Tax Avoidance is Nothing New

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I don’t know anyone who doesn’t do what they can to pay less taxes. Yeah, I know, this statement is a double-negative, but its true. Everybody is looking for tax relief in some form or another. Some go to great lengths to avoid paying taxes, and some cross the line into the territory of illegal tax evasion. Although tax avoidance is common at all socioeconomic levels, the government has always been eager to make examples of the rich and famous.

I came across a very interesting memo written by Treasury Secretary Henry Morgenthau in 1936 addressed to President Franklin Roosevelt. Morgenthau names several prominent Americans that were found using questionable tax avoidance techniques, including Jacob Schick (the shaver guy), Charles Merrill & Edwin Lynch, George Westinghouse, Alfred Sloan (President of General Motors), Alfred du Pont, and William Crocker. He also describes 9 of the most popular techniques used at the time.

Roosevelt subsequently launched a full-scale federal investigation into tax avoidance activities, even though we know now from a look at his own taxes that FDR himself was no stranger to such techniques. Interestingly, as part of Morgenthau’s conclusion, he states that tax avoidance is isolated to the wealthiest citizens. I’m not sure what to make of this. It is either a testament to his naiveté, or one of the weaknesses of his report. Or perhaps things have really changed in this country since 1936.

Outsourcing Payroll Duties: Employers Beware

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Many employers hire third-parties to handle payroll and keep track of related tax filing obligations. However, whether or not the payroll service provider is liable for failure to file and/or pay the employment taxes, depends on the nature of the relationship. Most payroll arrangements fall under one of three categories:

1. Standard Payroll Service Provider (PSP)

2. Form 8655 Reporting Agent (RA)

3. Form 2678 Agent

Neither the PSP nor the RA are liable for ensuring that tax returns are filed timely and deposits and payments are made timely. Even though they may be responsible to do so under their agreement with the employer, the employer retains sole responsibility from the IRS’ perspective. But the 2678 Agent is a different creature. It files and pays the taxes of the employer using its own EIN and it shares joint and several liability with its clients (the employers) should penalties be assessed for failure to file or pay. See the IRS’ Third Party Arrangement Chart for a more detailed breakdown of the differences among these three relationship options.

Embracing Boredom: New Book for Tax Geeks

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Are taxes tedious and boring? Most people probably think so. But there is no better form of tax reliefthan the kind that comes from knowing the law and avoiding tax troubles in the first place. Check out this amusing excerpt from a book review written by Tax Notes writer, Joseph Thorndike:

Every tax professional knows the look — that mixture of pity and dismay when you tell someone what you do for a living. Sometimes it comes with a flash of fear behind the eyes — fear of taxes, sure, and probably fear of the IRS. But also, more profoundly, fear that you might actually talk about your job. God help us.

I can almost hear the chorus of complaints that readers are going to raise. “It’s not that bad! Some people are really interested in taxes!” Right. If it makes you feel better, you go ahead and tell yourself that. And by the way, I’d love to see the slides from your family trip to Yellowstone last year.

If anyone doubts the inherent tedium of taxation, we now have independent confirmation. The late, great literary phenomenon David Foster Wallace singled out taxation as the most boring topic imaginable. In writing his posthumously published novel, The Pale King, Wallace made taxes — and their administration in particular — the epitome of soul-killing tedium. “The whole subject of tax policy and administration is dull. Massively, spectacularly dull,” he writes.

Germany Cracking Down on Tax Evasion

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Americans aren’t the only ones who keep Swiss bank accounts. Germans have a long history of evading taxes in this manner too, and the German government has finally established a way to mitigate the damage this has done over the years. The two countries are reportedly going to sign a deal on August 10th that would allow for taxation of German deposits in Swiss banks. Under the agreement, Swiss banks could have to pay the equivalent of $2.5 billion to the German government for damage already done due to tax evasion over the past 10 years. These German accounts will thereafter be considered legitimate. Also, some think that this accord will make a positive impact on the relationship between these two countries.

Like the IRS, German tax officials have cracked down on tax evasion in recent years, and it appears to be paying off. See full story here.

Is There Tax Reform on the Horizon?

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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.

Job Search Deductions

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In the latest issue of its Summertime Tax Tips series, the IRS addresses deductions that may be claimed by job-seekers that could supply some tax relief come April:

1. The deduction is allowed only if you are searching for work within the same field in which you currently work.

2. Money spent on preparing and mailing resumes is deductible.

3. Employment agency fees are also deductible.

4. Money spent traveling in search of employment within the same occupation is deductible as long as the trip is undertaken primarily for the job search.

5. These types of job search deductions are not allowed if there was a substantial break between the end of the last job and the beginning of your search.

6. These types of deductions are not allowed for first time job searches (i.e., only for reemployment purposes).

7. You can claim job search expenses that amounts to more than 2% of your adjusted gross income.

Lawyer Indicted for Tax Evasion

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Who: Knoxville attorney, John Threadgill

What: Indicted by Federal Grand Jury for paying personal expenses out of his law practice and deducted them as legitimate business expenses.

How Much: Threadgill was charged with evading $1.4 million in Federal income tax during the period of 1986-2004.

More Info: If convicted, Threadgill faces a fine of up to $100,000 and 5 years imprisonment. Clickhere for full article.

This is a very blatant example of tax fraud. I’m sure that the magnitude of the offense and the fact that the offender is an attorney played a major role in the IRS deciding to pursue him criminally. I suppose the legitimate forms of tax relief just did not seem as attractive to him at the time.

IRS Offers Tax Relief in Response to Discontinued Air Travel Taxes

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The Internal Revenue Service (IRS) announced that it would offer tax relief to those consumers taken for a ride by greedy airline companies. By July 22, 2011, Congress failed to extend federal air transportation excise taxes. The discontinued taxes include:

  •  A 7.5 percent tax on the base ticket price;
  • A domestic segment tax of $3.70 per person per segment (a single takeoff and single landing);
  • An international travel facilities tax of $16.30 per person for flights that begin or end in the U.S., or $8.20 per person for a flight that begins or ends in Alaska or Hawaii; and
  • A 6.25 percent tax on the amount paid for transporting property by air.

Air travelers with trips on or after July 23, 2011, who paid the discontinued taxes when purchasing their tickets on or before July 22, 2011, may obtain a refund from the IRS for the discontinued taxes paid, if the air carrier fails to refund the discontinued taxes.

In a greedy move, some air carriers have since increased their air fares in an amount equal to the discontinued excise taxes. Therefore, air travelers pay the same overall price that would have been paid if the excise tax had not been discontinued, with the air carrier profiting in accordance with the discontinued tax. It will be interesting to see if those greedy air carriers maintain their newly increase fares if and when the federal air transportation excise taxes are reinstated by Congress.

Trebek’s Coolness not in Jeopardy

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Alex Trebek is the coolest guy ever. He always seems to have an independent knowledge of the questions he asks on his show (even though he may be peeking at an index card with the answer on it). He never, ever, ever lets an answer slip by that is not in the form of a question. And back in the day, when he was at his prime, he had a mustache that could rival that of Tom Selleck.

Now, at the age of 71, Trebek is fighting crime. He recently injured his Achilles tendon while chasing a burglar he caught going through his stuff in a San Francisco hotel room. See the full AP news story here.

Chuck Norris and Dos Equis guy should probably watch their backs.