Category Archives: Not Right
Rachel Porcaro, now manager of a hair salon in Renton, cuts Rebecca Porcaro’s hair. Rachel Porcaro, a 32-year-old single mom with two boys, worked at a different salon during the time covered by an IRS audit.
Danny Westneat – Seattle Times staff columnist
Rachel Porcaro knows she’s hardly rich. When you’re a single mom making 10 bucks an hour, you don’t need government experts to tell you how broke you are.
But that’s what happened. The government not only told Porcaro she was poor. They said she was too poor to make it in Seattle.
It all started a year ago, when Porcaro, a 32-year-old mom with two boys, was summoned to the Seattle office of the Internal Revenue Service (IRS). She had been flagged for an audit.
She couldn’t believe it. She made $18,992 the previous year cutting hair at Supercuts. A few hundred of that she spent to have her taxes prepared by H&R Block.
“I asked the IRS lady straight upfront — ‘I don’t have anything, why are you auditing me?’ ” Porcaro recalled. “I said, ‘Why me, when I don’t own a home, a business, a car?’ “
The answer stunned both Porcaro and the private tax specialist her dad had gotten to help her.
“They showed us a spreadsheet of incomes in the Seattle area,” says Dante Driver, an accountant at Seattle’s G.A. Michael and Co. “The auditor said, ‘You made eighteen thousand, and our data show a family of three needs at least thirty-six thousand to get by in Seattle.”
“They thought she must have unreported income. That she was hiding something. Basically they were auditing her for not making enough money.”
Seriously? An estimated 60,000 people in Seattle live below the poverty line — meaning they make $11,000 or less for an individual or $22,000 for a family of four. Does the IRS red-flag them for scrutiny, simply because they’re poor?
I asked the local office of the IRS. They said they couldn’t comment for privacy reasons.
“We can’t give you any kind of broad interview because your request is associated with the case of an individual taxpayer,” IRS Media Relations said in a statement.
So I’ll just tell you Rachel’s story.
She had a yearlong odyssey into the maw of the IRS. After being told she couldn’t survive in Seattle on so little, she was notified her returns for both 2006 and 2007 had been found “deficient.” She owed the government more than $16,000 — almost an entire year’s pay.
She couldn’t pay it. Her dad, Rob, has run a local painting business, Porcaro Power Painting, for 30 years. He asked his accountant, Driver, for help.
Rachel’s returns weren’t all that complicated. At issue, though, was that she and her two sons, ages 10 and 8, were all living at her parents’ house in Rainier Beach (she pays $400 a month rent). So the IRS concluded she wasn’t providing for her children and therefore couldn’t claim them as dependents.
She stood to lose what is called earned income tax credit, a refund targeted to help low-income workers. You qualify only if you’re working, as Rachel has been.
Driver quickly determined the IRS was wrong in how it was interpreting the tax laws. He sent in the necessary code citations and hoped that would be the end of it.
Instead, the IRS responded by launching an audit of Rachel’s parents.
“I was floored,” says Rob Porcaro, 59. “I get audited now and then in my business, so I’ve been through it before. But to have them go after me because of my daughter, well, I’ve never heard of anything like it.”
Rob and his wife, Patty, had to send in house blueprints, bank statements, old utility bills. Rachel was asked to prove her children were hers, as well as document the money she’d spent on her children’s clothes, health care and so on.
They racked up $10,000 in accountant bills — $8,000 of which Driver is trying to recover from the IRS.
In the end, the parents were cleared. The IRS also backed off trying to reclaim Rachel’s earned income tax credit.
But the agency insisted Rachel couldn’t prove she was supporting her children — she didn’t have enough receipts — so she had to stop claiming them as dependents. A few weeks ago she paid back $1,438 (plus penalties and interest!) on that issue.
Way to go, IRS. You did an investigation likely costing tens of thousands of dollars (counting both sides). To squeeze a grand out of a single mom who did nothing wrong.
Legally, Rachel’s kids now are in tax limbo. I met them at the Porcaros’ house and they seemed real enough, jostling and pleading to play video games. But as far as the IRS is concerned, they don’t exist. Neither Rachel nor her parents can claim them as dependents.
“I tell you, we don’t buy a roll of toiler paper anymore without keeping the receipt,” Rob said.
Why did this happen? The IRS won’t say, but Congress has been fighting for years about the earned income tax credit for the working poor.
Republicans have called the credits “backdoor welfare” and tried to cancel them. When they controlled Congress, they ordered the IRS to ramp up audits of people who claim the credit.
In 2006, credit recipients such as Rachel were more than twice as likely to get audited as the rest of the 140 million individual tax filers.
