Earlier this Fall, the IRS was offering an amnesty program for offshore tax cheats to come forward and admit their wrongdoing, thereby getting a more lenient punishment.
Nearly 15,000 Americans who knew they were cheating came forward and admitted their bad behavior. From Reuters:
While IRS officials were still analyzing the amount of offshore assets declared in the amnesty program, Shulman said, “we are talking about billions of dollars coming into the U.S. Treasury” from the new disclosures.
This is not the end of the story. Combining these (perhaps) brave souls to the 4,450 accounts which are forcibly being turned over from the Swiss bank UBS, there are just under 20,000 leads that the IRS is now following. For example, they may find that some of the largest account holders were advised by the same unscrupulous high-powered tax adviser. And now we know his or her name, and we can investigate, and find even more cheaters.
This is happening on a State level, as well. According to the Wall Street Journal:
This year, 12 states had amnesties, up from the annual average of two or three. Another 10 or 15 are likely to follow suit in 2010.
If you live in a State with a State Income Tax, and you suspect you might be guilty of tax evasion, I’d recommend you set up a news alert for “[state name] tax amnesty” so that you can have plenty of time to weigh your options.
The Editorial Part
On a personal note, this will probably end up being my favorite story of the year. It takes the cynical view that if you’re wealthy enough, you can buy the power needed to keep more than you’re supposed to, and makes a big ol’ dent in that belief.
We have a big budget deficit, and I believe that’s because the previous administration’s ideas didn’t work out the way they were supposed to. Many people fear that their taxes will be raised as a result, though the only plans I’ve seen to raise taxes will affect maybe 5% of Americans. Amazingly, some people think that their taxes have already been raised (these people are either getting their news from some untrustworthy sources, or their paychecks are coming with a free mirage).
Happily, sometimes you don’t have to raise taxes; you just have to be serious about collecting them.
Nearly 15,000 Americans admit offshore tax cheating, Kim Dixon, Reuters, 17 Nov. 2009
More States Jump on Tax-Amnesty Bandwagon, Arden Dale, Wall Street Journal, 19 Nov. 2009
Between March 1917 and January 1984, there have been thirteen major changes in the rules for the estate tax, a tax paid by heirs for wealth inherited. Of these thirteen changes, eight were tax increases and five were tax decreases. In 2001, A study by the University of British Columbia and the University of Michigan determined that the timing of death surrounding these changes is elastic.
When the estate tax increased, individuals with wealth to leave to their heirs were more likely to die in the days before the increase than they were after the increase. The reverse is true when the tax law change favored the wealthy. When the estate tax decreased, individuals with wealth were able to hold on to life longer in order to save their heirs money owed to the government.
Here’s the study.
Right now, the estate tax is one of the IRS’s more complicated systems. Keeping it simple, the gross estate, after deductions, is used to determine the amount the heirs owe in tax payments. There are fourteen tax brackets from a rate of 18% for amounts below $10,000 up to 45% for amounts above $1,500,000. Keep in mind these are marginal tax rates. If you inherit $2,000,000 you do not owe 45% of that entire amount ($900,000), you owe $555,800 plus 45% of $500,000 ($725,000). But this is not currently relevant because the “first” $3,500,000 is excluded from the estate tax; effectively, the amount an heir would owe would be 45% of the amount inherited over $3,500,000. This greatly reduces the effective tax rate on an estate — for the 0.3% of all estates that end up owing taxes, their average effective tax rate is under 20% according to the Urban Institute-Brookings Tax Policy Center (source).
Unless Congress changes the law — a legitimate possibility — anyone who inherits wealth from an individual who dies in 2010 is exempt from the estate tax. If history is a guide, we should see the same pattern of convenient timing; those close to death at the end of this year will manage to hang on another week or two to pass away in a more heir-friendly tax environment.
And if the law sunsets in 2011 and the estate tax is back in force, those nearing death at the end of 2010 will accelerate their passing to get in under the wire.
