How to Spot a Shady Tax Preparer

According to the IRS, about 60 percent of taxpayers use tax professionals each year. While most are honest and well-trained, this is an area ripe for fraud if you choose poorly. After all, getting your taxes done by someone else means handing over a lot of personal information, your Social Security number (the Holy Grail for thieves), and those of your spouse and dependents, possibly your birth date, and your bank account information. The IRS wants you to remember, even if you hire someone to do your taxes, you bear the responsibility for what is in your return.

Until recently, anyone could hang out a shingle calling themselves a tax/financial professional, with zero experience or qualifications.  That’s why the IRS now requires tax preparers to get an IRS-issued Preparer Tax Identification Number (PTIN).  This helps, but where thieves smell money, there will always be unscrupulous people who slither past the rules. No determined thief is going to let a little thing like an IRS requirement stop him or her from scamming you.

But it’s not too difficult nowadays to spot a shady tax preparer and avoid them altogether.

Here are three red flags the IRS wants you to watch for:

  1. Is the preparer willing to provide you with his or her PTIN?
  2. Is the preparer willing to sign your return and provide his/her PTIN?
  3. Will the preparer ask you to sign an incomplete return? The IRS warns, a reputable preparer will never do this.

If the answers to any of these questions are unsatisfactory, don’t walk away. Run!

Others Points to Watch For

Ask the preparer about his or her qualifications.

  • Where did you get your training, and have you stayed up with the tax changes through continuing education?
  • How long have you been doing this?
  • What professional groups do you belong to?

Get a full list of the fees you will pay.

  • A reputable preparer will be upfront about fees.  You need to be upfront too, by explaining the extent of your return. If you have multiple small businesses, special credits which require extra forms, or a fistful of W-2s, say so.
  • Your fee should never be a percentage of your expected refund.  That encourages unscrupulous preparers to fraudulently jack up your refund. The preparer may initiate the fraud, but again, you are ultimately responsible and will be left holding the bag.
  • What is the expected time frame till your return is done?
  • Will the preparer review the completed return with you?
  • Will he/she be available for questions after the tax season?
  • If you are due a refund, will it be issued in your name?  Beware a preparer who says the refund will be issued to him/her, and you will be paid in cash. There’s no way for you to know if the refund was actually much larger than what you are paid.  If it’s a cash-only set up, say no and find another preparer.

Your prospective tax preparer needs to pass your inspection. If you feel uncomfortable during the initial meeting, trust your instincts and go elsewhere. You can do a simple background check of a preparer by contacting your local Better Business Bureau. If you have doubts, check the standing of a CPA by contacting the state board of accountancy. For attorneys, contact your state bar association, and for Enrolled Agents, check with the IRS Office of Enrollment.

You can read more about how to spot a shady tax preparer by checking with the IRS. If you feel you have stumbled upon a bad apple tax preparer, you can report the individual with the IRS by clicking here.

“If you feel that you have been a victim of a bad tax preparer or you feel that the IRS may flag a return you filed for inaccuracies, you may want to contact a professional to review your situation,” says David King, President of Optima Tax Relief. “Remember, the IRS is much more accommodating to individuals/businesses that voluntarily amend a past return as opposed to them amending it themselves.”

Photo: Commercial Appeal

How Hollywood Saves Billions on Production Costs through Tax Credits

You’ve heard the saying, it’s all about location, location, location. But for filmmakers these days, the shooting location is more about state tax breaks than scenery or terrain. Nearly 40 states get film credits from the fed, which they can use to lure the entertainment industry to within their borders. Some say this is a bad practice, while others say it is just sharing the wealth.

Seeing Stars

The use of film credits has skyrocketed, from $2 million a decade ago, to $1.5 billion in 2012, according to the non-profit Tax Foundation. Sharing the wealth is a good thing, it seems, though many entertainment industry trade workers in California disagree. With the majority of the biggest movies now shot elsewhere, many are finding it harder to make a living.

