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HOW TO PAY ZERO TAXES, 2014
By Jeff A. Schnepper
McGraw-Hill EducationCopyright © 2014 McGraw-Hill Education
All rights reserved.
"Our income tax system is overly complex. It distorts investment decisions and encourages people to put money into schemes to reduce their tax bills instead of into enterprises to create jobs and help our economy grow."
BILL BRADLEY, New Jersey senator (1984)
"The words of such an act as the Income Tax ... merely dance before my eyes in a meaningless procession: cross-reference, exception upon exception—couched in abstract terms that offer no handle to seize hold of—leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out the net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were, no doubt, written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness...."
JUDGE LEARNED HAND, Thomas Walter Swan, 57 Yale L.J. 167, 169 .
Q: What's the difference between Obama's cabinet and a penitentiary?
A: One is filled with tax evaders, blackmailers, and threats to society. The other is for housing prisoners.
"I don't believe in a law to prevent a man from getting rich; it would do more harm than good."
"Politicians tax the middle class for the same reason some people rob banks. That's where the money is."
FORBES MAGAZINE May 11, 1992
"If our current tax strucure were a TV show, it would either be 'Foul-ups, Bleeps and Blunders,' or 'Gimme a Break.' If it were a movie, it would be 'Revenge of the Nerds' or maybe 'Take the Money and Run.' And if the IRS ever wants a theme song, mabye they'll get Sting to do 'Every breath you take, every move you make, I'll be watching you.'"
PRESIDENT REAGAN, in remarks to students at Northside High School, Atlanta, Georgia, June 6, 1985
WHAT'S NEW FOR 2013?
"April is the cruelest month"
T. S. ELIOT
It starts with laughter on April Fool's Day—but by April 15, nobody is smiling.
The IRS had some issues in 2013:
The Internal Revenue Service reportedly posted the Social Security numbers of tens of thousands of people on the Internet before taking it down when a whistleblower pointed out the mistake.
The Treasury Inspector General for Tax Administration (TIGTA) found that IRS supervisors urged employees to ignore potential fraud when reviewing applications for Individual Taxpayer Identification Numbers (ITINs). The study showed 15,028 ITINs assigned to individuals with the same address in Dallas and $46.3 million in refunds sent to the same address in Atlanta. Another $7.3 million in refunds for allegedly 2,706 taxpayers went to the same single bank account.
The TIGTA also found that the IRS revenue agents failed to follow procedures designed to protect taxpayer rights during the tax collection process, did not follow guidelines on contacting taxpayers with representatives, and were not efficiently or effectively processing information referrals, including identity theft claims. Identity theft has increased by more than 650 percent from fiscal 2008 to fiscal 2012. At the end of fiscal 2012, the IRS had nearly 650,000 identity theft cases in its inventory.
Approximately 1.45 million taxpayers who qualified for relief from tax penalties totaling close to $181 million were never told they could get penalty abatement and never got it.
The IRS could not provide documentation for $394,430 paid for labor hours. Point that out in your next audit!
The IRS failed to save $527 million in erroneous tax credits for the Earned Income Credit and Additional Child Tax Credit due to inadequate IRS controls.
For the second year in a row, the IRS has failed to comply with the provisions of the Improper Payments Elimination and Recovery Act.
Accounting errors by the IRS in calculating unpaid tax assessments created a risk of "a material misstatement of the IRS's financial statements."
The American Civil Liberties Union released documents showing that the IRS criminal division had been reading taxpayers' e-mails without a warrant, in violation of the Fourth Amendment.
And then there were the IRS parties. During one conference, more than $50,000 was spent on receptions, including 28 bottles of wine for 41 guests. Then there was the almost $4,000 spent on giveaway items, including footballs, $418 in Kazoos, bathtub toy boats, and other novelty decorations. IRS credit cards were used to purchase romance novels, steaks, diet pills, and unspecified items from merchants affiliated with online pornography ... your tax money at work!
