Posts Tagged Internal Revenue Service
Making Sense, by Michael Reagan
Jay Leno told his studio audience the other night that President Obama should forget his plans to close the detention camp at Guantanamo Bay and instead close the IRS.
The applause was instantaneous and the laughs were loud and genuine.
Rick McKee / Augusta Chronicle
Most ordinary Americans would have whooped and hollered in favor of Leno’s idea long before they learned the IRS has been caught targeting conservative political groups and wasting millions on moronic employee-training conferences.
But the IRS is no joking matter.
The average working American — poor or rich or in-between — hates and fears the IRS for good reason.
Able to seize your bank account or house without a court order, able to shut down your business overnight, the IRS is the closest thing to the Gestapo America has ever had.
But it’s not the current IRS scandals that are the real problem. It’s not the hated tax-collecting bureaucracy itself. It’s not even whether the Obama regime used the dangerous powers of the IRS as a political weapon.
The real problem — the long-term problem and the one Republicans have to find the courage to fix — is the horrible income tax system the IRS is hired to enforce.
The federal income tax code deserves the death penalty for a lot good reasons. It’s unfair, overly complex, horribly politicized, harmful to individuals and the economy, helpful to the forces of Big Government and impossible to understand without a CPA.
It’s also a costly waste of money and time. Just complying with our unnecessarily (but deliberately) complicated federal tax system costs Americans about $430 billion a year, according to economist Arthur Laffer.
The IRS scandals are a golden opportunity for conservatives and Republicans to direct the country’s attention toward the ultimate and long-overdue goal — abolishing the IRS as we know it and drastically reforming our tax code.
We need a strong leader — now — who will stand up and lead the country down the road to radical tax reform.
Maybe it’s going to be Sen. Ted Cruz of Texas. Earlier this week he called for abolishing the IRS after instituting a simple flat tax that could be filled out on a postcard. Maybe it’ll be another rookie in Washington, Sen. Rand Paul of Kentucky.
The biggest problem we have is that our side — the tax-reform side — has no leader and no clear, unified message.
Should we conservatives go for a Flat Tax or a Fair Tax?
A low, simple, flat-tax percentage for all income earners, minus deductions for home mortgages and charitable deductions? Or a national sales tax of about 23 percent that would replace both the federal income tax and the payroll tax?
If my father Ronald Reagan were around today, I know what he’d do.
He’d do exactly what I’d do — get the flat-taxers and the fair-taxers together in a room and have them hash out a single tax reform program to sell to the American people.
So, sure, let’s bring the Obama Gang and its IRS lackeys to justice for their abuses.
But what we need most right now is for someone — Ted Cruz, Rand Paul, Donald Trump, even Jay Leno — to convene a national tax convention that would unite our side and lead the fight for a better tax code.
Republicans can’t afford to be split on the important issue of income tax reform or miss this chance to focus on the crimes of the IRS.
The Flat Tax and the Fair Tax each have pluses and minuses that need to be debated. But in the end it really doesn’t matter which idea triumphs.
America and all Americans would be better off with either one. Either would eliminate the progressive tax system and make federal taxes simpler, fairer, smarter and apolitical. And, best of all, either one would kill the IRS as we know it — forever.
- Reform the Tax Code (athomesense.com)
- Sharp Shooting with Michael Reagan & Cutting to the Quick with Ed Cox (mikesrobinson.com)
- Underreporting in Obamaland (athomesense.com)
- Imagine (athomesense.com)
- Editorial: IRS scandal highlights need for tax reform (newsday.com)
- New class of people identified as IRS enemies (wnd.com)
- This Isn’t The Ronald Reagan The GOP Wants To Remember (huffingtonpost.com)
- IRS targets 69 % adoptive families for audits as abuse of power emerges (thewiseme.com)
- IRS Scandal Silver Lining: Tax Reform Momentum (illinoisreview.typepad.com)
- IRS officials face grilling over lavish conference (wfaa.com)
MAY 16, 2013
REPUBLICANS AGREE TO STOP USING WORD “SCANDAL” IN EVERY SENTENCE IF OBAMA RESIGNS
POSTED BY ANDY BOROWITZ
WASHINGTON (The Borowitz Report)—Arguing that the American people are sick and tired of hearing the word “scandal,” a growing chorus of Republican lawmakers said they would stop using the word “scandal” in every sentence if President Obama resigns from office immediately.
“Mr. President, for the past week, the American people have heard nothing but scandal,” said Rep. Darrell Issa (R-California). “Scandal, scandal, scandal, and more scandal.” “You have called for investigations to get to the bottom of these scandals,” he added. “But the American thing to do is to quit.”
