“Like colonoscopies, which also are disliked by everyone, taxes are a necessity. Unpleasant, yet essential.”
Elizabeth Warren’s corporate tax plan sounds reasonable. It isn’t.
By Karl W. Smith
Senator Elizabeth Warren really hates it when corporations that report billions of dollars in profit pay little or no tax to Uncle Sam. (She’s totally steamed about Amazon.)
As a policy-oriented presidential candidate and scholar of business law, Warren favors technical solutions to perceived problems, and last week she tackled this one in a post on Medium. She proposed what she called a real corporate profits tax on the most profitable 1,200 U.S. companies, a measure that seemed compelling in its simplicity and appeal to fairness. On closer examination, however, her plan would distort the U.S. tax code and degrade corporate governance.
To see why, it's important to realize that corporations calculate their profit using at least two different accounting methods. The first method, using guidelines from the Securities and Exchange Commission, determines how corporations calculate the earnings they report to Wall Street. A separate set of accounting guidelines from the Internal Revenue Service is used to formulate corporate tax bills.
Warren argues that companies game the system, using one method to report high profit to investors and drive up their stock price, and another to report low profit to the IRS to keep taxes down. By that logic, she contends, highly profitable companies ought to be taxed on the higher of the two figures.
But it doesn’t really work that way because the two sets of guidelines have different objectives. Scrapping one or the other would cause all sorts of problems.
The SEC guidelines are designed to minimize corporate fraud and misrepresentation. The goal is to prevent managers from fooling a company’s owners, the shareholders, about how much the company is earning. Before the SEC was established in 1934, corporate managers had been known to pull all sorts of elaborate scams.
One of the most common was to set up a shell company owned exclusively by the managers. The managers would then have the main corporation purchase goods or services from the shell company at inflated prices. This would drain profits from the main corporation while enriching the management.
Once the scheme had gone as far as it could, the managers would have the main corporation declare bankruptcy, leaving its shareholders with nothing. To prevent the shareholders from catching on ahead of time, the managers would issue profitability statements using obscure accounting tricks.
So the SEC forced corporations to calculate profits using generally accepted accounting principles. GAAP has a number of provisions that most people would consider odd, but are important for discouraging misrepresentation. For example, revenue is counted when it is earned, regardless of when it's received.
That means, for example, that when shoppers buy gift cards for Christmas, the money they spend doesn’t count as revenue to the company that issued the gift card. Only when a customer actually uses the gift card to buy something does the company get credit for earned revenue.
From the shareholder point of view, this makes sense. A gift card is a promise to deliver something later. A company that makes a bunch of promises it can’t keep isn’t actually earning revenue or making a profit that shareholders are likely to see.
The GAAP standards are conservative, so many companies emphasize alternative accounting measures that cast their performance in a more favorable light. Amazon.com Inc. chief executive Jeff Bezos, for example, has said that he doesn’t much care whether his company ever earns a profit as calculated by GAAP; his goal is to maximize another measure called free cash flow. That seems to be fine with his investors because the stock price has kept rising even though Amazon has usually reported quarterly losses or scant profit during most of its 22 years as a public company.
The IRS allows, and in some cases demands, that companies deviate from GAAP. For example, the IRS does not allow a corporation to deduct any expenses from its profit until money is actually spent. GAAP, on the other hand, requires a corporation to deduct losses from profit as soon as it's probable that the loss will occur.
This makes sense when you consider that the IRS is primarily interested in keeping shareholders honest, not management. The corporate income tax was first introduced to keep taxpayers from cheating on their individual returns.
The personal income tax originally applied only to the wealthiest 3 percent of the population, and Congress was concerned that much wealth would be sheltered inside corporations to avoid paying the tax. The corporate income tax discouraged that trick.
The corporate tax eventually evolved into a tool for tax fairness. Investors are expected to pay corporate tax on top of any taxes on capital gains or dividends. For this to work, however, the corporate tax has to be designed so that the burden actually falls on investors rather than workers.
If corporations respond to the corporate tax by reducing the number of workers they hire or the speed at which they expand, that doesn’t just lead to lower profit but to fewer jobs and lower wages. For this reason, the IRS allows companies to count losses they incurred in the early years of growing the company against a later year’s taxable income.
Warren singled out Amazon as a symbol of tax unfairness because it reported $9.4 billion in profit in 2018 but paid no federal tax. One of the factors reducing Amazon’s tax bill, however, was the hundreds of millions of dollars in losses the company was still carrying from previous investments.
Amazon also benefited from other credits that Congress created to encourage investment, including the research and development tax credit that cut $419 million off of its tax bill.
If Warren’s real profits tax were passed, these incentives to invest in the U.S. rather than abroad would be blunted. Whatever else one might think about Amazon, it has invested a staggering amount in the U.S. economy over the last two decades and says it has hirednearly 50,000 new employees per year since 2012.
More subtly, Warren’s tax would reduce the incentive to take risks. Since companies can now deduct losses from future taxes, it can pay to make a few risky investments. Warren’s tax would only apply to companies making over $100 million in profit and so there’s no provision in it to account for negative income from risks that don’t pan out.
Instead, the real profits tax would encourage companies to structure their finances to reduce GAAP profits in good years and increase them in bad years. General Electric Co. became notorious for using this type of trick, which its executives employed to convince investors that GE was a steadier company than it really was. Giving corporations a financial incentive to copy that type of behavior would reduce transparency and fight the goals the SEC is trying to achieve.
Landmark Supreme Court tax case reaches 100
Just about everyone who has studied tax law is familiar with the landmark Supreme Court decision in Eisner v. Macomber. It was first argued before the court 100 years ago, on April 16, 1919. (It was reargued later that year and decided in 1920.)
The case involved stock dividends — additional shares — issued by Standard Oil of California, which were received by Mrs. Macomber and were treated as income by the government. Mrs. Macomber paid the tax under protest and sued Mark Eisner, the collector of internal revenue, for a refund. The court ruled that the stock dividend was not a realization of gain by Mrs. Macomber.
Justice Mahlon Pitney delivered the majority opinion: “A stock dividend shows that the company’s accumulated profits have been capitalized, instead of distributed to the shareholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.”
Pitney boiled down the case to what he saw as the overriding circumstances. “The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.”
Justices Oliver Wendell Holmes and Louis Brandeis issued dissenting opinions.
Despite its age, the decision still has meaning for today, according to Michael Graetz, a professor of tax law at Columbia University. “Eisner v. Macomber is a classic case, one that I teach in my federal income tax class every year, even though its current status is questionable,” he said. “Proportional stock dividends, the subject of the dispute, are now exempt from tax by statute. The court’s definition of income — suggesting that only income derived from labor or capital can be taxed — was abandoned in the Glenshaw Glass case in 1955, which held that windfalls such as the punitive damages at issue could be made subject to income tax. And its constitutional decision suggesting that the realization requirement might be constitutionally required has been questioned in many decisions upholding mark-to-market rules.
“But Macomber may enjoy a new life this century,” he observed. “Chief Justice [John] Roberts cited it in NFIB v. Sebelius, the Obamacare case, in his discussion of what constitutes a direct tax and must be apportioned to the states under the Constitution. If an annual wealth tax, like the one proposed by Elizabeth Warren, is ever enacted, Eisner v. Macomber will certainly be cited in the challenges that will inevitably follow.”
And of special note to Accounting Today readers, one of the co-counsels on the case for Mrs. Macomber was George Welwood Murray, the great-grandfather of former Accounting Today columnist and Wolters Kluwer tax author George Jones. In his “Histories of the Predecessor Firms of Milbank Tweed Hope & Webb,” Murray shared his memories of how he and another co-counsel, Charles Evans Hughes, came to be involved in the Eisner case:
“There came to be a good many stock dividends,” he wrote. “For instance, the Standard Oil Company of California issued several such and the amounts involved were very large. We became ourselves counsel in an already pending case, Towne v. Eisner, Collector. The attorney, Mr. Louis H. Porter, for Mr. Towne was glad to take us in as direct counsel rather than merely as friends of the court. This is how we came to prepare the brief and Judge Hughes to make the argument in the Supreme Court. It was the first case he had argued there since his retirement from the court. Still later, we brought a case which we had ourselves gotten up, Macomber v. Eisner, Collector. This case was argued twice and decided favorably to us, and became the classic authority as to stock dividends.These were really great cases.”
Murray noted that in the Towne stock dividend case, “Justice Holmes used a somewhat famous phrase. Wishing to distinguish between the meaning of ‘income’ as used in the Sixteenth Amendment from the meaning of the same word as used in the Revenue Act. he said: ‘A word is not a crystal, transparent and unchanged, it is the skin of a living thought.’”
Supreme Court hears arguments on major state trust tax case
The Supreme Court heard oral arguments Tuesday in a case involving a state’s ability to tax income from a trust based on the beneficiaries residing there before taking any distributions.
At issue in the case, North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, is whether the Due Process Clause of the Constitution prohibits states from taxing the undistributed income in a trust that has no ties to the state other than a discretionary beneficiary residing in the state.
Withers Bergman LLP partners David Lehn and William Kambas, along with other Withers Bergman LLP partners, authored an amicus brief in support of the trust. In the brief, they noted that the Supreme Court’s holding in Wayfair altered but did not eliminate minimum nexus thresholds. “Reversal of the decision of the North Carolina Supreme Court in this case would eliminate such Constitutional standard, to the detriment of the orderly administration of state and federal tax systems,” they stated.
In a 2016 decision in the Court of Appeals of North Carolina, the North Carolina Department of Revenue lost an appeal from a North Carolina Superior Court decision holding that the state did not demonstrate the minimum contacts necessary to satisfy the principles of due process required to tax an out-of-state trust.
The North Carolina Supreme Court affirmed the lower court’s grant of summary judgment in favor of the trust and upheld the order directing the Department of Revenue to refund taxes and penalties paid by the trust.
The original trust was established by settlor Joseph Lee Rice III. Its situs, or location, was New York. The primary beneficiaries of the original trust were the settlor’s descendants, none of whom lived in North Carolina at the time of the trust’s creation. In 2002, the original trust was divided into three separate trusts, one for each of the settlor’s children. Kimberly Rice Kaestner, Daniel Rice and Lee Rice. At that time in 2002, Kimberley Rice Kaestner, the beneficiary of The Kimberley Rice Kaestner Rice Kaestner Family Trust, was a resident of North Carolina.
Tax returns were filed in North Carolina on behalf of the trust for tax years 2005-2008 for income accumulated by the trust but not distributed to a North Carolina beneficiary. In 2009, the trust filed a claim for refund of taxes paid amounting to $1,303,172.
Representatives of the trust asserted that the department’s contention that a beneficiary’s residence alone is sufficient to satisfy the minimum contacts requirement of the Due Process Clause and allow a state to tax a nonresident trust conflates what the law recognizes as separate legal entities — the trust and the beneficiary. The Court of Appeals of North Carolina and the Supreme Court of North Carolina agreed, holding that the connection between North Carolina and the trust was insufficient to satisfy the requirements of due process.
Lehn, who was present at the oral arguments, observed that the justices were all interested in and engaged in the discussion. Having read the transcript, Kambas added that the justices appeared to carefully consider "the component parts of the trust system.”
Lehn was glad to see the justices’ recognition that “it was a discretionary trust and the State of North Carolina was trying to tax an individual that had no right to anything. One of the justices said to the Solicitor General of North Carolina that he was trying to change the terms of the trust.”
“But you're changing the trust instrument, because you as a state are saying the trust must give them 20 percent each, because, regardless of what the terms of the trust are, I'm going to tax you on that 20 percent even though you might get none, even though you might get more,” said Justice Sonia Sotomayor.
“We would like to think that they would uphold the North Carolina Supreme Court,” said Kambas.
"But it’s never a slam dunk," Lehn added. “If they wanted to affirm, they could have simply let stand the lower court’s holding, so the fact that they decided to hear the case makes people nervous,” he said.
Tax refunds and tax decreases varied by state, says H&R Block
By Michael Cohn
The size of H&R Block clients’ tax refunds was up 1.4 percent this tax season, while their overall tax liability was down 24.9 percent, the tax prep chain reported, based on data through March 31, 2019.
However, the results varied dramatically by state in this first tax season under the far-reaching changes in the Tax Cuts and Jobs Act. In addition, taxpayers who didn’t adjust their withholdings last year often saw the size of their tax refunds drop on average.
“Tax reform represented the largest change to the tax code in 30 years, and on top of that, the IRS changed withholding tables in February 2018, automatically adjusting take-home pay,” said Kathy Pickering, executive director of The Tax Institute and vice president of regulatory affairs at H&R Block, in a statement. “All these moving pieces have made it hard for people to understand the TCJA impact on their individual situation. Relying on their refund size to determine what tax reform means to them may not only be misleading, but can also put them further at risk of not getting the tax outcome they want when they file next year. Instead, people can get W-4 help from H&R Block in person and online for the refund outcome they want next year.”
H&R Block found that nearly 80 percent of taxpayers did not update their W-4 last year, based on its own data. That led to a bump in the size of their paychecks throughout the year, but it was sometimes more than the decrease in their taxes. Tax liability fell nearly $1,200 on average, but the size of tax refunds was up just $43 on average. An extra $1,156 on average went into paychecks during the year, or about $50 a biweekly paycheck starting in March of 2018. The impact of the withholding changes will be accentuated even more in 2019 because they will be in effect all 12 months of the year.
“We’ve been encouraging people to update their withholding since February of last year, so that they can balance the benefits of tax reform the way they want,” said Pickering. “For some, that’s getting it all in a larger tax refund, for others it’s getting it in their paychecks, spread out throughout the year,” said Pickering. “This is especially important for anyone who lost some tax benefits, like if they have more than $10,000 in state and local taxes, large amounts of unreimbursed employee business expenses, or any life changes.”
Taxpayers who itemized deductions in both 2017 and 2018 had the biggest disparity in paychecks and tax refunds. While their taxes fell an average of 36.6 percent, their tax refunds dropped 22.7 percent instead of going up. They received approximately $50 more in each paycheck than would be needed, if they wanted to keep their tax refund roughly the same size as last year.
“It’s reasonable to assume that a tax cut would mean your refund will increase, but that’s not necessarily the case,” said Pickering. “The IRS updated how employers calculate how much tax to withhold from paychecks, which means you could have been getting all your tax cut — and then some — in your paychecks.”
