APRIL 2023 CLIENT NEWSLETTER
We are caught up on this last day of April with all tax returns which can be completed, and only 25 still on extension [that we know about]. I wish to apologize for our slowness at times while a tidal wave of new clients arrived. We did turn some away [more on this later] but there are so many hours in the day to complete all of them without battle fatigue, which causes making clumsy errors at the end of the day or evening. Like a forest fire defense by the crew of one my clients, who would make a slow burn to offset the big fire as a containment measure, we have set aside a few complex-difficult clients for further attention later this Summer.
News from the California Franchise Tax Board. A letter was received this month on audits. I still remember the days when there were IRS auditors and their computer would indicate abnormalities in tax returns, especially with phony audacious deductions, Schedule C businesses with gigantic losses and little or no income, and business entities with the same. The audits would nail the client to the wall and extract great tax benefits with no real defense. Then, several months later, the FTB would send their collections billing based on the results of the Federal audit. Yes, they are married. Two audits for the price of one. Well, the IRS has been on audit vacation for several years now, and many people are taking advantage of the lack of diligence, and many have gone crazy with pseudo businesses, not make money, but to make tax losses. Accordingly, with huge deficits of $21 billion YTD this year, the California bear collector for the FTB is hungrily missing those audit results. We received the letter this month From the FTB who announced a cloaked threat that [not really because they do not have auditors], they will send letters to people with obvious discrepancies that they should correct them immediately. They even suggested amending returns. It was nice of the FTB to let us know they are still in business, sort of.
We turned away many new clients this year when we found their businesses accounts announced, “Please Audit Me.” I am perfectly aware that nobody is auditing this year. But next year, 87,000 new IRS people with new and better software will be auditing this year’s tax returns for Hobby limitations, loss extravaganzas, lack of capitalization, corporate businesses with no shareholder wages, and frauds. At least they will not be my clients and auditors, except the few we advised to get on payroll in a hurry because they had genuine business.
To clear up a point about the IRS hiring guys with guns. The IRS Special Agents do carry guns, make house calls, and can arrest people for criminal tax avoidance. The few Special Agents I knew at our low level were there for payroll trust fund payment avoidance. Businesspeople have a special responsibility when handling funds withdrawn from employee’s paychecks and if a person fails to make tax deposits or fails to file payroll reports or files fraudulent reports, they can get quick special handling by the IRS. This money is not theirs to mishandle, and that is why the report funds are named Trust Funds. In God we trust. But my treasury bills say, “with the full credit and safety of the US. Treasury. How could that be if they are $32 trillion in debt? How could a debt secure a debt?
About the new IRS funded regime. A great comment was made by a reader who said, “So the IRS wants $80,000,000,000.00 so they can find more ways to take our money. “That is a true statement because President Biden introduced the measure by stating he wanted to ‘close the gap between collections and the true amount of tax obligations.’ He also mentioned balancing the National Debt with the huge increase in funds exceeding the costs of compliance. Imagine what would happen to the economy if this were true. There would be a rush of cash to the Treasury to cover the $80 billion AND the deficit, which would cause economic life to cease to exist in America. They keep talking about Auditing people who earn over $400,000 annually and big corporations. Well, those people, some of my clients as an Enrolled Agent and the big corporations are all managed by the big audit firms which spend hundreds of hours each year on each client with very highly specialized people on these complex returns. I would imagine they would require five to ten years’ experience for entry level degreed accountants to even touch on a big corporate audit. As it is, to audit even a small business requires at least five years, which is the IRS entry level for the internal Enrolled Agent audit certification. So how is Biden supposed to reap audit results from the taxpayers without managing a tax school for five to ten years? They will train for the first year [now] and next year audit the hell out of everybody who deserves to be audited, and many others as well.
We have been focusing on the Inflation Reduction Act of 2022. This is a lie because inflation is not the old song about prices chasing scarce goods. Much of our inflation was caused by environmental costs forced on businesses. That and political Costs such as limiting oil and gas production and usage, shutting down nuclear plants ahead of scheduled life, restrictions on all life and the materials of this age. And wage increases pressed on many businesses with most government construction done by unions, schoolteachers unions spending $20,000 per student year to uneducate kids in many schools. These costs will go up, not down. The current administration will subsidize and print money until the drunken sailor goes back to the ship.
