Friday, January 31, 2014

putting financial stress into perspective: stress vs. STRESS

Last week, a story appeared in the Wall Street Journal discussing the stress I felt last year when faced with the decision of when to sell some shares of Tesla bought by my late husband.   As author Jason Zweig reports, I felt a good deal of relief after I had sold off all the shares, realizing that I had never been cut out to be a stock speculator in the first place, since I had neither the time nor the inclination to spend much energy following the vicissitudes of any one particular company's fortunes.  Reallocating the proceeds of that Tesla investment into well diversified mutual funds with low costs--and giving thoughtful consideration to future charitable donations based on that unexpected windfall--have allowed me to sleep much better since then.

The reopening of our Union College Volunteer Income Tax Assistance (VITA) site this week reminds me once again how much any stress I might feel about anything financial pales in comparison to circumstances facing the low-income working families and senior citizens we serve.  If I felt "stress", they feel "STRESS."

Confidentiality rules prevent me from sharing details about our taxpayers but a recent article* published by Sara Sternberg Greene in the NYU Law Review,  "The Broken Safety Net: A Study of Earned Income Tax Credit Recipients and a Proposal for Repair" paints a vivid picture.  What keeps the vulnerable population served by VITA sites like ours awake at night are far more pressing concerns than my own:  worrying about how they are going to keep the heat on, keep their cars running so they can get to work, pay for their prescription medicine copays and deductibles, or pay their astronomical property tax bills (Schenectady County has among the highest property tax bills in the country).

I am grateful that my students and I are able to relieve a little bit of their immediate financial stress by helping them to file accurate tax returns.  I am hopeful that improvements in educational opportunities (including initiatives in mathematics and problem solving dear to my heart) and better designed tax policies will produce even greater long term stress relief in the future.

[*Hat tip to Professors Francine Lipman and David Gamage on the TaxProf list for calling my attention to the Broken Safety Net article.]

Monday, December 2, 2013

Egregious misinformation on TurboTax website

Sigh!  Tax law is complicated enough for taxpayers to get right.  I am disappointed in TurboTax for making such a prominent FALSE statement on its website.

The first sentence in the TurboTax post in the screenshot above (captured on 12/2/2013) reads:  "If you're currently unmarried and don't have children, your filing status has to be single."

I don't know who at Intuit wrote such an egregiously incorrect statement, or what editing/proofreading process let it slip through, but anyone who thinks that statement is true should not be preparing even the most basic VITA returns, let alone be giving "tips" on the Internet site of the leading publisher of tax software.

Let's examine why this statement is false.

1) An unmarried person without children can sometimes qualify for a filing status other than "Single". For example, a childless bachelor who supports an elderly parent or another close relative who lives with him may qualify for Head of Household filing status.

2) Whether you are "currently" unmarried is completely irrelevant to your filing status.  What is generally relevant--in many cases--is your marital status on December 31 of the tax year.  (For a recent widow like myself, it is more complicated, but again--my *current* marital status at the time I file my 2013 return has nothing to do with my filing status on that return.  I will be filing a 2013 joint return with my late husband so my filing status will be "Married Filing Jointly" even though I will be "currently unmarried" at the time I file the return.)

Full disclosure:  I have used TurboTax software myself for years and have generally found it to be pretty reliable (though I always cross-check it with at least one other software product AND also do a line-by-line readthrough to double-check the logic and mathematics.)

I am very disappointed.

Monday, October 7, 2013

A time when Republicans and Democrats worked *together* to create public value

Prologue:  Mitt Romney attended the Harvard Business School, where the motto was:  "Create value."  I taught across the river at Harvard's Kennedy School of Government, where our motto was a bit different, a slight twist:  "Create *public* value.  Despite our many differences, I believe we both believe in creating public value.

The Affordable Care Act (also known as "Obamacare"), like all legislation, indeed all things created by humans, is not perfect or ideal, but it has the potential to represent a big improvement over the status quo.  As it happens, my personal preference would have been something more like the Canadian model of Medicare for all ages, but that is not on the table here (and also not perfect either), so I am hopeful that the Affordable Care Act will succeed as well nationally as it did in Massachusetts.

