Bozo Tax Tip #8: 300 Million Witnesses Can’t Be Right

Posted on April 2, 2013 by Russ

For tax bloggers like myself, Richard Hatch has been a godsend. His antics have been, well, remarkable. While he’s no longer at the top of my Bozo Tax Tips (he’s been strangely silent since his release from prison last December), his story is one that prospective tax offenders should learn.

I keep thinking that I’ll be able to drop this Bozo tax tip one year. Yet every time I think that’s going to happen Richard Hatch makes the news again. One tip I can give any celebrity: Be careful about your taxes. The IRS loves going after Bozo tax celebrities. So here’s the story that refuses to die.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.

2009 Update: Richard Hatch continues to look for that needle in the haystack. He’s filed another appeal, though to this non-lawyer it’s more likely that he’ll be released after serving his 51 months at ClubFed than getting a favorable ruling.

2010 Update: Mr. Hatch was released in mid-2009. He then violated the terms of his release and was sent back to ClubFed. Finally, in October, Mr. Hatch was released. He’ll be spending the next couple of years in his home state of Rhode Island.

2011 Update: As part of his sentence, Mr. Hatch was supposed to amend his tax returns and declare the $1 million of income. He neglected to do that. Judge William Smith didn’t neglect to give Mr. Hatch a piece of his mind this past March: He sentenced Mr. Hatch to nine more months at ClubFed. Following his release from ClubFed (in December), Mr. Hatch will have 26 months of supervised release.

2012 Non-Update: Mr. Hatch was released from prison in late December 2011. He has filed a writ of certiorari with the Supreme Court. The chance of the Supreme Court taking his case is about the same as a blizzard in August in Las Vegas. The writ was denied.

2013 Update: Mr. Hatch’s non-payment of taxes extends north of the border. Mr. Hatch owned a piece of property in Sydney, Nova Scotia. That property was sold in a tax sale after Mr. Hatch didn’t pay the property taxes on it for at least six years.

Judge Smith’s remarks from over a year ago has not yet sunk in to Mr. Hatch. “You can continue to proclaim your innocence…You don’t have the option of engaging in this type of game or negotiation with the court. It needs to be a severe punishment. That’s the only thing that will deter you in the future.”

And to think I’d have so little to write about if Mr. Hatch had just paid his $300,000 in tax in the first place.

Posted in Tax Evasion | Tagged , | 1 Comment

Bozo Tax Tip #9: Foreign Trusts

Posted on April 1, 2013 by Russ

By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.

First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle.

But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.

And those are the domestic trusts.

The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them.

Remember: If it sounds too good to be true it probably is.

Posted in Tax Evasion | Tagged | 1 Comment

Bozo Tax Tip #10: Report Income That You Didn’t Earn

Posted on March 31, 2013 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!

The story you are about to read is true. Only the names have been changed to protect the stupid. This is not an April Fools joke.

This past week I spoke with a new client, call him Tom. Tom had been using a tax preparer named Jim. Last year (2012), wasn’t a good year; Tom’s business lost money. Yet Jim told Tom that he should report positive income so that, “[Tom] can collect social security in the future.”

Tom signed the tax return with the wrong income. Unlike a story that Joe Kristan reported last week, this has nothing to do with the Earned Income Credit; Tom didn’t qualify for that. (I don’t mean to diminish the issues with the Earned Income Credit: They’re very real. Credits like that do lead to fraud.) Tom paid a couple of thousand dollars in tax that he shouldn’t have. We’ll be amending Tom’s returns so in the end all will be well with him.

A tax return is supposed to report your income–accurately. If you make $50,000, that’s what should be on the return. If you lose $5,000, that’s what should be on the return. As an IRS auditor told me years ago, “One of the goals of an audit is for the taxpayer’s return to be reported accurately: no more, no less.”

There is plenty of Bozo behavior in this story. First, Jim (the tax preparer) should go back to basics. Yes, Jim is a licensed tax professional so he supposedly has taken continuing education courses. He might want to stay awake for them this time.

Second, you need to always review your tax return. The income and deductions reported on your tax return should match what you actually earned and spent. If you have questions about anything on your return, ask. Your tax professional should be happy to answer any questions you have.

Finally, if a tax professional tells you to add extra income to your return either add income so that you can qualify for social security or the Earned Income Credit, run, not walk, the other way.

