From Russ Fox, EA, of Clayton Financial and Tax of Las Vegas, NV. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:
Today is the first business day of the new year. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log.
Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log.
The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 40,315). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.
Here’s the other things you should do:
On the cover of your log, write “2014 Mileage Log for [Your Name].”
Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:
1/2 40315-40350 Office-Acme Products-Office, 1234 Main St, Las Vegas
Discuss requirements for preparing tax return, year-end journal entries
It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.56/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.
Some gotchas and questions: 1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.
2. I have a second car that I use just for my business. I don’t need a mileage log.Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.
3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.
So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.
It’s time once more for that most prestigious of prestigious awards, the 2013 Tax Offender of the Year. The winner of this award must do more than just cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. While one year I’m hoping to have a shortage of nominees, that wasn’t the case in 2013.
As you will see, this year it took a lot to win. Last year, a murder for hire plot (mixed with tax charges) won the award; this year, a similar case merited only third place. That individual was Phillip Monroe Ballard of Fort Worth, Texas. Mr. Ballard attempted to channel the idea of last year’s winner, Stephen Martinez. Mr. Ballard approached another inmate and told him he’d pay $100,000 to kill the judge in his tax evasion case so his case would be transferred. The inmate informed authorities, and Mr. Ballard has not only a sentence on tax evasion to look forward to, he has a murder for hire conviction. Given that Mr. Ballard is 72, he’s unlikely to ever again be outside of ClubFed.
Coming in second place this year is the Miccosukee Tribe of Indians in Florida. In most years the Miccosukees would have easily won the award (but not in 2013). Let’s start with what we knew in 2012.
The Miccosukees run a successful casino near Miami. The tribe is exempt from taxes (they’re considered a sovereign nation), but the members of the tribe must pay taxes.
The Miccosukees allegedly decided to ignore the last part of the above and didn’t withhold income tax on distributions to tribe members (from casino profits).
Their attorney supposedly advised them that wasn’t a good idea. So the tribe sued the attorney for malpractice!
The tribe allegedly did not forward federal income tax withheld from patrons to the IRS.
The IRS had filed liens against the tribe (totaling $170 million) and has asked for financial records on the Miccosukee tribe from various financial institutions.
That’s where we left off in 2012. There have been a number of additional developments in 2013:
In August, a judge ordered Morgan Stanley, Citibank, Wachovia (Wells Fargo), and American Express to turn over financial records on the tribe to the IRS.
On October 8th, various tribal members filed Tax Court cases asking for redetermination of their Notices of Deficiency. The major allegation in the petitions is that the Miccosukee tribe is unique, and that the members of the tribe don’t own anything–everything is tribal so the members don’t owe tax (I’m condensing the argument; you can read the petitions yourself). It will likely be a year or two before these cases are heard, but I’m not optimistic on the tribe members prevailing. The problem is that the tribe is part of the United States, so its members today must pay income tax based on today’s laws. The tribe may want to read the 11th Circuit Court of Appeals decision upholding summonses to financial institutions in an investigation of the Miccosukee Tribe.
Then IRS Commissioner, Douglas Shulman stated in March 2012, “Yes, I can give you assurances…that we are a nonpolitical non-partisan organization…There is absolutely no targeting….” Here’s the clip:
In late June 2012, Congressman Darrell Issa (R-CA) sent a letter to J. Russell George, Inspector General for Tax Administration of the Treasury Inspector General for Tax Administration (TIGTA). In this letter, Congressman Issa notes the alleged scrutiny of Tea Party groups and also notes that TIGTA is investigating.
Let’s fast forward to Friday, May 10, 2013. Up to that date, I (along with almost everyone) believed former Commissioner Shulman. It was just a conspiracy theory. Joe Kristan put it well:
Confession: I never took seriously complaints that the IRS was harassing Tea Party organizations who filed for tax-exempt status. It didn’t seem impossible, but the IRS can be difficult to anybody, regardless of political affiliation. Don’t be paranoid!
