When Taxes Were Simple

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Excerpts from the March 1, 1919 edition of THE MOHAVE COUNTY MINER AND OUR MINERAL WEALTH. Daniel C. Roper, Commissioner of Internal Revenue at the time, basically describes the whole tax code in a couple paragraphs:

The normal rate of tax under the new act is 6 per cent of the first $4,000 of net income above the exemptions, and 12 per cent of the net income in excess of $4,000. Incomes in excess of $5,000 are subject also to a surtax ranging from 1 per cent of the amount of the net income between $5,000 and $6,000 to 5 per cent of the net income above $1,000,000.

In addition to the $1,000 and $2,000 personal exemptions, taxpayers are allowed an exemption of $200 for each person dependent upon them for chief support if such person is under eighteen years of age and incapable of self-support. Under the 1917 act, this exemption was allowed only for each dependent “child.” The head of a family who supports one or more persons closely connected with him by blood relationship, relationship by marriage, or by adoption is entitled to all exemptions allowed a married person.

Payment of the tax may be made in full at the time of filing return or in four installments, on or before March 15, on or before June 15, on or before September 15, and on or before December 15. Revenue officers will visit every county in the United States to aid taxpayers in making out their returns. The date of their arrival and the location of their offices may be ascertained by inquiring at offices of collectors of internal revenue, post-offices and banks. Failure to see these officers, however, does not remove the taxpayer of his obligation to file his return and pay his tax within the time specified by law. In this case taxpayers must seek the government, not the government the taxpayer.

Then he describes what the penalties were for failing to pay:

Any person who deliberately conceals tax liability, or who falsified a return in order to reduce or evade any internal revenue tax, or who deliberately abets such concealment or fraud finds arrayed against him the entire strength of this bureau, pressing for the full civil and criminal penalties. That is the attitude toward the tax-evader, expressed in one sentence. Whether he is a moonshiner, a stealthy trafficker in habit-forming drugs, a juggler of income figures, a delinquent in making the sworn return the law requires, or a revenue violator of any kind, the bureau is charged with the duty of hunting him out and exacting the full punishment provided in the law.

Here is what will happen to them if they don’t for failure to file a return on time, a fine of not more than $1,000 and an additional assessment of 25 per cent of the amount of tax due. For “willfully refusing” to make a return on time, a fine not exceeding $10,000, or not exceeding one year’s imprisonment, or both. For making a false or fraudulent return, a fine of not more than $10,000, or imprisonment for not more than one year, or both, together with an additional assessment of 50 per cent of the amount of tax evaded. For failure to pay the tax on time, a fine of not more than $1,000 and an additional assessment of 5 per cent of the amount of tax unpaid, plus 1 per cent interest for each full month during which it remains unpaid.

See the full article here.

Taxpayer Burden Reduction

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Today I was pondering the burdens placed on taxpayers and wondering, “what if there was a convenient way for taxpayers to voice their concerns and offer their opinions to the IRS about the burdens of filing & paying taxes?” Then I came across Form 13285A and the Office of Taxpayer Burden Reduction. That’s right, tax relief from those who are handing out the tax bills?

For all I know this  “office” is down in the basement of an IRS office building in Lanham, MD manned by a single IRS employee who can be seen clutching his favorite red stapler from time to time. But the form looks legit. You just need to provide (1) your contact information, (2) a description of the problem, (3) a description of who the problem affects, and (4) your proposed solution to the problem.

You may submit the form anonymously, but the instructions to the form state that the IRS may need to get in contact with you to obtain more details regarding the problem and/or solution and that “[n]ot providing any or all of the contact information may delay or impede the IRS review process if there is inadequate information to analyze the issue.”

The IRS will do a cost-benefit analysis in determining which ideas it will implement. But if your suggestion is that the tax laws should be changed, don’t bother with this form; the IRS can’t do anything about that. You would need to reach out to the legislators if your gripe is with the underlying tax laws.

Federal Tax Liens

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What is a Federal Tax Lien? With all this talk of liens lately, we thought it would be helpful to give a little refresher.

The Federal Tax Lien (FTL) is just one of the many collection tools used by the Internal Revenue Service (IRS) to collect past-due taxes. The FTL secures the IRS’ interest in taxpayers’ property without actually seizing and selling the property on the spot.  A tax lien technically attaches to all the taxpayer’s property, whether real or personal, and the IRS may choose to enforce its lien rights at the time the property is sold.  In practice, however, the FTL usually only affects rights to real property, or personal property of extraordinary value. The FTL is considered a “passive” collection tool. In contrast, bank levies, wage garnishments, and property seizures are all active collection tools.

Under new IRS guidelines, a Federal Tax Lien should not be filed unless the amount owed is $10,000 or more, although circumstances may warrant that a lien be filed on amounts less than $10,000.  Normally a tax lien will not be released until the tax liability has been fully satisfied.  However, a tax lien can be released by entering into a Direct Debit installment agreement as long as the total balance is $25,000 or less.  The IRS will also release a FTL if the taxpayer can convince the government that releasing the lien will facilitate collection of the tax or that it is otherwise in the best interest of the government.

Although tax practitioners and the Taxpayer Advocate Service have cast serious doubt on the effectiveness of the Federal Tax Lien as a collection procedure, it is still widely used and widely feared to this day.

United States v. Hoskins

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Who: Jodi Hoskins, former owner of “Companions,” a Salt Lake City escort service.

What: Convicted of tax evasion, and recently lost an appeal on a sentencing issue.

How Much: The government claimed to have incurred a tax loss (due to her evasion) of $485,000. Defendant argued that the tax loss was closer to $160,000.

