'Audits From Hell' Target Rich

The effects of tax evasion just keep rolling in. Widespread abuse of the tax system by some wealthy taxpayers has prompted the IRS to adjust their audit priorities. The Wall Street Journal ran a story stating the IRS has already begun intensive examinations through a new investigation unit. The IRS assigned its top investigators to the Global High Wealth Industry Group and their marching orders? Go after hedge-fund managers, investors and anyone else who might use complicated tactics to evade their tax obligations.

What does this mean? If you’re a wealthy taxpayer, watch out! These auditors are aggressive, relentless, and ready to dive deep into your finances.

The Wall Street Journal reports

The reviews performed so far have been particularly harsh, say attorneys. Investors are being asked to turn over numerous hard-to-get documents in short order. These are "the audits from hell that your grandfather warned you about," says Charles P. Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif.

The IRS unit, known as the Global High Wealth Industry Group, was set up last year. It began conducting audits earlier this year—but tax attorneys say the group is only recently getting up to speed. The unit is headed by Donna Hansberry, a longtime litigator for the tax agency who was formerly a senior legal adviser on the IRS commissioner's staff.

Rarely has the agency conducted audits of the wealthy and their businesses or investments in the same way as it looks at large companies, according to advisers. Now, though, these individual audits will be in the hands of agents who have worked on coordinated corporate audits. Given their experience and sophistication, according to advisers, the agents will be better at unearthing trouble.

Miriam L. Fisher, a tax attorney and partner at law firm Morgan Lewis in Washington, says the audit teams comprise "A-list examiners" drawn from around the country who are knowledgeable and experienced with various financial products and industries. The audits are so intensive that each team is handling only a few right now and they aren't far along in the process, she says.

Read more here

What the Republican Victory in the House Means for American Taxpayers

Leading up to the election last week, Republican candidates promised serious tax law changes in the next two years. However, since Democrats retained control of the Senate, many are wondering which, if any, of these promises will actually come to fruition.

Government Gridlock

Although Republicans took over the House of Representatives, they do not have the power to override a presidential veto. In order to pass a serious tax reform package in spite of a veto Republican leaders will need to come up with a 2/3-majority vote in both chambers of Congress. This has many worried that we will see serious government gridlock over the next two years. However, the change in power could finally push legislators to work together, and compromise on legislation that will actually help this country.

Health Care Revisions

Exit polls indicated that many voters were dissatisfied with the President's health bill, and the newly elected Republican leaders plan to listen to the dissatisfaction. Congressman John A. Boehner told reporters “the American people are concerned about the government takeover of health care. I think it’s important for us to lay the groundwork before we begin to repeal this monstrosity.”

Court Led Overhaul

Although Congress has limited options when it comes to overturning the health care reform law, the U.S. courts could take action. Currently there are 21 states that are challenging the law's requirement that all taxpayers have a qualifying health care plan. If the courts overturn part of the legislation, then it will be easy to build up public support for reforming the bill. Additionally, other experts are warning that members of Congress could add complications to the legislation and build up unpopularity of the law, which could be used as leverage to get Obama out of the White House next election. They could argue that the only way to repeal the law would be to elect a new Republican president.

1099 Changes and Manufacturer Taxes

In addition to concerns over the mandate, Republicans also plan to address two specific parts of the reform package: the new employer 1099 requirements, and the manufacture taxes. James P. Gelfand, Director of Health Policy at the United States Chamber of Commerce, has said he doesn't think "we’ll see a repeal of the health care law tomorrow." But that "Congress got the message that we need serious changes.” Gelfand claimed that he expects the new House to attempt to eliminate the provision that would require many employers to contribute to the cost of coverage for employees. Many experts claim that this provision would hurt job creation, as well as the tax on manufacturers of medical devices.

Energy and Climate Legislation

Although energy and climate reform has been a big issue for the President, it is unlikely that any major law changes will pass the new House. Last week, President Obama said he would like to move the country towards cleaner energy by focusing on smaller issues, which likely won't result in major tax law changes. "When it comes to something like energy,” the President asserted, “what we're probably going to have to do is say here are some areas where there's just too much disagreement between Democrats and Republicans. We can't get this done right now. But let's not wait. Let's go ahead and start making some progress on the things that we do agree on."