As it happens, the textbook I have been using in my public finance class since the first edition came out in 2005, Public Finance & Public Policy, is written by MIT Professor Jon Gruber, who also happens to be the author of both RomneyCare and ObamaCare.

There is an intriguing PBS interview with him in which he describes how it was that he came to invent this model.

Prof. Gruber, of course, hails from MIT, which is a school full of brilliant problem solvers with an engineering mindset.  Back in the late 1990s, when the government actually had a fiscal surplus rather than a deficit, the government decided to spend some of it on grants to help the state come up with plans for health care reform.  Prof. Gruber received some of that money and did a study in 2000, which--as he puts it--sat on the shelf gathering dust (as many studies do) for a few years.  After Mitt Romney became governor of Massachusetts, he apparently pulled the study off the shelf--because Mitt Romney (a Harvard B-School graduate) is also a kind of policy wonk too.  (By the way, even though I certainly don't see eye to eye with Mitt Romney, that phrase "policy wonk" is meant affectionately.  I am a Democrat and would consider myself a policy wonk also!  Prof. Gruber is also a Democrat and would probably be comfortable being described as a policy wonk too, I think.)  Anyway, Mitt really liked the plan because the numbers worked out (and so did his green-eyeshade guys, his financial advisers, even though his political advisers were leery.)

Prof. Gruber gives a vivid description of his encounter with Mitt Romney and his advisors:

  1. PBS: So when Romney hears that you've got this model that verifies that "Hey, this is a good idea," and you say it at the meeting, what's he like when he hears it?
    Gruber: Like a real wonk, just very excited: "Wow! Isn't this cool? We can cover the uninsured. We don't have to raise taxes. We can end the free-rider problem. Isn't this neat?" ... he was very much in management consultant mode, like: "Here is a problem. I can solve it. Isn't that neat?" -- sort of engineering almost mode.
    Engineering in what sense?
    Just in a sense of kind of, you know -- I teach at an engineering institute -- in the sense of kind of, that's what engineers do. They are faced with constraints; they try to solve a problem. He seemed excited that faced with the constraints he was facing, he could solve this problem.
    So you could imagine him sitting at Bain & Company and under other circumstances. This was not unfamiliar territory to him.
    Not at all.
    One of those guys who just --
    -- runs his hand down the thing and says, "Argh, I like that."
    You know, I was very impressed. I came out of that meeting. I went home and told my wife and said: "As a Democrat, I'm very scared. This guy could be president." He was really very smart, well-spoken, and just really seemed to know his stuff and was very impressive in person.
    Did they have good people around the table?
    That's what was very interesting. His financial people were wonderful. Tim Murphy is really the guy you should be talking to, sort of one of the unsung heroes of this. He was his main point person to make this happen. Amy Lischko -- I worked with terrific people.
    His political people were actually opposed. I mean, basically the meeting largely consisted of him arguing with his political advisers. His political adviser was saying, "We don't think this is such a smart thing to do," and Romney is saying: "No. Check it out. I can do this. Isn't this neat? I can make this work."
    So actually, I was not that impressed with his political advisers because I didn't like what they were saying, but he sort of shot them down.
    You keep saying this was "neat." Did he actually use the words, "This was neat"?
    I don't remember. No. But that was sort of -- he had a bit of a "Gee, golly gee" attitude about [it]. "Isn't this cool? We can make this work." ...
    There is a big moment where the bill is signed. Take me there. Describe the environment. I know you were there.
  2. I was there. I was very excited. I got to bring my wife. That was really neat. I was one of several people Romney actually thanked in his speech, which was really cool, a very proud moment for my wife. That was very exciting. It was this big podium and was all -- Ted Kennedy made a joke about hell freezes over. "I thought hell would freeze over before I would work with Mitt Romney." And Mitt Romney said, "I can't believe I'm working with Ted Kennedy." And they all laughed and hugged. And then they had a speaker from the conservative Heritage Foundation, which is a very conservative think tank, speak about what a wonderful validation of conservative principles this was. And it was all wonderful. And everyone was super-happy.
    Daniel Webster looked down upon it all.
    It was great. It was just an absolutely thrilling moment.
The contrast between the harmonious working together of problem solvers in both parties for the common vs. today's political chaos and polarization could not be more stark.  Professor Gruber is a Democrat, but Mitt Romney recognized him as a "fellow smart guy" and they worked together to develop a great solution for Massachusetts, and Ted Kennedy came on board too.  The conservative Heritage Foundation also weighed in positively.

