The Taxman Cometh

Nearly 13.5 million taxpayers (myself included among them) will have to wait at least until February 11, 2008 before we are even allowed to submit our federal income tax returns to the IRS. This comes as a result of the congressional delays in passing a one-year patch to the Alternative Minimum Tax (’AMT’).

The AMT came into existence in 1970 to prevent the wealthiest American families from using deductions and exemptions to reduce their income tax liability. As recent as last year, the IRS has reasonably concluded the AMT is the single-biggest problem with the Internal Revenue Code. There are two core problems, the AMT was never designed to be indexed to inflation, so every year Congress passes a one-year patch to the tax and never gets back around to fixing it, and the AMT now impacts millions more people then the original 150 families it targeted in 1970.

The solution is simple: repeal the tax, and if necessary, replace the tax with an add-on tax of four percent of adjusted gross income above $100,000 for singles and $200,000 for couples. The thresholds would of course be indexed for inflation, as they should have been with the original AMT.

The angering dilemma is that several forms used by taxpayers are impacted by the AMT patch passed by Congress shortly before Christmas. If any of these forms look familiar to you, expect serious delays in your tax-filing and refund:

• Form 8863, Education Credits (Hope and Lifetime Learning Credits)
• Form 5695, Residential Energy Credits
• Schedule 2 to Form 1040A, Child and Dependent Care Expenses
• Form 8396, Mortgage Interest Credit
• Form 8859, D.C. First-Time Homebuyer Credit

The IRS estimates the delay will effect 13.5 million people. I disagree. These forms are generally filed by parents of students enrolled in college/graduate school (or in my case, the graduate student themselves), people who have installed an energy-efficient home heating/cooling system or some other form of energy-friendly improvement, those who claim expenses for care of young children, and people who have a residence (and one extra home) which they paid less than a combined $1.1 million for and have a mortgage on. I would estimate these forms impact many more than 13.5 million people.

I agree with the Taxgirl, this problem was not created by the IRS–in fact, they’ve recommended time and time again that a permanent solution is needed to the recurring AMT problem. Without even addressing the fact that Congress’ patch cost the government $50 billion in lost revenue, this just adds a special gloss to the notion that we need to elect stronger leaders who are less susceptible to the push and pull of Hill lobbyists.

This is a serious problem that needs permanent fixing, not just a yearly band-aid. To those of us who are tax-conscious, this should make the ongoing presidential race much more interesting.

There seems to be no shortage of news stories coming out lately linking celebrities to tax scheming.From the not-so-surprising Immortal Hulk Hogan whose shocking breakup with long-time wife Linda is rumored to be a mere rouse, only attempting to shield the Hogan’s assets after the Hulk’s son was involved in a serious auto accident; all the way down to claims by the State of New York Department of Taxation that Derek Jeter has robbed them of millions in state income taxes by claiming to be a resident of the State of Florida.

Ex-rapper mogul Damon Dash has been accused of owing $2 million to the IRS. In turn, Dash has sued his accountant for allegedly embezzling the payments that were to be made to the IRS.

Perhaps the mother of all tax-fraud celebrity cases in the news this year has been the Blade star himself–Wesley Snipes. IRS authorities allege Snipes claimed refunds of almost $12 million in 1996 and 1997 for income taxes already paid. The fraudulent refunds came as a result of Wesley’s alleged conspiracy with American Rights Litigators, a group famous for making bizarre claims (see here, here and here) asserting that only income derived from foreign sources is taxable. As a result of the tax-evasion case filed by the IRS, Snipes has made several procedural claims–including the latest claim shot down by U.S. District Judge William T. Hodges, that Snipes could not receive a fair trial because of the KKK presence in Ocala, Florida (approximately 80 miles north of Orlando).

The question is why are celebrities so often caught in major tax scams. I believe the answer lies at the core of many of our nation’s founding principles, including a basic resistance to taxation, and downright defiance of over-taxation (see, American Revolution). We live in a society driven by individuals, and it must be hard for Wesley Snipes to part ways with all the loot he brought home by starring in Murder at 1600.

Indeed some of the squabbles, including Derek Jeter’s claiming he has residence in Florida, makes slightly more sense than Snipes’ claims, despite the fact that Jeter plays baseball in the Bronx at least 81 times each year.

Although I wouldn’t agree with the Hogan’s maneuvering, it could be smart planning if they’re using a divorce to shield assets that might be reached in a lawsuit resulting from their bonehead son’s auto accident.

These scams seem to be the rule not the exception, and the irony of it all is that Americans don’t really fault these celebrities for their misgivings. The truth is that the average American who has to deal with the AMT and not receiving their $2,000 refund for three months must take great pride in seeing these highly visible celebrities do to the IRS what they themselves would love to do.

This will certainly be a daunting adventure. After completing half of law school, your humble blogger has decided to pursue a career in tax law. Call me crazy, call me risque, call me whatever you want (especially if you are offering me a job). What captured my attention in tax class, and created a feeling of pride and exuberance like I have never before experienced in my brief study of the law, is the manner in which tax intersects almost everything in life.

I find the study of tax law and its interaction with daily life to be a fascinating and captivating phenomenon. The effects tax has already had on my study of the law is captivating, and now I have decided to share this with the world wide web. Along the way we will certainly explore the interaction of tax with everyday life, and other areas of law. There will also be updates (read–venting) on the two books I am working on, one fiction and one non-fiction.