Ode to the Taxman?

Posted by   admin on    August 5, 2010

Ode to the Taxman?

Let me tell you how it will be,
There's one for you, nineteen for me,
Cause I'm the Taxman,
Yea-ah, I'm the Taxma-an.
Should five per cent appear too small,
Be thankful I don't take it all.
Cos I'm the Taxman,
Yea-ah, I'm the Taxma-an.

Released as the opening track on The Beatles' 1966 Revolver album, the song "Taxman" was a reflection of George Harrison's displeasure with Great Britain's tax system at that time. It's lyrics attack the high levels of progressive tax taken by the British government during that era. Then, the Beatles large earnings put them in the top 95% tax bracket imposed and George wrote the song to make his displeasure known.

There's one for you, nineteen for me  one referred to the 5% of earnings left over after the 95% tax.

Currently, in the U.S., many taxpayers are voicing their concerns about higher taxes coming as a result of the Affordable Care Act (Obamas health care reform initiative) and Washington's debate over allowing the Bush Tax Cuts to expire. The pro-tax advocates argue that higher tax rates are needed to help shore up the costs of the Social Security and Medicare programs and to help pay for the overspending from the current and former administrations, as well as to make up for the wasteful economic stimulus programs.

Don't get me wrong, we experienced such a deep recession - the worst in my lifetime - that we needed government funded economic stimulus to help reverse the downward spiral we were in. However, it is yet to be determined how much benefit we received per $1 of taxpayer monies spent - the majority of which has been borrowed on our behalf. Money that will need to be repaid.

While we are being led to believe that only those earning more than $250,000 per year can expect to bear the additional costs of higher tax rates, more than those are feeling the pain. This includes middle-America and federal and state taxmen across the nation.

This letter will briefly discuss some of the shared pain - experienced by some and little spoken of in the media.

Some Observations of a Taxman

In George Harrison's famous song, he was referring to the taxman as the then-leaders of the two largest parties in British politics - the Labour Party and the Conservative Party; in this missive, I'm referring to the taxman or tax-people as the men and women that facilitate administering the various tax code(s) in the U.S.

Over the past year, our CPA firm affiliate has had more contact with the IRS and state tax authorities than anytime prior - and I've been helping clients with tax compliance filings for almost 30 years. In addition to being actively involved with investments since 1983; my work in tax compliance began in 1981. And, despite the tax side of my business efforts having grown significantly in the past two years, I cant remember when contact with the tax authorities was so great.

While most of the contact has related to working through new client issues unresolved by my predecessor(s), many of the notices followed up on have been rather benign - with one exception. Notices or refund inquiries that have been fairly simple to resolve in the past, are now taking longer to conclude. And, I'm finding federal and state tax-people to be less user-friendly in the process. None will admit it, but I have the impression that they are working harder than they have in the past and sharing their pain as a result.

While it may be hard for many of my gentle readers to have sympathy for federal and state tax authority staff, these tax-people are not the ones who make the rules - they just follow them. In their defense, it is rare when I've encountered an over-zealous agent trying to collect more than was due or seeking to delay processing a refund.

The only instance encountered of an intentional delay of refunds related to North Carolina where the revenue secretary, Ken Lay, revealed to the press that they were holding all refunds until they were sure they had enough cash on hand to pay their bills first!

It should come as no surprise that when Congress legislate new tax laws, more often than not, their tax-people are ill-prepared to administer the changes. For example, many Americans took advantage of Cash for Clunkers and the New Home Buyer tax credits. Yet, the IRS has been challenged administering these programs.

Apparently, there was a belief that a significant number of taxpayers were seeking to scam getting these refundable credits. In response, the IRS shifted the evaluation of these returns to the unit that processes amended tax returns for additional scrutiny. This immediately began to bog down the system. And since last October, the IRS has had a recorded message instructing to: due to a spike in the number of amended returns filed  the IRS has extended the time required to process - please allow 4 months before making any inquiries about your amended return. It wasn't long after the recorded message began that notice and refund issues started to mount in greater numbers and take longer to resolve.

Getting a tax notice is not something that makes you happy. Or, when conditioned to expect a rapid refund, its not unreasonable to become anxious when your refund is delayed. And, despite my belief that most notices are rather benign, they can mushroom into more complex problems if not handled correctly. Most taxpayers know this and opt to suffer the unexpected financial burden of hiring a professional to help resolve it.

Even thought these snafus generate additional earnings for tax practitioners, I believe it is more mutually rewarding when a client purchases services to research potential tax saving opportunities, or for planning and preparation work. Im sure you may as well.

While this may sound like weak reasoning for opposition to increased federal and state taxes, it should alert you that any changes to the tax code often generates additional  less than productive  ancillary expenses. And while these additional expenses may also result from legislative changes that lower tax rates, in the latter case, I'm sure such would be easier to stomach for taxpayers.

ELF's July Performance

As mentioned in last months letter, we believed that the coming second quarter earnings reports would be significant enough to reverse the negative trend that developed in May and June. While negative worries and forecasts were gaining unbelievable momentum, second quarter reports were above expectations and the markets reacted accordingly. We were relieved that we didn't sell into that downtrend after suffering from the negative forecasts that were driving the market down. The earlier negativity was beginning to impact consumer sentiment and seemingly put a damper on the recovery.

Now, we remain cautiously bullish as we wait to see if the negativity resumes and causes more harm to the recovery. Filtered into the current indications of a slowing recovery, it was very positive to see that business capital spending was on the increase. Even though they remain restrained to hire, increased business spending is a good sign.

Our portfolio clients ended the month of July up 10.06%. Here are some comparative numbers for you to review:


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