Have I Got a Fixer-Upper for You

If you want to rent a building in Sacramento (California’s state capital), I have one that’s perfect…for your enemies, that is. It does have some advantages: It’s a 24-story building right in the heart of downtown Sacramento. It’s owned by the State of California. It’s not for sale, but I’m certain that California’s Department of General Services would be happy to sell it to you. It’s fully leased to the Board of Equalization.

It does have issues. Be careful if you walk on the sidewalk next to the building; you may be hit by falling glass. It seems that the window seals on the building don’t work correctly and the windows have a tendency to pop out.

There’s also the pipes in the building. There are corroded pipes on several floors. A General Services spokesperson helpfully noted that, back in 2012, “At this point it’s isolated to waste lines.”

You may want to take the stairs if you have to go to this building. The elevator doors have a tendency to not open.

I also need to talk about the mold. That’s not the good kind of mold, but the toxic kind that you don’t want in any building. Well, given that water seeped in through the exterior glass, and there are reports of roof leaks, add in Sacramento’s summer warmth and you have a perfect environment for all sorts of gunk to grow.

On the bright side, California paid only $81 million for the building and the repair costs haven’t hit that much…yet. Add to the mix that the BOE is outgrowing the building and now the legislature has to figure out what to do with a building that no one in their right mind wants to work in. Of course, since the BOE pays General Services for leasing the building, and it’s unlikely anyone else would pay anything until all the problems are fully resolved, it’s not likely there will be any volunteers to move into a building that’s a construction zone. While nearby communities such as Elk Grove would pay the state to have the BOE relocate there, the problem is that you’d have to also pay to have someone relocate into a fixer-upper.

Posted in California | Tagged | 2 Comments

Louisiana Representative Girod Jackson Has Tax Troubles; Now an ex-Representative

If you’re in politics, portions of your personal life come under greater scrutiny. You also can become a poster child for the IRS if you make serious errors with your taxes. Louisiana State Representative Girod Jackson is finding that out.

Representative Jackson is alleged to have understated his gross receipts on his 2006 tax return by leaving out $492,000 of gross receipts from a business he owned and not filing his 2007 or 2008 returns. Representative Jackson resigned from the Louisiana legislature on Friday.

In a statement that is quoted in nola.com, Representative Jackson stated that he had made errors on his returns:

During my time in office, I have worked to be a symbol of honor and pride for myself and the constituents of the 87th District…And while I aim to live my life with dignity and respect, I am not without fault. Several years ago, there were filing errors on my business tax returns and delayed initial filings arising from accounting errors and oversight. Today, I have accepted the consequences of those mistakes.

While the Justice Department press release notes that the prosecution stems from an investigation by the IRS, the nola.com story notes that Mr. Jackson’s business was under scrutiny from an audit related to work following Hurricane Gustav.

A helpful hint to politicians: File and pay your taxes timely. If you don’t, you’re a superb target for the IRS. The IRS doesn’t instigate many criminal prosecutions (you do have to try hard for this). The targets chosen are done so because there crimes are especially egregious or by prosecuting them there will be publicity that could lead to a deterrent on others. Politicians are held to a higher standard, so they meet both these goals of an IRS prosecution. It appears Mr. Jackson found this out too late.

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Attorneys Behaving Badly

Two stories of lawyers in tax trouble. One is local (the second Las Vegas attorney in recent weeks who was found guilty of tax evasion); one committed especially bad behavior.

Let’s start with the local story. Paul Wommer decided that a good way of hiding money from the IRS was not to deposit all his income at once. If you do that and your deposits are cash–which apparently Mr. Wommer’s were–you are structuring your bank deposits. That’s a felony. Mr. Wommer did that 15 times. He also was caught evading paying $13,020 in tax to the IRS. Yesterday he was sentenced to 41 months at ClubFed.

Meanwhile, the case that is far worse comes from California. Orion Douglas Memmott was found guilty yesterday of attempted tax evasion and subscribing to a false tax document. From the DOJ press release:

According to testimony presented at trial, Memmott, a Stanford Law School graduate and tax attorney, stole hundreds of thousands of dollars from investors and law firm clients in order to spend on his own expenses, including failed day trading, travel, and personal trainers. Some of this money was removed from a client’s medical trust, leaving her destitute and homeless. Memmott concealed the embezzled money through the use of nominee accounts and false statements to investors, clients, and the IRS. Memmott also concealed his real estate holdings and rental income from IRS collection agents who were seeking to collect unpaid taxes for tax years 1993-1999, amounting to more than $650,000, not including penalties and interest.