Other Info: Since her sentencing was tied to the tax loss suffered by the government, defendant tried to show that, had she filed her returns, she would have claimed a ton of deductions which would have reduced the tax owed and, therefore, the actual tax loss was much lower. The appeals court rejected this argument, but did not go so far as to say that a tax evader cannot under any circumstances point to hypothetical unclaimed deductions to mitigate charges.

Hoskins failed to report over $1 million in cash receipts during the period in question; it was a fairly clear-cut case of tax evasion. For legitimate forms of tax relief, contact Montgomery & Wetenkamp.

IRS Tax Liens up 74 Percent

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The IRS is addicted to filing liens — even in an era when the American people need tax reliefthe most. The use of tax liens has increased an astounding 74% since 2006. A report released this week by the Treasury Inspector General for Tax Administration (TIGTA) shows that the use of all available IRS collection tools are on the rise. But when it comes to liens, the IRS clings to them like a chain smoker does to his pack of Camels.

Both obviously do more harm than good. Liens have been shown to destroy one’s credit and ability to earn a living, thereby making it even more difficult to pay back what is owed. I’m not sure why lien filings have increased. Perhaps it is an old habit for the IRS who sees it as an easy way to do something on an account where other options are not apparent. Whatever it is, the IRS needs to get a little more creative.

Although none are as impressive as the statistic on lien filings, the TIGTA report cites the following additional statistics:

  • 4% increase in number of levies and seizures in 2010
  • 4% increase in number of IRS employees between 2006 and 2010 (103,811 employees in 2006 compared to 107,622 employees in 2010, with a huge spike during fiscal year 2010)
  • 19% increase in number of Collection & Exam function Enforcement personnel (not including management)

Reporting Gambling Winnings

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Joe goes to Las Vegas for the weekend with $1,000 to spend.  On Saturday he wins $9,000 playing blackjack.  Then on Sunday he loses $8,950 playing blackjack.  He comes home with  $1,050.  Joe knows that he must report his gambling winnings because the tax code defines gross income as “all income from whatever source derived.”  Assuming this was the only time he gambled all year, he can report $50 in gambling winnings as income on his tax return, right?

Wrong.  Taxpayers must include the full amount of gambling winnings in gross income.  They may not reduce gambling winnings by gambling losses with only the net difference included, otherwise it ceases to be gross income.  Instead, taxpayers can deduct gambling losses (up to the amount of gambling winnings) as an itemized deduction [see Internal Revenue Code section 165(d)].

So Joe needs to report his $9,000 in winnings and then claim his $8,950 in losses as an itemized deduction.

Deceptive Tax Lien Mailers

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If you owe enough in back taxes, the IRS will file a lien against your property which secures an interest in that property. The IRS “Notice of Federal Tax Lien” would inform you of the recording of the lien, which becomes public record. If you have received this notice, then chances are you have also received a stack of mail from various tax resolution firms wanting your business.

These “FTL mailers” are often given the appearance of an official IRS notice, complete with an official-looking seal, fabricated notice numbers, and meaningless codes.  Some letters contain tables and formatting that is also meant to replicate the style of IRS correspondences.  Most of these mailers, if read carefully and completely, do divulge the true identity of the sender. However, the firm name is usually somewhere near the bottom of the page, in a small font, and missing any contact information other than a toll-free phone number.

If you have received any mailers that fit this description, please shoot me an email (jwetenkamp@mwattorneys.com).  Also, I would love it if you could send copies to me; I’m sort of collecting them:)

IRS Wants Quantity More Than Quality

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The Taxpayer Advocate Service (TPS) reports that IRS employee performance measures focus too much on “cycle time.” In other words, the IRS performance rules encourage employees to take actions and close cases quickly, even at the expense of quality work. This results in IRS employees setting unrealistic deadlines for taxpayers who face audits or IRS collection activity.

Unrealistic deadlines. This is certainly a problem that any practitioner could confirm, but for me it doesn’t hold the #1 position on my list of IRS problems. If the IRS is setting unrealistic deadlines, then at least they’re being responsive. The situation where the IRS employee responds too slowly can be just as frustrating as one where the employee is acting too quickly. However, even worse than that is the lack of discretion given to IRS employees. Most of them do not have authority to deviate from their rules, even in situations where it makes no sense to follow them. Of course, I understand that additional discretion can only be given to employees who, by their exceptional training, education, and experience, are responsible enough to not abuse that discretion. I guess the quality vs. quantity problem really begins at the employment interview.

Tax Relief? Buffet Wants None of It

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While most Americans are looking for tax reliefwherever they can find it, billionaire investor Warren Buffett would actually like to see his taxes increased.

How could I not mention Warren Buffett today? He is all over the news for his New York Times opinion piece about how the government should raise his taxes and the taxes of all the “mega-rich.” He says he would immediately raise rates on households with taxable income of more than $1 million, and he would add an additional increase for those making $10 million or more. He says he and his mega-rich friends have been coddled long enough by Congress, and it is time for the government to get serious about shared sacrifice.

The billionaire investor goes on to say “Last year my federal tax bill . . . was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”

And what about his mega-rich friends? He says that most of them wouldn’t mind paying more in taxes either! Unbelievable. That can’t be true. They didn’t get where they are by seeking out opportunities to pay more taxes. How could anybody say with a straight face that Buffett’s comments were not politically motivated. One thing is true; President Obama is already citing (and backing) Buffett’s words as he tours the country on his re-election campaign.

Taxes in Cuba

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In communist Cuba most people work for the government. Private sector workers in Cuba must give up to 50% of their income back to the government under the new tax system. The government would like to increase the number of private sector workers, but I don’t see how they’re going to accomplish that if they don’t lighten up and give them some tax relief.

Interesting article: For Cuba’s New Entrepreneurs, the Tax Man Cometh.