It’s Only a 56% Tax Increase…

Posted on June 8, 2014 by Russ

In the, “Tales, I win, heads, you lose” news of the week comes word of a 56% increase in Chicago’s telephone tax. The tax increase might prevent a $50 million property tax increase…but then again it might not.

The issues all stem from the problems with pensions in Chicago and Illinois. For those who aren’t familiar with the issues, Illinois is so far underwater on pensions that the state is in even worse shape that California. Chicago city pensions are in a similar situation–badly unfunded.

I’ll let the Chicago Sun Times tell a little of the story:

Instead of asking the Illinois General Assembly to simply renew a $2.50-a-month surcharge on telephone bills due to expire July 1, cash-strapped Chicago seized the opportunity to get more money — by persuading state lawmakers to raise the cap to “the highest monthly wireline surcharge imposed by any county or municipality” in Illinois.

That means Chicago can go up to $3.90, and increase a transaction fee on prepaid cellphones from 7% to 9%. The tax increase overall is expected to bring in $50.4 million. Earlier, Chicago’s city council passed a $250 million property tax increase ($50 million a year for five years); the phone tax increase will bring in enough money to possibly stop the first year of the property tax increase. Of course, there’s no guarantee that the Board of Aldermen (the official name of Chicago’s city council) and Mayor Rahm Emanuel will actually stop a tax increase.

Perhaps the city might look at cutting costs, too. Perhaps I’m also dreaming….

Posted in Illinois | Comments Off on It’s Only a 56% Tax Increase…

Back to the Past: Poker Sites and FBARs. Poker Sites Are Again Reportable Foreign Financial Accounts

Posted on June 5, 2014 by Russ

Back in the past, I asked the FBAR group at the IRS whether or not poker sites needed to be reported. In January 2009, they told me they did have to be reported. In prior years, the FBAR group said they did not have to. Thus, FBARs (then, Form TD F 90-22.1) were sent to FINCEN with poker accounts.

Come early 2011, FINCEN issued new regulations. These regulations made it clear at the time that poker accounts would no longer be considered reportable foreign financial accounts. However, yesterday a judge disagreed.

In United States v. Hom defendant Hom was charged with violating the Bank Secrecy Act for not reporting three accounts at FirePay, PokerStars, and Party Poker.

In the case, the Court decided:

Section 5312(a)(2) lists 26 different types of entities that may qualify as a “financial institution.” Based on the breadth of the definition, our court of appeals has held that “the term ‘financial institution’ is to be given a broad definition.” United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986). The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as “commercial bank[s].” Section 5312(a)(2)(B). The Fourth Circuit in Clines found that “[b]y holding funds for third parties and disbursing them at their direction, [the organization at issue] functioned as a bank [under Section 5314].” Clines, 958 F.2d at 582 (emphasis added).

The biggest problem that I see for the defendant is that he had an account at FirePay. FirePay was a United Kingdom-based third-party payment processor similar to Skrill (Moneybookers) and Neteller. FirePay was absolutely a foreign financial account: It issued credit cards, debit cards, and had functions that almost anyone would say are akin to what banks offer.

In this case, the defendant argued that all of his accounts were not foreign financial institutions. He did not separate out the poker sites from the third-party payment processor in his arguments. He was almost certainly doomed on the FirePay account. Still, the Court ruled that PokerStars and Party Poker were banks. What does this mean for individuals who have poker accounts?

1. As of now, plan on reporting these accounts for both FBAR (Form 114) and Form 8938 purposes. When in doubt, report is a good rule of thumb.

2. Do poker accounts need to be reported? As of now, yes.

3. Do prior year FBARs need to be filed and/or amended for poker accounts? This is unclear, but the answer is probably so. The statute of limitations on FBARs is six years from the due date. Given the FBAR is due on June 30th of the year following, the statute is about to run out on 2008. (In any case, for calendar years 2008 and 2009 poker sites were considered foreign financial accounts.) However, I would think that 2010 and 2011 FBARs would need to be filed or amended.

4. Do tax returns need to be amended to note the presence of foreign financial accounts if you have an FBAR filing requirement for poker accounts? Almost certainly they do for any tax years open (2011 – 2013).

5. Also note that tax returns may need to be amended just by the presence of a foreign financial account. The IRS now asks on Schedule B whether you have a foreign financial account. Anyone with money at PokerStars in 2011 would need to answer yes.

