Commonwealth Conversations: Revenue

Discover Tax program generates business expense audits

Banker & Tradesman (subscription only) ran a story this week on the subject of mortgage loan originators subject to DOR audits. The story also discussed how DOR generates taxpayer audits in general.

The piece was pegged to a notice from the Massachusetts Mortgage Bankers Association urging loan originators to “consult with your tax accountant or adviser” to best preserve the deductibility of appropriate unreimbursed business expenses for outside sales people. By the way, it is the IRS that defines what are acceptable unreimbursed expenses.

The story posed the question: Was DOR singling out mortgage loan originators for special attention? The answer, as reported in Banker & Tradesman, and we’ll repeat it here, is simply, “no.”

DOR uses a program called Discover Tax to review information on tax returns against many different kinds of databases. If, for example, a tax return reports relatively low income, but the taxpayer owns a $1 million home and two Bentleys, Discover Tax will flag that incongruity and generate an audit. DOR has no idea what type of employment or employer the taxpayer has; it’s the numbers that jump out.

Similarly, if a taxpayer has an unusual amount of unreimbursed business expenses relative to income, Discover Tax will recognize that and kick out an audit.

Any individual taxpayer -- including mortgage loan originators -- may encounter a problem if they claim unreimbursed business expenses on the same basis as afforded to outside salesman.

DOR’s view, articulated in 1989 and maintained since then, is that outside salesman sell for their employer outside the employer's office. Thus, a mortgage loan originator who works in an office is not an outside sales person.

If mortgage loan originators claim unreimbursed business expenses in amounts that  bubble up to an audit after a Discover Tax run, they face the question not only of justifying and documenting the expenses, but they must also make sure of their legitimate claim to them in the first place.  

Free state and federal tax filing assistance readily available

Between the American Association of Retired Persons Foundation Tax Aide program, and the IRS Volunteer Tax Information Assistance (VITA) program, there are close to 600 sites across the Commonwealth offering free state and federal tax preparation service to low- and moderate-income tax filers as well as those 60 and older.

The AARP sites can be found here; the VITA sites here. Both programs will assist low- and moderate-income taxpayers and those 60 and older in filing for the federal Earned Income Tax Credit, and the state's Senior Circuit Breaker Tax Credit. Both are refundable tax credits.

The EITC delivers a maximum federal tax credit of more than $5,751, which is then matched by a state tax credit equal to 15 percent of the federal credit or an additional $862. The income ceiling for the EITC is $49,078 for a married couple filing jointly or $43,998 for a single head of household.

Last year, more than 26 million federal tax filers received nearly $59 billion in tax credits. In Massachusetts, nearly $110 million was paid to nearly 400,000 tax filers as a result of the 15 percent state match, which began in 1997. The EITC was enacted by Congress in 1975.

Gov. Deval Patrick issued a proclamation declaring Jan. 27 as Earned Income Tax Credit Awareness Day. That same day, Lt. Gov. Timothy P. Murray issued a statement pointing out that "there are still many Massachusetts residents who do not realize that they qualify for the program or do not know how to claim the credit ... this resource is critical now more than ever, as Massachusetts families can use some extra money in their pocket to support every day needs for their households."

 

 

 

Refund volume heavy as filing season gets underway

Filing season is barely three weeks old and the story so far is refunds, with the volume and amount paid to taxpayers way up over a year ago.

As of Saturday, DOR had issued 287,179 refunds worth $147.5 million, for an average refund of $514. As of the same date a year ago, DOR had issued 200,766 refunds worth $106.2 million, for an average refund of $529.

DOR has paid out $41.3 million more in refunds than at the same time a year ago.

There appears to be a ready explanation for this jump. A year ago, the IRS advised tax filers who itemize deductions to wait until mid-February for the release of revised tax tables. Apparently, a lot of taxpayers took the IRS advice.

Interestingly, the January revenue report DOR released on Feb. 3 showed refunds running $47 million ahead of January 2011. In fact, if refunds had come in as forecast, January revenue would have finished $2 million above benchmark rather than $44 million below. Now, that's sort of like saying the Patriots would have won yesterday if Wes Welker had made a catch -- shoulda, coulda, woulda doesn't cut it in football, and it doesn't work in revenue collection either. But it's still worth mention.

So far, 375,676 taxpayers have filed, up 118,600 over a year ago. The vast majority of those, 355,598, have filed electronically.

The number of Senior Circuit Breaker Tax Credits issued has risen from 2,045 a year ago to 3,979 this year, and the amount of credits returned to taxpayers has risen from $1.6 million a year ago to $3.2 million this year. The average credit is up $26, from $772 last year to $798 this year.

The number of Earned Income Tax Credits issued has risen from 106,614 a year ago to 124,999 this year, and the amount of credits returned to taxpayers has increased from $39.6 million last year to $46.4 million this year. The Commonwealth matches 15 percent of the federal EITC credit.

