Bozo Tax Tip #10: Email Your Social Security Number

Posted on March 23, 2014 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

We’re starting a week early because I want to highlight something that I think contributes to the huge issue of identity theft. We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my partner in Maryland, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.

Posted in Tax Preparation | Tagged | 1 Comment

IRS Releases New Forms W-8BEN and W-8ECI

Posted on March 19, 2014 by Russ

The IRS released a new version of Form W-8BEN. The new version should be used by an individual responding to a withholding request from the US. It’s commonly used to note tax treaty benefits.

There is a disclaimer on the form: “For use by individuals. Entities must use Form W-8BEN-E.” There’s only one problem with that: Form W-8BEN-E has not been released yet; it’s still in draft form. I suspect that until the Form W-8BEN-E is released, an entity can use the Form W-8BEN.

The IRS also released a new version of Form W-8ECI. This is the form used by individuals and businesses who are foreigners with a business in the US; that is, income that is effectively connected with the US. Individuals and entities completing this form are required to complete a US tax return.

People receiving either of these forms should make sure they receive the new forms (dated by the IRS as February 2014). The old forms should no longer be accepted.

Posted in International, IRS | 1 Comment

The Flavor of the Season

Posted on March 16, 2014 by Russ

Every tax season is a bit different. The last couple have been late seasons. Very few of my client could file until the end of March; everyone was waiting for paperwork. This year is different: Many of my clients have all their paperwork and want their returns done NOW!

That’s a good thing for business, of course, but it’s going to be bad for this blog…for the next month. Yes, my annual blog hiatus is here a week early. Never fear, I’ve already written my Bozo Tax Tips; they’ll start appearing automatically on April 1st (no fooling!). There will be a couple of other posts about various deadlines, and if something major should happen in the world of tax I’ll interrupt the blog hiatus to post about it.

Everyone have a great Tax Season!

Posted in Taxable Talk | 1 Comment

The Other March 17th Deadline: Form 1042s

Posted on March 16, 2014 by Russ

There’s another tax deadline today: Form 1042s. The form 1042 series (1042, 1042-S, and 1042-T) is used to report annual withholding for US-source income of foreigners. Again, this is a postmark deadline (for paper-filed returns). There is no extra time for electronic filing of 1042-S’s; they are also due today.

Posted in IRS | Tagged | 1 Comment

Corporate Tax Deadline Is Here

Posted on March 16, 2014 by Russ

March 15th is the deadline to file calendar year corporate tax returns (Forms 1120 and 1120S). Because that fell on a Saturday, Monday, March 17th is the deadline. If you’re not ready to file, file an extension. Download Form 7004 and mail it certified mail, return receipt requested. If you’re a C-Corporation and believe you owe tax, pay the amount you think you will owe.

Extensions can also be electronically filed.

Finally, don’t forget your state corporate returns (though not all states have the same deadline). Some states’ extensions are automatic while others are not.

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A Second Bite at the Apple? Yes, When You Don’t Read the Fine Print

Posted on March 13, 2014 by Russ

I previously wrote about betonsports.com, a former Internet sports betting website. One of its executive, David Carruthers, made the mistake of changing planes at DFW. Unbeknownst to him, he had been indicted. His two-hour layover got extended…to 33 months at ClubFed. Sportsbetting on the Internet is generally against US law (though intrastate sportsbetting in Nevada is legal in certain situations).

Today, as I glanced through a Tax Court case on one Gary Kaplan, I saw the dollar amounts and did some math. Mr. Kaplan was assessed tax for two years totaling $24,369,493, and additions to tax totaling $12,358,596. That’s a total bill of $36,720,089, and certainly reason to petition the Tax Court.

Mr. Kaplan is the founder of betonsports.com. He took the company public on the London Stock Exchange in 2004. Mr. Kaplan transferred his shares of the business into trusts, and those trusts then sold shares. Mr. Kaplan never filed (or paid) tax returns, so the IRS created substitute for returns and assessed the tax and penalties noted above. This occurred after Mr. Kaplan was arrested and made a plea bargain on the criminal case.

Plea bargains are binding documents. They’re binding on the government, too. And that’s the major issue of the case: Did the plea bargain stop the IRS from assessing tax and penalties? Two excerpts from the plea agreement are quite on point:

[T]he Office of the United States Attorney for the Eastern District of Missouri agrees that no further federal prosecution will be brought in this District relative to the defendant’s participation in the BETONSPORTS ORGANIZATION, as described in the Third Superseding Indictment, of which the Office of the United States Attorney for the Eastern District of Missouri is aware at this time. In addition, the Office of the United States Attorney for the Eastern [sic] of Missouri and the Office of the United States Attorney for the Southern District of Florida, which has authorized the Eastern District of Missouri to enter into this agreement, agree that no federal prosecution will be brought in either District relative to the defendant’s involvement in a business venture known as Hope Mills Universal, of which said offices are aware at this time. In addition, the Office of the United States Attorney for the Eastern District of Missouri agrees that no federal criminal tax charges will be brought in this District relative to the defendant’s receipt of income from the BETONSPORTS ORGANIZATION, the sale of stock in BetonSports, plc and/or the investment of the proceeds in any such income or sale. [Emphasis added by the Tax Court.]