We were wrong.
“IRS admits targeting conservatives for tax scrutiny in 2012 election,” screamed one headline. Lois Lerner, Deputy Commissioner of the IRS for Exempt Organizations, noted that actions were taken:
“That was wrong. That was absolutely incorrect, it was insensitive and it was inappropriate. That’s not how we go about selecting cases for further review,” Lerner said at a conference sponsored by the American Bar Association.
“The IRS would like to apologize for that,” she added.
“I have ordered an investigation to be done,” Holder said. “The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters,” he added. “We are examining the facts to see if there were criminal violations.”
There’s plenty to investigate, starting with all the different excuses coming from the Obama Administration for the scandal. We’ve heard the following causes excuses from the Obama Administration:
Two (or four) low-level IRS employees in Cincinnati;
88 rogue agents mostly in Cincinnati;
Mid-level managers from Cincinnati, Laguna Niguel, El Monte and maybe elsewhere implemented this policy; and
Incompetence by various IRS employees.
I don’t believe any of those excuses, and I doubt you do, too. The two, four, or 88 low-level or rogue IRS employees has been thoroughly discredited. The mid-level manager defense has gone out the window. The current excuse is gross incompetence. Unfortunately for the Obama Administration, I doubt that’s the case.
Occam’s razor states that among competing hypotheses, the hypothesis with the fewest assumptions should be selected. For this to be gross incompetence, it would have to be gross incompetence among a large number of employees at the IRS. A far simpler hypothesis is that one high-level manager ordered the targeting. It’s simple, straightforward, and explains everything.
This is where that massive investigation by the Department of Justice through the FBI comes into play. There’s a problem here: There’s no evidence that the DOJ or FBI has done any investigation. And that’s why the Department of Justice is the 2013 Tax Offender of the Year.
In any criminal investigation, the victims of the crime are interviewed. Yet that doesn’t appear to be the case here. There’s no good reason for why this hasn’t happened. Back in September the National Review asked if the FBI was actually doing anything? They hadn’t contacted the American Center for Law and Justice (ACLJ). The ACLJ is representing 41 Tea Party groups targeted by the IRS. Another attorney representing six Tea Party groups also hadn’t been contacted. That’s a red hot investigation in action.
Indeed, the only individuals who have shown signs of interest in learning what the cause or causes of the IRS scandal are tax bloggers (Paul Caron of the TaxProfBlog deserves special attention here; he’s done a daily update on the scandal–at day 235 and counting) and Congressman Darrel Issa’s Committee on Oversight & Government Reform. The media cared about the scandal for a couple of months, but ObamaCare has pushed the IRS scandal off the agenda.
Unfortunately, this scandal has a huge potential to harm US tax administration. As I’ve said before,
For the IRS to function effectively, it needs both a reasonable budget and to be apolitical. It’s vital that the Department of Justice go after individuals who turn the IRS into a political organization from an apolitical one. Yet the current Administration apparently doesn’t see the urgency in this issue. That’s a huge mistake, and one that will definitely come back to haunt them and all Americans. We need a well functioning IRS…and given what the Administration is doing (and not doing), it’s very likely the budget for the IRS will continue to shrink.
It shouldn’t be difficult to determine who caused this policy. I wrote in early June, “I’m reminded of one of my favorite lines in literature. Sir Arthur Conan Doyle wrote, ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth.'” This scandal was not the result of misguided IRS workers in Cincinnati. Someone decided to implement this policy. That individual had to be high up at the IRS.
Back in June I wrote,
3. A high-level employee in Washington decided to implement this policy. High level employees at the IRS do make policy. Thus, let’s examine the structure of the Tax Exempt & Government Entities division of the IRS.