Bush Tax Cuts

Although next year there will be a Republican majority in the House, Democrats still have enough votes to extend or repeal the Bush tax cuts during the lame duck session. Obama has called for an extension of all the tax cuts, except for those that benefit highest earning taxpayers. Senate Majority Leader Harry Reid said that the Republicans' proposed extension of all tax cuts "won't happen." However, if Congress does follow the President's suggestion then there is no promise that the new Congress won't pass a retroactive extension of the cuts for wealthier taxpayers.

AMT Patch

Currently the Alternative Minimum Tax (AMT) is scheduled to affect 25 million families next year unless Congress passes a patch to the law. If Congress does not take action next year then all of these taxpayers will be faced with a huge and unexpected tax increase.

Estate Tax Compromise

Congress must address the estate tax. In 2011, this tax is scheduled to return at a rate of 55% on estates valued at over $1 million. This is a significant increase from the 2009 tax of 45% levied on estates worth more than $3.5 million. Republicans would like to completely get rid of the estate tax, but experts predict that we will see some sort of compromise that could affect estates valued at over $5 million.

Your Tax Questions, Asked and Answered (by a U.S. Treasury Official)

Yesterday the Freakonomics blog, on NYTimes.com, posted a blog entry with questions from readers and answers from Michael Mundaca, the Assistant Secretary of the Treasury for Tax Policy. Topics include common tax issues ranging from offshore tax shelters to the messy estate tax situation. You can find a few of the questions below, or go to NYTimes.com for the full article.

Q. Is this really a good year to die — tax wise? And do you expect an uptick in deaths as the calendar year ends? Have we ever seen a similar incentive to die, and did it spur deaths? – Drill-Baby-Drill Drill Team

When will congress straighten out the estate tax mess so that people will know how to plan? – n bergman

A. In general, I wouldn’t think any year is a good year to die, but you are correct that, under current law, the estates of those who die in 2010 are not subject to the estate tax. However, not being subject to the estate tax is not advantageous to all estates and heirs. Under 2009 law, $3.5 million of each estate was essentially exempt from the estate tax, but the heirs receiving property from such an estate nevertheless received assets with a “stepped up” tax basis, meaning that when such assets were sold, tax would be due only on any appreciation during the time the heir held the asset. For example, assume that someone died with an estate valued at $3 million dollars, all in stock, which passed to one non-spouse heir. Assume that the decedent had paid $1 million for the stock. If the decedent died in 2009, no estate tax would be due (because the estate is worth less than $3.5 million), and the heir’s basis in the stock would be increased to $3 million. Thus, if the heir immediately sold the stock, no capital gains tax would be due either, as there would be no gain. If instead that same person died in 2010, again no estate tax would be due, because it has been allowed to expire, but if the non-spouse heir immediately sold the stock received, capital gains tax would be due, because the value would exceed the basis. The Administration has proposed extending the estate tax (and the related gift and generation skipping taxes) at 2009 parameters (for the estate tax, an exemption amount of $3.5 million and a top rate of 45 percent). We are hopeful that Congress will address the estate tax before year end.

Q. Has anyone figured out exactly how it is going to work for same-sex married couples in community property states like California? My accountant still has no clue… – Paul

A. Regarding tax issues faced by same-sex married couples in community property states such as California, there are some helpful IRS resources, including a Chief Counsel Memorandum issued in May of this year that addresses some tax issues faced by California Registered Domestic partners (the memo is available here). Same-sex couples should consider consulting a tax professional about their particular situation.

Continue reading at NYTimes.com...

Wells Fargo 'Nightmare' For Homeowner Applying For Help Under Administration's Anti-Foreclosure Program

As stories of the troubled HAMP program roll in, more and more mortgage lenders are being named and shamed. Bank of America has had a number of issues, and you can add Wells Fargo to the list.

From HuffingtonPost.com:

Wells Fargo put an Illinois woman though a "nightmare of harassment, frustration, and relentless stress" when she tried to apply for a mortgage modification under the Obama administrations' Home Affordable Modification Program, according to a lawsuit filed in federal court this week.

It's a familiar nightmare to many lured by HAMP's promise of reduced monthly payments. More people have been bounced from the program than have received "permanent" five-year modifications, and federal auditors say the program sometimes actually causes borrowers to lose their homes.

