TaxBlog

It seems odd to me that the very party that is seeking to raise taxes on middle America, can’t ensure their memebers pay theirs.

We reported last week about recently confirmed Treasury Secretary Timothy Geithner who failed to pay taxes he owed, even though he surely must have known he owed them. Now he runs the IRS.

This week Tom Daschle was seeking nomination to head the Department of Health and Human Services. This despite failing to pay more than $120,000 in back taxes for perks he received. Yahoo news reports”

Daschle filed amended tax returns for 2005, 2006 and 2007 to reflect additional income for consulting work, the use of a car service and reduced deductions for charitable contributions. He filed the returns after Obama announced he intended to nominate Daschle to head the Health and Human Services Department.

Most of the additional taxes resulted from unreported income from the use of a car service provided him by a close friend and business associate, Leo Hindery Jr. The unreported income for that service totaled more than $250,000 over three years.

Daschle also had unreported consulting income of $88,333, in 2007. He also had reductions to charitable contributions totaling about $15,000 over the three years covered, according to the Senate Finance Committee document. The document, marked “Confidential Draft,” is a committee statement concerning Daschle’s nomination.

News then came out that President Obama’s nominee to be chief performance officer, Nancy Killefer will withdraw her nomination following the revelation that she had a $946.69 lien on her property in 2005 for failure to pay taxes.

This makes me wonder: how did Tom Daschle get away with filing such misleading and false returns? If that happened here he would be in the IRD’s crosshairs.

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The Australian Government has passed new powers to crack down on people who cross the Tasman to escape their tax debts.

The International Tax Agreements Amendment Act is a result of the tax treaty signed by Australian Treasurer Peter Costello and New Zealand Finance Minister Michael Cullen last November.

It allows the Australian Taxation Office to track down New Zealanders living in Australia who have evaded paying tax in New Zealand.

And it will also let Inland Revenue in New Zealand to do the same to Australians.

The law was passed by the Australian parliament on Thursday.

The new laws will make it easier to collect such debts and pay them back to the other country.

“This measure will treat Australian tax debts collected by a foreign taxation authority that have been remitted to Australia as tax debts collected in Australia,” the Treasury said.

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After our previous article, this news is out:

US tax preparation firm H&R Block has said that it is “pleased” to be able to settle a long-running class action lawsuit related to its sale of controversial refund anticipation loans, or RALs, for $39 million plus interest.

The settlement covers 1.72 million H&R Block customers who bought the loans, arranged through Beneficial National Bank – a unit of British bank HSBC Holdings – between April 1994 and December 1996.

The plaintiffs claim that the company did not make it clear that the cash advances they received were actually packaged as loans, an argument that H&R Block rejects. Nonetheless, the company was keen to settle a lawsuit which has dragged on since 1998. An initial $25 million settlement was thrown out by the federal appeals panel in 2003, while a second settlement was rejected by District Judge Elaine Bucklo as inadequate.

Ronald Futterman, the Chicago attorney who represented the plaintiffs, said that eligible class members would be paid about $78 for each of their loans, provided no more claims were submitted before a deadline at the end of October.

In a statement, H&R Block said it was “pleased” that the judge accepted the settlement.

“We view it as fair and beneficial to the class members and we’re eager to put this nearly decade-long lawsuit behind us as we continue preparing for the upcoming tax season,” the company said.

Follow up: H & R Block Cuts rates on loans

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I’ve been reading international tax blogs such as this one:

http://mauledagain.blogspot.com/

You find interesting tax businesses which don’t exist (or aren’t well advertised) in New Zealand or Australia.

“Tax Refund Anticipation Loans” or RAL’s is one such business.

How this works is that banks lend money through tax return preparers such as H & R Block using the tax refund as collateral for the loan. The risk of the return being wrongly prepared is low because H & R Block are a reputable firm.

Questions come to mind regarding the mechanics of this process?

How can a bank be certain that the information provided to the tax return preparer is correct?

I guess the answer is that they can’t but based on the law of averages the information is generally correct. This puts the loans into the high risk, high interest basket of lending, and as such the loans carry punative rates of interest.

Another question is how the tax return preparer makes money out of the deal? Perhaps some kind of bank hander from the lender?

It’s not uncommon for lending firms to pay large bonuses to retail staff who encourage purchasers to take out hire-purchase loans to cover the cost of their purchase. Perhaps this process works in the same way.

Maule focuses on the ethical considerations of such loans:

Two questions popped up as I read the article. First, is it appropriate for the company that is preparing the tax return and thus calculating the refund to make loans based on that refund? Second, is it appropriate to charge interest at the rates being charged?

