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IRS Has Serious Internal Control Deficiencies, Says GAO
Posted By:  - 11/15/11

A guest post from our good friend Tim Wise at ACTA.

The U.S. General Accountability Office (GAO) has completed its audit of the IRS's Fiscal Years 2011 and 2010 Financial Statements (summary, 1-page highlights and full report, both require Adobe). As the GAO reports, "IRS is a large and complex organization, posing unique operational and financial management challenges for its management. IRS employs over 100,000 people in its Washington, D.C., headquarters and over 700 offices in all 50 states and U.S. territories and in some U.S. embassies and consulates."

In the report highlights, GAO wrote that it found:

"In GAO's opinion, IRS's fiscal years 2011 and 2010 financial statements are fairly presented in all material respects. However, serious internal control and financial management systems deficiencies continued to make it necessary for IRS to use resource-intensive compensating processes to prepare its balance sheet. Because of these and other internal control, compliance, and system-related deficiencies, IRS did not, in GAO's opinion, maintain effective internal control over financial reporting as of September 30, 2011, and thus did not have reasonable assurance that losses and misstatements material to the financial statements would be prevented or detected and corrected timely."

While GAO said that "IRS continued to make strides in addressing its deficiencies in internal control," it also said:

"However, deficiencies remain concerning (1) material weaknesses in internal control over unpaid tax assessments and information security, (2) a significant deficiency in its internal control over tax refund disbursements, (3) a noncompliance with the law concerning the timely release of tax liens, and (4) financial management systems' lack of substantial compliance with FFMIA requirements . . . ."

GAO also points out that 182 recommendations remain "open" from its prior audits of IRS's financial statements. Here is how GAO reports that in more detail on page 14:

"We have reported on IRS's internal control weaknesses in prior audits and have provided IRS recommendations to address these and other less-significant issues. As of the date of this report, 182 recommendations related to our financial statement audits were still open, of which 10 relate to the material weakness in internal control over unpaid tax assessments, 105 relate to the material weakness in internal control over information security, and 9 relate to issues encompassed by the significant deficiency in internal control over tax refund disbursements. For more details on the material weaknesses and the significant deficiency identified as a result of our audit, see appendix I."

IRS's "management discussion and analysis" begins on page 23, which contains a great deal of informative data about the IRS, including a number of charts and tables. The financial statements begin on page 58.

HT Tax Prof Blog.

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Help Fight Unfair Taxes Online
Posted By: Andrew Moylan - 11/15/11

The Wall Street Journal has an interesting poll up on its site today regarding taxation of retail sales on the internet. The question seems relatively simple: Should states require online retailers to collect sales tax? The thought process for most people probably goes a little something like this..."If it's a sale, it should be subject to sales tax." That probably explains why a huge number of people voted for the (misleadingly-worded) answer "State sales taxes should apply always." Problem is, the "right" answer (from NTU's perspective) is "State sales tax only with physical presence." So please, for the love of all that is holy in proper tax policy (hah!), head over to the WSJ and cast a vote for taxes only with physical presence.

As intuitively appealing as the answer that state sales tax should always apply is, it ignores years of Supreme Court jurisprudence and small-business protections that only require businesses with a legitimate physical presence in a state to collect and remit that state's sales tax. In other words, Andrew Moylan Incorporated would be required to collect Virginia state sales tax because Andrew Moylan Incorporated is physically located in Virginia, but should AM Inc. also be required to collect sales tax for California, New York, Michigan, or any of the other states where it is NOT located? The Supreme Court says no, and rightly so, because that would impose enormous burdens on businesses to navigate more than 7,400 different sales tax jurisdictions across the country.

Keep in mind that, technically, every single sale that is made online is ALREADY subject to taxation. If the seller has a physical presence in the buyer's state, they'll collect and remit sales tax just like your local Target or Wal-Mart. If the seller does NOT have a physical presence, then the buyer is supposed to report the purchase and pay a "use tax" on it directly with the state government. Unfortunately, this use tax regime is a disaster. Most buyers have no clue they owe these taxes and very few actually pay them, so it's not as if there's no problem here at all.

