What went wrong with the IRS?

The American system of taxation is a complex undertaking. It is so complex it relies on the willing cooperation of the population and the willing assistance of tax professionals. With an estimated 85 million taxpayers paying federal income taxes and an equal number filing only to receive welfare payments, without the willing participation of everyone, the system would soon crumble.

The managing partner of a fairly large regional firm once told me that the IRS relies on the accounting profession to keep people on the straight and narrow. That seemed a novel idea at the time, but it’s perfectly obvious. They can’t audit every return and they can’t put everyone in jail. They can’t even handle Obamacare.

It is the accounting profession that holds the system together.

But the system is showing signs of decay … of a government that no longer trusts its citizens and a citizenry increasingly concerned it won’t be treated fairly by the IRS and other federal agencies.

For this system to work, people must feel they have competent advocates in their corner protecting them from the unbridled aggression of the IRS. They’re willing to put up with aggression as long as they think there is someone in their corner protecting them. You can argue that the IRS aggression is not unbridled, but in my experience as a tax professional, it is. Anecdotally, I recently ran into an appeals agent who suspected I wasn’t myself because my signatures didn’t match. Whatever that means, but she effectively barred me from representing my clients in a tax audit. Because the contact information of supervisory levels at the IRS isn’t published, it took me several days to get the number of someone above her. Once I found that person, the issue was quickly resolved. Field agents and appeals agents sometimes run wild. I could entertain you all afternoon with stories along these lines.

This kind of aggression has been increasing for several years, not due to Congressional mandate mind you, but due entirely to internal actions of the IRS: either at the agent level or the service level in changing the regs, changing enforcement action, etc., etc.

As the IRS is ramping up their aggression on the one hand, they’re simultaneously threatening professional tax preparers by attempting to make tax professionals part of the enforcement arm of the IRS on the one hand, and attempting to police professionals for incompetence on the other hand. This makes professionals very concerned about the penalties and sanctions the IRS could levy against them for actions appropriately is the responsibility of the client. Penalties can be severe, including losing your right to practice before the IRS or going to jail. What this is effectively doing is making tax professionals afraid to undertake a vigorous defense of their clients in the event of tax controversy. Some professionals have completely bailed on this issue. This is an ugly spiral that is feeding on itself and is not likely to end well.

Now I am one who thinks that policing professionals was not a bad idea. I cheered the concept when it was first disclosed because there has always been a lot of incompetence and shoddiness in the profession. But it seems to be getting worse rather than improving. Policing actually made the profession less competent. Why? … because today tax professionals are less likely to understand the constitutional underpinnings of the tax system and are therefore are less likely to take substantive stands for their clients.

The fundamental aspect of taxation is that you can only be taxed on profits. You are constitutionally protected from government attempts to tax you for receipts that are not profits. For instance if you buy something for $17 and sell it for $5, you can’t be taxed on the $5. This concept can be traced from the 16th amendment to the Supreme Court case Glenshaw Glass to section 162 of the internal revenue code. As long as a deduction is ordinary and necessary in the pursuit of profits and meets the requirements of economic substance and profit motive, it’s deductible. And whether it’s deductible or not is not decided by the tax code or the IRS, it’s decided by you. In fact the tax code doesn’t detail what is deductible and what isn’t. Depending on this formula, the exact same thing could be deductible for some taxpayers and not deductible for other taxpayers.

This seems to be getting lost in the process. I have had to push cases all the way to court to get fair treatment for some of my clients. I will say that, in a limited number of cases I got fair treatment for my clients at lower levels. But I used to say, to find a reasonable person at the IRS you had to push it up to appeals. Now I am saying more and more, that sanity now resides at the courts. For how long, who knows?

The result, and I can guess the intended result is, tax professionals are less likely to take legitimate deductions when they know they may have to explain them to the IRS. They toe the company line, as it is, as though they’re working alongside the IRS to increase revenue collections, never even mentioning their new attitude to their clients. Probably because they don’t realize it, but you can bet they’re thinking, “I don’t want to lose my ticket.”

And you can’t blame them.