Therese Crowley of Deerfield, Ill., facing reduced income because of health problems and less demand for her broker services, first asked for a HAMP application in April 2009. Wells Fargo allegedly dragged its feet for four months before it sent one along, then denied the application in October and gave her bogus explanations when she called to complain.

In November, Wells Fargo told Crowley to apply again, then denied her again the following month. A week later she called the bank and spoke to a woman named Paula, who "determined that Wells Fargo had erroneously overstated Crowley's income by $2,800," the complaint alleges. "Also, the file erroneously indicated that Crowley owed $2,381.07 per month on a credit card debt which in fact had been paid off in 2002. Paula agreed that with the correct information (information that Wells Fargo had during this entire process), in her opinion Crowley qualified for a HAMP loan modification."

Read more here

Latest Good Reads

Multi-tasking: how to take the “crazy” out of crazy busy

Harley turns down state tax credits

Stamping out tax misinformation

G-20 refuses to back US push on China's currency

So I won a free trip to the Bahamas. Now, how do I report it on my tax return?

Teachers' $500 billion (and growing) pension problem

Ask-a-career-coach: how to choreograph your career

Tax Deduction of the Week: Unreimbursed Employee Expenses

Last week the RDTC Tax Help Blog published the newest entry in their “deduction of the week” series. If you have to make unreimbursed purchases for your job, you may qualify to deduct those expenses on your next tax return! I’ve included a section of the article below, but you can read the full text here.

IRS Regulations

According to IRS Publication 29 you can deduct only unreimbursed employee expenses that are 1) paid or incurred during your tax year,

2) for carrying on your trade or business of being an employee, and

3) ordinary and necessary.

Allowable Expenses

Listed below are several examples of expenses the IRS will allow you to deduct. For a full list, be sure to read IRS Publication 29.

• Dues to a chamber of commerce if membership helps you do your job or carry on your business
• Job search expenses in your present occupation
• Licenses and regulatory fees
• Malpractice insurance premiums
• Medical examinations required by an employer
• Passport for a business trip
• Subscriptions to professional journals and trade magazines related to your work
• Tools and supplies used in your work
• Travel, transportation, meals, entertainment, gifts, and local lodging related to your work
• Union dues and expenses
• Work clothes and uniforms if required and not suitable for everyday use
• Work-related education, such as training courses

Miscellaneous Deduction

Unreimbursed employee expenses are considered part of the miscellaneous deduction on your tax return. You can include them on Schedule A, line 21 of your IRS Form 1040.

White House Denies Folding on Bush Tax Cuts, but Still ‘Open to Compromise’

From WashingtonIndependent.com:

A lot of hubbub this morning surrounding a Huffington Post article that suggested the White House was willing to cave on its position of permanently extending tax cuts for most Americans while only temporarily extending those for the upper two percent and instead accept the idea of a temporary extension of all the tax cuts. Following the story’s publication, White House Communications Director Dan Pfeiffer emailed Greg Sargent to set the record straight:

The story is overwritten. Nothing has changed from what the President said last week. We believe we need to extend the middle class tax cuts, we cannot afford to borrow 700 billion to pay for extending the tax cuts for the wealthiest Americans, and we are open to compromise and are looking forward to talking to the Congressional leadership next week to discuss how to move forward. Full Stop, period, end of sentence.

That still leaves unclear, however, whether the White House will keep demanding that the majority of the tax cuts be permanent while the ones for individuals making more than $200,000 be temporary. Republicans are pretty much categorically opposed to “decoupling” the time frames of tax cuts for these two groups, because then they’d be forced to advocate for an extension of tax cuts just for the rich at some point down the line.

Obama's Debt Panel Releases Three Tax Reform Options

Earlier today President Obama's National Commission on Fiscal Responsibility and Reform released a draft of their report on options for tax reform. The final report is due to be issued on the first of December. You can download a PDF of the report here or check out the following summary of the three options courtesy of the TaxProf.

