 Good afternoon. My name is Ray Tsuchiyama, your host for the very highly successful and widely watched business in Hawaii. This is yet another episode of this series that analyzes, investigates, and delves into issues about business, taxes, finance, and how to really get ahead in this world of business in Hawaii. We have today the founder of the show, Reg Baker. He and I have known each other for a long, long time, and he now resides in Las Vegas, Nevada, and he's come into the studio today to give his insights and updates on a topic that I think everybody is very interested in, taxes. Welcome to the show, Reg. It's great to be back, Ray. It's always nice to be here in Hawaii, although I wish it was a little bit warmer because after snowing in Vegas, I was hoping to come by and thaw out a little bit, but didn't quite work out. That's correct. We've had a very cool and rainy winter, and I hope it's going to break because the tourists may not be enjoying it that much. And that's even on Friday, so that's probably when it's going to start warming up, but that's all right. I'll have to come back again. Well, this is 2019, and we're going to be discussing tax year 2018. That's what we are doing this several months of the new year of 2019. And we had a lot of hoopla, a lot of new things happen, new legislation happening in the year 2018, and it's affecting how we file taxes this year. So you've been watching the returns, watching filings, any general things? What's been happening out there? Well, you know, there has been a lot of hoopla and a lot of noise. And I've been, because of my role with the Small Business Administration, been watching this tax legislation as it was developing in 2017. And of course, it got launched in December 2017, affecting 2018 tax returns. And so now we're seeing the effect of that. And there's an awful lot of positive things. There's a few people that might get squeezed, but the majority of the people are going to see savings. And some of the noise that I've been hearing, and I think a lot of people have been hearing, is that the tax refunds. You know, there's no tax break here. It's lowered. That's what they're saying. Reef funds are lowered. That's right. That's the media hoopla earlier in 2019. That's the spin that the media is putting on things, which is really bogus. You know, back in early 2018, the IRS came out with new payroll tax tables. And those payroll tax tables that all companies have to use when they process their payroll, brought the rates way down. And the taxes being withheld out of everybody's paycheck was way down. Everybody saw a little, some more than others, bumping their paychecks. And they liked it. Back then. That's the refund. Yeah, they were getting the money through the entire year. So they were paying in less taxes, therefore their refund would be less when they filed their tax refund. Now, have you seen evidence that this is true, the IRS? True in what sense? Oh, that there's been higher refunds happening recently also. Well, things have turned around. The first three weeks of the tax season were lower refunds. Because most of the people that file first are the ones that are the lower income, that are on the paychecks, that need that money. It's easier if I want to get it quick. And so that's usually where the big refunds are in the first part of the year. But now because rates have dropped and they were getting the money during the year, the refunds are smaller. But now that those first three weeks are over, the fourth week is kicking in and beyond. Now all of a sudden the rates are going to start popping up because now we're talking about different groups of people that have different tax implications like K-1s and partnerships and businesses. And now all of a sudden, according to USA Today, which I shared with you before the show, USA Today just came out and said that in the fourth week tax refunds are now bigger than they were last year. But like you said earlier in the show that there is a simple reason for all this that goes back to the withholdings of last year. That's exactly right. And there was a lot of recommendations from the IRS, from CPAs, from other organizations that take a look at your withholdings, make sure that you're withholding enough because you are going to be getting a bigger paycheck. And if that doesn't work for you, you've got to fix it before the end of the year. They were very much ignored. And some people are saying, well, my refund is so small, well, yeah, you were getting it during the year instead at the end of the year. Well, okay, moving on from the refunds, are there any other areas that people have encountered some issues? You know, those early filers have encountered, and their preparers have encountered some challenges because the Internal Revenue Service, through Congress, Congress passed the law, Internal Revenue Service is trying to live with it, which got a lot more difficult when they had the government shut down because they lost a few weeks there. Right, right, right. So they weren't able to keep up what they were trying to do. But the bottom line is that the software that is used to prepare the tax returns, the IRS had to go through massive changes to comply and be in conformity with the new rules and regulations. All the private tax software companies had to do the same thing. But there are about 10 states in the country that elected not to be consistent or conform with federal rules and regulations. So they decided by not passing their conformity bill that they do almost every year until 2018 to go with the old rules, the 2017 rules. So now we've got 10 states, 10 or 15 states, somewhere in that range, that are doing their tax returns at the state level under the old 2017 rules. The IRS and the rest of the country is doing everything under 2018 rules, and there's some disconnect that isn't quite working right. So some of the early returns are actually having some hiccups in