That was also the case for homeowners who deducted their mortgage interest in both years. Their refunds dropped an average of 11.8 percent, but their tax liability also declined an average of 28.3 percent. The benefit of lower overall taxes showed up in their paycheck rather than in their tax refund.
Conversely, taxpayers with adjusted gross income of less than $25,000 had their TCJA impact on their paychecks and their tax refunds match the most closely. Their tax liability fell 12 percent on average, while their tax refunds increased 5.4 percent on average, so the remainder of their tax benefit went to their paychecks.
The taxpayer group with the biggest tax refund increase was those who took the standard deduction in 2017 and 2018. Their tax refunds increased an average of 6 percent.
“Either surprise – getting a larger or smaller refund than expected – can be a problem when you’ve been planning for and expecting something different,” said Pickering. “If you’re not happy with your refund, the important thing is to update your withholding so the same thing doesn’t happen to you again next year.”
Taxpayers in states with high taxes or high property values were especially concerned about the impact of the $10,000 limit on the state and local tax deduction. For 2016, 44.8 million taxpayers claimed $566 billion in SALT deductions, or more than $12,600 on average. Many residents of high-tax states or with high-value property pay much more than $10,000 in state and local taxes.
North Dakota experienced the biggest increase in its average tax refund of 6.7 percent while Washington, D.C., had the biggest decline at 6.1 percent. But in terms of average tax liability, New Jersey had the largest decline of 29.1 percent on average, while Washington, D.C., saw the smallest drop of 18 percent. Even though 13 states, including the District of Columbia, saw their average refund decrease, all 50 states and D.C. had their average tax liability fall anywhere from 18.0 to 29.1 percent.
The tax refund trends for the 2018 tax year are expected to be magnified in the 2019 tax year because the paycheck withholding calculations will be in effect all year. Failing to update a W-4 could mean that someone who had a refund drop this year could see their refund drop by even more next year: on average $200 more. The IRS is expected to release a newly revised W-4 in May and is recommending that taxpayers update their withholdings
Trump touts tax cuts in Minnesota seeking to sway public opinion
By Alyza Sebenius
President Donald Trump touted tax cuts passed by Republicans in 2017, even as the law has swelled the deficit and failed to gain traction with voters in last year’s midterm elections.
“We’re getting historic tax relief,” Trump said Monday at an event in Burnsville, Minnesota. “It’s the largest package of tax cuts and reforms in American history.”
The visit to Minnesota — a potential swing state in the 2020 election — is part of a week of events designed to promote the tax law’s effects on the economy as he turns to his re-election campaign. As Americans finish filing to the IRS for the first time under the new system, Trump is trying to turn public opinion over the cuts to his advantage.
Trump highlighted different cuts in the tax law, and described a doubling of the child tax credit. He said many Americans are getting an extra $2,000 a year in tax cuts, and others are getting “much more.”
“We lowered income tax rates across the board,” Trump said.
The Trump administration and congressional Republicans sold the tax law as fuel for economic growth and deficit reduction. Senate Majority Leader Mitch McConnell gave assurances in December 2017 that the measure would not only contain the deficit but be a “revenue-producer.” Trump’s top economic adviser, Larry Kudlow, said last week that the tax cut package had largely already paid for itself, a statement that conflicts with government data.
The U.S. budget shortfall grew by 17 percent to $779 billion in fiscal year 2018, which the Congressional Budget Office has said was partly a consequence of the tax law. Along with additional spending that’s been signed into law, the CBO projects the deficit will surpass $1 trillion by 2020.
The nonpartisan Tax Policy Center estimated that two out of three taxpayers would see their taxes go down. The biggest benefits, though, go to the top 1 percent, who are projected to receive an average tax break of $62,000 in 2018, while the middle one-fifth of income earners got an average tax cut of $1,090 — about $20 per week.
But an NBC/Wall Street Journal poll this month showed that just 17 percent of Americans believe their taxes have been cut. A Reuters/Ipsos poll in March found that 21 percent thought their taxes were lowered.
The tax cuts didn’t provide Republicans the boost they had hoped for in the November midterm elections when the Democrats took control of the House.
The tax law, passed by Republicans over Democrats’ objections, lowered the corporate rate from 35 percent to 21 percent and cut individual taxes across income brackets for eight years. It doubled the standard deduction and enhanced the child tax credit. And it closed or tightened various tax breaks — most notably by capping the amount of state and local taxes that can be deducted — which had its biggest impact on residents of high-tax, largely Democratic-run states.
There’s “no question” that the advantages for businesses from the tax plan have just begun to kick in, Treasury Secretary Steven Mnuchin told Fox Business Monday. He said those benefits will become more apparent over the next few years.
— With assistance from Sahil Kapur and Laura Davison
The economy is unprepared for a drop in tax refunds
By Danielle DiMartino-Booth
Recent headlines touting a budding rebound in U.S. car sales should not be celebrated. The much lauded 17.5-million-unit figure reported for March auto sales was actually buoyed by fleet sales, which rose to a two-year high. Retail auto sales — a pure reflection of cars sold to individuals — fell 4 percent in March and by the same amount for the first quarter, according to Cox Automotive.
Even after accounting for seasonal factors such as which period had more selling days, the data paint a bleak picture of consumer spending, which isn’t likely to get any better given the trends we are seeing this tax season. Internal Revenue Service data show tax refunds are down 4.1 percent over 2018, and the strategists at UBS AG estimate refunds will be $25 billion lower than they’d initially estimated this year.
Although the Tax Cuts and Jobs Act enacted in late 2017 increased take-home pay somewhat last year, millions of households nevertheless treat tax refund season as a built-in component of their annual budget. Whether it’s that summer vacation, the family room face lift, or yes, that down payment on a new set of wheels — the tax refund proceeds are the planned funding source. And consider that at the same time refunds are down, gasoline prices are up by about 50 cents a gallon from their 2019 lows, equating to a $65 billion de facto tax on households.
It’s no exaggeration to say that there are few risks to the global economy more daunting than a persistent slowdown in U.S. consumer spending. At 17 percent, U.S. consumption’s contribution to global gross domestic product eclipses that of the 16 percent attributable to the entire Chinese economy, according to Deutsche Bank AG.
Black Knight data show that February and March mark the high points of the calendar year in which mortgage delinquencies decline due to tax refunds helping homeowners catch up on their payments. It’s probably no coincidence that mortgage delinquencies rose this February for the first time in 12 years. There's evidence that consumers looking to bolster their finances are turning to their homes in increasing numbers. Tappable home equity has fallen by $348 billion since peaking at $6.06 trillion in the second quarter of 2018, with $229 billion of the decline occurring in the fourth quarter as the housing slowdown deepened. Refinancing activity is up 43 percent over last year.
Some of the impetus to raise funds comes down amid a slowdown in wage growth. As noted by TS Lombard’s Steven Blitz, average hourly earnings for all workers slid to 3 percent in March on a three-month annualized basis from 3.6 percent in October.
The implications for the auto industry are twofold. April retail car sales are unlikely to rebound as tax bills hit household budgets. This one month of added strain will likely be the proverbial hair that breaks the camel’s back. According to Ward’s, auto inventories have already piled up to the extent production cuts of 4.2 percent were pushed through in February. “If demand does not make a sharp upturn, there will have to be some paring of dealer stocks through a combination of higher retail spiffs or production cuts, Ward's noted in a March 4 report.
The strain of inventories is increased further by the weakness in car sales in China, the world’s largest market since 2009. In 2018, Chinese car sales rang in at roughly 28 million units, compared with about 17 million in the U.S. As was the case with retail sales in the U.S., 2018 marked the first year of falling Chinese sales in decades. According to Xinhua, China’s state-run media outlet, car sales fell 12 percent in March from a year earlier, the 10th straight monthly decline.
Add it all up and the celebration of last week’s auto sales should be short-lived. Auto factory workers are already working 2.5 percent fewer hours than they were at this point last year, a trend that’s accelerated to an annualized pace of 14.3 percent in the last three months. When cutting hours doesn’t do the trick, layoffs kick in. According to Challenger, Gray and Christmas, auto layoffs are third only to the beleaguered retail sector and industrials this year.
The only production that looks to be increasing is that of pink slips in a sector that’s led growth in the current recovery, a development that will weigh further on U.S. spending even as consumption’s contribution to GDP has slipped to a year low. It’s likely the world economy is woefully unprepared.
Trump gave most Americans a tax cut and they didn’t notice
By Sahil Kapur and Laura Davison
Republicans passed a sweeping tax cut for two-thirds of Americans in 2017, saying it would pay for itself and the American public would thank them.
Now, as Americans finish filing with the IRS for the first time under the new system, the law has swelled the deficit and surveys show just one-fifth of taxpayers believe their taxes have gone down. That’s made it hard for President Donald Trump to leverage the tax cuts as an issue in 2020, when he’s up for reelection and his party will be seeking to retake the House of Representatives.
“The Democrats really outmaneuvered the Republicans by convincing the American people that the main thrust of the tax reform package was to cut taxes for the wealthy,” said Dan Eberhart, a major Republican donor who runs the drilling services company Canary, LLC. Republicans “failed to fully explain the success to voters.”
Trump is going to try again on Monday when he goes to Minnesota, a potential swing state in the 2020 election, to promote what Republicans consider their signature legislative achievement. It’s part of a week of events designed to promote the tax law’s effects on the economy as he turns to his next campaign.
The Trump administration and congressional Republicans sold the tax law as fuel for economic growth and deficit reduction. Senate Majority Leader Mitch McConnell gave assurances in December 2017 that the measure would not only contain the deficit but be a “revenue-producer.” Trump’s top economic adviser, Larry Kudlow, said last week that the tax cut package had largely already paid for itself, a statement that conflicts with government data.
The U.S. budget shortfall grew by 17 percent to $779 billion in fiscal year 2018, which the Congressional Budget Office has said was partly a consequence of the tax law. Along with additional spending that’s been signed into law, the CBO projects the deficit will surpass $1 trillion by 2020.
When the law passed, McConnell said, “If we can’t sell this to the American people, we ought to go into another line of work.” He added that the GOP merely needed to tell the public “that you have more money in your pocket.”
But an NBC/Wall Street Journal poll this month showed that just 17 percent of Americans believe their taxes have been cut. A Reuters/Ipsos poll in March found that 21 percent thought their taxes were lowered.
That’s despite an analysis by the nonpartisan Tax Policy Center that two out of three taxpayers would see their taxes go down. The biggest benefits, though, go to the top 1 percent, who are projected to receive an average tax break of $62,000 in 2018, while the middle one-fifth of income earners got an average tax cut of $1,090 — about $20 per week.
The law appears to have met a similar political fate as President Barack Obama’s stimulus package in 2009, in which most Americans received a one-year tax break but the incremental gains in paychecks were so small that most didn’t notice.
Eberhart said the Trump administration wanted “an immediate reaction” so it reduced the amount the IRS withholds from regular paychecks starting in 2018.
The move backfired. “It was too small an amount for most to notice,” he said. Adding to voters’ frustration, their tax refunds were smaller than expected, down about 1.1 percent overall, but still noticeable to individual households.
White House economic adviser Kevin Hassett on Friday dismissed poor poll results, saying that they might be explained by general frustration with the tax system broadly. He cited other data, such as the Michigan survey of consumer sentiment, that “suggest that you should have a very optimistic outlook for economic growth this year."
The tax law, passed by Republicans without any Democratic support, lowered the corporate rate from 35 percent to 21 percent and cut individual taxes across income brackets for eight years. It doubled the standard deduction and enhanced the child tax credit. And it closed or tightened various tax breaks — most notably by capping the amount of state and local taxes that can be deducted — which had its biggest impact on residents of high-tax, largely Democratic-run states.
There’s “no question” that the advantages for businesses from the tax plan have just begun to kick in, Treasury Secretary Steven Mnuchin told Fox Business Monday. He said those benefits will become more apparent over the next few years.
Democrats spent their 2018 midterm campaigns hammering the law as a giveaway to wealthy Americans that would widen the deficit and put popular programs like Social Security and Medicare on shaky ground. A Republican-commissioned poll before the election found that message to be effective.
According to exit polls for House races published on Election Day 2018 by CNN, 29 percent said the new tax law helped their finances; that group overwhelmingly supported Republican candidates. But 45 percent said the law had no impact and 22 percent said it hurt their finances, and those categories overwhelmingly backed Democratic candidates.
Ryan Ellis, a conservative tax lobbyist, blamed negative news coverage for the unpopularity of the tax law. "People don’t know about their own taxes," he said, adding that they "get half baked ideas" from the way the law is portrayed.
Republicans didn’t understand what the broader public wanted from a tax bill, said Morris Pearl, a former managing director at BlackRock Inc., who now chairs Patriotic Millionaires, a group of wealthy individuals who advocate for higher taxes on the rich.
“They forgot that the people who show up at their $1,000-a-plate fundraisers are not representative of all people,” Pearl said. “They overreached with their tax bill and tilted the system in favor of the very wealthy and large corporations.”
The tax effort stemmed from the bipartisan desire to move the U.S. corporate tax system in line with those of foreign competitors. Both parties supported lowering the country’s 35 percent corporate rate, though Democrats favored a more modest reduction.
Republicans realized that corporate tax cuts were a hard sell to the general public. So they reduced levies for pass-through businesses — partnerships and limited liability companies — and individuals, eliminated some existing tax breaks to offset the rate reductions and included a more generous child tax credit.
But because of earlier unpopular proposals like one to cut deductions for medical expenses, college tuition and child-adoption costs, public opinion had already soured — for good.
In many Democratic strongholds, such as New Jersey, New York and the District of Columbia, the average refund amount decreased, according to H&R Block, fueling discontent with the law, even though residents in those states got a tax cut on average.
Worse, the state and local tax, or SALT, cap really stung. Residents of high-tax states, encouraged by the elected Democratic officials, came to believe they were targeted to pay for the $1.5 trillion tax cut, even if they weren’t able to personally use the deduction.
"It is clear that they consciously exacted revenge on Democratic states like New York, California, New Jersey, Massachusetts, and Illinois by capping the SALT deduction, which is bad news for residents in those states," said Representative Tom Suozzi, a New York Democrat.
— With assistance from Justin Sink
By Michael Cohn
One thing that all business trips have in common is turning in receipts for travel and expenses, but what should or shouldn’t employees be expensing? Here are the recipients of the Top 10 Interesting Expense Awards from Oversight Systems, which develops software to automate expense and billing compliance.