But if proponents of burdensome tax-collection plans were serious about "fairness," they'd advocate a revenue-neutral system that respects our Constitution and preserves tax competition. As NTU noted in a recent news release, one step to explore would be requiring all firms to collect sales taxes only for the jurisdiction where they're based, rather than for multitudes of governments around the country. Another would be supporting Senate Resolution 309 from Senators Wyden (D-OR) and Ayotte (R-NH), which affirms Congress' intent not to give states "the authority to impose any new burdensome or unfair tax collecting requirements on small internet businesses."

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(VIDEO) NTU Launches "Taxonomics" Series to Explore Human Cost of Fiscal Policy
Posted By: Douglas Kellogg - 11/15/11

The first "Taxonomics" episode focuses on the story of local small businesses threatened with new taxes in a recession, many of their counterparts have already folded up shop. Of course the government refuses to exercise fiscal discipline, and is looking for more revenue.

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A Quick Review of State and Local Ballot Issues
Posted By: Brent Mead - 11/09/11

The results are in, and the winner is…well, that is complicated. Voters went to the polls across the country yesterday and NTU tracked the results of statewide and local ballot measures in 10 states. While the headlines are focused on the defeat of Issue 2 in Ohio, there were more positives than negatives, and the 2011 elections on the balance show a continued voter preference for lower taxes and less government.

All the results from last night should also be colored by the enormity of the victory in Colorado last week. Proposition 103 in Colorado was the only statewide tax increase in the country and it went down by a 2-1 margin. The policy choices expressed by voters last night do not necessarily reflect a tax preference. That preference is still very much clear by looking at the number of local tax hikes which went down in defeat.

In Ohio, Issue 2, the repeal referendum on the state’s collective bargaining reform law, went down handily. However, those same voters were even stronger in their antipathy for President Obama’s health care law, voting to protect health care freedom of choice by a 65%-35% margin. The early message from big government apologists seems to be that this vote was only symbolic. However, even as a symbol it shows continued strong disapproval of the federal health care law. When coupled with similar actions by states such as Missouri shows that federal overreach will continue to be an issue for voters going into 2012.

Additionally, a majority of the local tax and bonding measures went down in defeat. Thus, while voters said no to the state’s collective bargaining reform efforts, they sent an even stronger message that the solution to Ohio’s budget woes will not be found in tax hikes and government mandates.

Another potential harbinger of things to come can be found in California. San Francisco residents voted for Proposition C, which would save the city over $1 billion in public employee pension costs. While voters rejected a more expansive proposal, Prop C shows a basic recognition by even the most liberal of cities that pension costs are quickly reaching unsustainable levels and reform, not higher taxes, are the answer. On the tax front, Bay Area residents also rejected a .5% sales tax increase to pay for public safety programs.

Washington State also provided a solid win for taxpayers. Voters approved I-1183 to privatize state liquor stores and sell off the related assets. In the process, I-1183 became the most expensive ballot campaign in the state’s history. They also voted to strengthen the budget stabilization fund. However, I-1125, which would ensure transportation revenue goes to transportation needs only, was narrowly defeated 49%-50%.

On the local level, results were also mixed. For instance, residents in Seattle approved a $32 million property tax increase, but rejected a $20 million vehicle fee increase. In San Juan County, voters narrowly decided to extend the real estate excise tax and decisively shot down a new solid waste disposal user fee.

While NTU is still in the process of compiling the results of the hundreds of elections last night a couple basic trends can be found. Voters did express a willingness to raise taxes if the measure delineated what the funds would be used for and was for a set period of time. However, overall, far more tax increases were defeated than passed. I think the big story is that despite the spin over Ohio's Issue 2 from proponents of big government, voters were in no mood to write blank checks to big-spending public officials.

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Fleecing the Silver Screen
Posted By: Brent Mead -

It is a new month so it must be time for a new tax hike proposal from the D.C. city government. Today, we get Mayor Vincent Gray’s proposal to impose an additional 5 percent gross receipts sales tax on movie concessions. The new tax would be applied on top of the existing 10 percent sales tax with 75 percent of the first year’s revenue going towards building a movie theater in Anacostia and the remaining 25 percent going to the ever popular film tax credits.