In fourteen of the states receiving film credits, those credits can be sold, giving rise to a new endeavor, that of brokering the credits. Brokers sell the credits to wealthy individuals looking for tax saving, and who may have no connection whatsoever to the movie industry. The buyers pay a discount price for the credits, and end up with state tax savings, often around 15%. Filmmakers get their money faster than if they waited for the related tax refunds, which is frequently the deciding factor in whether a movie gets made at all.

“Film producers, who often cannot use the credit themselves, particularly if their projects show losses, can form limited partnerships with wealthy investors who have passive income to shelter. The partnerships allow filmmakers to trade the credits for the investors’ cash.” (LA Times)

Money generated by the credits may cover one-third of the movie production costs and may add several weeks of shooting time that would otherwise be unaffordable. Actor/director Ben Affleck told the Los Angeles Times, part of his new movie “Live by Night” will be filmed in Georgia, a popular state based on the film credit availability. “It comes down to the fact that you have X amount of money to make your movie in a business where the margins are really thin.”

Another director told the Times it’s no longer about which location has the right scenery. Instead, they “recreate” the scenery they want, and pursue the best tax credits.

An interesting side note is, Affleck and his friend and fellow director Matt Damon, are both big supporters of the film tax credits which reduce taxes. Yet they have both on record saying their taxes should be raised.

How Do Film Credits Work?

Here’s an example culled from the LA Times.

A wealthy Georgia oncologist purchases a film credit voucher which represents a credit against his state tax bill. The face value of the voucher is $92,840 and the purchase price is $81,699 (88 cents/dollar). The difference is his tax savings, of $11,141. Out of the total paid, the broker takes a commission of $1,857, and the rest of the purchase price goes to the filmmaker. The filmmaker gets funding immediately, rather than waiting for a state tax refund. The broker gets a cut. And the oncologist saves taxes. Win/win/win.

Yet, it’s not all rosy. Here are some points made by critics of film credit practices:

  • Hollywood trade workers, like electricians, carpenters, caterers, and other behind the scene workers say they are losing their livelihood. The top grossing films shot in California have dropped 60% in 15 years.
  • Some say the credits don’t produce long- term benefits for the communities where filming occurs.
  • Others say the main beneficiaries are those not connected with the film industries.
  • Still others say this practice allows corporations to shelter income from something unrelated to their activities.

All valid criticisms, but since the deals are only made with the cooperation of movie making insiders, the entertainment industry may just be cannibalizing itself in an effort to stay alive.

One Tax Credit Expires, Hollywood Scrambles

A real-time example of Hollywood cannibalizing itself to stay alive is the recent news that, at the end of 2013, one of the many tax credits (worth millions) Hollywood uses is expiring. In an industry that depends heavily on packaged federal and state film credits, to see even just one expire is causing a bit of a panic.

Though not recommended, as long as a filmmaker has a day’s worth of filming with dialogue completed this year, along with a script, budget, and investor documents, they can still use the credit next year. This means that many are rushing to meet the deadline. “Some financial planners who package the deals have pushed producers … to start shooting in hopes of keeping their projects eligible for the write-off even after it passes from the scene” This way, even if the people filmed aren’t actually in the final cut, and even if the movie flops at the box office, investors still make money. (LA Times)

So how does this work? Why do federal and state governments offer these lucrative film tax credits to keep the movie biz afloat, and in turn, keep the wealthy investors’ pockets padded? Maybe to keep the filming on US soil, or to keep the art form alive, or just because it’s good for business.

Or maybe because, without these credits, the industry would fold.

Photo: DigitalTrends

5 Questions to Ask Your Tax Adviser Now

The end of another year is rolling up fast. With the year-end comes your last opportunities to minimize your 2013 tax bill and make changes to your benefit plans for 2014. Here are some questions, posed by Forbes magazine, to ask your financial and tax adviser while there is still time.

1. Should you defer income or accelerate it in 2013? What about deductions?

The answer depends on whether you expect to be in a higher tax bracket next year. Tax rates stayed the same for 2014, but tax brackets are altered. Take a look at the new tax brackets and see if your situation has changed.