A sales rep expensed a sports bra from Lululemon as a “client gift.” Later, the client and the sales rep went together to a yoga class, which was also expensed to the company. When questioned, the sales rep saw no harm in the unusual purchases.
One employee expensed $99,000 worth of Lenovo computers. He may have had some computer issues, but this is excessive. Instead, he was using the corporate discount to buy computers at a steep discount and then sell them for a nice profit.
One employee decided her eyelash extensions qualified as a business expense and charged the $69 purchase to her company.
Smoking is expensive; the high cost of cigarettes became so burdensome to one employee that they began regularly altering receipts submitted with expense reports and concealing the cigarettes as “fuel.”
An employee at a biotech company began renting a car for a week for $752, racked up $2,500 in office supplies from a CVS Pharmacy in just a month, and charged $1,000 for catering a “meeting,” which all ended up being a personal expense.
One employee needed the latest smoker and purchased a $699 Traeger Grill. He then expensed it as a business expense. At least he economized by buying the lower-priced model, versus the top-of-the-line Traeger grill.
An employee was expensing a lot of fuel, despite not having a rental car. Turns out the employee, like an earlier honoree, was doctoring the receipts to hide alternate fuels — in this case, beer and cigarettes.
An employee at a medical technology company had a weird pattern of out-of-pocket parking expenses. Upon further investigation, the employee had been submitting the same doctored receipt for a parking deck that — get this — no longer existed.
This employee explained expensing a bottle of wine as a “snack” thusly: “I wanted to save the company money by not having wine at dinner.” The problem was that the receipts showed that she still had wine with her dinner.
One employee was so afraid of the end of the world in 2018 that they decided to order several doomsday prepper books with scary titles like “Your Home Fallout Shelter: How to Ensure Your Family’s Health and Survival in a Nuclear Incident” ($9.95) “Nuclear War Survival Skills” ($19.95) and “The Prepper’s Water Survival Guide: Harvest, Treat, and Store Your Most Vital Resource” ($14.95). Why they thought these were business expenses remains unclear ...
What are some of your favorite ridiculous expenses or deductions? Tell us in the comments section of this article.
Catching tax cheats with graph databases
Another Tax Day has passed, and tens of millions of American citizens and corporations have filed returns showing they paid their fair share. Unfortunately, many did not.
Consider that the “tax gap” — the IRS’s standard measure of tax evasion — has exceeded $400 billion, according to the agency’s latest figures.
Tax evasion “is illegal and is an underappreciated problem in the United States,” the Brookings Institution says. “About one out of every six dollars owed in federal taxes is not paid. The amount of unpaid taxes every year is plausibly about three-quarters the size of the entire annual federal budget deficit.”
To make matters worse, the IRS pursues fewer cases of tax evasion than it used to. The number of criminal cases brought by the IRS in 2017, in which tax fraud was the primary crime, declined by almost a quarter since 2010, the New York Times reported.
As the problem grows, it’s time for officials to explore the use of technology — especially the advanced analytics powered by graph databases.
Graph databases are used by multiple industries to perform deep, real-time analytics on massive datasets. When you receive a personalized recommendation from an online retailer, for example, chances are it was the product of graph databases.
The same technology can help catch tax cheats.
Side effects of a well-connected global economy
Conditions worldwide are ripe for tax evasion. Modern technology has facilitated easy movement of money across international borders, driving tremendous velocity and growth for the global economy.
Unfortunately, it also allows tax evaders to set up shell corporations with just a few clicks on the internet and an encrypted phone call to the criminals who make these corporations look like the legitimate entities.
The local laws in tax havens — such as the Cayman Islands, Panama, and the Bahamas — further complicate the issue, limiting the amount of information shared by these governments with the U.S., EU, and other tax authorities.
Setting up the shell corporations to evade taxes with crime-as-a-service
Shell corporations are entities set up with the express purpose of hiding the income and avoiding the taxes for that income. Crime-as-a-Service — organized online crime rings — has become a reality, with the sophisticated fraudsters incorporating new companies with fake or paid directors hiding the actual beneficiary, the tax evader. They route the money through an intricate trail of the accounts for these shell corporations and passing the proceeds or income back via an equally complex path to avoid the detection.
The result is a complicated hub of connections, with multiple layers of relationships hidden within data.
Traditional fraud investigation solutions built on the relational databases struggle to go beyond two or three levels of data, as every level requires computationally expensive and time-consuming database joins.
The first and second generation graph databases are great at finding the money trail up to three levels, but struggle as the layers of the tax evasion trail expands to four or more levels.
The criminals set up new corporations or subsidiaries of an existing corporation and use it to launder the money to and from the tax havens before shutting down these subsidiaries, making it very difficult to find or track the money movement through these “fireflies of tax evasion."
This requires the tax fraud detection solution to understand the structure of corporate entities with three or more layers, identify changes to the structure over time (“temporal analysis”) and flag suspicious patterns where specific subsidiaries were used for a short period of time for routing money and were shut down after that period.
Finding the tax evaders with the native parallel graph database and analytics
Native parallel graph databases are built for digging as much as ten or more levels deep into the money trail, and identifying the shell corporations that have similar or identical addresses, contact numbers, share one or more directors, and have been created or administered from the same set of IP addresses.
They are also adept at the temporal analysis of complex corporate hierarchies, identifying subsidiaries that are used for a very short period of time for passing funds back and forth to a related set of accounts who all seem to transact only with each other.
Native parallel graphs are also capable of incorporating data from multiple internal and external sources, such asOpenCorporates — the world’s largest open database of corporate information. This is useful in finding and connecting common directors among companies from multiple sources as well as common or similar addresses, phone numbers, and other contact information.
Taxpayers at risk of getting scammed by preparers
By Michael Cohn
Nearly half of Americans fail to check whether their tax preparer includes their Preparer Tax Identification Number and signs their return, putting them at risk of being scammed, according to a new survey.
More millennials are liable to this compared to Generation X and Baby Boomers. The online survey of 1,270 adults by YouGov and ACI Worldwide, a provider of electronic payment and banking technology, found that while most taxpayers who use a tax preparer (54 percent) check that they include their PTIN and sign their return, nearly half (46 percent) don’t check whether the preparer included their PTIN, putting them at risk of getting scammed. More millennials (56 percent) than Generation X (48 percent) and Baby Boomers (32 percent) fail to check their tax preparer’s credentials. The survey indicated that 38 percent of U.S. adults have experienced tax scams. Of the various scams, phone scams (27 percent) and email scams (17 percent) were the most common forms.
The survey also found that 29 percent of U.S. adults are still likely to mail in checks to pay the taxes they owed to the government. Of those who opted to receive tax refunds through a check in the mail (19 percent), more millennials (22 percent) picked this approach, compared to Generation X (20 percent) and Baby Boomer (17 percent) taxpayers.
When it comes to paying taxes, 23 percent of U.S. adults opted for electronic funds withdrawal, with 12 percent paying by debit card, and 11 percent using their credit cards for payment. Of the 29 percent who mailed a check to pay taxes, millennials (12 percent) were much less likely to do so compared to Generation X (28 percent) and Baby Boomers (43 percent).
For tax refunds, an overwhelming 71 percent of taxpayers said they would choose direct deposit, followed by 19 percent who prefer to receive a check in the mail.
“Despite the continued evolution of payment technology, nearly a third of Americans opted to write out a check and physically mail it, which takes more effort than an electronic funds withdrawal, debit or credit card payments,” said Andrew Sajeski, leader of biller solutions at ACI Worldwide, in a statement. “Paying by cash or check tends to take longer, and leaves the taxpayer at risk of being late, leading to additional interest and penalty charges. Moreover, if the check gets lost in the mail or stolen, the consumer’s personal information can be violated. It’s much easier and safer to set up an electronic funds withdrawal.”
Americans are delaying health care until tax refunds arrive
By John Tozzi
When Hayden Myer made an eye doctor’s appointment for the end of April, he told the clinic that he might not show up for the visit if his tax refund didn’t arrive in time.
The 27-year-old, who says his vision is bad enough that he avoids driving at night, has been wearing a four-year-old pair of glasses since he ran out of contact lenses last summer. He’s expecting about $265 from his refund.
Myer and many other Americans rely on getting money back at tax time to pay for important health needs. It’s a result of thin household savings colliding with rising medical prices and high-deductible insurance plans that expose them to greater health expenses.
“I’ve never been able to use my return for anything that is a leisure or a pleasure,” said Myer, who earns about $40,000 a year running a peer-support line for a mental-health nonprofit in Richmond, Virginia.
The federal deadline for people to file income taxes is April 15. Out-of-pocket spending on health care jumps about 60 percent in the week after people get their refunds, according to an analysis of account data published last year by the JPMorgan Chase Institute, a research group that draws on the bank’s data. The bulk of that money is spent during face-to-face encounters at clinics, hospitals or other medical providers.
That suggests people aren’t merely using refunds to pay down old debts; they’re waiting until they have cash in hand to get treated.
“It was surprising, and I’d go so far as to say alarming,” said Fiona Greig, director of consumer research at the JPMorgan Chase Institute. “Those are visits that would have taken place three weeks earlier, had the tax refund arrived three weeks earlier.”
Refunds trigger about a 10 percent increase in the number of people making in-person health-care payments on weekdays, according to the group’s research. Other research from the institute has shown that refunds are also frequently followed by increased cash withdrawals, credit card payments and spending on durable goods.
Tax refunds — the difference between the money withheld from workers’ paychecks and the taxes they actually owe — are the biggest single payment many households receive all year. The average federal refund taxpayers received this spring was $2,873, according to IRS data on filings as of March 29.
More than 1 in 3 working-age Americans skipped a doctors’ visit or medical test, or didn’t fill a prescription, because of the cost last year, according to a recent survey by the Commonwealth Fund, a nonprofit health-research foundation.
Myer, who has insurance, has been forgoing weekly injections for low testosterone, getting them only once a month or less. “That prescription is also just sky-high,” he said, costing about $75 per visit until he reaches his health plan’s deductible.
The medical costs add to a pile of student loans, credit-card debt and payments on his Nissan Rogue. He recently moved back in with his father after he couldn’t afford a rent increase. He also owes money to a psychiatrist who charges a sliding-scale fee. Getting a new prescription for his vision is Myer’s priority, though.
Dentists and physicians’ offices accounted for the greatest share of in-person health payments that followed tax refunds, the JPMorgan Chase Institute’s report showed. Mark Vitale, a dentist in Edison, New Jersey, said refunds always bring a surge of patients.
“Year after year, what patients will say to me is, ‘Let’s just wait until April 1 or May 1 when I get my tax refund,’” he said. Vitale has practiced for 35 years, and over time, he said, “the dollar has gotten tighter.’’
Three people who booked significant dental procedures like implants or crowns around the beginning of April cited their tax refunds, he said. They’re typically employed, middle-class people. Sometimes they’ve delayed dental work for years.
The research group analyzed data from millions of Chase bank accounts, as well as credit and debit cards, looking for patterns in the movements of money.
The granular picture of how cash flow affects people’s ability to get medical care reveals problems that clinicians, health plans, employers and financial companies ought to grapple with, said Greig.
Doctors need to talk to patients about how to prioritize care if they can’t pay for it. That conversation now happens “in a very incomplete way” with finance staff, rather than clinicians, she said. Employers and health plans should understand that trying to lower spending by pushing more expenses onto households could backfire if they delay care.
“Health problems don’t age well,” Greig said.
Tax preparers steered low-income taxpayers to extra-fee refund products, says GAO
By Michael Cohn
Low-income and minority taxpayers were more likely to use extra-fee tax preparation offerings like refund advances and refund transfers, according to a report Friday from the Government Accountability Office, and tax preparers often didn’t present them with information about the fees ahead of time.
The GAO report, and recent disclosures about a provision in the IRS reform legislation that was passed by the House this week codifying the Free File Alliance of tax prep industry vendors, are prompting some Democrats to propose a new bill to simplify the tax prep process and allow more users to get their taxes done for free by the IRS itself.
For its report, the GAO made undercover visits to the offices of nine tax preparers and reviewed some tax prep providers’ websites. It also reviewed documents it got from several banks and tax preparers. It found the disclosures generally followed requirements for disclosing fees, but the disclosure practices by some tax preparers could pose challenges for consumers.
For example, the tax preparers reviewed by the GAO investigators generally indicated they present taxpayers with almost all of the fee information documents only after their tax returns have been prepared, and after the preparers determined that taxpayers qualified for a tax-time financial product like a refund transfer or a refund advance . The timing of these disclosures could pose a challenge for taxpayers looking to compare prices for different providers, the GAO noted.
During six of the nine undercover visits, GAO investigators explicitly asked for literature on product fees but weren’t given the information by preparers. Refund transfer fee information on the websites the GAO reviewed sometimes was presented only after the tax preparation process started, or it was in small print, or could be found only after navigating through several pages on the site. As a result, taxpayers can face challenges if they try to compare prices among the different online tax prep services.
Trends in the market for tax-time financial products since 2012 include the decline of refund anticipation loans (short-term loans subject to finance charges and fees). The IRS cracked down on the practice of offering RALs by removing an important indicator of credit worthiness relied on by RAL vendors. The loans often came with high interest rates being charged to taxpayers who needed the money from the tax refunds right away. However, since the RALs declined in use, the tax prep industry has instead seen a rise in alternatives like refund transfers (temporary bank accounts in which to receive funds), and the introduction of refund advances (loans with no fees or finance charges).
“More recent product developments include increased online access to products for self-filers, higher refund advance amounts, the introduction of new products, and for tax year 2019, the reintroduction of fee-based loans,” said the GAO.
For many taxpayers, their income tax refund is the single biggest cash infusion they get all year, the GAO pointed out. In 2017, more than 20 million taxpayers used refund advance loans and other financial products to get quick access to this cash. Lower-income and some minority taxpayers were more likely to use them. But the products can be comparatively expensive.
“We found that tax preparers don't always clearly communicate about fees associated with tax refund products,” said the GAO. “This may make it difficult for taxpayers to compare prices for these products. We also found that IRS's data on the use of these products is inaccurate.”
The GAO identified some limitations in IRS data on product use, including over- or under-counting of certain types of products like RALs and refund transfers and advances. The IRS hasn’t communicated these data issues to users, nor has it updated its guidance to tax preparers on how to report new product use. As a result, users of such data (including federal agencies and policymakers) don’t have accurate information to inform their findings and make decisions.
