Jerry Coon

Our Michigan State Senator Mark Jansen came to town last week to meet with concerned Rockford residents and business owners over a topic of concern. That topic was fairness in our sales tax system. I know that seldom are the words “fairness” and “tax” used in the same sentence, but it is appropriate in this situation. Allow me to explain.

Michigan assesses sales tax of 6% on purchases of most types of goods. The tax is collected by the retailer and the money is submitted to the Michigan Department of Treasury in Lansing. A total of approximately $8 billion dollars in collected. About $5.4 billion of those dollars go the school aid fund and the rest goes into the general treasury. The City of Rockford gets a small part of those remaining dollars and we are thankful that for what we do get.

Where the fairness issue comes into play is that only retailers with a physical presence in Michigan are required to charge sales tax and pay it to Lansing. Retailers without a physical presence, like Web-based companies such as Amazon and Dell, are not required to charge sales tax and most of them don’t.

This is patently unfair to the retailers in Michigan, such as brick-and-mortar businesses like Great Northern Trading Co. and Kimberly’s Boutique in downtown Rockford, Rockford Ace Hardware, or even larger companies like Meijer, that are trying to compete with the Web-based companies of the world. The Michigan businesses previously noted spend substantial amounts of money on their physical location. They pay property taxes, utilities and upkeep on that physical location. By employing people in Michigan, they keep the economy going.

Currently, over 406,000 Michigan residents are employed in the retail industry. That means one in 10 of every person working is employed in retail trade. Where it all becomes unfair to the Michigan retailers is that the Web-based retailers may not only undercut the Great Northern Trading Co. businesses of Michigan based on not having a physical retail location, but also because they don’t have to charge the 6% sales tax. Not having to charge the 6% sales tax is what is unfair.

When the sales tax was instituted, the physical presence test was a valid way of determining when sales tax should be collected. If you wanted to do business in Michigan, you had to physically come to Michigan. The Web has changed that ball game today and the physical presence test is no longer appropriate. A company can be physically located anywhere in the United States or the world and do business in Michigan. Those companies “doing business in Michigan” should be charging Michigan Sales Tax, and public opinion agrees with that assessment. It’s that definition of “doing business in Michigan” that is the issue.

To that end, legislation has been introduced in Lansing called the Main Street Fairness Act that will basically define “doing business in Michigan” to include Web-based retailers. The Web-based retailers will be subject to the same sales tax rules as the brick-and-mortar businesses. They will owe sales tax to Michigan on the sales made to Michigan residents. Currently, 16 other states have enacted similar legislation. They have realized there is a problem that needs to be solved.

There are arguments, of course, against the Main Street Fairness Act and one is that the legislation could be considered a tax increase. Actually, that is not true. Currently, Michigan residents who buy items online from retailers without a physical presence but still doing business in Michigan, even though they are not charged the 6%, are supposed to submit the 6% along with their income tax return. Line 22 of the Michigan MI-1040 is used for this purpose. I do know a few people who comply with this rule, but it is a very small minority. My point is that since the law is on the books already, it can’t be called a tax increase.

The Main Street Fairness Act needs our support. The businesses of Michigan who are doing business should not be subjected to unfair competition of this sort. We know these people. They are our neighbors, friends and associates. They support our city by paying local and state taxes. They employ large amounts of people to keep the economy going. They are a philanthropic group of people.

A couple of projects that come to mind are the Meijer-supported White Pine Trail and the downtown Rotary Pavilion. Can you think of one project around here like these two with Amazon or Dell associated with it?

Lansing needs to step up and define “doing business in Michigan” to include Web-based businesses. Now that would be fair to all parties. This is Jerry Coon signing off.

 Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

As many of you know, last Tuesday the Environmental Protection Agency (EPA) held a meeting at Rockford Public School’s ninth-grade facility to discuss their involvement in the potential cleanup of Wolverine World Wide’s Tannery property. This is a wonderful and valuable piece of property along the Rogue River directly north of downtown and along the White Pine Trail. There is a question, however, as to whether the property will require an environmental cleanup or how much cleanup will be required before it can become a factor in the future success of downtown Rockford. The answer to that question was not answered last Tuesday night.

