We interrupt this tax programming to bring you a shameless brag from a proud great-grandmother

I'm only 56. I was well into my 30s when first child was born. How could I be a great-grandmother already?

Read on for more details....

A decade ago, my 14-year-old daughter came home from a summer math program with stars in her eyes about the wonderful mathematical community of kindred spirits she had encountered there. Some of the friends she had met were returning home to places like the Bay Area and Boston area, which had vibrant and thriving local mathematical circles that brought students together during the remainder of the year.

But, sadly, there was nothing like the Bay Area Math Circle or the Boston Math Circle in our area.

But we didn't give up. We reached out to other students and, with the support of RPI computer science professor Mukkai Krishnamoorthy, fondly known as "Prof. Moorthy," we formed our very own Albany Area Math Circle.

It started in 2001 with just my 14-year-old daughter Alison and his 13-year-old son Raju and it has now grown to about 30 high school students who meet weekly on Friday nights to collaborate on extreme mathematics together!

An important part of our community culture is the idea that you can learn a lot more by sharing your own mathematical understanding with others, so we encourage our high school students to mentor and coach younger students, and we now have about 40 students in our thriving middle school math circles as well. I consider those middle school students to be my mathematical grandchildren or even mathematical great-grandchildren because their coaches are high school students whom I have mentored and/or who my daughters mentored.

A week ago, the local Capital District Chapter of the NY Society of Professional Engineers sponsored their annual MATHCOUNTS competition at GE Global Research, which brought together 150 students from 22 middle schools. I am proud to say that the top 20 individuals and the top 8 teams at the contest were all mentored by high school student coaches who are members of our Albany Area Math Circle!

The first and second place teams as well as the first place individuals in the countdown and written competitions were coached by high school seniors Dave Bieber and Anagha Tolpadi respectively. Since my daughter Alison coached Dave and Anagha when they were in middle school, that makes Dave and Anagha my mathematical grandchildren and the middle school students that Dave and Anagha coach are my mathematical great-grandchildren! The other teams were coached by students I have mentored myself, so their students are my mathematical grandchildren.



Here are two photos of my mathematical great-grandchildren Cecilia Holodak of Van Antwerp Middle School and Aniket Tolpadi of Iroquois Middle School, shown with a GE scientist presenting their awards for winning the Countdown and Written Rounds, respectively.



For those interested in more proud-math-grandma photos and more details, see our Albany Area Math Circle blog here.

The two children who started it all, my daughter Alison and Moorthy's son Raju, have grown up and moved away, but Professor Moorthy and I still enjoy spending our Friday evenings working with the mathematical community the two of them inspired us to create.

It pleases us even more that Alison and Raju continue to enjoy working with younger students--Alison leads problem solving sessions at the brand new Princeton Math Circle (started up by 14-year-old Bianca Ray Avalini) and Raju teaches in a math enrichment program in Somerville, Massachusetts.

We now return you to our regular tax programming.

Warren Buffett more stimulated under President Obama than under President Bush?

Despite being one of the wealthiest people in the world, and despite protesting the unfairness of a tax system under which he pays a lower tax rate than his secretary does, Warren Buffett said in an interview a few year ago that he has filed for Social Security and cashes those monthly checks.

Social Security recipients got 2008 Economic Stimulus Payments under President Bush, but those ESP amounts had income ceilings, so Warren Buffett didn't get one of those.

Social Security recipients got 2009 Economic Recovery Payments--and, as far as I can tell--there were no income limits for ERP recipients, so I assume Warren Buffett did receive one.

And any 2009 ERP credit he did get is not going to change his 2009 tax liability (since he's clearly ineligible for Making Work Pay credits in any event), which means that he got that $250 ERP without any tax consequences whatsoever.

The difference is most likely pragmatic rather than ideological.

The 2008 ESP payments required millions of elderly and disabled Social Security recipients to file tax returns in order to get them. That caused a huge burden on the IRS, which had to redeploy auditors to answer the phones due to all the questions they got about the 2008 Economic Stimulus Payments.

