Horsing Around with Tax Preparers

This is a big week for taxes and technology. State "insurance exchanges" are scheduled to open for business under the Affordable Care Act, which lets consumers sign up for tax-subsidized individual health insurance. The White House has already announced that technological glitches will delay online enrollment on the small business ("SHOP") and Spanish-language sites. That's a decidedly 21st-century, "first world" problem. So, why on earth is the IRS lassoing an 1884 law dealing with lost Civil War horses to regulate tax preparers?  

Right now, there are no industry-wide rules governing tax preparers. So, back in 2011, the IRS announced their new "Return Preparer Initiative," which required preparers to register with the IRS, pass a competency test, and take continuing education classes. The new rules apply to any tax preparer who isn't already regulated as an attorney, Certified Public Accountant (CPA), or Enrolled Agent (EA).  

In 2012, a group of preparers sued to stop the program, arguing that the IRS lacked congressional authority to enforce it. Earlier this year, Judge James Boasberg agreed, shutting down the program. Naturally, the IRS appealed. And that brings us to our horses.  

After the Civil War, thousands of Americans who had lost horses in the conflict brought war loss claims against the government. A whole stable full of agents emerged to press claims for the victims, usually for a piece of the recovery. Would you be shocked to learn that some of those claims were bogus, with greedy agents representing broken-down old nags as "Sea Biscuit"-class steeds? So the government passed the "Enabling Act of 1884" — also referred to as "the Horse Act of 1884" — to grant the Treasury Department permission to regulate them. (You remember all of this from high-school history, right? OK, neither did we.)  

Well, last week, the IRS took their appeal to court, and saddled their argument on the Horse Law. Gil Rothenberg, who argued the government's case, said "I hate to beat a dead horse, especially one from the Civil War." But he argued that tax preparers represent clients just like 19th-century "enrolled agents" represented theirs. Therefore, he says, the 1884 law gives the Treasury the same authority to regulate today's tax preparers.  

"Hold your horses," say the tax preparers who filed the case! Today's tax preparers merely provide a service to their clients. They don't actually "represent" them before the government the same way attorneys, CPAs, and EAs all do. That makes the 19th-century law a horse of a different color, with no binding authority to today's case.  

Tax experts who observed the oral arguments report the judges sounded skeptical of the IRS's argument. We should know sometime early next year what the final decision will be. Of course, if Congress doesn't like the results, they can simply saddle up new legislation to hobble the Court.

We think the real question isn't who regulates your tax professionals. We think the real question is what sort of attitude a tax professional brings to the table. Are they content to put the right numbers in the right boxes on the right forms, then call it a day? Or do they give you the plan you need to create the savings you really want? So call us for that plan. And remember, we're here for your whole herd!

A Sweeter Tax Than Most

When you hear the word "tax," you probably think of something the IRS takes out of your paycheck. Or you might think of something they take out of an inheritance. But taxes affect virtually every financial transaction you make. Take, for example, that simple jar of honey lurking on the shelf in your refrigerator.  

Americans eat more honey than anyone else in the world — about 400 million pounds of it a year. Most of it goes towards sweetening foods like cereals, cookies, and breads. Even whiskey producers are adding honey to their blends to attract younger drinkers. (The Scotch Whiskey Association just stung Dewars for labeling their new "Highlander Honey" as "scotch" rather than "spirit drink.")

Where does all that honey come from? Well, China is the world's largest honey exporter. But Chinese beekeepers sometimes use pesticides banned here in the U.S. They sometimes dry their honey by machine, which lets the bees produce more, but leaves the honey with a foul taste similar to sauerkraut. Worst of all, Chinese producers sell their honey at prices as low as half of what our domestic producers charge.  

Back in 2001, the U.S. government slapped Chinese honey with punitive tariffs, currently set at $2.63/kilogram, to protect American producers. Those taxes can triple the cost of Chinese honey. So today, about 40% of our honey comes from here in the U.S., with the rest coming from Argentina, Brazil, Canada, and other countries.  

What's a poor Chinese beekeeper to do? Enter the "honey launderers." Chinese producers send their honey to nearby countries like Malaysia, Vietnam, India, or Korea, and re-label it as coming from those countries. They add rice sugar, molasses, or fructose syrup to hide any unpleasant tastes or smells. (Ick.) They filter the honey to remove the pollen, which palynologists, or pollen specialists, can use like a natural "fingerprint" to track down a honey's origin. And they pocket the savings they create by evading the tax.  

How much tax does the illicit honey avoid? A lot. Back in 2008, Immigration and Customs Enforcement officials charged 14 people with a globe-trotting scheme to evade $80 million in payments. And in February of this year, officials busted two of the nation's biggest suppliers for evading $180 million more. In a scene reminiscent of Donnie Brasco, officials launched "Operation Honeygate" and planted an agent "on the inside" for a year. The agent served as one supplier's director of procurement, and the investigation led to five individual guilty pleas, two deferred prosecutions, and $3 million in fines.  