I work in the income tax system. That system of laws can be very confusing and the numbers within that system can tend to make the system even more confusing. Basically, I make a living by being able to interpret and apply those laws and numbers. However, I have to admit that Tuesday’s presentation via the liberal usage of charts, test result numbers, and the accompanying explanations, at certain points, was able to confuse me. The presenters were masters at not tipping their hands, so to speak.

Glen Blackwood of Great Lakes Fly Fishing Co. tried his level best in an attempt to get the EPA presenters to give an answer on a 1-10 scale of where the property stood. Even Glen, who is also a very good auctioneer, couldn’t get any type of commitment. They did pass on a ton of information, however, and listened to many people provide their opinions. The opinions varied from supporting Wolverine as a good corporate citizen, to not trusting Wolverine because it is a big corporation citizen, to just trying to get the presenters to clarify the volume of information they were presenting. I happen to support Wolverine as a good corporate citizen and feel they will do what is proper to allow Wolverine and the public to use the property.

My opinion is to let Wolverine and the Michigan Department of Environmental Quality put together an appropriate plan of action with the EPA having oversight approval. It appears, however, the bottom line is this: the EPA has until June 21 to make a decision as to how they will deal with this property. From what they said last Tuesday, they are reserving the right to take right up until June 21 to make that decision. The fact that they are taking until the last minute tells all of us how important that decision is. It’s a big decision and let’s all hope they get it right.

There are also a number of important tax decisions that can be made early in the year that greatly affect the amount of tax that taxpayers will ultimately pay when filing their tax returns next year.

For example, taxpayers with a 401(k) or a 403(b) under the age of 50 are allowed to contribute up to $17,000 to their retirement. Taxpayers age 50 or older are allowed to contribute up to $22,500. Now we know there are at least two benefits to reaching age 50: taxpayers are allowed to join AARP and also put an additional $5,500 into retirement savings. It’s easier to defer those amounts over the course of the entire year. It’s important to contribute as much as possible if you expect your tax bill to be as small as possible next tax season.

Another tax-saving tactic is taxpayers who qualify to contribute and deduct contributions to traditional individual retirement accounts may contribute up to $5,000 to their account. Also, an additional $1,000 may be contributed upon reaching age 50. That is another advantage of reaching age 50.

A third tax-saving tactic is taxpayers with health savings accounts may contribute up to $3,100 for those with a single plan and $6,250 for those with a family plan. There is an advantage of getting older here, too. Taxpayers age 55 or older may contribute up to $4,100 in a single plan and $7,250 in a family plan. These deductions are subtractions from income above the line, as the tax saying goes. If distributions are taken to pay for medical expenses, the amount withdrawn is not taxable. I do have to say that even though I have a large and growing number of clients with HSAs, not that many contribute the maximum to their accounts.

A further advantage of making a contribution to an HSA is that, upon reaching age 65, the money can be withdrawn for other items that are not necessarily medical in nature. If withdrawn for non-medical reasons prior to age 65, the amount withdrawn is taxable and there is a 20% penalty. At age 65, the amount is taxable but there is no penalty.

Think about making tax-saving moves early in this year. It will save taxes later on. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

Things are really heating up in Lansing concerning reforming the Personal Property Tax (PPT). Governor Snyder and the legislature are hot on the trail of reforming the entire PPT system. I wrote a few months ago in a column that the complete elimination of the PPT will mean a reduction of revenue to the City of Rockford of approximately $280,000, which equates to over 10% of its budget. In addition, other entities such as Rockford Public Schools and Krause Memorial Library will see potential funding cuts of approximately $400,000. I’m beginning to wonder if Governor Snyder and the legislature have something against municipalities and school systems like Rockford.

In all fairness, the package of eight bills introduced into the Senate would create a PPT Reimbursement Fund that would return approximately 81% of the lost revenue, on a non-guaranteed basis, to most local governmental units like Rockford. The good news is that the Michigan Treasury Department will have a fund called the Personal Property Tax Reimbursement Fund. The bad news is the Michigan legislature and the Treasury Department will control the payouts from the fund, hence the non-guaranteed basis. It appears they will be able to put conditions on the payouts to control who gets what and the conditions that must be met before they get the amount. If the legislature determines, however, that money is needed somewhere else, it can go somewhere else.