So, determined not to make that mistake twice, it looks like Congress decided to have other government agencies (Social Security, RailRoad Retirement Board, and the Veterans Administration) do the stimulating this year. But, unlike the IRS, those agencies have no way to know the total amount of income their recipients receive, so they just sent those checks out to all their recipients--including Warren Buffett.

Schedule M doesn't stand for "Making work pay"

It stands for "Making work for preparers."

Last August, when the draft version of Schedule M appeared on the horizon Kay Bell immediately posted it and predicted:

Yep, the 2010 tax filing season is going to be another wild one for tax preparers, tax software companies, the IRS and, most importantly, we taxpayers.

There are lots and lots of headaches associated with Schedule M this year.

Why do we have Schedule M in the first place?

Well the government wanted to stimulate two different groups of Americans: working folks (through a "Making Work Pay" tax credit of up to $400 per taxpayer) and retired folks (through an Economic Recovery Payment of $250 per recipient of government pension benefit plans for the elderly and disabled.)

But Congress was apparently worried about stimulating any one American TOO much.

So, in its infinite wisdom, Congress came up with another Rube Goldberg machine, which resulted in the IRS having to create Schedule M.

If you are working AND receiving Social Security, Supplemental Security, Veterans' benefits, or RailRoad Retirement benefits, the amount of your maximum Making Work Pay $400 credit is reduced by the $250 Economic Recovery Payment you got.

The problem is that lots of Americans are understandably quite confused with all this stimulus that's been going round lately.

(A whole lot of stimulating has been going on these days! Cars, houses, unemployment benefits, energy efficient appliances--this year's stimulating has everyone vibrating in confusion.)

When you ask a taxpayer, "Did you get an Economic Recovery Payment last year?" you get all kinds of wrong answers, in both directions.

Many people who actually did get them don't remember getting them and respond "No," especially since they weren't particularly labelled in a memorable way, and many folks got them by direct deposit.

Many people who did actually did NOT get them, answer "Yes" because they are confusing them with the 2008 "Economic Stimulus Payments" made the previous year.

The Social Security Administration and Veterans' Administration, the government agencies that made the payments have forwarded their records of the payments to the IRS, but the government didn't bother to forward the records to the taxpayer!

Excuse me?

If a bank or other financial institution pays a taxpayer $10 or more in interest, it is required to issue a 1099-INT to the taxpayer reporting the interest paid so the taxpayer can properly report that information on Schedule B of their tax return. The impact of that $10 in interest is most likely a change of 0 to $4 in tax due or refund.

(Some financial institutions are extremely careful to report all interest to paid to taxpayers. I recently saw an end of year 1099-INT report a grand total of 17 cents in interest. The postage to send the 1099-INT cost more than the amount of interest in question! In case you are wondering, if a taxpayer's only interest is 17 cents, she is allowed to round to the nearest dollar and report $0 in taxable interest for the year.

By contrast, with the Economic Recovery Payments, we have a case where a public agency paid a taxpayer $250 to the taxpayer potentially, resulting in a $250 change in tax liability, but our government felt no need to bother to provide any kind of end of year statement to the taxpayers!

Given that some payments may have been misdirected and others may have been direct deposit payments easily confused with direct deposit payments from other sources, and that many ERP recipients are elderly, in poor health, and/or disabled, it seems the least the government could have done was to provide some way for taxpayers to check the amount of ERP that the government agency believes it paid them last year!

We had more than enough problems with the 2008 Economic Stimulus Payments (ESP) last year, but at least the IRS quickly provided the very helpful web tool "How much was my 2008 Stimulus Payment?" to allow taxpayers to look up the amount the IRS had sent them.

Unfortunately, the agencies that sent taxpayers the ERP money this year do not have any similar way for taxpayers to look up the amount of ERP money they received in 2009.

They just have to make their best guess and hope for the best. If they guess wrong and efile, the return will reject and the IRS will just tell them that the amount they reported on Schedule M does not agree with the IRS records obtained from the government agency that paid the money.