What's the lesson? Taxes are baked into the price of everything you buy, whether they're even paid or not!  

There's not much we can do to help you avoid hidden tariffs on baked goods. Fortunately, we can help with the taxes that really count — taxes on your income, your payroll, and even your estate. If you're busy as a bee, you deserve to keep everything the law allows. So call us for the plan you need — and remember, we're here for everyone else in your hive!

When the IRS Comes a-Knockin'

If you get an IRS audit notice, you probably expect to spend hours responding to endless document requests, visiting bland government offices, and meeting with faceless bureaucrats. You might hope you get lucky and find yourself assigned to a pleasant, friendly examiner, one who acknowledges how intrusive and annoying the audit process can be. But you certainly wouldn't expect to wind up in bed with the auditor!

Vincent Burroughs is a 40ish contractor and amateur motorcycle racer in Fall Creek, Oregon. When the economy collapsed in 2008, his business suffered and he got behind on his taxes. In 2011, the IRS came calling. The auditor, Dora Abrahamson, recognized him from his motorcycle racing, and apparently liked what she saw. Burroughs claims Abrahamson started flirting with him over the telephone and by text message ("[I] need a hug badly, do you have one?"), offered him massages, and even sent him a "selfie" in a revealing pose!

Burroughs figured he had a friend at the IRS, so he didn't stop the flirting. In September 2011, Abrahamson visited him at his house to give him a hand with his papers. She showed up "provocatively attired," he says. She told him she could impose no penalty, or a 40 percent penalty. And she said if he would give her what she wanted, she would give him what he needed. After an awkward series of events that we don't need to detail here, the two wound up in bed. Shortly thereafter, Abrahamson stepped down from the case due to a conflict of interest, and the new auditor told Burroughs he owed $69,000.

Abrahamson's conduct caused Burroughs "to be agitated, depressed, and unable to sleep." It also made his girlfriend unhappy. (Uh oh.) So Burroughs sued Abrahamson and the IRS, seeking unspecified punitive damages. He claimed the IRS failed to properly supervise Abrahamson for, among other things, "permitting her carnal desires to overcome her judgment that it was inappropriate to pursue a sexual relationship with a taxpayer she was auditing," "failing to seek and follow through on getting help for her psychological problems," and "failing to sufficiently train Defendant Abrahamson on how to avoid situations which could lead to the appearance or actuality of sexual conduct with taxpayers being audited or investigated."

Unfortunately for Burroughs, the Federal Tort Claims Act waives immunity for government employees only when the injuries they cause take place within the scope of the employment. U.S. Magistrate Thomas Coffin ruled that Abrahamson's conduct did not occur substantially within the time and space limits authorized by her employment, was not motivated by a purpose to serve the employer, and was not of a kind that she was hired to perform. Therefore, it did not occur within the scope of her employment — so the IRS is off the hook! (News reports are less clear on whether Burroughs is off the hook with his girlfriend.)

The case has naturally attracted all sorts of press. Burroughs appeared on ABC's 20/20. And we thank Tonight Show host Jay Leno for making the obvious IRS joke so we don't have to!

What other lessons can we draw from this week's sad story? Well, if you do ever get an audit notice, call us before you try and handle it yourself! We'll make sure you get all the professional assistance you need to defend your financial interests and even your dignity.

Role Models (Not!)

Every year, the IRS Criminal Investigation unit releases an annual report detailing how they pursue and prosecute tax-law violations. It's full of the usual dry statistics you would expect from any IRS report: investigations launched, tax preparers indicted, identity thieves sent to prison, and even average sentences for different crimes (29 months for tax preparers, 64 months for money launderers). But it also includes some surprisingly entertaining stories about the people the Criminal Investigations unit targets — the kind of stories that make feel better about our own choices in life. Having a bad day? You'll cheer up when you read about these geniuses!

• Back in 2006, the IRS offered a special "Telephone Excise Tax Refund" program for certain calls incorrectly taxed according to time and not distance. Taxpayers could claim the actual tax paid, or take a simplified amount ranging from $30 for a single filer to $60 for a return with four or more exemptions. But where you and I might have seen a few extra bucks, or maybe a dinner out for the family, Ronald Wilkerson saw gold. Wilkerson, who owned a tax-prep service in Baton Rouge, filed 635 false returns claiming a total of $1,415,388 in telephone refunds. He collected $485,939 in fees for his efforts before the IRS caught on to him. Now Wilkerson is living in a gated community — unfortunately, it's the kind where the gates are designed to keep people in, not out.
  