Lower-income and some minority taxpayers were more likely to use tax-time financial products, according to a GAO analysis of 2017 data from IRS, the Bureau of the Census, and the Federal Deposit Insurance Corporation. “Taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African-American households were 36 percent more likely to use the products than white households,” said the GAO. “Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawn shop or car title loans.”
The GAO made two recommendations to the IRS to make the collection of product use data more accurate and make data limitations known to users of the data. It said the IRS should communicate data issues regarding the refund anticipation loan indicators for tax years 2016 and 2017 and the refund transfer indicators since tax year 2016—for example, by attaching explanatory material to the dataset. It also said the IRS should improve the quality of tax-time financial product data collected; for example, by allowing authorized e-file providers to indicate more than one type of tax-time financial product for each return or by informing tax preparers of the addition of new product definitions and instructions on how to accurately code the products. The IRS agreed with both recommendations.
“The IRS neither administers nor promotes the sale or use of these products,” wrote Kirsten Wielobob, deputy commissioner for services and enforcement at the IRS. “We recognize that variations have occurred in recent years affecting the nature and number of refund-related products and how they are promoted to the public.”
The American Coalition for Taxpayer Rights, a 14-member trade association of some of the biggest retail and do-it-yourself tax preparers and the financial institutions that offer tax-time financial products, took issue with the GAO report. “Every year, about 20 million hard-working Americans voluntarily choose financial products at tax time because they provide them with the financial flexibility they want and best serve their individual needs," said a statement Friday from the group. "ACTR members are proud to offer these products, knowing that taxpayers choose them for a variety of reasons, including secure refund disbursement, identity-theft protection, and continuing customer service to monitor the status of a refund. ACTR members continuously look for ways to improve the value, security, and transparency of these products. We look forward to any discussion with the IRS, advocates, stakeholders and the current bank product regulators.”
Sen. Elizabeth Warren, D-Mass., and Tammy Duckworth, D-Ill., sent a letter Friday to the IRS in response to the GAO findings. The lawmakers asked the IRS for more information about obstacles to disbursing tax refunds more quickly to enable families to get faster access to tax funds without using products like RALs and refund advances, and how the IRS could better regulate tax preparers.
"The findings of the GAO report are alarming, showing that low-income taxpayers -- those with the greatest need for additional funds -- are forced to buy expensive tax-time products because they need to pay bills due before refunds arrive," the senators wrote. "As the distributor of tax refunds, the IRS plays a role in perpetuating this problem."
Two years ago, Warren asked the GAO in an oversight letter to conduct a review of the tax-time financial products most commonly used by taxpayers, as well as the transparency of and fees charged for these financial products. The newly-released GAO report found that:
Warren and Duckworth, along with several other Democrats and independents in the Senate reintroduced the Tax Filing Simplification Act on Friday. The bill would make it easier for taxpayers to file their taxes online directly with the IRS to help more eligible taxpayers receive tax refunds, like the Earned Income Tax Credit.
IRS Commissioner Chuck Rettig praised the IRS for how it managed to navigate tax season effectively this year as it dealt with the Tax Cuts and Jobs Act and the aftermath of the government shutdown. “I’m very proud of every IRS employee,” he said in a message to taxpayers Friday. “They remain dedicated to helping taxpayers understand and meet their filing obligations. Our employees make a difference, and they take pride in serving taxpayers and our country. We’re are also hiring people to join our IRS family — if you know someone who may be interested, please suggest they visit usajobs.gov. Beyond technical skills, the success of the IRS also depends on respecting taxpayer rights and treating everyone we encounter with fairness. My pledge to taxpayers is that we at the IRS will continue to keep taxpayer rights paramount in all of our interactions. Inside our agency, we understand, accept and value our differences, and strive to maintain an inclusive and diverse workplace, where employees treat each other with kindness and civility. We will continue to carry those values with us in all of our dealings with taxpayers as well. We believe every person is important, none more or less so than any others. By valuing and respecting each other, we are better able to move forward together.”
Senators unveil bill to impose minimum standards on tax preparers
By Michael Cohn
Sen. Ron Wyden, D-Ore., and Ben Cardin, D-Md., introduced legislation Thursday to require minimum standards for paid tax preparers and rescind Preparer Tax Identification Numbers of incompetent and fraudulent practitioners.
The bill represents the latest effort to regulate the tax prep industry. The IRS began rolling out a Registered Tax Return Preparer program in 2010 that imposed mandatory registration, testing and continuing education requirements on preparers. CPAs, enrolled agents and tax attorneys have long been subject to competency and continuing education requirements, but much of the tax prep industry has been unregulated, except in a handful of states. The RTRP program didn’t fully get underway until 2012, but a group of independent tax preparers quickly filed suit in the case of Loving v. IRS. A federal court judge ruled in favor of the tax preparers in 2013, invalidating the RTRP program and saying it exceeded the IRS’s statutory authority. An appeals court upheld the ruling the following year. Since then, Wyden, who is the top Democrat on the Senate Finance Committee, and others have introduced legislation requiring various standards for tax preparers, but so far without success.
The latest effort, known as the Taxpayer Protection and Preparer Proficiency Act of 2019, would give the Treasury and the IRS the statutory authority to set federal standards of tax practice for all paid return preparers. It would require certain preparers to meet minimum competency requirements, including obtaining a PTIN; satisfying any examination and annual continuing education requirements; and completing a background check.
The Treasury would have the authority to require tax preparers to provide PTINs on returns (except people preparing a return under supervision of a preparer who signs the return), as well as rescind PTINs if a preparer is shown to be incompetent or disreputable, subject to notice and an opportunity for a proceeding.
The bill would also require a GAO study on the sharing of information between the Treasury Department and state authorities about PTINs issued to paid return preparers and preparer minimum standards. The GAO did an undercover investigation in 2014 into paid preparers. At 17 out of 19 randomly selected sites, the GAO report found tax preparers failed to complete a return accurately due to serious mistakes or willful negligence.
“Inept or crooked paid preparers regularly exploit taxpayers to pad their bottom line,” Wyden said in a statement. “States like Oregon have led in this area by requiring minimum standards for preparers, and it’s critical that we restore federal standards to protect all taxpayers.”
The senators pointed out that approximately 60 percent of taxpayers use paid preparers, and the IRS receives more than 10,000 complaints per year about them. The Taxpayer Protection and Preparer Proficiency Act would require preparers to demonstrate competency in preparing returns, claims for refund and associated documents. It also would require preparers to complete continuing education requirements.
“Our tax code is complicated and many families rely on outside help to figure it out. To protect taxpayers from incompetent or unscrupulous preparers, the IRS needs to ensure that preparers are qualified and held accountable,” Cardin stated. “I’m pleased to join in support of this legislation, which restores meaningful and much-needed standards and oversight in the paid preparer industry.”
IRS cracks down on payroll tax cheats
By Michael Cohn
The Internal Revenue Service has been focusing efforts in recent weeks on payroll tax compliance, with revenue officers visiting nearly 100 businesses suspected of having serious issues with employment tax compliance.
IRS Field Collection and Criminal Investigation employees undertook a two-week campaign between March 25 and April 5 to ensure the businesses complied with the payroll tax requirements. Over the two-week period, the IRS Criminal Investigation unit indicted 12 individuals and executed four search warrants. A half dozen individuals and businesses were sentenced for crimes associated with payroll taxes. Approximately two dozen more enforcement actions are planned in the weeks following the two-week campaign as well.
The IRS noted that payroll taxes withheld by employers account for nearly 72 percent of all revenue collected by the IRS, so noncompliance can be a major problem.
“Payroll taxes form a key part of our tax system," said IRS Commissioner Chuck Rettig in a statement. “When individuals and businesses evade their employment tax obligations, it not only undermines our tax system, it also creates an unfair situation for people who are following the law. The IRS is committed to compliance in the payroll tax arena, which helps ensure fairness and faith in our tax system.”
The business owners who received visits from the IRS were told about ways to catch up with the payroll taxes they owe, how to stay current and the potential for civil and criminal penalties. The Trust Fund Recovery Penalty is one example of the legal ramifications of not properly collecting and remitting payroll taxes to the IRS.
“Employers know the rules—they must deposit and report employment taxes accurately—this is non-negotiable,” stated IRS Criminal Investigation chief Don Fort. "When employers fail to pay over the required employment taxes for whatever reason, they skip out on one of their most important responsibilities as a business owner. Not only are those employers cheating the system and their employees, they are cheating future generations relying on those taxes to help build the future.”
Lastly, native parallel graphs are capable of analyzing the money flow through accounts with as many as 10 or more hops, understand the loopbacks through an equally complex path and identify suspicious patterns that seem to indicate tax evasion. This is powered by the massively parallel processing in the native parallel graphs.
As criminals deploy complex strategies and modern technology for tax evasion, this technology can be used effectively by the IRS and other agencies all over the world to catch the crooks.
Gaurav Deshpande is vice president of marketing at TigerGraph.
Electric-vehicle tax credits get a bipartisan boost in Senate
By Ari Natter
A bipartisan group of senators introduced legislation Wednesday that would extend a lucrative tax credit for electric vehicles that could benefit companies like Tesla Inc. and General Motors Co.
The chances of the Senate extending the electric vehicle tax credit, which President Donald Trump proposed rescinding in his most recent budget request, aren’t great, according to analysts.
“Prospects aren’t zero — EV credit expansion could still be part of a bigger bargain — but they aren’t good because the Congress isn’t showing much room for bipartisan bargains anytime soon,” said Kevin Book, managing director of Washington-based consultancy ClearView Energy Partners. “The sponsor list isn’t exactly the Trump Country white pages, either.”
A man attaches a charging plug to a GM Chevrolet 2017 Volt hybrid electric vehicle at a charging station.
The current $7,500 per-vehicle incentive for consumers, credited with helping establish the nascent market for electric cars, phases down once a manufacturer sells 200,000 of the vehicles.
The legislation by Michigan Democrat Debbie Stabenow would grant automakers a $7,000 tax credit for an additional 400,000 vehicles after they reach the 200,000 vehicle cap, according to a statement from Stabenow’s office.
“At a time when climate change is having a real effect on Michigan, today’s legislation is something we can do now to reduce emissions and combat carbon pollution,” Stabenow said. “Our bill will help create American jobs and cement Michigan’s status as an advanced manufacturing hub.”
The bill, which also extends a credit for hydrogen fuel cell vehicles for 10 years, is also being backed by Republicans Lamar Alexander of Tennessee and Susan Collins of Maine. Democratic Representative Dan Kildee of Michigan is introducing companion legislation in the House.
Democrats would likely need to “prioritize the credit as their big ask” over other party tax priorities and put something for Republicans on the table in order to see it through, said Liam Donovan, a tax lobbyist at Bracewell LLP.
The chances in the Democratic-controlled House, where more than 100 lawmakers recently asked the Ways and Means Committee to extend the credit, are markedly better.
In a recent interview, Senate Finance Committee Chairman Chuck Grassley said if the House were to pass an extension of the electric vehicle tax credit “it would get due consideration over here.”
Shares of Tesla, which reached the 200,000-vehicle cap last July, rose as much as 2.7 percent before the start of regular trading. Shares were up less than 1 percent at 10:50 in New York trading. GM, which reached the cap late last year, jumped as much as 0.9 percent.
Should robots be taxed?
A new report urges against the taxation of robots, with the warning that any such policy would stifle innovation — an oft-used argument against taxation of most tech-related capital goods. However, the rise of robots has not had the clear-cut, expected results the world might have hoped for, complicating the tax question.
The report, issued by the Information Technology and Innovation Foundation, is a direct rebuttal of one of the fundamental arguments for taxing robotics: Robots will eliminate human jobs, leading to a decline in income tax and an increase in dependents on the state, which needs to be funded somehow. The report states these arguments are flawed and not supported by history. This may be true, but it’s also true that the trickle-down theory of tax breaks leading to productivity and innovation has not been supported by history, either.
Robert D. Atkinson, president of the ITIF and author of the report, stated, “We need to increase productivity in order to increase wages and spur economic growth. The most important way to do this is by encouraging the adoption of new machinery and equipment. Taxing new equipment, like robots, would reduce the incentive for companies to make such investments. Instead, an effective growth and competitiveness policy would lower prices for equipment, machinery and software.”
But while Atkinson may be expected to fall on this side of the argument, due to his interest in technological innovation, the king of software himself had something different to say just a couple of years ago: In 2017, Bill Gates surprised many in an interview with Quartz, saying a robot tax would help fund occupations that need a human touch, such as elder and child care.
“You ought to be willing to raise the tax level and even slow down the speed [of automation],” he said in the interview. It’s important to properly manage the displacement of humans by robots, he added. This displacement needs to be managed both for the wellbeing of workers as they lose jobs and income, but also for the wellbeing of the government pocketbook. According to The New York Times, income taxes account for half of the $3 trillion collected every year by the Internal Revenue Service; payroll taxes account for another third.
To put how quickly that IRS revenue could shrink in perspective, consider the example of the robocall industry in the United States. An often-cited 2013 Oxford University study placed telemarketers at the top of the list of jobs likely to be replaced by automation. This prediction has come true, and in fact, has become a crisis in America: There were 30.5 billion robocalls made in 2017, and last year, that increased a whopping 56.8 percent to 47.8 billion, according to software company YouMail. The job outlook for telemarketers has been negative since 2004, with vacancies declining by 29.63 percent until 2018, when the outlook saw a small uptick.
But in addition to job decline, the artificially intelligent robots making these calls are convincing enough to be able to fool the average person that they’re speaking to a real human being, as comedian and social commentator John Oliver demonstrated on a recent episode of “Last Week Tonight.” Traditionally, opening up channels to make manufacturing, innovation, transport and trade easier has had the simultaneous effect of facilitating misuse of the system. A significant percentage of these billions of robocalls are fraudsters attempting to get people to sign up for misleading loan forgiveness programs, for example, or simply to coax people to give out their social security numbers.
On the other hand, also topping the 2013 list of jobs likely to be automated away were tax preparers. While the market has robust DIY tax preparation software platforms available today, like Intuit’s TurboTax, H&R Block Tax Software, and TaxAct, tax preparers still have more than enough work to keep them busy. Artificial intelligence software is still not advanced enough to replace humans when it comes to even mildly complex tax preparation questions. To that end, tax software companies have experimented with providing access to real human tax preparers on an at-will basis through their platforms.
