I Survived an IRS Tax Audit

As one taxpayer explains, visiting an IRS building for an audit is pretty much like visiting any other anonymous corporate office buildings. Except that it might result in you writing a fat check to the government.

CNN reports:

My road to this second-floor office started with a standard white envelope emblazoned with the dreaded words: Internal Revenue Service. When it arrived at my house in December, I found a five-page letter explaining that my 2008 taxes had been selected for audit. I needed to call "WITHIN 10 DAYS to schedule an appointment."

Terror.

About 1.6 million people found themselves in this situation last year, according to the IRS. That means 1.1% of all filers drew the short end of the stick -- and about 300,000 of them were selected because of deductions related to a business venture.

That's why I got called to answer for myself.

My husband had an art gallery in Denver and the IRS had a few questions about his 2008 Schedule C, the form where you report income and deductions for your business. I'd filed the form for him, along with the rest of our taxes, using TurboTax.

Thankfully, when that big scary letter arrived in the mail, it told me exactly what expenses were in question -- all $23,000 of them. That was a relief: I always thought I'd have to show up and answer questions about any part of the return, rather than being able to prepare.

In our case, the IRS wanted to know about the rent and utilities he paid for the building, as well as a line item for "vehicle deductions."

So I dutifully called Ms. Green, the name at the top of the letter. The problem was, I told her, it was my husband's business. And we're in the middle of a divorce.

Read more here

Mortgage Giants Leave Legal Bills to the Taxpayers

According to newly released documents, mortgage giants Fannie Mae and Freddie Mac have spent more than $160 million of taxpayer's money defending former executives in civil lawsuits. Raise your hand if that sounds like a good use of your tax dollars. Didn’t think so.

NYTimes.com reports:

The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

Continue reading at NYTimes.com...

Household Wealth Grows $1.2 Trillion

CNN is reporting that American households’ wealth increased over the last few months. Are you feeling richer?

From CNN.com:

Americans got richer in the third quarter even as home values hit the skids after more than a year of increases.

Net worth for households and individuals climbed $1.2 trillion, or 2%, to $54.9 trillion in the third quarter, according to the Federal Reserve's Flow of Funds report released Thursday.

Household wealth had tumbled in the second quarter -- sliding $1.5 trillion between April and June -- after having climbed for four straight quarters. But growth returned in the third quarter thanks to higher stock values, with the S&P rising 11% following a 12% slide in the second quarter.

Corporate equities jumped $939 billion and mutual fund shares gained $378 billion, eclipsing the $698 billion dip in real estate assets -- the first decline in five quarters.

"Today's report shows that households have continued to rebuild their balance sheets throughout Q3, although the boost to net worth was completely due to a strong recovery in the equities market," Theresa Chen, an economist with Barclays Capital, said in a note to clients. "Looking forward, we expect net worth to rise further as overall economic activity increases and the employment outlook improves."

Continue reading 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.

Key Tax Breaks at Risk as Panel Looks at Cuts

In just a few weeks a deficit commission is planning to submit recommendations for balancing the federal budget by 2015. Experts predict that they will recommend getting rid of a handful of popular tax breaks including the mortgage interest deduction. Although they are popular among American taxpayers, the tax incentives reportedly cost the government about $1 trillion a year.

The Wall Street Journal reports

At stake, in addition to the mortgage-interest deductions are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.

Even if they do reach an agreement, any curbs on current tax breaks would likely face tough sledding in Congress. The banking and real-estate lobbies have fiercely rebuffed efforts to rescind the mortgage-interest deduction in the past.

Read more here

20% of Americans Hit by Major Economic Loss

A new Economic Security Index study found that economic losses were at a 25-year low for Americans last year, with about 20% of the population facing major losses. The study – which has been tracking economic data sine 1985 – used a wide variety of information to achieve accurate results.

According to CNN Money, the index was constructed by Yale political scientist Jacob Hacker, and the project was funded by the Rockefeller Foundation.

The ESI defines people as economically insecure when their situation meets two criteria. First, within a year's time they have lost 25% or more of their available gross income. Available gross income is the money they have left over after paying for medical costs and debt. Second, they don't have enough in an emergency fund or other liquid reserves to make up the difference.