I have sent questions to the IRS on this issue. (The FBAR group at the IRS is one of the few groups that accepts emails.) I have asked whether they want such accounts to be reported; whether back FBARs/amended FBARs should be filed; and whether tax returns should be amended. I will both post on the response I receive and update this post when I do receive the response.

A few other things to note about the decision. This is not a precedential decision; it is a decision of a District Court Judge. A Court of Appeals has not ruled on this. The defendant lumped an account that was clearly a foreign financial account with accounts that might not be. The Court looked at them in toto rather than individually. I suspect that if Mr. Hom appeals this decision, he will also argue that the poker accounts should be looked at differently than the third-party payment processor.

I am troubled by the Department of Justice looking at poker accounts as a foreign financial account. Still, there are some other issues regarding this decision that are unclear. FBAR charges are rarely brought in isolation. I don’t know what caused these charges to be brought.

In the end, this is not a good decision for poker players or tax accountants who service the poker world. Lots more useless paper will end up being generated as a result of this decision. (Well, electrons as FBARs now must be electronically filed.) Still, the old adage of better safe than sorry holds. As of today, reporting poker sites as foreign financial accounts is back on.

Posted in Gambling, IRS | Tagged | 2 Comments

Next Month Has Arrived (or, Deadlines for Us, But Not for Them, Part 3)

Posted on June 4, 2014 by Russ

I’m a Cubs fan. As such, I’m always waiting for next year.

I have a client who has been waiting since October to get his IRS notice issue resolved. I’ve written about it twice before. Back in March, we received a collection notice. I called the IRS up, and they put a nine-week hold on the account. That wasn’t long enough; last month, a second collection notice was received and another nine-week hold was put on the account. It turns out only four additional weeks were necessary.

Yes, I’ve been telling my client that next month would it would get resolved. (Luckily, I hadn’t said which next month.) Today, I received another IRS notice regarding this client. The IRS reviewed the paperwork I had sent back in October and agreed completely with what I sent. My client will get his $24 refund very soon. It only took a total of eight months.

There are two takeaways on this case. First, be patient. If you write the IRS, it could take a long, long time to get a resolution. I suspect the delays may vary by service center. This set of notices came out of Philadelphia; they appear to be having the lengthiest delays.

Second, the underlying notice was a math error (CP11) notice. The only problem with that is there were no errors on the original return. Somehow, the IRS computer took the numbers from an electronically filed return and made its own math mistake. Yet had we not challenged the notice, 60 days after it was sent my client’s only choice would be to pay the tax and then file a claim for refund.

In any case, this is finally resolved (and with a happy ending).

Posted in IRS | 1 Comment

No, Fido & Lulu Can’t Own Your Business

Posted on June 1, 2014 by Russ

Sometimes you read a story and wonder if it’s really true. Such was the case when I read this DOJ press release on Matthew and Sandra Zuckerman.

It starts like many cases: The Zuckermans didn’t like filing and paying taxes, so in 1986 they stopped filing. This continued for at least 24 years. If you don’t do anything that gets yourself well known, and stay in the shadows, it is possible (but still quite illegal) to not file and pay income taxes. Mr. Zuckerman, though was very successful.

He formed a corporation titled Silicon Valley New Issues that specialized in ‘reverse IPOs.’ (An IPO is an initial public offering of stock to the public. A reverse IPO is where a company purchases an already public shell company so that it can become a public company.) Mr. Zuckerman formed an interlocking web of businesses and trusts so that his income wouldn’t be traceable to the IRS. His personal wealth was quite large, with a mansion in Woody Creek, Colorado, and another $1.8 million home in Toluca Lake, California.

It is one of those companies, Hyperpanel University, Inc., which drew my attention to this case. All corporations have to have a Board of Directors. That board handles various business items of the corporation. Now, in a tightly controlled corporation you might just have one board member–yourself. But Mr. Zuckerman elected a strategy that I haven’t seen before (and I doubt I’ll see again): He named his pets as board members. A helpful hint to anyone who is contemplating such a move: Board members do need to be human beings. (Mr. Zuckerman’s dog and cat are no longer board members of Hyperpanel.)

In the end, all of the maneuvering just delayed the inevitable. Mr. Zuckerman pleaded guilty to one county of tax evasion earlier this year; last week, his wife, Sandra, pled guilty to one county of willful failure to pay income tax. They’ll be sentenced later this year. There’s no word on Fido and Lulu being charged.