Option 1: The Zero Plan

• Consolidate the tax code into three individual rates and one corporate rate
• Eliminate the AMT, Pease, and PEP
• Eliminate all $1.1 trillion of tax expenditures
• Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
• Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low

Option 2: Wyden-Gregg Style Reform Individual Tax Reform

• Repeal AMT, PEP, and Pease
• Establish 3 rates – 15%, 25% and 35%
• Triple standard deduction to $30,000 ($15,000 for individuals)
• Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
• Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
• Limit charitable deduction with floor at 2% of AGI
• Cap income tax exclusion for employer-provided healthcare at the amount of the actuarial value of FEHBP standard option
• Modify and repeal several other tax expenditures
• Dedicate portion of savings to deficit reduction Corporate tax reform * Reduce corporate tax rate to 26%
• Permanently extend the research credit
• Eliminate and modify several business tax expenditures, including:
• Domestic production deduction
• LIFO method of accounting
• Energy tax preferences for the oil and gas industry
• Depreciation rules
• International tax reform including a territorial system

Option 3: Tax Reform Trigger

• Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
• Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
• Haircut would limit proportion of deductions and exclusions individuals could take to around 85% in 2015. Similarly, corporations would only take some proportion of their general business credits
• Set haircut to increase over time until tax reform is enacted

Survey: Americans Mixed on GOP, Health Plans

According to a new Associated Press-Gfk poll, a slight majority of taxpayers (53%) support the campaign promise of many newly elected Republican leaders: to extend all of Bush tax cuts. However, they do not support a repeal of Obama's health care legislation.

CBN.com reports

Forty-four percent feel that only taxpayers making less than $250,000 a year should receive the cuts.

As for Obamacare, only 39 percent want to see the Republicans fulfill their pledge to kill the new health care law. Instead, 58 percent want it left alone or extended even further.

"I think everybody wants change," said Steven Lamb, 60, a Tenn. state government worker in Nashville who voted Republican last week despite opposing the party's stance on tax cuts and health care.

"I'm tired of what's going on, and the only way to do it is to make a change," he added.

Read more here

Nearly 70 Percent of Taxpayers Used IRS e-file in 2010

According to the IRS's newest press release about 99 million taxpayers filed their federal income tax returns electronically last tax season. This represents a 3% increase from the year before.

Of the 141.5 million returns filed so far this year, almost 70 percent were filed electronically.

Each year, more taxpayers chose to e-file their tax returns. Last year, nearly 95 million taxpayers, or 67 percent, used e-file. In the past decade, the number of individual tax returns e-filed has increased by 145 percent. The overall number of individual tax returns increased only by 8 percent. IRS e-file is no longer is the exception; now it is the norm.

Home Computer e-Filers

Taxpayers who prepare their own tax returns using home computers continued to set the pace for e-file. This year, more than 35 percent of e-filers prepared and filed their returns themselves.

Almost 35 million returns were e-filed from home computers, up 8 percent from last year.

Direct Deposit Refunds

More than 74 million refunds were electronically deposited into taxpayers’ accounts, saving taxpayers a trip to the bank. More importantly, these taxpayers received their refunds at least a week faster than those receiving paper checks.

Continued at IRS.gov...

Lamar Odom Seeks Tax Deduction For NBA Fines and Fitness Fees

LA Lakers player, and husband of reality star Khloe Kardashian, Lamar Odom has sued the IRS because of a tax bill stemming from his 2007 return. Odom is requesting that the government allow his deductions for $12,000 in sports fines and $178,000 spent to stay physically fit. Athletes aren’t the only ones who would appreciate a tax deduction for gym memberships, cops, firefighters and other workers with fitness requirements would probably appreciate this deduction as well.

Forbes.com reports

A college dropout, Odom is representing himself without a lawyer. In his personally signed pleading, filed at the court’s Washington, D.C. office on October 25, Odom disputed a bill that the IRS sent him in August. “The taxpayer claimed $12,000 of employee business expenses for fines that were assessed by the National Basketball Association,” he declared, writing in the third person. “These fines are commonly assessed on professional athletes and are work related. Therefore the fines incurred are ordinary and necessary employee business expense.” The petition, which listed his address as an agent’s office in Los Angeles, offered no details about the nature of transgressions leading to the fines.

Federal law generally prohibits tax deductions for financial sanctions resulting from criminal cases and matters like traffic violations. But Odom wrote, “The fines imposed by the team and the NBA are not imposed for the violation of any government law and are therefore not specifically excluded.”