Based on previous experience, this might not work out well for Rockford. The PPT system is being reformed because the assumption is that the businesses that save taxes will then hire employees and our economy will take one more step in the right direction. Great assumption, however, the debatable part of reforming the PPT system is whether those businesses that save taxes will actually hire new employees or just add the savings to their profits.

Rockford will have to jump through certain hoops in order to receive their share of the PPT Reimbursement Fund. None of the businesses saving taxes, however, have to jump through any hoops to receive their share of the PPT savings. Let’s get some equality into the system. Let’s have all involved parties meet some pre-set requirements in order to realize the pre-set savings.

For example, if a business saves $200,000 under PPT reform, it has to add $100,000 in payroll. If it doesn’t add the payroll, it continues to pay the $200,000 in tax. If Rockford is required to cut a pre-determined amount from their budget, say $100,000, as a condition to get the 81% reimbursement, that would be fair. No budget cut; no reimbursement. As you might imagine, since it is taking eight separate bills to reform the system, it’s just a little complicated. Senate Bills 1065-1072 can be found on the Senate’s website at www.senate.michigan.gov. Let’s hope the legislature gets it right.

Another topic that is getting more complicated today is the forgiveness of student loans, especially by health care professionals who agree to work in under-served areas. Typically, these programs are state programs and the professional agrees to work in an under-served area for a certain time frame. Either the state pays the loan for the professional or, if it’s a state or federal loan, it is just forgiven. The state or the employer may even just pay the professional directly for the amount of the outstanding loan.

The Internal Revenue Service looks at these circumstances in differing lights. Normally, when a loan is forgiven or paid by a third party, there may be cancellation of debt income that is taxable. In the first instance where the state pays the loan or the loan is forgiven, as long as the loan is cancelled under a qualifying state program, no income will accrue to the professional. The key is that the repayment or cancellation falls under a qualifying state program.

If the repayment or cancellation isn’t part of a qualifying state program, the repayment or cancellation is most likely subject to income tax to the health care professional.

If the health care professional receives money directly and can use the funds in any manner he or she chooses, this would most likely result in taxable income to the professional.

The IRS is constantly issuing clarifications in this area as the rules change. In the right circumstances, forgiving a loan for a health care professional to work in under-served areas makes sense and should not result in taxable income. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

This is always one of the more enjoyable articles that I write. The tax season has just ended. That sentence says it all for people like me, who make a living in the world of preparing tax returns. We all get a chance to take a deep breath and see exactly what has happened in the surrounding world in the last three-and-one-half months.

While it’s true that Action Tax Service does more than prepare tax returns, a good percentage of our business for the year occurs in the period of January 1 through April 17. We did get three bonus days this year. First, it was a leap year so we received February 29 as our first extra day. Second, April 15 fell on Sunday so that was our second extra day. Finally, our third extra day occurred because April 16 is Emancipation Day in Washington, D.C. Since the IRS’ national headquarters is located in Washington, D.C., they are closed. And if they are closed, all IRS offices are closed.

Emancipation Day occurred on April 16, 1862. It’s easy to confuse Emancipation Proclamation Day with D.C.’s Emancipation Day. President Lincoln issued an Executive Order, the Emancipation Proclamation, on September 22, 1861. Throughout history, it appears that many presidents have issued controversial Executive Orders and not just presidents Bush and Obama. Lincoln ordered the 10 states of the Confederacy to cease rebelling by January 1, 1863 or their slaves would be set free. Of course, they didn’t quit rebelling for another two years or so, but their slaves were technically set free on January 1, 1863. However, on April 16, 1862, slaves in D.C. were set free. Actually, their owners were paid the value of the slaves in exchange for their freedom.

Lincoln’s Proclamation, by contrast, did not provide compensation to the owners of the slaves, it didn’t outlaw slavery, and it didn’t make the ex-slaves citizens of the USA. Those items did not occur until the 13th Constitutional Amendment was passed in December, 1865. It seems that in 1862, Washington, D.C. was on the cutting edge of things. We might even go as far as to say they were progressive back then.