The Porcaros say they get that the IRS can’t just audit the wealthy. Poor people commit fraud, too. But the intensity and duration of the IRS’ “obsession,” as Rob called it, as well as that it appears the agency was trolling for the working poor, remains a sore point.
It’s why they agreed to talk about their finances in the newspaper.
“I feel they’re persecuting the people who are down in the mud making the bricks,” Rob says. “I’m sure there are tons who don’t have the resources to lawyer up. What a way to go, to have your own government take you down because you’re too poor.”
Driver, the tax specialist, says it’s well-known that the system targets the weak — people with sloppy returns, for example, who don’t tend to be well off.
“It’s the way a wolf goes after the weakest sheep.”
Rachel says an irony of her year in tax hell is that the IRS is right about one thing — you can’t get by in Seattle on what she makes. That’s why she’s living with her parents. To try to make a life in our shimmering city without relying on welfare, food stamps or other public assistance.
“We’re an Italian family,” she said. “We’re surviving as a tribe. It seems like we got punished for that.”
Danny Westneat’s column appears Wednesday and Sunday. Reach him at 206-464-2086 or email@example.com.
A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying asset). Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date.
Bloomberg News reports Friday morning that the derivatives lobby has put a bug in the ear of the New Democrat Coalition.
JPMorgan Chase, Goldman Sachs, and Credit Suisse lobbied New Dem Reps. Mike McMahon (D-N.Y.) and Melissa Bean (D-Ill.) “to expand the ways the legislation allows dealers and major investors to trade the contracts,” according to Bloomberg.
The result of the banks’ lobbying effort seems to be draft legislation that could actually exempt most financial firms from a wide swath of derivatives regulations. The discussion draft put forth by House Financial Services Committee chairman Barney Frank (D-Mass.), Bloomberg reported Thursday, would not regulate derivatives used by financial companies for the rather ambiguous purpose of “risk management.” (Check out HuffPost’s Jason Linkins’ take on the wild world of derivatives here.)
At stake in the legislation could be a significant portion of the tens of billions of dollars that commercial banks make in the largely unregulated derivatives market each year. U.S. banks made $5.2 billion in the second quarter of 2009, a 225 percent increase from the same period last year.
New Democrats praised Frank last week for the bill. New Dem chairman Rep. Joe Crowley (D-N.Y.) said in a statement, “I congratulate my fellow New Dem Members, 15 of whom serve on the Financial Services Committee, for their work with Chairman Frank to reform our financial system to provide greater protections for American consumers and businesses while ensuring continued access to valuable tools to manage risk.”
At a Wednesday hearing on the legislation, administration officials called Frank’s plan too weak. Gary Gensler, the chairman of the Commodity Futures Trading Commission, said the bill would allow financial firms too many exemptions from regulation.
“We stay particularly vulnerable because we haven’t filled the [regulatory] gaps,” Gensler told the Huffington Post Investigative Fund in an exclusive video interview this week.
Derivatives, despite their role in the near-collapse of the entire world economy, were not important enough for a some members of the House agriculture committee to sit through a hearing on their regulation in September. Instead, Reps. Blaine Luetkemeyer (R-Mo.) and Kathy Dahlkemper (D-Pa.) skipped out for fundraisers.
Check out Bloomberg’s awesome story here.
Even though some consumers have seen their credit scores improve as they trim their debt, others have seen their scores drop significantly because of late payments on bills, foreclosures and rising credit card debt.
Meanwhile, lenders’ actions during the recession are delivering another blow to borrowers — even some with pristine credit. Lenders are closing credit card accounts and lowering credit limits for millions of consumers and business owners who have never paid late. Some lenders are reporting mortgage modifications in a way that dings consumers’ scores, dealing a setback to those trying to get their finances on track.
More lenders also are adopting a new scoring model the financial industry believes is better at predicting risk — but that could move consumers’ scores more than 20 points up or down. The most widely used credit score, the FICO score, ranges from 300 (poor) to 850 (excellent). Consumers with scores above 750 generally qualify for the lowest-rate loans.
“The credit environment has a whole lot of moving parts that weren’t there three years ago,” says John Ulzheimer, president of consumer education for Credit.com. “Consumers can’t just sit still and expect all is well.”
From the third quarter of 2006 to the second quarter of 2009, the number of consumers considered “deep subprime” — with such low credit scores they qualify for credit only at steep interest rates, if at all — rose from 34.4 million to 39.8 million, according to research by the Experian credit bureau and Oliver Wyman, a consulting firm.
Meanwhile, the percentage of “superprime” consumers, who are able to qualify for the best rates, dipped in recent quarters, partly because more people paid their bills late, the firms found.
Lenders say they’re taking steps to reduce their risk in a difficult economy. Some admit they’re concerned about the impact of their actions on consumers’ credit scores but say they have no control over how scores are determined.