Hacker noted that it can typically take between six to eight years to restore one's available income to its previous level. Meanwhile, a survey cited by Hacker found that 48% of Americans said last year they only had enough resources to carry them for two months before experiencing any economic hardship.

According to the index, which is based primarily on Census Bureau data, 12.2% of Americans were economically insecure in 1985. By 2009, Hacker and his team estimate that 20.4% of Americans could be classified that way. The actual number of people affected increased by more than half, from 28 million in 1985 to roughly 46 million by 2007, the last year for which hard numbers were available.

Continue reading at CNN.com…

IRS Undeliverable Mail Costs Millions

From WebCPA:

The Internal Revenue Service's current method of sending notices and letters is costing taxpayers millions of dollars because it results in a large amount of undeliverable mail, according to a new government report.

The report, from the Treasury Office of the Treasury Inspector General for Tax Administration (TIGTA), found that the IRS sends out approximately 200 million notices and letters each year to individual and business taxpayers and their representatives at a cost of $141 million. In 2009, approximately 19.3 million of those mailings were returned to the IRS at an estimated cost of $57.9 million.

TIGTA assessed whether the IRS can reduce the volume of undeliverable mail. Its review of a random sample of 331 notices and letters returned to the IRS found that 37 percent were undeliverable because of invalid or nonexistent addresses; 35 percent had the wrong address; 24 percent were refused by the taxpayer or the taxpayer was not at home to receive the certified or registered mail; and four percent were returned for other reasons.

TIGTA recommended that the IRS allow taxpayers to submit a change of address over the telephone and improve its systems for identifying known bad addresses. TIGTA also recommended implementing a standardized procedure for processing undeliverable mail.

"The Internal Revenue Service needs to take advantage of the latest technologies and systems now available to cut down on undeliverable mail, thereby saving the taxpayers money," said TIGTA J. Russell George, the Treasury Inspector General for Tax Administration.

BP's Open Wallet

After BP announced they had spent more than $1 billion on efforts related to gulf oil spill, many Americans have begun asking where all that money has gone. To help confused consumers CNN Money has put together a slideshow describing how BP has spent their $1 billion. Check out the full article and accompanying slides here.

Local advertising campaigns

Gulf States are doing all they can to bolster their tourism industries, which have been hammered by the oil spill -- and BP is footing the bill.

In Panama City, Fla., for example, the tourism development board is getting about $1.1 million from BP to spend on television and digital billboard advertising to assure the public that its local beaches remain pristine.

"The campaign's focus is on getting the word out that the Panama City beach hasn't been impacted by the oil spill, that our beaches are clean and the water is clear," said Dan Rowe, president and CEO of Panama City Beach Convention and Visitors Bureau.

Rowe said that the Bureau requested $2.2 million, but has so far received half. The remaining distribution hinges on the other clean-up needs of the state.

Why 47% of Americans Paid No Income Tax in 2009

One specific statistic got a lot of media attention this last tax season: approximately 47% of Americans would pay no federal income tax in 2009. The Tax Policy Center recently published a report explaining why so many people would be tax-free.

The first factor in so many people not having to pay income taxes is the recession. Many people lost their jobs, or had their pay cut as a result of the economic downturn. The lower your income, the less you pay in taxes. If your income gets low enough, you will not be subject to federal income taxes.

The biggest factor in the high number of people who didn’t have to pay income tax: tax credits and deductions. The increase in deductions, credits and dependent exemptions has lowered tax liabilities almost across the board, often low enough to remove all tax liability.

So, is this a good thing? A bad thing? It’s up for debate. Yes, our country is neck-deep in budget deficits, and more tax revenue would certainly help solve that issue. On the other hand, nearly every family has suffered some economic losses in the last few years, and that extra cash in their pockets goes a long way in helping stay afloat. Either way, I will be keeping an eye on this trend over the coming years to see how it all plays out.

You can read the Tax Policy Center’s full report here.