On the same reasoning, Odom, now 31, also attacked an IRS decision not to allow taxpayers in effect to subsidize his efforts as a pro athlete to stay fit. “The taxpayer claimed $178,337 of employee business expenses for professional training and conditioning,” he wrote. “The taxpayer’s employment contract requires that the taxpayer be in sufficient physical condition that allows him to perform as a professional basketball player throughout the basketball season.”

Tax law and court cases have tended to frown on writing off such items. In the explanation attached to its bill, the IRS wrote Odom, “We have disallowed some of the expenses you claimed as business expenses because it was determined they were personal expenses and not deductible.”

Read more here

Stephen Colbert and the Bush Tax Cuts

Monday night, Stephen Colbert discusses the Bush tax cuts and class warfare on his television show. If you missed it check out the embedded video below, courtesy of ColbertNation.com.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - Nothingness
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

Tax Cut Timing is Proving Problematic for Democrats

From NY Times.com:

When one party controls the White House and Congress, it controls the calendar for what gets done and when. So how is it that Democrats ended up in such a fix over what to do about the expiring Bush-era tax cuts?

That is what many Democrats are asking.

By dint of calculation and miscalculation, after mixed messages and missed signals, President Obama and Congressional Democratic leaders delayed debate until before the midterm elections. They dared Republicans to fight for extending the tax cuts for the rich and, in so doing, “hold hostage” those for the middle class. But it was Democrats who blinked as their ranks splintered in the heat of a worsening electoral climate, and they delayed any vote until after the elections.

Now, with the tax cuts due to expire Dec. 31, the debate finally commences next week in a lame-duck session, with Democrats weakened, Republicans emboldened by the election results and the tepid economy continuing to provide some argument against letting rates rise even for the highest income levels.

For every election since the Bush tax cuts became law in 2001 and 2003, a central plank of Democrats’ campaign platforms has been to repeal them for high-income brackets — to pay for other programs, like expanded health care, or to reduce budget deficits.

Jobless Claims Drift Lower; Prices Rise, Trade Gap Cut

Yesterday the Labor Department released new data showing that initial claims for jobless benefits hit a four-month low last week. The trade gap also narrowed, which is providing optimism about the ever-struggling economy. We are all desperate for signs our economy is improving, so we might be jumping the gun. On the other hand, we’ll take any good news we get on the economic front.

CNBC reports

The number of workers filing initial claims for unemployment benefits fell to a seasonally adjusted 435,000 in the week to Nov. 6 from a revised 459,000 for the prior week.

The bigger-than-expected dropped was underscored by the four-week moving average of claims which fell to its lowest since just before Lehman Brothers filed for bankruptcy in September 2008 in the depths of the financial crisis.

Meanwhile, a separate Commerce Department report showed the U.S. trade deficit narrowed more than expected in September, despite near record imports from China, as a weak U.S. dollar helped American exports grow for the third consecutive month.

A narrower deficit is positive for U.S. economic growth since it suggests more demand is being met by U.S. production.

A third government report showed a jump in petroleum prices in October pushed overall import prices to their highest since April, but the rise was less than analysts expected.

Read more here

Questions for the Tax Lady: November 9th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I'm going to be moving soon and I have boxes full of old pay stubs and receipts that I've had for at least ten years. How long should I hold onto these tax records? Do I need to move them all to my new place?

Answer: Ah, yes, I think we all have boxes of records we no longer need but are terrified to throw away. There are different rules for how long you need to keep various tax-related records. For your paystubs, anything over a year old, you can shred.

Question: I do not want to have a large tax bill next April. What are the easiest end-of-the-year tax planning moves to make?

Answer: The best thing you can do right now to ensure your tax bill will be manageable: Do a tax dry run. Use the information you have now – like income, tax payments, educated estimates about expenses and deductions – and see what your tax bill looks like. You may want to try using a tax calculator to see what your estimated tax bill looks like.

If your dry run shows you will owe a big chunk of change, you can make some charitable contributions, make your January mortgage payment before the end of the year, or take advantage of soon-to-be-expiring tax credits for making green upgrades to your home. You still have plenty of time to make these simple money-saving tax moves and reduce your tax bill come April.

If you are looking at a big fat refund check, adjust your tax withholding and enjoy the extra cash now, when you probably need it most. Then next year, adjust your withholding to just cover your projected tax bill, and keep more cash in your pocket every month.