A gigantic computer chip plant is being built in Arizona to pull the chip business back to America where it started. But the business went overseas for cheaper labor, while the labor costs for the new business will be extravagant with wonderful employee benefits. I imagine the costs will be so bloated that production will still go overseas again even with huge Federal subsidies. And all the recent discussion about clean hydrogen fuel for trucks. All current proposals are to subsidize over 50% of the actual fuel costs as they now do with synthetic fuels. And the whole deal is contingent with finding solar and wind power and finding places to get the electrical energy to break down the water to make hydrogen. How can inflation fall back with the government subsidizing and restricting natural economic processes?
The spectacular San Francisco Central Subway is finished. The engineering miracle of 1.7 miles opened in January at a cost of $1.95 Billion, three times as much as initially estimated. Ridership is severely lacking, however. Probably because riders need to walk 900 feet to the nearest connection and take three escalators to reach platforms 12 stories underground. Nancy Pelosi got credit for championing the project. Thanks to WSJ 4/3/23. Besides, it is still a long drive to Merced, the new stop for the Superfast Bullet Train to Bakersfield. Who wants to go to San Francisco these days? How do they get to Merced? Merced means mercy in Spanish but how could the founders have known about the Bullet train? The latest estimated cost of the 500- mile Golden Bullet is only $128 Billion, four times the original estimate. Sorry about the 171-mile Merced to Bakersfield stop. It is estimated it will be under construction for the next ten years. WSJ again.
About Real Estate. The Federal appeals court ruled that the outright ban on new gas stoves in Berkeley, California violates the Congressional Energy Policy and Conservation Act. San Francisco, San Jose, and Los Angeles also have unconstitutional bans on installing gas appliances. Next, they will try to ban water or gasoline. Thanks, Washington Examiner.
Los Angeles passed a new tax on real estate sales. It is a 4% sales tax on homes priced between 5 million to ten million and 5.5 % for all above. Imagine, a sales tax on home sales! What took them so long?
The Federal Housing Finance Agency [aka FHA] is the ultimate destination for most mortgage applications and qualifying demands. This brings to mind the 2008 collapse of the real estate market after the Feds kept demanding looser financing standards so everybody would qualify for a house. In the credit risk World water does not run uphill. Now, new costs have been legislated to socialize mortgage-lending risk. Firsthand, the director Ms. Thompson said the new policy would not impose fees and ALL ELSE EQUAL. Like the pigs explaining their exclusiveness to the other animals in the Animal Farm story, “WE ARE ALL EQUAL BUT SOME OF US ARE MORE EQUAL THAN OTHERS.” Buyers today with FICO scores of 720 or 739 with 15-20% down payments will pay increased interest rates of .75% [3/4 of 1%]. Borrowers who put down 20-25% will pay only .5% [1/2 of one percent] more. Most had previously avoided the PMI penalty. The default rate for these prime borrowers is only 4.2% to 8.8%.
The mortgage change for the winners of the poor credit qualifications are reduced fees for all borrowers with credit scores below 680 and all borrowers who have a down payment of 5% or less. The borrowers with less than 4% down payment and credit scores between 620 and 639 default from 39.3% and 56.2%. What a short memory this Administration has! Thanks, WSJ again. Tougher times for buyers and realtors.
Last, but not least, we have available short-term five-year annuities paying 5.5% interest. Interest compounded daily. Unlike bank CDs, no taxes until maturity or withdrawals. Safer than banks from Silicon Valley [not kidding]. Highly rated by California DOI.
It appears that because of the automatic extension we will be busy all year through 10/15. We are open from 9-5 weekdays. It has been wonderful to see my returning clients and so many new ones. I also added over 20 new challenge coins to my military and civic collection.
Thanks, from Phil, Nette & Jocelyn
FEBRUARY 2023 CLIENT NEWSLETTER
Great News from both the IRS and FTB: The Counties of Riverside, Los Angeles, Orange, and San Diego have been officially declared Federal Disaster areas. Not for economic disaster but for flood damage. The object of this proclamation is that automatic extensions for residents and businesses in these areas [and some others] will be extended without application until October 15, 2023. Amounts due by March 15 for business returns, or April 15th will still be due with an extension form. Estimates for 2023 will still be due for the current year at the regular quarterly intervals or made up with later deposits.
Other California Good News: The California gas refund checks we received a week before the last election [Gavin Newsome’s picture was missing] was declared taxable by the IRS late last year. After heated sessions in Washington several weeks ago the status was changed to non-taxable, the same as the refund received a year before.
