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.

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.

What does a tax audit look like?

The image that comes to most people's minds when they picture a tax audit is a taxpayer sitting across a desk from a government auditor.

Once upon a time, that was true, but nowadays the overwhelming majority of what the IRS and New York State authorities call "audits" of individual taxpayers are "correspondence" audits conducted through the mail.

This is true for taxpayers at all income levels. It's just a practical reality--the tax agencies are under pressure to do more and more with less and less, and correspondence audits enable scarce auditor resources to be stretched a lot farther.

There are still a few face-to-face audits. Apparently, Taxgirl Kelly Erb had a face-to-face audit, presumably in an office, and I recently read an email on the TaxProf list from a law school professor who was expecting a tax auditor to come to her home to conduct the audit there. The professor said the worst part was having to clean up her home for the auditor! (I can definitely relate to that!) Perhaps coincidentally, both Kelly and the law school professor used to work for the IRS. Kelly has noted that she herself had previously been on the other side of the table from the taxpayer.

But most audits are not face to face, so perhaps you'd like to take a look at what a correspondence audit looks like. Here is a PDF of the initial letter for our NYS correspondence audit, with sensitive personal data (like Social Security numbers and our total taxable income) deleted.

I must say that I was initially rather taken aback at the strong boldface heading of at outset of the letter: NOTICE AND DEMAND for Payment of Tax Due, given that this was the first thing we'd heard from the state about our 2006 return since we'd filed it almost three years ago.

It seemed that the New York State Tax Department was coming on awfully strong in its very first ever approach to inquiring about our tax return. (It's my impression that the first notice in a correspondence audit from the IRS is not worded quite so strongly, but then I've yet to see one, so I don't know for sure.)

But after reading a lot of Treasury Department and GAO reports on correspondence audits, I realize that a lot of taxpayers just ignore tax audit correspondence, so maybe the New York tax officials have a good case to make that they need to be somewhat alarmist to make sure they grab the taxpayer's attention quickly.

That boldface headline certainly got my attention! I will be taking care of this matter pronto!

Later on in the letter, there is a page with the comforting title of "Taxpayer Bill of Rights," but it's full of scary things that could happen if we don't pay up or at least respond with our version of the facts within 30 days. (Seizing assets, filing liens, garnishing wages--none of it very reassuring, and certainly none of it does any good for one's credit rating, reputation with the bank or one's employer.)

The audit letter also has another page that provides the possibly comforting information that if one spouse wants to blame it all on the other spouse, s/he has the right to try to prove to the satisfaction of the tax authorities that s/he knew nothing about the allegedly incorrect information provided on the tax return and that s/he did not benefit from the allegedly ill-gotten tax gains from the allegedly incorrect information provided by his/her spouse.

None of this was any comfort to me. As the spouse who is supposed to be the expert at dealing with taxes in our house, any error would be almost surely be attributable to me. (My daughters sometimes irreverently refer to me as the "tax goddess.")

So I read everything over very carefully--and then breathed a deep sigh of relief--I think!

When I got around to reading the smaller and somewhat fuzzier computer print on the back of the first page, it yielded the information that suggests we may not have too much difficulty setting things straight--I hope.

If you're not familiar with New York tax law, I need to explain a few bed buffaloes in the code to help clarify this matter.

UPDATE: An earlier version of this post was getting way too long. I have decided to break it up into pieces. A separate post explaining those bed buffaloes in our tax audit will be up soon.

Mysteries of the NYS Tax Department Audit Notice

The duplicate audit notices my husband and I received on Friday

A close reading of the New York State Audit Division's Notice and Demand for Payment yields some mysteries to ponder:

Mystery #1: Time is apparently not linear with the NYS Tax Department

The Notice and Demand for Payment is dated 02/04/10, but it was postage metered on 01/28/10 and it arrived 1/29/10.

However, the computer generated text of the notice helpfully points out that "The Tax Amount Assessed portion of this bill may be claimed as an itemized deduction on your 2009 federal return if payment is made during calendar year 2009."

How the taxpayer is supposed to travel back in time to 2009 in order to pay a bill the Tax Department did not issue until 2010 is among the mysteries not explained by the audit notice. As the math textbooks say, the solution to the time travel problem is "left as an exercise for the reader."

My guess is that the NYS tax department considered updating the computer-generated script to refer to 2010 tax law, but given the vicissitudes of Congress, there's no way to be entirely what 2010 federal tax law will look like, and perhaps the NYS tax department folks didn't want to go out on a limb making any predictions about the ultimate form that 2010 federal tax law may take.

Still, it's a bit annoying to be told in 2010 that you might have been able to deduct a payment on your 2009 tax return when they waited until 2010 to bother telling you that they believed you were required to make the payment. (However, this is doubly moot in our particular case, since (A) I don't believe we owe the money they are "demanding" and (B) I believe our 2009 return will once again put us among the 8% of New Yorkers subject to the Alternative Minimum Tax, which means that--at the margin--additional New York State income taxes paid in 2009 would not reduce our federal taxes.)

Mystery #2: Why did we receive two identical copies of the audit notice in two identically addressed separate envelopes?