The IRS provides a web page noting how it is structured. At the top is the Commissioner of the IRS (currently Daniel Werfel is the Acting Commissioner). Underneath him are two Deputy Commissioners: Deputy Commissioner for Services and Enforcement (DCSE) and Deputy Commissioner for Operations Support. It’s DCSE where we need to go, as here there are nine reports, including the Commissioner of Tax Exempt and Government Entities Division (TEGE). The DCSE? Well, it’s listed as former IRS Acting Commissioner Steven T. Miller, the Acting Commissioner for Tax Exempt and Government Entities is Michael Julianelle. (You can see the top-level of the IRS Organization Chart here.)
As you might remember, Ms. Lerner took the Fifth when testifying before Congress. She made a statement where she said she wasn’t guilty of anything. That might be true. However, if she didn’t implement the policy, her bosses had to order her to do so. It could not have been at a level below hers. Indeed, I suspect it was done above her level…but that’s just a suspicion.
4. The policy came from the White House. Today, there is absolutely no evidence of this. But the IRS is part of the Executive Branch. Could this have been ordered from the White House? Certainly. (Note that when I say “from the White House” I do not mean it had to be President Obama. It could have been the President, the Secretary of the Treasury, the White House Chief of Staff, etc.)
The reason there are suspicions that this comes from above the IRS is the reports of individuals who filed the 501(c)(4) applications receiving scrutiny in other ways. The individuals were subject to audits (from another division of the IRS), scrutiny by the Bureau of Alcohol, Tobacco, and Firearms, the Department of Labor, etc. It is theoretically possible that these are all coincidences. Today, there’s no proof that these are not coincidences. But it sure feels improbable to me.
Those appear to me to be the only possible culprits. That’s a list of about ten individuals. It should not take the Department of Justice (and/or the FBI) that long to determine which individuals may be guilty.
But what if the DOJ/FBI has interviewed everyone, and every individual either denied everything or took the Fifth Amendment? That’s definitely possible; however, the DOJ then could coordinate with Congressman Issa’s committee and recommend giving immunity to one or more individuals and then those individuals would be compelled to testify. In the end, I suspect Congressman Issa’s committee will do just that; at that time, we will learn who really did order the policy.
I was asked why I’m not giving the 2013 Tax Offender of the Year award to the IRS. The reason is straightforward: The IRS likely didn’t order this policy. I believe one individual ordered this policy. The IRS faithfully implemented this policy. That individual is the culprit, not the IRS. (As an aside, almost every individual I’ve worked with at the IRS is doing his or her best, treat taxpayers well, and serve the Agency quite well.) The IRS didn’t commit this offense; some person did.
And that’s why the DOJ deserves the 2013 Tax Offender of the Year award. The DOJ could have (and should have) investigated this scandal. Instead, as best as anyone can tell they’ve done nothing.
The IRS accomplishes its mission by issuing clear, concise tax law guidance, providing assistance to taxpayers, enforcing current tax law, and collecting taxes used by the U.S. government. Reducing the IRS’s budget constrains IRS effectiveness and efficiency, which results in taxpayers’ loss of respect for the agency and our voluntary tax system. IRSAC is very concerned that prior year and proposed budget cutbacks have so diminished IRS effectiveness that most taxpayers are now experiencing increased compliance costs. This undermines the voluntary tax system, reduces government revenues and promotes the underground economy. The IRS must be provided sufficient resources to continue to operate as a world-class financial institution while maintaining the integrity of our voluntary tax system.
If the DOJ were to have investigated, and if the culprit were prosecuted, then the stigma of this scandal would have been removed. Instead, the IRS scandal continues to percolate, the budget of the IRS gets cut, and the ability for the IRS to effectively administer the tax laws of this country have been hurt. The Department of Justice is worthy of the 2013 Tax Offender of the Year Award.
(I apologize to the attorneys in the Department of Justice Tax Division for my selection of the DOJ as the Tax Offender of the Year. Tax Division attorneys pursue tax scofflaws and do, overall, an excellent job in enforcing the nation’s tax laws fully, fairly, and consistently. Unfortunately, the DOJ is, imho, responsible for the lack of a true investigation into the IRS scandal.)