One professional preparer writing on the TaxWise forums have contacted Social Security on behalf of their bewildered taxpayers, only to be told that in some cases an Economic Recovery Payment paid to one person was mistakenly reported as accruing to the person's parent rather than to the child, for example.

Another preparer tried to report a $250 ERP payment made to a taxpayer after she showed him the bank account statement with a $250 direct deposit from Social Security, but the IRS records apparently show zero in ERP. There appears to be no way to efile the amount the preparer believes to be correct. The best the preparer can do is to efile the amount the IRS believes to be correct, resulting in a refund that will be $250 too large, but then after the taxpayer receives her refund, the preparer can prepare a paper return afterwards to correct the overpayment and return the money to the government.

What a fiasco! This is completely disgraceful.

If our government can require private financial institutions to give a clear accounting of tax information to their customers for amounts as small as $10 in interest paid (an amount that frequently has minimal tax liability consequences), why doesn't our government lead by example and tell its own public agencies, the Social Security and Veterans' Administration, to give a clear and easily accessible accounting to taxpayers of amounts those agencies paid which can change a taxpayer's liability or refund by $250!

Update on the audit

I went to the Post Office yesterday to mail off the documentation requested by NYS Tax Department "Audit Group 3" telephone representative.

Basically, she said that I all I needed to do was to explain that we'd declined to claim our older daughter on the federal form in order to allow her to get the education credit and to provide the name and Social Security number of our daughter, so the tax department could look up her tax return and see that she hadn't claimed her own exemption on her return. (Why the NY tax form didn't give any opportunity to provide this information right on the original tax return in the first place is not clear. The federal Form 1040 requires listing the names and SSNs of all dependents claimed on the return, but the NY tax return did not and still does not provide any place to do that.)

It's also unclear to me why the Audit Group 3 phone representative could not just take that minimal information directly over the phone from me, especially since the wording of the audit notice letter had suggested it was possible for taxpayers to resolve matters over the phone, and this matter does look extremely straightforward.

(It's possible that their idea of "resolving matters over the phone" means getting the taxpayer to agree that the NYS Tax and Finance Department is correct and pay the assessed amount by credit card over the phone! Perhaps the only people who need to respond by mail are those who don't agree with the bill enclosed with the audit notice. It's likely that they hope many taxpayers will take the path of least resistance and just surrender and concede the bill, even if it's not correct. The National Taxpayer Advocate's reports have pointed out that many low income taxpayers--who are far more likely to be audited than the average American--do exactly that.)

But...whatever....off I trotted to the Post Office to mail off the form with an attached letter of explanation providing the information required. I sent it Certified Mail ($3.24) and set up email notification, so I'll know when it arrived. There's a good chance it will arrive today (2/3/2010), which is somewhat strange to contemplate, since the audit notice letter itself was dated 2/4/2010.

More reflections on phone information

Although I'm not a big fan of phone calls, I did want to call to make sure I was sending exactly the right documents that would be required to resolve our correspondence audit. And I also wanted to get some insights into how much difficulty a low-income taxpayer might have in navigating the phone interface of the NYS Tax Department.

Upon further investigation and reflection after my experiences this morning, the phone information provided in the audit letter was definitely NOT as helpful as it could have been.

1) Page 7 of our audit letter stated that "If you prefer to resolve your disagreement by phone, call the toll free Personal Income Tax Customer Service Center number given on the enclosed Notice of Taxpayer Rights."

However, the only actual toll free number given on the "enclosed Notice of Taxpayer Rights" is 1-800-462-8100. A taxpayer who attempts to follow the advice given on page 7 will only waste more costly cell phone minutes (toll free doesn't mean free if you're calling from the kind of cell phone plan most of our low income clients have!) only to learn he's reached the number for ordering forms, certainly not the number for resolving an audit disagreement by phone.

