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New tax breaks cause confusion, enforcement issues

New tax breaks enacted last year are causing confusion for taxpayers and enforcement problems for the Internal Revenue Service, according to a government report issued Thursday, the deadline for filing individual returns.

As of March 5, the IRS erroneously gave out $24.2 million in Making Work Pay tax credits, according to the report by J. Russell George, the Treasury inspector general for tax administration. The IRS issued a total of $25 billion worth of the credits during the period, for an error rate of less than one-tenth of 1 percent.

The IRS also erroneously issued about $4.7 million in tax credits meant for people who bought plug-in electric cars. The new tax breaks were enacted as part of the massive economic recovery package passed last year.

“Our report concludes that the IRS is having a mixed filing season this year,” George said. “On the one hand, they are having difficulty implementing many of the changes created by the passage of the laws designed to stimulate the economy. On the other hand, the news is not all bad as the IRS is detecting and stopping more erroneous refunds this year.”

The report covers returns processed as of March 5. At the time, the IRS had received about 61 million returns. The agency expects to receive about 140 million individual returns this year.

“Any time you have major tax changes you will see some confusion over it,” said IRS spokesman Terry Lemons. The IRS is doing “everything we can” to work through problems and process returns quickly.

The stimulus package enacted last year presented many challenges for taxpayers and the IRS, making an already complicated tax system even more complex. There were tax credits for qualified families who buy new homes or make energy improvements to existing ones, as well as tax breaks to help pay college tuition or buy new cars.

The Making Work Pay tax credit was President Barack Obama’s signature tax break in the package. It provides individuals with up to $400 and couples up to $800.

The homebuyer tax credit was so popular that Congress extended and expanded it in November. Buyers who have owned their current homes at least five years are eligible, subject to income limits, for tax credits of up to $6,500. First-time homebuyers — or people who haven’t owned homes in the previous three years — can get up to $8,000. To qualify, buyers have to sign purchase agreements before May 1 and close before July 1.

The IRS expects half the people claiming the homebuyer credit not to include proper documentation, such as a settlement statement, and that will delay refunds, according to the report.

As of April 2, the average refund was $2,950, up about $255 over last year, Lemons said. The fastest way to get a refund: file electronically and have the refund deposited directly into a bank account, which takes about 10 days.

Refunds can take six to eight weeks for last-minute filers who use paper returns and receive checks, Lemons said.

SC gov’s state flights may raise tax liabilities


SC gov’s state flights may raise tax liabilities

COLUMBIA, S.C. – South Carolina Gov. Mark Sanford’s use of state planes for personal and political trips could open him and the state to federal tax penalties because the flights never were recorded as taxable fringe benefits.

Tax experts who reviewed an Associated Press analysis of more than 100 flights since 2003 said numerous trips could have triggered Internal Revenue Service rules that require adding the value of flights to the governor’s wages, making them subject to taxes. The analysis shows nine flights since 2008 alone could be worth $19,019 in taxable benefits.

“The state appears to take the position that they assume that all of these are business flights,” said Marianna Dyson, a former IRS fringe benefits lawyer and one of the nation’s leading experts on the topic. By doing that, the state “ignored the rules applicable to the use of an employer’s aircraft.”

The governor’s office contends the need to report any of Sanford’s trips as income is preposterous because every flight is official business. “It’s all working condition fringe benefits that we don’t believe is taxable,” said Sanford spokesman Ben Fox.

An AP investigation this summer showed Sanford traveled to numerous personal and political events even though state aircraft only are to be used for official business. While the governor has said he did nothing wrong, he has yet to explain how he properly used state planes for all those flights.

The governor on many occasions mixed official business — such as a meeting with newspaper editors — with a political event like a speech to a GOP group — and tax experts say those trips could require Sanford to pay taxes on some flights. It would be up to the IRS to decide, though an agency spokesman would not comment on how governors and states comply with fringe benefit laws.

Plus, Sanford likely needs to pay taxes on the flights taken by his children because they have no official role in state government.

The two-term governor’s travel has been under scrutiny since he returned from a secret June rendezvous in Argentina with a woman he later called his soul mate. He has reimbursed the state $3,300 for travel related to a 2008 trip during which their longtime friendship became physical.

Ensuing AP investigations have shown Sanford flew in pricey commercial airline seats despite state requirements for low-cost travel; failed to disclose on ethics or campaign finance documents his use of private planes; and spent $63,000 for charter jets on European trade trips when commercial travel was available for a fraction of the cost.

Sanford’s travel is being investigated by the State Ethics Commission, and lawmakers who’ve urged him to resign are considering whether to try to force him from office. The governor, who says he is trying to save his marriage, insists he’s staying.

His spokesman was given detailed information on more than 100 trips with potential tax implications but refused to detail why each was not taxable.

“These claims defy common sense, and the governor stands where he stands — which is right there with literally hundreds upon hundreds of elected officials who also include their family on trips to public events, just as it falls squarely in line with former governors,” Fox said.

Sanford, a legend of frugality for telling staff to use both sides of Post-It notes, took his children with him on yearly taxpayer-funded flights from the family’s coastal plantation to Columbia to light the state’s Christmas tree and to national governors conferences. Experts said the children’s flights were nearly always subject to fringe benefit rules.

Bob Kamman, a fringe benefits expert in Phoenix who reviewed the AP research, which was based on flight logs and schedules, said at least 68 flights could be taxable.

He said business and personal travel can mix without tax consequences as long as the primary reason for a trip is business.

In August 2005, Sanford flew to the northwestern part of the state and spent less than two hours meeting with different newspapers before being driven to North Carolina for two nights and a day of “personal time” at a private lodge. The plane returned to Columbia without the governor.

“You have to draw the line somewhere on ‘primarily personal’ and ‘primarily business,’ and this is where it should be drawn, especially when the plane has to fly back to Columbia before picking him up again,” Kamman said.

Other governors have faced similar scrutiny. An AP review in December estimated former Illinois Gov. Rod Blagojevich could owe more than $60,000 on non-business flights worth at least $225,000. Former Alaska Gov. Sarah Palin’s settlement of an ethics investigation for trips taken with her children included a promise to pay any back taxes.

As with private employers, a state is supposed to report taxable benefits for its employees. But in South Carolina, the agencies that manage state aircraft and submit tax forms say the value of state aircraft use has never been reported. That’s in part because the agencies rely on officials to verify they use the aircraft properly, and then assume that all of them do.

Failing to report benefits as income could subject the state to a penalty of 25 percent of what wasn’t reported. For the flights since 2008, that tab could approach $5,000.

Dyson, the former IRS fringe benefit lawyer, said the idea was to protect taxpayers by using rules aimed at curbing abuses of corporate executives. She said most states have lagged the corporate world in properly reporting the benefits.

“These rules, which are designed to be fair, protect shareholders,” she said. “By the state ignoring these rules, I think it encourages more personal use of the aircraft.”

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