Higher bracket next year: Consider accelerating your income, pulling it into 2013, to minimize your current year tax.

Lower bracket next year: You may want to defer income if possible to pay less taxes in 2014. If you are age 70 ½ or older, you could save taxes by taking only the minimum required IRA distribution in 2013, and wait till January to take more. You can also prepay 2014 deductions – like property tax and estimated state income tax – and claim them in 2013 while your tax bracket is higher.

2. Should you recognize gains and losses now?

If you have gains on investments and you’re in a lower tax bracket this year than next, this might be an advantageous time to sell. If you are in the 10% or 15% tax bracket, you’ll pay zero capital gains tax.

If you are in a higher tax bracket this year, taking your unrealized losses now should reduce your 2013 tax bill.

3. Should you convert a traditional IRA to a Roth IRA?

Roth IRAs require you to pay tax on your contributions now, but distributions are tax-free. If your tax bracket in 2013 is lower, and you can afford it, pay the tax now. That will set you up for tax-free retirement funds later. Just remember, if you convert to a Roth IRA you’ll need to pay all the tax on those tax-deferred contributions you’ve made. So ask your tax adviser to run the numbers before you decide.

4. What about year-end charitable giving?

You already know you can lower your tax bill by making charitable gifts before January. However, if you expect a higher tax bracket next year, the donation will benefit you more in 2014. Consider holding your donation till January.

If you are at least 70 ½ years old , you can donate up to $100,000 directly from your IRA to a charity. This doesn’t give you a charitable deduction on your taxes, but it will allow you to avoid the required minimum distribution, up to $100,000. Note: This tax provision may disappear after 2013 unless Congress acts to renew it.

5. Should you change your benefit plans?

If you have a flexible spending account, now might be a good time to increase your contributions to the max, which is $2,500. Chances are with rising deductibles, co-pays and premiums expected for all of us, you’ll need the financial help of paying for these expenses with pre-tax dollars. Also make full use of your childcare flexible spending account (maximum of $5,000) to save some tax money and evenly spread out the cost of childcare.

A good tax/financial adviser can steer you in the right direction when preparing for 2014. Contact Optima Tax Relief for help with these important matters before it’s too late.

One more thing: as the year ends, fraud ramps up. You may get unwelcome offers from “financial advisers” who promise “guaranteed” “risk free” or “secret” investment deals. If that happens, don’t walk away… run! To ensure you are dealing with a legitimate adviser, use FINRA’s Broker Check.

Photo: Dave Dugdale

Tax Tip: Hire Veterans for the Work Opportunity Tax Credit

Get a Hefty Tax Credit if You Act Fast

What business can’t use a tax credit? As the year comes to a close, smart business-people take advantage of the waning days of December to minimize their tax bills for the year. If you are planning to hire soon and you choose a qualified veteran to fill that position, you could scoop up a tax credit worth up to $9,600. It’s called the federal Work Opportunity Tax Credit (WOTC). There is a catch, however. Unless Congress acts to renew this credit, you will lose the chance to take advantage of it when the calendar flips to 2014.

Here’s what you need to know about this valuable credit

The WOTC was originally part of the American Taxpayer Relief Act of 2012. The intention was to stimulate employers to hire from two groups: veterans and disadvantaged individuals. Later the law was extended through 2013 (though only for veterans). So far, Congress has not moved to extend the credit into 2014 and beyond, but they still may.

  • Employers who operate taxable businesses and hire qualified veterans before January 2014 may be eligible for a credit of up to $9,600 per eligible veteran.
  • Tax-exempt businesses can also get the credit, but it is limited to $6,240.
  • The credit can be carried back or carried forward.
  • The amount of the credit depends on certain factors, including: the veteran’s wages on your payroll during the year, how many hours the vet works for you, and how long he or she was unemployed before being hired by you.
  • Employers who hire disabled veterans may qualify for the maximum credit.

How do you know if the veteran you are considering is qualified?

Generally the individual must have served for at least 180 days on active duty. An exception may apply if the vetsustains a service-related injury and is therefore released early. The 180 day period does not include basic training.

