Saturday, March 24, 2012

"Where the Money Is" or "Selective Enforcement"--the IRS Occupies the 0.1% with Audits

  • IRS Audits Hyper-High Earners

  • The Internal Revenue Service has significantly increased the rate of audits on very high income taxpayers with the audit rate on taxpayers with incomes over $10 million going from 18% to almost 30%, the audit rate on incomes of $5-10 million increasing from 12% to slightly over 20% and the rate on $1-5 million incomes going from 7% to 12% (the overall audit rate barely exceeds 1%). Commissioner Doug Shulman warned that additional budget "cuts" would limit the ability of the IRS to perform audits and may cause the "tax gap" to increase. Additional statistics reported: The IRS collected $2.4 trillion in taxes; five out of six individual returns showed refunds; over 230 million returns were processed and over 400 million taxpayers received assitance in person or on the phone during the past fiscal year (Oct '10 to Sept '11).

    This data leaves me with mixed emotions. On the one hand, so long as horizontal equity is maintained on tax audits (e.g. Warren Buffett and Rush Limbaugh effectively have the same likelihood of being audited) there IS a statistical case to be made for auditing high-income returns at a high rate for both revenue collection and adminstrative reasons--an audit of an errant or overly aggressive return of a taxpayer with $6 million in AGI likely will produce a similar (and possibly higher given progressive tax rates) level of revenue to auditing 100 similarly-flawed returns of taxpayers with AGI of $60,000 at a sizably reduced administrative cost. On the other hand, a nearly 3000% difference in the audit rate of taxpayers over $10,000,000 vs. average taxpayers feels like the class envy so clearly brought to the forefront with last summer's Occupy Wall Street (and other places) movement. Is it just me or do parts of the American public believe that you can kill geese laying golden eggs and still have golden omelets a week later?

    Tuesday, March 13, 2012

    Not Loving Tax Preparer Regulation: A Court Challenge by CPA Firms

  • Three Small Preparers Sue IRS Over Tax Preparer Licensing

  • A Biography of the Plantiffs

  • The libertarian Institute for Justice and three small tax preparer businesses brought suit against the Internal Revenue Service in regards to the new regulations for paid tax preparers. The three, based in Illinois, Wisconsin and New Jersey, argue that the new regulations exceed the authority of the IRS, are applied unevenly (based on the exemptions for CPAs and attorneys) and are unduly hard on small tax preparers. To the best of my knowledge, the IRS has yet to respond.

    I, while lukewarm at best on the new regulations, do not expect this suit to be successful. This looks like the equivalent of one of the taxpayer lawsuits about paying taxes with gold, perhaps with some technical merit but no practical chance to succeed. The one difference--the gold issue has been adjudicated so frequently in the past to become frivolous now, while at least this suit bring a new application of issues to the court.

    Saturday, March 10, 2012

    First Round of TPIN Competency Exams Are Now Graded by the IRS

  • IRS Returns First Set of Competency Exam Results

  • The IRS recently began notifying tax preparers who took the Tax Return Preparer Competency Exam as to whether they passed or failed. Preparers who passed the exam (which required 350 out of a possible 500 points (presumably 70%) must also pass a tax compliance check (which should be completed within a month of notification of passing the competency exam); if all goes smoothly, the preparer will receive a certificate from the IRS which designates them as a Registered Tax Preparer. Tax preparers which have not passed the Competency Exam or separately the Enrolled Agent/Special Enrollment Examination, CPA Exam or bar exam (for attorneys) will not be legally able to prepare tax returns for fee after December 2013.

    Unless you were one of the paid tax preparers who took this round of the competency exam, the most useful information out of this IRS announcement is the 70% pass criterion. If you plan to take the competency exam, make sure to remember that the exam will NOT be available during the first two weeks of March.

    Tuesday, March 06, 2012

    Dan Adams of AIM: Maximizing Customer Satisfaction May Lead to More Success than Maximizing Shareholder Value

  • A New Management Strategy from AIM

  • Since the mid-1970s, maximization of shareholder value (based on a Jensen and Meckling journal article) has generally been sancrosanct as a motto for top executives, MBA programs and other business commentators. Dan Adams, President of AIM, likes value maximumization as a RESULT but not nearly as much as a goal. Instead, Adams recommends emphasizing understanding and satisfying customer desires. Adams provides six reasons for his perspective: investors (especially short-term investors such as mutual funds) are more concerned with your apparent health than your actual health; an emphasis on share price maximization lends itself to excessive consideration of short-term vs. long-term issues; share value maximization has NOT worked during the last 35 years (this one can be questioned--the 35 years prior to 1976 were arguably among the greatest growth years in U.S. history), tangible goals are more likely to be met (Adams considers share maximization somewhat etherial) and employees need something inspiring to work for (perhaps Adams' strongest argument) and finally, understanding customer needs and desires can make you more successful not only with a specific customer but with other customers as well.

    At minimum, Adams has written a thought-provoking article well worthy of management accountants, managers, financial specialists and a host of business academics. At most, Adams may have started a paradigm-shift in management which could lead to a better understanding of how to succeed in business. Already in value-added analysis, we look for activities which make a product or service more beneficial to users--why not extend this to the overall management of a business or organization?

    Canada: "You Can Have NHL Teams--We Would Rather Have Corporate HQs"

  • Corporations Headed North?

  • An Obama administration proposal to reduce the maximum corporate rate to 28% while eliminating numerous deductions left Dr. Nathan Oeistreich of San Diego State University unimpressed. Said Dr. Oeistreich: We are cutting the rate to 28% when Canada cut its rate to 15% and we are even considering raising oil taxes. Why should we not be surprised if corporations chose Hamilton over Buffalo, Windsor over Detroit, Winnipeg over Minneapolis or Vancover over Seattle? Roger Russell of Accounting Today also criticizes the increased taxation of dividends and the continued efforts to extract taxes from foreign subsidiaries of U.S. companies; though he is willing to back off somewhat if the Obama administration is putting the proposal out simply for political reasons.

    Tax proposals during a Presidential election year deservedly are generally considered with a "grain of salt;" there have been so many past promises regarding taxes during campaigns that never reached fruition (many times, thankfully the case) that it is hard to take any proposal seriously except as an attention-getter (example: Herman Cain's "9-9-9"). Oeistreich and Russell DO make one valid point: too much tax legislation ignores second-order consequences.

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