Agreeing that America was suffering from “scandal fatigue,” Sen. Lindsey Graham (R.-S. Carolina) said, “If even one of these scandals turns out to be real, it will be bigger than the creation of the universe,” adding that he and his fellow Republican senators were prepared to take turns standing in the well of the Senate chanting the word “scandal” until President Obama steps down.
“Rand Paul has personally offered to say the word ‘scandal’ for eleven hours,” he said.
On Fox News Channel, host Sean Hannity said that the American people were weary of hearing “nothing but scandal, scandal, scandal,” noting that Fox personalities had used the word “scandal” no fewer than thirty thousand times in the past four days.
“The only way President Obama can bring these scandals to a satisfying resolution is by resigning from office. Otherwise, he’s subjecting the American people to the ugly spectacle of scandal upon scandal upon scandal,” he said, adding, “Upon scandal.”
- Top Official Resigns Over IRS Scandal (huffingtonpost.com)
- IRS Acting Commissioner Resigns (Updated) (pjmedia.com)
- House Democratic Leader Defends Obama In IRS Scandal (huffingtonpost.com)
- In Two Hours Obama Destroys the GOP’s Benghazi and IRS Scandals (politicususa.com)
- US tax chief resigns amid scandal (bbc.co.uk)
- Boehner on IRS Scandal: Who’s Going to Jail? (breitbart.com)
- Will Republicans Let Obama Have His Scandal? – Bloomberg (bloomberg.com)
- Boehner reacts to IRS scandal: ‘Who’s going to jail over this?’ (theblaze.com)
- Obama fires IRS acting chief over ‘inexcusable’ tax targeting scandal (guardian.co.uk)
- IRS: 2 ‘Rogue’ Employees Responsible For Targeting Of Conservative Groups (newyork.cbslocal.com)
The Joke of the Day – 1/13/2013
A man wrote a letter to the IRS: “I have been unable to sleep knowing that I have cheated on my income tax. I understated my taxable income and have enclosed a check for $200.00. If I still can’t sleep, I will send the rest.”
Mitt Romney’s Taxing Problem
Updated: September 21, 2012 | 4:38 p.m.
September 21, 2012 | 3:43 p.m.
AP PHOTO/JULIE JACOBSON
Mitt Romney pauses as supporters cheer to remarks during a rally on Friday in Las Vegas.
Mitt Romney paid the Internal Revenue Service somewhere in the ballpark of $250,000 more than he legally needed to last year, solely for political consistency purposes.
For comparison purposes, that’s about as much money as an American earning the median income will pay in federal taxes – at current rates – over the next .
Romney donated $4 million of his $13.7 million income last year to charity, according to a summary of his 2011 tax returns released by the Republican’s presidential campaign on Friday afternoon. He only claimed $2.25 million in charitable deductions, leaving $1.75 million in potential deductions on the table.
Multiply that non-claimed money by the 15 percent tax rate on investment income – which the statement said was the primary source of Romney’s income last year – and you’ve got about a quarter of a million dollars headed unnecessarily to the IRS. The statement says this was done “to conform to the governor’s statement in August, based upon the January estimate of income, that he paid at least 13 percent in income taxes in each of the last 10 years.”
Reporters are sifting the details of the 2011 return right now, along with a very topline summary of returns from 1990 to 2009. That summary shows that Romney has, contra claims by Senate Majority Leader , D-, never paid less than a 13.66 percent effective federal tax rate, and paid an average effective rate about 20 percent over that time.
For comparison purposes, taxpayers in the middle quintile of income paid an effective rate of about 11 percent last year, according to the Congressional Budget Office. Those in the top 1 percent paid just under 29 percent.
Romney’s 2011 rate, in other words, puts him much closer to the effective-rate experience of the middle class than to that of the super-rich. He’d be even closer to the middle-class rate if he’d claimed all his deductions. Which, when you think about it, is what pretty much everyone in the middle class would do.
- Mitt Romney’s Fake Gift To The Treasury (huffingtonpost.com)
- Mitt Romney limited deductions, overpaid on $13 million income (riehlworldview.com)
- Mitt Romney claims to have intentionally overpaid 2011 taxes (dailykos.com)
- Mitt Romney’s Cynical Tax Ruse (motherjones.com)
- Mitt Romney Releases Basically Made-Up 2011 Tax Returns [Mitt Romney] (gawker.com)
- Mitt Is Overpaying His Taxes – For Now – Bloomberg (bloomberg.com)
- Mitt Romney Paid More In Taxes Than He Had To Last Year (businessinsider.com)
- Mitt Romney to Release 2011 Tax Return (dailyfinance.com)
- Mitt Romney Releases 2011 Tax Return (taxprof.typepad.com)
- Romney Forgoes Full Charity Tax Break for 13% 2011 Rate (bloomberg.com)
4 Easy Ways We Can Tax the Rich to Fill Government Coffers
With a little smart arithmetic, here’s how we can pay off the deficit–two times over.
