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.
Last week I had an inquiry that asked me about deducting massages at the poker table. At many poker rooms and major poker tournaments, you can get a massage; the cost ranges between $1 and $3 per minute (plus a gratuity). If you’re playing an event like the World Series of Poker, where the chairs are (to put it kindly) not the greatest, a massage might make you feel quite good and ready for a few more hours of play. The question arose whether a massage while playing is tax deductible for a professional gambler.
Porfessional gamblers, unlike amateurs, are allowed to deduct all ordinary and necessary business expenses; that’s codified in IRC § 162:
(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….
The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business…The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business…and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, [internal citations omitted]
So where does a massage lie? Well, a poker player could argue that massages make long sessions more bearable; that they help a player concentrate; and that they make a player feel better. Those are all true, of course, but is it helpful for developing a poker player’s business? What would happen to the player if he did not have the massage? And therein lies the rub.
The IRS would argue that most poker players do just fine without a massage; that it is a luxury; that it is not necessary for a poker player to play; and that they involve elements of personal pleasure making them nondeductible personal expenses. Unfortunately for poker players who like massages, the IRS would almost certainly prevail on one or all of these arguments.
It’s hard to imagine a massage that doesn’t involve elements of personal pleasure. Indeed, that’s the reason poker players get massages (to feel better during a long session). The problem lies in that the Tax Code does not allow deductions for personal expenses. I know the manager of a spa here in Las Vegas. She stated that her business is a “…luxury, one that is not necessary. We want our customers to feel good and better.”
So we come back to the original question: Can a poker player take a tax deduction for a massage at the poker table? The answer is that it is almost certainly a personal expense that is not deductible.
There have been some changes made by by FINCEN (the Financial Crimes Enforcement Network) for the Report of Foreign Bank and Financial Accounts (FBAR) for 2014. While overall these are minor, they will impact everyone who files an FBAR.
First, Form TD F 90-22.1 is no more. The FBAR has a new form number, Form 114.
Second, as of last July the FBAR must be electronically filed. The good news is that as of last October, your tax accountant can file the form for you as long as you complete Form 114a.
Third, as of January 1st, you don’t have to register to efile an FBAR. You can now just go the BSA efile website, follow the instructions and file the form. Do note that past experience is that the BSA efile website works well in Internet Explorer but might not work in Firefox or Chrome.
United States persons are required to file an FBAR if:
The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. [emphasis added]
It used to be that the rule was take the maximum value of each account, sum the maximums, and compare the sum to $10,000. Now, the rule (except for dollar amounts) matches that of FATCA (except for dollar amounts) in that it looks at your value in an account on one day.
Some things haven’t changed, though. The FBAR is due on June 30th and there are no extensions. If you have a foreign financial account you must check a box at the bottom of Schedule B even if you don’t need to file the FBAR. There’s a second box you must check if you need to file an FBAR, and you have to list the countries you have foreign accounts in (if you must file an FBAR) on your tax return. Thus, if you do need to file the FBAR, get your information together as your tax professional will need it in order to file your return.
As we finish the first week of January, we’re running some repeats of important issues.
It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:
Corporations (except attorneys)
Entities you purchased tangible goods from
Entities you purchased less than $600 from (except royalties; the limit there is $10)
Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your computer (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.
Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing is easier than electronic filing.
Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.
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
