The Inspector General for the IRS recently released a report on help that the IRS provides to taxpayers. In particular, the IG sent in undercover auditors to check out the info that IRS staff was providing. Unfortunately most of us already knew what the results were going to be without reading the report.
Unknown to most people, the IRS will actually help you file your "simple" tax return, in theory for free. In the recent audit, the IG tried two different methods of free filing: using humans at the IRS service centers, and the free filing software provided by IRS "partners".
The results were hilarious. Using humans at the IRS service centers generated 75% correct returns.
Of the 25% incorrect, the results were all over the place, from an overpayment of $1,808, to an underpayment of $5,000.
Then the "auditors" tried creating returns with the free software provided by the various tax software companies. In this case only 57 percent of the returns were correct, with once again the results being an underpayment of a little over $1,000 to overpayments of over $5,000.
Something to keep in mind about these results. These were relatively simple returns, just think how much of a mess would have resulted if the sample returns were more complicated.
The bottom line is the tax code is way too complicated. When even agents of the IRS can not file a proper tax return it is time for Congress to take action.
Wednesday, August 29, 2007
Tuesday, August 14, 2007
Nevada Corps and privacy?
If I just had a dime for each time someone told me how much privacy their Nevada corporation was going to give them, and how they wouldn't have to pay taxes on their corporate income. . .
This might have been true a few years back, but we are now in the information age, the age of the internet. Once an ounce of information has been shared, its available everywhere.
Case in point, corporation tax returns. The sales line used by the Nevada corporation sellers is that since Nevada doesn't have a corporate tax, there is no information shared with the IRS, and ultimately the state where the Nevada corporation owner lives.
What the promoters don't tell you is that every corporation is required to file a tax return with the IRS. Also, the IRS has a program to share information with the various states. So when you file the corporate return for your Nevada corporation with the IRS, the IRS can in turn share that information with your home state.
Think the IRS and your home state are too stupid and lazy to actually do this? Think again. In a recent report created by the IRS for the Joint Committee on Taxation, the IRS reveals that they shared data with various states over 2 billion times, 2,809,446,617 to be exact, in 2006.
What does that mean to you? That means that if you are using a Nevada entity, even though Nevada may not share data with the IRS, the IRS is going to be sharing data with your home state. If you aren't properly reporting the income earned by your Nevada corporation to your home state, chances are you are going to be hearing from your state about the taxes you owe.
2,809,446,617, think about it. The population of the US is roughly 300 million. That means the IRS shared about 10 pieces of information with states for every man, woman, and child who lives here.
There is no privacy anymore.
This might have been true a few years back, but we are now in the information age, the age of the internet. Once an ounce of information has been shared, its available everywhere.
Case in point, corporation tax returns. The sales line used by the Nevada corporation sellers is that since Nevada doesn't have a corporate tax, there is no information shared with the IRS, and ultimately the state where the Nevada corporation owner lives.
What the promoters don't tell you is that every corporation is required to file a tax return with the IRS. Also, the IRS has a program to share information with the various states. So when you file the corporate return for your Nevada corporation with the IRS, the IRS can in turn share that information with your home state.
Think the IRS and your home state are too stupid and lazy to actually do this? Think again. In a recent report created by the IRS for the Joint Committee on Taxation, the IRS reveals that they shared data with various states over 2 billion times, 2,809,446,617 to be exact, in 2006.
What does that mean to you? That means that if you are using a Nevada entity, even though Nevada may not share data with the IRS, the IRS is going to be sharing data with your home state. If you aren't properly reporting the income earned by your Nevada corporation to your home state, chances are you are going to be hearing from your state about the taxes you owe.
2,809,446,617, think about it. The population of the US is roughly 300 million. That means the IRS shared about 10 pieces of information with states for every man, woman, and child who lives here.
There is no privacy anymore.
Monday, August 13, 2007
MLM'ers denied deductions
One of the big challenges facing multi level marketers is getting the respect they deserve. Not only from friends and family, but from the tax court as well.
In years past, the tax court has disallowed deductions claimed by MLM'ers under the theory that they weren't actually engaged in business, and that their activities had a large amount of personal "benefit". Kind of makes you wonder if your job is supposed to always be a dreadful day at the salt mines.
In the case of ROBERT D. AND CAROL A. BERRYMAN,.COMMISSIONER, the Tax Court had a fairly easy decision to make.
The Berryman's claimed losses of $ 49,590, $ 45,114, and $ 67,738 for 2002, 2003, and 2004 tax years. Deductions included cat litter????? Tickets to Oklahoma State games, and Dish TV.
Seriously guys, you can only take deductions for business activities, sure you might be able to write off that hotel room that your family used on your business trip, but cat litter? This brings up the age old phrase about hogs getting slaughtered.
