TAX REPORT By TOM HERMAN
High Earners Face Surge in Tax Audits
The IRS is turning up the heat on high-income taxpayers, especially those who work for themselves. IRS officials say audits of taxpayers making $100,000 or more rose 14% last year from 2006. Recent IRS data also show a 29% increase in audits of people making $200,000 or more -- and an 84% surge in audits of those with incomes of $1 million or more.
IRS research indicates much of the tax-noncompliance is committed by self-employed workers, such as consultants and small-business owners, whose taxes aren't withheld from their pay and whose income isn't reported separately to the government. By contrast, compliance is much higher among people whose pay is reported by their employers and whose taxes are withheld from their pay.
This year, "we will continue to focus on audits of high-income individuals," Linda Stiff, the IRS's acting commissioner, said in an interview. She also says IRS agents are intensifying their focus on "abusive" tax shelters, loosely defined as transactions with no real business purpose other than to avoid taxes.
In addition, agents have increased audits of taxpayers involved in partnerships and businesses organized as "S corporations." With a typical S corporation, income isn't taxed at the corporate level. Instead, profits and losses flow through to shareholders, who are supposed to pay taxes at their own individual rates.
For the vast majority of taxpayers, the odds of getting audited remain quite low. Only about 1% of all individual income-tax returns filed in each of the past few years have been audited. But the chances of attracting the IRS's attention now are significantly higher than they were just a few years ago.
In fiscal 2007, the IRS examined a total of nearly 1.4 million individual income-tax returns. By contrast, the IRS audited only 617,765 returns in fiscal 2000. The IRS's "coverage" rate -- audits divided by total number of returns filed the previous year -- has also been rising in recent years. For fiscal 2007, it stood at 1.03%, up from 0.98% the prior year and 0.49% in 2000. Even so, it's lower than where it was as recently as 1997.
IRS coverage rates are rising especially rapidly for higher-income taxpayers:
The IRS audited 31,382 returns with incomes of $1 million and higher in fiscal 2007, up from 17,015 the prior year. The coverage rate rose to 9.25% from 6.30%.
The IRS audited 113,105 returns with income of $200,000 and higher, up from 87,558 the prior year. The coverage rate: 2.87%, up from 2.57%.
The IRS audited 293,188 returns with income of $100,000 and higher, up from 257,851. The coverage rate: 1.77%, up from 1.67%.
The IRS relies on numerous techniques to choose which returns are audited. Many returns are selected on the basis of a secret computerized-scoring system that the IRS recently has updated, which is based on a continuing research project involving in-depth audits of thousands of returns. Computer programs assign each tax return a score that evaluates the potential for inaccuracies, based on the IRS's experience with similar returns. IRS staffers then pore through those returns with the highest scores to see which would make the best targets.
Many returns are picked because of "mismatches" -- which means that something a taxpayer reported doesn't match what was reported separately to the IRS by employers, banks or other financial institutions. Thus, one way to reduce your chances of hearing from the IRS is to double-check your return to see if what you reported matches what appears on those forms.
Other returns get audited because they were done by a paid tax preparer whom the IRS suspects of wrongdoing. Still others are picked based on information the IRS has obtained through its growing efforts to identify promoters and participants of tax shelters and other abusive tax-avoidance transactions.
Some returns get selected because of a tip from confidential informants, such as former business partners, ex-spouses or an angry neighbor. Separately, thousands of audit victims are picked at random among various income groups.
Most IRS probes are conducted by mail and are known as "correspondence" audits. These focus on a limited number of specific issues on a return and are designed to address those topics that don't require a full-scale, face-to-face audit. More complex issues are handled through what are known as "field" audits and are conducted in person. These may involve a trip to an IRS office or to the taxpayer's home or business.
In fiscal 2007, just over one million of the 1,384,563 individual income-tax audits were correspondence audits. Of the 31,382 audits of people with income of $1 million and higher, 19,123 were correspondence audits and 12,259 were field audits.
One of the easiest ways to attract IRS attention in a hurry is to claim there's no law that you have to pay federal income taxes or even file a return. IRS officials refer to these and similar excuses as "frivolous" arguments. Don't even think about trying to make such claims. Courts consistently reject them, and the penalty can be severe.