Posted in Tax Preparation | Tagged , | 1 Comment

DC Circuit Upholds Injunction on Preparer Regulation

Posted on March 28, 2013 by Russ

There’s no loving for preparer regulation at the DC Circuit. In a terse three sentence order, the Court of Appeals for the District of Columbia refused to grant the IRS’s request for a stay of the court decision (Loving et. al. v. IRS et. al.) striking down the IRS’s preparer regulation scheme.

The IRS’s appeal will still be heard, and they still could win. However, tax preparer regulation for this tax season won’t happen.

Posted in IRS | Tagged | 1 Comment

To Boldly Go Where No IRS Employee Has Gone Before…

Posted on March 24, 2013 by Russ

I’m not a huge fan of Star Trek. I may have met Wil Wheaton (Wesley Crusher on the sequel, Star Trek: The Next Generation), but I just don’t watch much television. Apparently, someone (or several someones) at the IRS are fans of Star Trek. They spent $60,000 of taxpayer money to make a parody:

The parody is about the sins of wasting taxpayer money. I’ll let you, my faithful blog readers, determine whether or not you think the parody was worth $60,000. (I’m of the opinion it was money spent as effectively as the money spent on preparer regulation.)

There’s also another parody using Gilligan’s Island as the theme. While a Congressional subcommittee found that the Star Trek parody was a waste of money, the Gilligan’s Island video had legitimate value as a training video. The Gilligan’s Island video has not been released.

As the automatic budget cuts of the sequester move on, the clear wasteful spending that this video shows make it difficult for President Obama and others to say that the sequester budget cuts will be harmful.

Posted in IRS | Tagged , , | 1 Comment

Annual Blog Hiatus

Posted on March 22, 2013 by Russ

With just about three weeks left before Tax Day, it’s time for our annual blog hiatus. We’ve written our annual top ten Bozo Tax Tips (they’ll start appearing on April 1st), but between now and April 15th our clients are paying us to get their work done. Of course, if anything really, really big in the world of tax happens we’ll interrupt the hiatus and post about it. Otherwise to you and our fellow tax bloggers, have a Happy Tax Day!

Posted in Taxable Talk | Comments Off on Annual Blog Hiatus

Beavers Convicted: Loans Require Payback

Posted on March 21, 2013 by Russ

I’m shocked, just shocked to find out that there’s corruption in Chicago.

Actually, I’m not. I’m just surprised to find out that gambling led to the downfall of a cog in the Democrats’ machine politics in the Windy City. Commissioner Bill Beavers was convicted today of corruptly impeding the IRS and three counts of filing false tax returns. Beavers used his campaign warchest as a personal piggy bank to fund gambling trips to the Horseshoe Casino in Hammond, Indiana.

Beavers and his attorneys alleged that the money he took from the campaign funds were “loans.” There’s one thing about loans that I emphasize to my clients: They require documentation. As Assistant US Attorney Matt Getter said, “He put back [only] what he needed to put back to cover his tracks.” Acting US Attorney was more succinct:

The message that was sent here was that Bill Beavers took a lot of money people gave him to run his campaigns and he stuck it in his pocket, and a lot of it, he gambled…For that, at least, he should have paid his taxes, and he didn’t.

One of Mr. Beavers’ statements is interesting: “There’s no law against what I did…There’s no law against gambling with campaign funds.” I have no idea of the state of Illinois’ campaign finance laws; however, I do know something about the Internal Revenue Code. If you take money from a campaign fund and use it personally, it is almost certainly income to you. And that income is clearly taxable. Further, not reporting all your income on your tax return can be a crime. In Mr. Beavers’ case, it was a crime.

Mr. Beavers may continue to proclaim his innocence, calling the judge “unfair.” From my point of view, it looks like the government did a pretty good job of proving its case.

No sentencing date has been announced.

News Reports: Chicago Tribune, Chicago Sun-Times

Posted in Illinois, Tax Evasion | Tagged | 1 Comment

When a W-2G (or Other Information Return) Is Wrong

Posted on March 20, 2013 by Russ

Let’s say you’re self-employed, and you get a 1099-MISC from a customer. He notes he paid you $1,200. However, he really paid you $900. What do you do?

First, you contact the customer and attempt for him to correct the error. Hopefully, you can show him a copy of your invoice(s) or other documentation, and he or she will issue a corrected 1099-MISC.

