15, 25, 28, Hut!

There's no denying that amateur sports, especially college football, are big business. Together, the 15 top-grossing teams score over $1 billion in revenue, with the University of Texas Longhorns alone generating $71.2 million in profit.

Numbers like that would normally make the "receivers" at the IRS smile. But college football is different. The big Division I schools that sponsor the most competitive teams are all tax-exempt. And the IRS loses again on a juicy revenue stream that's unique to college sports — required donations, sometimes totaling twice the cost of a season ticket, that fans make to the school to secure those seats.

Back in 1986, boosters couldn't deduct the contributions they made specifically to secure sports tickets. But Louisiana Senator Russell Long, who sat on the Finance Committee, met with lobbyists who argued that his home state Louisiana State University needed tax-deductible contributions to add seats to Tiger Stadium. Long agreed, but didn't want to be seen showing favoritism to his own constituent. So he approached Texas Representative Jake Pickle, whose Austin district included the Longhorns' campus. Together, the two lawmakers cobbled together the sort of backroom deal that makes the rest of us proud to be Americans. They added a provision to the 1986 Tax Reform Act which preserved a 100% deduction — for just those two schools! Here's how the legislation describes one of them to limit its reach:

"Such institution was mandated by a State constitution in 1876; such institution was established by a State legislature in March 1881; is located in a State capital pursuant to a statewide election in Sept. 1881; the campus of such institution formally opened on Sept. 15, 1883; such institution is operated under the authority of a 9-member board of regents appointed by the governor.”

Naturally, every other school in the country complained. So — did the lawmakers turn red in embarrassment at getting caught with their hands in the cookie jar and shut down the offending provision? Noooooooo . . . two years later, they voted to trim the deduction to 80% of the donation, but extend it to everyone.

How much does this all cost the IRS? Well, nobody really knows. But Ohio State University is the leader in seat-related donations, with $38.7 million. LSU is next with $38 million, and Texas is third with $33.9 million. (In fact, LSU is about to spend $80 million to add 70 more luxury boxes and 6,900 more seats, which should bring in another $15 million in donations.) If the average donor pays 25% in federal tax, that means $22 million in lost tax dollars. And that's just three schools out of 1,000 eligible to collect such donations. Of course, defenders of the deduction argue that it's worth the hit to the Treasury. They note that donations go to support scholarships, facilities, and other university expenses.

This Saturday, it will be hard to turn on a television without hearing about the upcoming election or "Frankenstorm" Sandy. College football will provide a welcome respite to millions of fans across the country. So next time you sit down to watch your favorite team, hoist a cold one to the tax code that helps make their success possible!

Watching Out for the Cliff

Ordinarily, we use these posts to discuss fun items related to taxes and finances. We know that you can read the usual boring articles about the usual boring tax topics pretty much anywhere else. And most of you are happy to let us worry about "the details."

Every so often, though, we need to discuss more serious issues, even if it's just to let you know that we're on top of them. That's the case today with the so-called "fiscal cliff" — Federal Reserve Chairman Ben Bernanke's clever term for what happens on January 1, when a bunch of current tax rules expire, and some new rules take effect. Here's a quick rundown of what to expect:

• The Bush tax cuts expire. That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.
  
• The 2011-2012 payroll tax cuts expire. That means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot — but it means higher taxes for about 163 million working Americans.
• New taxes imposed by the 2010 "Obamacare" legislation take effect. The Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there's a new 3.8% "Unearned Income Medicare Contribution" (which sounds so much better than "tax') on "net investment income" (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
• The Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions aren't adjusted for inflation. So, every couple of years, Congress "patches" the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans — but without the "patch," that number explodes to 33 million.
• Oh, and don't think dying solves your tax problem. That's because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 is our fiscal cliff, and we're hurtling towards it like Thelma and Louise. What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge — Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we'll actually go over that fiscal cliff. (Maybe it'll be like those old Road Runner cartoons, where the coyote runs off a cliff and keeps right on going, just fine, until he looks down. That's when he realizes he's standing in thin air, then plummets 1,000 feet to the bottom of the canyon.) If that winds up being the case, we may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they'll pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We're not writing today to take sides on any of these issues, or tell you where taxes should go. But we want you to know that we're watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we're here for your family, friend, and colleagues, too!