2) There is also a NON toll free number given on the above-referenced page: 518-485-6800, but since the toll free version originally pointed out explicitly as the place to call to resolve problems hadn't worked, I assumed that the corresponding toll version wouldn't work either. (I later called the number and it appears that in fact the toll version WOULD have worked! So if only page 7 had pointed the taxpayer to the toll version initially, he might have reached someone who could help him.)

3) Anyway, instead I called the number given on page 8 of the tax audit notice enclosure, the one labelled "If you have questions regarding this notice, call 518-457-5434. That was a number that should have been answered starting at 8 a.m., according to the NY Tax Department website, but as I indicated earlier, when I called at 8:20 a.m., the recording just informed me that the office was closed and I should call back during "normal hours," without actually telling me what those hours were!

These may all seem like minor petty details, but the cost of calling several incorrect numbers or at several incorrect times adds up for the millions of New York taxpayers who have to deal with complying with our tax code.

In our case the audit issue was clear and straightforward, but for a taxpayer with a more complicated issue, and perhaps with only a limited number of minutes left on his phone plan and no money to buy more, these kinds of issues DO add additional stress!

And, the fact is that if our tax code (both federal and state) were simpler, taxpayers would not need to be wasting nearly as much of their time AND of government employee time AND running up phone bills on both ends dealing with all these bed buffaloes in our tax code.

It's not the fault of the NYS Tax Department that the tax code is so complicated, but the audit letter could at least avoid wasting taxpayer time and cell phone minutes by clearly directing taxpayers to the correct phone number to call and the correct time to call those phone numbers. Those misdirected phone calls that come in at the wrong time or to the wrong number run up the state's phone bill as well.

Phone log with the NYS tax department dealing with the audit

According to the NYS Tax website, taxpayers can call them weekdays between 8 a.m. and 5 p.m.

Here's my phone log.

8:20 a.m. Monday Feb 1

I called the phone number listed in my audit notice, which is the main number for billing, payments, and information, 518-457-5434.

I immediately connected to a voice menu, listened to the options, punched in 1 for "Personal income taxes," and then was invited to punch in my Social Security number, which I did. As soon as I punched in my SSN, a recorded voice message repeated my SSN back and asked me to press 1 to confirm it, which I did.

It then played the following message:

"The office is currently closed. Please call back during normal hours."

The message did not give any information as to what the supposedly "normal hours" are. The website says 8 to 5 on weekdays. It's 8:20 on a Monday.

Anyway, if I was calling outside the supposedly normal hours, why didn't the voice menu tell me that before inviting me to punch in information. If I'd been a low-income taxpayer worried about using up cell phone minutes, I would not be very pleased about this.

I'll keep trying.

8:32 a.m Called again. Went through the punching SSN, reading back and confirmation steps. This time I was quickly transferred to a very nice representative who gave his name as Steve, if I recall correctly. I explained that I wanted to explain the circumstances to disagree with the audit notice I had received. He asked again for my SSN, along with my name, address, home phone, and employer's names. I believe the reason for asking all this information was to confirm my identity before disclosing any sensitive information.

After I provided satisfactory answers to those inquiries, Steve politely but firmly stated that we owed New York State $84.08 and that we should pay that amount before February 25 to avoid additional interest and penalties.

When I reiterated that we wanted to explain the information we needed to provide to disagree with the bill, he said he would need to transfer my call to another department ("Audit Group 3") in order to get the information about the documents required to do that. He also helpfully gave me the direct number for Audit Group 3 in case I got disconnected and once again very politely but firmly advised that we should pay the bill by February 25 to avoid additional interest and penalty.

(This information repeatedly provided by Steve is very important for many taxpayers, who may be uncertain about whether their position is correct. If I were less than 100% confident that the position we took on our return was correct, I would consider following his advice to pay the amount in question before February 25 to stop the clock on the interest and penalties. If I later turned out to be correct, I could still file to get a refund of that amount, possibly with some interest. If I turned out to be incorrect, however, following Steve's admonition would have saved me interest, which is currently running at 7.5%, as well as possible penalties.)