I truly hope we can come together as a country the way Massachusetts problem solvers came together as a state almost a decade ago.

A personal note epilogue:  By the way, I bought an Affordable Care Act policy for myself and my young adult daughter this weekend.  Even without subsidies, it is a great deal better than our current coverage.  Because we are in good health and fortunate to be able to cover small routine expenses easily, I chose a high deductible bronze policy from a top-ranked local HMO we have known and used for many years.  (The health plan organization was #1 in the state rankings in Consumer Reports and in the top 20 out of 600 nationally ranked plans.)  The premium is less than half the best price currently available to us on the open market for individuals in New York State, and it is also a much better deal than COBRA coverage under my late husband's large group policy from his employer.  There was an array of great choices for us from several different providers that were ranked high in the lists published by Consumer Reports, based on the National Council on Quality Assurance, a nonprofit health plan accreditation organization.

If plenty of people in good health (like my daughter and myself) sign on to buy plans on the exchange, it will succeed and be viable.  I hope that it will create value for our family and many other families in the future.

Saturday, August 24, 2013

Updates for the coming tax year

It has been quite a while since my last post.   For those who don't know, my husband died, unexpectedly but peacefully, in his sleep in May.  He was only 59, took great care of his health, and to all outward appearances and lab tests was in radiant robust great health with the energy and vitality of a teenager until he took a nap from which he did not wake up. (Obituary and memorial blog here.)

It has been a very rough three months.  It is still not easy.  Yesterday, I went over to the beautiful brand new business school building at UAlbany, which just opened this week.  I knew Ross had been looking forward to teaching there.  It was gorgeous, full of natural light streaming in everywhere and beautifully designed to maximize energy efficiency.  I found an empty office with no name card on the door, possibly the one he would have been in if he had lived.  The door was open so I looked inside and fought back tears.

I am also only 59 and until Ross died, I also felt the energy and vitality of a teenager.  I have fleeting moments when I think I will feel that way again.   Although those moments are indeed brief as well as fleeting, there are more and more of them, and I am feeling hopeful.

One thing that really brightens my spirits is helping others, teaching others, empowering others, encouraging others.  There is a tradition of women in my family (my mother, my grandmother, my aunts) doing exactly that well into their 80s.  My mom (whose name is also Mary O'Keeffe--she is Mary Norine Gingras O'Keeffe, while I am Mary Margaret O'Keeffe) especially inspires me.  Statistically I have decades ahead of me in which to continue to make contributions to the world.

I haven't quite figured out entirely what I want to do with the rest of my one wild wonderful life, but I have found my VITA work very rewarding and I know I want to find a way to fit that into whatever I do with the rest of my life.  I also wanted to check that my brain was still working, and to make sure that it would be responsible for me to continue doing VITA work, so I decided to learn a massive additional amount of tax law and take the IRS Special Enrollment Exams, all three of them in an 8-day period.  I was a little jittery and unsure of myself, managed to lose track of where the key to my locker was at the testing facility--it turned out I had left the key in the lock, but was reassured that my brain kicked right into gear when I sat down at the terminal and started working through the little scenarios.  So I passed all the exams, and assuming that the IRS finds my criminal and tax record satisfactory (which I expect they will), I should have my official card from the Treasury Department bearing Enrolled Agent Status.  Yay!

Most of the EA test content goes way beyond VITA but it covers many areas of tax law in which I have either a personal interest and/or a professional interest for teaching/research purposes (e.g., estate and trust tax laws, corporate and partnership returns, tax treatment of passive income and various types of exotic investment instruments, the laws that relate to filing obligations for non-profit tax exempt organizations, the procedural rules for audits and appeals, etc.)