The Tax Lady’s Tips

Last Friday, the new issue of my law firm’s newsletter was sent out. You can download a JPG of the letter here, or sign up to have it sent to your mailbox each month at RoniDeutch.com.

Bank Tax, CO2 Auctions Recommended by Soros Panel to Help Climate Efforts

Earlier last week a United Nations panel issued a report recommending ways to fight global warming. The group suggested that taxing foreign-exchange transactions and auctioning pollution permits could raise $65 billion.

Bloomberg reports:

The panel, which includes billionaire investor George Soros and Larry Summers, director of President Barack Obama’s National Economic Council, said selling carbon-emissions permits would generate $38 billion and a financial transactions tax an additional $27 billion, according to the report released today.

The findings are intended to guide envoys at UN climate talks that start this month in Mexico as they seek ways to pay for $100 billion in climate aid that was pledged by 2020 to poor nations at last year’s summit in Copenhagen. The report found that the goal is “challenging but feasible” to achieve.

“Without agreement on finance, we will not be able to reach agreement on other issues for climate change,” Jens Stoltenberg, Norway’s prime minister and co-chairman of the advisory group, said at a press conference in New York. “Now we need the political will to take the decisions.”

UN Secretary General Ban Ki-moon appointed the panel, called the High-Level Advisory Group on Climate Change Financing, in February. It’s led by Stoltenberg and Ethiopian Prime Minister Meles Zenawi. The 21-member group also includes Soros, Summers and Deutsche Bank AG Vice Chairman Caio Koch- Weser.

Read more here

Republicans Oppose Compromise with President Obama on Tax Cuts

From Chicago Tribune.com:

In another ominous sign of new political gridlock developing in Washington, House Republican leaders Sunday took a hard line on compromising with President Obama on extending tax cuts that are due to expire at the end of this year.

"I really want to see that we can come together and agree upon the notion that Washington doesn't need more revenues right now," Rep. Eric Cantor of Virginia, the No. 2 House Republican, said on "Fox News Sunday."

"And to sit here and say we're just going to go about halfway, or we're going to send a signal that it's going to be uncertain for job creators and investors to put capital to work, that's exactly what we don't need right now."

Obama has proposed permanently extending tax cuts for American households making less than $250,000 a year, but he has argued that the country cannot afford to extend those cuts for the wealthiest Americans.

The president repeated that proposal in his weekly address this weekend.

"At a time when we are going to ask folks across the board to make such difficult sacrifices, I don't see how we can afford to borrow an additional $700 billion from other countries to make all the Bush tax cuts permanent, even for the wealthiest 2% of Americans," he said.

TIGTA: Scammers Defraud IRS Out of $1.9 Billion Via Multiple I.D. Numbers

The Treasury Inspector General for Tax Administration released a new report asserting that tax scammers have defrauded the federal government out of $1.9 billion by using multiple taxpayer identification numbers. You can find a summary of their report below (courtesy of The TaxProf), or click here to download a PDF of the full text.

Multiple Use of Taxpayer Identification Numbers Continues to Result in Significant Erroneous Exemptions and Credits (2010-40-117):

Individuals inappropriately received at least $380 million in personal tax exemptions and tax credits in 2007 as a result of the multiple use of Taxpayer Identification Numbers (TINs). ...These TINs were used on over 3.2 million tax returns. Over five years, erroneous exemptions and credits could exceed $1.9 billion.

California's Unemployment Fund has Deficit of $10.3 Billion

California businesses already pay some of the highest unemployment taxes in the country – and the tab is likely to increase.

The recession and the Legislature's decision years ago to raise benefits have drained the state unemployment insurance fund, which now has a estimated $10.3 billion deficit.

The nonpartisan Legislative Analyst's Office, in a recent report titled "California's Other Budget Deficit," said the state will probably need to raise unemployment taxes on employers as well as reduce benefits to bring the fund back in balance.

Raising the tax would require a two-thirds vote in both houses of the Legislature and might be politically impossible. Gov.-elect Jerry Brown has promised not to raise taxes without voter approval.

But pressure is growing on Sacramento to fix the system soon – whether it wants to or not. California has borrowed about $8.5 billion from the federal government to keep benefits flowing, and the repayment obligations are coming due.

"The longer we go without a fix, the bigger the hole becomes," said Loree Levy, a spokeswoman for the Employment Development Department, which doles out the benefits.