Exclusive Interview With TurboTax Whistle Blower

Last week, I did a blog post about Mr. Charles Freret who went on a one-man crusade to expose a flaw in the popular do-it-yourself tax program: Intuit’s TurboTax.  You can read that article & post here.   After Mr. Freret read the aforementioned post, he contacted R&G Brenner and agreed to sit down for an exclusive interview.  Mr. Freret’s story of persistence to discover the truth is incredible.  What he uncovered along his journey is TurboTax is miscalculating tax returns on a large scale.  And upon further investigation, the TurboTax flaw was present not only in the current tax year program, but tax years 2008 & 2007 as well.  Coverups, Lies & Government disinterest all will eventually lead to more money out of TurboTax users pockets.  Here is his story:

R&G Brenner (RGB): How long have you been preparing your own taxes?

Charles Freret (CF):…over 40 years

RGB: So you’re pretty well versed in preparing your own taxes, and you have been doing them by hand!?

CF: Yes

RGB: Was 2010 the first year you used TurboTax?

CF: No, I used it once before in 2004

RGB: But this tax year, you discovered a problem with the calculation of your taxes using TurboTax?

CF: That’s correct, and the only reason I used it this year…was because I had a free [e-file] submission

RGB: In order to get your refund a little faster?

CF: Yes

RGB: Ok…and you discovered that there was a problem with TurboTax increasing your refund.

CF: Yes, by [giving] a deduction twice.

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Half of Americans Will NOT Pay Taxes in 2010

All is not well at the IRS.  According to the Tax Policy Center–and what is surely to exacerbate the Federal budget crisis-47% of American households will pay ZERO federal income taxes this year.

Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability…In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Even if you do not have to pay federal taxes this year, it is recommended that you still file a return as this is the only way to receive money back that was withheld by your employer.  If you are unsure if you are required to file a tax return or if you are due money back from your employer, contact us today.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners – households making an average of $366,400 in 2006 – paid about 73 percent of the income taxes collected by the federal government.

The number of households that don’t pay federal income taxes increased substantially in 2008, when the poor economy reduced incomes and Congress cut taxes in an attempt to help recovery.

In 2007, about 38 percent of households paid no federal income tax, a figure that jumped to 49 percent in 2008, according to estimates by the Tax Policy Center.

In 2008, President George W. Bush signed a law providing most families with rebate checks of $300 to $1,200. Last year, Obama signed the economic recovery law that expanded some tax credits and created others. Most targeted low- and middle-income families.

Obama’s Making Work Pay credit provides as much as $800 to couples and $400 to individuals. The expanded child tax credit provides $1,000 for each child under 17. The Earned Income Tax Credit provides up to $5,657 to low-income families with at least three children.

There are also tax credits for college expenses, buying a new home and upgrading an existing home with energy-efficient doors, windows, furnaces and other appliances. Many of the credits are refundable, meaning if the credits exceed the amount of income taxes owed, the taxpayer gets a payment from the government for the difference.

“All these things are ways the government says, if you do this, we’ll reduce your tax bill by some amount,” said Roberton Williams, a senior fellow at the Tax Policy Center.

The government could provide the same benefits through spending programs, with the same effect on the federal budget, Williams said. But it sounds better for politicians to say they cut taxes rather than they started a new spending program, he added.

The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here’s how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Source: Huffington Post

States Are Crossing Borders to Collect Taxes

The States are getting desperate.   New York & Connecticut (among others) are gearing up to enforce a tax law usually reserved for the rich and famous.  Athletes, for example, make millions upon millions of dollars and their travel schedules are well known. Therefore, when they travel to another state to play, that particular state taxes a prorated share of their annual income.  Due to the financial crisis and state budgets crises, now the Joe-the-Plumbers of the world can expect to be taxed just like the Joe Mauers of the world (who just signed the richest contract for a catcher in MLB history).

Anyone who crosses a state border for work — to make a sales call, say, or meet with a client or do a road show on Wall Street — probably owes income taxes in that state.

If you live in Boston but spend one out of 250 workdays this year in New York, you owe New York income taxes on 1/250th of your salary. And vice versa if you are a New Yorker visiting Boston — or Anywheresville, for that matter — for business.

Such laws have been on the books for decades, and they vary by state. But it is only recently, accountants and tax lawyers say, that many states appear to have picked up enforcement, expanding it beyond the wealthiest celebrities and athletes.

“The states are all hungry for revenue,” said Alan Clavette, an accountant in Newtown, Conn. “We are certainly seeing states like New York and Connecticut looking more and more for executives and everyday taxpayers who may be spending time across the border.”