The IRS spent about $50 million on 225 conferences during the 3 years between fiscal 2010 and 2012. The Small Business and Self-Employed division spent $4.1 million alone on a single conference in Anaheim, California. You should have been there. Speaker fees for presentations such as "how seemingly random combinations of ideas can drive radical innovation" totaled $135,350. One speaker was paid $17,000 to create six paintings. Three were donated to charity, two were given to conference attendees, and the sixth was lost. Then there were the videos that cost $50,107 to produce. They included a dance video showing IRS employees learning the "cupid shuffle" and a Star Trek parody, for which the set alone cost $2,400 and 11 hours of staff work (estimated to cost an additional $3,100). But, they did get a 1-minute finished video. We won't even talk about the IRS video parody of Gilligan's Island used to train 1,900 taxpayer assistance employees in 400 locations nationwide. As Maynard G. Krebbs would say, "WORK?" In addition to these large expenditures, the IRS spent $15,669 of your money on "brief bags" with free gifts and trinkets, $6,060 on lanyards and badge holders, $1,524 on engraved travel mugs and clocks, and $90 on sleeves for puzzle pieces.
And then there were the political issues. The supposedly politically independent IRS was found to have targeted conservative groups seeking tax exemption for extra scrutiny. The TIGTA found the inappropriate conduct "inexcusable" and Attorney General Eric Holder announced that criminal penalties may be sought in a Justice Department criminal investigation. Add that to the 24 IRS employees who were indicted for fraudulently obtaining more than $250,000 in government benefits and you have what some would call a rogue agency out of control.
There was some good news:
The IRS was in compliance with restrictions on the use of enforcement statistics to evaluate employees.
For fiscal 2012, the IRS collected $2.5 trillion but only spent about 48 cents for every $100 in revenue collected, which is the lowest cost since 2008.
Among households with incomes of less than $50,000, 55 million or 59 percent didn't pay any federal income tax. Nonpayers made up 41 percent of all households.
IRS firings for misconduct fell to the lowest level since 2002.
Between fiscal 2009 and fiscal 2011, the total amount of outstanding taxes collected under the IRS Collection Program was 20 percent higher than before, with even fewer revenue officers on staff. Conversely, the IRS had grown slower in closing Offer-in-Compromise cases during the same period.
2012 WAS WHEN ...
I don't want to get on a rant here but our Congress has all the character of an egg yolk frying on the asphalt road behind my grandfather's barn on a hot summer day. Since when did having a three-digit IQ disqualify someone from running for office? Are our choices limited only to the left-hand leg of the bell curve? As we crawl out of a recession, I'm reminded of my 92-year-old mother-in-law's comment, "Recession? I lived through the depression of the 1930s and this is a depression." Does anybody think a sane business person would take the risk and invest and expand when the tax rules keep changing (maybe) and the cost of employee healthcare is subject to a new law that nobody understands and few agree upon.
When I wrote this, we were approaching what some called a fiscal cliff and others refered to as tax Armageddon. If Congress did nothing, we faced the biggest tax increase in the history of the Internal Revenue Code. Between the expiration of the Bush tax cuts (which were extended in 2010 for 2 years through 2012) and the expiration of the "extenders," deductions would be lost, rates would increase, credits would disappear, and the marriage penalty would return in full force. The maximum tax on dividends would jump from 15 percent to as much as 43.4 percent! According to the Tax Policy Center, four out of five U.S. households would face an average of $3,701 more in taxes. Add mandated spending cuts to this tax hike and on January 1, 2013, we were scheduled to suffer an $8 trillion hit!
Here's the part that really gets me angry. Everybody agreed on what should be done. But nobody in Congress had the backbone to do anything until after the November elections. So once again politics trumped economics and sanity. Once again hundreds of millions of dollars were wasted on reprogramming IRS computers and tax preparation programs at the last minute. More of your tax money was spent redoing IRS forms. It's hard to play the game if the rules keep changing. It's even harder if the rules change in December when the year is already up.
According to the Joint Committee on Taxation in March 2012, the prior cost of "kicking the can" down the road for tax cuts, extenders, estate tax, etc., through fiscal year 2012 was 967.7 billion in wasted dollars. Add to that decreased stability and the inability to properly budget into the future, and you had a framework for economic impotence.
Don't blame the IRS. Then Commissioner Doug Shulman warned, "If Congress can't act by the end of the year, and even starts to think about retroactive legislation of things like the AMT, which have already expired, you could have a real disaster in the filing season, where there is total confusion, where some people are filing under one law and others under another."
Congress finally passed the American Tax Relief Act of 2012 to address these issues. See Chapter 19 for details.
What else happened? Well, the IRS did have some issues:
The IRS delayed tax refunds early this filing season for 7.8 million tax returns because of fraud detection problems with its computer system.
It was revealed that the IRS paid $3.2 billion in erroneous American Opportunity Tax Credits during the first 5 months of 2010 to 2.1 million taxpayers.