If this hurdle is met, you must:

Start by filling out Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This form is a questionnaire, which you submit to your state employment security agency. It requires input from both you and the veteran.

Ideally, you should submit it before you hire the individual. Regardless, it must be sent within 28 days of the hire date. If the request is rejected, the state agency must tell you why it was rejected. Then, you have the right to appeal.

Assuming your request is accepted, when you file your business tax return for the year you will also fill out and submit Form 5884, Work Opportunity Credit. You can also submit it with an amended return if you prefer.

There are five basic categories of qualified veterans, which partially determine the amount of the credit available. The maximum credit in each category depends on the number of hours worked.
  1. Veterans who are members of families receiving “supplemental nutrition assistance,” subject to certain time limits. Maximum credit: $2,400.
  2. Veterans unemployed for 4 weeks to 6 months. Maximum credit: $2,400.
  3. Disabled veterans hired within one year after discharge or release from active duty. Maximum credit: $4,800.
  4. Veterans unemployed for at least six months, aggregate, in the year before hiring. Maximum credit: $5,600.
  5. Disabled veterans unemployed for at least six months, aggregate, in the year before hiring. Maximum credit: $9,600.
You can learn more about the Work Opportunity Tax Credit by visiting the U.S. Department of Labor WOTC Website.

Boxer Fights Tax Wars on Two Shores

Manny Pacquiao battles BIR and IRS

Filipino boxing phenom Manny Pacquiao is hard to beat in the ring. Named the “fighter of the decade” in 2010 he’s a force to be reckoned with. Now, he can’t seem to catch a break. He’s in the ring with two formidable foes, the Bureau of Internal Revenue (BIR)in the Philippines as well as the IRS. The BIR says he owes 2.2 billion pesos (equivalent to $50.2 million) for income earned in 2008 and 2009.

Paquiao says that money was earned in bouts that occurred in the United States, and maintains he paid the taxes he owed on those amounts, to the IRS, as required. Thanks to a tax agreement between the two countries, taxpayers are not subject to double taxation, which is Pacquiao’s defense.

Tax commissioner Kim Henares, however, says that in two years, the boxer has provided no documentation, proving that he made U.S. payments. She told ABS-CBN television news, “2.2 billion (pesos) is what Pacquiao owes now because of surcharges and interest.” She added, even if he did pay the taxes due in the United States, he would owe more to the Philippines because their tax rate was higher at the time.

While he works to clear up the mess, his accounts in the Philippines have been frozen and a lien has been placed on his property worth millions, leaving him unable to pay his staff. If he does not pay the taxes owed, said Henares, the authorities could take the payments by stripping away his assets.

Now to the IRS

Pacquiao’s promoter, Bob Arum and his attorney, Tranquil Salvador maintain the U.S. taxes was paid and that proof is on the way. But in recent days, the IRS states he failed to pay income tax on his earnings from 11 fights in 2006 to 2010, leaving a tax debt of $18,313,668.79.

Pacquiao’s representatives say certified documents are on the way, which prove his U.S. tax liabilities were paid (at least for 2008 and 2009, the years in question by Filipino authorities). But they say they will not give the proof to the BIR, preferring to fight the charges in court.

To fight back against the tax authorities he went on a public campaign on all of the major TV networks in the Philippines, accusing the BIR of harassment. “I’m not a criminal or a thief. I am not hiding anything. I will face my problems as they come.”

Avoiding the U.S.?

As Pacquiao fights this battle on two fronts, the only thing that is clear is that he needs serious legal help to untangle the tax mess. Meanwhile, Arum has told reporters his client may never fight in the U.S. again because the tax burden is too heavy. Whatever he earns in the United States, 39.6 percent comes off the top. And depending on the state where the fight is held, another tax bite might be taken.

“Manny can go back to Las Vegas and make $25 million, but how much of it will he end up with — $15 million?” His client can fight in China for a smaller purse, $20 million, and keep all of it.” Arum added, “He’d have to be a lunatic” to fight in the United States and let his winnings disappear that way.