Saturday, January 26, 2008
Success is having people love you that you want to have love you. - Buffett
It takes 20 years to build a repuatation and 5 minutes to ruin it. think about that and you'll do things differently.
What I'll do is form a partnership where I'll manage the portfolio and have my money in there with you. I'll guarantee you a 5% return, and I;ll get 20% of all profits after that. And i won't tell you what I own because that's distracting. All I want to do is hand in a scorecard when I come off the golf course.
There simply aren't enough saints available to staff a large institution that requires its members to voluntarily act against their own well-being.
The market is there only as a reference point to see if anybody is offering to do anything foolish. Charlie and I never have an opinion on the market because it might interfere with the opinions we have that are good.
It takes 20 years to build a repuatation and 5 minutes to ruin it. think about that and you'll do things differently.
What I'll do is form a partnership where I'll manage the portfolio and have my money in there with you. I'll guarantee you a 5% return, and I;ll get 20% of all profits after that. And i won't tell you what I own because that's distracting. All I want to do is hand in a scorecard when I come off the golf course.
There simply aren't enough saints available to staff a large institution that requires its members to voluntarily act against their own well-being.
The market is there only as a reference point to see if anybody is offering to do anything foolish. Charlie and I never have an opinion on the market because it might interfere with the opinions we have that are good.
Couldn't agree more!
"One should guard against preaching to young people success in the customary form as the main aim in life. The most important motive for work in school and in life is pleasure in work, pleasure in its result, and the knowledge of the value of the result to the community." -- Albert Einstein
"One should guard against preaching to young people success in the customary form as the main aim in life. The most important motive for work in school and in life is pleasure in work, pleasure in its result, and the knowledge of the value of the result to the community." -- Albert Einstein
On Walter schloss
Walter Schloss article in Forbes
At 91, the man Warren Buffett famously dubbed a "superinvestor" is still picking unloved stocks.
Walter Schloss has lived through 17 recessions, starting with one when Woodrow Wilson was President. This old-school value investor has made money through many of them. What's ahead for the economy? He doesn't worry about it.
A onetime employee of the grand panjandrum of value, Benjamin Graham, and a man his pal Warren Buffett calls a "superinvestor," Schloss at 91 would rather talk about individual bargains he has spotted. Bushy-eyebrowed and avuncular, Schloss has a laid-back approach that fast-money traders couldn't comprehend. He has never owned a computer and gets his prices from the morning newspaper. A lot of his financial data come from company reports delivered to him by mail, or from hand-me-down copies of Value Line, the stock information service.
He loves the game. Although he stopped running others' money in 2003--by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500--Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age. In a day of computer models that purport to quantify that hideous and mysterious force called risk, listening to Schloss talk of his simple, homespun investing methods is a tonic.
During his time as a solo manager after leaving Graham's shop, he was a de facto hedge fund. He charged no management fee but took 25% of profits. He ran his business with no research assistants, not even a secretary. He and his son, Edwin (who joined him in 1973), worked in a single room, poring over Value Line charts and tables.
In a famous 1984 speech titled the "The Superinvestor of Graham-and-Doddsville," Buffett said Schloss was a flesh-and-blood refutation of the Efficient Market Theory. Asked whether he considers himself a superinvestor, Schloss demurs: "Well, I don't like to lose money."
He has a Depression-era thriftiness that benefited clients well. His wife, Anna, jokes that he trails her around their home turning off lights to save money. Those beloved Value Line sheets are from his son, 58, who has a subscription. "Why should I pay?" Schloss says.
Featured in Adam Smith's classic book Supermoney (1972), Schloss amazed the author by touting "cigar butt" stocks like Jeddo Highland Coal and New York Trap Rock. Schloss, as quoted by Smith, was the soul of self-effacement, saying, "I'm not very bright." He didn't go to college and started out as a Wall Street runner in the 1930s. Today he sits in his Manhattan apartment minding his own capital and enjoying simple pleasures. "Look at that hawk!" he erupts at the sight of one winging over Central Park.