But this development has certainly made it easier to differentiate my practice from my competitors. If you’re a business owner, this is not a good time to rely on a professional that came to you via relationship marketing. This is a good time to rely on a results based or value based marketer.

We will come back to this subject often on this blog.

This will serve as an appetizer.


Are you Fonda Fonda?

This is great. Hanoi Jane gets 501(c)(3) tax exempt status, people who give her money (who can these idiots be?) get a tax deduction and she probably uses the money to do her nails. The starving children in Africa are still starving, and polar bears are still freezing in the cold temperatures caused by Global Warming. I didn’t mind her brother Peter and his iconic film Easy Rider. I liked her dad Henry. But Jane is just not one of the Fonda’s I’m Fond of.

link here


Unemployment tax … part of the dangerous mundane

Unemployment Tax – part of the dangerous mundane

Just so everyone knows.

Payments to subcontractors can be subject to unemployment tax. Just as if you paid them a W-2.

Businesses are several times more likely to be audited by the employment tax people than by the IRS, and the employment tax auditors are generally smarter because most of them are real people.  If you’re issuing 1099s to businesses, no big deal. If you are making a few pretty small payments and issuing 1099s to individuals, again, no big deal. You’re liable for the tax but they’re more likely to brush it off as incidental.  Besides it isn’t going to break the bank.

But if you are paying a large number of people for their services and issuing them 1099s instead of paychecks, the auditors will assert unemployment tax. They’re so hungry for money, they aren’t real particular about the law.

Just saying …

A client ran into this situation earlier this year and decided not to fight it. I personally think it could be defended relatively easily.  This is not difficult to mount a defense to. But, when things go to court, you never know …  But I don’t make those decisions. You do.

In fact I don’t make any of these decisions. I just think out loud.

Four things I’d like to think out loud about.

  1. If it’s industry practice, it helps a lot.  If your competitors are doing the same thing, it would put you at a competitive disadvantage to pay tax when your competitors aren’t. If you end up in a controversy you have to fight, this is a strong defense as an addendum to everything else you will be using to defend yourself.  This is a very strong issue. Many IRS regulations and court cases have hinged on this particular issue. In fact, when you scan the cases you will see this pop up time and time again. Industry Practice.
  2. If you make payments directly to corporations (i.e., Bill Jones Operating Company, Inc.) it helps because you don’t have to issue 1099s to corporations. One of the targets of one of these audits is 1099s.
  3. All these corporate or LLC businesses you’re paying have business tax deductions.  Mileage, supplies, whatever. This is another very strong defense because, the tax is supposed to be on payments for labor (personal services). If the company has any deductions at all, then the entire payment is obviously not for labor.  Part of it is for the business’ expenses.
  4. This is a practical consideration. The account to which you’re coding these payments can either attract or escape the attention of the auditors . You should all know that accounting is an art, not a science. There is no “right” account.  If you choose an account that’s realistic that won’t attract the attention of the unemployment auditors, you’ll be better off. You are under no obligation to stick your head in the noose.

Hope this helps.

Pardon any typos. I have a feeling there are some. I’m famous for my typos.

Up For Getting Screwed Again?

Up for Getting Screwed Again?

Got this from a client

This isn’t political, although if you don’t like my politics, you’ll have to learn to stomach them.  In fact, let me take a moment right here to clarify where I stand for those whom this kind of thing is important. Politics is part of my history, I’m sad to say. I ran for Congress once and came in second. I learned a lot during my two year campaign. I learned that neither Republicans nor Democrats have your interests at heart or give a rats a## what you think. Neither side can be trusted. I love the old saying, “To tell when a politician is lying, watch for his lips to move”. As far as I’m concerned, every time they open their mouths, a lie comes out.

Whatever your political leanings you’re probably opposed to paying more taxes to make life easier for a big, profitable company that pays millions of dollars in bonuses to it’s senior executives. The company I’m talking about today is the beloved J.P. Morgan, probably not near and dear to your hearts.

J.P. Morgan was recently penalized many billions by the U.S. government (that’s billions with a B) for mortgage lending abuses.  This is not unlike two thieves calling each other names, but let’s save that for another post. Today, lets concentrate on the ludicrousness here (real word).