Posted in Tax Fraud | 2 Comments

Punt Blocked; National Audit Defense Network Heading to ClubFed

Posted on May 27, 2014 by Russ

Back in 2000, a company made the following boast on the Internet:

Oryan Management has developed a simple, “Turn-Key” method for you, the ordinary taxpayer to receive these Tax Credits and Deductions while keeping your costs low. Depending on how you pay your taxes, you could reduce your next quarterly payment by more than your out-of-pocket expenses for the year.

In addition to offering positive cash flow and business stability, Oryan assures your peace of mind by providing Pre-Paid Audit Protection on your tax return.

Wow, that sounds good. The tax credit was for modifications made for the Americans With Disabilities Act. Of course, like most credits you actually have to make building modifications; it really wasn’t available for everyone without doing that.

The IRS investigated, and the prepaid audit defense was worth exactly what you paid for it.

As I first reported back in 2009,

The government alleges that the scheme combined the Americans with Disabilities Act (ADA) with tax fraud. The idea of Tax Break 2000 was that you could get a tax credit for making facilities ADA compliant. However, the government alleges that Mr. Prokop and two individuals from Las Vegas conspired to defraud the US, committed tax fraud, and aided in preparing false tax returns.

Well, four years later and the trial has ended here in Las Vegas. The three indicted men, Alan Rodrigues, Weston Coolidge, and former NFL punter Joseph Prokop, were found guilty earlier today. Rodrigues and Coolidge were found guilty on 20 felony counts; Prokop was found guilty on 18 of 20 counts. Appeals of the verdict are expected.

Posted in Tax Fraud | 1 Comment

The Only Thing Not Thrown at the Petitioner Was the Kitchen Sink

Posted on May 27, 2014 by Russ

There’s a time to be a protester and there’s a time not to be. In Tax Court, it’s imperative you have legitimate arguments; you can pay a very high price for frivolity. Today’s petitioner learned that…perhaps.

The petitioner neglected to file tax returns from 1999 through 2007. (I suspect this might continue to future years at it does take some time for a case to get to trial at Tax Court.) He faced the Failure to File Penalty, the Failure to Pay Penalty, the Underpayment of Estimated Tax Penalty, and the Fraudulent Failure to File Penalty. That’s the first time I’ve ever seen a Fraudulent Failure to File Penalty. He timely filed a Tax Court petition.

The petitioner didn’t show up for trial, and something else I hadn’t seen before:

We hold petitioner in default. He has failed to comply with the Rules of the Court. He has not cooperated in the preparation of these cases for trial, he has failed to comply with Court orders, and he did not appear for trial. His responses are filled with tax-protester rhetoric. Such conduct provides ample basis for holding him in default.

So what is the Fraudulent Failure to File Penalty?

Section 6651(f) imposes an addition to tax of up to 75% of the amount of tax required to be shown on the return where the failure to file a Federal income tax return is due to fraud. “[R]espondent must prove by clear and convincing evidence that petitioner underpaid his income tax and that some part of the underpayment was due to fraud.” There is no question that petitioner’s failure to file a return for each of the years in issue resulted in underpayments for each year. To establish fraudulent intent, the Commissioner must prove that a taxpayer intended to evade a tax known or believed to be owed by conduct intended to conceal, mislead, or otherwise prevent the collection of tax. Not only do respondent’s averments show such intent, but petitioner is deemed to have admitted that his failure to file returns for the years in issue “was not due to mistake” and “was due to * * * [his] fraudulent intent to evade taxes”. We have adequate grounds on which to sustain respondent’s section 6651(f) additions to tax for all years in issue. [Internal citations omitted.]

All of the other penalties were upheld, too. Rubbing salt into the wounds the IRS asked for a penalty for filing a frivolous tax court petition.

Among his frivolous arguments, petitioner claims that he is not subject to Federal income tax, that the only persons required to pay Federal income tax are those people working directly for the Federal Government or the U.S. military, and that the Internal Revenue Code does not establish any liability for the payment of Federal income tax. A position maintained by a taxpayer is frivolous where it is “contrary to established law and unsupported by a reasoned, colorable argument for change in the law.”