it that they're not working exactly the way they're supposed to. But they fixed the taxpayers filing in states that are not conforming to the most current federal laws. That's correct. And I still do a lot of work with Hawaii residents and do Hawaii tax returns, and I do a lot in California. Nevada, in case people didn't know, has no state tax. So there's no state tax in Nevada. But I do a lot of returns for California and Hawaii, both of which have elected not to conform with the IRS. And when you think about volume, you know, numbers, California has 35, 40 million people. So it's not a small drop in a bucket when you think about it. It's a lot of numbers when those filings do appear at the IRS. And that's a very good point because the tax systems that prepare those tax returns for California, because it is such a large market, they focus on fixing them first. Now, Hawaii is probably one of the smallest markets in the country. And so they're always going to be kind of at the tail end, and that's where a lot of the hiccups are coming. So, you know, there might even be some surprises down the road when people have filed the return so early. They may find that maybe there was a glitch in there somewhere that they'll find out about later. So there's some things that we still don't know about that may appear in the future. Well, one quick example. And for those people that are employees that have unreimbursed employee expenses, there's a form called a 2106 that you used to have at the federal level when you filed your tax return and you had to schedule aid and you had some reimbursement expenses that you wanted to claim. Well, the IRS says there's no more 2106. It's gone. You don't use it anymore on your federal return. And that's a federal form. But when you do a Hawaii return and you have unreimbursed employee expense, you want to get your money back from, you have to attach the 2106. Which doesn't exist. But there is no. It gets a little complicated and the tax software companies have to create this now and plug it into the state returns. But like you say, for the private software companies to create something in software for the Hawaiian market, which has barely 1.4 million people, it may take a little more time. Absolutely. And even with 1.4 million people, not all of them file tax returns. Some of them are family, some of them are children or underground. So there may only be a few hundred thousand tax returns. But it also applies, like you said before, to people who file multi-forms, multi-states. They may have property and business in several states, including Hawaii or Nevada and California. And two of them, three, are not compliant. Right. So it's been an interesting tax season. We knew it was going to be a challenge. All the tax preparer professionals, the AICPA, have all talked about this going to be one of the most complicated and challenging tax seasons in history. But you're part of the group called the Tax Repair Group. Yes. You and your colleagues must have known this was coming and were preparing for this. But the tax, the people who are filers, really were not much to know about the complications. If they were reading the newspaper or listening to the news, they would have known. It was not a secret. But in fairness, there's just so much you can do to be prepared. We knew it was going to be a problem. We knew there was going to be complications. The software upgrades were going to be complicated. We knew there was going to be a hiccup, but we weren't sure where. And so we were aware we knew it was going to happen, and we just had to wait to see exactly where it would start popping up. And you're correct that in software programs, if you touch one part, it may have impact on other parts that you're not aware of later on. And as you get into more complicated tax returns, it becomes somewhat of a matrix calculation. When you start talking about alternative minimum taxes and what's capped out, what isn't, I can deduct this up to this much, but not at the state level, but only at the federal level. It becomes a real matrix calculation that there can be what I refer to as a hiccup in almost any area. You talked about the period where there was a government shutdown. How much of an impact did it have, or do you think it's having on the refunds and the reviews of the filings that's coming in? The IRS is a very large organization, and they've got a lot of people, tens of thousands of people working for them. All over the nation. Some of the areas were affected by the shutdowns, some weren't. Those that were processing the refunds themselves were not affected. They continued to process refunds and get it done. The programmers were affected. The compliance people, the ones who do the audits, were affected. So now all of a sudden, we've got a huge backlog in audits that weren't being done because of that period. And the programmers weren't able to continue their rewrite of the programs. Now, the majority of it was probably already done, but they were working on the fixes, the hiccups that they knew about. That all got stalled. So it is an impact, but on different parts of the organization. And we have to see how it all works out. Another big part of the impact, and I know we've probably got to go and break here soon, but another impact real quickly was that there was a lot of people that was getting close to retirement. A lot of that knowledge base, the historical... The IRS. They were all there and they're going, you know, I don't want to go through this anymore. And then there was a threat of a second shutdown, if you remember. That's right. And these people said, you know, I'm out of here. And so they lost a lot of people. Well, at that crucial point, we will be taking a short break. Thank you very much. Aloha, this is Winston Welch. I am your host of Out and About, where every other week, Mondays at 3, we explore a variety of topics in our city, state, nation, and