The Service either failed to notify or incorrectly notified 61,427 taxpayers about their need to start repaying the First-Time Home Buyer Credit.
The Tax Inspector General for Tax Administration (TIGTA) reported that the IRS failed to "securely operate its computer network...." The TIGTA also found that the IRS needed to gain tighter control over its wireless technology and improve security to protect data from computer attacker exploits. Weaknesses in the Internal Revenue Service's financial and tax processing systems continue to jeopardize the confidentiality, integrity, and availability of sensitive taxpayer information. No surprise that the number of fraudulent returns jumped to 2.2 million in 2011, up from just 457,369 in 2009.
Somebody got the math wrong. The IRS sent out 8.6 million math error notices, but almost 138,000 taxpayers disputed the computer-generated adjustments.
Tax returns that were incorrectly prepared by IRS volunteers, if filed, would have caused taxpayers to pay almost $10,000 more than they owed and would have kept them from receiving legitimate refunds of $4,000 according to a TIGTA study. Of the 36 returns audited, only 14 were prepared correctly.
Another TIGTA study found more than $697 million in wrongly claimed investment theft deductions causing a revenue hit to the Treasury of over $41 million.
The percentage of customer service phone calls that actually reached IRS representatives in fiscal year 2012 fell to 61 percent, down from 70.1 percent in 2011. That's what happens when Congress cuts the IRS budget by 2.5 percent, and the IRS responds by eliminating 3.1 percent of its full-time employees.
TIGTA also found the IRS's new e-file system "error prone" and still unable to ensure the accurate processing of individual tax returns.
There was some good news:
For 2011, the IRS scored a 73 percent on the American Customer Satisfaction Index survey, way up from only 32 percent in 1998.
The IRS was ranked third out of 15 large agencies in the Best Places to Work in the Federal Government survey for 2011, up from eighth place as recently as 2008.
Why is it so much fun to work at the IRS? It may have something to do with a forfeiture relating to a Nevada brothel. I guess the job with the Secret Service was already taken.
According to the TIGTA, IRS inability to detect identity theft could result in the issuance of $21 billion in fradulent refunds over the next 5 years.
The best "tax tip" of the year? A Cleveland waitress received an erroneous tax refund of $434,712. She had requested a refund of only $754.
WE SURVIVED 2011
Senator Olympia Snowe (R-Maine) hit the nail on the head in 2011 when she said, "It's all political theater. It's not about legislating anymore. It's all for the next election that's coming very shortly." That pretty much described 2011. But we did have an interesting year:
A Joint Tax Committee Report revealed that 51 percent of households not only owed no federal income tax for 2009, but that 30 percent of all households got back a check for their full income tax bill and more resulting from refundable credits.
In January the IRS launched IRS2Go, a free application for the iPhone and Android market, an app that lets users check their refunds and access help lines over the phone.
Having trouble keeping up with changes to the tax law? In April 2011, IRS Commissioner Shulman reported that there have been about 3,500 tax law changes since 2000.
More than half of small businesses spend at least $5,000 and 40 hours per year just to file their taxes according to a National Small Business Association survey.
Our government tax enforcers are still having problems:
The IRS improperly transferred hundreds of millions of dollars in taxpayer payments to its Excess Collections File.
A March Government Accounting Office (GAO) report revealed that taxpayer data are at risk of being disclosed, modified, or destroyed because of material weaknesses in IRS internal control systems. About 74 percent of previously reported information security weaknesses still remained unresolved or unmitigated.
A June 2011 report by the Treasury Inspector General for Tax Administration (TIGTA) found that IRS databases are increasingly being targeted by attackers and that the IRS needs to increase its security diligence.
An August 2011 TIGTA report showed that only 19 percent of written inquiries from taxpayers received timely and accurate responses. In another study, the percent dropped as low as 8 percent.
The TIGTA reported that the IRS has been doing a better job of detecting and preventing fraudulent returns. But, I guess that doesn't apply to prisoners and those with kids. The number of fraudulent tax returns filed by state and federal prisoners in the United States doubled from 18,103 in 2004 to 44,944 in 2009. That allowed $295.1 million in illegal tax refunds. The IRS reported that between 23 and 28 percent of earned income tax credits (EITCs) each year are issued erroneously. For 2009, that was $13 billion in improper payments.
Excerpted from HOW TO PAY ZERO TAXES, 2014 by Jeff A. Schnepper. Copyright © 2014 McGraw-Hill Education. Excerpted by permission of McGraw-Hill Education.
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