Immigration Help from the US Department of Health and Human Services: In 1921 the US Department of Health and Human Services awarded the Vera Institute of Justice $168,000,000 more to provide free legal services to help illegal immigrants avoid deportation. They have been awarded 1.1 billion to date. According to the “Festivus Report” on your tax dollars at work. There are now 5.5 million illegals in the country.
Another gift from the Feds to make new mortgages more appealing: It was exactly 15 years ago when the housing and real crash occurred. The major cause was the Feds goal of financing houses for everybody with unaffordable mortgages which were available with no income verification, no down payments deferred payments and reduced interest rates. It worked for a few years until the mortgages were reset to the real world of defaults and foreclosures. The crash went far beyond the mortgage lenders with the stock market crashing 50% along with real estate prices and the government bailing out financial firms to sustain liquidity in the economic collapse. Now, we have a new crisis growing with a forgotten element, the PMI. Most everybody knows This is the extra insurance assessed to new mortgages with no or low-down payments. This is a risk assessment which insures the mortgage lender for the inherent risk of loss from a bad mortgage loss. The Biden Administration last month announced that the Federal Housing Administration is now reducing the annual premium on FHA insured mortgages 35% from .85% to .55% for new mortgages. The people in Washington have a very short political memory.
Federal Restaurant tip changes: The tax people are worried about people tipping too much at restaurants, money they somehow may have missed with their levies on tip income they already include in wages. Their excuse is that some people may be working at less than the federal minimum wage [only $7,25 per hour] when tips reduce their wages. No matter how it is calculated or reported it will probably result in restaurants charging higher prices and paying employees more to cover the tips. More restauranteur time and energy to satisfy the taxers and the purpose of the tip will hardly satisfy the good or bad tippers.
Now, local news: The best part is that this coming week will bring us up to three times the rainfall as last year. I am still replacing trees and plants from the droughts from the past and am thankful to Mother Nature to provide abundant rain, which is a five-year occurrence in these parts.
We cannot miss the worst part of receiving both natural gas and electricity proposals to increase price notices in the mail this month. Everybody has experienced huge increases in their bills these past few months. Problem with this occurring budget-tearing experience is that the WSJ last month noted Natural Gas prices plunging and drillers scaling back. Much electricity is made with natural gas and now coal since the nuclear plants are shutting down. It appears that our gas and electricity costs are really based on high European fuel costs from shipping our precious fuels to offset Russian closure of pipelines. We have internationalized our energy costs, especially since we are now importing oil again after shutting down pipelines all around the country and slow-walking permits for the oil and gas industries. The gas price request covers four years at only 4.7 billion dollars. You are invited to attend a public forum to protest. Be careful though because the FBI is now invited to find terrorists in the crowd speaking out against proposals here or at public schools.
International News: The economic giant of Europe, Germany, after slow-walking military aid to the brave Ukrainians, finally authorized a brigade of tanks to them after Biden conceded a brigade of Abrams [31 tanks], with the caveat that it would take two years to make them. With 5,000 tanks in storage and after our Marine Corps giving back to inventory all of their Abrams, you would think they could scrounge up a few tanks for the people fighting the Western War against the Russians. They can never win the war without these, more, and old reconditioned obsolete F16 fighters. It is obvious that our and German allies want Russia to win, otherwise the excuses don’t pan out at all.
Now, the very best news is that Mark Cuban, the Shark TV show millionaire has started a generic prescription, “Mark Cuban Cost Plus Drugs Company.” This is real. In thirteen months [only a year] they have over two million subscribers. They have over 1,000 generic drugs listed. I experienced huge asthma inhaler costs some years ago and it was about $450 for a month through Kaiser with Medicare paying a hundred of it. I used to go through the Canadian Pharmacy for half the cost. It was made overseas by the same American Drug company that developed it. [Now, the generic version is only $10 through Kaiser Pharmacy]. The price through costplusdrugs.com is their cost plus 15% markup, a $3 pharmacist fee and $5 shipping. That is incredibly cheap and eliminates a lot of middle-people who float prices all over the landscape. This is truly a public service announcement for my people. Thank you Mark and the Washington Examiner.
One last thing. My Author’s Instagram site [Instagram.com/phillipbchuteauthor/] has over 1,200 followers and I would like you or your family to follow the wisdom of this old guy with Sarah, my granddaughter’s assistance.