The accounting industry has made a point, aided by groups such as the American Institute of CPAs and the Information Technology Association, to shift the profession to keep pace with technological advancements, making accountants as professionals just as valuable as they have always been.
We are at a stage now that allows certain very simple tasks to be automated, like phone calls. But more complex jobs, like tax preparation, still need the human touch, similar to how eldercare and childcare need it. Robots can process a huge amount of data in seconds, which is very helpful to accounting tasks like auditing, but they cannot as yet apply discretion and provide nuanced advice, which is what accountants and auditors are expected to be able to do. Similarly, they cannot yet replicate the literal human touch needed in professions like nursing, which require dexterity at a level robots cannot yet achieve.
But it’s not inconceivable that some day, robots will indeed be advanced enough to finally take over those jobs deemed “most susceptible to automation,” which make up a full 51 percent of activities in the U.S. economy, according to the McKinsey Global Institute. This reality can only be managed if the development of automation, AI and robotics is measured and done carefully. Responsible innovation doesn’t simply mean slow innovation — it also means ethical innovation, with some check against robotics that is easily used to commit fraud and deception, as in the robocall industry.
One way to force innovators into careful consideration is taxation. Taxing the robots, so to speak, would help ensure that the growth of innovation in robotics doesn’t outpace the government and economy’s ability to keep up with the loss of jobs, and the loss of income taxes.
Special tax issues for cannabis businesses
It’s tax time for everyone, but for entrepreneurs in the rapidly growing cannabis business, it’s a particular challenge. That’s because they are confronted with the issue of filing taxes for a federally illegal market, even though it’s perfectly legal in the state in which they do business.
Section 280E of the Internal Revenue Code prohibits the deduction of otherwise ordinary business expenses from gross income associated with the trafficking of Schedule I or Schedule II substances as defined by the Controlled Substances Act.
Specifically, the statute states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”
Entrepreneurs who engage in the cannabis business face the prospect of paying the same expenses as other businesses without the ability to take advantage of the normal deductions or credits available to other businesses, since cannabis falls under the definition of a Schedule I substance. In other words, they must pay tax on their gross income.
“Section 280E was added to the code back in the 1980s as a result of a case involving a drug cartel,” said Jessica Billingsley, CEO of MJ Freeway, a cannabis technology company and consulting service that serves businesses and governments in 29 states, the District of Columbia, and 10 countries. “What it means is that a state-licensed business that pays and all associated state taxes in a legal cannabis business is still, at the federal level, prohibited from deducting payroll and regular business expenses.”
The lack of deductibility can cause taxes to jump from 30 percent to as high as 80 percent, according to Billingsley. “This is a reality for all our retail clients. They are all impacted by the inability to take tax breaks on normal deductions that other shops can take to support their businesses. They have the exact same overhead, but cannabis retailers have higher taxes.”
And it also provides an incentive to cut corners to minimize gross profit. Moreover, cannabis businesses are often underbanked because banks are leery of providing accounts to businesses that do not comply with federal law. Taken together, this makes them a target for audit on their federal returns.
What to do? “Obviously, they want to work within legal means to optimize the cost of goods sold,” said Billingsley. “It incentivizes operations to be vertically integrated. If they control their supply chain, they have a little more flexibility as to where their costs are. You can optimize cost of goods sold so you have more flexibility when you control your supply chain. What that means is that you have a cultivation business as well as a distribution and retail business. You grow, harvest and distribute as well as sell retail.”
But the ability to do this varies from state to state, she noted. “Some states require it, while others prohibit it. But to the extent you have the ability to control, it will be more tax advantageous.”
A typical MJ Freeway client has “multiple verticals — cultivation, manufacturing, distribution and retail — in multiple states or countries,” she said. “They are cannabis businesses that are scaling rapidly, and we built software to support them at this fast pace..”
By Jim Buttonow
Behold, the IRS audit. They are rare these days. Only one out of every 184 taxpayers experienced an IRS audit in 2017, and less than a quarter of these audits are conducted in person by the IRS.
For many, navigating an IRS audit looks as simple as parting the Red Sea. Fortunately, most IRS audits are done by mail and are much less intrusive than the dreaded audit where the taxpayer personally meets with the IRS at their office (called an “office” or “desk” audit) or at the taxpayer’s home or place of business (called a “field” audit).
Nine out of 10 audits end in a change to the tax return. In mail audits, the additional amount owed averages around $6,790. For face-to-face audits, the cost is much higher — taxpayers owe an additional $77,309 on average from these audits. Mail audits are fairly simple — taxpayers simply need to respond timely, in writing, to prove a few line items on their return. For office and field audits, or if the taxpayer is disputing the IRS determination in an audit, they should ask a professional to intervene.
In the meantime, for the chosen few who must deal with an IRS audit, there are some do’s and don’ts to follow to successfully navigate an IRS audit — the Ten Commandments in handling an IRS audit.
Ignoring an audit will not make it go away. In fact, it will do the opposite — the IRS will just proceed and assess additional tax on the areas that they want to audit on the tax return. In face-to-face audits, the IRS may ask third parties for information about the taxpayer, such as a bank to get information about the income the taxpayer receives or, if they are a small business, a vendor that supplies them with materials for the business. When the IRS requests information from a third party, they are usually trying to determine if the taxpayer is hiding income.
Never, never lie to the IRS. Lying to a federal agent is a crime. The taxpayer should present their facts to the IRS and their tax return position. If a taxpayer feels like they need to lie, that is a sure sign that they need to hire a tax professional to help.
The IRS auditor does not have the final say. If there’s a disagreement on the facts or the application of the tax law, the taxpayer should exercise their right to appeal, and appeal the determination to the IRS Office of Appeals. A few months after the audit concludes, they will get to present their case to an independent person, called an Appeals officer, at the IRS and get a second opinion. If they don’t agree with the Appeals officer, they can take their tax dispute to court.
For taxpayers under audit, it is the IRS’s procedure to make sure that they have filed all required returns. It is never a good start with the auditor when they have not filed all required returns. The IRS will review, at a minimum, the past six years of filing history. If the taxpayer doesn’t file, the IRS auditor can file for them — called a substitute for return — and include no deductions, credits, or dependents.
If the taxpayer is not prepared for the audit, they should be prepared for auditor skepticism and a long audit. For office and field audits, it is best to do a mock audit and know that income is properly reported and the auditor’s selected audit areas are properly reported. If the taxpayer cannot advocate for their tax return position from the start of the audit, they may get many more questions and requests for information from the auditor. The audit may even prematurely expand into other years because the auditor is suspicious that there is a problem.
6 Thou shall elevate issues to thy auditor’s manager
Audits should not feel like wandering the desert for 40 years. If the taxpayer doesn’t like how the audit is progressing, they should ask to speak to the auditor’s manager. In fact, they should always get the auditor’s and their manager’s contact information at the beginning of the audit in case they need to contact them. At any point that there’s a disagreement with the auditor, the manager is the first line of appeal. For example, if the auditor believes penalties apply, the taxpayer can ask the manager to hear their side of the case and intervene on their behalf. Few take advantage of the manager, and as a result, do not get a second opinion or intervention that could speed up the audit and get better results.
This is not a commandment, but in the 1956 movie “The Ten Commandments,” the pharaoh makes this proclamation many times. The rule in an audit is to get all requests for information in writing. Why? Auditors can get confused about the facts of the case if the taxpayer does not have a clear audit trail. Unclear facts lead to long audit. Take the lead in the audit, demand requests for information in writing and reply in writing. It will eliminate confusion and focus the audit on the issues in hand. Also, it will leave a written record of the facts that will be needed if the taxpayer wants to appeal the findings of the case.
There are many deadlines in an audit — the audit appointment, deadlines to provide information, deadline to respond to the initial audit report, deadline to petition IRS appeals, and a deadline to petition the tax court, among others. When the taxpayer misses early deadlines in an audit, they put the auditor in a tight place. It is OK to delay one or maybe two meetings, but many missed deadlines and incomplete information means that the auditor will proceed to the next step: proposing adjustments to tax based on the taxpayer not meeting their burden of proof.
It is important to know that auditors have deadlines too. For face-to-face audits, a good rule of thumb is for the auditor to finish within one year. An open audit or an audit that is within a year of the statute of limitations expiring (three years from the due date of the return, or filing date, whichever is later) can mean trouble. Auditors and their managers like to close cases within two years after the filing of a return.
9 Contest thy penalties
Too often, taxpayers do not argue whether penalties apply. IRS auditors have been criticized for arbitrarily assessing penalties — namely the 20 percent accuracy penalty for negligence — in audits. Taxpayers should closely examine the facts and prepare to argue that penalties do not apply, and be prepared to explain the circumstances and prove to the IRS that they made a reasonable attempt to comply with the tax law, but were not able to because of unforeseen circumstances. For example, if they used a tax pro to file and their tax return position is being contested in the audit, they should highlight their reliance on the tax pro’s advice. In any event, they shouldn’t just concede — they should access the auditor’s manager and the IRS office of appeals if they need a second and third opinion.
Face-to-face audits require that the taxpayer “speak IRS.” They must know how to navigate the audit, their rights as a taxpayer, and how to advocate their tax return position. Unless they have experience and knowledge in handling an audit, they should seek the advice of a tax professional.
Professional representation in complex business audits can cost thousands. However, for most office audits, the tax pro will spend about two or three days in total in preparing for the audit, meeting with the IRS, and finalizing all matters of the audit. If the audit gets into multiple years, the time will increase. Tax pros should be able to offer a reasonable range of fees to expect before the taxpayer engages their assistance.
IRS sees progress in identity theft battle
By Michael Cohn
The Internal Revenue Service said Monday that the number of taxpayers who reported they were victims of identity theft fell 71 percent between 2015 and 2018, thanks to coordination between the IRS and its Security Summit partners in the tax profession, the tax prep software industry and state tax authorities.
Since it formed the Security Summit initiative in 2015, the IRS has been partnering with others in both the private and public sector on combating tax-related identity theft. The effort has led to fewer fraudulent tax returns being filed, fewer confirmed identity theft returns being stopped, fewer bad refunds being issued and fewer taxpayers identifying themselves as identity theft victims.
“The IRS and the Security Summit continue to make tremendous inroads in the battle against identity theft,” said IRS Commissioner Chuck Rettig in a statement. “In 2018, our partnership protected more taxpayers and more tax dollars from tax-related identity theft. At a time when many in the private sector continue to struggle with these issues, the tax community has made major progress working together to stop identity theft and refund fraud.”
The IRS and its partners in the tax prep profession have shared dozens of elements from tax returns that could be indicators of fraud such as the length of time to prepare the return. The IRS has also improved and expanded its fraud filters and added extra protections to business along with individual tax returns. State tax authorities have asked for more information such as driver’s license numbers. Software developers have strengthened their password requirements to protect accounts and added multi-factor identity authentication. Debit card companies have also beefed up their protections, and more financial institutions are now helping recover fraudulent refunds.
The IRS and its partners in the Security Summit set up the Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (IDTTRF-ISAC) to detect and stop tax refund fraud. Overall 65 groups are now participating in ISAC, enabling them to react and respond more quickly as new schemes pop up from fraudsters.
Between 2015 and 2018, the IRS found the number of taxpayers reporting they were identity theft victims by filing identity theft affidavits fell 71 percent. Last year, the IRS received 199,000 reports from taxpayers compared to 677,000 in 2015. This was the third year in a row this number declined. There were 242,000 identity theft reports in 2017 and 401,000 in 2016.
Between 2015 and 2018, the number of confirmed ID theft returns stopped by the IRS fell 54 percent. However, there was a 9 percent uptick last year in the number of confirmed identity theft returns, 649,000 compared to 597,000 in 2017. But the IRS pointed out that the 2018 count is still significantly below the 883,000 in 2016 and the 1.4 million in 2015.
Between 2015 and 2018, the IRS protected a combined $24 billion in fraudulent refunds by preventing confirmed identity theft returns. Last year, the 649,000 confirmed fraudulent returns tried to access $3.1 billion in tax refunds. The IRS protected $6 billion in 2017, $6.4 billion in 2016 and $8.7 billion in 2015.
Between 2015 and 2018, the IRS’s partners in the financial industry recovered an additional $1.4 billion in fraudulent refunds. The financial industry is helping the IRS combat identity theft and recover fraudulent refunds that may have been issued. As fewer fraudulent tax returns enter the system, fewer fraudulent refunds are being issued. Last year, financial institutions recovered 84,000 federal refunds totaling $112 million for the IRS. Institutions recovered 144,000 refunds worth $204 million in 2017, 124,000 refunds worth $281 million in 2016 and 249,000 refunds totaling $852 million in 2015.
“Despite these major successes, more work remains,” Rettig added. “Identity thieves are often members of sophisticated criminal syndicates, based here and abroad. They have the resources, the technology and the skills to carry on this fight. The IRS and the Summit partners must continue to work together to protect taxpayers as cyberthieves continue to evolve and adjust their tactics.”
Identity thieves take aim at tax pros
In response to the success of the Security Summit in fending off identity theft, criminals are changing their targets and tactics, increasing trying to steal personal and business information from companies and tax professionals.
Theft of taxpayer information held by tax professionals is still a major issue. Identity thieves can breach tax practitioners’ computer systems, steal client data and file fraudulent tax returns before a preparer may even know they have been victimized.
Criminals can also steal the tax practitioner’s Electronic Filing Identification Number (EFIN) or Preparer Tax Identification Number (PTIN) to file false returns. Tax pros who experience a data theft should contact their IRS stakeholder liaison immediately for help.
Meanwhile, the number of businesses reporting they are victims of tax-related identity theft increased 10 percent last year, with 2,450 reports compared to 2,233 reports in 2017. The Security Summit partners are putting in place similar protections for business tax returns to safeguard against business identity theft.
Identity thieves use several different tactics with businesses. They can file a fraudulent tax return, a fraudulent quarterly tax payment or use stolen Employer Identification Numbers (EINs) to create fraudulent Forms W-2. Thieves can also impersonate business executives to convince payroll or finance employees to disclose employee W-2 information or make wire transfers. Partnerships, trusts and estates also can be at risk of suffering tax-related identity theft.