NATO, the National Association of Theater Owners not the global military alliance, notes that concessions represent the major source of profit for movie theaters. Revenue from actual ticket sales generally goes to the movie studios so theater owners rely on popcorn and soda to cushion their tight operating margins. Since Mayor Gray’s tax hits theaters on gross receipts, it will significantly impact bottom lines.

Mayor Gray justifies this tax hike in order to bring the silver screen to the area of D.C. east of the Anacostia River. With 26 other theaters in the D.C. metro area, should the City Council really raise taxes to create a 27th? Movie goers in the D.C. area will easily be able to hop on the subway to Bethesda or Arlington if district theaters become too expensive. Moreover, the lack of a movie theater in Wards 7 & 8 is most likely due to the simple fact that such a theater is not economically feasible. Raising taxes on the only major profitable side of the business only makes maintaining a theater in this area more difficult. A simpler way to look at it would be if someone could make a buck by running a movie theater in that area of D.C., it probably would have happened by now.

This is not the mayor’s first time targeting movie goers. This spring, he proposed raising taxes by $2 million a year by imposing a 6 percent tax on movie tickets. Thankfully, the City Council stripped that provision from the final budget.

Now after all of this, you might be thinking is there any upside to this proposal? Well according to Mayor Gray’s press release;

It is believed this legislation will convince actor and producer Adam Sandler, who has expressed interest in the District of Columbia as a location, to bring his next major motion picture to DC”

I think the district will get by just fine if it refuses to green light Bucky Larson 2.

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Sen. Rubio Challenges Geithner on Dems' Zombie Surtax Plan
Posted By:  - 10/21/11

America’s vampire government has long been feeding off taxpayers. While Washington may not go for the jugular, it has taken aim at your wallet, and it’ll take more than a wooden stake to bring it down. But vampires aren’t the only ghoul haunting taxpayers this fall. A zombie-like surtax on millionaires is scaring the life out of job-creators everywhere.

The Washington Times reports:

“Like a horror-movie villain, the millionaire tax is once again back from the dead. This version – the third in the past two years – would slap a 5.6 percent surtax on everyone earning $1 million or more per year. It’s Senate Majority Harry Reid’s way of paying for President Obama’s misnamed job-creation plan.”

Unlike say, The Walking Dead, the Democrats’ surtax plan is one zombie that’s not receiving rave reviews. Economists have argued that the plan would create a number of harmful economic distortions, including increasing the incentives to reduce taxable income and penalizing saving and investment. Business groups have pointed to Obama Administration statistics that 4 out of the 5 taxpayers who will face this new tax are business owners, thus reducing the amount of money available to invest or hire. And if that isn’t enough, history indicates that lowering marginal tax rates on the wealthy has encouraged investment and growth – exactly the outcomes you’re looking for to escape a recession.

In fact, Obama seemed to agree with this sentiment not too long ago. “The last thing you want to do is to raise taxes in the middle of a recession,” Obama told NBC reporter Chuck Todd in 2009, “because that would just suck up – take more demand out of the economy and put businesses in a further hole.”

And although economists may say we’re technically no longer in a recession, doesn’t that same logic still apply? Sen. Marco Rubio thinks it should.

In a Small Business & Entrepreneurship Committee Hearing, Sen. Rubio challenged Treasury Secretary Tim Geithner over the Administration’s continued push for a 5.6 percent surtax, which would push the top marginal tax rate to over 50 percent – well above the international average of 43.5 percent.  

Check out the rest of Sen. Rubio’s defense of taxpayers here:



With leadership like that America can put this misguided zombie surtax in the ground once and for all. Then, and only then, can we go about the business of enacting comprehensive tax reform that doesn’t terrorize America’s job creators.

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Kicking Off the 2011 Election Season
Posted By: Brent Mead - 10/20/11

Even though it is still October, the fall election season is upon us. This Saturday, Louisiana kicks off a month of elections that will close on November 19th. In addition to the slate of candidates for local and state offices, voters in the Pelican State will also decide on five amendments to their constitution this weekend. As we do each year, NTU tracks these ballot measures in our General Election Ballot Guide in order to give taxpayers a better idea of what they are being asked to vote on.

