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RECENT TAX DEVELOPMENTS
I often hear those with federal tax debts state: “I am worry-free because all I own is my home which is an exempt homestead.” I tell them to start worrying. Other creditors lack the powers given by Congress to IRS. IRS can reach your homestead to satisfy an individual tax debt even if the home is titled as tenants by the entireties and your spouse did not sign the tax return. IRS can reach your retirement assets protected in many states against most other creditors. IRS can also wipe out your bank account simply by sending a letter (Notice of Levy) to the bank and garnish your wages without a court order. In a flash the account or wages disappear. Recently, IRS Chief Counsel advised that IRS can levy on an interest in non qualified or incentive stock options even when the non-qualified stock option plan restricts transferability and the ISO plan is non-assignable under ERISSA. Although taxpayers have certain limited collection due process rights, it is often wiser to borrow to pay off IRS and deal with creditors who must first obtain a judgment in order to involuntarily collect from you.
COMPLEXITY OF TAX CODE
I recently participated in an American Bar Association telephone conference with Nina Olsen, the National Taxpayer Advocate. Her biggest complaint about the tax system is its complexity. She says taxpayers spend about 7.6 billion hours per year complying with the tax law. Since 2001, there have been more than 3,250 changes to the tax code. In 2008 alone, there were 500 changes. The number of words in the code, estimated at 2.1 million, has more than tripled since 1975. 25 volumes of tax regulations now take up 9 feet of library shelf space. Some of the more vexing areas of needless complexity involve the Alternative Minimum Tax, over 100 phase out rules for various tax benefits and approximately 130 distinct civil tax penalties. That, despite Congress having passed Tax Reform Acts in 1969, 1976, 1986 and 1998, a Tax Reduction Ac...
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A LESSON LEARNED ABOUT RISK
January 11, 2009
A New Year resolution that should be on everyone’s list is to gain a better understanding of and appreciation for risk.
RISK IS A NORMAL ASPECT OF LIFE
Robert Frost: “We took risks. We knew we took them. Things have come out against us. We have no cause for complaint.”
Harold Macmillan: “To be alive at all involves some risk?”
We consciously and unconsciously take risks every day. We drive to work not thinking all the time of the likely risk of an accident and remote risk of death. We put the risk aside because driving is a must if we are to get about. We board planes for business trips and vacations assuming the risk flight because we view the hazard as remote and always happening to someone else. Some of these daily risks are born from absolute necessity and some are voluntarily assumed.
Risk is also an element of every investment alternative. Investment risk is directly related to reward. Before the sub-prime crisis many chased performance seeking the highest available rate of return thinking that the return in excess of other available rates was a gift. Many were unaware that they were taken on much greater risk than for lesser returning investments.
General George S. Patton: Take calculated risks. That is quite different from being rash.”
I was speaking with a stock broker a week ago. He said “there isn’t much risk left in the market because it has already fallen so low.” I asked him if he’d considered specific company risk. The risk that a company you hold may go out of business may not be reflected in the averages. Equity value can disappear very quick, e.g., Wachovia.
I visualize investment risk by thinking of a ladder braced at the bottom and pointing straight up in the air. The ground is the so called “risk free” U.S. Treasury rate for a short term, mid-term or long term obligation. Initially, each percentage point above the risk free rate takes you one rung up on the ladder. The hig...
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February 1, 2009
One might think of the economy as a horse drawn wagon loaded with goods and services. Three of the four horses pulling the wagon are consumers. The other horse is government spending. The wheels allowing the wagon to move are the four spokes of the financial system providing credit, namely: (1) consumer and mortgage borrowing (2) business borrowing (3) state and local borrowing and (4) U.S. Treasury borrowing. The axel grease allowing the wheels to turn is confidence for every financial transaction is a series of promises we trust will be kept. When a criminal like Bernard Madoff breaks a promise, we discount his behavior as abnormal. But, when sincerely made promises are broken by the system at large our confidence is badly shaken.
Today the three consumer horses have stopped galloping out of depression, fear and uncertainty. Three of the four credit wheels have broken off from their axels; and, even if we could get them back on, there is no axel grease to start them turning.
