50,000 Inmates Claim Tax Refunds, Report No Wages

A report released today by a government investigator found that about 50,000 prison inmates claimed more than $130 million in tax refunds in 2010. These inmates did not provide any wage information to the IRS, but were still able to claim millions in refunds. Are these legitimate refunds, or fraud? The IRS won’t say yet, but you can be sure an investigation will be conducted.

The Associated Press reports:

The Treasury Inspector General for Tax Administration stops short of saying the refunds were fraudulently claimed. It does, however, say the Internal Revenue Service should investigate further.

The report is the latest in a series of audits looking at prison inmates claiming tax credits and other government payments. It notes that the IRS identified nearly 250,000 fraudulent tax returns during the 2010 filing season — a 50 percent increase over 2009 — preventing $1.48 billion in fraudulent refunds.

"While the IRS is identifying larger numbers of fraudulent returns, improvements must be made to its screening processes to ensure that returns filed by prisoners get adequate scrutiny," said J. Russell George, the Treasury inspector general for tax administration. "Expanded and expedited access to wage and withholding information would significantly increase the IRS's ability to verify information reported on a tax return when processed, and prevent fraud."

The IRS issued a statement saying the agency takes refund fraud seriously and aggressively fights it.

"The IRS is very successful at detecting and stopping incorrect refunds, including criminal refund fraud, and overall prevents 98 percent of questionable claims from being issued," the statement said.

Read more here

Treasury's Bailout Overseer Quits

Treasury Department assistant secretary Herb Allison, who oversaw the bank bailout fund, stepped down this morning. He reportedly decided to step down because the program was nearing an official end. According to Reuters.com:

Allison had been in charge of the $700 billion Troubled Asset Relief Program that is scheduled to expire in two weeks.

"With the TARP program entering a new phase and continuing to wind down, I have decided that now it is the right time for me to step down," Allison said in an e-mail to staff members that the Treasury made available.

He said he was returning to Connecticut after two years' service in Washington to spend time with his wife, who had been unable to join him during that time. The chief counsel for the financial stability office, Tim Massad, will take over as acting secretary on September 30.

Though TARP is officially ending on October 3, after which it cannot make any new investments in financial institutions, its work in recouping the money that it did lend will continue for years.

Allison is one in a line of officials preparing to take their leave from Washington, many of them more senior, including Larry Summers, director of the White House's national Economic Council; Council of Economic Advisers Chair Christina Romer and White House budget chief Peter Orszag.

Treasury Secretary Timothy Geithner, in a town-hall style event with Treasury staff, lavished praise on Allison and cast TARP as a highly effective mechanism despite the fact that it was "a four-letter word" for lawmakers and most Americans who saw it as a handout for bankers.

Continue reading at Reuters.com…

Government Could Seek Foreign Investors for GM

From Yahoo News:

Investment bankers handling the upcoming General Motors Co. stock sale are expected to court foreign investors as well as those in North America, according to a U.S. Treasury Department statement.

GM and the Treasury Department would not comment Sunday on reports that the automaker is in talks with its current partner in China, SAIC, about buying a stake in the Detroit company. SAIC is owned by the Chinese government.

The Treasury Department, in a statement issued late Friday, said investors in GM would be sought across "multiple geographies," with a focus on North America.

The U.S. Treasury loaned GM about $50 billion to help it through bankruptcy protection last year. GM has repaid $6.7 billion. The rest of the bailout money was converted to a 61 percent government stake in the company.

The government hopes to get the remaining $43 billion back with stock sales that could start in mid-November.

Foreign investment in U.S. automakers and other companies is common. Before the stock sale, GM will put on a two-week "road show" of presentations for investors, and several stops are expected to be in cities outside the U.S.

U.S. Could Lose $37 Billion a Year to Tax Havens: Levin

From ABCNews.com:

The U.S. government loses $37 billion per year in tax revenues because multinational corporations stash money in overseas tax havens, Democratic Senator Carl Levin and a group of small businesses said in a report on Tuesday.

Levin, who for years has pushed for a tough law to fight tax evasion among corporations, has enlisted some small businesses to back his so-far unsuccessful proposal to close loopholes letting companies legally avoid taxes by keeping income abroad.