8:38 a.m After Steve transferred me to the line for Audit Group 3, a recorded voice asked me to punch in my SSN yet another time, followed by a request to punch in my zip code. The recorded voice then informed me that all lines were busy, but predicted a wait time of approximately 7 minutes. So I waited on hold, listening to reasonably soothing if somewhat repetitive music, periodically interrupted by messages telling me that my call was important to them and encouraging me to consult the website for additional information.

8:54 a.m. After 14 minutes on hold, I reached a very helpful and efficient telephone rep who did not give her name. She again requested my SSN and my name and then told me we owed $84.08 on our 2006 New York taxes.

When I explained that we disagreed with the bill and explained our reasons, she listened and provided clear information about what we would need to do. We simply need to attach a letter to the audit notice disagreement form providing our daughter's name and SSN and stating that we had been entitled to claim her on our 2006 federal tax return but had chosen not to do so in order to allow her to get the education credit on her federal return. Once they get that information, they will be able to look up the information they have on our daughter's federal and state returns and confirm that our information is consistent with those returns.

I had hoped that perhaps she could just take the information about our daughter's name and SSN over the phone, but apparently not. I guess that it's understandable that they want to keep telephone calls short, to avoid making hold times even longer for other taxpayers, so I will go off to the Post Office later today and mail the letter via certified mail.

Although she did not tell me to do so, I will take special care to use the return envelope provided in the audit notice, since I understand that the window in the envelope will allow a barcode to show through to the outside that will expedite processing once it reaches the NYS Tax and Finance Department.

End of phone call: 8:56.

Total elapsed time for the phone call: 24 minutes, including 14 minutes on hold, four minutes talking to Steve, two minutes talking to the Audit Group 3 employee, and four minutes dealing with listening to voice menus and punching in numbers.

Plus an additional minute or so wasted on the 8:20 attempted phone call, where I was invited to punch in my SSN and confirm it before being told the office was closed and to call back during the unspecified "normal hours," and waiting another 10 minutes to call back after making the apparently correct guess that maybe 8:30 was the beginning of "normal hours."

It was a local call for me and we have unlimited local calling from our landline, so no phone charges for us. However, many low-income taxpayers have calling plans which might make those minutes a costly expense.

Still, all in all, it was not nearly as bad as I expected, especially since I imagine Monday morning right after W-2s come out must be a peak calling time for the tax department.

Bed buffaloes in our tax audit

Here are the bed buffaloes that led to our audit:



Bed buffalo #1: New York State tax law does not allow the same number of deductions for exemptions as federal tax law.

While taxpayers are allowed to claim deductions for both personal exemptions and dependent exemptions on their federal tax return, the State of New York now only permits taxpayers to claim deductions for dependent exemptions. (Apparently, there was some distant time in the past, prior to 1988, when New Yorkers could claim personal exemptions for themselves as well as dependent exemptions for their dependents, just as they do on their federal returns, but no more. I can't for the life of me understand why the NYS Legislature decided to create trouble and confusion for taxpayers by deciding to change the definition of allowed exemptions back in 1988 so that it no longer aligned with the federal definition, but I guess we are stuck with that bed buffalo. Changing it back to conform with the federal definition would likely only cause more confusion at a time when state tax administration resources are already stretched thin! And our state legislature is even more notoriously dysfunctional now than in the past. In any case, we only moved to New York in 1989, and so our family has always known we could only claim our dependents as exemptions on our NYS returns.)

The NYS Tax Department folk are very aware that this is confusing for some folks, and every year they highlight this distinction, both on the tax form and in the accompanying instructions.

This is understandably confusing for many New York taxpayers and errors are quite common, especially for taxpayers who do their returns by hand. It's quite understandable that many taxpayers might reason: "I claimed four exemptions on my federal return and so I get to claim four exemptions on my state return," even though the New York instructions say otherwise. (This is not too surprising--life is short and the tax instruction manuals are long, and only tax policy wonks like me actually think they make interesting reading! Actually, I don't find the instructions especially interesting reading, but I do feel compelled to read them, since I want to keep my family AND our VITA taxpayers out of tax trouble!)