In his inauguration address, President Obama stated, “The question we ask today is not whether our government is too big or too small, but whether it works…” Clearly, he means to steer the economic recovery by flexible pragmatism as opposed to a fixed ideology.
A MULTI-PRONGED ASSAULT
President Obama intends to assault the worsening economic catastrophe in a number of different ways, namely:
1. Economic Stimulus: Stimulus measures are intended to create jobs and boost confidence that consumers will awaken from the spending slumber like Sleeping Beauty. The House last week passed a huge stimulus bill intended to jump start the economy. The Senate this week will take up a similar measure. There are, however many views about what this bill should and should not include that will eventually be resolved by compromise. Some issues are:
a. Economic Recovery versus systemic change: The House bill goes beyond direct job producing provisions like road proj...
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ANOTHER CHARGE OF THE LIGHT BRIGADE?
March 21, 2009
Media baron Rupert Murdoch was quoted recently: “We are in the midst of a phase of history in which nations will be redefined and their futures fundamentally altered.”
A far less notorious Russian First Deputy of Staff, Vladislav Surkov, was also recently quoted: “The crisis won’t be overcome if we fight it with troops of sluggish number-crunchers. We need new creative solutions, not a scientific basis for doing nothing, lying n the stove and waiting for the restoration of the American economy.”
The Charge of the Light Brigade, immortalized in Tennyson’s poem, exemplifies how stupidity, miscommunication, incompetent leadership combined with unimaginable bravery to bring about a military disaster for the British against the Russians in the Crimean War. Many are alarmed that President Obama’s Stimulus plan together with his energy, education and health care proposals will inevitably cause an economic calamity for this country. No one can adequately predict the future but I do believe that the administration is not blindly charging against insurmountable odds and does have a sane plan that is intelligently based on present circumstances and has a good chance of success. In this issue I will focus on some broader policy issues and give you a framework for understanding what is being attempted.
WHAT ARE THEY TRYING TO ACCOMPLISH?
It is helpful for me to think of the administration’s plan as three interconnected plans, namely:
1. Stabilize the economy and prevent a deflationary cycle: In my last issue “Congressional Stimulitis” I discussed the several components of President Obama’s stimulus plan which includes $800 billion in government spending, continued and expanded bank rescue efforts printing money to ease credit flows and a program to stem home foreclosures. One criticism of the package is that it is unfocussed diluting its effect by spreading funds over too many projects. I for one would have preferred more e...
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CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS
COME IN FROM THE COLD
The IRS has announced a revised voluntary disclosure policy for those with un-reported foreign bank accounts who want to come in from the cold.
CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS
Offshore or foreign bank accounts have always been perfectly legal and U.S. citizens or residents can own them for legitimate reasons such as higher investment yields, creditor protection or to facilitate business dealings abroad. The owner of a foreign bank account will have no problem with the U.S. government so long as the account is reported to the Treasury on TD 90-22.1 (Foreign Bank Account Report or FBAR) by June 30 of each year and the interest income from the account reported to IRS in a timely filed Form 1040.
Many U.S. persons, however, hiding behind bank secrecy laws of countries like Switzerland and Liechtenstein, have failed to report the account and income earned on the account. Bank secrecy laws for years frustrated IRS efforts to capture this unreported income estimated to cost the Treasury $100 billion.
For many reasons, including the need to monitor and interrupt the flow of funds to terrorists, the IRS is now aggressively pursuing offshore non-filers. Penalties for getting caught red handed may include:
1. A fine of at least $10,000 for neglectful non-filing of the FBAR.
2. A fine, equal to the greater of $100,000 or ½ the value of the account at the time of the non-filing. For accounts of $1 million or more the $100,000 increases to $500,000, for willful non-filing of the FBAR.
3. A fraud penalty on the income not reported equal to 75% of the underpayment in tax.
4. A criminal penalty including lengthy jail sentences of up to 10 years for both failing to file the FBAR and failing to report the income.
Evidencing a more aggressive stance the U.S. Department of Justice recently asked a U.S. District Court to order Swiss Bank UBS to turn over the names of some 52,000 customers. UBS had avoided a criminal trial for its...
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