Please call for appointments or e-mail. We are booking solid for a week in advance now with many new clients.
Best wishes to all!
Phil Chute, EA & Staff
JANUARY 2023 NEWSLETTER
GOOD NEWS FOR A CHANGE: Our client who was lost in the U.S. Tax Court maize finally received a check back from the IRS with a NO CHANGE conclusion of our 27-month-old petition after his audit results. It was a combination of great record keeping by the client who had completed and correctly filed his tax returns five years ago, and endless endurance. The IRS audited and disallowed the many miles he drove as an Uber driver to earn a living. Here was a case of an ordinary taxpayer who was treated with malice and incompetence. IRS was hoping he would pay the big bill [$30K with penalties and interest] and disappear. The client and I hung on by answering the repetitious telephone inquiries and responding to their demanding communications until we finally won our case. A thousand hoops and whistles to get through the circus of needless bureaucracy. During the whole period, we never met a human behind a desk or telephone, ever. We communicated with people in at least six states. It is a faceless and mindless experience.
First, the auditor ignored our documents which were sent certified mail with required signature. How could they not receive a 125 pages carefully prepared set of documents which was referenced and summarized in the attached response letter? They had trashed it. We sent another and they refused it. Instead, they sent the bill with a 90-day letter. We petitioned the U.S. Tax Court in Washington, D.C. as a Small Tax Court Case. The venue was shuffled to the Court in San Diego. After a year the Tax Court somehow failed to put a stay on the collection from the audit. The IRS kept ignoring and sending threatening letters while we were in proceedings. The client paid the full amount to save his credit and property to get them off his back. There should have been no need to do this if the IRS had followed the law and waited for the conclusion and settlement. It took 18 months to win the case, and almost another year to return the funds the client overpaid to the IRS. I hate to think of this as an example of what to expect with 87,000 INEXPERIENCED new hires coming on board this year.
This was our seventh U.S. Tax Court Case and another winner.
We are aware of tax preparers who now prepare tax returns without ever meeting their clients. And we know there are services overseas which prepare those taxes. It may not be a good experience because many of these are ghost preparers who are not legally authorized to do returns.
This is the main reason why all these years, our practice is to face the clients in an interview to first get to know them and input their data correctly in the computer. We get better answers to questions and a good way of knowing our clients better. We become personally accountable, too. Then, for later years, if they wish, they can just send their data by mail or computer. I have always preferred the one-on-one interview each year unless you now live out- of-state. When I was a Stockbroker-Principal the first law of the N.A.S.D. was to know your client. It still works well.
FEDERAL TAX CHANGES FOR TAX YEAR 2022
Charitable contributions for non-itemizers were eliminated.
The dreaded new 1099-K form annual threshold of $600 from third-party payors has been put on hold until next year. The old limit of $20,000/200 transactions are still applied.
The maximum amount of childcare expenses is now $3,000 for one and $6,000 for two or more qualified persons. This phases out when AGI exceeds $15,000.
The maximum refundable Additional Child Tax Credit amount is now $1,500 per child.
The Nonbusiness Energy Property Credit now renamed Energy Efficient Home Improvement Credit, has been extended to property placed in service thru 12/31/2011. It appears that we have a very insecure bureaucracy dedicated to changing the names of all past legislation and popular human beings.
The Residential Energy Efficient Property Credit renamed Residential Clean Credit is upped to 30%.
Child Tax Credit age limits reverted from age 18 to under 17 and the amount changed to $2,000 per child. Phaseout begins when M.A.G.I. exceeds $2,000/$4,000 joint.
Pension Required Mandatory Dividends, aka R.M.D., changed from age 72 to 73 beginning 01/01/2023.
Mileage rates for charitable driving remains a lousy $.14 per mile. Mileage for business beginning January 1 thru June 30 is $.585 per mile and from July 1 thru 12-31-2022 is $.626. Mileage for medical or moving is $.18 for the first half of the year and $.22 for the second half.
Section 179 for business use of new sports utility vehicles must not exceed cost of $27,000. If you can find one.
Subchapter S corporations can now apply for the Qualified Plug-In Electric Drive Motor Vehicle Credit [aka QPIEDMVC] subject to the newly debated laundry list of qualifications.
Taxpayers who are employees cannot deduct unreimbursed employee expenses unless they are one of the following:
*Armed Forces reservist.
*Qualified performing artist.