"There are too many small businesses now paying more than their fair share," Levin told reporters on a conference call. "It creates a very unfair competitive situation."

Levin wants to attach some of his proposals to help fund a bill that sets up a $30 billion fund for small business. Levin has tried to attach his initiative to other bills in the past without success.

The coalition of small companies favors banning the use of overseas tax havens, which are generally unavailable to smaller firms.

Changing Stance, Administration Now Defends Insurance Mandate as a Tax

From NYTimes.com:

When Congress required most Americans to obtain health insurance or pay a penalty, Democrats denied that they were creating a new tax. But in court, the Obama administration and its allies now defend the requirement as an exercise of the government’s “power to lay and collect taxes.”

And that power, they say, is even more sweeping than the federal power to regulate interstate commerce.

Administration officials say the tax argument is a linchpin of their legal case in defense of the health care overhaul and its individual mandate, now being challenged in court by more than 20 states and several private organizations.

Under the legislation signed by President Obama in March, most Americans will have to maintain “minimum essential coverage” starting in 2014. Many people will be eligible for federal subsidies to help them pay premiums.

In a brief defending the law, the Justice Department says the requirement for people to carry insurance or pay the penalty is “a valid exercise” of Congress’s power to impose taxes.

Congress can use its taxing power “even for purposes that would exceed its powers under other provisions” of the Constitution, the department said. For more than a century, it added, the Supreme Court has held that Congress can tax activities that it could not reach by using its power to regulate commerce.

GM's Auto Sales in China Top US for First Time

From CNBC.com:

General Motors' first-half sales in China, the world's biggest auto market, exceeded sales in its home U.S. market for the first time, according to data released on Friday.

GM's China auto sales jumped 48.5 percent to 1.21 million units in January through June, compared with the 1.08 million light vehicles it delivered in the U.S. over the same period, company data showed.

China overtook the U.S. as the world's top auto market in 2009, helped by government incentives and a 4 trillion yuan ($590 billion) economic stimulus package.

GM's June China auto sales rose 23.2 percent to 176,486 units.

Sales of Shanghai GM, the Detroit automaker's flagship car venture with SAIC Motor, came to 71,782 units, up 18.9 percent on a year earlier.

Government Revises GDP Estimate Down to 2.7% For 1Q

The Government lowered their original first quarter estimates regarding the Gross Domestic Product, due to a an underestimate of consumer spending. Even though the estimate is lower, it does mark the third consecutive quarter of growth. Check out the following story about the adjustment courtesy of USA Today:

Gross domestic product rose at a 2.7% annual rate in the January-to-March period, the Commerce Department said Friday. That was less than the 3% estimate for the quarter that the government released last month. It was also much slower than the 5.6% pace in the previous quarter.

GDP measures the value of all goods and services produced in the United States and is considered the best measure of the country's economic health.

The economy has now grown for three consecutive quarters after shrinking for four straight during the recession — the longest contraction since World War II.

In normal times, 2.7% growth would be considered healthy. But it's relatively weak for a recovery after a steep recession. After the last sharp downturn in the early 1980s, GDP grew at annual rates of 7% to 9% for five straight quarters.

Continue reading at USA Today.com…

Bonds: Avoid the next great bubble

“Fueled by a combination of fear and greed. ” That is how CNNMoney.com describes the bond market bubble. According to CNNMoney.com:

A projected $380 billion will pour into bond funds this year, more than went into domestic stock funds in the past decade. That's on top of a record $376 billion last year. All this money flowing in has made bonds very expensive.

It's true that bonds are less volatile than stocks. But in fact they lose money just as often as equities do. "I don't think the public understands they can lose money in bond funds," says James Swanson, chief investment strategist at MFS, an asset-management firm in Boston.

So that's the fear part. The greed part comes from an entirely different group of people: safety-loving folks who normally park their money in cash, such as bank savings accounts, CDs, or money-market funds. Fed up with the meager interest rates those accounts are paying these days -- the average taxable money-market fund yields 0.03% -- they're venturing into short-term bond funds to eke out a bit more yield.