August 28, 2012
Conservatives force the deficit issue, ignoring job creation, and insisting that tax increases on the rich wouldn’t generate enough revenue to balance the budget. They’re way off. But it takes a little arithmetic to put it all together. In the following analysis, data has been taken from a variety of sources, some of which may overlap or slightly disagree, but all of which lead to the conclusion that withheld revenue, not excessive spending, is the problem.
1. Individual and small business tax avoidance costs us $450 billion.
The IRS estimates that 17 percent of taxes owed were not paid, leaving an underpayment of $450 billion. In way of confirmation, an independent review of IRS data reveals that the richest 10 percent of Americans paid less than 19% on $3.8 trillion of income in 2006, nearly $450 billion short of a more legitimate 30% tax rate. It has also been estimated that two-thirds of the annual $1.3 trillion in “tax expenditures” (tax subsidies from special deductions, exemptions, exclusions, credits, capital gains, and loopholes) goes to the top quintile of taxpayers. Based on IRS apportionments, this calculates out to more than $450 billion for the richest 10 percent of Americans.
2. Corporate tax avoidance is between $250 billion and $500 billion.
There are numerous examples of tax avoidance by the big companies, but the most outrageous fact may be that corporations decided to drastically cut their tax rates after the start of the recession. After paying an average of 22.5% from 1987 to 2008, they’ve paid an annual rate of 10% since. This represents a sudden $250 billion annual loss in taxes. Worse yet, it’s a $500 billion shortfall from the 35% statutory corporate tax rate.
3. Tax haven losses are at least $337 billion.
The Tax Justice Network estimated in 2011 that $337 billion is lost to the U.S. every year in tax haven abuse. It might be more. A recent report placed total hidden offshore assets at somewhere between $21 trillion and $32 trillion. Using the lesser $21 trillion figure, and considering that about 40% of the world’s ultra-high-net-worth individuals are Americans, at least $8.4 trillion of untaxed revenue sits overseas.
4. That’s enough to pay off a trillion-dollar deficit. Reasonable tax changes could pay it off a second time:
(a) A non-regressive payroll tax could produce $150 billion in revenue.
Get ready for some math. The richest 10% made about $3.84 trillion in 2006. A $110,000 salary, which is roughly the cutoff point for payroll tax deductions, is also the approximate minimum income for the richest 10%. A 6.2% tax paid on $1.43 trillion ($110,000 times 13 million payees) is about $90 billion. The lost taxes on the remaining $2.41 trillion come to about $150 billion.
(b) A minimal estate tax brings in another $100 billion.
The 2009 estate tax, designed to impact only the tiny percentage of Americans with multi-million dollar estates that have never been taxed, returns about $100 billion per year.
(c) A financial transaction tax (FTT): up to $500 billion.
The Bank for International Settlements reported in 2008 that annual trading in derivatives had surpassed $1.14 quadrillion (a thousand trillion dollars!). The Chicago Mercantile Exchange handles about 3 billion annual contracts worth well over 1 quadrillion dollars. One-tenth of one percent of a quadrillion dollars could pay off the deficit on its own.
More conservative estimates by the Center for Economic and Policy Research and the Chicago Political Economy Group suggest FTT revenues of a half-trillion dollars annually.
Add it all up, and we’ve paid off the deficit, almost twice. More importantly, the avoided taxes and a few other sensible taxes could provide sufficient revenue for job stimulus without cutting the hard-earned benefits of middle-class Americans.
- 4 Easy Ways We Can Tax the Rich to Fill Government Coffers (alternet.org)
- 6 Things You Should Know About the $21 Trillion the World’s Richest People Are Hiding In Tax Shelters | Alternet (mbcalyn.com)
- TurboTax – Tax Tips for Avoiding E-file Rejections (turbotax.intuit.com)
- TurboTax – Video: What Days of the Week Does the IRS Deposit Tax Refunds? (turbotax.intuit.com)
- TurboTax – Tips to Reduce Self-Employment Taxes (turbotax.intuit.com)
- Understanding the Federal Tax Gap (turbotax.intuit.com)
- BuzzFlash on Taxes (seniorsforademocraticsociety.wordpress.com)
- Taking Note: Tax Avoider in Chief? (takingnote.blogs.nytimes.com)
- British tax dodgers to be publicly named (english.ruvr.ru)
- 5 Things You Can Expect from Washington if You Elect Republicans | Alternet (mbcalyn.com)
Anonymous Hacks IRS Database — Publishes Romney Tax Returns
By Orbson Rice
Late last night, the mysterious group of hackers known as Anonymous successfully hacked the main database for the Internal Revenue Service. The group appeared to have a singular target- Republican Presidential nominee Mitt Romney. Romney has been criticized by both parties for his failure to produce more than one past tax return. According to Ann Romney on ABC’s “Good Morning America” they had no intention of ever disclosing the contents on those returns: “We’ve given all you people need to know and understand about our financial situation and how we live our life”. Anonymous however, seems to have thought that we “the people” might want to know a little more about the man who seeks the White House.