Former NY State tax commissioner James W. Wetzler said aside from imposing this tax on the rich, it was largely a “don’t ask don’t tell” type of deal.  The amount of time and recourses required to go after the lawyers or traveling salesmen simply did not warrant the expense.  However, governing bodies now have access to tax data they never had before and this all appears to be changing:

But now states have greater access to data warehouses that help them better track taxes owed. Real estate transactions, federal data from the Internal Revenue Service, commercial license plates, traffic tickets, bids for government construction projects — all this information, newly digitized and dumped into a computer system, can help states find tax scofflaws.

“We’re sort of getting into ‘1984’ land here,” said Kenneth T. Zemsky, an accountant and partner at Ernst & Young. “A lot of the reason they went after athletes and entertainers is that they couldn’t find the other people. Now they’re able to get those people, too.”

Failure to file in accordance with this tax law can have serious consequences.  Most states take multiple years to investigate and come to final determinations on returns that they audit. Depending on the amount they claim you owe, it could lead to garnishment of wages and/or future refunds.  Also,  penalties and interest continue to accrue for the entire period of non-payment. Depending on the state, the penalties and interest could be greater than the amount of taxes.

It appears that the states best enforcement tactic may be requiring employers to withhold additional state taxes from employee’s paychecks:

State auditors may not be able to monitor every border-crossing, but with corporate payroll managers as their enforcers, they don’t need to…In some cases auditors check to see if, say, an employee who was reimbursed for airfare to California also had California income taxes withheld from his paycheck. If not, the company can be fined.

The bigger burden associated with distributing your taxes to more state governments is the administrative effort it requires, for both employee and employer. Many states require filing a return for a single day’s work. For peripatetic workers like salesmen or consultants, filing a pile of additional state tax returns can become prohibitively expensive, not to mention frustrating.

In other words, this all boils down to enforcement.  Even with all the new technology at the state’s fingertips, they may not have enough to gain with a full court press on this issue.  The future will surely reveal which states are the most aggressive.  The most aggressive states stand the most to gain, and reciprocally, they are the states that are more desperate to close their budget gaps.  The state of New York appears to be desperate, and thus we would not recommend that NY taxpayers take a “wait-and-see” approach.  If recent history is any guide, NY State will tax first and ask questions later.  If you think you will be affected by the enforcement of this tax law, please contact us.  An experienced R&G Brenner tax consultant is ready to guide and advise you through this process.

Source: NY Times

California Wants To Repay I.O.U.’s

The state of California has announced that they would like to make good on over $50 Millon in uncashed I.O.U.’s–also known as Registered Warrants–to some 59,000 residents and businesses as a result of last years budget crisis; almost half of which are due to Los Angeles County residents.

John Chiang, the state controller, promised Thursday to contact every one of the nonredeemers in an effort to “close an ugly chapter in California fiscal history.” Mr. Chiang practically begged them to drain the treasury.

“We have your money,” he said. “Ask for it. We want to give it back to you.”

California issued about 450,000 I.O.U’s totaling approximately $2.6 Billion, and starting redeeming them–with interest–this past September.  However, not everyone has cashed in yet.

With unemployment hovering around 12%, this money is desperately needed…but some may not even realize they have money coming to them.

If you would like to redeem your I.O.U., California residents & businesses must do so BEFORE September, 2010.  In the event that you don’t want to wait for CA to contact you, There are a few ways you can collect your well deserved refund:

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Taxpayer Advocate Scolds IRS

In the wake of the newly imposed regulations governing paid tax preparers, Nina E. Olson of the office of The National Taxpayer Advocate–an IRS watchdog–issued a report faulting the IRS on collecting delinquent taxes.  She called it “…an astonishing lack of transparency as to what is included in these revenue figures and how they are computed,”.  After the IRS reported $118 Billion in collected delinquent taxes, the figure turned out to be more like $86 Billion.  This 27% difference was essentially buried in the footnote of the report with no explanation for the miscalculation.

Furthermore, the reports specifically addresses other IRS shortcomings including a lack of customer service, excessive use of liens, and criticisms of the new regulations governing paid tax preparers.

Regarding I.R.S. customer service:

The single biggest problem at the agency was getting an I.R.S. representative to pick up the phone when a taxpayer called with questions.

Only six out of 10 callers now get through, after an average waiting time of 12 minutes, compared with eight out of 10 three years ago. The report called the I.R.S.’s customer service — a focus of the agency — “unacceptable.”

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