Duh!

Today's wired world has most of us drowning in information. Twenty-four-hour cable news networks, instantaneous online updates, Facebook, and Twitter are constantly assaulting our senses. Much of what passes for "news" is really just noise — the latest statistical fluctuations in the presidential polls, for example, or the comings and goings of your favorite Kardashian sister. But every so often, we learn something so surprising that it rocks us to the core and causes us to re-evaluate everything we thought we knew.

Three professors have just revealed that sort of earth-shattering information in the newest issue of Accounting Review. They analyzed data from 5,000 corporations over 17 years from 1992-2008 to answer an age-old question: "Do IRS Audits Deter Corporate Tax Avoidance?" And here's their startling conclusion — make sure you're sitting down to read it: when audit rates go up, so do taxes!

"We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques."

Shocking, isn't it? (Just FYI, "endogeneity" is a statistical condition that occurs when there's a correlation between a parameter or variable and an "error term." It can arise as a result of measurement error, or a few other things that require looking up, including autoregression with autocorrelated errors, simultaneity, omitted variables, or sample selection errors.)

Let's give the authors a little credit here — they do say it's not really surprising that more audits equal more taxes. But they say it was hardly obvious before they started their study. What if they found that corporations were just so confident they could outmaneuver the IRS that audit rates didn't matter?

The professors also argue that shareholders benefit from IRS audits — especially when corporate governance is weak. Co-author Jeffrey Hoopes of the University of Michigan reports that "strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes.” They cite Tyco as an example, where top executives minimized taxes by relocating profits to low-tax foreign countries, then diverted millions of dollars for their own personal use. (Remember CEO Dennis Kozlowski, who spent $15,000 of shareholder money on an umbrella stand? Yeah, that guy . . . he's in jail now.)

What does all this mean for you? Well, audit rates for personal returns average just over one percent. That's a tiny fraction of the 30% or so that the biggest group of companies in the Accounting Review study faced. But we file every return as if we expect it to be audited. Yes, we work and plan to minimize your taxes. But the strategies we use are all court-tested and IRS-approved. That way, you save money and sleep well at night!

Department of Worst Nightmares

Last week, we wrote about a recent report issued by the Treasury Inspector General for Tax Administration ("TIGTA") — an independent board that works to prevent and detect fraud, waste, and abuse within the IRS and related entities. We were amused to learn that 70 federal agencies owed $14 million in unpaid employment taxes on their employees' wages — and 18 more agencies hadn't even filed their employment tax returns. But we were appalled to learn that the IRS can't take any effective action to collect those outstanding balances.

While we were busy bringing you the news about Uncle Sam's "Get Out of Jail Free" card, the TIGTA was busy issuing another report that we knew you'd want to hear about. And this one may be worth paying attention to. Would you believe that TIGTA thinks "Firearms Training for IRS Criminal Investigation Division Needs Improvement"?

When we think of IRS "agents," we typically think of deskbound bureaucrats who spend their days shuffling papers that would put the rest of us to sleep. And for the most part, that's true. "Revenue Agents" are the IRS's invaluable front line, auditing and examining financial records to make sure that taxes get paid.

But it's easy to forget that the IRS has a long history of law-enforcement success. (Remember who finally put Al Capone in jail?) Today's Criminal Investigation ("CI") Division employs 2,700 "Special Agents" — an elite force who investigate tax evasion, money laundering, narcotics-related financial crimes, and counter-terrorism financing. Their duties include executing search warrants and arresting fugitives. They're even authorized to use deadly force to protect themselves and the public. So, naturally, Special Agents must meet firearms training and qualifications standards every year, including "firing a handgun, entering a building with a firearm, and firing a weapon while wearing a bulletproof vest."