New schemes are constantly arising. The security software provider McAfee reported Monday that a powerful data-stealing malware campaign with a tax theme on the rise ahead of Tax Day. Trickbot is a trojan that is infecting unsuspecting users and aims to steal password and financial information to send back to the attacker. By stealing tax documents, scammers can also file fraudulent end-of-year tax forms to steal refunds. Another security provider, Proofpoint, recently said it has uncovered a disproportionate number of tax-related campaigns pushing malware called the NetWire RAT through email, giving attackers backdoor control to peoples’ machines. In addition to the U.S., Proofpoint said it has also seen evidence of attacks in Canada, Singapore, New Zealand, the U.K., and Australia
For more information about identity theft, how to identify it, how to prevent it and how to report it, visit IRS.gov/identitytheft.
I’ve seen Trump’s tax returns and you still haven’t
By Timothy L. O'Brien
Remember back in early 2016 when Donald Trump, who was still regarded as something of a long shot for the presidency, promised he would disclose his tax returns publicly — just like every other candidate had done voluntarily since 1973?
“I have big returns, as you know, and I have everything all approved and very beautiful and we'll be working that over in the next period of time,” Trump said on “Meet the Press.”
The “next period of time” turned out to mean “never.”
Once Trump became skittish about releasing his returns he landed on one recurring reason for why he couldn’t put them out there, as forever memorialized when he was asked about his taxes during a presidential debate.
“As far as my return, I want to file it, except for many years, I've been audited every year,” he said in Houston on Feb. 25, 2016. “Twelve years or something like that. Every year, they audit me, audit me, audit me.”
An audit doesn’t prevent anyone from releasing their tax returns. If they really want to, they can go right ahead. Richard Nixon — RICHARD NIXON — released his tax returns when he was being audited. And it is extremely rare, also bordering on never, for someone to be audited several years in a row, much less 12. So maybe Trump hasn’t been entirely forthright about his audits. But who knows? When asked during one interview why he thought he had been targeted, he gave a faith-based response. “Well, maybe because of the fact that I'm a strong Christian, and I feel strongly about it, maybe there’s a bias,” he once offered.
In the end, Trump, who regards disclosure of his tax returns as a financial form of open-heart surgery, decided that people should just stop bothering him. “I'm worth more than $10 billion by any stretch of the imagination. Has tremendous cash. Tremendous cash flow. You don’t learn much from tax returns,” he told “Meet the Press” several months before Election Day in 2016. “But I would love to give the tax returns. But I can't do it until I'm finished with the audit.”
All that talk of an audit may have put Trump in a corner. On Wednesday night, Democrats on the House Ways and Means Committee asked the Internal Revenue Service to release six years of the president’s personal and business tax returns, attributing their request to Congress’s oversight role. Representative Richard Neal, chairman of the committee, said he was making the request precisely because he wanted to make sure that the IRS was properly auditing Trump.
Trump has already said he isn’t inclined to release his tax returns in accordance with Neal’s request, so this is certain to ignite a legal battle. In the interests of good government and the avoidance of financial conflicts of interest in the Oval Office, I hope Congress wins this one. And I know, for a fact, that it’s not true that you don’t learn much from a tax return. As I noted back in early 2016, I have seen Trump’s tax returns, and I think you should too.
Trump unsuccessfully sued me in 2006 for libel over a biography I wrote called “TrumpNation,” citing unflattering sections of the book that examined his business record and wealth. He lost the suit in 2011, and during the litigation he was forced to turn over his tax returns to my lawyers.
As I noted in 2016, I think there are five broad categories of disclosure related to his returns that should matter to voters, politicians, and anyone else interested in making sure the White House is conflicts-of-interest free.
1) Income: The returns would offer a gauge of how financially robust the president’s businesses actually are and how much of that money flows to him.
2) Business Activities: Trump has always said that the Trump Organization employs thousands and that U.S. companies shouldn’t relocate overseas and take jobs away from U.S. workers. Tax returns would offer a view of Trump’s global footprint and provide a clearer sense of the size and scope of his company.
3) Charitable Giving: Trump has often bragged about being a dedicated philanthropist. If that’s true, his returns would prove it.
4) Tax Planning: The president uses a lot of shell companies, or LLCs, as part of his business and personal dealings. Some wealthy people have also used shell companies overseas to mask their fortunes and hide the money from authorities. Trump’s returns would show how actively he has used tax havens, if at all.
5) Transparency and Accountability: This may be the most important category of all. Trump is now, arguably, the most powerful and influential man in the world. His tax returns would provide a much clearer picture of potential financial conflicts or pressures that would come to bear on him in the White House. They would also provide a way of monitoring whether the president is more interested in his financial self-interest and deal-making than policy-making.
Neal has only requested six years of Trump’s returns, which is, I think, regrettable. Some of the transactions that may interest investigators the most took place around 15 years ago, when Trump, suddenly flush with cash, went on a shopping spree. He bought and developed golf courses, launched a new hotel and condominium in Chicago, and deepened his involvement with the Trump SoHo Hotel in lower Manhattan.
It is still curious to me how Trump, who always used to finance his transactions with debt, raised the funds to do all that in the mid-2000s and pay cash. To find out, Neal will have to dig deeper than six years ago.
Senators want IRS to enforce tax laws against college admissions cheats
By Michael Cohn
The Republican and Democratic leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., are asking the Internal Revenue Service to crack down on the people involved in the recent college admissions scandal.
They noted that the parents of the prospective college students purported to make tax-deductible donations to a sham charity set up by the scheme’s organizer, William Singer, who set up a tax-exempt organization known as the Key Worldwide Foundation, to funnel illicit payments to him and to college officials as bribes. Singer eventually agreed to help government investigators implicate the parents and university officials who were charged in the case. Officials at prestigious schools such as Yale University, Georgetown University, the University of Southern California, UCLA, the University of San Diego, the University of Texas, Austin, Wake Forest University and Stanford University have been implicated. Among the parents are actresses Felicity Huffman and Lori Loughlin, who appeared in court Wednesday.
In a letter Wednesday to IRS Commissioner Charles Retting, Grassley and Wyden described several types of transactions between various parents and the Key Worldwide Foundation to facilitate the payments.
“As you are surely aware, this scandal involves the parents of college-bound children allegedly paying for fraudulent SAT and ACT test scores, allegedly bribing college administrators, and committing other fraud to help their children attain preferential admissions,” they wrote. “As alleged in various Department of Justice charging documents, those payments often took the form of fraudulent tax-deductible donations to a charity known as the Key Worldwide Foundation.”
Some payments were made from private foundations and from businesses, along with donations of stock holdings arranged to appear as if they were charitable donations, possible as a way to avoid capital gains taxes.
“If these allegations are true, such payments to KWF obviously should not be treated as legitimate charitable deductions, and we expect the IRS will enforce the law accordingly in this regard, both as to KWF as well as to the parents who may have claimed such payments as deductions on their personal income tax returns,” Grassley and Wyden wrote.
They urged the IRS to crack down on those involved in the scheme. “This scandal, however, appears to implicate further violations of the tax code, and we expect the IRS to be vigorous in enforcing the applicable tax laws,” the senators wrote.
Turning marketplace facilitators into tax collectors
While most states have been busy retooling their sales tax on remote sellers to conform to the standards set forth by the Supreme Court in its Wayfair decision, the current activity is centered in the marketplace facilitator arena, with more than 20 states currently looking at ways to hold marketplace facilitators responsible for collecting and remitting sales tax on behalf of marketplace sellers. And 10 states have already adopted legislation requiring sales tax collection by marketplace facilitators.
“Marketplace legislation is gaining steam quickly and becoming a major trend among the states,” said Scott Peterson, vice president of U.S. tax policy and government relations with Avalara and former executive director of the Streamlined Sales Tax Governing Board. “It’s one of the four major sales tax issues being discussed in state legislatures, the others being Wayfair, feminine hygiene, and lodging.”
Putting the burden on marketplace facilitators eliminates the burden on smaller sellers, and ensures that the state can look to one party for compliance with their sales tax.
“It eliminates the burden on small retailers and on the states themselves,” Peterson explained. “They would much rather get one return that includes information from 5,000 or 10,000 retailers than a separate return from each one. Moreover, it gives states the ability to get tax from the small retailers when they can’t do it under Wayfair.”
The lowest threshold for states to require remote sellers to collect and remit sales tax, at $100,000, leaves many retailers exempt from the requirement. But the marketplace facilitator collects from every seller on the marketplace, no matter how small the amount of sales or number of transactions, Peterson explained.
“If a seller makes $25,000 in sales over a marketplace, the state can make the marketplace collect sales tax and get tax paid on every sale on the marketplace, regardless of how small the seller,” he said.
All of the marketplace bills are virtually identical regarding seller responsibility, according to Peterson. “They all say that to the extent the marketplace collects, sellers are relieved of any liability.”
However, the exact requirements for marketplace facilitators and their third-party sellers differ from state to state, according to Avalara author Gail Cole.
“For example, some states require marketplace sellers to report their marketplace sales and take a deduction for them if the facilitator is responsible for collecting sales tax; others don’t,” she said. “However, all states require sellers to register with the tax department and collect and remit tax on sales made through other channels, such as their own e-commerce store or a non-collecting marketplace.”
The number of states looking to hold marketplace facilitators responsible for collecting and remitting sales tax on behalf of all marketplace sellers is steadily increasing, according to Cole. “More than 20 states currently have marketplace facilitator measures under consideration, including the four most populous states in the country — California, Florida, New York and Texas,” she said. And by the end of 2019, it is projected that 35 states will have such legislation on the books.
Help is available
The Streamlined Sales and Use Tax Agreement, or simply Streamlined Sales Tax, is an effort by state and local governments to simplify sales tax compliance for SST-registered businesses, Peterson noted.
The agreement, which was cited by the Supreme Court in its Wayfair decision, provides liability relief and accuracy relief. SST aims to make multi-state compliance easier and more affordable by covering the cost of automated sales tax solutions for qualified businesses, including sales tax calculations, return preparation, and filing, in part through Certified Service Providers.
CSPs are agents certified to perform all of a seller’s sales and use tax functions, other than the seller’s obligation to remit tax on its own purchases. A CSP is designed to allow a business to outsource most of its sales tax obligations, according to the SST. There are six providers certified by the SST Governing Board: Accurate Tax, Avalara, Exactor, Sovos, TaxCloud and Taxify.
Some states are considering not joining the SST, but simply using the CSP model to help them collect sales tax more efficiently. Pennsylvania, Utah, Missouri and Connecticut are among those.
“We expect other states to look closely at this solution as well, as they grapple with how best to align with the Wayfair decision,” said David Campbell, chief executive of TaxCloud.
“Since the Wayfair decision last year, we have been talking to many of the states that haven’t signed on to the Streamlined agreement about using the CSP model,” he said. “As legislation is pending in statehouses across the country, CSPs are being looked into as an efficient way to collect online sales tax. Not only is it cheaper and easier for online retailers, but states gain by having the handful of CSPs as points of contact for audit, remittance, calculation, etc. By using a CSP, states don’t have to chase the tens of thousands of online retailers around the country, and also won’t have thousands of inbound queries from retailers with compliance or remittance issues.”
The impact of Wayfair has led to issues in acquisitions, where a common warranty is, “We are current and materially accurate in our taxes,” said Ryan Gamble, managing director at consulting firm Riveron. “Conversations we are having regard the implications in the income tax area. Economic nexus has been part of income tax for years, with similar standards to sales tax nexus. Does Wayfair signal that, given that it has overturned a law from 1992 when there was no real e-commerce, can the same reasons be given for P.L. 86-272 [a 1959 law that provides protection from state income tax on the sale of tangible personal property when a company has only one salesperson in a state]? It’s not a stretch to say that the same rationale would apply based on the change in the economy. From a planning standpoint, companies could try to avail themselves of that protection more aggressively now that they’re losing on Wayfair. And how aggressively will the states push back?”
Then there are companies that don’t deal in personal property, Gamble observed: “Will they be working to have Congress have a similar approach by eliminating the protection afforded by P.L. 86-272 and make a level playing field for everyone? That’s what we’re seeing in the marketplace currently.”
“Both state income tax and sales tax have economic nexus. They used to be very separate but today they’re tied together,” agreed Michael Nunez, tax director for state and local services at CPA firm Hall & Co. “For most small internet sellers, we recommend they first track their sales by state, and then layer over that and see in which states they cross the threshold. Not all states use the same threshold as South Dakota, that the Supreme Court approved. The practitioner should sit down with the client and discuss their options. If they are substantially over a particular threshold, the decision would be to become compliant — register and collect on a prospective basis. Or they may be below the threshold, so they should start tracking their sales in that state on a year-to-date basis and be on the alert for when they approach the state’s threshold.”
IRS seeing difficulties with FATCA reporting
By Michael Cohn
The Internal Revenue Service is having trouble dealing with the information it’s getting from foreign banks about U.S. taxpayer assets under the Foreign Account Tax Compliance Act because of problems with the data and various mismatches, according to a new government report.
The report, from the Government Accountability Office, found that data quality and management issues have limited the effectiveness of the IRS’s efforts to implement FATCA, which was part of the HIRE Act of 2010. The law required foreign financial institutions to send information about U.S. taxpayer assets or else face stiff penalties of up to 30 percent on their income from U.S. sources. The law proved to be controversial, and the Treasury Department needed to negotiate intergovernmental agreements with the tax authorities in dozens of other countries to get them to agree to turn over data under their own banking secrecy laws. In most cases, the foreign banks turn over the information first to their own home country’s tax authority, which in turn transmits it to the IRS. The IRS also needed to develop portals where the information could be sent, as well as forms, instructions and other guidance and technology systems to implement FATCA.
However, even with all that work, the IRS has had difficulties matching the information reported by foreign financial institutions with U.S. taxpayers' tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by the foreign banks. On top of that, the IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. individual taxpayers, partly because some IRS databases don’t store foreign asset data reported from paper filings. The “IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance campaigns,” according to the report. The report also found that nearly 75 percent of taxpayers reporting foreign assets to the IRS also reported them separately to the Treasury Department, indicating potential unnecessary duplication.
Another major problem for FATCA has been the hardships faced by U.S.-born expatriates. Some Americans living abroad can't get services from foreign banks that find the law too burdensome. Even American actress Megan Markle, who married Prince Harry in the U.K. last year, is expected to face difficulties with tax compliance. With the couple’s baby due soon, some observers have speculated their children could be subject to U.S. tax, unless she renounces U.S. citizenship.
The GAO found that some foreign financial institutions, or FFIs, have closed some U.S. taxpayers’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted thanks to the increased costs and risks they face under FATCA. According to State Department data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449 — or nearly 178 percent — from 2011 through 2016, partly because of FATCA.