Remember back to 2008 when the mortgage lending debacle hit the news, tore our economy to shreds and dug a hole we are still trying to crawl out of?  You may also remember that bailing out the banks with trillions of dollars wasn’t exactly a popular move. Certainly it wasn’t with me. They crammed that down our throats. You may also remember that a lot of that money was paid out in bonuses to the very managers who guided their companies to break the law and get their companies into the trouble they were in. In other words, they were getting bonuses for screwing up. And your money paid them. But they did it. And so did the government. So we have to live with it.

Now they’ve been penalized for the illegal acts they performed in the process. Normally, penalties and fines are not tax deductible. Also apparently, according to the link below, some people and some companies, particularly Wall Street Companies, can get away with deducting penalties because the government looks the other way. Which means they are actually screwing you again with the complicity of the government.  (By the way, I’m not claiming that any of that money found it’s way into the bank accounts of politicians, but that would be interesting to know.)

The link below takes you to a petition to make sure J.P. Morgan pays their taxes without being allowed to flaunt the law.

Take a look. Follow your conscience.


The World’s Most Productive Country

Productive countries
The U.S.?

(Graphic and article quoted courtesy of Forbes. Thank you Forbes. The editorializing is my own.)

There are some problems with the image. Hopefully you can see it. But if not, or if it’s not large enough to read, you can find it on Forbes. Follow the second link in the body below. Suffice it to say, it’s an if info-graphic of circles showing the big yellow ball on the middle right that signifies that the U.S.is the most productive country in the world. 


I have to admit, I was surprised.  Just yesterday I read that Norway, for the fifth year in a row, has the highest standard of living. So I thought … Norway. Nope. It’s us. Although we work fewer hours than many, we have the largest GDP.

 Of course, you may remember the old saying, figures don’t lie, but liars can figure. The numbers these rankings rest on are dependent on government published numbers, and we all know that no government nor any scientist can be trusted with the truth. Never forget East Anglia.

Guess who’s second. The Netherlands. Wow. Does that make any sense? Not to me. I’ve never thought of the Netherlands as an industrial powerhouse. They’re probably including the sex trade. Isn’t that interesting? The Netherlands owes it’s standing in the world community to their hard laboring prostitutes? Could be. I wonder if the Netherlands will drop back into the pack now that the legislature over there has outlawed selling day passes for $100 guilders or whatever currency they trade in over there. Maybe it’s the Euro. Whatever it is, that was considered a real bargain, and a real boon to their tourist industry. People flew in from all over the world. If and when you staggered out of the last brothel at the end of your 24 hours, they presumably poured you on a plane and flew you home.

As you can see, economic statistics are very complex … very hard to understand.  Don’t even try.

From Forbes …

Human resources people worry a lot about worker productivity and “engagement,” a.k.a. happiness. (That’s why the Netherlands legislature took its action against day passes. Not that the prostitutes complained, but the legislature was worried about putting too much strain on the workforce.)

Back to Forbes. The circles, representing countries, are larger where workers are happier. The horizontal axis shows productivity (GDP per hour worked); the vertical, hours worked per year. The U.S. is happiest, with 30% of its workforce engaged, while its GDP per hour is a high $63. Outside the U.S., two of the happiest nations–Colombia and Brazil–are not all that productive. Perhaps they’re preoccupied with free sex.

The French and the Dutch put in short workdays and boast high GDP per hour. That sounds like the magic formula for happiness, yet fewer than 10% of them are happy. Now that is hard to understand. With a booming sex trade and short work days and the free time to presumably enjoy the burgeoning sex trade, the Netherlands are unhappy.

Of course the French are just crazy. But that raises interesting questions about the Netherlands. Are happy workers the most productive? (Click on happy workers if you can’t see the info-graphic.) Are people the most happy when they’re working? See? This can get confusing.

I don’t know if this tells us more about the state of the world’s economy, or more about how difficult it is to satisfy a Dutchman.


For the uninitiates in the audience, the Netherlands and the Dutch are synonymous.  Bear with me. I invent my own words as I go. Grab a pencil to mark up your thesaurus. I used to strike out every third word. You have no idea how much more lively my writing becomes when I do that.