world, events, organizations, the people that fuel them. It's a really interesting show. We welcome you to tune in and we welcome your suggestions for shows. You got a lot of them out there and we have an awesome studio here where we can get your ideas out as well. So I look forward to you tuning in every other week where we've got some great guests and great topics. You're going to learn a lot. You're going to come away inspired like I do. So I'll see you every other week here at 3 o'clock on Monday afternoon. Aloha. Hey, Aloha. My name is Andrew Lening. I'm the host of Security Matters Hawaii airing every Wednesday here on Think Tech Hawaii, live from the studios. I'll bring you guests. I'll bring you information about the things in security that matter to keeping you safe, your co-workers safe, your family safe, to keep our community safe. We want to teach you about those things in our industry that may be a little outside of your experience. So please join me because Security Matters. Aloha. This is an episode of Business in Hawaii. We are talking more and more about taxes and its implications from the government shutdown and programming issues, software glitches, all kinds of things. But we want to go back to the area what other areas were impacted by the shutdown and by the continuing issues with the IRS were for the tax filer. You know, when they went through tax reform, it changed the rules a lot. And so a lot of the people within the IRS needed to learn the new rules. A lot of these people were very close to retirement. Right. And that was enough to push them over again. They didn't want to have to learn a whole new set of rules and begin... They were comfortable with the lower rules. The linear rules for 20 years. And now all of a sudden they had a new set of rules and they said, all right, time out, I'm out of here, goodbye. And so they lost a lot of very seasoned people in the IRS. And that institutional knowledge I mentioned earlier, a lot of it just walked right out the door. And I forget exactly statistics, but there's only about 2% or 3% of the entire workforce that's under 30. Wow. It's a huge older workforce that has been there for a long time. At the IRS. Very few young people. And when they do go in there, they don't usually last very long. And so they're out. And so what's happening is that a lot of the people that have got all this experience that have moved into what they call the compliance area, which is where the IRS does their audits and exams and reviews. And these people are seasoned, they're smart, and they have a lot of years, you know, to do. I would agree with seasoned. As an elite first within the organization. Right. And there are some good short people there. I'm just being sarcastic. But they're war and they're leaving. And so with the shutdown, that even convinced more people to leave. As a trigger. So they've got probably the smallest workforce of examiners and auditors at the IRS that they've ever had before. And so audit rates are dropping. And in some cases, dramatically. And so that's going to have an impact on compliance issues. And so that's a big area. Will the government look at this issue? Is it a priority issue? The government relies on taxes to pay for everything from the military to social security and so forth. Would that be coming up as an issue in the new future? Well, as soon as they build the wall, then they'll probably stop. But yes, it is a priority. And it has been frequent. This isn't a new issue. The issue has been there for many years. And it's just gotten worse and worse. And this reform and government shutdown has just been a double punch to make it a lot worse. It was a perfect storm in some ways for the season folks. But I remember in the earlier show, you said that it was many, many years that there was any real activity in looking at the rules again and so forth. I mean, it's not like they've been doing it over a year. It was decades before when they did a major review of the tax rules until 2017. When I was taking my first tax class in college, back in the early 80s, they were talking about tax reform. And they've been talking about tax reform all the way up until December 2017 when they finally actually did it. And whether it's a good reform or not, it depends upon different factors, but they did it. They've always had little tweaks. And they've always done little things here and there. And it was a shell game in a sense. And some would come and go. But this was the first large-scale tax reform in 30 years. Right. So we shouldn't be so harsh that it doesn't have such a large impact. It is having an impact on different parts of the tax world, the preparers, the filers, the private software developers. There's states that are not consistent with the federal law. There's many, many groups out there that are still dealing with this. One group that we haven't talked about, Ray, is the business group. Oh, right, right. We've talked a lot about individuals. But the code was changed to encourage people to bring some of the offshore dollars back to the United States and have some leniency as far as taxes were concerned. And new investment, new jobs, new manufacturing in the U.S. Which is why we have got very high employment, very low unemployment. And the economy is still going pretty strong because businesses did come back. They did bring some of the capital. They did make some of those investments. Some companies that were going to go to different foreign countries decided to stay and do the business here. And so it did have an influence. There was a positive impact for the United States economy based on just that one big tax rule. Yes, there was no longer an incentive. We used to have, at the corporate level, business level, one of the highest tax rates in the world. Now we're somewhere down below middle. So now there's no incentive for U.S. companies to go to other countries. Like the Barbados or the Bahamas. Because now