• Chicago has always had a reputation for "voting the dead." Well, if dead people can vote, why shouldn't they get tax refunds, too? At least, that's what Chicago tax preparer Katrina Pierce thought. Pierce used stolen identities of deceased individuals to file 180 fraudulent returns for tax years 2006 and 2007. She scammed $500,770 from the IRS, plus $146,433 from the Illinois Department of Human Services and even $25,000 in false food stamp benefits. Prosecutors wrote that "stealing was [her] full time occupation and she was good at it," before giving her nine years to discover whether orange really is the new black.

• Kim Jenkins Brandveen operated Healthcare Solutions Medical Supply in Richmond, Virginia. She withheld federal employment taxes from her employees' paychecks, just like she was supposed to. But somehow, she forgot to send the money to the IRS. When collection agents stepped in to claim payment, Brandveen shut down the business and abandoned its bank accounts. Then she set up Healthcare Solutions Service Corporation, a virtually identical business serving the same customers with the same employees. And once again, she failed to pay over her employees' withholding taxes to the IRS! Let's see if 60 months in time-out jogs her memory for her next venture.

• The IRS also investigates tax and money laundering violations involving false insurance claims. In Houston, City Nursing recruited Medicare and Medicaid beneficiaries to sign blank treatment forms, then completed the forms to bilk the government for more than $45 million in "physical therapy." (It might have been more plausible if City Nursing actually had a physical therapist on staff!) U.S. District Court Judge Melinda Harmon sentenced the owners, along with two employees who managed the fraud, to a total of 55 years in a place where they'll have plenty of time to work on their own weight-lifting and exercise programs.

If you're feeling especially clever today, you might detect a pattern. None of these stories end well for the schemers who thought they found the easy way to riches. Look, we know you hate paying tax. But you don't have to flirt with the IRS "Hall of Shame" to pay less. You just need the right plan. The Tax Code is so complicated that there are actually more ways to save legitimately than there are to cheat. So let us give you the plan you need to save tax and sleep well, too!

When 20 > 20.1

Labor Day has come and gone, and, while fall isn't "officially" here, it's time to put away those summer whites. Never mind that the mercury is still hitting 100 degrees in parts of the country; forget about those pennant races still heating up in the AL West and NL Central. This weekend, the National Football League kicks off regular season play! This week's season opener is just the first step on the road to Super Bowl XLVII, to be played outdoors on February 2, 2014, at the Meadowlands in New Jersey. (If you look hard enough on ESPN, you can find pre-game coverage starting early next week.)  

Earlier this year, Baltimore quarterback Joe Flacco won MVP honors in Super Bowl XLVII and signed a new six-year contract worth $120.6 million. It makes him the highest-paid player in the game, just ahead of New Orleans quarterback Drew Brees. But in a surprise twist that NFL statisticians would love, Brees will actually take home more money than Flacco.

How can that be? Taxes, of course — why else would we be talking about it?  

Here's how it all works. Flacco plays his home games at M&T Bank Stadium in Baltimore, with his new contract paying him $20.1 million per year. According to Americans for Tax Reform, the IRS will intercept $8.72 million of that paycheck. Maryland and Baltimore County will pick off $1.72 million more, for a total combined tax bill of $10.44 million, or 51.98%. Flacco will also pay a "jock tax" for several of his away games — for example, when he plays the Cincinnati Bengals on November 10, he'll owe Cincinnati's 2.1% earnings tax on his pay for that game. And he'll pay even more tax on his bonuses, endorsements, and other income. It would be hard to blame Flacco for thinking the tax man roughs him up worse than any team's defensive line!  

Now, Flacco could take home far more by playing for a team in one of the nine states that don't levy income taxes. The Jacksonville Jaguars (2-14 for 2012) would love a Super Bowl MVP at their helm. So would the 8-8 Dallas Cowboys. Neither Florida nor Texas tackle players with state or local income tax, which means Flacco would have taken home that $1.72 million sack.  

Meanwhile, Drew Brees plays his home games at the New Orleans Superdome, with a contract paying him "only" $20 million per year. That's $100,000 less than Flacco makes in Baltimore. Brees pays the same 39.6% income tax and 3.8% Medicare tax as Flacco. But Louisiana's top tax rate is just 6% (on income over $50,000), compared to Maryland's 6.25% (on income over $1 million). That difference might not seem like a lot. But bring out the chains, and it means Brees actually keeps $470,000 more per year than Flacco.  

As for the rest of us, this week doesn't just mark the start of football season. It also marks the start of tax-planning season! No NFL team would take the field without a game plan. So why would you think you can beat the IRS without a plan? If you don't have one, the clock is counting down to December 31, with no overtime. And remember, we're here for your teammates, too!