The notice states: "A copy of this bill has been sent to you and your spouse." Well, yes, we did get two copies, but both copies were identically addressed to both of us in identical separate envelopes, and we live still live together at the same address.

It seems to me that programming the computer to send a single envelope with a single copy of the six-page audit notice to all joint return couples whose most recent address of record on file with the New York State tax authorities indicates they are still living together would save a good deal of money and trees. (For the record, my husband and I have filed New York joint returns from the same address for 20 years and hope for many more "happy returns" from our cozy upstate New York home in the future.)

I'm not at all sure what the tax department hoped to accomplish by sending two identically addressed envelopes, each of them addressed to both of us at the same address, at least from the outward appearance of the envelopes.

A careful scrutiny of the contents of the six pieces of paper in both envelopes reveals that--buried in the middle of one internal page--one copy was intended specifically for me and one copy was intended specifically for my husband, but there was nothing visible from the outside of the envelope to indicate who was intended to receive each letter.

If one of us had moved out and left a forwarding address with the PO, how would the postal carrier have known that one of the envelopes should be forwarded to the spouse who had moved away, since both names were listed in the identical order on both externally identical envelopes?

If the tax department really wanted to send each spouse their own personal copy of the notice, why not program the computer to address the envelopes so that each envelope would show the name of the particular spouse to whom it is intended to be delivered, rather than keeping that information buried on an internal page.

Sending two identically addressed envelopes to the same address each stuffed with six 8.5x11 pieces of paper plus a return envelope in each seems like a lot of wasted paper and postage for no good reason.

UPDATE: On closer scrutiny, the two envelopes aren't quite identically addressed. There's a subtle difference. Both envelopes are addressed to both of us, but one envelope lists my name on the first line and his name on the second line, while the other envelopes lists his name on the first line and mine on the second line. Still not clear why they are wasting all the paper and postage. Also, each envelope contained 8 pages of text on six pieces of paper. With better planning, they could easily have put the 8 pages of text on four pieces of paper.

Another tax blogger gets audited

First Taxgirl Kelly Erb, now me.

Two letters arrived at our house yesterday, each with an ominous return address:

New York State Department of Taxation and Finance
Audit Division-Income/Franchise Desk AG3
W A Harriman State Campus
Albany NY 12227-0001

Upon opening both envelopes up, I discovered two identical letters (even the document number was the same on each, as was the AUDIT ID number), each of them six pieces of paper long. I don't know why the NYS Tax Department chose to send us two copies of this letter in two separate envelopes, each of which bore 48.2 cents in metered postage. At least two of the pages were printed on both sides, so we are talking 8 pages of printed text in each envelope.

The boldface header that first caught my eye was intimidating:

NOTICE AND DEMAND for Payment of Tax Due

A quick glance showed that the audit concerned our 2006 New York State tax return, which we filed in April 2007, almost three years ago. This is the first we had heard about any issues on our 2006 return, so the title of the notice was a bit alarming.

Ancient history, I thought, wracking my memory to try to remember what possible tax issues could come up from that year. I knew we should have all the archived receipts from that year stored in our basement file cabinet, but I wasn't exactly looking forward to spending the weekend digging through them. (It's a very busy time at our VITA site, as you might imagine, since most people get their W-2's this week.)

As I read through the letter, I figured out exactly what the New York tax authorities were challenging on our 2006 return: it was not any sort of exotic tax shelter (not that we have any of those!)--it was the dependency deduction we had claimed for one of our two daughters!

We had claimed two dependents on our 2006 New York return, resulting in a tax savings of $68 per child in NYS taxes that year, but the New York audit division has apparently decided we were only entitled to claim one daughter and is demanding $68 in back taxes plus $16.08 in interest on the back taxes allegedly due for the unspecified daughter they assert we were not eligible to claim on our NY return.

(Interestingly, they are not attempting to assesss any penalty, since the penalty amount is listed as $0. Apparently they are trying to be understanding about the penalty since the rules for claiming dependents are so complex.)

Hmmm, but $16.08 in interest on a $68 tax liability allegedly overdue for almost three years, that's an APR of about 8%, a pretty good investment return for the state these days. Where else can you you get those kinds of interest rates on your investments these days?

So the state of New York is demanding $84.08 from us, unless we can justify the two dependents we claimed on our 2006 New York return to their satisfaction. The burden of proof is on us.

Our daughters were 16 and 20 in 2006. Our 20-year-old was a fulltime college student in 2006, and we have transcripts and tuition receipts to prove it. Neither daughter provided more than 50% of her own support. Both were US citizens. Both daughters lived with us, at least in the way that the tax authorities define "live with," since our older daughter was actually away at college most of the year. I remain completely confident that both of them met all the criteria to be our "Qualifying Children" dependents that year.

The notice didn't specify which daughter's exemption they were challenging, so I suppose we will have to respond to the audit by documenting that both of them met the criteria to be claimed as our dependents.

It is might very well cost more than $84 in time and trouble to straighten this out, but hopefully the process will be enlightening and educational for others.

I'll keep you posted on how this works out. I'll also post a PDF of the letter (with personal details redacted) which explains why the NYS Audit Division suddenly decided to challenge our claiming our two daughters on our tax return--apparently out of the blue--almost three years after we filed our return.