As is always the case, the quickest way to get your refund is to have it direct deposited; that will take an average of 3.2 business days, rather than 5.2 days it takes to issue a paper refund check

It's tax filing -- and tax fraud -- season

The Detroit News has published an extensive report on tax identity theft that is well worth reading, and more than a little scary.

This is not the kind of fraud that results from credit card theft; instead, it is the result of stealing social security numbers, most usually, from the deceased.

The federal Social Security Administration publishes a master death file which lists names,SSNs and places and times of death of the deceased. But what was designed to prevent fraud has now, in some instances, spawned it.

In the Detroit article, a mother explains that a month after the January 2011 death of her 49-year old son, someone in Boca Raton, FL , e-filed a tax return using the son's name and SSN. The refund was then deposited in a Florida account. The mom did not learn of this until her accountant tried, unsuccessfully, to file a tax return on behalf of her son. She eventually collected her son's refund, but only after months of talking it over with the IRS.

Closer to home, WCVB-TV aired a similar story last November about a deceased Cape Cod teenager whose identity was stolen and a phony return filed.

While no state is immune from this crime, one of the national hotbeds is Florida. The Tampa Bay Times last fall ran a story on the arrest of 49 people who allegedly stole identities and used them to obtain millions in from fraudulent tax refunds. 

In Massachusetts, the Department of Revenue has purchased the master death file for use in fraud detection. The SSN on every income tax return is checked against the death file. While the filing season is still young, DOR has already intercepted a dozen fraudulent tax returns that came in with SSNs stolen from the deceased.

City and Town examines MASSPCSO sham transaction case

Division of Local Services attorney James Crowley has written a very clear and compelling story on a complicated tax case for the latest edition of City and Town , the free DLS publication emailed biweekly to thousands of local officials across the Commonwealth.

Aptly titled "That's Nobody's Business: Sham Corporation Denied Personal Property Tax Exemption," Crowley surgically dissects an Appeals Court decision issued last year that upheld an Appellate Tax Board denial of a property tax exemption to a leasing corporation.

The court ruled that the leasing corporation, MASSPCSO, formed by the wireless telecommunications company Sprint Spectrum, L.P., was a sham because it did not engage in business and was created solely for the purpose of avoiding taxes.

Sprint formed the sham leasing company as a way to transfer taxable equipment to a subsidiary (MASSPCSO) and then lease back the equipment for use in Massachusetts as a way of avoiding local personal property taxes. The local assessors didn't buy the scheme, and neither did the courts.

As Crowley noted, "the Appeals Court observed that MASSPCSO had no employees; failed to keep separate bank accounts; did not independently make investments; did no business with other parties except where it was incidental to leasing equipment to the parent; did not lease property to third parties; could not act independently; did not purchase equipment or be responsible for debt incurred in conjunction with said purchases."

In other words, a classic sham transaction.

DOR to hold 14 meetings on Sr. Circuit Breaker Tax Credit

Brian Lynch of DOR's Office of Advocacy, Training and Communication begins a two-month series of presentations on the Senior Circuit Breaker Tax Credit starting tomorrow at 1 p.m. in Wellesley at the Council on Aging, 219 Washington St.

DOR's web homepage has a complete list of Brian's tour, which is designed to educate taxpayers 65 and older about the benefits of the credit. All sessions will be held at local Council on Aging offices.

For tax year 2011, the credit is worth as much as $980 for eligible taxpayers 65 and older who either own or rent their home. Seniors who live in public or subsidized housing are not eligible for the credit.

Boston Globe weighs in on bundled cell phones

The Boston Globe today took its turn today at examining the sales tax policy governing bundled cell phone transactions.

Reporter Michael Farrell's story is a fair recitation of the history of the policy. Farrell noted that one wireless seller, Sprint, is paying the difference in sales tax between the sales price of the phone and the retail or wholesale price on which the tax is actually computed, unlike other wireless sellers.

This blog has published numerous posts and comments on bundled cell phones, and welcomes Farrell's contribution to the discussion.

If you'd like to sample some of the back and forth, type in "bundled cell phone transactions" in the blog search field (scroll down from the top of the blog and you will find it on the right hand side) and have at it.

Income tax estimated payments come up short in December

DOR released today the December revenue report and the story is all about income tax cash estimated payments, or the lack thereof.

December's collection of $1.969 billion was $87 million less than projected, due almost entirely to a $93 million shortfall in income tax cash estimated payments.

The December summary spreadsheet lays out the numbers. Whiles sales tax revenue was above benchmark and corporate/business tax below benchmark, they offset each other. But there was no offset for the shortfall in income tax cash estimated payments.

There is no certain explanation for the shortfall. These payments are frequently received in December so that taxpayers may use them as deductions on their federal 2011 tax returns. This year, there were two fewer December deposit days than a year ago, and the final deposit day fell on a holiday weekend, so some of these payments may be pushed into January.

Indeed, DOR has always cautioned that December and January need to be viewed as a whole when it comes to cash estimated payments.