When we look at Washington today, another word, gridlock, comes to mind. I’m not sure either the Emancipation Proclamation or Emancipation Day would have made it through the system today.

My day of freedom this year is April 17. I have a routine and do some of the same things every year. First, I don’t get up at 6 a.m. I sleep in just a little. Second, I have a cup of coffee and add a little touch of Kahlua to it. I drink coffee every day, but a little touch of Kahlua is special.

Third, I buy a fishing license. Michigan’s fishing licenses all expire on March 31, so before I get in the Rogue River, I make sure I’m legal. This year, I will probably check out the new fishing shop, the Hex Shop Fly Fishing Outfitters that opened in O’s old location downtown.

Fourth, I either hit a bucket of golf balls or play nine holes just to loosen up the golf swing. My friends have quite a head start on me this year.

Next, if there is time, I mow the lawn. That might be a requirement this year in that the grass is really growing.

Just like everybody, my projects go from completing tax returns to completing projects around the house. I’m sure my wife, Deb, has quite a lengthy list this year.

Just a reminder, however, that Action Tax Service is open daily until the next tax season rolls around to service the approximately 20 percent or all taxpayers who filed an extension this year. Give us a call. We can help, but only until 4:30 instead of the 8:00 p.m. that we are there during the tax season. This is Jerry Coon signing off and getting ready to read Deb’s list.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com. 

Jerry Coon

162-0. I know it’s never been done before and the 2012 Detroit Tigers aren’t going to do it either. They aren’t going to win all of their games this year. They may even have lost a game between the time I wrote this article and the time you are reading it. However, I do think they have a shot at making a run at turning in a very good, if not the best, won-loss record in all of baseball history. The highest won-lost record in American League history was turned in by the 2001 Seattle Mariners at 116-46. I know this is hard to believe, but the best winning percentage of all time came from the 1906 Chicago Cubs with 116 wins and 36 losses. Unfortunately, both of those teams did not win the World Series in their record-setting year. Not necessarily a good precedent.

I believe the best team in all of baseball history was the 1927 New York Yankees. They finished with a record of 105-46 and did win the World Series. That doesn’t surprise me in that the Yankees’ nickname was Murderer’s Row, because they killed pitcher after pitcher. I’m sure that nickname wouldn’t work today. They would be known as something a little less graphic. Even though I’m less than a Yankees fan, I do have to respect a team led by two of the greatest hitters and players in the history of the game, Babe Ruth and Lou Gehrig, and one of the best pitchers of the day, Waite Hoyt. They had seven future Hall of Famers on that team.

What the Tigers have in common this year with that 1927 team is they are led by two of the best hitters and players of today, Miguel Cabrera and Price Fielder, and the best pitcher in the game today, Justin Verlander—possibly three future Hall of Famers. In today’s baseball, they have a stacked team. It’s too early to tell because things happen over the course of 162 games and seven months. Hitters go into slumps. Pitchers get hurt. Managers forget how to manage. But it sure seems like this is the year to be a Tiger fan. Go Tigers!

The tax season ends next Tuesday, the 17th. About 80% of all returns are filed by that date. However, that leaves 20% to be filed after that date. Equating that 20% to a number means that 21 million-plus tax returns will be filed after April 17. Hopefully, all of those 21 million-plus taxpayers have filed an extension and paid any tax that might be due with the extension.

It’s easy to file for an extension. Fill out a Form 4868, sign it and mail it in or file it electronically and it’s a done deal. You have just gained six additional months to file your return. You have eliminated the 5%-per-month failure-to-file-your-return-on-time penalty. What you perhaps have not eliminated is the failure to timely pay all of your tax by the April 17 deadline.

This penalty is assessed if, when you eventually do file your return, there is a balance due on that return. The failure to timely pay penalty is assessed at one-half of one percent. In and of itself, one-half of one percent sounds reasonable. The kicker, however, is that one one-half of one percent accumulates another one-half of one percent each month that your debt is outstanding.