I should say that even though I passed the EA test with lots of questions on estate tax law, I certainly do not feel competent to prepare any of the more exotic types of returns I studied. For example, I would never dream of preparing the estate tax return for my late husband's estate (let alone preparing an estate tax return for anyone else!) but I feel much better equipped to ask intelligent questions and understand the documents the law firm handling the estate will ask me to sign.  In essence, I now feel I know enough to know what I don't know, and to be suitably humble.   Estate tax returns are definitely not do-it-yourself affairs for amateurs, any more than brain surgery would be!  It takes more than passing tests or taking CPE hours to get competent at something like this--I would say it takes years of practice supervised by more experienced practitioners.

So I feel very fortunate to have the local law firm I have engaged to prepare the return for Ross's estate.   They are a very experienced team, who happen to be all women--the three partners are women, all the associates are women, all the paralegals are women, and all the clerical staff are also women.  I guess that is not surprising, since they specialize in legal fields where females predominate in the profession--estates and elder law.  Since women generally outlive men, most of their clientele is female.   In any case, I feel very comfortable with them--they seem to understand and share my values.  The senior partners have decades of experience and the paralegal estate administrator working on my case also has decades of experience.  They come highly recommended by people whose judgment I trust.  They all strike me as smart and thoughtful and caring, and are making a difficult process a lot easier for me.  They are good at asking the right questions, listening thoughtfully to my answers.  They explain the process well, answer my questions, and make me feel like a valued part of a team enterprise in getting everything correct.  Everyone involved with working on the return (whether attorney or paralegal) has a PTIN and the firm has an EFIN.   They don't seem to mind at all that I have been "kicking the tires" more than probably most of their clients do.

Moving on to other matters, since my husband's death, I have decided not to continue running the consulting firm in which I worked with him.

I will continue to teach Eco 339 Public Finance and Eco 391 Income Tax: Policy and Practice (also known as "the VITA class") at Union College.

But--I have always wanted to pursue graduate study in math, so I have decided to take some part-time graduate math classes at UAlbany as well.  It is fun to go back to being a student for a while.  I am inspired by my former colleague, Judy Kugel, a dean at Harvard's Kennedy School who just retired from that job while still at her peak and decided to enroll in the mid-career Masters Program in Public Administration--at age 75, which I think is incredibly cool.

Never too old to learn!

Go us!

September 19, 2013 update:

My certificate (suitable for framing!) and wallet card arrived in the mail today.

Monday, March 11, 2013

IRS needs the resources to communicate better

For years, I have been concerned about this, and now with the Form 8863 debacle, the chickens are clearly coming home to roost.  As Forbes TaxGirl Kelly Erb and her commenters have noted, there is mass confusion and uncertainty for many taxpayers right now.  (Update:  Don't Mess with Taxes blogger Kay Bell is also covering it.)

When you order something from an on-line vendor (e.g., buy an airplane ticket or purchase an item from Amazon), you generally get an immediate on-line confirmation either on-screen and/or via email that tells you *exactly* what information your vendor thinks you sent, spelling out all the details of the order you placed (e.g., item numbers and descriptions, sizes, colors, quantities, type of delivery, etc.)  That way--if somehow the transmission got garbled or misinterpreted--you know right away and can take immediate steps to make sure that the correct information is sent.

However, Americans get no detailed confirmation whatsoever from the Internal Revenue Service, even though for many taxpayers, filing their tax return amounts to by far their biggest on-line transaction of the year.

How do we know that the information we *think* we sent (because we can see it on our end on our software screens and hardcopy printouts) is what the IRS actually received?

The answer is that we don't actually know what the IRS received.  For years, the IRS has begged Americans to efile, using approved third party "middleman" software suppliers that it regulates, but it does not provide any routine detailed confirmation echoing back the information it actually received via those middleman software providers.  All it routinely confirms is the SSN, the filing status, and the amount of refund requested or balance due reported.  No additional details confirming the information the IRS actually received are routinely and immediately available.

Things are different at the state level, at least in some states.  Some states (e.g., New Jersey) provide their own efile site, which makes it possible for the taxpayer and the tax agency to have access to exactly the same information.   Other states (e.g., New York) do not provide their own efile site, but do provide a way for the taxpayer to view the efiled return that the state agency received.  This means that it is easily and routinely possible for taxpayers in New Jersey and New York (and other states) to view the actual information that their state tax departments received.  (I have pasted part of a sample screenshot of their menu below.)

