Beware of Public Sector Ethics Breakdown

A survey by the Ethics Resource Center finds that governments are at considerable risk for major ethics violations. ERC President Patricia Harned said that the "next Enron" could be a government with state and local governments being at greatest risk. While federal workers were a little more impressed with compliance programs compared to state and local governments (30% vs about 15%) but all levels of government found serious issues with the ethical climate, only 7-10% were confident in the ethical climate at any level. Additionally, over half of employees at all levels claimed to have seen misconduct in the past year. The most commonly mentioned specific problems were abusive behavior, lying to employees and self-serving behavior.

So many times when politicans or interest groups call for increased governmental involvement in affairs, there is the assumption that the government will act more nobly and with less self-interest than private businesses or organizations. The ERC survey, at minimum, calls such assumptions into question. Additionally, states and local governments, especially, need to revisit their ethics guidelines and policies and all levels of government need to do a better job of ethical monitoring.

"Toga, Toga, Toga": Baucus Parties with the AARP

Senate Finance Committee Chair has proposed a tax stimulus package of $156 billion. Compared to the Bush proposal, the Baucus proposal reduces individual tax rebates to $500 (or $1000 MFJ) and extends this rebate to Social Security recipients. In addition, certain unemployment benefits are extended, especially in states with unemployment rates exceeding 6%.

About the only good thing I can say about the Baucus plan is that it is not significantly more costly to tax revenues than the Bush plan. Inclusion of Social Security recipients, who in many cases have received far more than what they contributed (difficult to do in today's work force unless you live to 95 or so), is pure pandering to elderly voters.

Monstrous SEC Penalty for Option Backdating

Former Monster CEO Andrew McKelvey agreed to pay over $250,000 in fines to the Securities and Exchange Commission and has been barred from serving as a director or executive of a publicly-traded company. McKelvey and two other executives authorized the backdating of stock options to four Monster employees (NOT including McKelvey) without properly recording compensation expense. As a result, Monster overstated pretax income by about $340 million in the aggregate during the 1997-2005 period.

Hard to argue the SEC decision, but what a cost without personal benefit. Moral: make sure that you know and do on FASB and PCAOB standards.

A Second Look at a Tax Rebate

In view of my Monday post on the temporary stimulus plan of G.W. Bush:

[1] Though no one directly challenged me on this, I did notice that a number of tax practitioners did not like the 2001 tax rebate for administrative reasons. I should have addressed this issue in the initial post--any rebate needs to done in a way that it does not confuse taxpayers on their 2007 tax returns. After all, the late-December AMT patch will provide plenty of confusion by itself.

[2] A legitimate challenge to the rebate--do we even need this? One could argue that the Fed rate cut is likely to increase the money supply enough to handle any slowdown in the economy from the housing tempest and that the stimulus may lead to increased inflation in 2009. Politically, however, the Republicans would be dead in the 2008 elections if they even considered ignoring the discomfort in the economy, so politics yet again likely will trump economics.

[3] Given, based on [2] above, that a temporary stimulus package is at least politically necessary, I continue to prefer a tax rebate to either a tax rate cut or a spending package because I believe that it is easier to end a rebate than a rate cut and MUCH easier to end a tax cut than a spending program.

Bush Reprises a Tax Rebate--and the Democrats Weigh In

McCain also calls for tax cut--this one in corporate rates and R&D

President Bush has called for a tax rebate as a way to stimulate the economy with fears of recession growing (in a related development, the Fed cut the fed funds rate by 3/4% yesterday to in effect increase the money supply). Although specifics have not yet been announced; a possible amount would be up to $800 for single taxpayers and $1,600 for married filing jointly. The Treasury estimates the "tax expenditure" to be about $140-$150 billion. At a South Carolina debate, the three significant remaining candidates (Clinton, Edwards and Obama) called the Bush proposal unsatisfactory and proposed that at least part of the tax rebate come from payroll taxes to increase the number of low-income Americans who would benefit.