One company he's keen on now shows the Schloss method. That's the wheelmaker. Superior Industries International (nyse: SUP - news - people ) gets three-quarters of sales from ailing General Motors (nyse: GM - news - people ) and Ford. Earnings have been falling for five years. Schloss picks up a Value Line booklet from his living room table and runs his index finger across a line of numbers, spitting out the ones he likes: stock trading at 80% of book value, a 3% dividend yield, no debt. "Most people say, 'What is it going to earn next year?' I focus on assets. If you don't have a lot of debt, it's worth something."
Schloss screens for companies ideally trading at discounts to book value, with no or low debt, and managements that own enough company stock to make them want to do the right thing by shareholders. If he likes what he sees, he buys a little and calls the company for financial statements and proxies. He reads these documents, paying special attention to footnotes. One question he tries to answer from the numbers: Is management honest (meaning not overly greedy)? That matters to him more than smarts. The folks running Hollinger International (other-otc: HLGAF.PK - news - people ) were smart but greedy--not good for investors.
Schloss doesn't profess to understand a company's operations intimately and almost never talks to management. He doesn't think much about timing--am I buying at the low? selling at the high?--or momentum. He doesn't think about the economy. Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange's closing bell.
Schloss owns a prized 1934 edition of Graham's Security Analysis he still thumbs through. Its binding is held together by three strips of Scotch tape. In the small room he invests from now, across the hall from his apartment, one wall contains a half-dozen gag pictures of Buffett.
Schloss first met that more famous value hunter at the annual meeting of wholesaler Marshall Wells. The future billionaire was drawn there for the reason Schloss had come: The stock was trading at a discount to net working capital (cash, inventory and receivables minus current liabilities). That number was a favorite measure of value at Graham-Newman, the investment firm Schloss joined after serving in World War II. Buffett came to the firm after the Marshall Wells meeting, sharing an office with Schloss at New York City's Chanin Building on East 42nd Street.
Schloss left the Graham firm in 1955 and with $100,000 from 19 investors began buying "working capital stocks" on his own, like mattressmaker Burton-Dixie and liquor wholesaler Schenley Industries. Success drew in investors, eventually rising to 92. But Schloss never marketed his fund or opened a second one, and he kept money he had to invest to a manageable size by handing his investors all realized gains at year-end, unless they told him to reinvest.
In 1960 the S&P was up half a percentage point, with dividends. Schloss returned 7% after fees. One winner: Fownes Brothers & Co., a glovemaker picked up for $2, nicely below working capital per share, and sold at $15. In the 1980s and 1990s he also saw big winners. By then, since inventory and receivables had become less important, he had shifted to stocks trading at below book value. But the tempo of trading had picked up. He often found himself buying while stocks still had a long way to fall and selling too early. He bought Lehman Brothers (nyse: LEH - news - people ) below book shortly after it went public in 1994 and made 75% on it in a few months. Then Lehman went on to triple in price.
Still, many of his calls were spot-on. He shorted Yahoo (nasdaq: YHOO - news - people ) and Amazon before the markets tanked in 2000, and cleaned up. After that, unable to find many cheap stocks, he and Edwin liquidated, handing back investors $130 million. The Schlosses went out with flair: up 28% and 12% in 2000 and 2001 versus the S&P's --9% and --12%.
The S&P now is off 15% from its peak, yet Schloss says he still doesn't see many bargains. He's 30% in cash. A recession, if it comes, may not change much. "There're too many people with money running around who have read Graham," he says.
Nevertheless, he has found a smattering of cheap stocks he thinks are likely to rise at some point. High on his watch list (see table) is CNA Financial, trading at 10% less than book; its shares have fallen 18% in a year. The insurer has little debt, and 89% of the voting stock is owned by Loews Corp. (nyse: LTR - news - people ), controlled by the billionaire Tisch family. He says buy if it gets cheaper. "I can't say people will get rich on it, but I would rather be safe than sorry," he says. "If it falls more, I won't worry about it. Let the Tisches worry about it."
Schloss flips through Value Line again and stops at page 885: Bassett Furniture, battered by a lousy housing market. The chair- and tablemaker is trading at a 40% discount to book and sports an 80-cent dividend, a fat 7% yield. Schloss mutters something about how book value hasn't risen for years and how the dividend may be under threat.