Bottom line: So the maximum number of exemptions we were eligible to claim on our 2006 federal return was four (two personal exemptions for my husband and myself and two dependent exemptions for our daughters.) The maximum number of exemptions we could claim on our 2006 state return was only two (just for our two daughters--none were allowed for ourselves.

We did not exceed those limits. So why does New York think we made a mistake in claiming our two daughters on our New York return?

Read on more for more bed buffaloes.



Bed Buffalo #2: Federal tax law provides that parents may decline to claim a dependent child on their federal tax return in order to allow that child to claim education credits on their own federal return.

We had done exactly that. Our income was too high to claim the education credits on our federal return, so by declining to claim our older daughter on our federal return, we enabled her to claim the education credit on her federal return. We did lose the value of her dependency exemption on our return, but due to dependent exemption phaseout provisions in the tax code (another bed buffalo in the tax code I won't go into here), that exemption wasn't actually worth all that much money to us.

Discussing this strategy gives me an opportunity to comment on a tangentially related bed buffalo that can gore the unwary.



Bed Buffalo #3: Declining to claim dependents that you could have claimed on your return does NOT, under current tax law, allow those dependents to claim their own personal exemptions on their returns!

A taxpayer who CAN be claimed by another taxpayer as a dependent may NOT claim a personal exemption for herself, even if that taxpayer entitled to claim her declines to claim her.

I knew that, of course, so I made sure to keep my daughter from being gored by that particular bed buffalo, but many people do not realize this.

Okay, enough on that side note, our family successfully dodged that bed buffalo. Back to the consequences for our New York return.

Yet another bed buffalo!



Bed Buffalo #4: Even though we had chosen not to claim our daughter on our federal return, New York State still allowed us to claim her on our NYS tax return.

I remember discovering this particular bed buffalo back in 2006, finding it somewhat surprising at the time. I had initially assumed that choosing not to claim her on our federal return would preclude claiming her on our state return, but page 94 of the 2006 NY Income Tax Instructions reads:

If you were entitled to claim a dependent on your federal return but chose not to in order to allow your dependent to claim the federal education credit on his or her federal tax return, you may still claim him or her as a dependent on your New York return.

(Conveniently those 2006 instructions are still available available online. In fact for the obsessively curious or very delinquent late filers, instructions are still available on-line going all the way back to 1985!)

So, I followed the instructions and did exactly what the worksheet on page 94 told us we could do: claim dependency deductions for both daughters on our New York return even though we had only claimed one of them on our federal return.

As far as I can tell, we followed the tax instructions correctly to the letter, but we still got ensnared in an audit triggered precisely by the discrepancy between the one dependent claimed on our federal return and the two dependents claimed on our New York return.

Why? Because the New York State tax forms did not--and still do not--provide any place where the taxpayers can explain why the number of dependents they claim on their state return exceeds the number of dependents that they claimed on their federal return.

Since New York State tax authorities are understandably diving into the sofa cushions for much needed tax revenues, they recently obtained a datatape from the IRS allowing them to compare the total number of exemptions claimed on 2006 federal returns (in our case that number was 3, my husband, myself, and our younger daughter) with the total number of exemptions claimed on 2006 NYS returns (in our case that number was 2, just our two daughters.)

Most of the people swept up in that comparison net were people who had been gored by Bed Buffalo #1 above, people who wrongly claimed personal exemptions themselves and/or their spouses on their NY returns, due to confusion with the federal rules.

Some of the people who successfully navigated Bed Buffaloes #1, #2, and #4, may find that when they mail in their required explanation, that the tax authorities will realize their dependent child was actually gored by Bed Buffalo #3, which could result in additional money owed by the dependent child, on her federal and/or state returns, if s/he wrongly claimed a personal exemption for herself.

I believe our family has successfully navigated around all the Bed Buffaloes listed above, but I need to call the NYS tax department folks to find out exactly what documents we should provide to prove this to their satisfaction.

Stay tuned for more.