But *nobody* has an easy way to see what information the IRS received.  Paid tax preparers and VITA sites and do-it-yourself efilers can all see the information we sent (on our screens and our hard copy printouts), but we have no idea how much of the information might have been lost or garbled in the process of transmission, or how the IRS might have interpreted the information it received.

This needs to change.  If the state tax agencies can do it, then the federal government should be able to do it.  The United States government requires us to file annual returns signed under penalty of perjury, so the least they could do is to provide a prompt and immediately accessible copy of the information they believe they received.

H&R Block has finally informed users of its software that some information on Forms 8863 got lost or misinterpreted in unexpected ways in the process of transmission.  I have heard mixed reports from preparers using TaxWise software (the software used at most AARP and VITA sites, including ours, as well as at many paid tax prep shops.)    A number of TaxWise preparers are reporting similar problems with Form 8863, but not all of them.   To make matters more confusing, there are several different implementations of TaxWise, including an online product (TaxWise Online or TWO, which we use and which automatically updates to the most recent available version at all times) and a desktop products (which other customers use, and which needs to be manually updated via regular downloads.)

Where do our own VITA site taxpayers stand?  The answer is--I don't honestly know and I have no way to find out.  All I can tell them is what we sent--the information that appears on our screens is the same information that appears on the paper hardcopy printouts we review with our taxpayers prior to efiling and give each taxpayer to take home at the time we prepare their returns.

What the IRS received is another matter entirely.  The only way they can find out what the IRS received is to call the IRS and ask.  And their lines are (understandably) very busy right now.

What Congress needs to do is to appropriate the funds for the IRS to provide the same kind of transparent confirmation that states like New York and New Jersey already do.  Then taxpayers could see on their screens exactly what information the IRS received.

I don't blame the IRS for this.  I blame Congress.  It has asked the IRS to do more and more with less and less funding, and this year Congress has added further insult to injury by epically procrastinating, making the IRS folks run harder and harder just to stay in one place.  Providing proper taxpayer service ought to be a priority for the federal government.

The United States has an enviable record of taxpayer compliance (not perfect, but still the envy of most nations around the world) and poor taxpayer service undermines that goal.

Tuesday, January 15, 2013

Up close and personal on taxes

The Tale of Four Tax Returns, a short video documentary from PBS last week, really highlights many important aspects of our taxcode from the perspective of four very different real life  taxpayers.

Top left is Jennifer Rosado, a low-income single mother with children.  Two years ago, in 2010, she was making poverty level wages of $12,800 and the refundable tax credits she received made the difference for her family between living below the poverty line and above it.  It is important to stress the difference between those tax credits and traditional welfare--she had to EARN the income through work in order to receive those credits.   After two years she has worked her way into a higher paying job and she is currently on the phase-out portion of the Earned Income Credit.  Her tax scenario looks a lot like the Ashley Sawyer case study in the VITA test.

Lower left is Danny Rangel, a Navy veteran now working as electrian, whose income of about  $30,000 also qualifies for VITA tax preparation assistance.    Unlike Jennifer, Danny has no children, so he is paying a substantial amount of his income in federal taxes.  If we consider both income and payroll taxes, he paid a larger share of his income in federal tax in 2010 than Mitt Romney did.  The difference becomes even more stark if we consider the other taxes he pays (sales taxes, excise taxes on gas and other items, property taxes passed onto him in the form of high rent).  His tax scenario looks a lot like the Rose Hudson VITA case study.

The two taxpayers on the right are on the other end of the income spectrum.  Eric Schoenberg, the wealthy investor in the lower corner earns eight times as much as Seth Hahn at top right, but both taxpayers earn well above the median income.  Their financial positions are similar to those to which many Union College students aspire.   Their very different tax circumstances reveal a lot about the complexity of the unfairness built into our tax system.

The show's transcript is available here.  The video, which provides a Rashomon-style multifaceted perspective on our tax system, is embedded below.

Monday, December 31, 2012

Under penalty of perjury!

Mathbabe (a mathematician, data scientist, and public policy blogger) wrote a blog post called I totally trust experts, actually in which she stated:

"I also hire an accountant and sign my tax forms without reading them."  

As a public finance economist specializing in tax policy, I know Mathbabe is far from alone in that practice, but in my opinion, an "expert" accountant is seriously remiss in professional responsibilities if s/he encourages you to sign your tax return without reading it.