His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper and it eventually will recover.
If only he had waited a bit to buy wheelmaker Superior, too. It's been two years since he bought in, and the stock is down a third. But the superinvestor, who has seen countless such drops, is philosophical and confident this one is worth book at least. "How much can you lose?" he asks.
At 91, the man Warren Buffett famously dubbed a "superinvestor" is still picking unloved stocks.
Walter Schloss has lived through 17 recessions, starting with one when Woodrow Wilson was President. This old-school value investor has made money through many of them. What's ahead for the economy? He doesn't worry about it.
A onetime employee of the grand panjandrum of value, Benjamin Graham, and a man his pal Warren Buffett calls a "superinvestor," Schloss at 91 would rather talk about individual bargains he has spotted. Bushy-eyebrowed and avuncular, Schloss has a laid-back approach that fast-money traders couldn't comprehend. He has never owned a computer and gets his prices from the morning newspaper. A lot of his financial data come from company reports delivered to him by mail, or from hand-me-down copies of Value Line, the stock information service.
He loves the game. Although he stopped running others' money in 2003--by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500--Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age. In a day of computer models that purport to quantify that hideous and mysterious force called risk, listening to Schloss talk of his simple, homespun investing methods is a tonic.
During his time as a solo manager after leaving Graham's shop, he was a de facto hedge fund. He charged no management fee but took 25% of profits. He ran his business with no research assistants, not even a secretary. He and his son, Edwin (who joined him in 1973), worked in a single room, poring over Value Line charts and tables.
In a famous 1984 speech titled the "The Superinvestor of Graham-and-Doddsville," Buffett said Schloss was a flesh-and-blood refutation of the Efficient Market Theory. Asked whether he considers himself a superinvestor, Schloss demurs: "Well, I don't like to lose money."
He has a Depression-era thriftiness that benefited clients well. His wife, Anna, jokes that he trails her around their home turning off lights to save money. Those beloved Value Line sheets are from his son, 58, who has a subscription. "Why should I pay?" Schloss says.
Featured in Adam Smith's classic book Supermoney (1972), Schloss amazed the author by touting "cigar butt" stocks like Jeddo Highland Coal and New York Trap Rock. Schloss, as quoted by Smith, was the soul of self-effacement, saying, "I'm not very bright." He didn't go to college and started out as a Wall Street runner in the 1930s. Today he sits in his Manhattan apartment minding his own capital and enjoying simple pleasures. "Look at that hawk!" he erupts at the sight of one winging over Central Park.
One company he's keen on now shows the Schloss method. That's the wheelmaker. Superior Industries International (nyse: SUP - news - people ) gets three-quarters of sales from ailing General Motors (nyse: GM - news - people ) and Ford. Earnings have been falling for five years. Schloss picks up a Value Line booklet from his living room table and runs his index finger across a line of numbers, spitting out the ones he likes: stock trading at 80% of book value, a 3% dividend yield, no debt. "Most people say, 'What is it going to earn next year?' I focus on assets. If you don't have a lot of debt, it's worth something."
Schloss screens for companies ideally trading at discounts to book value, with no or low debt, and managements that own enough company stock to make them want to do the right thing by shareholders. If he likes what he sees, he buys a little and calls the company for financial statements and proxies. He reads these documents, paying special attention to footnotes. One question he tries to answer from the numbers: Is management honest (meaning not overly greedy)? That matters to him more than smarts. The folks running Hollinger International (other-otc: HLGAF.PK - news - people ) were smart but greedy--not good for investors.
Schloss doesn't profess to understand a company's operations intimately and almost never talks to management. He doesn't think much about timing--am I buying at the low? selling at the high?--or momentum. He doesn't think about the economy. Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange's closing bell.
Schloss owns a prized 1934 edition of Graham's Security Analysis he still thumbs through. Its binding is held together by three strips of Scotch tape. In the small room he invests from now, across the hall from his apartment, one wall contains a half-dozen gag pictures of Buffett.
