand.  But however difficult it may be to comply with a document request, or however ridiculous the request may seem, the IRS usually gets what it wants.

What if the taxpayer doesn’t comply to that initial polite request?  Maybe the IRS asks again with some emphasis, stronger words, or even a threat of summons.  Normally the IRS resorts to a summons only after the taxpayer has ignored a couple informal requests or after the taxpayer has openly refused to provide the information sought by the IRS.  When a taxpayer ignores a summons, the procedure is for the IRS to go to the Justice Department and request a court order to enforce the summons.  And courts have routinely rubber-stamped such requests.  A court-ordered summons is very serious and cannot be ignored without risk of civil or criminal contempt.

This week the US Supreme Court will decide whether or not a taxpayer should be granted an evidentiary hearing in which a judge would determine if a summons is proper and not simply intended to harass the taxpayer, over-complicate the issues, or delay the process.  This is a big case as it relates taxpayer rights.  The IRS should not be able to ask for anything and everything under the sun with no explanation as to its purpose and no procedural mechanism for the taxpayer to dispute it.

Supermodel Gisele Blames IRS Audit on her Forbes List Ranking

Are you not making the millions you planned to make?  Is your face not occupying magazine covers? Is your name nowhere to be found on any Forbes lists?  Well, the silver lining is that you are not subject to any extra scrutiny by the IRS.  Supermodel Gisele Bündchen was audited recently and believes that her 7-year stint at the top of Forbes’ “Highest Paid Supermodels” list was at least partly to blame.  Perhaps Gisele gets a double dose of said scrutiny, being married to football star Tom Brady, who also sits atop his respective Forbes highest paid list.  Maybe living life in relative anonymity isn’t such a bad thing after all.

Gisele’s beef with Forbes is that they don’t have the details of her accounting, they don’t have her bank statements, and their estimates are too high.  She obviously makes a lot of money, but nowhere near the $42 million that Forbes has her making.  Forbes countered by citing all the various sources of their income estimates: editorial shoots, independent licensing ventures, spokesperson gigs, and contracts from beauty and fashion companies.

For all we know, she may have been audited anyway.  There are many different factors (or “red flags”) that are considered when selecting cases for an IRS audit, but one of the biggest factors has to be an extremely high income.

Still, Gisele doesn’t think too highly of Forbes.  She says “[t]here should be a magazine to quantify knowledge, understanding and love for people: that is power.”  Not a bad idea for a magazine, and she better get on that quick before the government figures out a way to tax knowledge, understanding, and love too.

Koskinen's Press Club Speech

The IRS Commissioner typically speaks at a National Press Club luncheon once a year.  It is the perfect venue to learn about the Commissioner, his vision, and everything at the top of his to-do list.  Here are a few things that stood out to me from Koskinen’s Press Club remarks from April 2nd, 2014:

  • He enjoys college basketball, . . . or at least March Madness, . . . or at least Duke.  He made a pretty funny joke about Duke’s loss in the early rounds of the NCAA championship.
  • During the three months he has been serving as head of the IRS, he has visited 18 of the 25 largest IRS offices.  He has jumped right in and run around quite a bit for an old guy.
  • He likes to hear the opinions of the minions.  I really do respect this approach and hope that it is more than just words and becomes part of the culture at the IRS.
  • He is realistic; he does not pretend to be perfect and he doesn’t expect IRS employees to be perfect either. In fact, he said that his theory is “bad news is good news,” meaning that even negative reports have a silver lining because at least it signifies that the news is getting reported.  After all, a problem cannot be corrected unless and until it has been identified.  I see his point, but I’m not sure I would have taken it that far.
  • He is big on the whole idea of restoration of public trust and the notion that every taxpayer should be treated fairly.  He spent a large portion of his talk discussing the investigations into the IRS’ tax exempt application scandal.
  • He wraps up by commenting on the tax filing season, problems with voluntary compliance and tax fraud, FACTA, customer service (by phone and at local service centers), tax reform, and administration of applicable provisions of the Affordable Care Act.
  • The biggest problem, according to the Commissioner, is insufficient funding.  He basically needs another billion dollars, give or take.