The first question should be answered in the negative because there is a conflict of interest. The higher the loan, the more interest income is generated for H&R Block. This puts the company in the position of trying to maximize the refund, when the company should be maximizing the client’s compliance with the tax law. Every “close call” is going to be affected, subtly or not so subtly, by the impact on the lending activity. It’s best to leave the refund anticipation loan to some other lender, to whom the customer can go after he or she is handed a copy of the return by the preparer. H&R Block, after all, should stick to tax return preparation and not open up a bank.

The second question must be answered in the negative. According to the story, and I’ve read similar reports elsewhere, the annualized interest rates on these refund anticipation loans are as high as 700 percent. SEVEN HUNDRED PERCENT? Toss in the fact that roughly 80 percent of the people using refund anticipation loans are low-income, and suddenly there is a recipe for all sorts of unacceptable situations. I’m not alone in this reaction. H&R Block has been sued on account of its refund anticipation loan practices, has paid out tens of millions in damages, and still must defend charges brought by the California Attorney General. State banking commissioners have been asked to investigate.

This is not a blog on politics, however, it seems to me that if RAL’s are outlawed then people will find other methods to finance their consumption.

There is also further information on RAL’s in his posts here and here

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A judge had some unflattering words to say about Inland Revenue yesterday as the department tried to liquidate a West Coast company.

During a civil hearing in the High Court at Greymouth, Justice Anthony Christiansen described the IRD as “lurking in the background like a shark waiting to consume failing companies”.

The comments arose following an attempt by the department to liquidate possum skin company Gray Fur Trading. It said the company owed almost $200,000 in overdue income tax and GST, but the court was told the facts revealed that almost half that amount was added on in costs and penalty payments.

The initial debt was closer to $90,000 but ballooned from 2003, when the company was first advised it was in trouble, and again in October 2004 when the IRD answered correspondence sent in reply to its demands the previous year.

Gray Fur Trading lawyer Bev Connors said a crash in the international fur market had hurt the company and Justice Christiansen agreed, saying the crash had hurt a lot of businesses.

It was then the judge compared IRD with lurking sharks.

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Sweeping reforms are being planned of the liquidation and creditors legislation.

The Inland Revenue Department (IRD) is understood to be gauging support among business groups for the proposal as a quid pro quo for relinquishing its preferred creditor status.

The measure has support from insolvency experts, who have told a parliamentary select committee that struggling companies are being artificially propped up by unpaid PAYE and GST, which directors are using as working capital.

“It’s happening because there is no legislation preventing it, and it’s time directors were made personally liable,” said John Vague, of McDonald Vague.

(more…)

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Almost 50 jobs have been axed at West Auckland’s Waipareira Trust as its management scrambles to halt multi-million-dollar losses.

The trust owed more than $1 million to the IRD, and more than $3 million to banks, creditors and in legal fees.

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There is some discussion around new insolvency laws.

In Australia, the Taxation Office agreed to drop its usual preferred creditor status in voluntary administrations – a big concession – and waits patiently in line with all the others owed money.

But here the IRD is insisting on its right to full and immediate payment, which could scupper the chances of most voluntary administration deals.

One suggestion is for New Zealand to have a voluntary administration regime such as the one which operates in Australia and other places around the world. In Australia the ATO gave up its right for preferential treatment if a company enters voluntary administration. However it seems that the New Zealand IRD are not so keen to give up their right to have preferential right over taxes. In my opinion PAYE should have preferential treatment given its nature. This also reduces the ability for the IRD to prosecute business owners for non payment of PAYE. If a business owner pays their staff and does not pay PAYE to the IRD by the due date, this is tax evasion, a crime which carries a very serious title and stigma. The thinking goes that the business owner is withholding tax from the salaries of their workers to pay to the IRD. Not paying that amount is a serious matter in the eyes of the IRD.

If the IRD did not have preferential treatment for PAYE then we would certainly see PAYE prosecutions go through the roof. The IRD also currently have preferential treatment for GST.

More news to follow as the legislation is discussed further…

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The state of Victoria has hired debt collectors to collect outstanding taxes.

Mr Prince said the use of debt collectors was an acceptable method for the State Revenue Office to fulfil its function. “The State Revenue Office has a role to carry out, this is part of it effectively carrying out that role,” he said.

Under the tender, the debt collectors are not allowed to contact taxpayers before 8am, after 8pm or on a Sunday.

Is it time for NZ to consider the use of private debt collectors to collect IRD’s debts? In the US the IRS recently began outsourcing. There is no question that the private sector would collect tax more efficiently, but what of the morality of it?

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