Schloss first met that more famous value hunter at the annual meeting of wholesaler Marshall Wells. The future billionaire was drawn there for the reason Schloss had come: The stock was trading at a discount to net working capital (cash, inventory and receivables minus current liabilities). That number was a favorite measure of value at Graham-Newman, the investment firm Schloss joined after serving in World War II. Buffett came to the firm after the Marshall Wells meeting, sharing an office with Schloss at New York City's Chanin Building on East 42nd Street.
Schloss left the Graham firm in 1955 and with $100,000 from 19 investors began buying "working capital stocks" on his own, like mattressmaker Burton-Dixie and liquor wholesaler Schenley Industries. Success drew in investors, eventually rising to 92. But Schloss never marketed his fund or opened a second one, and he kept money he had to invest to a manageable size by handing his investors all realized gains at year-end, unless they told him to reinvest.
In 1960 the S&P was up half a percentage point, with dividends. Schloss returned 7% after fees. One winner: Fownes Brothers & Co., a glovemaker picked up for $2, nicely below working capital per share, and sold at $15. In the 1980s and 1990s he also saw big winners. By then, since inventory and receivables had become less important, he had shifted to stocks trading at below book value. But the tempo of trading had picked up. He often found himself buying while stocks still had a long way to fall and selling too early. He bought Lehman Brothers (nyse: LEH - news - people ) below book shortly after it went public in 1994 and made 75% on it in a few months. Then Lehman went on to triple in price.
Still, many of his calls were spot-on. He shorted Yahoo (nasdaq: YHOO - news - people ) and Amazon before the markets tanked in 2000, and cleaned up. After that, unable to find many cheap stocks, he and Edwin liquidated, handing back investors $130 million. The Schlosses went out with flair: up 28% and 12% in 2000 and 2001 versus the S&P's --9% and --12%.
The S&P now is off 15% from its peak, yet Schloss says he still doesn't see many bargains. He's 30% in cash. A recession, if it comes, may not change much. "There're too many people with money running around who have read Graham," he says.
Nevertheless, he has found a smattering of cheap stocks he thinks are likely to rise at some point. High on his watch list (see table) is CNA Financial, trading at 10% less than book; its shares have fallen 18% in a year. The insurer has little debt, and 89% of the voting stock is owned by Loews Corp. (nyse: LTR - news - people ), controlled by the billionaire Tisch family. He says buy if it gets cheaper. "I can't say people will get rich on it, but I would rather be safe than sorry," he says. "If it falls more, I won't worry about it. Let the Tisches worry about it."
Schloss flips through Value Line again and stops at page 885: Bassett Furniture, battered by a lousy housing market. The chair- and tablemaker is trading at a 40% discount to book and sports an 80-cent dividend, a fat 7% yield. Schloss mutters something about how book value hasn't risen for years and how the dividend may be under threat.
His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper and it eventually will recover.
If only he had waited a bit to buy wheelmaker Superior, too. It's been two years since he bought in, and the stock is down a third. But the superinvestor, who has seen countless such drops, is philosophical and confident this one is worth book at least. "How much can you lose?" he asks.
Friday, January 18, 2008
AMR getting slaughtered again, not sure what I was thinking when added to it. Looks like dead money for a very long time :( Just when I need the cash for a house. Jumbos are charging very high rates, doesn't bode well for housing at all. The best time to be cash rich and buy down, and I don't hav cash :(
Wednesday, January 09, 2008
OMG, just have lost nearly two third of gains made. Blood letting continues on AMR. Is it options manipulation? Or something more severe?
Yes there's earnings concern with oil high, but they seem to have 21B in cash which seems enough to drag it through in the near term at least and not straight into bankruptcy.. Spin off will reduce debt more. Could have good value going ahead. Really tempted to buy more but don't want to increase margin position.
Oh well, atleast will end active investment by self. Debating on whether to buy KBH home.. tempting..
Yes there's earnings concern with oil high, but they seem to have 21B in cash which seems enough to drag it through in the near term at least and not straight into bankruptcy.. Spin off will reduce debt more. Could have good value going ahead. Really tempted to buy more but don't want to increase margin position.
Oh well, atleast will end active investment by self. Debating on whether to buy KBH home.. tempting..