There isn’t anything good to say about this case. Mr. Memmott is likely to spend several years at ClubFed (and deservedly so).

One last remark regarding preparer regulation: Both individuals I’ve written about are members of the Bar. Both subscribe to supposedly stringent ethics rules. Clearly, both individuals were guilty of violating the canons of their profession. The idea that just because someone has a license bad behavior will vanish is, of course, foolish.

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Probable IRS Systemic Issue with Individuals Taking the Automatic Two-Month Extension

If you read my previous post, you will see that I mailed in an Appeal today regarding a client who took the automatic two-month extension for being outside of the country on April 15th. To date, an extremely high percentage of my clients who were outside of the US on April 15th but who file with US addresses have been assessed the Failure to File penalty and/or the Failure to Pay penalty. In all cases the taxpayer either filed by June 17th or filed an extension with full payment by June 17th (and included the required statement with his return).

I would appreciate it if other tax professionals who have seen this issue correspond with me (or comment to this post). I have submitted this issue through the IRS’s Systemic Advocacy Management System (SAMS). I am also working with my practitioner liaison at the IRS in trying to resolve this issue. I have a large number of clients who file in this manner; many tax professionals will have just one such client. We’re trying to determine how big of an issue this is (we suspect it is impacting almost all such returns). Thus, the request for assistance from the tax professional community.

You can email me at rcfox [at] claytontax [dot] com.

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The Law and Regulations vs. IRS Publications

Let’s say that the Tax Code (which is law) said, “Every tax return must be signed in red ink.” If that were the case, we’d all be using red ink to sign returns. The Tax Code is law, passed by Congress; until a court overrules it (a court that has precedential authority) or Congress changes the Code, we must follow it. The Tax Code and court decisions are the highest form of guidance: They are akin to Thou shalt do this.

The next lower level of rules in tax are Treasury Regulations (the IRS is housed in the Department of the Treasury). Congress, when they write laws, usually states that The Secretary of the Treasury or his designate will develop regulations to implement [something]. Regulations have the force of law. Regulations are written and then published in the Federal Register. After initial publication, there’s a period for public comment. After that, the comments are addressed in the Federal Register, and the final regulation is published. After a waiting period (usually 90 days), the regulation becomes final.

Regulations can be challenged in Court (see the Loving case). The US Supreme Court has held that in most instances agencies are to be given deference in their regulations. That means successful regulatory challenges are rare. As stated above, regulations have the force of law.


That brings me to the point of this post: What happens when a regulation applies to all taxpayers but an IRS publication limits it to just some taxpayers? The answer is that IRS publications are not legal guidance; the regulation would apply to all taxpayers. Why do I bring this up? Because the IRS appears to be having a problem with individuals outside of the United States on the April tax due date.

IRS Publication 54 is titled “Tax Guide for US Citizens and Resident Aliens Abroad.” As you may be aware, there’s an automatic two-month extension available to certain taxpayers. Publication 54 states,

Automatic 2-month extension. You are allowed an automatic 2-month extension to file your return and pay federal income tax if you are a U.S. citizen or resident alien, and on the regular due date of your return:

  • You are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or
  • You are in military or naval service on duty outside the United States and Puerto Rico.

That would seem to imply you need to be outside of the United States for work (be it employment or self-employment). One of my clients filed her tax return in late April, taking advantage of this extension. The IRS assessed the late filing penalty (but not the late payment penalty) even though a statement was attached to the return noting the two-month extension. Before I wrote a letter to IRS Appeals, I looked up the actual law behind the rule. It’s Treasury Regulation, 26 CFR § 1.6073-4 (c):

(c) Residents outside the United States. In the case of a U.S. resident living or traveling outside the United States and Puerto Rico on the 15th day of the 4th month of a taxable year beginning after December 31, 1978, an extension of time for filing the declaration of estimated tax otherwise due on or before the 15th day of the 4th month of the taxable year is granted to and including the 15th day of the 6th month of the taxable year.

Well, it appears that while what is stated in Publication 54 is true, anyone outside of the United States on April 15th is eligible for the automatic two-month extension. That’s the plain language of 26 CFR § 1.6073-4 (c). Yet my client was told she’s ineligible for the automatic two-month extension. (My client was outside of the United States for purposes of self-employment, too.) We’re heading to IRS Appeals where I’m nearly 100% certain we’ll prevail. Still, my client must spend time and money on fighting something that she shouldn’t have to.

Posted in International, IRS | 1 Comment

What If Your Tax Professional Vanishes?