Tax matters can be complex even for those without foreign income issues. Toss in foreign tax agreements and the issues grow sticky pretty fast. Individuals with who have foreign income issues are advised to seek tax representation from professionals with vast experience untangling the tax web.

New Flexible Spending Account (FSA) Carryover Rules for 2013

Flexible spending accounts (FSAs), often called a flex plans, are not new, but they are improved.

Participants use them to set aside money pre-tax, to pay for out-of- pocket medical costs such as co-pays and other expenses not covered by insurance. Employers like FSAs because they don’t have to pay employment tax on the amounts employees use to fund their accounts. It’s a win/win, but despite the name, one thing these accounts have not always been is flexible. A few years ago the IRS added an optional “grace period” to make FSAs better, and now they’ve improved them again, by allowing a carryover.

For now, let’s start with the basics.

What is an FSA?

A flexible spending account is an employer-sponsored pre-tax (or “tax free”) account that you can use to set aside money to cover eligible health and/or dependent care expenses.

At the beginning of the plan year, January 1st, your employer will ask how much you’d like to contribute to the account. Total any expenses that you predict won’t be covered by your insurance, like the braces your child will need or on-going rehabilitation treatment. This amount is then taken out of your paycheck in equal installments each pay period, and put into a special account by your employer. Although there are limits to how much you can set aside, and up until now, any excess leftover after the plan year was forfeited, the benefits of having an FSA money are numerous.

Benefits of an FSA

An FSA is included in your employer’s benefits package for a reason–it reduces your income taxes. The contributions you make to your flex plan are deducted from your pay before any Federal, State, or Social Security taxes are calculated, and are never reported to the IRS. In other words, you’re reducing your taxable income while at the same time increasing your spendable income. Making the most of your FSA could save you hundreds of dollars in taxes per year.

A basic example of this would be if, say, you were in the 15% tax bracket. You know you’ll spend $1000 on eligible health care expenses, so you set it aside in a flex account for the year. Your “take home” pay is $1000. If you opt out of putting it into an FSA, but still spend that $1000, you’ll have paid $150 in taxes to the IRS. Your “take home” pay is then only $850.

Without an FSA, you’d still pay the amount not covered by your insurance, but you’d be using money from your paycheck after taxes have already been taken out. The chart below, from FSA Feds, gives a real example of the tax benefits of an FSA.

FSA Chart

“This example illustrates tax savings based on 25% Federal and 7.65% FICA taxes, resulting in a 32.65% discount on eligible expenses paid through an FSA. State and local taxes are not included. Actual savings will vary based on your individual tax situation, and on whether you are covered under Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS). You may wish to consult a tax professional for more information on the tax implications of an FSA.” –

What Can Be Deducted

If it’s considered an eligible deductible expense, and isn’t reimbursed by your current insurance, it can be reimbursed through a Flexible Spending Account. Some deductible expenses for a health care FSA (HSA) include:

  • Fees in excess of reasonable and customary amounts allowed by your insurance
  • Non-elective cosmetic surgery
  • Stop-smoking programs and any prescribed drugs to help with nicotine withdrawal
  • Acupuncture treatments
  • Inpatient treatment at a center for alcohol or drug addiction
  • False teeth, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf
  • Co-payments on covered expenses
  • Deductibles

With a dependent care FSA, you can save money for expenses used to care for dependents while you’re at work, like day care costs for children under the age of 13, or adult care programs for senior citizens that live with you. Also, some adoption costs can be included as expenses.

The IRS lists the ins and outs of the various FSAs and HSAs here, but take note: If you’re single and don’t expect to incur any health costs besides a few $25 copays, an FSA may not be worth it.

New FSA Rules for 2013

So, FSAs allow employees who participate to pay for medical costs with pre-tax savings. Employees decide how much to put into the accounts through payroll deductions. As they incur an eligible expenses, they are reimbursed from the funds in their FSAs. The maximum a participant can put into an account is $2,500, although employers can set lower limits.