they've got competitive rates here. And so they're staying here and they're doing the business and they're bringing money back into the country. And that's why we like to say globally competitive. So that is one positive. And the economy is humming along and very low unemployment and the stock market and so forth. Well, it's been going up and down, but right now it's going up. 18% in February. It did really well. So that's a reform that it should be, that business should take advantage of. And they have. There's been an awful lot of reinvestment. There's a lot of depreciation. Companies can make big investments in their fixed assets and write them off a lot quicker and save taxes. It comes to mind something I wanted to mention. A lot of people have this misconception that these big companies, eBay or Amazon, they don't pay taxes. Well, they may not pay a lot of income taxes because of all these incentives to do reinvestments. I mean, Amazon is opening billion dollar facilities and they get to do that because of the quick write-offs and it shelters a lot of that income. So income taxes, they don't pay, but they pay employment taxes. They pay Medicare taxes, FICA taxes, unemployment taxes, commerce taxes, sales taxes. They pay a lot of taxes, but people just don't appreciate how much billions are being paid by these large companies in taxes. They just focus on that one component, income tax. And it's another one of those spin that a lot of the journalists in the media group love to play with. And we're talking about the federal level and big corporations. How about for Hawaii businesses? There's state unemployment taxes. I'm sorry, are there advantages under the new tax rulings for Hawaii businesses to take advantage of? Are there similar things? There would have been if they had made their state rules in conformity with the federal, but they didn't. And so the answer is generally speaking, no. Oh, okay. So we're still the outliers. All these states that you said, 10 to 15 of them, are still relying on the older tax rules. Yes, that are less advantageous. What do you think will happen during the next year or so when these states come into the fold or still be out there relying on the previous year? Well, interesting question. One reason, think of one reason why they did not go in conformity with the federal taxes because it was too expensive. Okay. If they had put the Hawaiian rules and regulations in conformity with the federal, the income tax revenue at the state level would have dropped. It would have been very expensive. Okay, okay. And so the question is, when will they be willing to drop the tax rates in Hawaii and let the residents keep more of their income? Or are they more interested in increasing taxes and getting more tax revenue to do whatever? I mean, we got this real thing that's got to be. Well, yeah, that's a topic we're going to right now. But that's an interesting... So it's self-serving. I mean, the states have their own pot that they want to keep at a high level that they don't want to lower that pot if they align or connect or link with the federal rules. Well, if they had, say, 15% less tax revenue, where would they cut the budget? Oh, that's a huge question. Yeah, the DOE might be... So that skews the budget for the next three years or five years. It'll be a whole unbelievable mess with everybody wanting to preserve their own departments. It'll be a free-for-all for sure. Because there hasn't been any ideas to accelerate other types of businesses in Hawaii to create the pie larger that we're going back in economics. And God forbid, if they ever decided to look at maybe ways of cutting their budget, that would be truly the end of the world. And give more for business and invest in their own business or lives or pay their employees more or offer them more benefits. Very competitive environment we have for talent in Hawaii. It's hard to find good skills with people and you have to pay them well if you want to keep them. But with the tax rates as high as they are, the companies can't pay the employees because it's all going to taxes or to cover the cost. It's a vicious circle. You're correct because even if people say, let's have a high-tech economy, you have to hire software engineers at Silicon Valley rates. If you offer 60% of that, they won't come. They're not stupid. They just will be in Silicon Valley wherever they can get their best rates. And it's connected to the levels of work that they can do and contribute and so forth. You're absolutely right. We have a disconnect here and it goes round and round in circles. But you're right, it goes back to taxes and the reason why there's 70 to 80,000 former Hawaii residents in Clark County and Nevada. I was reading an article. Our homeless situation has increased 14% and our population has dropped 40%. We're one of the very few states that are losing people because America stands for innovation, jobs, and education. That means immigrants would love to come here or internal migrants from California or West Coast, wherever, but they're not coming. People are leaving though, younger people. Primarily to Arizona, New Mexico, and Nevada. Well, this is not an economic show, but it's all interrelated because taxes are part of this. Why should a business like Amazon come to a place without seeing some of their taxes? It's not economics and I know we're about ready to wrap up, but taxes can either build an economy or tear it down. And it is, taxes does have a direct impact in the economy and economics. You can't separate them. You're absolutely right. It's too bad we didn't get into a topic. You really wanted to delve into more retirement, but we will have another show when you come back. We devoted entirely on that topic because I think that's a very, very important and significant topic for residents in Hawaii. Thank you very much, Reg Baker, and this is another episode of Business in Hawaii. Your host, Ray Tsuchiyama.