“Banks have no motivation to take an action that will impair someone’s ability to obtain credit,” says Claudia Callaway, partner at Katten Muchin Rosenman, a law firm that represents lenders.
But consumer advocates say regulators and Congress need to address lender actions that are unintentionally hurting credit scores. They say that as underwriting standards tighten, even a small change in a credit score could affect what rate consumers get on a loan — if they get one at all. Some analysts also say the fact that consumers’ credit scores can fall even if they’ve never missed a payment or exceeded their credit limits raises questions about the score’s usefulness.
“All these changes are new structural changes in the financial system,” says Leonard Bennett, a Newport News, Va., lawyer who has testified before Congress about credit-reporting issues. “The ability to predict risk and integrate that into a credit score — based on historic data — is logically impossible.”
But Tom Quinn, a vice president at Fair Isaac, which created the FICO credit score, says its data show the scoring formula “is working,” because it’s able to rank consumers’ riskiness.
For now, with little guidance from regulators, lenders are moving ahead with actions that could lower many consumers’ credit scores and hinder their ability to get credit. Here’s how:
1. Cutting credit card lines
As lenders slash credit card lines and close accounts, they’re raising the percentage of available credit that consumers are using — a key factor in FICO credit scores — and making many people look riskier to lenders. By the end of 2010, lenders will eliminate $2.7 trillion of the $5 trillion in available credit on cards, analyst Meredith Whitney says.
Surprisingly, those who pay their bills on time and don’t go over their limits are experiencing the bulk of lenders’ reductions, industry research shows. These consumers often have a lot of unused credit. By paring back this available credit, lenders are freeing up capital they’re required to hold against the loans in case consumers default.
Mary Lou Reid of Arcadia, Calif., is an unwitting symbol of the lenders’ actions. Despite being a financial planner and having a perfect payment record, she’s had 68% of the available credit on her credit cards eliminated over eight months.
When USA TODAY profiled Reid earlier this year, Chase had closed two of her accounts, citing inactivity. Since then, four other lenders have closed or cut limits on eight accounts. One lender also more than doubled her credit card interest rate, prompting her to close the account.
Reid says the lenders’ moves have taken a toll on her credit scores.
Her FICO scores have dropped — each of the three major credit bureaus (Experian, TransUnion and Equifax) has its own FICO score — with her Experian score plunging the most, down 52 points to 722. She attributes the lower credit scores largely to lenders’ credit reductions. As multiple issuers closed or reduced her credit lines, Reid says, she borrowed from an inactive card to try to prevent it from being closed.
Because of the lenders’ actions, she says, she’s halted the expansion of her office. She’s also cut back on buying major business supplies and hiring workers at a time when the economy could benefit from a boost in consumer spending. “I’m angry that I spent years dotting my i’s and crossing my t’s, and this is where it has gotten me,” says Reid, 62.
Chase declined to comment on Reid’s situation. In a mailing earlier this year, it stated, “If we close your account or suspend your credit privileges or any feature, we will not be liable to you for any consequences.” Bank spokeswoman Stephanie Jacobson says the bank is trying “to be more transparent” in such cases.
From October 2008 through April, an estimated 24 million U.S. card holders had their credit card limits reduced or accounts closed, even though they had no new “risk triggers” such as late payments in their credit reports, Fair Isaac says. Of that group, 8.5 million saw their credit scores fall.
Most consumers saw “little impact” to their FICO scores, Fair Isaac says, with a typical drop when it happened of less than 20 points. Yet a 20-point drop can be disastrous and mean paying up to $552 more a year in interest on a home equity loan, Fair Isaac and Informa Research Services data show.
Credit line reductions are particularly problematic for small businesses, says Todd McCracken, president of the National Small Business Association. A 2009 NSBA survey shows that 59% of small businesses use cards to finance their business. This survey also shows that 41% of businesses had their card limits cut from April 2008 to April 2009.
Marilyn Landis, 56, a small-business owner in Pittsburgh, says that in the past year she “hunkered down” to cut her card balances. As she did so, one issuer lowered her card limit by $5,000 — to $100 above her balance — without citing a specific reason. Then another issuer sent her a letter saying that because her credit score had dropped, it was lowering her credit limit. (She didn’t check to see how much her score dropped.)
“I’m paying my balance down, and the end result is that I end up with a worse credit score and less credit availability,” says Landis, whose firm analyzes businesses’ balance sheets and inventory systems. “That’s a lousy cause and effect.”
2. New credit scoring
More than 400 lenders have begun testing or using a new version of the FICO credit score — called FICO 08 — including five of the USA’s seven largest banks. The model is expected to more accurately assess consumers’ riskiness, which could help lenders trim their losses. The new score emphasizes how much available credit consumers are using, says Fair Isaac, because its data show that consumers with higher usage tend to be much riskier.