The Bush plan of a tax rebate is better than either a rate cut or a spending program for temporary stimulus--both of these alternatives are likely to become institutionalized and thus continue after their stimulus value had passed. Treasury Secretary Paulson and Bush are probably right to make the cut significant--more for perception than reality, BUT perceptions on recessions frequently become self-fulfilling. At the same time, the Democratic proposal of a payroll tax cut has some merit if consumer spending is the goal. My proposal: a rebate of the first $700/$1400 of total income tax and a up to $100 ($160 if self-employed) rebate per employee on Social Security taxes. On the payroll rebate: self-employed should get a potentially greater rebate because they pay a higher rate. I would also set the rate of rebate at 5%/8% self-employed (for mathematical convenience), start the rebate at FICA earnings of $5000 (the EIC is designed to cover self-employment taxes on very-low income employees--see the single rates) and would recapture the rebate at 50% on earnings over the Social Security ceiling (which I believe that the Wandering Tax Pro listed at $102,400 last week).

Returning

Sorry for lack of posts this week; I had a mini-crisis at school. Did notice in passing several items of interest: the Wesley Snipes trial (other tax bloggers can cover this better than me), a Wall Street Journal (referenced through Instapundit which compared tax plans of Republican presidential candidates and the G. W. Bush tax rebate stimulus plan. I will try to write more on the WSJ article or the rebate proposal later.

SOX Cost Cheaper than Expected for Small Companies?

Lord and Benoit estimated that Section 404 compliance costs for smaller publicly-traded companies are slightly less than $80,000, about $15,000 less than expected. The management assessment portion (404a) is about $54,000 on average with an estimated range of $15,000 to over $150,000 while the internal control evaluation (404b) has an estimated average of just under $25,000 with an estimated range of about $7,500 to $85,000. SOX Director Bob Benoit, a partner of Lord and Benoit and a COSO Task Force Member, expects that the comparative low cost will surprise some Members of Congress.

It is almost always good news when something costs less than expected. Nevertheless, it is important that decision-making benefits are occuring and that they reasonably could exceed even this lesser cost.

Fewer CPA Firm Choices for Big Business Audits: Better Quality, Excessive Fees or Countervailing Power?

A GAO survey found that 82% of the larger publicly-traded companies believed that they were effectively limited to three or fewer firms and 60% thought that competition in the audit provision market was insufficient. At the same time, smaller publicly-traded firms said that they were satisfied with audit choice options and larger businesses agreed that the quality of audits had improved. Finally, some smaller (probably more like medium to medium-large) CPA firms were attempting to compete in the large client market, but big business felt that these firms lacked sufficient personnel and specialized technical knowledge to handle these audits.

At least three points of view are possible in looking at the audit provision market for large businesses: [1] use of the big CPA firm is necessary to achieve a "good" enough audit in today's regulatory climate, [2] oligopolistic tendencies by the "Big Three" or "Big Four" are leading to excessive audit fees and "overauditing" as a safeguard against legal liability, [3] as the largest businesses grew, CPA firms became more concentrated as a means of being able to match the "market power" of the Exxons, Walmarts, etc. of business. This last explanation is somewhat like John Kenneth Galbreith's explanation for the growth of the federal government and labor unions not long after the "trusts" of the late 18th century. The points of view are not necessarily mutually exclusive; one could accept more than one of the three premises above.

Read My Lips. No New Tax Screwups.

NOTE: Congratulations to Kay Bell of Don't Mess with Taxes and Carnival of Taxes fame. I was unaware that she wrote for "Yahoo Finance."

Kay Bell provides ten common mistakes which could slow down return processing (and potentially a refund) or cause unexpected taxes and penalties later. The mistakes listed are:

[1] Math errors--including transpositions, omissions and arithmetic errors. Software helps but does NOT eliminate math errors.
[2] Wrong ID (SSN)numbers--you, dependents and 1099s. DON'T try to sneak in your dog.
[3] Ignoring IRS material--use those labels and envelopes where possible.
[4] Choosing an inappropriate form--easiest is not necessarily best.
[5] Omitting IRS supporting forms--you need to include the W-2; also, there is an order for those supporting forms (2106, 4797, etc.) and schedules (A, C, D, etc.) shown at the top right of the supporting form or schedule.
[6] Omitting unearned income--EASY for the IRS to catch and you may have to pay penalties as well as the extra tax.
[7] Using the wrong tax calculation--yes, the tax table is available to $100,000, but the capital gains tax calculation on Schedule D may save you money.
[8] Cash flow--don't staple a check for payment, get the details right on the face of the check or the direct deposit info for refund.
[9] Sign your return--can delay refund or even create a failure to file penalty.
[10] Overlooking the due date--it really does happen--you don't want the penalties and hassle.