The second excerpt note that:

…[t]he defendant has discussed with defense counsel and understands that nothing contained in this document is meant to limit the rights and authority of the United States of America to take any civil, civil tax or administrative action against the defendant * * * except that the United States shall not seek civil forfeiture in connection with this case or any asset constituting or derived from the receipt of income from the BetOnSports Organization, the sale of stock in BetOnSports, PLC and/or the investment of the proceeds of any such income or sale. [Emphasis added by the Tax Court.]

The Tax Court noted that during the change of plea hearing the judge in the criminal case made sure that Mr. Kaplan knew that the government could initiate a civil tax proceeding:

[Court:] Do you understand, Mr. Kaplan, that there is a difference between a criminal tax proceeding and a civil tax proceeding?

[Petitioner:] Yes I do, Your Honor.

[Court:] And in this document, the U.S. Attorney’s Office has agreed it will not bring any criminal tax proceeding against you; however, that doesn’t preclude the initiation of any civil tax proceeding or administrative action against you.

[Petitioner:] I understand that. And we’ve agreed to that.

Mr. Kaplan argued that the statute of limitations barred the IRS’s actions. There’s an obvious problem with that: If you don’t file a tax return the statute of limitations never runs. Strike one.

The petitioner then argues that the plea agreement precludes the actions. The excerpts of the District Court’s questioning are particularly on point. The judge noted that this could happen; Mr. Kaplan said he knew it could. Strike two.

Mr. Kaplan’s last argument is that the IRS is precluded by judicial estoppel.

Under the doctrine of judicial estoppel, once “‘a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’”

Unfortunately for Mr. Kaplan,

…because the plea agreement unambiguously reserved the Government’s right to bring a civil tax action against petitioner, petitioner suffered no detriment nor prejudice from any perceived “position” of the Government. For these reasons, petitioner’s judicial estoppel argument is without merit.

That’s strike three, and Mr. Kaplan owes the $36.7 million…plus interest.

If you ever make a plea deal with the government, you absolutely want to read the fine print. And if a judge points our that a civil tax proceeding could occur, you might want to inquire about that…especially if you have millions of dollar sitting around.

Case: Kaplan v. Commissioner, T.C. Memo 2014-43

Posted in Gambling, Tax Court | Tagged | Comments Off on A Second Bite at the Apple? Yes, When You Don’t Read the Fine Print

The IRS Needs Volunteers for the Taxpayer Advocacy Panel

Posted on March 12, 2014 by Russ

The IRS is looking for a few good men and women. The IRS is looking for volunteers to serve on the Taxpayer Advocacy Panel (TAP), a federal advisory committee that listens to taxpayers, and help identify concerns and make recommendations for changes and improvements to IRS services.

“In trying to comply with an increasingly complex tax system, taxpayers may find they need different services than the IRS is currently providing,” said Nina E. Olson, National Taxpayer Advocate. “The TAP is vital because it provides the IRS with the taxpayers’ perspective as well as recommendations for improvement. This helps the IRS deliver the best possible service to assist taxpayers in meeting their tax obligations.”

There are some requirements: You must be a US citizen, current with your taxes, pass an FBI criminal background check, and be able to commit 200-300 hours each year. New TAP members will begin serving a three-year term this December. The TAP is looking for members in Alaska, Arizona, California, Delaware, Idaho, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New York, Oregon, Pennsylvania, Utah, Vermont, Virginia and International; alternates are needed for the District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, North Dakota, Puerto Rico, Rhode Island, South Carolina and West Virginia.

You can find applications here. Additional information about the TAP and/or the application process is available from 888-912-1227 (select prompt number five) or by email at taxpayeradvocacypanel@irs.gov.

Posted in IRS | Tagged | 1 Comment

An Update on the BOE’s Fixer-Upper

Posted on March 12, 2014 by Russ

When I last wrote about the home of California’s Board of Equalization–one of two tax collecting agencies in California–I called it a fixer-upper. That might have been kind.

It does have a good location (right in downtown Sacramento). It is 24-stories tall. Of course, there are a few problems. Like the windows that pop out randomly and take the wings of gravity down to the ground. There’s the mold that’s been found in many areas of the building…toxic mold. If you ever have to go above the ground floor you might want to use the stairs: The elevator doors periodically don’t open.

The most recent issues relate to water pipe issues. It seems that the waste lines tend to leak. Now it’s been determined that the entire drain system wasn’t built to code. Oops….