The Anonymous attack successfully retrieved 25-years worth of Romney’s tax returns and published them without permission on major websites throughout the Internet. The majority of these websites removed the returns within minutes, however it was too late to completely protect the candidate’s already tainted image. We at Free Wood Post were able to examine Romney’s 2008 tax return and found that he had good reason to fear its release. The 2008 return paints a picture of an extraordinarily wealthy man, whose low tax rate and bizarre itemized deductions will surely raise many questions as to his suitability to be President.
Romney campaign spokeswoman Andrea Saul stated last week that “there has been no year in which Romney paid zero taxes”. In 2008, this was true. He earned $23,425,316 and paid $412.18 in federal income taxes. This calculates to a federal tax rate of 0.0018%. How did Romney get his tax burden so low? According to his return, he had approximately $23,407,000 in itemized deductions. These deductions ranged from $78,923 for “Toupee Creators Unlimited” and $41,826 for “Spray-on tan services” to a $3.8 million dollar write-off for a trip to Las Vegas with potential campaign donors. The Romney family also paid salaries to their numerous employees including, two yacht captains, three pilots for their private jets, two professional dog walkers, one toupee stylist and a “live-in contortionist”. What someone does with a live-in contortionist, one can only speculate. However, the $891,064 Romney spent on an “EWS Donor Party at the Pennsylvania Mansion” might give us a clue. While the return does not indicate what “EWS” stands for, given that the deducted supplies for the party included “Venetian masks, alcohol, lubricant and various Egyptian leather accessories” it was most likely an “Eyes Wide Shut” party.
In addition to his wild nights, Romney also deducted health related expenses. These included $127,000 for Cognitive Behavioral Therapy for a condition termed “Pseudologia fantastica” also known as Compulsive Liar Syndrome. This may explain why the Republican nominee’s views seem to change dramatically depending on his audience. In fact, his recent string of political gaffes may be the direct result of his inability to keep up with the many competing “truths” he has spoken over the past year. According to noted Psychiatrist Bryan King, “Pathological liars seem utterly sincere about their lies, but if confronted with facts to the contrary, will often just as sincerely reverse their story.” According to Politifact, a news organization that researches the veracity of politician’s statements, only 16% of Romney’s examined statements were found to be completely true.
While the 2008 tax return only gives us a brief glimpse into the life of Mitt Romney, it is unlikely that the other 24 years would have given us his complete financial picture. Given that Romney has several secret tax havens in the Cayman Islands, Bermuda and until recently Switzerland, we will likely never know the extent of his holdings or of the other unorthodox appetites he quenches with that money. However, the Anonymous hack did succeed in giving Americans a better understanding of the Republican candidate.
- Anonymous Hacks IRS Database – Publishes Romney Tax Returns (chasvoice.blogspot.com)
- Anonymous Attack Retrieved 25-years Worth of Romney’s Tax Returns and Published Them (2012thebigpicture.wordpress.com)
- #ANONYMOUS Hacks IRS – Releases TAX Return #OWS (occupythebanks.com)
- Anonymous Hacks IRS Database and publishes Romney Tax Returns (12160.info)
- Russ Hallberg Jr liked Pit Bull’s discussion Anonymous Hacks IRS Database and publishes Romney Tax Returns (12160.info)
- 5. Anonymous Hacks IRS Database and publishes Romney Tax Returns (12160.info)
- RNC Completely Misfires In Accusation That David Axelrod Is Reid’s Source (huffingtonpost.com)
- Will The Media Force Mitt Romney To Release More Tax Returns? (crooksandliars.com)
- Obama: Romney’s economic plan is return to Bush failures – The Hill – covering Congress, Politics, Political Campaigns and Capitol Hill | TheHill.com (mbcalyn.com)
- Mitt Romney’s plan to raise your taxes and cut his (blogs.ajc.com)
Who, What, Why: Why are US athletes taxed on Olympic medal wins?
The sweet taste of Olympic victory for US swimmers Ryan Lochte (l) and Michael Phelps (r)
US medal-winning athletes at the Olympics have to pay tax on their prize money – something which is proving controversial in the US. But why are athletes from the US taxed when others are not?
The US is right up there in the medals table, and has produced some of the finest displays in the Olympics so far.
Michael Phelps has broken the record for most Olympic medals ever, and16-year-old rising star Gabby Douglas has won the all-round gold in the gymnastics – the first African-American woman to do so.