Kay's list of simple but common errors is definitely worth attention.

Off-topic: Can the Republicans Stop the "Killer Bs" (Barack and Bill) from taking the White House?

The Iowa caucus delivered a resounding boost of momentum to Senator Barack Obama's campaign with Hillary Clinton and John Edwards virtually tied for second. Chris Dodd and Joe Biden left the Democratic race, while Edwards, Dennis Kucinich and Bill Richardson need a solid NH showing tonight (Edwards probably needs close to 20%; Kucinich at least 5% and Richardson at least 8%) to stay viable. John Mc Cain is a slight Granite State favorite--but the Republican picture will not be clear until at least February, very possibly longer.

While acknowledging that Hillary Clinton remains a formidable candidate with tremendous financial and personnel resources, "Obama fever" appears to be sweeping the country. Barring a Clinton turnaround by Super Tuesday early next month, I believe that the Illinois senator will become the first serious African-American presidential candidate based on his tremendous popularity among young people and independents.

In my opinion, an excellent vice-presidential selection for Obama would be Bill Richardson--Richardson would energize the Hispanic vote, provide foreign policy and federal-state relations experience and is generally considered a fairly moderate Democrat. Barring a major international crisis, assasination attempt, etc. between now and November, a Obama-Richardson candidacy would virtually force the Republican candidate to achieve MASSIVE majorities (probably in excess of 65%) amongst white males over 30 (there is no present reason to believe that Obama-Richardson would be less attractive to women than Kerry-Edwards in 2004) and evangelical Christians. Though I lean Republican, I see no reason to expect this--in fact, I would at least have to look at who the Republican nominate and see the Democratic platform was--Obama/Richardson is not a ticket to reject out of hand.

UPDATE (1/9): Hillary indeed proved to be formidable yesterday. I still think that Obama gets the nomination IF no major foreign crises occur between now and August. Richardson will be smart tomorrow to pledge his support "to the Democratic nominee."

Government Procurement: More Hassles Ahead?

Larry Allen, leader of the government contractor association Coalition for Government Procurement, warned small-business executives that unfavorable legislation could soon be in the offing for those wanting to sell to the federal government. He pointed to legislation written by House Government Reform Chairman Henry Waxman (Accountability in Contracting Act) which passed the House and which was highly regulatory in nature. An alternative bill by Senator Susan Collins (R-ME) is considered more palatable by contractors; nevertheless, some provisions in the Collins bill are still considered bothersome.

In times of deficits and elections, procurement procedures are going to be an easy way to score political points. With taxpayer monies at stake, a reasonable compromise must be found between protecting taxpayers from waste and making selling to the federal government worth the hassle.

IRS Sides with Taxpayers vs. Tax Preparers on Privacy

The Internal Revenue Service has passed final regulations on tax preparer disclosure of taxpayer information to third parties; in addition, the IRS issued proposed regulations on marketing of tax refund anticipation loans. For third party disclosure to be permissable, tax preparers are required to get explicit permission and may not repeat requests for such permission. Additionally, the request for permission may not be in fine print and taxpayers may limit the time that permission is granted. The proposed refund loan marketing restrictions are based on an IRS assertion that loan-making give tax preparers an incentive to take overly aggressive tax positions.

Although I cringe at new government regulations, the content of the regulations is reasonable. Maybe I am too "old school," but it seems to me that tax preparation should be a service of good faith, not a retail opportunity.

Don't Count on Receiving a Tax Refund before February

The AMT patch was passed in late December (and technically is still unsigned) and the IRS is still revising forms. CCH analyst Mark Luscombe questions whether the IRS will be able to start tax processing by the standard January 14 date. If processing is delayed, even early-bird electronic filers with relatively simple returns almost certainly will have their tax refund delayed. Treasury Secretary Henry Paulson acknowledges that delays in tax return processing and refund distribution are likely.

While President Bush is not totally blameless here, Congress must bear primary responsibility for the AMT delay, as initial insistence on "taxgo" delayed the AMT patch from a November date. Both Republicans and Democrats in Congress need to find a long-term solution versus year-to-year patches as well.

Welcome to 2008!

Happy New Year to all readers. Substantive posting probably begins tomorrow. Be aware that some tax posters will be going into tax season hiatus soon.