Why the bubble could burst

One part of the bubble is already leaking air: long-term government bond funds. Because they invest in super-safe U.S. Treasuries and other forms of government-backed debt, they were a popular place to hide during the mortgage meltdown.

But when the economy began improving and rates on 10-year Treasuries began rising (from about 2% at the end of 2008 to as high as 4% in April before slipping to 3.3% today), these funds started suffering. In fact, the Vanguard long-term Treasury bond fund fell 12% in 2009 and, despite the recent run up in Treasury securities, is still down 5% since the end of 2008.

Experts say that's just the beginning. Read about the major factors that could harm bonds further here.

Latest Budget Extender Includes Tobacco Taxes

According to an article on msnbc.com, lawmakers in Albany, New York will soon vote on an emergency spending plan in hopes of avoiding a government shutdown. The New York state budget is 80 days late; a large tax increase on tobacco products totaling $290 million is included in the latest bill. For example, the tax on a pack of cigarettes would go from $2.75 a pack to $4.35 a pack. Should the bill pass, the new taxes would take effect September 1. Because all State Republicans have indicated that they would vote ‘no’ on any tax increases. In order to pass, the bill would require all 32 Senate Democrats to vote ‘yes’.

What are your views on “sin taxes” such as these? Comment on my Facebook page or message me on Twitter @ronideutch!

The Tax Caps Cometh

Today, the Wall Street Journal published an online article exploring the different ways China and the US are using property taxes to stimulate the economy. China may be considering a property tax to “dampen” their possible housing bubble. Whether this will keep China from experiencing a housing crash is up for debate, but it certainly didn’t keep the US housing market from plummeting.

On the other hand, people in Indiana, New Jersey and New York may see reduced property taxes to help stimulate their local economies. Here are the facts as stated in the article:
In Indiana, Republican Governor Mitch Daniels has already lowered property taxes on homes to 1% of assessed value. In New Jersey, Republican, Governor Chris Christie has introduced a reform package that would cap property tax increases to 2.5% each year. And in New York, Democrat Andrew Cuomo has just announced his candidacy for governor with a call for a 2% cap on property tax increases.

So, will property tax caps help homeowners? Are the caps good? Bad? This article explains that it depends on how you think of government. If you see shortfalls in city and state budgets as a revenue problem, you probably think property tax caps are a bad idea. Alternatively, if you think of budget shortfalls as mostly a spending problem, you will see a property tax cap as a tool to control that spending.

Read the full article here.

Short-Run Tax Hikes Being Used to Fill Gaps

From USAToday.com:

Many states and cities coping with hard times are asking residents to open their wallets for the latest fashion in taxation — the temporary tax.

Governments are raising taxes for a specific period of time and promising the hikes will go away when good times return.

Some big temporary taxes:

• Arizona voters decide today whether to approve a three-year sales-tax hike. Republican Gov. Jan Brewer pushed to raise the sales tax from 5.6% to 6.6%, dedicating two-thirds of the new money for schools.

• Kansas hikes its sales tax July 1 from 5.3% to 6.3% for three years. The tax is designed to prevent cuts in education and social programs.

• Mobile, Ala., boosts its sales tax by 1 cent for 16 months starting June 1. The combined state and local rate will be 10%. Goal: avoid laying off police and firefighters.

• A half-dozen other states are eyeing temporary taxes. So are many cities and counties, including King County, Wash., which includes Seattle.

Group Proposing Nevada Tax, Government Changes

From the Associated Press:

A study group appointed by majority Democrats in the Nevada Legislature is proposing sweeping changes to raise taxes and reshape state government to improve the quality of life in the state over the next 20 years.

A preliminary report due for discussion Friday by the 20-member Nevada Vision Stakeholders Group offers hundreds of goals — but few specifics about how to reach them. The legislation creating the group called for recommendations but left it to legislators to figure out how to change taxes and implement the goals.

Republican Gov. Jim Gibbons quickly dismissed the proposals to change Nevada's tax structure and diversify an economy now largely based on tourism and mining.

"You surprised?" Gibbons scoffed.

Gibbons vetoed a measure last year to allow the Legislature to spend money to hire a consulting firm to review Nevada's revenues and spending, and to work with a citizens group to create a plan to build a better state over the next 20 years.