For example, money owed during April is subject to a penalty of one-half percent. Money owed during May is subject to a penalty of one percent. Money owed during June is subject to a penalty of one and one-half percent, etc., etc. In addition, interest is charged on the amount outstanding. Between the penalties and interest, it can add up to diabolical amounts, and over time those penalties and interest can add up to more than the tax. Did you ever see those commercials in which people owe thousands of dollars to the IRS? It’s most likely a fair statement to say the tax may be a smaller amount than the penalties and interest. All of this might be eliminated by filing the return by April 17.

There are valid reasons to file an extension. There are very few valid reasons for not paying any tax due by April 17. Consider the penalties and interest that may be due by not paying the tax due with the extension. Dave Ramsey would say to do just about anything to pay the IRS by April 17. I agree. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

The Grand Rapids Press is causing some consternation in the Coon household. My habit is to read selected portions of the Press, such as the sports and the business sections. I glance at the front page and usually read the “Perspective” section with the opinions and letters to the editor.

However, Deb’s habit is to read through the entire Press every day. It’s something she looks forward to or, should I say, used to look forward to.

From now on, Deb will only be reading the Tuesday, Thursday and Sunday papers. She is not a happy camper because she won’t be reading the Monday, Wednesday, Friday and Saturday papers. Going to m-live.com and reading those missing days on the Web isn’t quite the same thing as sitting down on the couch and perusing the Press.

Oh well, you might say, that’s progress. It’s the green way of doing things. It’s the wave of the future. We have all read the explanation of the changes as provided by the management of M-Live Media Group. The explanation hasn’t made Deb any happier. Is this really the wave of the future with the Grand Rapids Press being the first of many newspapers to follow suit? Or is this a Classic Coke, a Ford Edsel, a Lions hiring Matt Millen, a Boston Red Sox trading Babe Ruth to the New York Yankees, a Hunt Brothers believing they could hoard all of the silver in the world, or one of a multitude of other similar decisions that will go down in history as one that was not so good? We will find out soon.

I know Deb would love to see the Press going back to being delivered every day, but I’m not holding my breath. Either the management is brilliant and has M-Live on the cutting edge or they have made a slight error. I’m an optimist at heart, but what other city in the United States the size of Grand Rapids has a daily newspaper that is delivered only on Tuesday, Thursday and Sunday? I’m thinking none. Good luck to the Press in pulling this one off.

This tax season isn’t going off totally without a hitch or two. We haven’t been able to electronically file city tax returns as yet, nor have we been able to print city returns so we can’t mail them in either.

The cities are attempting to use a Common Form this year for all city tax returns. Before the development of the Common Form, most cities created their own tax return. They all looked similar but they weren’t exactly the same. In the spirit of independence, each city’s return had its own way of dealing with the filing of income taxes. Each city has its own Income Tax Administrator, so the form reflected what the particular administrator wanted the form to look like.

For the last few years, the City of Grand Rapids has spearheaded the effort to develop the Common Form. In the long run, principally for cost-saving purposes, the idea eventually is for all cities to accept electronically filed returns. It’s much less expensive to process e-filed tax returns rather than hand processing those returns. In these difficult financial times, you have to take savings where you can find them.

For all cities to use e-filing, it would be much easier if all of the returns were submitted on one exact form: the Common Form. The software is very expensive to develop, but it will be cheaper if the software guys can develop one program that applies to all 22 different cities as opposed to one program for Grand Rapids, one program for Walker, one program for Lansing, etc.

However, there is a slight hiccup in the deal right now so we are accumulating those city returns. Hopefully, they will get the issues all ironed out soon. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

A picture of the 1945 Detroit Tigers baseball team sits in my office. They were the World Series champions that year. I know they only had to beat the Chicago Cubs, but beat them they did. Losing must have hard on the Cubs that year because they haven’t been back to the World Series since. Of course, the Tigers haven’t exactly blown away the rest of baseball having also been back to the fall classic only three more times: 1968, 1984 and 2006. All of that has a good chance of changing in the next few years.

If you are Tiger fan, you know they just bought the services of Milwaukee’s first baseman, Prince Fielder, by signing him for the next nine years. They are paying him the princely sum of $214 million. I realize that is a lot of Little Caesar’s pizzas, but given that fact that Fielder is one of the best left-handed hitters in all of baseball and given the fact that Detroit already has Miguel Cabrera, one of the best right-handed hitters in all of baseball, and has Justin Verlander, the best pitcher in all of baseball, I’m anticipating that I will be hanging a new picture in my office come this October. The 2012 Detroit Tigers World Series championship team will be a welcome substitute to those 1945 champions.