The California state auditor is now going to conduct a five-month long study about what to do with the BOE headquarters. Hopefully the auditor will be able to find some solutions before any more problems pop up.

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The Moral Climate may have Changed but the Law Hasn’t

Posted on March 11, 2014 by Russ

Another professional gambler went to Tax Court seeking to stop Section 165(d) of the Tax Code–the section that stops a gambler from deducting losses in excess of wins. This ended up being a full decision of the Tax Court, so it’s worth taking a look at it.

Today’s taxpayer is a CPA from California who, in his off time, is also a professional gambler betting on horse racing. He filed his tax returns with two Schedule C’s: one for his tax practice and one for his gambling. He, though, took his gambling losses (in excess of wins) to help lower his accounting income. He also took a deduction for “Takeout” from horse racing. The IRS objected to both, and the dispute made its way to Tax Court.

Let’s deal with the more mundane “Takeout” issue. Horse race betting is a form of “pool” accounting. Individuals make wagers, they form a pool, the race happens with winners being declared, and the track pays out from the pool. The track deducts from the pool taxes and other business expenses. That’s the Takeout–it’s taken out of the pool. (It’s akin to the rake on a hand of poker).

The problem is that this isn’t an expense of the bettor; it’s an expense of the track. Thus, since the wagerer doesn’t pay it, he can’t deduct it. The Court succinctly came to that conclusion.

The more interesting part of the case is whether Section 165(d) is legal. The petitioner noted an excerpt from Tschetschot v. Commissioner (T.C. Memo 2007-38):

The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be.

The basis of petitioner’s argument is:

Petitioner responds to the last two sentences of the quoted excerpt from Tschetschot with the hope that “the judiciary is at some time [presumably, meaning this Court in this case] going to take a bold stance and help to reverse section 165(d) of the Internal Revenue Code.”

A law can be held unconstitutional if it doesn’t have a rational basis. The Tax Court looked at the Congressional commentary from when Section 23(g) of the Revenue Act of 1934 (which has identical language to the current Section 165(d)) was passed and found there was, indeed, a rational basis. First, here’s the commentary:

Section 23(g). Wagering losses: Existing law does not limit the deduction of losses from gambling transactions where such transactions are legal. Under the interpretation of the courts, illegal gambling losses can only be taken to the extent of the gains on such transactions. A similar limitation on losses from legalized gambling is provided for in the bill. Under the present law many taxpayers take deductions for gambling losses but fail to report gambling gains. This limitation will force taxpayers to report their gambling gains if they desire to deduct their gambling losses.

The Tax Court’s conclusion is that Congress must change the law:

The basis for the enactment of section 23(g), as set forth in the last sentence of the foregoing committee report, still pertains to taxpayer reporting of gambling gains and losses. Therefore, it still constitutes a “rational basis” for the continued application of section 165(d) to the losses. There being no constitutional impediment to the continued application of section 165(d), we reiterate our admonition in Tschetschot that this Court “is not free to rewrite the Internal Revenue Code and regulations * * * [but is] bound by the law as it currently exists”. [footnote omitted]

Thus, until Congress changes the law a professional gambler cannot deduct gambling losses in excess of wins.

Case: Lakhani v. Commissioner, 142 T.C. No. 8

Posted in Gambling, Tax Court | 1 Comment

False Checks, Trusts, and Ignoring Taxes Lead to Real Prison

Posted on March 9, 2014 by Russ

Perhaps Michael Williams subconsciously wanted to go to ClubFed. He sure did just about everything he could to make sure he did. Let’s run down the list of things he did.

First, have a business that makes money and not file tax returns. Check.

Next, set up trusts that don’t file tax returns. Check.

Let’s add some bank fraud. How about creating phony US government checks and trying to deposit those. Not only is that bank fraud, but it’s probably some other felonies. Check.

And then let’s target the state officials and judges who are involved in state investigations. Let’s refer them to the IRS. That will get them. (No, it didn’t.) The IRS won’t care about that. Check.

(Here, I should point out that this likely got a separate agency involved: TIGTA, the Treasury Inspector General for Tax Administration. TIGTA is the internal affairs department of the IRS, and phony criminal referrals would likely get referred to TIGTA rather than IRS criminal investigation.)

Mr. Williams, a resident of Colorado, was indicted in 2012. He was found guilty on November 5, 2013 after a six-day trial. It took the jury just three hours to find him guilty of tax evasion, currency structuring, bank fraud, and interfering with internal revenue laws.

US District Court Judge Linda Arguello called Mr. Williams “a danger to the community…[He] is continuing to show his contempt for the government and he appears to believe he is exempt from the laws of the United States.” He received 71 months at ClubFed to think things over.

Posted in Tax Fraud | 1 Comment