So the US is feeling pretty proud of its athletes right now. But not everyone is happy to hear that their Olympic medal-winning athletes are being taxed on their medal prize money.
Athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, a Republican, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money.
“Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home,” said Rubio.
This, he said, is an example of the “madness” of the US tax system, which he called a “complicated and burdensome mess”.
· The US, unlike most countries, has a “worldwide” system of tax, which means that money earned abroad is liable for US tax
The US Olympic Committee awards prize money to its medal winners – $25,000 (£16,000) for gold, $15,000 (£10,000) for silver, and $10,000 (£6,000) for bronze.
This money is considered taxable income by the US Internal Revenue Service (IRS).
According to the advocacy group Americans for Tax Reform (ATR), an athlete on the highest rate of tax (35%), could face a tax bill of $8,750 (£5,600).
The value of the medals themselves could be subject to tax too, according to the ATR – adding a further $236 (£150), $135 (£85), and $2 (£1.20) respectively for gold, silver and bronze.
The Olympic example highlights what they regard as the underlying problem of the US’ so-called “worldwide” tax model.
Under this system, earnings made by a US citizen abroad are liable for both local tax and US tax.
Most countries in the world have a “territorial” system of tax and apply that tax just once – in the country where it is earned.
With the Olympics taking place in London, the UK would, in theory, be entitled to claim tax on prize money paid to visiting athletes. But, as is standard practice for many international sporting events, it put in place a number of tax exemptions for competitors in the Olympics – including on any prize money.
That means that only athletes from countries with a worldwide tax system on individual income are liable for tax on their medals.
And there are only a handful of them in the world, says Daniel Mitchell, an expert on tax reform at the Cato Institute, a libertarian think tank – citing the Philippines and Eritrea as other examples.
But with tax codes so notoriously complicated, unravelling which countries would apply this in the context of Olympic prize money is a tricky task, he says.
Mitchell is a critic of the worldwide system, saying it effectively amounts to “double taxation” and leaves the US both at a competitive disadvantage, and as a bullyboy, on the world stage.
· Gold - $25,000 (£16,000)
· Silver - $15,000 (£10,000)
· Bronze - $10,000 (£6,000)
“We are the 800lb (360kg) gorilla in the world economy, and we can bully other nations into helping enforce our bad tax law.”
The tax burden may not be as heavy as it first appears, however, as there are a number of credits and tax treaties which can either exempt or reduce the amount due, says tax lawyer and blogger, Kelly Phillips Erb.
She believes that the US tax system needs to be modified, and – most importantly – simplified.
The Rubio bill – by adding another exemption to the already complicated tax code – would only make matters worse, she says.
Congress is about to go off on a one-month recess, and with the Olympics already well underway, this is, says Erb, more about “political grand-standing” than anything else.
Not all athletes get prize money along with an Olympic medal – it depends what country you come from.
How much for a gold medal at London 2012 Olympics:
· Singapore - $800,000 (£515,000)
· Kazakhstan - $250,000 (£160,000)
· Kyrgyzstan - $200,000 (£130,000)
· Uzbekistan - $150,000 (£95,000)
· Russia - $135,000 (£90,000)
· Tajikistan - $63,000 (£40,000)
· US - $25,000 (£16,000)
· Australia - $20,000 (£13,000) plus face on a stamp
· UK - No money - but their face on a stamp
Sources: BBC Uzbek, Reuters
Money is not awarded by the International Olympic Committee. The decision whether to offer prize money is made by the national Olympic Committees in each individual country, who also set the sum.
UK medal winners get no prize money – but get the honour of appearing on a stamp instead.
At the opposite end of the scale is Singapore, which is offering $800,000 (£515,000) for a gold medal.
Many countries in Central Asia are alsooffering large sums to medal winners.
John Hoberman, a sports historian and expert on doping at the University of Texas at Austin, says Americans are focusing on the wrong issue.
The real question, he believes, is whether athletes should be awarded prize money at all at the Olympics – and he is firmly in the “no” camp.
“Cash incentives are just an incentive to cheat,” says Hoberman.
He believes the more money you offer, especially in poorer countries, the greater the chance an athlete will be tempted to dope.
- Why are US medal winnings taxed? (bbc.co.uk)
- Senator Rubio Introduces Legislation to Waive Tax on Olympic Winnings (jdjournal.com)
- American athletes taxed for winning Olympic medals (rt.com)
- Fla. senator introduces bill to make Olympic prizes tax-exempt (krem.com)
- Winning a gold medal brings a $9,000 tax bill (stltoday.com)
- Phelps sets record for the number of Olympic medals (english.ruvr.ru)
- Bill introduced to exempt taxes on Olympic medals (swrnn.com)
- Rubio bill outlaws taxes on gold medals (thehill.com)
- America’s Olympic Winners Must Pay IRS Nearly $9,000 For Every Gold Medal (mediaite.com)
- Florida senator proposes bill banning taxes on Olympic medals and prize money (charlotte.news14.com)
Underwater Homeowners Face a Tax Time Bomb
On Dec. 31, underwater homeowners could be hit with a huge tax bill, unless Congress moves to help them.