Gibbons had predicted the results would include tax increases that will scare away businesses that want to relocate in the state.

"These companies already are bypassing Nevada because of the uncertainty about our future tax structure," Gibbons said. "It is affecting our ability to recruit businesses."

Senate Permits Government to Borrow an Additional $1.9T

In a slim vote of 60-40, the Senate approved legislation allowing the government to increase its debt by $1.9 trillion. The fate of the bill might have been different if newly elected Scott Brown (R) had taken his seat in the Senate. However, for now the Democrats still have a supermajority and were able to get the legislation passed.

The measure would put the government on track for a national debt of $14.3 trillion - about $45,000 for every American - and it served as a vivid reminder of the United States' dire fiscal straits.

The massive increase in the debt limit would allow majority Democrats to avoid another vote until after the midterm elections this fall. New estimates released by the Congressional Budget Office on Tuesday show that the U.S. this year could run a deficit matching last year's record $1.4 trillion shortfall.

To win the votes of moderate Democrats, President Barack Obama promised to appoint a special task force to come up with a plan for dealing with the spiraling debt.

Continue reading at Washington Post.com…

Why Can’t the I.R.S. Help Fill in the Blanks?

In a new business story on NYTimes.com author Randall Stross wonders why in the digital age, taxpayers are still being forced to take the task of preparing a tax return from scratch. Stross argues that since government computers already have important data from employers and financial institutions, the IRS should help taxpayers with their returns.

Requiring taxpayers to file returns without being told what the government already knows makes as much sense “as if Visa sent customers a blank piece of paper, requiring that they assemble their receipts, list their purchases — and pay a fine if they forget one,” said Joseph Bankman, a professor at the Stanford Law School.

Many developed countries now offer taxpayers a return containing all information collected by the taxing authority — to “get the ball rolling by telling you what it knows,” Mr. Bankman says.

It is a stunningly reasonable idea. When you prepare your return, why can’t you first download whatever data the Internal Revenue Service has received about you and, if your return is simple, learn what the I.R.S.’s calculation of your taxes would be? You’d have the chance to check whether the information was accurate, correct it as needed and add any pertinent details — that you’re newly married, for example, or have a new child — before sending it. Far better to discover problems early with the I.R.S., whose say matters more than third-party software’s best guess.

The I.R.S., however, isn’t rushing to offer returns that are already filled in. In the 2009 report to Congress of its Taxpayer Advocate Service, it noted that during the 2008 presidential campaign, Barack Obama proposed giving taxpayers “the option of pre-filled tax forms to verify, sign and return.” The report said “it is not feasible at this time” because the agency receives W-2 data from the Social Security Administration and 1099 data from financial institutions too late in the filing season, “much later than most eligible taxpayers would be willing to wait.”

Continued at NYTimes.com…

U.S. Already $292 Billion in the Red this Year – CBO

From Reuters.com:

The U.S. government racked up a gaping shortfall in the first two months of this fiscal year after posting a record budget deficit last year, congressional analysts said on Friday.

In October and November, the government spent $292 billion more than it took in, the nonpartisan Congressional Budget Office said. That was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

The federal budget has been battered by the worst economic downturn since the Great Depression of the 1930s, as tax revenues have plunged and spending on safety-net programs like unemployment insurance have skyrocketed.

The budget deficit was $176.4 billion in October, according to Treasury Department records, and the CBO estimated the deficit for November will have come in at $115 billion. The CBO gave its figures in billions of dollars and said numbers may not add up to the totals because of rounding.

Receipts totaled $132 billion in November, the CBO estimated, down 9 percent from the same month last year. That was partly due to new legislation that gives increased tax write-offs to corporations.

Improper US Government Payments Hit $98 Billion

As the nation continues to debate the House of Representatives health care reform bill, new statistics have emerged showing that improper payments made by the federal government to people, firms, and contractors rose to $98 billion this year. Over half of the errors were reportedly made in the Medicare and Medicaid programs, which according to Budget Director Peter Orszag, shows the need for some type of health care reform.