The Treasury has already set up some joint strategies with the State Department to address the challenges of U.S. expats in accessing foreign financial services. However, the GAO said they lack a collaborative mechanism to coordinate their efforts with other agencies to address the ongoing challenges of accessing such services or getting Social Security Numbers. The GAO said they need a more formal means to collaboratively address the burdens faced by Americans abroad from FATCA. That way, federal agencies could develop more effective solutions to mitigate the burdens faced by taxpayers abroad, by monitoring and sharing more information, and jointly developing and implementing steps to address the problems.
The GAO made seven recommendations to the IRS and other agencies to enhance the IRS's ability to leverage FATCA data to enforce compliance, address unnecessary reporting, and better collaborate to mitigate burdens on U.S. persons living abroad. It also recommended one matter for congressional consideration to address the overlap in foreign asset reporting requirements. The State Department and the Social Security Administration agreed with the GAO's recommendations, but the Treasury Department and the IRS neither agreed nor disagreed with the recommendations.
“FATCA, combined with enforcement efforts on the part of the IRS and Department of Justice, has drawn attention to the requirements to disclose foreign accounts and report income generated by those accounts,” wrote Kiersten B. Wielobob, deputy commissioner for services and enforcement at the IRS. “The increased reporting and disclosure demonstrates improved voluntary compliance thus heightening fairness and integrity in the tax system.”
As if this season didn’t have enough problems, scammers are hard at work making life difficult for preparers and taxpayers alike – though making it easy in a way for the IRS to compile this year’s Dirty Dozen tax scams.
These common scams may crop up anytime but many peak during filing season. The best IRS advice? “Don’t fall prey.”
Kicking off the annual Dozen is a warning of the ongoing threat of internet phishing scams that lead to tax-related fraud and ID theft. Taxpayers, businesses and tax pros need to be alert for a continuing “tricky and clever” surge of fake emails, text messages, websites and social media attempts to steal personal information.
Watch out for emails and other scams posing as the IRS, promising a big refund or personally threatening people. Don’t open attachments or click on links in emails.
Tax-time phone scams find aggressive criminals posing as IRS agents to steal money or personal information via phone scams or “vishing” (voice phishing). Beginning early in the filing season, the IRS generally sees an upswing in scam phone calls (often robo-calls) threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other details. These types of scams have cost 14,700 victims a total of more than $72 million since 2013.
Despite what the agency terms “a steep drop in tax-related identity theft in recent years,” the IRS continues to caution that the scam remains serious. Tax-related ID theft occurs when someone uses a stolen Social Security number or ITIN to file a fraudulent return claiming a refund – and thieves constantly strive to find a scheme that works. Once their ruse begins to fail as taxpayers become aware of their ploys, they change tactics. Business filers should be aware that cybercriminals also file fraudulent 1120s using stolen business identities.
“Choose tax preparers carefully,” says the IRS, and with good reason: Tax reform has propelled more taxpayers than ever to a paid pro to prepare their returns this year and a vibrant minority of dishonest preparers operate each filing season perpetrating refund fraud, ID theft and other scams. Look for a preparer who’s available year-round, the IRS advises taxpayers, and ask to see the PTIN.
Look out for promises of inflated tax refunds, a common scam tactic during filing season. Con artists promising overly large refunds – using such tools as fictitious rebates, benefits or tax credits – frequently prey on older Americans and low-income taxpayers and those who don’t have a filing requirement. Scam artists can use flyers, advertisements, phony storefronts or word-of-mouth to attract victims. They may even make presentations through community groups or churches. They may also file a false return in their client’s name, and the client never knows that a refund was paid.
6 Magic money
Schemes involving falsifying income and creating bogus documents again make the Dozen, as the IRS warns about schemes involving falsifying income, including the creation of bogus 1099s. Con artists commonly use this trick as well as related scams designed to get taxpayers to erroneously claim undeserved credits such as the Earned Income Tax Credit.
The IRS also cautions taxpayers to avoid getting caught up in scams disguised as a debt payment option for credit cards or mortgage debt, a scheme usually involving the filing of a 1099-MISC and/or bogus financial instruments such as bonds, bonded promissory notes or worthless checks.
Falsely inflated deductions or credits on returns often crop up as crooked tax preparers overstate deductions such as charitable contributions, medical or business expenses or the EITC and other credits. Often by the time the IRS contacts the taxpayer about these problems, the promoter or preparer is long gone.
Disasters, charitable causes and the goodness of most taxpayers are low-hanging fruit for scammers masquerading as charitable organizations -- a frequent scam on the Dirty Dozen list. Using a deduction as bait, these fake charities often lure victims into making ineligible donations, ultimately leaving the unsuspecting donor in the lurch. Be wary of charities with names that are similar to familiar or nationally known organizations.
9 How to cheat in business without really trying
Improperly claiming various business tax credits is a common scam used by unscrupulous tax preparers. Two credits often targeted for abuse are those for research and fuel taxes: Improper claims for the R&D Credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses; the Fuel Tax Credit is generally limited to off-highway business use or use in farming and is unavailable to most taxpayers.
Failure to report offshore funds remains a crime -- and an entry on this year’s list. After IRS efforts on offshore issues in recent years, many taxpayers have already voluntarily disclosed their participation in these schemes; the IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes and has pursued criminal charges leading to billions of dollars in criminal fines and restitution.
Numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities then accessing the cash using debit cards, credit cards or wire transfers. Others have used foreign trusts, employee-leasing schemes, private annuities or insurance plans.
Does the First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds. Are the “employees” subject to federal income tax those who work for the federal government? Is only foreign-source income taxable? In each case: NO.
Frivolous tax arguments like these remain a perennial among the Dozen. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. As the IRS reminds people time and again, these arguments have been tossed from courts.
12 When good tax tools go bad
Abusive tax shelters, trusts, conservation easements make this year’s list as abusive tax-avoidance schemes – along with their crooked promoters. Three variations of these schemes – abusive trusts, abusive micro-captive insurance shelters and abusive syndicated conservation easements -- are featured in the final installment of this year’s Dozen. The three all start with a legitimate tax-planning tool that is improperly distorted almost always by a promoter to produce benefits that are too good to be true and ultimately seriously compromise the taxpayer.
Many rich fretting about SALT didn’t get that tax break anyway
By Laura Davison and Henry Goldman
Politicians in mostly Democratic high-tax areas say the new federal cap on state and local tax deductions hurts their residents. Yet the vast majority of those taxpayers never actually got the break in the first place, undermining a key criticism of the Trump tax overhaul.
About three-quarters of people who in past years paid more than $10,000 in state and local taxes had been required to take the alternative minimum tax, meaning they couldn’t have written off the SALT levies anyway, according to IRS data analyzed by Bloomberg. And because the AMT has been scaled back as well, those top earners in fact get a new tax break by now being able to write off up to $10,000 of their SALT payments.
Bloomberg analyzed IRS data from 10 of the wealthiest counties in the U.S. — including New York’s Westchester, New Jersey’s Somerset, Connecticut’s Fairfield and California’s Marin counties.
The numbers could deflate some of the heated rhetoric over the 2017 tax overhaul, the Republican Party’s signature legislation of the Trump era. Since the law was enacted, governors and lawmakers from high-tax states have decried the change as a GOP assault on Democratic strongholds. New York Governor Andrew Cuomo called it an “economic civil war.”
“A lot of folks are coming in assuming they’re going to lose under the new tax law when in fact, they’re not,” said Ryan C. Sheppard, an accountant at Knight Rolleri Sheppard in Fairfield, Connecticut. “In many cases they’re doing better because in prior years the alternative minimum tax disallowed all their state and local tax deductions. Now they’re at least getting $10,000, where they got zero before.”
The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes at $10,000. That set off campaigns to eliminate the provision by politicians in states with high income taxes and high property taxes, which tend to be Democratic states.
Cuomo predicted that limiting the deduction to $10,000 would wreak havoc for the budgets of New York and states in similar circumstances. He formed a coalition of like-minded governors from eight states, all of them Democrats, to insist that Congress repeal that provision.
Democrats in Congress have introduced legislation to do that, but there’s little appetite to move forward on it, given that the main Democratic talking point on the new tax law is that it benefits the wealthy. Fighting to restore the full deduction for SALT would step on that argument.
And in the Republican-controlled Senate, Chuck Grassley, chairman of the Finance Committee who represents lower-tax Iowa, has declared any attempt to restore the full SALT deduction dead on arrival.
The cap on SALT deductions, as well as the repeal of some other deductions for home mortgages, will bring in $668.4 billion in tax revenue over a decade, according to the congressional non-partisan scorekeeper, the Joint Committee on Taxation.
Cuomo says the SALT deduction cap could rob the state’s coffers if residents pressure local lawmakers to lower taxes, or worse, move out of the state to lower their taxes — ultimately calling into question New York’s long-term viability. He’s said it would raise New Yorkers’ total tax burden by at least 20 percent.
“I’m afraid we’re at that tipping point,’’ Cuomo said earlier this month. “There is nothing more serious than this.’’
Top earners in Manhattan, or New York County — those earning at least $200,000 and up into the millions of dollars — paid an average of $144,189 in SALT in 2016, according to IRS data, so being able to write off less than 10 percent of that would be a big, and costly, change.
But the impact will largely be felt by those making $1 million or more, accountants say.
The reason is that 74 percent of those top earners fell under the AMT, a backstop to prevent the wealthy from whittling down their tax bill by piling up deductions and credits. So the fact that they now can write off up to $10,000 of their SALT payments reduces their overall tax burden and effectively gives them a tax break they didn’t have before.
This year is the first filing season under the GOP tax law overhaul, which cut tax rates for all income levels. Those reductions were partially offset by curbing some deductions and exemptions, leading to a wide array of outcomes for taxpayers depending on their personal situations.
The law also included several changes that disproportionately benefit the wealthy. The law cut the top tax rate to 37 percent from 39.6 percent. And it offered a new 20 percent deduction for owners of partnerships and limited liability companies and reduced the number of people subject to the estate tax.
The tax law also largely scaled back the AMT. About 62 percent of people making between $500,000 and $1,000,000 paid the AMT before this year. Now only about 2 percent of those filers will have to pay the AMT, according to estimates from the Urban-Brookings Tax Policy Center.
Tax accountants are finding that many of the people who used to use the AMT are using SALT deductions, even though limited, to their benefit.
For example, a taxpayer who made $200,000 and had $37,000 in SALT payments owed $44,760 in federal taxes under the AMT before the tax overhaul. This year, that same taxpayer would now be able to deduct $10,000 of his or her SALT payments and the federal tax bill would go down by about $3,000, to $41,715, according to Steve Rossman, a shareholder at accounting firm Drucker & Scaccetti in Philadelphia.
For the sliver of top earners who didn’t pay the AMT, the war cries of Cuomo and other Democratic politicians hit home. About one-fourth of taxpayers in Connecticut’s Fairfield County who earn more than $200,000 had an average SALT bill of $80,564 and weren’t subject to the AMT, so they could lose an average of $70,000 or more worth of deductions.
“For them it’s devastation. It feels like an earthquake to them,’’ Karen Brosi, a tax accountant in Palo Alto, California. “They’re already paying extraordinarily high state income taxes. Now, they very truly are not getting any federal tax benefit from those and in fact are finding that their federal bill is going up.’’
New York officials fear the state will bear the brunt of the SALT cap to the tune of some $14 billion annually. The tax plan’s harshest impact falls on the top 1 percent of earners, who account for 56 percent of the state’s revenue, said Robert Mujica, New York State budget director.
New York designed its tax code around state and local tax deductibility, which has been a feature of federal tax law since the income tax was introduced in 1913. It’s “unacceptable” for the federal government to target New York’s tax base, Mujica said in an interview.
“No other state is going to have as many people who pay more than New York,” he said. “That’s the fundamental issue.”
Senator Bob Menendez and Representative Bill Pascrell, both New Jersey Democrats, are pushing a bill to fully restore the SALT deduction and have proposed to pay for some of that by returning the top marginal tax rate to 39.6 percent.
But some of the complaining about the new tax law is just “crying wolf,” said Rossman.
“The politicians are leading their constituents, but the constituents are drawing conclusions without knowing what’s happening to themselves,’’ he said. “Some people will realize that under the old law they were actually paying more.”
College scandal involved shadowy tax-exempt charity with ‘yellow flags’
By Lynnley Browning, Simone Foxman and Suzanne Woolley
The California charity at the center of the college-admissions scandal listed no employees, had questionable documentation, and didn’t live up to its promises for years before it was exposed as a conduit for bribes to officials at elite universities.
And it apparently never attracted attention from the IRS.
Key Worldwide Foundation told potential donors that its aim was to provide educational opportunities to underprivileged kids. But the foundation, headed by William Singer, also helped celebrities, executives and other wealthy people bribe test monitors, school officials and coaches so their kids would be admitted to top universities, according to the FBI.
“Many things were off, odd,” said Lloyd Mayer, a professor at Notre Dame Law School who focuses on nonprofits and charities and who has read the filings. “These are all yellow flags.”
The foundation was spotlighted as the FBI conducted what it dubbed "Operation Varsity Blues," ensnaring key players from Hollywood, Wall Street and the sports world in a scandal that has laid bare the class distinctions in the college admissions process. The parents and coaches involved face criminal charges and some have lost their jobs.
Despite taking in more than $7 million in funds over four years and claiming to run an intern development program, Key Worldwide didn’t list any employees, according to four years of disclosures filed with the IRS. It had just three officers, low for a charity of its assets, and reported that two of them worked zero hours. Singer worked eight hours a week for the non-profit, the filings say, and didn’t report any compensation.
“You’d think they were at least paying somebody to keep track of the funds and pick recipients,” Mayer said.
The foundation had no independent directors, meaning that its own officers filled that role, led by Singer. The IRS considers non-independent directors to potentially have conflicts of interest through personal or financial ties to the entity.
At least one recipient of the foundation’s grants had the same residential address as the charity itself. Other grant recipients say they never received any money.
Despite these questionable practices, experts say the IRS just doesn’t go after foundations like Key Worldwide unless someone alerts it to possible wrongdoing.
Marcus Owens, a former IRS official in charge of the agency’s tax-exempt division, said that the filings didn’t contain details that "would automatically trigger an audit.” But that’s because "they avoided describing what they really do and they lied about certain grants they made."