The one measure with cause for concern is Amendment 1. From our ballot guide;

“Amendment 1 on the statewide ballot would redirect future tobacco settlement funds from the Millennium Fund to the Taylor Opportunity Program for Students (TOPS) scholarship. Additionally, the proposed amendment would permanently extend and place in the constitution a $.04 per pack cigarette tax set to expire next year.”

Generally speaking, state constitutions should be used to limit what kinds of taxation are allowed, and to set limits on the level of taxation. Rarely is the constitution used to set the specific rate. This measure would make it substantially more difficult for voters or the state legislature to reduce their tax burden in the future.

Furthermore, the Millennium Fund is Louisiana’s account to handle Tobacco Master Settlement Agreement (MSA) funds. The primary purpose of the MSA is to offset state Medicaid expenditures related to tobacco use. Amendment 1 would stop using future tobacco settlement payments for health care expenditures and redirect them to a wholly unrelated program. This gets away from the fundamental purpose of the MSA and taxpayers should be wary.

Fortunately, the remaining measures on the ballot are commendable efforts in fiscal responsibility. Amendment 2 would use one-time monies generated by natural resource development to start paying down the billions of dollars in unfunded state pension liabilities. Louisiana has roughly $9.5 billion in legacy obligations from its pre-1988 employee retirement plans. This amendment is an honest effort to meet those obligations without raising taxes. Amendment 3 creates a lockbox around the Patient Compensation Fund, so the legislature cannot raid it at will. Amendment 4, while somewhat confusing, simply sets some useful guidelines for refilling the state’s budget stabilization fund. The last measure is a technical correction.

As we say at the top of our guide, these off-year elections can too often be forgotten amidst the noise of the 2012 Presidential race, or even a classic SEC showdown. Bayou State taxpayers need to be on the lookout and hopefully NTU’s 2011 Ballot Guide can help.

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New Coalition Hopes to Turn Agreement Into Action On Corporate Tax Reform
Posted By:  - 09/23/11

Agreement is hard to come by in Washington, but on at least one issue the parties seem to be in agreement – the need to lower America’s corporate tax rate.

President Obama has repeatedly stated support for the idea. “If there are ideas whereby we can lower the corporate tax rates in a way that does not massively add to our deficit,” said Obama in 2008, “ . . . that is something that we would be very interested in.” Referring to such reforms as a “win-win for everybody.”  

Likewise, the House-passed Republican budget (which withered in the Senate) would have cut the corporate tax rate to 25 percent, down from today’s 35 percent.

Despite the widespread agreement, corporate tax reform has been unable to find a footing in Washington. “Tax reform has been like the weather, everyone talks about it but no one does anything about,” opined Pat Heck, a former top aide to the Senate Finance Committee.

In an attempt to get the ball rolling on something everyone believes to be a good idea, a broad coalition of major businesses has launched an effort to lower the U.S.’s sky-high corporate tax rate. The coalition, Reducing America’s Taxes Equitably, known by its acronym RATE, hopes to make Washington see the powerful economic effects that a reduced rate would bring.

NTU has long argued that America’s current tax system exerts a tremendous drag on the economy, piling heavy rates and double taxation onto the backs of our would-be job creators. A recent report by top accounting firm Ernst and Young found that the overall effective tax rate on corporate earnings that are retained and reinvested in the firm is 42.1 percent – one of the highest among developed nations. In fact, according to “Paying Taxes 2011,” a study jointly published by the accounting firm PricewaterhouseCoopers and the World Bank Group, the United States now ranks an embarrassing 124th out of 183 countries worldwide in total tax rate faced by a typical corporation.”

And while others are taking steps to make their corporate rate more competitive in an increasingly globalized economy, America has done little. Since the Tax Reform Act of 1986 lowered the top federal rate from 46 percent to 34 percent (subsequently raised to 35 percent in 1993) the corporate income tax rate has remained unchanged. On the other hand, 30 out of the 34 nations in the Organization for Economic Cooperation and Development, have lowered their statutory corporate rates since 2000.