Three American cities on the brink of broke

Jefferson County, Alabama, Harrisburg, Pennsylvania, and Detroit, Michigan are going broke. According to Fortune magazine, via CNNMoney.com, the leading causes of financial upheaval for these three American cities are rampant unemployment, timid consumer spending, and underfunded public pensions. These cities are facing financial ruin mostly brought on by problematic politics and poor financial decision making by city officials.

Municipal bonds that are issued to fund public projects such as roads and public buildings have a less than half percent rate of default within a 5 year average, and are historically the safest avenues to invest. However, municipal bond defaults are on the rise. If these cities default on their debt, then the other, already financially overburdened states, as well as American taxpayers will have to foot the bill.

Read more here. Tell me what you think about this topic:
www.facebook.com/ronideutch or
www.twitter.com/ronideutch

6 Surprising Facts About The Early Days Of Income Tax

When thinking about the word “taxes,” most taxpayers think about the money being taken out of their paychecks, rather than the early history of American taxation. However, some of the facts in this article from SFGate.com on the early days of the income tax are very interesting, so I though I would share the information with all of my blog readers. Check out a few of the facts below, or head over to SFGate.com for the full list.

Fact One: Taxes Were Simple

The first 1040 form produced by the Bureau of Revenue, as it was called then, totaled only four pages, with three pages to be filled out by the taxpayer, and one page of instructions. The tax system was so simple.

Fact Two: The Tax Base Was Small

The first $3,000 of income for an individual taxpayer, or $4,000 for a married couple was exempt from tax. In 1913, the tax only applied from income between March 1 and the end of the year, so these exemptions were adjusted to $ 2,500 and $3,333 for that year. This meant that most Americans didn't have to pay any tax. If you adjust $3,000 in 1913 for inflation, it is equivalent to $66,000 in today's dollars.

Fact Three: The Tax Rate Was Low

The tax rate for those who had to pay was minuscule - 1% of taxable income, less the exemptions above and the deductions that were allowed at the time. High-income earners paid more, however, as a 1% surcharge was levied on taxable income between $20,000 and $50,000. The surcharge went as high as 6% for taxable income above $500,000. A taxable income of $500,000 in 1913 is equal to approximately $11 million in today's dollars. (For more, see A Concise History Of Changes In U.S. Tax Law.)

Continue reading at SF Gate.com…

GOP wants website to put policy in hands of voters

Do you think you would be able to make great public policy decisions—possibly better than those made by past and current government officials? Many people think of politics as something that happens despite their opinion on the matter.

If you could Tweet Congress, would you? What issues would you like the House to focus on during this election year? Would you interact on a website that is read by actual government officials? To encourage this type of community and conversation, the House of Representatives’ Republicans are going to launch a new website on Tuesday, June 1st. The new GOP website, Americaspeakingout.com, will make the Republican 2010 midterm policy agenda accessible to Americans. It will also use different types of social media so that Americans can interact and talk about what policies they think Congress should be working on.

According to CNN.com, “the new GOP website is an official government project, supported by leadership staff and funded with taxpayer dollars.” The website aims to give control to voters, and was a team effort by the GOP and Microsoft. After creating a profile, users will choose their username and accumulate “points” every time they submit an idea or engage in an online debate. This will encourage people to visit the website and get involved in politics. California Republican Representative Kevin McCarthy stated that the feedback leaders get from the site will lead to the development of legislation that Republicans will try to enact this year.

Read the full article here.

Ballot Issues Test Anti-Tax Mood

From USAToday.com:

The nation's fervor against taxing and spending will be tested beginning Tuesday in a series of state and local ballot measures seeking major tax hikes to preserve government services.

The ballot issues are making for odd alliances and potential election surprises. Some places friendly to the anti-tax "Tea Party" movement appear ready to raise taxes while opposition to public employee labor contracts is gaining strength in traditional union strongholds.

On May 18, Arizona will decide the biggest and most important measure: a 1-cent sales tax hike for three years that will lift the state's rate to 6.6% and the rate for Phoenix to 9.3%, one of the nation's highest.

The tax increase has no significant organized opposition and is leading in polls. The pro-tax sentiment comes in a state known for conservative politics, including a tough new crackdown on illegal immigration.