There has been one potential drawback with FSAs. Originally, they were inflexible, as in, use-it-or-lose-it. Any funds left in an individual’s account at year end were forfeited.

This restriction caused some problems.

  • Many employees were leery of participating, for fear of losing their hard earned money.
  • Some participated, but underfunded their FSAs to avoid forfeiting money if they failed to spend it.
  • Or if they got to the end of the year with an unspent balance, they would go out and make purchases they wouldn’t ordinarily make, like an extra pair of prescription sunglasses, just to use up the money.

The “Grace Period”

A few years ago, a grace period was added to FSAs to encourage greater participation. The grace period is 2 and ½ months, after the end of the year during which employees could spend out the balance of their FSA funds. A grace period is not automatic, and must be elected by the employer. This feature improved FSAs, but the newest addition should prove even better.

The Carryover

Now FSA participants who do not spend out their fund balances by the end of the year, may carry over up to $500 into the following year. So an employee who ends the year with $400 in his or her FSA and has chosen to set aside $2,000 into the new year’s plan will have $2,400 to spend in the new year.

Again, the carryover is not automatic. An employer must make the election to allow the carryover. The upper limit to carryover is $500, but employers may choose to allow a smaller carryover.

Note: A plan cannot allow both the carryover and the grace period. Employers must choose one or the other. So, if you have a plan in place which currently allows a grace period, you must elect to end the grace period in order to choose the carryover.

When does this kick in? It can begin now for employers who amend their plans to allow it. Normally such an election would have to be made before a plan year starts, but because this law is new, employers can choose it for 2013 and going forward.

For more information on the tax savings of an FSA, contact Optima Tax Relief today.

This article was co-written by Teresa Ambord and Brenda Harjala, staff writers for Optima Tax Relief.

Photos: New Mexico State UniversityFSAFeds

The Mexican Soda Tax: Will It Help Combat Obesity, or Fail?

Another attempt to legislate what we eat and drink? This may sound familiar. This time though, the fat tax is being levied in Mexico, where a former official says they are “a country of malnourished fatsos.”Mexico was recently named the most obese nation in the world. Mexicans are also the largest consumer of sugary soft drinks, which may be a contributing factor. Enter the Mexican Soda Tax.

Mexican Soda Tax

Can government really legislate healthy eating? It’s been tried before, including a recent attempt by New York mayor, Michael Bloomberg. You probably remember he tried to ban the sale of larger sodas in New York City. A court blocked his ban. Now, he’s funding anti-obesity ads in Mexico through Bloomberg Philanthropies.

It’s not unusual for governments to push behavior modification through the tax code. Our government has promoted some behavior (such as home ownership, charity) and discouraged others (like alcohol and tobacco use) through tax. As hated as taxes are, at least a tax is less intrusive than a ban.

What will be taxed in Mexico?

The bill adds 5% tax on some foods, but as yet there is no specific list. Instead the law says,“food that is high in calories such as fried foods… sweets, foods made mainly with cereal, among others…” The bill also adds a tax on sodas, equal to about 7.5 cents per liter. This applies to sodas having more than 275 calories per 100 grams.

Has it worked before?

The Wall Street Journal says Mexico is on the “cutting edge of government efforts to cut obesity rates. “But will it work? In general, people don’t take kindly to being told what to eat and drink. Take a look at what happened in Denmark.

In 2011, Denmark became the first country to impose a tax on fattening foods. A year later, they were the first to abolish the law. quotes the Danish tax ministry as saying “The fat tax and extension of the chocolate tax, the so-called sugar tax, has been criticized for increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk. At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes traveling across the border to make purchases.”

What does this mean for America?

More than you might think. Many large Mexican and foreign food companies operate here in America, and, at least for a time, might see a drop in sales, therefore jobs, thanks to the tax. If the tax does succeed in bringing down consumption of fattening foods and drinks over the long term, it may embolden people who want to impose their values on the public, here in the United States.