Improper payments in the Medicare and Medicaid programs totaled $55 billion in fiscal 2009, according to documents provided by OMB.

Medicare covers healthcare for the elderly and some disabled, while Medicaid does the same for the poor.

Orszag said the error rate for payments under Medicare Advantage, where private insurers offer coverage to Medicare beneficiaries, jumped to 15 percent, or to $12 billion, in fiscal 2009. The error rate was 10 percent in fiscal 2008.

"This was not the result of methodological changes. This is one of the reasons why, as part of health reform, we believe there are crucial changes necessary to the Medicare Advantage program," he said on a telephone conference call.

Continued at CNBC.com…

States Work to Stave Off Government Shutdowns

Since today – July 1st – marks the beginning of the new fiscal year for most states, legislators needed to have budgets prepared by yesterday evening. However, California is not the only state government that is facing budget problems. According to a new Associated Press article, “Legislators in more than a half-dozen states, their revenues evaporating in the recession, frantically worked to stave off government shutdowns and devastating service cuts.”

Across the country, lawmakers are feeling the heat as their legislatures began the new fiscal year without a budget in place.

In Illinois, the sputtering drive to come up with a state budget broke down completely Tuesday, leaving the state without any plan for paying its employees or delivering government services. The session ended without any firm plans to return or even for Gov. Pat Quinn and legislative leaders to resume negotiations.

In Pennsylvania, Gov. Ed Rendell said Tuesday night he didn't think an agreement with lawmakers would come soon. The state faces the prospect of not being able to pay state employees if they cannot resolve an impasse.

Although other states in the country are experiencing ongoing budget problems, none of them are expected to have as serious of an affect on the rest of the country as California. They other day I posted an entry explaining how the Golden State’s poor economy could prolong the recession, and this new AP article reiterates that message.

“Fallout from California's budget mess threatened to spread nationwide because of the sheer size of the state's economy. The Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted before Wednesday”

Government Throws in the Towel on KPMG

From the Wall Street Journal:

It’s over. The Justice Department declined to ask the Supreme Court to review the 2nd Circuit’s ruling in U.S. v Stein. That’s the case, once billed by the government as the largest tax-fraud prosecution in history, in which U.S. District Judge Lewis Kaplan of Manhattan (pictured, left) dismissed the indictments of 13 former KPMG executives because prosecutors violated their rights. The violation? Pressuring KPMG not to pay the defendants’ legal fees.

More than three months ago, the 2nd Circuit affirmed Kaplan’s decision. The deadline to file a petition for writ of certiorari with The Supremes was last week. “All indications were that they would not [petition the Supreme Court], but we were not taking anything for granted,” says David Spears, who represents defendant Jeffrey Stein.

Meanwhile, a watered down version of the original case is underway before Judge Kaplan. Three former KPMG executives and an ex-partner at Sidley Austin are facing charges that they sold bogus tax shelters.

A spokeswoman for the Southern District of New York, which brought the case, declined to comment.

IRS and States Team Up on Payroll Taxes

According to the Wall Street Journal online, the Internal Revenue Service is joining forces with more than twenty-five states in an intensified effort to crack down on employment related tax violations. Among the key issues is whether a worker should be classified as an employee or an "independent contractor" - a difference with significant tax implications for both businesses and workers. You can check out the full article here.

Former IRS Commissioner Fired by Red Cross

Mark Everson, the former Commissioner of Internal Revenue, was recently fired from his position as President of the Red Cross. The reason? According to a Red Cross press release Everson was released after "engaged in a personal relationship with a subordinate employee." The release continues to state that "the situation reflected poor judgment on Mr. Everson's part and diminished his ability to lead the organization in the future."

Those of us in the tax industry know Mr. Everson as the 46th commissioner of the Internal Revenue. President George W. Bush appointed him to the position in 2003 and left the IRS in May of 2007 when deputy commissioner Kevin Brown took the position of Acting Commissioner. After his departure, the Board of Governors unanimously approved Everson as President of the Red Cross.

Everson’s departure from the Red Cross comes less then six months after being approved for the position. Everson also released his own statement on the issue, which has no mention of his personal relationship with a subordinate employee and cites "personal and family" reasons for his departure.