That’s a wrap on 2013. I wish you and yours a happy, healthy, and prosperous new year.
41. Connecticut
42. Oregon
43. Iowa
44. Maine
45. Minnesota
46. Hawaii
47. New York
48. Vermont
49. New Jersey
50. California
The rankings include a variety of factors, and the Bronze Golden state ranked last in quite a few: personal income tax rates, individual capital gains tax rates, individual dividends and interest tax rates, and state gas taxes. California also has an added S-Corporation tax rate, and both an individual and corporate Alternative Minimum Tax (AMT). California ended up with a relative ranking of 113.637; the top state, South Dakota, has a ranking of 34.627. Yes, you’d have to deal with the South Dakota winters, but climate isn’t everything.
As noted in the introduction,
Of the 47 measures included in the 2013 edition of the Index, 22 are taxes or tax related, 14 relate to regulations, five deal with government spending and debt issues, with the rest gauging the effectiveness of various important government undertakings.
It is a comprehensive review. The states that did the best are those with low tax rates, low regulations, and lower spending and government debt.
The conclusion of the report is really presented in the introduction:
Political fantasies involving higher taxes, increased regulation, and much higher levels of government spending and debt, as we have learned at the federal level over the past nearly seven years, do not serve our economy well. The same goes, of course, at the state and local levels.
With just two business days left in 2013, it may be time for you to harvest some capital losses. You’re allowed to take $3,000 of capital losses (in excess of capital gains). To be a capital loss, the transaction must be realized–you must sell the security. As long as the stock sale is placed by the 31st (the trade date), it’s a 2013 sale.
Like almost everything in tax, there are some gotchas. The biggest one is wash sales. Let’s say you sell 100 shares of XYZ on December 30th in security account 1 and then buy 200 shares of XYZ on January 15th in security account 2. That’s a wash sale–you’ve purchased substantially the same stock within 30 days of the sale. Let’s say you purchased those 200 shares on December 15th; that’s also a wash sale. It’s within 30 days from the date of sale in either direction. The IRS, in Revenue Ruling 2008-5, believes that if you sell the 100 shares of XYZ and then buy the same shares in an IRA, that’s also a wash sale!
As Joe Kristan noted, the sale must be in a taxable account. Selling stocks in an IRA won’t decrease (or increase) your tax.
So if you have a dog in your portfolio that you’ve been thinking of selling, now may be the time to do so. But don’t wait too long: Most investment advisors will be closing up early on New Year’s Eve.
Posted inIRS|Comments Off on Capital Losses Must be Realized to be Taken
With just under a week to go before 2013 is complete, it’s time for a final reminder to submit nominations for the Tax Offender of the Year. To be considered for the Tax Offender of the Year award, the individual must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:
The IRS announced that they will begin accepting 2013 business tax return on Monday, January 13, 2014. This includes corporate tax returns (Forms 1120 and 1120S), partnership tax returns (Form 1065), trust and fiduciary tax returns (Form 1041), excise tax returns (Form 720), and payroll tax returns (Forms 940 and 941). However, unincorporated businesses (those filing a Schedule C, E, or F on their Form 1040) must wait until personal tax return filing begins on January 31st.
Phil Laak is a very successful poker player. According to the Hendon Mob database, he’s won more than $3,136,000 in poker tournaments. He’s also a successful cash game player. The web site TMZ has stated that Phil Laak left out paying one interested party: California’s Franchise Tax Board.
Mr. Laak allegedly owes the FTB $24,874 for his 2010 and 2011 California taxes. Mr. Laak was (and I believe still is) a California resident; assuming that’s the case, he would owe California income tax on all of his earnings anywhere in the world. Hopefully Mr. Laak will be able to quickly resolve his California tax troubles.