But the switch comes as lenders are cutting credit lines, making it appear that consumers are using more of their credit even if they have done nothing wrong. “It’s bad timing,” says Bennett, a lawyer for consumers on credit issues. The new score “adds unpredictability to the financial system.”
3. Loan modifications
A growing number of cash-strapped consumers are working with lenders to modify their mortgages so they can stay in their homes. But these modifications could wreck consumers’ credit.
A modification is typically a change in loan terms. Usually, the interest rate is reduced temporarily to lower monthly payments. The amount of principal owed isn’t changed, and no debt is forgiven.
But such arrangements can damage a credit score because of the way lenders report loan modifications to credit bureaus. Under Credit Data Industry Association rules, loan modifications are reported as “partial payments.” This could result in “a serious hit to your score,” Ulzheimer says. “The argument we keep getting is that if you modify your loan, it means you can’t afford it,” he says. “That’s not true. If you modify a loan, that could be a … decision to lower your payment.”
Borrowers who have done a loan modification may not know that their score has been hurt until they’re rejected for a loan or get a notice that their credit card account has been closed, he says.
Cathey and Glenn Hargrove of Tampa applied for a modification in March after Glenn, 55, lost his job as an environmental consultant. They were approved for a trial modification in May and made all their payments on time, Cathey says. But the couple say their mortgage servicer, CitiMortgage, reported to the credit bureaus that they made partial payments that were delinquent. They recently learned that their modification had been denied.
Their Equifax FICO score plummeted to 635 from 801, then returned to the high 700s after CitiMortgage corrected the record to show their payments weren’t delinquent, Cathey says. Their TransUnion FICO score, however, went from 801 before the modification to 645 and hasn’t budged.
Spokesman Mark Rodgers says CitiMortgage generally doesn’t comment on individual situations. The government’s modification program says the lender “must report” the payment so it complies with the Credit Data Industry Association, he says.
The industry should come up with another way to classify loan modifications, Cathey Hargrove says. “If we were a bad credit risk, it was going to show up before this,” she says. “If you haven’t seen that, do we really deserve to look like 645?”
Attacking from nests as big as pickup-truck beds, invasive western yellowjacket wasps in Hawaii are munching their way through an “astonishing diversity” of creatures, from caterpillars to pheasants, a new study says.
Adult yellowjackets consume only nectar. But they kill or scavenge prey to deliver needed protein to their growing broods.
“They basically just carry it in their mandibles—you see them flying with their balls of meat,” said lead study author Erin Wilson, who just finished her Ph.D. at the University of California, San Diego.
In their native habitat in the western U.S., the wasps die off in winter. But in Hawaii the wasps survive the winter, possibly due to mild year-round temperatures or subtle genetic changes.
A longer life-span gives the insects more time to build up their nests. So what would normally be a basketball-size nest can become, at the extreme, several feet long—big enough to fill the back of a pickup truck, Wilson said.
The extra room allows a colony of 50,000 workers to explode to 500,000 or more. Larger colonies mean that the insects deplete more prey than in areas where the wasps die off in winter.
Much of the pulp used for paper-making comes from the century-old Kraft pulping process. Since early the 1930′s, operations using it reclaim and burn the process’ “black liquor” waste to produce a majority of the energy consumed. Big Paper has discovered a new Kraft process reclamation trick to make millions more each year: by perversely claiming tax credits offered under a “green” Federal fuel blending incentive.
Tax credit to encourage blending of ethanol and bio-diesel with petro-fuels.
Specifically, manufacturers of kraft-based papers found a loophole which allowed them to manipulate a Federal tax incentive originally designed only to promote blending of biofuels with fossil fuels that are to be used for transportation.
Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry–handsomely–to use more fossil fuel.
This just isn’t right in so many ways, killing so many wolves is one problem, but combined with killing them from the air give me a break, if you want to be a real hunter at least get off your lazy butt and hunt them on thier turf.
Alaska abruptly resumed shooting wolves from helicopters this weekend in hopes that shooting the wolves will increase the population of caribou for hunters to kill. The state plans to kill up to 328 wolves, sparing under 100 in the Yukon area.
“They [the state] have a mandate to provide for maximum sustained yield. They want to provide more moose and caribou for people to harvest,” said Greg Dudgeon of the park service. “Our mandate is to manage and provide for healthy populations of wildlife. So we don’t place the value of a wolf over a caribou, or a caribou over a moose.”
The state hopes to increase the caribou population from 40,000 to 100,000. Dudgeon said the goal is outrageous because the animals haven’t been that populous since the early 20th century.