Why did I mention the Cubs? I know this is a bold prediction, but I fully expect them to be back in the hunt for a championship within a few years. They recently hired a fellow by the name of Theo Epstein, the former general manager of the Boston Red Sox, to run their baseball operations. Epstein has made a career of making winners out of losers.

If you have watched the movie, “Money Ball,” you might remember that Epstein was one of the disciples of Billy Bean in Oakland. He took that particular form of religion from Oakland to Boston. They subsequently broke the curse of “the Babe” in Boston and won a couple of world championships. He is now moving to Chicago to break the curse of “the Goat.”

I hope he does it, too, and if he does, it would only be fitting that the Cubs beat the Tigers in the 2016 World Series. After all, the Tigers would already have won the 2012, 2013, 2014 and 2015 World Series. Four in a row would be enough. It would be time to let the Cubs break their curse. Go Tigers! Go Cubs!

There sure has been a lot of publicity about tax rates lately. It’s become a topic of discussion because we are in the midst of a presidential election campaign. Needless to say, Mitt Romney’s tax return has been thoroughly dissected. Since the Romneys paid just slightly less than 15% in tax on their 2010 tax return, it’s quite obvious that President Obama feels that the Romneys don’t pay enough tax. In fact, the President lately has mentioned and applied the “Buffet Rule” to the Romneys. It seems that the billionaire Warren Buffet pays an overall tax rate that is lower than his secretary’s rate.

As the President noted in his State of the Union address, the Buffet Rule states that an owner of a business shouldn’t have a lower tax rate than his secretary. Of course, in the Romneys’ case, they still paid more than $3,000,000 in federal taxes—a rather sizable amount. Their tax rate was 15% because the majority of their income was from investments. Investment income is taxed at the maximum capital gains rate of 15%. They took advantage of the same tax laws available to all of us. The Romneys do not have any special rules just for the Romneys.

I’m also pretty confident in stating that even though Warren Buffet pays 15% tax, the total amount of tax he pays is substantially more than his secretary not only pays but earns. He also took advantage of the capital gains tax rate rules. There are also no Warren Buffet tax rules.

A cursory examination of the Obamas’ 2010 tax return shows that they paid tax at the rate of approximately 25%. They paid that rate because a predominant portion of their income was earned from two sources: wages earned from acting as the President of the United States and income earned from having authored several books.

In our system, earned income is taxed at higher tax rates than investment income and their investment income was negligible. But if they did have investment income, it would have been taxed at the Romneys’ capital gains tax rate of 15%.

The Obamas paid total federal tax of just over $450,000—a rather sizable amount. They took advantage of the tax laws to get their tax down to $450,000. The same laws are available to all of us. The Obamas also don’t have any special rules for the Obamas.

Given all of the publicity given to the Romneys and the Buffet Rule, I just hope the Obamas pay a higher tax rate than their secretary.

All that being said about the Obamas, the Romneys and the Buffets of the world, we do have a bit of a problem in our tax system. Approximately 47% of all tax return filers take advantage of those same laws as the Romneys, the Buffets and the Obamas to eliminate 100% of their tax. Yes, that is correct, 47% of all filers not only don’t pay 15%, 25% or something in between. They pay 0%.

When the President says that everyone should pay their fair share, is he talking about the Romneys’ or Buffets’ 15%, his 25%, or the 47% paying 0%? I think he is just sore because Romney pays a lower percentage than he does. This is Jerry Coon quickly signing off before they suggest that the Coons’ tax rate goes up to 25%.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Jerry Coon

IRS needs bigger budget?

I might have made a slight mistake last week in putting in writing that I thought we were becoming weather-wise close to Indiana. Evidently, the weather gods were just waiting for me to write that article, because it has been winter since that time.

However, some people are happy with the cold and the snow. The ice fishermen are happy. The downhill and cross-country skiers are happy. All of the people involved in the Rockford Ice Festival are happy. The tubers are happy. The golfers of Michigan, however, are disappointed.

