There is an excellent article in the Miami Herald on the identity theft tax fraud crisis. The epicenter of this is South Florida (as noted in the article). I don’t have much to add to the frustrations of victims with the IRS’s conduct in these cases. One quote:
“The IRS call center person acted as if we were the ones who had done something wrong.”
Poker dealers are paid a low hourly wage; they make most of their money from gratuities (tips) from players. Those tips are, of course, taxable. In a poker tournament, dealers also receive tips. Some come from the prize pool while some come from the players themselves when they win or place high in the tournament. Some tournaments offer players a “Dealer Add-On.” The Dealer Add-On costs players a small fee–say, $5 to $50. In return, the player receives an additional amount of tournament chips.
Clearly, a dealer who receives a portion of that add-on must report it as income; all income is taxable unless exempted by Congress, and such Dealer Add-Ons haven’t been exempted. However, there’s a dispute in Florida as to whether the Dealer Add-On is considered income to the casino.
The Florida Division of Pari-Mutuel Wagering (which regulates non-Indian casinos in the state) now says the money is income to the casino, and tax must be paid to the state on it. Until this July, Florida said that Dealer Add-Ons were not income to the casino. The Isle Casino in Pompano Beach, Florida has sued the state charging the rule is, “an invalid exercise of delegated legislative authority.”
Given that Dealer Add-Ons are small compared to the other income that a casino brings in, this dispute will have a minor impact on the casinos. However, it could cause an increase in the fees that a casino charges for running tournaments; that could negatively impact poker tournaments.
Yesterday I looked at the idea of forming a Nevada Corporation while in California and being able to avoid California taxes. It doesn’t work. Today’s focus is on something that comes up now and then and applies to trusts.
Let’s assume John and Jane, two California residents, form a trust to benefit their children, Ann and Bob. Ann lives in Florida; Bob resides in California. The trust is an irrevocable trust, so it files its own tax return (a Form 1041). The income to the beneficiaries is reported on Schedule K-1s. Ann is surprised and calls her accountant when she receives both a federal K-1 and a California K-1.
The issue is simple: The trust is a California trust, so the income is California-source. California requires that a Schedule K-1 for Form 541 (California’s trust tax return) be included. Yes, Ann must pay California tax on the income. Ann’s CPA called me and asked me why I included the K-1 from California. My response was succinct: I have to and Ann has to pay the tax.
California’s desire to have anyone and everyone pay California tax has led to many trusts relocating to Nevada (which has no state income tax) and other trust-friendly states. California isn’t one of those states. Ann’s parents, John and Jane, could have formed the trust in Nevada but because they didn’t Ann is stuck in the Hotel California. You can check out any time but you can never leave.
Ignoring the California K-1 is a Bozo idea. Instead of just paying tax, you will get the joy of paying tax, penalties, and interest. If your parents are in California and thinking of forming a trust to benefit you, it may be worth your time to talk about Nevada to them. Otherwise, welcome to the Hotel California.
One of the most difficult things to explain to a non-tax practitioner is the tax concept of domicile. For most individuals, your domicile is your residence. I reside in Las Vegas, Nevada. It’s my only home. In my case, my domicile and residence are identical (as is the case for most people).
However, some individuals have multiple residences. Take Ken Mauer. Mr. Mauer has a home in Afton, Minnesota (just east of the Twin Cities). He also has a home in Fort Meyers, Florida. They’re both residences, so which is his domicile? If Mr. Mauer’s had residences in Nevada and Florida, this wouldn’t be a big issue (neither state has a state income tax). However, Minnesota has a state income tax so being considered a Florida resident would save Mr. Mauer thousands of dollars in state income tax.
Shock of shocks, Mr. Mauer declare himself a Florida resident and didn’t file Minnesota tax returns for 2003 or 2004. After the Minnesota Department of Revenue objected, he filed a part-year 2003 return. Mr. Mauer was audited by the Department of Revenue and lost. He appealed the decision to the Minnesota Tax Court and lost. He then appealed to the Minnesota Supreme Court. That court upheld the previous decision.
I’m not going to into Minnesota’s 26-factor test, or the factors that led to Mr. Mauer being considered a resident of the Gopher State rather than the Sunshine State. One factor, though, is key: Mr. Mauer spent more time in Minnesota than Florida. Few tax agencies will consider you a resident of the other state if you continue to spend a lot of time in their state. Suffice to say, it you are in such a situation it’s best to cut all ties to your old state…or at least spend 183 days in your new home. In Mr. Mauer’s case, he’s liable for Minnesota state income tax for 2003 and 2004.
Hat Tip: How Appealing
We have a late entry for the 2012 Tax Offender of the Year. Rashia Wilson bragged on her Facebook page, something that many individuals do. But it’s what she said that likely got her in trouble. According to the Tampa Bay Times, Ms. Wilson said,
“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”
She may have been correct: It took a little over six months for her to be indicted.
Technically, she hasn’t been indicted for tax fraud. The 57 counts she and her boyfriend, Maurice Larry, face include conspiracy, wire fraud, filing false tax returns, theft of government property, and aggravated identity theft. The pair are looking at very lengthy terms at ClubFed if found guilty of all charges. The government is also seeking a money judgment in the amount of $1,176,787.00; that’s how much the pair allegedly profited from their scheme.
This is not Ms. Wilson’s first brush with law enforcement. She was arrested in September on a weapons charge.
While this alleged tax fraud ring is based in Florida, it apparently may have received information on identities in California. A story in the San Francisco Chronicle noted that 931 Berkeley residents may have had their identities stolen by this ring. The Chronicle story also notes that Ms. Wilson hosted “tax fraud parties” that allegedly raised more money than drug dealing.
A hint to those who want to begin a life of crime: Don’t brag about it on Facebook. Yes, law enforcement does read the Internet.