Yesterday, a new client called me. It seems that his tax professional (we’ll call her Jane Doe) vanished. She’s not answering phone calls (nor returning messages–and her voice mail is now full), nor returning mail, nor returning faxes. My client thought an extension was filed (with a payment), but his records are with Ms. Doe, and my client really doesn’t want to have to pay for a tax return twice. What are his options?

First, I hope that nothing has happened to Jane Doe. That said, it appears that her ability to prepare tax returns has vanished with her vanishing. Clearly if she’s not around she’s not going to be preparing any returns.

My new client asked me several good questions:

1. Is my extension valid? It is (and an extension was filed–see below); the extension is for you, the taxpayer, and is valid no matter who prepares your return.

2. Can I verify that the extension was filed? Yes, you can. You can either call the IRS (800-829-1040), request a “Tax Account Transcript,” or you can authorize a tax professional to obtain it on your behalf. (My new client signed a Tax Information Authorization and I ordered transcripts from the IRS. The extension was filed.)

3. I don’t want to pay to have the return done twice. Can I get the files back from Ms. Doe? If a client requests his files to be returned, a tax professional is required to return them. There’s an obvious issue if a tax professional dies; Ms. Doe won’t be here to return the files. In theory, the Executor of Ms. Doe’s estate should return those files…but that’s not likely to happen prior to the extended tax deadline.

My new client probably has a claim against Ms. Doe (or her estate). She was paid to complete the tax returns; if she doesn’t, there’s a clear issue. If she has died, you could file a claim against her estate. If she just vanished, you have to find her in order to get your money back.

There’s no way, though, of avoiding paying for the tax work a second time. I make my living preparing returns for money–I need to be paid for my work.

4. How do we prepare the return when Ms. Doe has all of my 1099s? Luckily, we can order a Wage & Income Transcript from the IRS. This should show all of the government paperwork you received (1099s, 1098s, W-2s, W-2Gs, K-1s, and 5498s). This will help with some of the issues.

However, my new client is self-employed. He’ll need to redo some work (providing his deductible business expenses and income from his business). If you use QuickBooks (or another accounting system), the new tax professional will need to see various reports. That’s easily done and shouldn’t be a problem.

You may have to recreate other records. If this needs to be done, start now. If you need to request bank or credit card statements, do it now; it can take a few weeks for them to appear. You are subject to the October 15th deadline, so start on this today!


There are some takeaways for everyone:

1. Make sure you get a copy of your tax returns from your tax professional (and keep these!). While you can order a Tax Return Transcript from the IRS, it’s a lot easier to have the actual returns. (A Tax Return Transcript is free from the IRS. You can also order a copy of your actual return, but this takes far longer and you must pay for it.)

2. Make sure you receive your files are returned. We scan everything into an electronic filing system, and return all files (I have far too much paper in my office and don’t want more).

3. If your tax professional is a solo practitioner (or a small office), ask the question, “What would happen if something happened to you?” It is a valid question and is one of the main reasons I brought in a partner a couple of years ago.

4. Make sure your tax professional communicates with you. My new client mentioned that Ms. Doe had been, in his words, “flaky.” If you have qualms about a tax professional, why are you continuing to use her? Tax professionals have access to your personal, confidential information. You absolutely, positively should be very comfortable with your tax professional. If not, consider someone else.

Posted in Tax Preparation | 1 Comment

IRS Scandal Update

More news this week on the IRS scandal. First, Tax Analysts has sued the IRS. “On May 21, Tax Analysts sent a FOIA [Freedom of Information Act] request to the IRS seeking all materials used since 2009 to train IRS personnel in the IRS exempt organizations determinations office in Cincinnati.” The IRS extended the deadline on June 25th to July 10th, and then to August 9th, and then to September 20th. Tax Analysts had enough…and they sued to force the IRS to comply with the FOIA request. The IRS may be overwhelmed with FOIA requests, but the law only gives the IRS a certain amount of time to comply.

Lois Lerner is now accused of sending files from her business email address to her personal email address. Eliana Johnson discussed this on CNBC’s Kudlow Report:

Ms. Johnson notes that this appears to be quite intentional targeting, and those involved knew it was wrong. One certainty at this point, the meme that this was a case of bad judgment or it was four rogue agents in Cincinnati is dead.

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California Goes After Flow-Throughs with Passive Investments in California

Let’s say you’re the manager of a business in Florida. Your business has some excess capital, so you decide to invest in the RussFox Fund, LLC. Your investment makes up a whopping 0.02% of the fund. (Put another way, you own 2/10000 of the LLC.) The RussFox Fund invests and trades capital equipment, including some in California. You take no part in the management of the fund–you’re clearly a passive investor.

