Tax Lawyer's Blog

Kay Bell of Don’t Mess With Taxes has a great piece on the tax returns of our Presidential and Vice Presidential candidates titled Palin’s tax returns, tax questions.  She finds two potential problems with the Palins’ returns:

1.  Late payment of taxes – the Palins’ 2007 tax return showed a tax liability of $24,738 but the Palins’ had only paid in, prior to April 15, 2008 (the due date of the return) $22,721. When they filed their return in early September 2008, they paid the balance of $2,017.  The IRS will probably send the Palins’ a notice of penalties and interest due on the underpayment. It won’t be very much.

2.  Per diem payments- Palin did not include on her income tax returns the per diem payments she received from the state of Alaska (her employer) in 2006 and 2007.  Paul Caron of TaxProf blog quotes Jack Bogdanski of Jack Bog’s Blog’s on this subject:

Per diem allowances received by an employee can legally be omitted from her gross income if they constitute reimbursements for amounts that the employee could have deducted as business expenses had the employee paid for them out of pocket and not been reimbursed.  Thus, for Palin, the tax question would appear to boil down to whether, had she not been reimbursed for the $60,441 of travel, meals and lodging expenses, she could have legitimately taken business deductions for them.

But the W-2s Palin received from Alaska in ‘06 and ‘07 did not include the per diem amounts and, not surprisingly, the Palin’s relied on those W-2’s in preparing their income tax returns.

A week ago the Palins got an opinion letter from a tax attorney to determine if it was proper for them to rely on the W-2s issued by the State of Alaska. Tax attorney Roger Olson’s** answer was:

Unless employees have reason to know that the W-2 is incorrect, the IRS expects employees to rely on the employer’s W-2 as prepared & filed with the IRS, as Governor Palin did.  The income tax aspects of fringe benefits are complex and highly technical, and not subject to second-guessing by laymen. The State of Alaska is confident that its position is correct.  Its employees were entitled to rely on that determination, So was Governor Palin.

Caron has problems with Olson’s tax opinion letter because it fails to contain even a single cite to an authoritative source (no tax code section, no treasure regulation, no case law, no IRS ruling).  I, too, find that a tad disturbing. Unless Olson on Tax Law is dispositive?

But Olson was not asked to opine on whether the per diems should have been included on the Palins’ tax returns, only whether the Palins’ had the right to rely on the State of Alaska’s determination that they should not have been included.

Of course, Alaska might be wrong and the IRS might select Palin’s tax returns for audit. If that happens, the issue of whether or not the per diem payments the Governor recieved constitute taxable income will then be raised.  If it turns out that Alaska’s W-2 is incorrect and it should have included the per diems, the Palins will have an additional tax liability.

But I would bet my keyboard and mouse they won’t be assessed a penalty. The Governor’s reliance on the state prepared W-2s was reasonable and, therefore, her failure to include the per diems received from the state was not due to willful neglect.

** Caron fairly points out that “Mr. Olsen has a tax LL.M. from George Washington and is a former Assistant Attorney General of the Department of Justice’s Tax Division under President Reagan.”

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