August 1, 2012
The letter from Bank of America Home Loans got right to the point. “We are pleased to inform you that we have approved your Home Equity Account for participation in a principal forgiveness program offered as a result of the Department of Justice and State Attorneys General global settlement with major mortgage servicers.” In the letter, which I obtained from an anti-foreclosure activist, Bank of America offered the homeowner full forgiveness of their entire home equity loan balance of over $177,000. But then Paragraph 5 came with an ominous warning: “Please be aware that we are required to report the amount of your cancelled principal debt to the Internal Revenue Service.”
Under current law, a principal reduction like this would be exempted from tax liability. However, that law, the Mortgage Forgiveness Debt Relief Act, expires at the end of the year, and after that, any mortgage debt forgiveness provided to a borrower will count as gross income for tax purposes, potentially costing millions of families several billion dollars. In the above case, the borrower would be required to pay taxes on the entire $177,000 amount forgiven by the bank, as if it were earned income. And that’s money that struggling homeowners simply don’t have.
“They wouldn’t be able to handle it,” said Peggy Mears of the Alliance of Californians for Community Empowerment, a community organizing group in California that has worked extensively on foreclosure issues. “If they could handle it, they wouldn’t be in arrears with their house notes. They don’t have that kind of money.”
The tax issue could significantly disrupt a still-fragile housing market and rob homeowners of the tools to pull themselves out of mortgage debt. It also represents a final indignity for homeowners who have been abused by the fraudulent mortgage practices of leading banks for years. Just when they think they get relief from their troubles, they get hit with a massive tax bill they cannot pay. “This has the effect of pulling people up with one hand, and hitting them in the face and knocking them over the cliff with the other,” said Sen. Jeff Merkley, D-Ore., who supports extending the law.
The issue dates back to 2007, when the housing bubble first started to deflate. Rep. Brad Miller, D-N.C., was tasked by the then-chairman of the House Financial Services Committee, Barney Frank , D-Mass., to find ways to help borrowers who would get caught up in the ensuing carnage. Miller’s search led him to Section 181 of the tax code. “I heard about the fact that interest reductions are not treated as income and principal reductions are, which creates a huge problem for modifying mortgages and solving the foreclosure crisis,” Miller said.
The odds of foreclosure largely correlate with a borrower’s level of indebtedness. A homeowner who’s “underwater,” meaning he or she owes more on the home than it’s worth, is far more likely to miss payments that a borrower with equity. And studies show that principal reductions do a far better job than any other kind of loan modification in helping borrowers maintain payments and avoid foreclosure. If you privilege other modifications through the tax code, like reducing the interest rate, over principal reductions, you punish those homeowners receiving the most sustainable type of modification, and eventually take them off the table, leading to a weaker housing recovery.
“I suggested to Barney [Frank] that we create an exemption for principal reductions,” Miller said. “Barney said to me, ‘Let’s go talk to Richie,’” meaning Richard Neal, the chairman of the tax-writing subcommittee in the House. Neal agreed to help, and the change got added as an amendment to an unrelated bill.
That first exemption lasted three years, but the foreclosure crisis lingered on beyond that. Democrats were able to include an extension in the larger deal that extended all of the Bush tax cuts for two years. Now the law is scheduled to expire again on Dec. 31, 2012. Any debt relief that completes after that date would be taxable.
The difference now is that principal reductions and other debt relief are set to become more widespread. Banks have been extremely resistant over the last several years to grant principal reductions, which forces them to take an up-front loss. Even if, over time, the greater probability of the borrower maintaining the payments makes it more cost-efficient for the bank than the risk of a bigger loss in foreclosure, banks do not want to mark the immediate loss on their books. In addition, mortgage servicers, who manage securitized loans sold to investors, get compensated through a percentage of unpaid principal balance, so principal forgiveness represents a direct cut into their profits.
Because of the mortgage settlement, banks are mandated to forgive at least $10 billion of principal, as a punishment for using false documentation to foreclose on homeowners, among other abuses. Though this is a relatively small amount of forgiveness (homeowners have roughly $700 billion in negative equity on their mortgages), the implications for the borrowers who receive it are significant. A $100,000 principal reduction for a family making the median adjusted gross income of $32,393 would calculate to an additional tax bill of roughly $21,200. And most homeowners threatened with foreclosure and in need of a principal reduction have far poorer finances than the median. “’I’m on unemployment and I just got a $20,000 tax bill?’” said Ira Rheingold of the National Association of Consumer Advocates. “This would be so counter to public policy, it makes absolutely no sense.”