Chances are, the tax in Mexico will curb consumption for awhile, but if history is a predictor, it won’t change much over time, say critics of the measure. Raul Picard, a top official of Mexico’s industrial chamber predicts it will lead to “a proliferation of contraband goods of questionable origin, possibly posing a threat to public health.” Academics in Mexico say the tax will hurt the poor the most, because they spend a greater percentage of their incomes on cheap, unhealthy but affordable, food.

Photo: International Business Times (Creative Commons)

Is Your Honest Face an Asset or a Liability at Tax Time?

Did you ever see the 90s sitcom,“ Taxi?” The lead taxi driver was Alex, a middle- aged, average looking guy. Then there was Woody, a much younger driver whose character was a country boy, naïve and fresh-faced. In one episode Alex and Woody needed to win the trust of a man and woman they had not met. So they went to the couple’s apartment and knocked.

The door opened, just enough for the couple to see only Alex, as Woody waited to the side. Based on nothing but Alex’s looks, they immediately distrusted him and refused to listen to his plea. Just as they were about to shut the door in his face. Alex realized what he needed to do. He said, “Wait… look at him!” he said, stepping aside so they could see Woody. They took one look at Woody’s innocent face and said, “oh, okay, come on in.”

It was a great scene. One study indicates that – unlike Alex who knew he didn’t appear trustworthy — most of us think we have honest faces and can use them to get away with fudging the facts a little, like about income tax.

What Does Your Face Tell People about You?

The study mentioned above was done in Germany and called “Dubious Versus Trustworthy Faces – What Difference Does it Make for Tax Compliance?” The players had various tax scenarios, and were told that half of them would be selected for an audit. Some were told the selection would be random. Others were told the auditors would choose their audit targets by looking at photos of the players’ faces.

In the end, those who believed their photos would be used had a much higher tendency to fudge the truth, try to hide income and exaggerate expenses, etc. The researchers concluded, these people may have believed their “honest faces” would inspire trust in the auditors which would let the players get away with a bit of dishonesty.

Who knows if that’s really true or not? But Forbes magazine says while American taxpayers overall report 99% of their W-2 income (which of course, is information the IRS already has), they often report only about 45% of income that is not verifiable, like side jobs for cash. If we’re counting on our honest faces to get us through a dreaded audit, we need to rethink that.

Most audit targets are selected by computer and by the last year of an audit. And of those, most are cleared up by correspondence. That is a good thing, unless you were hoping you could bat your eyelashes and blink your baby blues at the auditor to squeak by. Rest assured, if you should have a face-to-face audit, an honest face might hurt more than help.

Hire a Professional Face

Tax professionals urge clients not to represent themselves, for many of the reasons stated above. People who think they appear honest might try bend the truth just a little, expecting to be taken at their word. In the end, they might accidentally volunteer too much information and open up a whole new can of worms.

When dealing with the IRS, no matter how honest and trustworthy you think you loo, don’t go without a pro.

Photo: Wikimedia

A Daylight Saving Time Story: The Lazy Bones Tax

It’s that time again… daylight saving time that is. Or better still, it is the end of daylight saving time (DST) which means we get an extra hour of sleep. One thing most of us agree on, except for that one extra hour of sleep in the fall, DST is just annoying and confuses our body clocks for weeks. There are even websites where you can go to register your aggravation with the whole process.

So whose big idea was it? It depends on who you ask. But here’s what turned up.

The Daylight Saving Time Story

Way back in Ben Franklin’s day, he was living in France and wrote a letter—mind you, it was tongue in cheek— to a friend who was editor of a major French publication. Franklin joked about the possibility of changing the clocks in the spring, which of course leads to changing them back in the fall. The idea was to make people get up and take advantage of daylight hours to increase productivity.

It seems Franklin noticed the French liked to sleep away the mornings, getting up to go to work when they pleased. One morning he was rudely awakened at 6am by some outside noise. But, he said, he was glad of it, otherwise he would’ve slept away many hours of daylight.

Something must be done, he opined to his friend. So he wrote up a satirical analysis, calculating how much more productive people would be if only they would get out of bed and work while the sun was shining, rather than making due with candlelight.