Moreover, the United Kingdom is scheduled to lower their rate and the Japanese had proposed a rate decrease until the tsunami disrupted their economic plans.

Given these trends it is clear that America is quickly being left behind. Our high corporate rate is deterring businesses from locating their production facilities on our shores, creating disincentives for continued investment, and hurting workers through reducing employment opportunities and lowering wages.

"For the sake of our national economic and strategic future, it’s vital that we create a more simplified corporate tax system that is fair, transparent, and most of all, pro-growth,” said RATE Co-Chair James Pinkerton. NTU could not agree more.

For more on the RATE Coalition we urge you to check out their website by clicking HERE.

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An Outsider's Perspective on the Insider
Posted By: Douglas Kellogg - 09/22/11

The President’s vague new “millionaire tax” proposal has brought out the same old arguments that were used in past speeches seeking tax hikes on people making $200,000 or more, and as always, on oil and gas companies.

Oddly enough, a Business Insider article earlier this week took up some of the base arguments against such tax increases. Let’s take a look at a few of these, to see why they are not on the mark – and, in the process, see why the President’s plan is unlikely to do much good for the ailing U.S. economy.

Business Insider’s Henry Blodget claims spending is only part of the problem: “few reasonable non-partisan economists think that we can solve our budget-and-debt problems just by cutting spending. Unless we radically reshape and re-size the government – something that would have a huge and almost certainly negative impact on the economy – we also need to raise the percentage of GDP that is collected in taxes.”

The comment that reducing the size of government would have a “negative impact” on the economy perhaps betrays an ideological agenda, but beyond that spending has been a bipartisan problem over the past decade. Federal expenditures have essentially doubled from when George W. Bush was elected until today, and have increased by nearly 30 percent since Barack Obama moved into the White House. Today this alarming trend looks all the worse because of a decline in tax revenue that often happens in recessions. We can certainly expect revenue to increase if the economy improves, more so if our tax system is streamlined to be made more competitive internationally.  Still, spending has jumped radically and would likely outpace any increase in revenue, beyond bone-crushing tax hikes.

Business Insider then dismisses the concerns over discouraging upper-income earners and job creators from being economically active: “This is the argument that even reasonable people sometimes espouse. But it’s absurd. No one is proposing raising the top tax bracket to 90%, the way it was in the 1950s (when, by the way, the economy was tremendously successful). No one is proposing raising it to even 80% or 70% or 60%.”

This is a misunderstanding of historical circumstances by only looking at a snapshot in time. Those incredibly high rates were more limited in reach and escapable through various deductions. To give just one more recent example, the 1986 Tax Reform Act managed to streamline and reduce tax rates to two levels (15 percent and 28 percent) while remaining relatively “revenue-neutral” precisely because the previously narrow base of income subject to tax was broadened. The top rate prior to passage of the Act was 50 percent.

Blodget continues on this path saying, “Anyone who says with a straight face that successful, ambitious people will kick back in a chaise lounge because the government is going to take 40 cents of every dollar in income above a million dollars instead of 35 cents is an idiot, an ideologue, or a liar.”

Who has made such an argument? The real argument he must be referring to is that higher tax rates chase capital away, which seems pretty self-evident. But in case anyone could use a refresher, here is a nice summary of research on the topic. There are numerous effects, from keeping money outside of the U.S.’s jurisdiction to small business owners who declare profits on their personal returns getting hammered with higher taxes. Aggravating such financial situations with tax hikes WILL harm a floundering economy. It is hard to imagine we are still talking about a supposed job creation plan… .

As NTU continues to discuss, the tax code remains quite progressive. Despite the President’s claim the Bush Administration “skewed (the tax code) in favor of the wealthiest taxpayers and reduced the tax code’s overall progressivity,” the Bush tax reforms took many lower income folksoff the tax rolls.

The only way to permanently accomplish what Business Insider and the President are arguing for, a “fair” tax code and job growth (taking them at face value), is fundamental tax reform. That will ensure that no secretaries are paying more taxes than Warren Buffett.

Certainly there will be more to come as this debate continues!

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