Let me clarify. The Michigan golfers who are stuck here in Michigan are disappointed. The Michigan golfers who are happy are those spending the winter months in states closer to the equator. However, those golfers still here have to accept the reality they have to wait until April to get back out on the course. I’m a golfer. As such, as with all golfers, shots go awry, so I’m used to being disappointed and I think I accept that reality rather well. I’m also a Detroit Tiger, Lions, Pistons and Red Wings fan. That also means I’m used to being routinely disappointed and most of the time accepting of a rather ugly reality.

Of course, just like in golf, there is always next year and, since I’m an optimistic person, it’s going to be a great year coming up for me as a golfer as well as the Tigers, Lions and Red Wings. However, even an optimistic person can’t see the Pistons having a good year.

In a previous article, I also discussed the difficult situation of the Internal Revenue Service. I believe it’s called “Damned if you do and damned if you don’t.” Come down too hard on people and they are chastised by most everyone. Go too easy on people and no one chastises them, but compliance with the tax laws suffers.

Currently, the IRS has a budget of 11.8 billion dollars. That may sound like a lot, but according to a recent study by the national taxpayer advocate’s office, it’s not enough.

The amount of taxpayer fraud and identity theft cases grew by 20% last year alone, and there were over one million returns that could have used additional screening that did not occur because of funding or personnel shortages.

The IRS has made some changes in forms to deal with identity theft cases and to help clean up the screening process.

For taxpayers who have suffered through an identity theft crisis, the IRS is issuing a six-digit Identity Protection PIN that the taxpayer must put on the Form 1040 when filing. This will help the IRS to determine if the return being filed is really from the taxpayer or if his/her identity is being hijacked.

You might be thinking that it should be impossible to file a false return using someone else’s identity. Think again. A Florida-based identity theft ring that was recently uncovered specialized in filing false tax returns for people who recently deceased. They created false returns using the deceased taxpayer’s personal information and, subsequently, received millions of dollars of false refunds. Apparently, they were only caught because of dogged forensic work by the personal representatives of some of the deceased taxpayers and the IRS itself.

Think about this. There are millions of taxpayers who are not required to file a tax return. In reality, each of these taxpayers is a potential target of having someone file a false tax return without their consent, claiming a substantial refund. Since the real taxpayer isn’t filing a return, the IRS has nothing to judge the fake one against. The refund will probably be issued.

This is a potential nationwide fiscal nightmare waiting to happen. I’m not happy about suggesting this, but perhaps the IRS does need some added funding, especially if they can demonstrate they have a plan and the personnel to keep this nightmare from happening.

The issue of taxpayers hiding money in foreign accounts has also been troublesome. To help find out exactly which taxpayers have money in foreign accounts, all taxpayers must answer a two-part question.

In the first part, the taxpayer must answer “yes” or “no” to whether the taxpayer has a financial interest in a foreign account. The second part asks whether or not the taxpayer is required to file Form TD F 90-22.1. This form is required for taxpayers who have $10,000 or more in a foreign account.

Mitt Romney will be answering “yes” to both of these questions. For the most part, when people are asked a direct question on a tax return, they tend to give an honest answer. These are direct questions and require direct answers. Most people are going to give honest answers and the IRS won’t have to do any additional screening.

To also help in the screening process with the end goal of finding unreported income, the Schedule C, Sole Proprietor form, the Schedule F, Farm Income form, and Schedule E, Rental Income form, now require taxpayers to answer two new questions:

A. Did the taxpayer make any payments in 2011 that would require the filing of Forms 1099? Yes or No.

B. If A is yes, did the taxpayer file all required Forms 1099? Yes or No.

Now those are direct questions that also require direct answers. The IRS just became more pro-active in attempting to find taxpayers who are working as subcontractors for other taxpayers.

Schedule C, F and E taxpayers are required to file 1099s for subcontractors who are paid $600 or more during the year. This ups the ante on compliance because it is forcing the taxpayer filing the Schedule C, F or E to declare under the penalties of perjury that they have filed the required forms or are not required to file the forms at all.

As you can see, compliance is becoming more important. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.