TIGTA looked at 597 Special Agents working out of the New York, Los Angeles, Chicago, and Washington D.C. field offices. They found that CI's firearms training and qualification requirements "generally met or exceeded those of other federal law enforcement agencies." That's certainly reassuring for those of us who think the only thing more terrifying than an IRS agent packing heat is an IRS agent with a gun he doesn't know how to use.

However, TIGTA found, some special agents don't actually meet those training and qualification requirements. Field office managers didn't always take consistent actions when special agents failed to meet the requirements. And there's no national-level review of firearms training to make sure all special agents meet their requirements. TIGTA recommended that CI either enforce the requirement that special agents who don't meet training requirements surrender their firearms, or modify the literal rules to reflect what actually happens in the field when an agent misses training requirements. TIGTA also recommended that CI establish a process to monitor and periodically review special agent firearms training and qualification records.

IRS Special Agents do some of the Service's most valuable work. Their efforts help keep everyone's taxes down, and keep us safe in other ways as well. We're confident none of you reading this will ever wind up on the wrong side of an IRS agent's gun. But if it ever did happen, wouldn't you want that agent to have a little experience?

Latest Government FAD

If you don't take care of your taxes, you risk some pretty expensive fines and penalties. Some of those amounts are fixed, like $89 per partner per month for failing to file your partnership return. Others are based on the actual tax due, like the 10% penalty for failing to file employment taxes. If the IRS has to come after you, they can slap liens on your home or other property. They can impose levies to pluck back taxes from your paycheck, your bank account, or your retirement plan. They can even seize your assets and auction them to collect their pound of flesh.

Having said all that, would it surprise you to learn that there's someone with a "Get Out of Jail Free" card for not paying his taxes? Would it surprise you even more to learn that it's Uncle Sam himself?

The Treasury Inspector General for Tax Administration ("TIGTA") is an independent board that oversees the IRS. Their job is to audit, investigate, and inspect the tax system itself, as well as to prevent and detect fraud, waste, and abuse within the IRS and related entities. Last month, the TIGTA issued a report with a bland and vague title: A Concerted Effort Should Be Taken to Improve Federal Government Agency Tax Compliance. But that deceptively bureaucratic name masks a pretty outrageous conclusion:

"Federal agencies are exempt from paying Federal income taxes; however, they are not exempt from meeting their employment tax deposits and related reporting requirements. As of December 31, 2011, 70 Federal agencies with 126 delinquent tax accounts owed approximately $14 million in unpaid taxes. In addition, 18 Federal agencies had not filed or were delinquent in filing 39 employment tax returns. Federal agencies should be held to the same filing and paying standards as all American taxpayers."

Fourteen million bucks might not seem like a lot compared to our sixteen trillion dollar debt. But believe it or not, the problem is bad enough that the IRS has an entire unit, called the Federal Agency Delinquency ("FAD") Program, just to collect delinquent taxes from other federal agencies! How well do they do? Last month's report took a look at the December 2008 "FAD list" of 132 delinquent accounts to see what had happened through December, 2011. The TIGTA found that just 33% of those agencies had paid their employment taxes. 30% of those accounts were still open and unresolved, three years later. Even worse, 36% of those accounts had actually expired; meaning the IRS won't ever collect those balances.

That "FAD" unit sounds like a real pit bull, right? Well, they might be, if they had any leash. IRS Policy Statement 2-4 says the IRS can't assess interest or penalties against delinquent federal agencies. And even if they could, Comptroller General Opinion B-161457 says that the agencies aren't authorized to pay them!

You might ask yourself why it even matters whether the government pays taxes to itself. We've all heard that people who live in glass houses shouldn't throw stones. That age-old advice seems especially appropriate here. We're in the home stretch of an election centered largely on the role we want entitlements to play in our society. And every time a federal agency short-changes its payroll tax obligation, it cheats the Social Security and Medicare trust funds of much-needed dollars. It hardly seems controversial to ask Uncle Sam to set the best example possible!