Well, not really. This post by the Tax Foundation notes that New Yorkers are finding other states, such as Florida, far less taxing and are relocating there. The story references the New York Post; that newspaper ran a story noting that $20 billion of income migrated south.
Foundation analyst Nick Kasprak said taxes play a role in people’s decisions to relocate.
“You generally see people moving from higher-tax states to lower-tax states,” he said. “Certainly, taxes are one way that states compete with one another.”
Now, you know that, I know that, but do the people running California know that? Back in December I posted about how California has lost $48 billion of AGI (Adjusted Gross Income) from 1993 to 2008. In total, the Bronze Golden State lost just over 720,000 tax returns while losing that income. However, at the same time, California’s population increased by 5 million.
The conclusion is obvious: High income individuals have left and were replaced by low income individuals. People like me left the state and have gone to less taxing environments.
Another conclusion is equally obvious: California must make fundamental reforms to its taxation system. This is going to be horribly painful (especially if you are in a public employee union). Both the number of employees, what they do, what they’re paid, and what their benefits are, must all be cut–and cut substantially. Even the most golden of climates can turn ugly.
Yet another survey puts California among the worst three states from a tax perspective. Alvarez & Marsal Taxand, a consulting and tax advisory firm, surveyed 800 financial executives (302 responded). Among the questions asked was Which states do you view as most competitive from a tax perspective? The usual suspects finished on the bottom: California, New York, and New Jersey. As Alvarez & Marsal Taxand noted, “…the states generally viewed as having complex tax systems and high tax rates are the three states listed (by a wide margin) as the least competitive states.” Alvaraz & Marsal Taxand Managing Director Don Roverto told the the Orange County Register, “The feedback from clients who do business in California is that it has one of the highest combinations of high rates and complex systems and that’s why it’s at the bottom.”
It’s also not a surprise which states finished at the top: Texas, Florida, and Nevada. These states all feature a tax exclusion or non-income tax based system.
Perhaps California will consider tax simplification, lowering rates, and making businesses feel wanted. Of course not–the Bronze Golden State will have one or two tax hike proposals on the November ballot.
When I last reported on the Miccosukees (a South Florida Indian tribe that runs a casino), the tribe decided to apparently ignore the advice of their then-attorney and not withhold taxes on earnings of their members. They now have been accused of not remitting taxes they withheld from patrons.
Via Taxdood comes news that the Miccosukees face a lawsuit from two patrons who played Bingo at their casino, won, and had taxes withheld from their winnings. The patrons weren’t amused when the IRS informed them that the supposedly withheld funds–withholding that appeared on their W-2Gs–didn’t make it to the IRS.
One interesting issue is whether the Miccosukees can be sued in federal court by the patrons. I suspect that the case may end up in tribal court. However, I also suspect that the IRS can cause nightmares for the Miccosukees if they aren’t remitting withheld money to the IRS.
The storefront in North Miami cashed checks. There’s nothing that unusual in that. However, there were two major differences between the storefront in Miami and most check cashing locations: The store charged very high fees (35%-45%) but didn’t ask questions about the checks that were cashed and it was operated as a sting operation by the FBI. Eight individuals, including two former NFL players, were arrested today on mostly tax related and identity theft charges.
More specifically, [seven of] the defendants are charged with forgery of U.S. Treasury checks, in violation of Title 18, United States Code, Section 510, theft of government money, in violation of Title 18, United States Code, Section 641, and use of five or more identification documents with unlawful intent, in violation of Title 18, Untied States Code, Section 1028(a)(3).
The two former NFL players are William Joseph, who started his career with the New York Giants and ended his career in Oakland with the Raiders and Michael Bennett, who started his career with the Minnesota Vikings and also ended his career with the Raiders. Mr. Bennett, though, was sacked on different charges.
Mr. Bennett went to the storefront and asked for a loan, showing what purported to be $9 million of collateral in a bank account with UBS. The trouble was the balance in the account was $9 million less than what Mr. Bennett showed at the store (the account allegedly had no funds in it). Oops. Mr. Bennett has been charged with wire fraud.
Most of the defendants are accused of cashing between 11 and 35 fraudulently obtained tax refund checks. I am seeing and hearing more examples of identity theft; as noted in the DOJ press release,
U.S. Attorney Wifredo A. Ferrer stated, “Not only is identity theft America’s fastest-growing crime, it’s also a consumer’s worst nightmare. Most recently, identity theft has become a taxpayer’s worst nightmare also. As this three month undercover operation illustrates, identity thieves are using stolen identities to commit steal tax refunds from legitimate taxpayers. Identity theft, when combined with tax refund schemes, threatens the financial security of our citizens. It is time for tax refund scammers to realize that we will not allow them to steal others’ identities and line their pockets through fraud.”
As John V. Gillies, Special Agent in Charge of the FBI’s Miami Division, stated, “Without proper safeguards, identity theft tax fraud has become a growing epidemic.” Hopefully, these arrests are not the end of the FBI and DOJ actions against identity theft criminals.
My partner, Aaron, has a Toyota Prius (actually, two of them, if you count his wife’s car). I like the car a lot, and I’m certain Aaron won’t misplace his car. Aaron, though, does not manage the vehicle fleet of Miami-Dade County (Florida). That city/county managed to “misplace” 293 Toyota Priuses.
A television station in Miami, Channel 41, spent eight months investigating and found the cars in a parking garage in Miami. This news report stated the cars were “rusty.” I can’t imagine having the cars sit in a garage for four years could do them any good. An auto blog speculates that this relates to the previous Mayor, Carlos Alvarez. (He was recalled in 2011.)
The good news is that 123 (or 135) of the Priuses are now in use. That only leaves 170 (or 158) left to go!
