My grandson Andrew loves to watch the Disney classic "Toy Story." I really enjoy watching it with him and re-listening to this Randy Newman song. Recently some strange things have gone on with IRS that are a concern to me. On the other hand, some good things are happening with IRS and that is worth a comment also.
IRS likes to audit smaller returns using computer technology. That is certainly nothing new. However, these applications are becoming more and more prolific and error prone. The computer model is implicitly based on the presumption that the information returns IRS tries to match up to tax returns are accurately prepared. If the W-2s, 1099s, etc. have been prepared contrary to the way IRS expects them to be prepared, the computer will not be able to match them up with your tax return and you will receive an annoying letter most likely accompanied by an assessment that will make you crap your pants.
I recently had a small corporate client with a problem such as this. The IRS computers had adjusted the return and disallowed a special deduction we had claimed. The adjustment wiped out a claim for refund we had claimed. Not only did IRS fail to notify the taxpayer of the adjustment, the IRS had calculated a small balance due on the return and inexplicably marked the account paid in full and that was that. We will be working on this to try to correct and I don't know what to really expect yet.
The good news is that there is a way to monitor what IRS is doing with your account so that situations like this can be investigated and corrected without hours of time on the telephone lines. IRS has a service for professionals it calls "E-services." If your tax professional is not registered with E-services, they should be. By filing a Power of Attorney your tax representative can access your account through E-services and see the status of your account, a transcript of your return, and all wage and income returns (W-2s, 1099s, K-1s, etc.) filed by payors reporting income to IRS under your SSN.
E-services is a great tool for the tax preparer to have in the toolbox because you can find out things without speaking directly with anyone at IRS. You are communicating directly with the computer that causes the problems, so to speak.
This recommendation may be helpful to those who sell on E-Bay. Why, you ask and rightly so. The answer is in new requirements this year that have been imposed on PSEs (Payment Settlement Entities) such as Pay-Pal. The PSEs will be required to report to IRS the total of all payments settled for each customer for the year. So if you sell on E-Bay and have Pay-Pal settle your payments, beware. IRS will know how much you sold on E-Bay. If the total looks like you may be running a business, you should expect IRS to try to match up this total with your tax return.
But it doesn't stop there. There are many such PSEs other than Pay-Pal. Anyone who processes credit card payments and settles the payments for their customers will be required to report them. This might include banks, savings and loans, and other merchant services providers. Most any business will likely have some of this.
The payments will be reported on Form 1099-K. The instructions for this form are not very helpful and so there will be many who try to fill this thing out without having a clue about what they are supposed to be reporting.
I'm really not looking forward to next summer. That's when the IRS computers will be sending out letters.
Saturday, October 1, 2011
Sunday, February 27, 2011
Why the Fair Tax Won't Work
Lots of people are convinced that we need to migrate from the income/payroll-based tax system that we have today to a consumption-based tax system. The incentives to do so make some sense in that the consumption-based tax would collect taxes from individuals who otherwise are not paying taxes now. The consumption-based tax is therefore considered a regressive system because tax rates would go down with an increase in the tax base. The tax base would expand to include individuals who make too little money to pay income taxes and it would also include individuals who are otherwise getting some big tax breaks. Everybody has to eat, so everybody would pay tax on money they spend to survive.
The consumption-based system could be designed to be a "fair" tax, but so could the one we have now. I think the name is a complete misnomer in that respect. But I believe the concept is flawed in another way. The income/payroll based system has small and large businesses collecting taxes from their employees and remitting it to the government. There is a reporting system for both income (1099s) and for wages paid (W-2s). If an employer fails to provide an employee with a W-2, the employee can't file his taxes and get his refund and he will squall to IRS. It happens. Likewise if a sole proprietor fails to file his taxes, the 1099s will catch up with him and the IRS will come calling. The system we have is sort of designed to audit itself. IRS would rather audit through computers tracking these forms than calling people to come in with their shoeboxes of receipts.
So if we transition to a consumption-based tax system, small and large businesses will be collecting taxes not from the employees, but from the customers. We have some of that going on with state sales tax and some excise taxes, but not on the scale we would need with a consumption tax. Small businesses can get into financial trouble and fail to remit the sales tax. There is no reporting system to alert the government when this is happening. The government may find that a business has stopped sending the sales tax reports and payments in, or that the amounts have fallen off so that they don't appear to be sufficient, but then the government needs to send out an auditor to check it out. They really don't have a way to know for sure if there is anything broken without sending out a warm body.
As an aside, you may be assured that with the downturn in the economy and state coffers getting low, there is a lot more sales tax audit activity. We are hearing about some aggressive tactics on the part of state governments to replace lost revenues through audit assessment.
My point is that the automated audit system employed by IRS would need to be replaced by a great number of sales tax auditors and tax collectors. And these would be the old style IRS tax collectors with guns on their hips. I don't picture this as being the type of system that fair tax advocates have in mind.