In addition, the tax exemption also covers short sales, which have increasingly become an option for banks and homeowners to avoid foreclosure. In a short sale, the bank agrees to allow homeowners to sell their property for less than the value of their mortgage, forgiving the balance. The borrower walks away from the home without an eviction, the property sells at a higher price in a short sale than a foreclosure sale, and the bank doesn’t have the expense of maintenance and upkeep on the property between eviction and the foreclosure sale. Short sales increased 25 percent year-over-year in the first quarter of 2012. But if the exemption expires, the homeowner would have to pay tax on the balance forgiven by the bank in a short sale, making this option much less attractive.
The mortgage settlement added several other cases where homeowners would have to pay taxes on awards from banks. Under the settlement, up to 750,000 foreclosure victims, who have already lost their homes, will receive checks of $2,000 as compensation for foreclosure fraud. But the settlement language did not make clear that the cash reward represented compensatory damages, and as a result, these checks could be taxed. Similarly, service members stand to get compensation of $116,800 or more, due to a series of violations under the Servicemembers Civil Relief Act, including incidents where banks illegally foreclosed on military members while they were deployed overseas. But because of the vagueness of the language, they could be taxed as well. Rep. Brad Miller said he advised those involved in writing the settlement that they should try to make everything, including the mandated principal reductions, explicitly portrayed as compensatory damages, to ensure the exclusion from tax liability. “They had no idea what I was talking about,” Miller said.
At this point, only Congress can fix this problem by extending the exemption, and there are two parallel efforts underway to do so. Sen. Debbie Stabenow, D-Mich., has sponsored a bill, S.2250, which would prevent taxation on all debt forgiveness, like principal reduction or short sales, through the end of 2013. That bill has 17 co-sponsors, including four Republicans (Dean Heller, Scott Brown, Susan Collins and Johnny Isakson), as well as the support of the White House, which called for it in its proposed budget. Rep. Jim McDermott, D-Wash., has a more extensive bill in the House, H.R.4290, which would not only relieve the tax burden for principal forgiveness, but also exempt the direct cash payments to homeowners from the mortgage settlement. It would also stop banks from taking a deduction for any payments they make for Servicemembers Civil Relief Act violations. That bill has 42 co-sponsors, but no Republicans. “I wanted to put an idea out there and let it cook,” McDermott said. “I can’t ram it through, I can’t get a hearing on it in the Ways and Means Committee. But people can look at it, decide it’s a good idea, take it and shape it.”
Given that this is in essence a tax cut – the Congressional Budget Office estimates that excluding principal reductions from taxation for two more years will save recipients $2.7 billion — many Democrats in Washington believe that Republicans will eventually get onboard. But that’s no guarantee. “I’m not sure we can get that extended,” Rep. Miller said. “Republicans are not keen on principal reduction in the first place. When we extended the law in 2010, that was considered a give to Democrats.” Given that the tax issue would in all likelihood bring principal reductions to a screeching halt, Republicans could view resisting an extension as a way to stop something where they have ideological opposition. And it could be used as a bargaining chip in other negotiations.
In addition, it’s not like Congress has nothing to work on in the lame duck session, where this will probably get decided. Lawmakers must navigate a host of issues, including trillions of dollars in fiscal measures like the Bush tax cuts, the automatic sequester of $1.2 trillion in discretionary and defense spending, the alternative minimum tax and much more. With all this packed into a short space of legislating, the principal reduction issue could easily get lost in the shuffle. And it’s not as if Washington has made a priority out of granting relief to homeowners over the past several years. “In a rational world with a rational Congress, I would not be concerned,” Rheingold, of NACA, said. “But we don’t have that.”
At stake is the future of the housing market itself. Though analysts keep touting a bottoming out of prices and home sales, the numbers suggest that there’s still a long way to go, and the biggest stumbling block remains negative equity. “For us to get to a housing recovery, we really do need significant principal reduction,” said Rheingold. “As we’re seeing the first signs of doing any principal reduction or short sales, if this tax relief is allowed to expire, it would really do tremendous damage.”
But consumer and housing advocates have not engaged on the issue yet, though they have relentlessly demanded more principal reductions. “It’s not something that a lot of us have been thinking or talking about,” acknowledged Rheingold. “We’re thinking about implementation of the settlement, and whether there will be principal reductions, not these other hazards.” Housing advocates have called on Ed DeMarco, the head of the Federal Housing Finance Agency, to authorize principal reductions on loans owned by Fannie Mae and Freddie Mac. And his rejection of this has spurred calls for President Obama to fire him. But this issue, which would punish the beneficiaries of those principal reductions with a giant tax bill, has not generated the same level of outrage.