Publicly, Key Worldwide highlighted its work with underprivileged kids. It “has touched the lives of hundreds of students that would never have been exposed to what higher education could do for them,” its website says. “Many of these students have only known life on the streets, surrounded by the gang violence of the inner-city.”
Its IRS filings say that its mission is “to provide education that would normally be unattainable to underprivileged students, not only attainable but realistic.”
Key Worldwide was founded about seven years ago by Singer, the central figure in the college bribery operation. He pleaded guilty Tuesday to racketeering, money laundering, fraud and obstruction of justice.
He is cooperating with investigators who have charged some 50 people, including actors Lori Loughlin and Felicity Huffman; William McGlashan Jr., a former partner at the private equity firm TPG, who was fired; and Gordon Caplan, the co-chairman of global law firm Willkie Farr & Gallagher, who has since been put on leave.
Singer bribed college coaches and officials at top universities including Yale, the University of Southern California and Georgetown University. Prosecutors allege that well-heeled parents paid Singer around $25 million from 2011 until last month.
Court papers allege that Singer conducted the scheme through his firm, Sacramento, California-based Edge College & Career Network LLC, and funneled the bribes through his Key Worldwide Foundation, an affiliated nonprofit.
Earlier this week, the California Attorney General’s office ordered Key Worldwide to cease and desist operations in the state; the charity’s website no longer has any content.
In most years since its inception, the foundation filed annual required financial statements with the IRS that are public record. The filings were signed by accountant James Williams, in Sacramento, who didn’t respond to repeated requests for comment.
In 2016, the last year records were available, the nonprofit reported $2,024,828 in “total functional expenses,” of which only $908 was for “management and general expenses,” leaving a clear question mark over how it was using its money.
IRS spokesman Eric Smith declined to comment, citing agency rules on taxpayer confidentiality.
In its first year at least, Key appears to have taken part in some genuine charitable activities. Tobi Quintiliani, a senior director with the 1736 Family Crisis Center, said that Singer set up a 5-day summer camp on entrepreneurship for about 80 students in July at UCLA.
But in federal tax filings, Key said it created a residential summer program for 100 kids with the center, and claimed they had placed students identified by the center in programs for the next two years, an assertion Quintiliani disputes.
Between 2014 and 2016, Key sent $33,329 to “Community Donations," an entity located at the same Sacramento residential address as the charity itself. While charities like hospitals occasionally raise money through affiliated organizations that share their own address, experts encourage them to keep particularly careful records as such coincidences draw scrutiny. Records for a business entity of the same name couldn’t be located.
In 2016, Key reported a $100,000 “donation” to Princeville Enterprises, a suspended corporation that shows no record of having been a formal charity. A public filing indicates its chief executive was Jorge Salcedo, the head men’s soccer coach at UCLA who has been charged with conspiracy to commit racketeering in the college admissions case. Attempts to reach Salcedo were unsuccessful.
Robert Seltzer, the accountant who set up the entity for Salcedo in 2004, said Wednesday that Princeville Enterprises was set up to hold money that Salcedo made from summer soccer camps.
Paul Streckfus, editor of EO Tax Journal, said one obvious area where investigators can see warning signs is a foundation’s compensation. And Key Worldwide was reporting curious numbers.
Gordon Ernst, a former head tennis coach at Georgetown University, received almost $1.5 million from the foundation as a consultant from 2013 through 2016, according to its IRS filings. Ernst has been charged with conspiracy to commit racketeering. Ernst’s lawyer didn’t immediately return a message seeking comment.
Key Worldwide also appears to have listed numerous questionable partnerships on its website. Representatives for three of the six organizations it lists as partners on the site — Houston Hoops, Atlanta Xpress and Bizworld.org — said they had never heard of the foundation or had a partnership with it.
Bizworld.org has demanded that Key Worldwide immediately remove all references to it from the website, Bizworld.org chief executive officer Thais Rezende said in an email.
Efforts by the IRS to root out and prosecute tax fraud have declined in recent years amid steep cuts in staffing and budgets. In 2017, a tax-exempt organization stood a less than 1 percent chance of being selected for an audit, according to IRS data. The agency had about 840 fewer tax examiners in 2017 than it did four years ago.
"No one at the IRS probably even looked at the returns until the FBI called," Mayer said.
The IRS tends to focus more on individual taxpayers claiming deductions than on how charities are spending the money they’ve raised, said Suzanne Friday, vice president for legal affairs at Council on Foundations.
Still, Key Worldwide was relatively straightforward in one part of its mission statement. On its most recent IRS filing, it says, “Our contributions to major athletic university programs, may help to provide placement to students that may not have access under normal channels.”
— With assistance from Laura Davison, Robert Lee and Tom Maloney
Trump promised to bring back $4 trillion in offshore cash. He missed by $3.3 trillion
By Laura Davison and Jeff Kearns
Corporate America brought $664.9 billion of offshore profits back to the U.S. last year, falling short of the $4 trillion President Donald Trump said would return as a result of the 2017 tax overhaul.
Companies repatriated $85.9 billion in the fourth quarter of 2018, the lowest sum for the year and down from $100.7 billion the previous quarter, Commerce Department data showed Wednesday. Corporations brought back $579 billion in the first three quarters of 2018, upwardly revised from $571.3 billion in the prior report.
Corporations are bringing back more than they did in 2017, before the tax law was enacted, when U.S. firms repatriated $155.1 billion.
Companies kept much of their overseas profit offshore because a 35 percent tax kicked in only if they brought the cash back to the U.S. But the Republican tax law set a one-time 15.5 percent tax rate on cash and 8 percent on non-cash or illiquid assets, regardless of the country where the profits sat.
In touting the tax overhaul, Trump predicted that more than $4 trillion would return to the U.S., which he said would create jobs and spur investment. Investment banks and think tanks have estimated that U.S. corporations actually hold $1.5 trillion to $2.5 trillion in offshore cash.
The repatriation figures were part of a quarterly report on the current-account deficit, which widened to $134.4 billion in the October-December period from $126.6 billion. The gap is considered the broadest measure of international trade because it includes income payments and government transfers.
It’s unlikely that U.S. corporations will bring back all of the offshore profits they have, despite the tax law changes. Only about 54 percent of corporate offshore earnings are held in cash, according to a 2016 paper led by Jennifer Blouin, a researcher at the University of Pennsylvania. The remaining 46 percent are illiquid assets difficult that would be difficult, if not impossible, to repatriate without selling.
Any claims made about how repatriated cash would boost wages and investment in the U.S. are likely overblown, according to researchers at the University of Richmond and Claremont McKenna College.
“Policy changes have a relatively small impact on hiring and investment decisions if firms have relatively easy access to credit markets,” the researchers said in a 2018 paper.
Instead, companies have been plowing the tax cut cash into stock buybacks. Earlier this month, data from Citigroup Inc. showed that companies in the S&P 500 repurchased more than $800 billion of shares last year, surpassing the amount they invested in new or upgraded equipment. That’s the first time that buybacks have been larger than capital expenditures, despite a change in the tax law that give companies immediate write-offs if the buy machinery. Capex was slightly more than $700 billion, according to the Citigroup data.
Democratic politicians have blasted the Republican tax law for benefiting corporations and their investors rather than workers. House Ways and Means Committee Chairman Richard Neal began a congressional hearing on the tax law saying the middle class has been left behind.
“Investors are doing very well. Corporate CEOs have it great. Wealthy heirs couldn’t be doing better,” Neal said in a prepared statement Wednesday. “Let’s not pretend that stock market gains and corporate profits tell the whole story of today’s economy.”
Uncertainty about whether Democrats could upend the tax law in the coming years is making companies hesitant to overhaul their operations now, said Lisa De Simone, an accounting professor at Stanford University.
“There is a lot of concern about doing some of the things intended by the law — repatriating profits, bringing back intangible assets, moving significant operations to the U.S.,” she said. “Those changes are incredibly hard to undo.”
— With assistance from Jordan Yadoo
Trump Fed pick Stephen Moore owes $75K to IRS, court document says
By Christopher Condon and Joe Light
Stephen Moore, whom President Donald Trump said he’ll nominate for a seat on the Federal Reserve, owes more than $75,000 in taxes and other penalties, according to the U.S. government.
A federal tax lien filed in the circuit court for Montgomery County, Maryland, where Moore owns a house, says that the government won a judgment against Moore for $75,328.80. The January 2018 filing said it was for unpaid taxes from the 2014 tax year and could accrue additional penalties and other costs.
An IRS spokesman said he was prohibited by law from commenting on the case. A White House spokesman declined to comment. Moore referred questions about the tax debt to his wife, Anne Carey.
Carey said the dispute originated with a deduction on Moore’s 2014 tax return in which he accidentally claimed the sum of his alimony and child-support payments to his former wife, when only alimony is deductible. Because Moore had moved, he never received notifications from the IRS after the agency audited the return, she said.
The IRS disallowed the entire deduction and added penalties and interest, Carey said. She said she and Moore have now resolved to pay the lien as quickly as possible but will continue to press their dispute with the IRS.
She said the couple had overpaid their taxes in more recent years by about $50,000 and will seek that amount in a refund when they file their 2018 tax return.
“It was not an attempt at defrauding the U.S. government,” Carey said.
Carey said the White House hasn’t raised alarm about the tax lien, which was reported earlier by the Guardian.
Trump announced last week he would nominate Moore, a senior fellow at the conservative Heritage Foundation, for an open seat on the Fed’s board of governors. The White House hasn’t yet officially submitted Moore’s nomination to the Senate, which must vote to confirm him.
Raise your hand if you want to be audited
Most of us are aware that certain issues are more likely to give rise to an audit than others — and Laurie Kazenoff has seen them all.
A former senior attorney with Internal Revenue Service Chief Counsel and currently a partner at New York-based Moritt Hock & Hamroff LLP, Kazenoff said that the IRS consistently looks for a number of red flags on individual and business returns.
“You can be audited for any reason, but there are common areas that are on the IRS radar,” she said. “The higher your income, the more likely you are to be audited, but the most commonly audited areas are Schedule Cs because of the opportunity to fudge the numbers by understating income or inflating deductions such as home office or other expenses.”
“If the numbers are outside the norm, the computers will pick it up,” Kazenoff cautioned. “Most fields on a return are compared to averages, and outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you’re supporting yourself, or how you stay in business. If the numbers fall outside the national average, there’s a good chance of being picked up for an examination.”
Missing information is an area sure to trigger a notice, according to Kazenoff. “Many people don’t realize that the IRS matches every piece of third-party reporting with what taxpayers put on their return,” she said. “This includes interest income, dividend income, independent contractor income as well as W-2 income — the issuer is required to report it both to the taxpayer and the IRS. If the taxpayer fails to report the figures on their return — to the penny — the matching system will flag the return and they will receive a letter from the IRS.”
Not every industry is considered an equal risk, according to Kazenoff. “The service issues a list of industries they target, such as the mining industry," she said. “And there are businesses that have historically underreported income. Businesses where cash changes hands, such as restaurants and laundromats, are examples. But although gas stations deal in cash, they have an independent record-keeping system.”
The IRS also targets independent contractor situations, Kazenoff noted: “Are the workers really employees?”
Worker misclassification is an important issue for the IRS and various state taxing authorities because of the perception that many employers are not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits, and paid leave.
“A lot of companies try to avoid payroll taxes, workers compensation and unemployment withholding,” she said. “They think they can get off the hook, but it’s an issue the IRS will pursue.” Although there is no bright-line test to judge whether a worker is an employee or an independent contractor, “[The IRS] will look to see if certain factors are present to determine if the worker is really an independent contractor,” she said.
Filing a large claim for a refund on an amended return will almost always cause an audit, according to Kazenoff. “They will wonder what you did wrong on the first return,” she said. “It will almost always be picked up.”
“If the original return failed to include an item of income, of course you will want to correct it on an amended return,” she said. “But filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.”
This is particularly true where the amended return raises new issues, she indicated. “As an example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS is likely to audit for that particular issue, but will open up the entire return for questioning,” she said.
Mueller team relied on forensic accountants
By Michael Cohn
Special counsel Robert Mueller’s team included forensic accountants who helped the former FBI director investigate allegations of collusion between the Trump campaign and Russia, according to a letter released Sunday by Attorney General William Barr summarizing Mueller’s findings.
The four-page letter provides few details about the investigation or Mueller’s conclusions, but mentioned the composition of his team. “In the report, the Special Counsel noted that, in completing his investigation, he employed 19 lawyers who were assisted by a team of approximately 40 FBI agents, intelligence analysts, forensic accountants, and other professional staff.”
The brief summary did not discuss the exact work of the forensic accountants, but Mueller’s team was involved in investigating former Trump campaign chairman Paul Manafort, who was convicted of tax fraud and bank fraud charges, and former Trump attorney Michael Cohen, who was convicted of tax fraud and lying to Congress. Mueller’s team also reportedly subpoenaed records from Deutsche Bank concerning Trump-related entities.
The report acknowledged efforts by the Russian government and a Russian organization known as the Internet Research Agency to meddle in the 2016 election in support of the Trump campaign and hack into the email accounts of officials on the Hillary Clinton campaign and in the Democratic Party. However, the report seemingly cleared Trump of collusion allegations, according to Barr’s summary, while leaving many questions unanswered about the Trump team’s contacts with Russians. ”As the report states, ‘[T]he investigation did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.’”
Barr and Deputy Attorney General Rod Rosenstein also cleared Trump of obstruction of justice, but acknowledged that Mueller’s report wasn’t definitive on that point. “The Special Counsel states that ‘while this report does not conclude that the President committed a crime, it also does not exonerate him.’” Nevertheless, Barr added that he and Rosenstein had “concluded that the evidence developed during the Special Counsel’s investigation is not sufficient to establish that the President committed an obstruction-of-justice offense.”
Trump welcomed the news and claimed the report had completely exonerated him. “No Collusion, No Obstruction, Complete and Total EXONERATION,” he tweeted. “KEEP AMERICA GREAT!”
Nevertheless, Democratic congressional leaders vowed to keep pressing for the full report to be released. "Attorney General Barr’s letter raises as many questions as it answers," House Speaker Nancy Pelosi, D-Calif. and Senate Minority Leader Chuck Schumer, D-N.Y., said in a joint statement. "The fact that Special Counsel Mueller’s report does not exonerate the president on a charge as serious as obstruction of justice demonstrates how urgent it is that the full report and underlying documentation be made public without any further delay.”
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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