The IRS has not formally announced the federal income tax brackets for 2010 yet. In fact, the 2009 tax brackets are still the numbers I — or more accurately, my accountant — will be focusing on in the near future. But around this time each year, The Tax Foundation creates a reasonable estimate of the following year’s changes to the tax brackets.
Thanks to a low level of inflation, there won’t be too many changes in 2010. I’ll keep this updated if the IRS decides to set the rates differently than outlined in this prediction, but chances are these will be the official brackets.
Remember that if you are “in the 29% tax bracket,” for example, you don’t owe 28% on all of your income. You owe that rate on only the income within that bracket. A misunderstanding of this concept often leads to people being afraid of earning enough money to enter the next bracket, with the belief that even $1 into the next bracket would dramatically increase the amount of tax due. Thankfully, the system does not work that way.
Married individuals filing joint returns and surviving spouses
| If Taxable Income Is: |
The Tax Is: |
| Not over $16,750 |
10% of the taxable income |
| Over $16,750 but not over $68,000 |
$1,675 plus 15% of the excess over $16,750 |
| Over $68,000 but not over $137,300 |
$9,362.50 plus 25% of the excess over $68,000 |
| Over $137,300 but not over $209,250 |
$26,687.50 plus 28% of the excess over $137,300 |
| Over $209,250 but not over $373,650 |
$46,883.50 plus 33% of the excess over $209,250 |
| Over $373,650 |
$101,085.50 plus 35% of the excess over $373,650 |
Heads of households
| If Taxable Income Is: |
The Tax Is: |
| Not over $11,950 |
10% of the taxable income |
| Over $11,950 but not over $45,550 |
$1,195 plus 15% of the excess over $11,950 |
| Over $45,550 but not over $117,650 |
$6,235 plus 25% of the excess over $45,550 |
| Over $117,650 but not over $190,550 |
$24,260 plus 28% of the excess over $117,650 |
| Over $190,550 but not over $373,650 |
$44,672 plus 33% of the excess over $190,550 |
| Over $373,650 |
$105,095 plus 35% of the excess over $373,650 |
Unmarried individuals (other than surviving spouses and heads of households)
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,375 |
10% of the taxable income |
| Over $8,375 but not over $34,000 |
$837.50 plus 15% of the excess over $8,375 |
| Over $34,000 but not over $82,400 |
$4,681.25 plus 25% of the excess over $34,000 |
| Over $82,400 but not over $171,850 |
$16,781.25 plus 28% of the excess over $82,400 |
| Over $171,850 but not over $373,650 |
$41,827.25 plus 33% of the excess over $171,850 |
| Over $373,650 |
$108,421.30 plus 35% of the excess over $373,650 |
Married individuals filing separate returns
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,375 |
10% of the taxable income |
| Over $8,375 but not over $34,000 |
$837.50 plus 15% of the excess over $8,375 |
| Over $34,000 but not over $68,650 |
$4,681.25 plus 25% of the excess over $34,000 |
| Over $68,650 but not over $104,625 |
$13,343.75 plus 28% of the excess over $68,650 |
| Over $104,625 but not over $186,825 |
$23,416.75 plus 33% of the excess over $104,625 |
| Over $186,825 |
$50,542.75 plus 35% of the excess over $186,825 |
Every so often I come across a news story that’s more enjoyable to read when I add a vindictive “ha ha ha ha ha” after each sentence. For example:
Rich Americans who have evaded taxes by hiding foreign holdings have about a week to turn themselves in to an Internal Revenue Service amnesty program or gamble they will not be caught.
Ha ha ha ha ha!
In fact, most of this news article is enhanced with a little maniacal laughter. That is, unless you’ve been in the habit of hiding money you owe the IRS in a Swiss bank account maintained by UBS AG. And since hiding money from the IRS is equivalent to stealing from your fellow citizens (in the form of, for example, making sure the bridges you all use never get the maintenance they need, and schools are using outdated books, etc.), I’m thrilled to see this moving forward.