There’s still time for a fix. An extension would probably get folded into some other must-pass bill at the end of the legislative session, reasoned Sen. Merkley. There’s also the possibility of dealing with it retroactively sometime in 2013, before homeowners get the big surprise on their 2013 taxes. “I’ve heard no one defend the way the law will go,” Merkley said. Rep. McDermott, the lead sponsor in the House, saw options as well. “The legislative process can move very rapidly when it wants to,” he said. “When there’s a will, there’s always a way. What’s troublesome is finding out if anybody cares.”
Peggy Mears, of ACCE, said that her organization would begin to talk to its members about the issue. “We’re going to refuse to give up fighting for homeowners,” she said. “It would be a shame for people in Congress to pull money out of the consumer’s pockets.”
Without a strong push from outside advocates and attention from lawmakers, an extension will be a challenge. And homeowners abused by banks throughout the mortgage process would suffer a final nightmare courtesy of the Internal Revenue Service. “Of all the tax changes likely to expire,” Rep. Brad Miller said, “this is the one that causes me the most concern.”
- Underwater Homeowners Face a Tax Time Bomb (alternet.org)
- Will Congress Screw Underwater Homeowners on December 31? (motherjones.com)
- Underwater Homeowners Face a Tax Time Bomb (prn.fm)
- Housing crisis datapoint of the day, tax-relief edition (blogs.reuters.com)
- Principal reductions on underwater homes may soon be taxed (americablog.com)
- (tax)BOMBSHELL!- ACCORING TO US CONGRESSMAN, IRS RULES ARE A MAJOR THREAT TO HOUSING CRISIS….. (mattweidnerlaw.com)
- Regulator Leaves Underwater Homeowners High and Dry – Bloomberg (bloomberg.com)
- Stop Bashing DeMarco for Mortgage Aid Ruling (bloomberg.com)
- FHFA’s Edward DeMarco doesn’t give an inch on mortgage principal reductions (scpr.org)
- Why Fannie and Freddie Won’t Budge to Save Underwater Homes (business.time.com)
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Prediction: Romney Will be the Republican Nominee
No one who has received amnesty for a serious crime, such as tax evasion, can be president. One would think that someone for whom the clear implications are that he has received amnesty, but will not release exculpatory documents, also cannot be president.
As the press has been focused on what we now know as Romney’s “retroactive retirement”, that does not help him escape anyhow, I have tried to shine a light on the clearest, cleanest, unspinnable, problem with Romney’s finances — — suggesting that the Republican leaders, who dislike him anyhow, such a fatally-flawed nominee.
But, all I had on my side was logic. Why would he have closed only the Swiss Account when the Cayman/Bermuda accounts are also abusive tax havens, and he left those alone? Why would Romney have bothered to close the Swiss account at all? I deduced that what was special about his Swiss Account was the amnesty program allowed by the IRS. I also surmised that it was amnesty, more than anything else, that would keep him from releasing earlier tax returns.
Now, through investigative reporting, there is that the logic was not wrong. Romney failed to disclose the documents he filed with the IRS in 2010, the year he has already released, that detail his Swiss Account holdings.
Hence, I am now prepared to go beyond my suggestions that the Republicans would not give him the nomination to a firm prediction: Romney will ” as Darrell Issa, who also cannot run for higher office due to his , suggests). be the 2012 Republican nominee for president. (He may be the “
Who will be? Before Romney is forced to withdraw, he will make a Vice Presidential selection, as an attempt to make it seem that his nomination is just rolling along, and is inevitable.
That person will have been fully vetted, (including his/her tax returns!).
I predict, therefore, that the Republican nominee for president will be the person Romney selects as his VP.
How ironic if that turned out to be T-Paw, who dropped out after losing to Michelle Bachmann in Iowa, (and whom Lawrence O’Donnell picked all along) becomes the 2012 Republican nominee for president!
- Paul Abrams: Ask Mitt About Amnesty — His Own (huffingtonpost.com)
- MSNBC Guest: Mitt Romney Could End Up Withdrawing From GOP Race Before Convention (mediaite.com)
- Paul Abrams: Ask Mitt About Amnesty — His Own (huffingtonpost.com)
- Mitt Romney’s 2010 Tax Disclosure Missing Key Documents (huffingtonpost.com)
- Romney and amnesty (prairieweather.typepad.com)
- Ah. Mitt Romney Has Not Released His Taxes For 2010 After All… (delong.typepad.com)
- Is the FBAR FUBAR? (talkingpointsmemo.com)
- Is The Noose Closing Around Romney’s Tax Returns? (businessinsider.com)
- Jon Stewart Makes Up Hilariously Fake Tax Returns In Response To Romney’s Refusal To Release (mediaite.com)
- About Romney’s Swiss bank account … (blogforarizona.com)