Great point brought up by the court. If you were running losses of $50K+ a year, would a reasonable person continue to run that "business"? Simple answer, no.
Once again, MLMs can be a great opportunity to increase your income and receive some tax advantages at the same time, but you have to treat it like a business.
In years past, the tax court has disallowed deductions claimed by MLM'ers under the theory that they weren't actually engaged in business, and that their activities had a large amount of personal "benefit". Kind of makes you wonder if your job is supposed to always be a dreadful day at the salt mines.
In the case of ROBERT D. AND CAROL A. BERRYMAN,.COMMISSIONER, the Tax Court had a fairly easy decision to make.
The Berryman's claimed losses of $ 49,590, $ 45,114, and $ 67,738 for 2002, 2003, and 2004 tax years. Deductions included cat litter????? Tickets to Oklahoma State games, and Dish TV.
Seriously guys, you can only take deductions for business activities, sure you might be able to write off that hotel room that your family used on your business trip, but cat litter? This brings up the age old phrase about hogs getting slaughtered.
Great point brought up by the court. If you were running losses of $50K+ a year, would a reasonable person continue to run that "business"? Simple answer, no.
Once again, MLMs can be a great opportunity to increase your income and receive some tax advantages at the same time, but you have to treat it like a business.
This officer was no gentleman
It appears that former Auburn University Professor and Army Lt. Col., Loyd Frank Lawing, Jr didn't teach ethics. Then again, if it is true that those who don't, teach, maybe he did.
Mr. Lawing was the chapter advisor for Alpha Tau Omega and get this, "embezzled nearly all the fraternity’s funds" from June of 2002 to July of 2005. The frat must have been an animal house if Mr. Lawing was able to take all their funds over a 2 year period without anyone catching on.
Here's the dept. of Justice release.
http://www.usdoj.gov/usao/alm/Press/lawing_plea.html
Mr. Lawing was the chapter advisor for Alpha Tau Omega and get this, "embezzled nearly all the fraternity’s funds" from June of 2002 to July of 2005. The frat must have been an animal house if Mr. Lawing was able to take all their funds over a 2 year period without anyone catching on.
Here's the dept. of Justice release.
http://www.usdoj.gov/usao/alm/Press/lawing_plea.html
Wednesday, August 1, 2007
Real Estate investing and the Carried Interest Debate
Right now there is a big debate going on about the taxation of "Carried Interest". Evidently Congress thinks that this is going to be a big election issue and thus are trying to exploit it for all the publicity/press/votes they can.
Here is a link to some Congressional hearings on the subject
What is carried interest, and much more importantly, why should you care?
Carried interest is the hedge fund manager's short hand way of saying, compensation in the form of the investment partnership that you help manager.
If the compensation deal is structured correctly, the manager will receive profits distributions that will probably be considered long term capital gains. Thus they are able to drop their tax rate from around 35% (federal only) to 15%. This saves a lot of money if they are receiving millions of dollars of compensation.
Since these hedge fund managers are receiving millions of dollars in compensation, Congress figures they make easy targets and thus are trying to pass laws to tax the hedge funds manager's "carried interests" as ordinary income subject to norma tax brackets.
The problem here for RE investors is that while the fancy phrase of carried interest applies to big time hedge fund managers, many real estate investors do the exact same thing, but without the fancy title. In typical deals, the RE investor will find the deal, bring on a private investor to fund the deal, and split the profits 50/50.
Presumably the profits will be long term capital gains and thus the RE investor only a 15% tax on the profits.
If in fact the legislation passes, those profits will now be subject to taxes at the normal tax brackets.
Bottom line, ignorance isn't just bliss, its expensive.
Here is a link to some Congressional hearings on the subject
What is carried interest, and much more importantly, why should you care?
Carried interest is the hedge fund manager's short hand way of saying, compensation in the form of the investment partnership that you help manager.
If the compensation deal is structured correctly, the manager will receive profits distributions that will probably be considered long term capital gains. Thus they are able to drop their tax rate from around 35% (federal only) to 15%. This saves a lot of money if they are receiving millions of dollars of compensation.
Since these hedge fund managers are receiving millions of dollars in compensation, Congress figures they make easy targets and thus are trying to pass laws to tax the hedge funds manager's "carried interests" as ordinary income subject to norma tax brackets.
The problem here for RE investors is that while the fancy phrase of carried interest applies to big time hedge fund managers, many real estate investors do the exact same thing, but without the fancy title. In typical deals, the RE investor will find the deal, bring on a private investor to fund the deal, and split the profits 50/50.
Presumably the profits will be long term capital gains and thus the RE investor only a 15% tax on the profits.
If in fact the legislation passes, those profits will now be subject to taxes at the normal tax brackets.
Bottom line, ignorance isn't just bliss, its expensive.
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