The Office of the National Taxpayer Advocate has released its 2007 report to Congress, outlining several recommendations, including:
- Create a process to update Congress on the impact of last-minute tax changes (referring in part to the late-year AMT patch, which has delayed the production of AMT deduction forms until February)
- Enact a taxpayer "bill of rights" outlining rights and obligations of U.S. taxpayers
- Authorize the National Taxpayer Advocate "to compensate taxpayers where the action or inaction of the IRS has caused excessive expense or undue burden to the taxpayer...." Such payments would be nominal (a maximum of $1,000) and tax-free.
- Reduce compliance burdens on small charities
- Repeal a rule that prohibits the IRS from referring taxpayers to Low Income Taxpayer Clinics to assist in cases
Click here to read the full report, which includes the top thirty problems encountered by taxpayers, and a full list of legislative recommendations.
The National Taxpayer Advocate is currently Nina Olson, who was honored with the Tax Foundation Public Sector Distinguished Service Award this past November (picture here). See also this Tax Foundation Podcast with Nina Olson, discussing what can be done to reduce tax compliance burdens.
Maryland Governor Martin O'Malley and legislative leaders are opposing the repeal of the 6 percent computer services tax which will take effect July 1. We've previously written about the tax, covering how it was added at the last minute in a back room, the problem of singling out for tax one industry that could very easily leave the state, and how confusing enforcement will be:
Nine states tax computer services, but litigation has arisen in several states over the difficulty of separating "computer services" from other types of services. The Maryland version covers web design, facilities management, custom computer programming, data center support, systems integration, installation, and maintenance, but not Internet access, computer training, and data entry.
That doesn't shed too much light on the difference between services that will pay a 6 percent tax and services that will pay no tax, and there's also ambiguity over whether Maryland residents hiring an out-of-state company will pay the tax or not.
State officials didn't give much hope for repeal, according to the Baltimore Sun:
"I'm hoping it will not get repealed," [Senate President Thomas V. Mike] Miller said at a live taping in Annapolis of WYPR host Marc Steiner's radio show. "I'm going to work hard to make sure it's not."
O'Malley said he wouldn't be pushing for the repeal, and House Speaker Michael Busch said he wouldn't support one without consensus on an alternative source of revenue -- likely from budget cuts, new taxes, or a combination of the two.
Not coincidentally, Governor O'Malley's approval rating has plunged to 35 percent (President Bush is at 27 percent among Marylanders), with a majority of respondents opposing the $1.3 billion in tax increases, most of which took effect January 1. Some sample responses:
"I'm a blue-collar worker, man. I can't afford all those taxes," said Franklin Gregg, 57, a lifelong Baltimore resident who works at an auto parts retailer and said he used to approve of O'Malley's work as mayor. Now, he said, he is thinking about leaving the state.[...]
Marguerite Bowman, 60, a registered Democrat and retired teaching assistant who lives on Kent Island in Queen Anne's County, said she buys appliances and furniture in Delaware to save on sales tax and has even considered moving there to avoid high income taxes.
"I have thought about it several times," she said. "If I'm buying an appliance, I got news for you, I'm going to Delaware. If I'm buying furniture, I'm going to Delaware. People do it all the time out here, and we do it because we don't have to pay the sales tax."[...]
Elizabeth Moran, 64, a retired office manager in the Rodgers Forge neighborhood of Baltimore County and a self-identified "conservative Democrat," said she worried that the expansion of the sales tax to computer services presaged a slippery slope leading to the taxation of more services.
"My husband is an accountant, and this is eventually going to filter down to him, too," Moran said. "When you have to pass taxes on to your clients, they don't like it."
We analyzed how the tax increases would harm Maryland's competitive position here.
We've written before on Virginia's "abusive driver fees" and "civil remedial fees," and why they are just a tax on traffic offenses. Because the revenue goes to general state spending, they are properly called a "tax" and not "fees." We've covered how this is an example of politicians targeting easy revenue sources for punitive taxes, the public outcry over the huge assessments, and finally, the pending court challenges.