The consumption-based system could be designed to be a "fair" tax, but so could the one we have now. I think the name is a complete misnomer in that respect. But I believe the concept is flawed in another way. The income/payroll based system has small and large businesses collecting taxes from their employees and remitting it to the government. There is a reporting system for both income (1099s) and for wages paid (W-2s). If an employer fails to provide an employee with a W-2, the employee can't file his taxes and get his refund and he will squall to IRS. It happens. Likewise if a sole proprietor fails to file his taxes, the 1099s will catch up with him and the IRS will come calling. The system we have is sort of designed to audit itself. IRS would rather audit through computers tracking these forms than calling people to come in with their shoeboxes of receipts.
So if we transition to a consumption-based tax system, small and large businesses will be collecting taxes not from the employees, but from the customers. We have some of that going on with state sales tax and some excise taxes, but not on the scale we would need with a consumption tax. Small businesses can get into financial trouble and fail to remit the sales tax. There is no reporting system to alert the government when this is happening. The government may find that a business has stopped sending the sales tax reports and payments in, or that the amounts have fallen off so that they don't appear to be sufficient, but then the government needs to send out an auditor to check it out. They really don't have a way to know for sure if there is anything broken without sending out a warm body.
As an aside, you may be assured that with the downturn in the economy and state coffers getting low, there is a lot more sales tax audit activity. We are hearing about some aggressive tactics on the part of state governments to replace lost revenues through audit assessment.
My point is that the automated audit system employed by IRS would need to be replaced by a great number of sales tax auditors and tax collectors. And these would be the old style IRS tax collectors with guns on their hips. I don't picture this as being the type of system that fair tax advocates have in mind.
Friday, February 18, 2011
How to get a good credit score.
Point One. Oddly enough, to have a good credit score, you have to use credit. If you live a cash only existence, you will not even generate a credit score at all. And without a credit score, you can't get credit. Catch 22 is already taken, this is Catch 44. But this doesn't mean you have to owe anybody. You just have to use credit accounts.
To illustrate, my parents shopped at Leggett for many, many years. They had a Leggett account based on my father's credit. My mother could charge on the account, but it was based on his credit, she didn't work outside the home. When my father passed, the Leggett account was closed by the company. My mother did not have a credit score. She was pissed, and still is.
So you have to have credit accounts with somebody. You can have a Sears card or a JC Penney, but you should also have one of the major credit cards. You wouldn't have to use it much and you could pay it off monthly, just have it and use it responsibly.
Point Two. Don't have too many accounts. This is sort of common sense, but the reason may not be. The more accounts you have, the more inquiries there are into your credit rating. And the more inquiries there are into your credit rating, the lower your score.
Point Three. Pay on time and pay more than the minimum payment. If you want to pay over time, pay at least double the minimum payment and have a plan on how long it will take you to pay the balance off. If the plan is longer than two to three years, you should scale back.
Point Four. Don't use more than 70% of your available credit for each account. This is not really a magic number, but I have heard it quoted as a measure that is used in credit analysis. I have also found others who suggest using even less of your available credit, even down to 10%. The more of your available credit you use, the more irresponsible you appear.
Point Five. Monitor your credit report. There can be bad information in it. You can ask for corrections to be made. You may have to be assertive about it. Know your rights. (The Clash were on this years ago.) If there is negative information in your credit report that is over seven years old, you can have it removed.
If one of your accounts reports a late payment and you can prove it was timely, you can have this corrected. My thinking is that this would be rare, but it is possible.
I have known cases where the same information was duplicated in a credit report. If your mortgage is reported twice, that is a major problem, but it is among the easiest to resolve. Guano happens.
To illustrate, my parents shopped at Leggett for many, many years. They had a Leggett account based on my father's credit. My mother could charge on the account, but it was based on his credit, she didn't work outside the home. When my father passed, the Leggett account was closed by the company. My mother did not have a credit score. She was pissed, and still is.
So you have to have credit accounts with somebody. You can have a Sears card or a JC Penney, but you should also have one of the major credit cards. You wouldn't have to use it much and you could pay it off monthly, just have it and use it responsibly.
Point Two. Don't have too many accounts. This is sort of common sense, but the reason may not be. The more accounts you have, the more inquiries there are into your credit rating. And the more inquiries there are into your credit rating, the lower your score.
Point Three. Pay on time and pay more than the minimum payment. If you want to pay over time, pay at least double the minimum payment and have a plan on how long it will take you to pay the balance off. If the plan is longer than two to three years, you should scale back.
Point Four. Don't use more than 70% of your available credit for each account. This is not really a magic number, but I have heard it quoted as a measure that is used in credit analysis. I have also found others who suggest using even less of your available credit, even down to 10%. The more of your available credit you use, the more irresponsible you appear.
Point Five. Monitor your credit report. There can be bad information in it. You can ask for corrections to be made. You may have to be assertive about it. Know your rights. (The Clash were on this years ago.) If there is negative information in your credit report that is over seven years old, you can have it removed.
If one of your accounts reports a late payment and you can prove it was timely, you can have this corrected. My thinking is that this would be rare, but it is possible.
I have known cases where the same information was duplicated in a credit report. If your mortgage is reported twice, that is a major problem, but it is among the easiest to resolve. Guano happens.
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