It would’ve been better if we’d managed to get the names of all of the American cheaters hiding the needed pothole-fixing money in Switzerland (the original stated goal was to get the names of 52,000 account owners), but I won’t let that get me down. I never thought I’d see even this much go-get-em attitude from the IRS. (I should point out that this isn’t a Democratic or Republican plan – it started under Bush and Obama is simply continuing it.)
The fun part now is that nobody is saying yet who is on the list of about 4,400 account holders that will be turned over to the IRS, so the IRS started an “amnesty” program for volunteers who are willing to come forward now, instead of risking a worse punishment later.
The IRS said that, in one week of July, about 400 individuals turned themselves in under the amnesty program. That was four times higher than the number of tax evaders who stepped forward in all of 2008, according to the agency.
The risk of not joining in the amnesty program now is paying much more than you owe and possibly criminal prosecution. The deadline is September 23, 2009. Here’s the amnesty program Q&A page on the IRS web site, in case you think you might need it.
By the way:
At the same time, IRS officials have said other foreign banks are being queried for possibly helping the wealthy evade taxes, although they have declined to be specific.
Ha ha ha ha ha!
Tax evaders rush to beat amnesty deadline, Kim Dixon, Reuters, Sep. 24, 2009
Image credit: zolierdos
For those of you who have filed or are planning to file an amended income tax return (form 1040X) to receive the (up to) $8,000 first time homebuyer tax credit this year rather than waiting for next year, there is some good news.
Although the IRS is more than likely overwhelmed, the refunds are currently taking about eight weeks to receive. Here is a recent comment from a Consumerism Commentary reader:
Just wanted to let you know that I received my $8,000 (plus interest) from my 1040X by mail yesterday. I mailed my amended return around June 25, so I feel the turnaround was very acceptable. Even though our original refund came by direct deposit, this one came by check; I don’t know why.
There are a few interesting notes to take away from Kimberly’s experience.
The IRS is providing interest payments as if they owed money to the taxpayer since April 15. This is the normal case when the IRS underpays a refund. It’s good to see they are providing interest in the same manner here even though the law was not created until after many people had filed their 2008 tax returns.
Six weeks is a reasonable time frame to expect your credit. Many people I’ve spoken with expected the credits to take much longer, prompting some to suggest waiting until the 2009 income tax return is due. I see no reason to wait that long. Plus, it’s unlikely you’ll receive interest if you wait until April 2010.
Keep in mind that if your paperwork requires manual intervention, like an address change, or if the information you provide does not match what the IRS has on file, your credit could take longer to receive.
The refunds are sent by paper check. I warned of this in earlier articles. Even though you may have designated a bank account for direct deposit when you filed your original tax return, the IRS is sending the refunds through the U.S. Postal Service as if we were still living in the twentieth century.
Have you received your first-time homebuyer tax credit yet? How long did it take?
If you have filed your taxes for the most recent year but would like to take advantage of a new credit, such as the $8,000 first-time home buyer tax credit, without waiting for next year, you will need to file an amended income tax return.
You cannot file an amended tax return electronically. This article will explain the process and all it will cost you is a postage stamp.
Note: Some online tax preparation applications like TurboTax and Tax Cut allow you to complete this form online, but you are still required to print and send the forms and supporting documentation through the mail.
1. Have your completed tax return ready. Start with the income tax form you submitted earlier this year, either your 1040, 1040EZ, or 1040A. You will need to include some of this information on the new form. Do not attempt to rely on your memory.
2. Download the blank amendment form. You need Adobe Reader to download and print Form 1040X. It is available on the IRS website or directly from Consumerism Commentary through this link [pdf]. This will always link to the most recent 1040X.