Your tax pro should be taking special pains to let you know that signing a tax return is not like signing the ubiquitous terms of service to get access to some internet site.  I know there is a lot of confusing boilerplate (Cathy isn't the only mathematician who finds taxes annoying and tedious--see here another discussion about Berkeley math PhDs and taxes, and for a comic relief parody from another mathematician, see here), but part of a tax preparer's professional obligation is to help the client navigate through the gobbledigook and understand the critical essence of the information presented in the return before asking for a signature.

Signing a tax return is signing a statement that says--upfront, in the opening sentence--

"Under penalty of perjury, I  declare that I have examined this return and the accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."

Who is the "I" in that sentence?  It is not your tax preparer.  It is YOU, the taxpayer.

You--not your accountant!--are the person ultimately accountable to the IRS for the accuracy of what is on your return. You are signing--under penalty of perjury--and submitting a document to a government agency with the power to pursue both civil and criminal charges against you, to seize assets, garnish wages, and generally create a great deal of hassle down the road.

Studies have shown that tax pros, even CPAs,  frequently make mistakes on tax returns. They may be experts in tax law, but they are not experts in knowing every twist and turn of your personal financial circumstances.  They admit as much when they sign the return.  Unlike you, the tax pro is not required to sign a sweeping statement that it is "true, correct, and complete."  The tax pro only signs that it is based on "all facts of which [the preparer] has any knowledge."  Reliance on a CPA is not going to be a defense against negligence penalties if you acknowledge that you did not even bother to read your return before signing it. Many Tax Court opinions make this clear.

As the supervising faculty member for a Volunteer Income Tax Assistance (VITA) site providing free tax help to low-income working families, I insist that my student volunteers walk their taxpayers line by line through the tax returns they prepare for them, confirming their understanding of the key statements and numbers on their tax returns and encouraging them to ask questions until they feel completely comfortable signing that statement on the return.

Our clients who have generally relied on paid preparers in the past say that no paid preparer has ever taken the trouble to do that before they came to us.  Most of the clients said their prior preparers just entered a bunch of numbers into the computer, printed out a bunch of documents they didn't understand, and told them "Here is the amount of your refund.  Sign here."  (Despite this cavalier attitude, such preparers often charge very high fees, even for very simple returns.)

Walking our clients line-by-line through the tax returns before asking them to sign is an essential part of our quality control process.   During the walk-through, some taxpayers recall important issues they might have forgotten to mention earlier as we walk them line-by-line through their returns or they catch misunderstandings our preparer might have gotten from the statements they had made during the interview.   The return walk-through also helps our clients to get a clearer handle on the big picture of their finances and the tax implications of the choices they have made and/or may be considering for the future, e.g., 401k enrollment, community college tuition, home ownership, self-employment, charitable giving.  (Interesting note though:  the poor give a larger share of their income to charity than the rich, despite the fact that there is minimal--frequently zero--tax benefit for charitable donations by low-income families.)

Another sad irony:  in many recent years, as my former classmate, National Taxpayer Advocate Nina Olson, has repeatedly pointed out, low-income working families have been far more likely to be audited than many folks with higher incomes.  And when they do get audited, they are at much higher risk of getting steamrolled by a process they do not understand.  The poor really can't afford to do what Mathbabe admits to doing!  Most of them can't afford the professional resources to dig themselves out of IRS trouble, so their best defense is (1) filing an accurate return and (2) understanding the information on their tax returns well enough to have the confidence to contest any audit claims made by the IRS.

But the tide is turning.  Thanks in part to Nina Olson's highlighting of the issue, the IRS is now increasingly redirecting its audit resources towards the higher income taxpayers.  So those folks are also well-advised to examine their returns carefully before signing.  Caveat taxpayer!

"Examining your return" does not literally have to mean reading every word of the obscure boilerplate on your return, but responsible tax preparers should be guiding all their clients (rich and poor) should take a thoughtful look at it, and make sure their clients understand the essence of the statements they are making to the IRS (and their state, if applicable) about the amounts and sources of income,  exclusions,  various types of deductions, tax credits, and why they are justified in claiming them.