But the Tax Court didn’t give him a penalty. Rather, there were two Tax Court cases filed, so the Court assessed two penalties of $25,000 each–the maximum–for wasting the court’s time. That’s also the first time I’ve ever seen that done.

A helpful hint to anyone considering preparing a frivolous Tax Court case: Don’t! Other than making tax bloggers laugh, you will find that Tax Court judges will have a somewhat different reaction…a reaction that could separate substantial sums of money from your wallet.

Case: Jones v. Commissioner, T.C. Memo 2014-101

Posted in Tax Court | Comments Off on The Only Thing Not Thrown at the Petitioner Was the Kitchen Sink

Something New From the IRS that We Can All Like!

Posted on May 27, 2014 by Russ

I’ve been bashing the IRS recently, but I’ve had lots of good reasons to do so. The new signature verification policy is somewhere between stupid and useless; the IRS’s response to the current IRS scandal is poor; and customer service at the IRS has been, to put it mildly, bad. Yet it’s time to praise the IRS for something new that’s beneficial to everyone–and it works!

The IRS has an electronic payment system called EFTPS. It’s useful, and once you’re enrolled in it, it works reasonably well. But what if you want to make a payment today and you aren’t enrolled in EFTPS? You must mail a check or pay by debit or credit card. Most state tax agencies have a webpay system.

Now, the IRS does too.

Welcome IRS Direct Pay. This is the IRS’s new webpay system, and can be used to pay your tax, pay an IRS notice, or make an estimated payment. The system is only for personal use (Form 1040 and related payments). I’ve had several clients use the system, and my clients were pleased with the system.

The system does take two business days to process a payment, but it seems to work very well. Kudos to the IRS in getting this right.

Posted in IRS | Tagged | 1 Comment

Staking and the 2014 WSOP: Nothing Has Changed

Posted on May 24, 2014 by Russ

The poker world is about to descend on Las Vegas. Over the next several weeks, many players who enter the myriad of poker tournaments from expensive tournaments at the World Series of Poker to more affordable tournaments at Binion’s and the Venetian will be “staked.” Instead of the player putting up 100% of his or her buy-in, he or she will have backers who have put up part of the entry fees. Since some tournaments will cost upwards of $10,000 (there are $25,000, $50,000 and a $1 million buy-in this summer), staking is commonplace.

There are rules you must follow when you’re staked. You must make sure proper IRS paperwork gets to your backers. A lot depends on where you will be playing. If you’re at the Venetian playing in their Deep Stack Extravaganza, you’ll find a cooperative cage ready and willing to accept Form 5754. (Form 5754 is used when you have backers). The same is true for Binion’s. However, if you are playing at a Caesars property–and this includes the Rio Hotel & Casino, where the World Series of Poker takes place–you are on your own; Caesars will issue one W-2G (or Form 1042-S) to the winner. This is a decidedly player-unfriendly attitude; it also violates IRS rules. What does this mean for the player?

Back in 2007 I wrote about this situation. It has now been seven years and nothing has changed. If you’re backed, you have to send out 1099-MISC’s or 1042-S’s for your backers:

  1. If you’re backed by an American get a signed and completed Form W-9 from him before you pay him. If someone refuses to complete a Form W-9, you are required to withhold.
  2. The issuance of 1099s is based on you backer profiting $600 or more for the entire year.  So realize that if you have backers who profit $600 or more, the onus is on you for sending out Form 1099-MISC’s. (The 1099s are not sent until year-end.)
  3. If you’re backed by a non-American, the situation is far more complex.  You will need to obtain a Form W-8BEN; make sure it’s the new version that was released this year.  The form must be complete in order for you not to withhold.  It must have an ITIN, a Tax Treaty Article noted, with reasoning why there is no withholding, and it must be signed and dated.  If you don’t have the complete paperwork, you must withhold even if your backer is from a Tax Treaty friendly (for gambling) country.  If you don’t, you could be held liable for the tax plus penalties and interest!  For specific scenarios, see this article I wrote in 2011.

As I’ve said before, eventually Caesars will be called on the carpet for their policy. Until they are the onus is on you to obey the law. When the casino ignores the rules, you effectively become the casino for your backers.

Posted in Gambling | Tagged | 3 Comments

New Identification Rules Go Over Like a Lead Balloon

Posted on May 21, 2014 by Russ

Joe Kristan had a post this morning noting the reaction of 250 Iowa tax professionals to the new rules on third-party verification rules. The reaction was “You must be kidding me.”