3. Enter your current personal information in the top section. If you have a current version of Adobe Reader, you should be able to click on any blank line of the form to type directly into the document. Ensure you include the proper tax year at the top of the form; if you are completing this form in July 2009 to amend the tax form you filed in April 2009 for the 2008 tax year, make sure you enter the year 2008 in this field. Double-check your Social Security Number.
4. Identify what has changed. The second section of this page of form 1040X has three columns. The first column should contain the amounts you presented on your original 1040. The third column should contain the adjusted value. The second should contain the difference between your first column (original amount) and third column (new amount). For example, if you are adjusting your form to change the amount of your Earned Income Credit (EIC) from $0 to $300, line 13 would read would read in order $0, $300, and $300. If you are changing the EIC from $300 to $0, the line would read $300, -$300, $0.
5. Download the appropriate credit form. If you are filing the amendment because you now qualify for the first-time home buyers tax credit, download form 5405 [pdf] and use this form in the same manner to calculate your rebate. Enter the result from line 6 of form 5405 on line 15 of form 1040X.
6. Finish the calculations on 1040X. Continue until the first page of the form is complete and be sure to make note of any additional forms you need to provide based on the adjustment you are making.
7. Complete the second page of 1040X. You can skip Part I of the second page if you are not changing your number of exemptions and are not changing your exemption for families displaced by Katrina or midwestern storms. Part II is required. Explain why you are amending your return. Here is an example:
I am filing this amendment to claim the new first-time home buyer tax credit for the house purchased on July 1, 2009. Please see the enclosed documentation to support my ownership.
8. Print and sign the tax forms. Ensure you are printing all forms relevant to the amended tax return including any forms related to credits you are claiming. Don’t forget to add your signature where required.
9. Mail the forms and supporting documentation. In addition to the forms, include any evidence pertaining to the credit you are claiming to ensure the IRS will process your request quickly without questioning the validity of your claim. For example, you might want to include a copy of your bill of sale, your title, or your mortgage documentation.
Send your complete package to the address corresponding to your state.
I might include “(1040X)” at the end of the first line of the address to help route the form to the correct department faster.
It is unlikely the IRS will directly deposit any additional refund owed to you due to your amended return even if your initial refund was directly deposited, so you can expect to receive a check. Many people are reporting the IRS is very slow in providing these checks so ensure all of your documentation is in order and be prepared to wait four months or more.
Always remember that I am not a tax professional. Even if I were, this should not be considered tax advice. Ask your tax accountant if you have doubts whether to file an amended return.
In February, I wrote that the United States was suing Swiss bank UBS in order to get the offshore institution to release the names of the wealthiest 19,000 of the 52,000 American bank account owners. These depositors have managed to evade paying United States income taxes on the interest earned within these foreign accounts.
The New York Times is now reporting that the U.S. Justice Department plans to drop the case due to lobbying pressure from the bank and the Swiss government. Many tax evaders, fearing the bank would release their name publicly, have already come forward to claim the interest they earned and perhaps pay the income tax owed to the government.
Some smaller accounts have been transfered to domestic banks.
Settlement Anticipated in UBS Case, Lunnley Browning, New York Times, June 22, 2009
As you are reading this, if you are in fact reading on the same day this was written, both the federal and New Jersey government are reaching deep into my bank accounts. At the end of the day, I will find myself worth several thousand dollars less than at the beginning of the day. Today is the day quarterly estimated taxes are due for those of us who live in the United States and for those who opt or are required to make these payments.
Last year, I didn’t pay enough through estimated tax payments and I was subject to a small penalty tax. I believe I’ve calculated the correct amounts this year to avoid paying extra. Like last year, I enrolled in automatic tax payments for both the federal and state income taxes. This saves the trouble of sending checks, but it necessitates having the right amount of money in my bank account at the right time.
To handle this requirement and to further automate my finances, the accounts are funded monthly to ensure I’m saving enough for both quarterly estimated payments and what will likely be another significant final tax bill next April.
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