One day you open the mail and see a notice from California’s Franchise Tax Board, California’s state income tax agency. It says you’re Florida business is liable for the $800 California minimum franchise tax (plus penalties and interest, of course) because your business has California-source income.

Now, would California do that? The answer is they have already done so. The facts that I gave mirror the facts of a case written up by Tax Analysts on a Kansas-based company called Swart Enterprises, Inc. Swart paid the FTB and then filed a claim for refund. That claim was denied; Swart has now filed a lawsuit in Fresno County Superior Court. It will likely be some time before this case is decided, but it will be interesting to follow.

Of course, the conclusion that Tax Analysts writes is exactly what I thought: “While states are always on the lookout for each and every dollar of tax revenue, taxing investments in California serves as a big disincentive for out-of-state companies to invest in the state.”

Posted in California | Tagged | 1 Comment

Massachusetts Has a New Software Sales Tax

Taxachusetts, er, Massachusetts has had for years a reputation of being a high tax state. Lately, Massachusetts has become a somewhat better locale (based on taxes). It’s not that Massachusetts has improved; rather, other nearby states have enacted or increased taxes. Just when you thought you could throw away the Taxachusetts label, out comes a new sales tax.

Last month, the Massachusetts legislature passed a new sales tax on computer software services. At 6.25%, it’s the highest sales tax rate on this in the country. The tax applies to all “computer software, including pre-written upgrades, which is not designed and developed by the author.” The law was effective July 31, 2013.

One website has published a piece about how confusing this new tax is. Consider:

This added levy is not only cumbersome, it’s super confusing. For example:

  • if you install software (Microsoft Office, Constant Contact, Drupal, etc.), it’s taxable
  • if your client clicks the mouse to install it, it’s not taxable
  • training your client to use this software is not taxable
  • but if you “customize” or configure the software in any way, it’s taxable
  • if you don’t actually make any changes, but just discuss them and plan them, it’s consulting and not taxable
  • if you create graphic design mockups, it’s not taxable
  • but as soon as you implement that design (i.e. program it), it becomes taxable if you’re using “prewritten” software “not developed” by you (such as WordPress)

At least, that’s how we think it works.

The Massachusetts high-tech community is up in arms over the new tax. As Christopher Anderson, president of the Massachusetts High Technology Council, said in an interview on WBZ-TV (as reported in the Boston Globe,

“When we impose a tax that no other state in the country imposes as broadly as this, it is going to have an impact on those small and midsize companies, initially, in terms of their ability to win and retain business or add or retain employees,” he said.

“In fact, a number of them are telling me they may have to shed employees just to maintain the business load they have,” Anderson added in the interview with WBZ’s Jon Keller.

Democratic state Senator Karen Spilka has filed a bill to repeal the measure. Meanwhile, Florida Governor Rick Scott has urged unhappy Massachusetts companies to consider moving to the Sunshine State. I am certain that if this tax remains law Massachusetts will see some companies move out-of-state. Taxes matter, and when a business in Massachusetts faces a confusing 6.25% tax while a business in neighboring New Hampshire doesn’t, a business owner might just move.

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Full Tilt Poker Remission Claims to Begin in Mid-September

The Garden City Group (GCG) posted the following information on the Full Tilt Poker Claims Administration website yesterday:

Important Update About the Start of the Claims Process

Starting on September 16, 2013, GCG will email a Notice with instructions on how to submit a Petition for Remission online to all potentially eligible claimants identified by GCG utilizing data supplied by Full Tilt Poker (“FTP”). The deadline to submit a Petition for Remission is November 15, 2013. Instructions concerning the filing of Petitions will be included in the Notice and will be posted on this website. Please continue to check this website for updates. Please note that the registration process for email notification is no longer available…

If you do not receive an email notice and you believe you are eligible to participate in the remission process, you may file a claim online using the directions that will be provided on this website.

Once claims are filed, GCG will have to verify the claims (relatively simple in cases where the claimant agrees with the information sent by GCG but more complex where there are differences), total the amount of approved claims by all claimants, compare that to the total available for remission, and then pay the claims. However, the DOJ then must approve the amounts.

While in theory claims could be paid this year (after all, this is all electronic information, etc.), it’s far more likely that the review and payment process will take at least 90 days and probably longer. I’d expect payment in mid-2014 based on the announcement, and take later rather than sooner if I had to guess. We could get lucky and have a Christmas present of the Full Tilt funds…but it’s far more likely to be a 2014 Christmas present.

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