He took it a step farther and added punishments and requirements for those who failed to get their buns out of bed and get to work. He even went so far as to propose a tax on people who shutter their windows to keep out the sun. He also wanted church bells or cannons to sound every day at sunrise, and guards to patrol after sundown to keep all non- emergency traffic off the streets.

The rationale behind all this, if people changed their sleeping patterns they would conserve their own energy and in general feel better and get more done.  Taylor Bigler (entertainment editor for the says old Ben is probably up there in heaven having a hearty laugh at us Americans, who took his little joke seriously and still change our clocks, twice a year as though we really could “save daylight.”

A Joke that Stuck

Yeah, Franklin meant it as a joke. But hey, a lot of things our government has proposed in its history do sound like jokes. This is especially true when it comes to changing our behavior by taxing it or slapping a fine on it.  Like taxing cigarettes to deter teens, taxing single snacks but not taxing the same thing in a multi-pack, and fining TV commercials for being louder than the programs they interrupt. The list of ridiculous taxes is endless.

Actually, when you think of it, there’s little danger of a lazy bones tax in the United States. Because the lazy bones tax was meant to make people more productive, and we all know, government taxes productivity out of existence.

Photo: Earls37a

Should E-Cigarettes Be Taxed?

You’ve heard the saying, “if it ain’t broke, don’t fix it.” But the Food and Drug Administration and many in Congress may be doing just that to the e-cigarette industry. So far it has been pretty successful, so… here’s a surprise… the FDA wants to regulate it, and many in Congress – sensing a potential new revenue pot –want to tax it like regular cigarettes are.

What exactly are e-cigarettes?

They vary by brand, but they look like cigarettes, do not burn tobacco, and deliver nicotine and flavor as a vapor. Starter kits usually cost somewhere between $20 to $200. E-cigarette manufacturers say they are essentially harmless, especially when compared to the toxins in real cigarettes. Of course, that is what you’d expect them to say. Because of this claim, they believe their industry should at least get friendlier government handling than the tobacco industry has gotten.

The FDA on the other hand says not enough is known about the effects on human health. The Centers for Disease Control is concerned because the use among middle and high school students is rapidly rising. Although they cannot point to actual harm as yet, they worry the use of e-cigarettes might create a stepping stone for young users to graduate to real cigarettes.

Growing Industry

Meanwhile, the e-cigarette industry is growing at phenomenal speed with sales doubling each year. The expectation is that sales could reach $2 billion by the end of 2013.

The health questions do need to be answered, though. One FDA study cited by the Washington Post said e-cigarettes release carcinogens and toxic chemicals. However the study does concede these replacements still might be safer than regular cigarettes, which release tar, carbon monoxide, hydrogen cyanide and other poisons. E-cigarettes do none of that.

Who Wants Regulation?

Attorneys general from about 40 states are asking the FDA to ask them to regulate the marketing of e-cigarettes to kids. Opponents of smoking accuse the makers of e-cigarettes of glamorizing smoking, which draws young people in. Plus, there is the question of where people will be allowed to smoke e-cigarettes. Will users be regulated to the far corners of parking lots like regular smokers now are?

Actually, some makers of e-cigarettes (many of whom also produce regular cigarettes) are okay with some degree of regulation. Why? Because like most successful endeavors, a lot of me-too producers rise up, selling cheaper, but lower quality copies. Yet overall, e-cigarette makers are lobbying heavily to hold off the regulators. For example, the makers of Newport cigarettes bought Lorillard tobacco in April of this year, for $135 million. Last year, they spent $2.35 million lobbying against regulation, and are will likely spend more this year.

The FDA hoped to tackle these questions this month, but of course the government shutdown has slowed their efforts.

Love or Hate It

Congress is a jumble of people, some who never met a tax they didn’t love and others who never met a tax they didn’t fight. But the overarching feeling we get from Congress is, if an industry — like e-cigarettes– is profitable, regulate and tax it till it isn’t.

Photo: planetc1