Posted inCalifornia, Gambling|TaggedPhil.Laak|Comments Off on “Unabomber” (Poker Player) Phil Laak Reportedly Hit With Tax Liens from California
Law enforcement officers are supposed to know the law. That’s obvious, but one former FBI agent remembered half the law about currency (cash) deposits to his regret.
Travis Wilson is a former Special Agent of the FBI. Agent Wilson liked to gamble, and played at the casinos in California, Arizona, Nevada, and West Virginia. There’s nothing wrong with that. He left the casinos some nights with more than $10,000. Agent Wilson didn’t want his superiors at the FBI to learn of his gambling habit. Of course, there’s nothing illegal about gambling. And if Agent Wilson was a poker player and kept a log, it might have made a nice supplement to his income. That said, DOJ Inspector General Michael Horowitz is correct:
When a law enforcement agent conceals ongoing gambling activity it risks creating a security vulnerability. The DOJ OIG will partner with prosecutors and other investigative agencies to ensure that such conduct does not go unchecked within the Department of Justice.
So what was Agent Wilson to do? Deposit his cash, let his superiors know about his winning gambling habits? No, that would cause Currency Transaction Reports (CTRs) to be issued, and he didn’t want them to know about the gambling. Perhaps stopping the gambling would have been a good idea. No, that didn’t happen. Well, why not make smaller deposits (less than $10,000) so that no CTR would be issued; that would stop all the problems. No CTRs and his superiors wouldn’t know.
There’s a problem here, and it’s one that Agent Wilson should have known about: 31 USC § 5324. That’s structuring, and that’s a felony. That’s when you deliberately make smaller deposits to evade financial reporting (such as CTRs). Banks are required to have programs in place to automatically generate Suspicious Activity Reports (SARs). You may remember that SARs led to the downfall of former New York Governor Eliot Spitzer. And that’s almost certainly what happened here.
Agent Wilson should have known about structuring. But apparently he missed that lecture at the FBI Academy; instead, he’ll get some remedial education at ClubFed. He pleaded guilty to structuring $488,000 of deposits; he’s facing up to five years at ClubFed when he’s sentenced next March. He’s also a late nominee for the Tax Offender of the Year.
I’ve been complaining about the Death Master File for some time. This is a wonderful tool for identity thieves, allowing them to get all the details for an individual who has gone to the great beyond. As Jason Dinesen noted, it’s almost certainly the way one of his clients was a victim of identity theft. It’s also the method used in an attempted identity theft of my partner’s deceased stepfather.
What does this mean? First, file a final tax return for anyone who has passed on. That will tell the IRS that there should be no more tax returns for that social security number.
Second, while the Commerce Department has 90 days to set this program up, expect them to take longer. There’s no penalty on the government if it doesn’t act expeditiously, so I’d estimate it will be sometime in April at the earliest before this is set up. That means we have one more tax season of identity theft from the death master file.
Still, as Jason said, “All I can say is — thank you Congress (how often do we say that anymore?), and it’s about time.”
One conclusion that I draw is that a state appearing on both bottom ten lists is a state with a bad regulatory environment. California, Florida, North Dakota, and Washington share that dubious distinction. Indeed, California ranks the worst for tax administration and is 46th for insurance administration. It’s no wonder that business executives believe that California’s regulatory climate has miles to go before it becomes average (in ranking).
Only one state makes the top ten in both lists: Virginia. A state with a favorable regulatory climate will attract business, and that’s something that Virginia is doing.
Finally, I do need to point out that states that rate poorly in tax administration but do not have a personal income tax lead to some interesting scores on the COST list. The states without a corporate tax return (such as Nevada) should have a negative score in the Corporate Return Filing Burden column imho–these are states where life is easy for tax administrators.
My thanks to the Tax Foundation, RStreet.org for publishing these charts and to Jason Dinesen for pointing out the insurance information.
Posted inCalifornia, Nevada, Virginia|Comments Off on Tax and Insurance Administration Are Different