*Fee-based state or local government official
*Employee with impairment-related work expenses.
Exceptions for home office do not exist and will cause audits.
The latest minimum wage effective January 1st this year is $15.50. The Federal minimum is only $15.00 but California is always at the top for everything. Wrong because New York City taxes added to their state beat California to become the highest taxed state in the nation.
Northern California produces most of the water supplies in the state from rain and snowfall during the Winter season. Unfortunately, 95% of storm water is flushed into the Pacific Ocean due to a lack of storage reservoirs to store runoff and prevent flooding. The state has authorized 8 water bonds since 2000 for water projects totaling almost $27 Billion, with most of the money going to ecosystem restoration and pet environmental clauses. No new dams have been built since then.
Meanwhile, 531,000 acres were left unplanted in the Great Central Valley due to bad or lacking water concerns. California State reimbursed the farmers $2,500,000 to leave the fields fallow. The Valley is also known for very high unemployment.
California’s New State Council Law to dictate wages, working conditions, and benefits for the benefit of the Service Employees International Union took effect on January 01, 2003. A referendum, Save The Local Restaurants, petition has now gathered over a million signatures to qualify for the November election. The state legislature has allowed the law to take effect, instead of holding the action, by declaring the votes must be verified first. This new law allows triple damages for lost wages and benefits, plus attorney’s fees for discrimination for workplace complaints. That would be lawyer’s paradise. The law also allows mandated pay raises to $22 hourly which would be worker’s paradise.
California, Never a Slave State, Considers Reparations: A State Reparations Commission discovered that slavery is the real issue of black poverty. To settle accounts, they determined that California taxpayers owe each of their black neighbors $223,000. A method of collection was not given. [Wall Street Journal article.]
Governor Newsome’s New California Budget: This addresses shortfalls of $20 to 40 Billion (your city/county) dollars this coming fiscal year. Many social programs will be shifted to local accountability. But Medicaid to all eligible residents, regardless of immigration status, and universal preschool, social safety net spending, will be maintained and reinforced. What shortfall?
Other Miscellaneous Investment Concerns: The Biden’s Labor Department has a new rule that will permit pension money managers to play politics with trillions of retirement fund savings. They want environmental, social, and governance investing instead of securing high returns on worker’s lifetime savings. “Simply put, retirement savings will be used as leverage to force companies to reduce their carbon emissions and establish racial and gender quotas and other social justice fads. [from the Washington Examiner] Big Brother has spoken.
Gas-fired stoves, water heaters, and home heating are under fire by the overseers of California Air Resources Board. A federal appeal won a case with the Ninth Circuit Court over resistance to the Berkley’s ban on gas usage which stated, “It is a hidden hazard.” “Cities and states should be able to exercise police powers to prohibit the use of dangerous or unsafe items.”
New hookups for residences and some businesses are now not approved in many counties. For some unknown reasons natural gas is detrimental to our health and we must send it all overseas to Europe which had been shut down from Russian supplies. A recent WSJ article reported that the Biden appointed Consumer Product Safety Commissioner recently announced that “Banning gas stoves are in the works because of public health harm. They are a hidden hazard and products that can’t be made safe can be banned.” Same for gas-powered autos in the future. A new gas increase notice was just mailed to state residents recently to cap the whole situation. At least we can lead the nation in home gas prices again.
Lastly, Education News: Fairfax County Virginia High School gives us the latest War On Merit aka W.O.M. article. The National Merit Commended Students in the top 3% of their high school sent certificates of honor students to the Superintendent’s Office on 9/16/2022. Their cover note asked that the letters of commendation should be presented ASAP since it is the student’s ONLY notification. The Administration held the certificates and did not notify parents until over a month had passed and the time for students to apply for colleges had passed. When they finally were, the Superintendent’s Office issued the statement that “There was a plan for equal outcomes for every student, without exception, with equitable grading, giving students 50% for just showing up.” An administrator later admitted that the honors were hidden on purpose stating, “We want to recognize students for who they are as individuals, not focus on their achievements. They don’t want to hurt the feelings of kids who don’t get the award.” Equal outcomes over academic excellence sounds like perverted Communism. [The City Journal has provided this information over Twitter.] Are we all created equal?
Best News of All: The IRS is now accepting electronically filed tax returns and we have added additional staff to cope with the business this year. At least we have survived another year and will be happy to see old friends and clients returning.
Best regards to all,
Phillip B Chute, EA & Staff