After defending the surcharges for months, Virginia Governor Tim Kaine (D) may be ready to give up on them. At the end of yesterday's State of the State Address, he said he would sign a repeal:
The imposition of higher fees on drivers who commit serious traffic offenses was designed to both increase transportation revenue and encourage safer driving habits.
After six months, neither goal has come to pass. The abusive driver fees will not generate the amount of revenue we had hoped. And neither the number of traffic tickets issued nor the tragic number of deaths on Virginia highways last year indicate that the fees have improved highway safety.
Virginia citizens in huge numbers have told us that the fees should be repealed. We should listen to them. I hope that this session, you will send to my desk a bill fully repealing the abusive driver fees.
If anybody ever wonders why tax reform is so difficult to accomplish, one need look no further than the website of the National Association of Realtors®, which is featuring on the front page a podcast where its president, Dick Gaylord, talks about how "politics is our business." You would think real estate is their business, but then again, the NAR's primary mission appears to be to influence policy in order to get Congress to pass friendly legislation. In a word, the NAR is what economists call a rent-seeker.
It's sad that people believe that more special tax breaks are needed for housing. The Congressional Budget Office has calculated that capital income derived from owner-occupied housing has a -5.1 percent effective tax rate. That's right, a negative tax rate. In other words, the tax code is subsidizing housing.
But the fact that we are over-invested in housing thanks to the tax code leads to a kind of catch-22 in terms of rhetoric because then the Realtors® and other special interests in housing (e.g. NAHB) can make claims on how housing is a vital part of the American economy, citing how many "jobs they create." And therefore, they can argue that their industry is worthy of even more subsidies and friendly policies.
This is nothing new. It's the famous "what is seen versus what is not seen" problem of the political economy. They make these claims about the importance of real estate as if everyone would be homeless and the real estate agents would be begging on the street corners if not for the special tax treatment they are receiving. The fact of the matter is that more people would be renting and real estate agents would be doing something else, possibly making less as they would no longer be extracting rents from taxpayers and consumers. But that does not necessarily mean social welfare would be less. In fact, it would be higher, albeit distributed in a different (and fairer) manner.
The tax fraud trial of Wesley Snipes began this week in Florida, and the actor faces up to 16 years in prison for his failure to file tax returns between 1999 and 2004, or pay tax on the estimated $38 million he earned in that period.
Snipes faces an uphill battle, as few succeed in convincing juries of a genuine, good-faith belief that he or she had no obligation to pay income taxes. Snipes has relied on the "§ 861" argument, which asserts that only items listed in Section 861 of the Internal Revenue Code are taxable, and therefore, the domestic income of U.S. citizens is not taxable.
If only. All income, earned inside and outside the country, of U.S. citizens is taxable under Sections 1, 61, 63, and others. Section 861, and accompanying regulation 26 C.F.R. § 1.861-8, list what income is earned "inside" the country, and that's relevant only to non-residents and foreign corporations because they only pay tax on domestic income. The list doesn't really matter for U.S. citizens, because they are taxed on all income, whether it is earned domestically or foreign.
Even putting that aside, among the taxable items on the § 861 list is "[c]ompensation for labor or personal services performed in the United States." § 861(a)(3). So any income earned in the United States is taxable even under Section 861. IRS regulations re-iterate this point, stating:
"In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States."
26 C.F.R. § 1.1-1(b). § 861 advocates argue that regulation § 1.861-8 (which provides more detail on types of income that are to be treated as "domestic") overrides § 861(a)(3), but laws always override regulations.
Courts have conducted a similar analysis in reviewing the § 861 argument, and those who rely on it to avoid income taxes routinely face fines and imprisonment. The taxpayer often gets much harder than scammer who gives him or her fraudulent advice. For a list of cases and penalties, see here.
The Internal Revenue Code is long and complicated, and we at the Tax Foundation work for a tax system that is simple and transparent, and doesn't inhibit our economy with excessive burdens on individuals. But we're not there yet. If someone tries to convince you that there's no obligation to pay income taxes, remember that if it sounds too good to be true, it often isn't true.
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