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Tax Lawyers: The Palins Owe Thousands

On the campaign trail, Alaska Gov. Sarah Palin likes to mock Sen. Biden’s comment that “paying higher taxes is patriotic.” (Actually, what Biden said is paying taxes is patriotic, which is another thing entirely.)

Well, a pair of tax lawyers analyzed the Palins’ recently released 2006 and 2007 tax records and found that Palin really doesn’t think paying higher taxes is patriotic. In fact, they say the Palins’ tax returns contain several major errors that saved them from paying thousands of dollars in taxes. From TaxProf Blog:

Jack Bogdanski, There’s No Debate: Palins Owe Thousands in Back Taxes:

There is no serious debate (at least, none that has been brought to our attention) about the fact that at least the amounts paid for the children’s travel — $24,728.83 in 2007, according to the Washington Post — are taxable. The campaign’s tax lawyer has got at least that much of the law, and perhaps more, wrong. … The Palins, who had their tax returns done by HR Block, simply got it wrong. And the fact that the state payroll office got it wrong, too, doesn’t erase the Palins’ unpaid tax liability.

The release of an opinion letter by attorney Roger M. Olsen dated September 30, 2008, has stirred up the pot once again about the accuracy of Sarah and Todd Palin’s 2006 and 2007 tax returns. Not only that, but Mr. Olsen’s letter raises a couple of new issues.

This paper focuses on five problems: three raised in the tax returns and two new ones raised by Mr. Olsen’s letter. Here’s a summary of the five problems and my conclusions, for those who want to cut to the chase. My analysis will follow.

  • The Palins did not report as income some $17,000 that Governor Palin’s employer (the State of Alaska) paid her as an “allowance” for her travel. Can they do that? Yes, most likely.
  • The Palins did not report as income some $43,000 that the State of Alaska paid the Governor as an “allowance” for her husband and children’s travel. Can they do that? No, most likely not.
  • The Palins deducted $9,000 on their 2007 return, claiming it was a loss from Mr. Palin’s snow machine racing activity. Can they do that? Most likely not, but more info could make the deduction o.k. If any of the above issues goes against the Palins, they then risk getting hit with the section 6662 penalty for “negligence or disregard of rules or regulations.”
  • Can the Palins avoid the section 6662 negligence penalty by claiming that they reasonably relied either (a) on the W-2’s sent to them by their employer, which did not reflect either the $17,000 or the $43,000, or (b) on their tax return preparer H&R Block, or (c) on Mr. Olsen’s opinion letter dated September 30, 2008? The three reliance defenses are unlikely to succeed, but more info may make the (b) defense a good one.
  • Does Mr. Olsen have any exposure to sanctions by the IRS because of his letter? I believe Mr. Olsen’s letter probably violates 31 C.F.R. section 10.35. If so, he would be exposed to possible sanctions from the IRS Office of Professional Responsibility.

Bogdanski also found that the state of Alaska violated its own per diem policy, for unknown reasons, by not taxing Palin on the $17,000 worth of allowances she took while working in Anchorage and Wasilla.

The verdict?

[T]he Palins should have reported as taxable income, at the very least, the $24,728.83 of travel reimbursements for the children. That income would have been taxable to them at somewhere between 25 and 28 percent, and so they are in the hole to the government for more than $6,000, plus interest since at least April 15 at the rate of between 5 and 6 percent a year. They should file an amended return and pay the resulting tax and the interest. And if somebody at the IRS took a good, hard look at the payments for Sarah and Todd, we would bet that there would be some additional tax due there as well.

What’s more, Politico’s Ken Vogel noticed the “gifts” section on the Palin’s disclosure statement for the Federal Elections Commission, which covers 2007 and 2008, was left blank — despite the fact that Palin reported receiving more than $25,000 in gifts as governor.

It looks like the records were released late Friday afternoon for a very good reason.

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