Tuesday, December 29, 2009


As we count the days until the end of 2009 it is once again time to look back on the year in taxes. .
Luckily Congress had passed its “extender” bill early enough in 2008 so that there were no unnecessary delays in processing income tax returns, as there had been in past years. We must be thankful for small favors.

The last few years Congress has provided us with special tax “gimmicks” which have required those who do not normally file a tax return to do so in order to get a special refund or rebate. This year’s “gimmick” was a “second chance” at last year’s George W Bush “stimulus” rebate fiasco via the refundable “Recovery Rebate Credit”.

The rebate checks sent out in 2008 were based on information reported on the 2007 tax return. If an individual or couple’s situation changed for 2008 – i.e. the birth of a child, a reduction in Adjusted Gross Income, or an increase in taxable income that resulted in a positive tax liability – it was possible to add an additional rebate amount in the “Payments” section of the tax return and either increase the 2008 refund or reduce the 2008 balance due. I had several clients who were able to take advantage of this “second chance” for all of the named reasons.

Last year an IRS representative reported that the economic “stimulus” rebate check program had overwhelmed every aspect of the Service. Because of the rebate checks everything that would normally have taken the IRS 60 days would take 120 days. It appears that there is still some “hangover” from the rebate mess. Almost every inquiry I sent to the IRS in 2009 regarding a client return or issue still received as the first response, on average 2 months later, a form letter stating that the IRS needed more time to research the issue and that they would get back to me in 45 days. When the 45 days had passed a second letter arrived saying exactly the same thing!

In a 2008 guest post at another tax blog I said of the Economic “Stimulus” Rebate -

"I can guarantee that after all is said and done when I write about the affect of the 2008 economic ‘stimulus’ checks I will be once again saying, ‘These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy'."

A 2009 TIGTA report on “Evaluation of the Planning, Computation, and Issuance of the Recovery Rebate Credit” proved me right. According to the report summary –

However, taxpayer confusion in calculating the recovery rebate credit and programming errors presented significant challenges. Despite education and assistance efforts by the IRS, taxpayer confusion in computing the recovery rebate credit resulted in a significant number of errors. Of the 114.3 million tax returns processed as of April 17, 2009, 16.7 million (14.6 percent) included at least 1 error that needed to be addressed by the IRS Error Resolution function (8.4 million had a recovery rebate credit error).”

And –

We identified 399,099 tax returns (0.4 percent) for which our calculation of the recovery rebate credit and the IRS’ calculation did not agree. Our analysis indicated that 258,850 taxpayers did not receive $84.6 million to which they were entitled and 140,549 taxpayers received $60.6 million more in credits than they were entitled to receive.”

And one more –

Finally, legislation did not provide the IRS with math error authority {allowing the IRS to systemically disallow certain taxpayer claims at the time a tax return in processed – rdf} to prevent individuals without valid Social Security Numbers from receiving the recovery rebate credit. . . As a result, the IRS erroneously provided more than $27 million in recovery rebate credits to more than 44,000 taxpayers who did not have a valid Social Security Number.”

TIGTA did give the IRS credit for doing a good overall job – “the IRS successfully planned for the implementation of the recovery rebate credit”. The Service certainly did rise to the occasion and do a relatively good job in dealing with the excessive job thrust upon it without much notice. The problem is, as usual, with the cafones in Congress who initiated the rebate checks, and the recovery rebate credit, in the first place.

Another kind of “gimmick” for 2008 returns was the refundable “First-Time Homebuyer Credit” of up to $7,500. It was not really a true credit but really an interest-free loan, as it had to be paid back over an extended period of time beginning in two years. I had four clients who took advantage of this “gimmick” – two on the same property (non-married co-owners). The credit was enhanced and improved effective for new home purchases which closed between January 1 and November 30, 2009 in February, and expanded and enhanced again in November, but those who purchased in 2008 were stuck with the old rules.

I also took advantage of the weird one-time only additional standard deduction of $500 or $1,000 for real estate taxes paid on quite a few returns. As I predicted in most cases this added deduction benefited retired taxpayers.

In March Obama appointed Paul Volcker, of the President's Economic Recovery Advisory Board, to head a panel that will make recommendations for reforming our tax laws. The panel was charged with “three tasks: one is tax simplification; the second is closing tax loopholes and reducing tax evasion; and the third is reducing corporate welfare. And it's worth noting that with regard to that first category, one of the key things that the Volcker board will be examining is ways of unifying, streamlining, making more consistent the various credits that are out there: Making Work Pay, the Earned Income Tax Credit, the Child Tax Credit, and what have you. And in addition, with regard to the tax gap, there are hundreds of billions of dollars in uncollected taxes each year." It was scheduled to make recommendations to the President by December 4th, 2009.

You may recall the last time we had a Presidential panel to investigate how to “reform” the Tax Code was in 2005. That panel made some drastic, and by the way very good, recommendations on how to truly simplify our current system. However, either because of Dubya’s short attention span, because the Panel did not suggest what he wanted to hear, or because more important things began to occupy him, the recommendations were totally ignored by the President and the Panel just faded away.

The Volcker Panel called for suggestions and recommendations on how to “reform” the Tax Code from the public, and I answered the call.

Days before the December 4th deadline, Volcker reported that the panel needed more time to review the over 500 public comments that had been submitted. So we will have to wait until 2010 to hear the panel’s report. Let’s hope that they have some good ideas, and, if so, that they will be listened to and acted upon.

It appears that, according to the Tax Foundation, TAX FREEDOM DAY 2009 - April 13th - occurred before TAX DAY 2009 (April 15th). Unfortunately I was too busy to stop and celebrate. It was eight (8) days earlier than 2008, when TAX FREEDOM DAY was April 21st, and two weeks earlier than 2007. There are two reasons for the earlier celebration - (1) the recession has reduced tax collections even faster than it has reduced income, and (2) the stimulus package includes large temporary tax cuts for 2009. Nevertheless, Americans still pay more in taxes than they do on food, clothing and housing combined.

New Jersey’s TAX FREEDOM DAY was April 29, 2009 – more than 2 weeks after the national day. NJ is #2 (appropriate) on the list of most taxed states – behind Connecticut, whose TAX FREEDOM DAY was only one day later.

As I had said in last year’s tax year in review post by the fall of 2008 the economy had become a real mucking fess, with banks and brokerages failing left and right and bankruptcy threatening the big three automakers. There were calls for a second “stimulus” package, which was passed in 2009.

While one could say there has been progress, 2009 will end with the economy still “shaky.

To be continued . . .


FYI – Part II will be posted tomorrow (Wednesday). The BUZZ will appear on Thursday this week. There will be no BUZZ this coming Saturday.