Income tax cash estimated payments are made by taxpayers who have reason to believe they will owe tax on income earned from gains recorded on investments or dividends.

It is possible that some taxpayers who continued to make estimated payments in 2011 based on their gains in 2010 have now realized that they do not owe any additional tax, and thus they are not paying additional income tax cash estimated payments.

The Commonwealth received $192 million in such payments last month, which was $90 million less than December 2010 and $93 million less than forecast. On a year-to-date basis, however, income tax cash estimated payments of $686 million are just $33 million less than a year ago, down 4.6 percent, and $84 million less than forecast.

The flow has not stopped, but it has slowed down. "We should have a more complete picture on income tax cash estimated payments later this month," DOR Commissioner Amy Pitter said.

Overall, revenues of $9.847 billion for the first half of FY12 finished $252 million ahead of a year ago, an increase of 2.6 percent, and $49 million below the revised FY12 benchmark of $21.010 billion. 

2011 sales tax holiday saved consumers estimated $20.98M

DOR has released its final report on the 2011 sales tax holiday weekend that occurred on August 13-14, estimating that the amount of sales tax revenue foregone was approximately $20.98 million, exceeding the estimate of $19.9 million from the 2010 sales tax holiday weekend.

Last summer, just prior to the holiday, DOR issued a preliminary estimate of $20.5 million in potential savings to consumers from the holiday weekend.

The most commonly asked question about this report is why can't DOR say precisely how much sales tax revenue was foregone to the Commonwealth and saved by taxpayers.

Sales tax is reported to the Commonwealth no later than the 20th of the month following. For example, information on December sales tax collections will not be reported until January 20th.

Retailers do not list individual transactions by date when they report that data,  but simply lump together the entire amount of taxable retail sales for the month, and then apply the 6.25 percent sales tax and forward that amount to the Commonwealth.

As a result, DOR receives no reporting on the volume of taxable or untaxable sales on any given day or days. Individual retailers undoubtedly have some information on this, but they are not required to share it with DOR.

So in the absence of hard data, DOR estimates using the methodology outlined in the report.

 

Corporate tax rate drops to 8.0 percent effective January 1

DOR announced earlier this month a drop in the personal income tax rate effective for tax years beginning on or after Jan. 1 from 5.3 percent to 5.25. This reduction extends to gains from investments held for more than a year (gains on investments held for less than a year are still taxable at 12 percent).

A second tax reduction also kicks in on Jan. 1, when the corporate tax rate drops from 8.25 percent to 8.0 percent.

And, as was the case with the personal income tax reduction, there is a backstory to the drop in the corporate tax rate.

Gov. Deval Patrick in his first year in office, in 2007, proposed to change the way the Commonwealth levies the corporate income tax with the introduction of a proposal to adopt combined reporting, a system that is now in place in about half the states. The idea was to come up with a corporate tax system that made it harder for corporations to shift taxable profits earned in Massachusetts to low-tax or no-tax states.

The Legislature rebuffed the governor's initial effort, but agreed to the appointment of a special commission to look at corporate taxation. In December 2007, the commission issued its report, and on the basis of recommendations in the report, the governor filed legislation to implement combined reporting.

In July of 2008, the governor and legislative leadership signed into law combined reporting. Importantly, the law included a gradual reduction in the corporate tax rate, which at the time was 9.5 percent. The rate was to be gradually lowered, to 8.75 percent effective for tax years beginning on or after Jan. 1, 2010; to 8.25 percent effective for tax years beginning on or after Jan. 1, 2011, and to 8.0 percent effective for tax years beginning on or after Jan. 1, 2012.

Combined reporting, in tandem with the rate cut, meant that the big multi-state or multi-national corporations would often pay more, while the in-state corporations in would in certain cases pay less, with the net effect producing a fairer corporate tax system.

In a press release issued yesterday, the Patrick Administration noted that the 2008 tax reform law meant that "Massachusetts-based businesses are paying a lower corporate tax rate while several thousand multi-state or multi-national companies are also paying at a lower rate, but reporting more in taxable income because they can no longer shift taxable profits to low-tax or no-tax jurisdictions."

The corporate tax reform law of 2008 also gradually reduced the financial institution tax rate from 10.5 in FY08 percent down to 9.0 percent effective Jan. 1, 2012.

The rate for S corporations with more than $9 million in annual receipts was modified so that the corporate rate (for a business corporation or financial institution as applicable) for the year minus the personal income tax rate for the year equalled the rate for the large S corporations.

The rate for S corporations with between $6 and $9 million in annual receipts was modified to 2/3 of the rate applicable to larger S corporations.

Corporate and business tax collections have risen and fallen with the economy since enactment of the law. In FY07, before the law took effect, corporate tax collection was $2.476 billion. In FY08, corporate tax collection hit $2.549 billion, but dropped to $2.099 billion in FY09 as revenues overall crashed. Since then, corporate revenues have recovered modestly, in line with the overall economy, to $2.119 billion in FY10 and $2.228 billion in FY11.