The problem was that the IRS wasn’t kidding.

Jason Dinesen (who is an Iowa EA) noted that the debate between the two of us on what a “remote” signature is over. Unfortunately, I was right and Jason was wrong. This is one time I’d like to have been wrong.

Let me explain the issue for those who are just joining this discussion. The IRS released a new version of Publication 1345. That’s the bible for Electronic Return Originators–people who efile tax returns (like me). We’re required to follow the rules in this publication. There was one piece of good news in the new version of Publication 1345: The IRS will allow electronic signatures. That was outweighed by lots of bad news, including mandatory ID checks for anyone whose return I file when they come into my office (yes, mom, I need to see your ID) and mandatory third-party identity verifications for remote transactions.

Jason has done some research with his attorney and found the same issue that I and other Nevada tax professionals will face: It’s probably illegal for us under state law to run credit checks and similar verifications. The only time it’s legal is if we’re going to offer credit. The IRS is apparently telling us to violate state law. I don’t want to visit ClubFed nor do I want to visit the High Desert State Prison.

In this morning’s post, Joe Kristan told his readers to call the IRS. I agree; I urge all tax professionals to speak to or email their IRS Stakeholder Liaison.

(The above link is to the IRS list. You likely have a local Stakeholder Liaison. Be advised that your local Stakeholder Liaison may know nothing at all about this issue. When I was attending a continuing education event last week I brought this issue up with both my local Stakeholder Liaison and a representative from the Taxpayer Advocate; neither knew anything about this.)

Additionally, if you are a member of a professional society such as AICPA or NAEA, make sure you contact someone with government relations in your organization. The more people who are aware of this issue, the more likely it will be resolved favorably to tax professionals (and the public).

Joe Kristan updated his post and noted,

I received a call from an IRS representative this morning saying that they have been getting phone calls as a result of this post (well-done, readers!). She tried to reassure me by telling me that the third-party verification doesn’t apply to in-person visits. I knew that. I told her that as I read the rules, there are either “in-person” or “remote” transactions, with no third category of, say, “I’ve worked with this client for many years and they’re fine.” She didn’t disagree, though she still thinks I’m overreacting. She did say IRS field personnel are “elevating” the issue and seeking “clarification” from the authors of these new rules, including what “authentication” means for in-person visits and what a “remote transaction” is that would require third-party verification. Keep it up, folks!

In a tweet today, Jason Dinesen wondered why this was released with little fanfare. The cynic in me felt that the IRS hoped that this would be a fait accompli so that tax professionals would be stuck with the new rules.

My hope is that the IRS will adjust the definition of a remote signature so that the new rules will only apply for electronic signatures. If not, the IRS can expect a large increase in paper returns for next tax season.

For those wondering what the reaction of the tax professionals in Iowa was, I immediately thought of the reaction of the audience in this scene from The Prodcuers.

Posted in IRS | Tagged | 1 Comment

One Good Crime Deserves Another

Posted on May 18, 2014 by Russ

I’ve written about Nifty Fifty’s before. It’s a Philadelphia-area chain featuring food themed from the 1950s. The owners of the chain used ideas from the 1850s to help their profitability: They skimmed cash, paid employees in both paychecks and the skimmed cash, paid supplies with the skimmed cash, inflated expenses on their tax returns, and submitted false tax returns to bank to obtain loans. The five owners all pled guilty to various tax charges and were sentenced last year. Full restitution is being made to the IRS.

However, that wasn’t the end of the story. The accountant who prepared Nifty Fifty’s tax returns is now under indictment. William Frio is charged with conspiracy to commit tax evasion, filing false tax returns (his own returns), structuring, and loan fraud. Mr. Frio is alleged to have taken active participation in the Nifty Fifty’s tax evasion scheme. Frio is also alleged to have falsified a loan application and structured transactions with the same bank. And the structuring that happened is alleged to be quite large ($2.6 million). During this same time period he allegedly didn’t report some income that he received from another corporate account on his personal tax return.

The most interesting accusation in the indictment is that Mr. Frio allegedly embezzled “hundreds of thousands of dollars” from Nifty Fifty’s. “Oft evil will shall evil mar.”

Mr. Frio faces up to 57 years at ClubFed plus restitution to the IRS if found guilty of all charges.

Posted in Tax Evasion | Tagged | 2 Comments