But what if he refuses? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $300. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)

Earlier this week I was faced with a different situation. My client, an amateur gambler from Indiana, entered a poker tournament in Iowa. The tournament had a $300 buy-in, and my client cashed for $2,300. Under federal law, no W-2G would be issued because the amount of his win, $2,000, is less than the threshold for issuing a W-2G in a poker tournament ($5,000). However, under Iowa law withholding on nonresident’s winnings begin at gross winnings of $1,200 (at a rate of 5%). My client received a W-2G for $2,300, not $2,000. What should be done? (My client has excellent records, including the tournament buy-in receipt.)

The amount of the win is $2,000, not $2,300. Indiana does not allow gambling losses to be deducted on their state income tax returns, so this is an issue for my client. (This can be an issue for individuals on federal returns, too. Gambling losses are an itemized deduction, so they don’t impact Adjusted Gross Income (AGI). Many tax items are tied to AGI, such as being able to contribute to a Roth IRA.) However, if I enter $2,000 as the amount won for that W-2G, the IRS’s automated underreporting unit will flag the return.

The solution is to enter the W-2G as it was received, and then subtract out the $300 buy-in just below this. I included an explanation: “Buy-in for W-2G winnings.” Should the IRS, Iowa, or Indiana flag the return, we can respond with a perfect paper trail showing that what we did is to put the income my client really earned on the tax return. Given that this is a fundamental principle of US taxation, all should be well.

The same process can be used for other information returns that are erroneous: Enter the “wrong” numbers, and modify them with an explanation. Do realize that there is a chance that the AUR unit may ask for proof. This is yet another reason why the solution to many tax issues is to document, document, document.

Posted in Gambling, Indiana, Iowa | Tagged , , | 7 Comments

Saying You’ve Never Paid Taxes in your Life on National TV After Earning Lots of Money Isn’t Brilliant

Posted on March 17, 2013 by Russ

An acquaintance of mine is a mixed martial arts (MMA) fighter. I’ve known him for many years; he’s smart, driven, and is definitely not the individual who I’m writing about. He’s smart enough to know that he has to pay his taxes. Unfortunately, it appears some MMA fighters need a lesson in basic tax law.

Nick Diaz is an MMA fighter; last night he lost go George St-Pierre in a championship bout. In the post-fight news conference, Diaz said the following:

I can’t be jumping teams. I just have to invest a little bit more, now that I have a little bit more money…You know what? I’ve never paid taxes in my life. I’m probably going to go to jail.

I’m certain that someone at the IRS will be checking to see if Diaz has filed tax returns. It appears that Diaz is a resident of Stockton, California; the Franchise Tax Board will also be checking their records. Diaz has fought in Hawaii, Missouri, and New Jersey, too, so three more state tax agencies will likely be looking for money.

The president of the Ultimate Fighting Championship, Dana White, made remarks that I hope Diaz and/or his agent took to heart:

What’s sad is, he better go pay his taxes…He came out publicly tonight and said he’s never paid taxes in his life? Holy s—. That’s sad. You wanna talk about sad? That’s sad. Somebody better handle that with this check and make sure that kid doesn’t end up with nothing. There’s a guy who’s Nate and Nick’s lawyer and seems like a decent guy looking out for them. I’ll probably give this guy a call and tell him, ‘Nick said he’s never paid taxes in his life, and you probably want to start working on that f—ing Sunday morning, not Monday morning.’

Posted in Tax Evasion | Tagged , | 1 Comment

If You Want a World Series of Poker Bracelet…

Posted on March 12, 2013 by Russ

…You can get one at auction in Sacramento on April 4th. Jerry Yang, the winner of the Main Event of the 2007 World Series of Poker, is in tax trouble with both the IRS and California’s Franchise Tax Board. Back when Mr. Yang won the Main Event (and $8,250,000), here’s what I wrote about his tax burden:

Mr. Yang, hailing from California, had $2,062,500 withheld to the IRS right off the top of his prize. Given the marginal tax rate he will likely face, he will probably owe another $825,000 in federal taxes (a total of $2,887,500 to the IRS). He will also California tax, so the Franchise Tax Board figures to rake in $849,750 of the win. Mr. Yang’s actual win is probably $4,512,750 or so. The Franchise Tax Board is especially grateful. This is the second year in a row that a Californian has won, and given California’s budget issues, any and all revenues will be quickly spent.

The notice of encumbrance notes multiple liens, including a $571,894.54 lien by the IRS. (Though it is listed twice, there’s likely one amount owed to the IRS; the lien is listed twice because there are two separate properties in different counties under the lien.)

One of the things I tell my gambling clients is to put aside one-third of what you make for taxes (at minimum). Given that Mr. Yang had money withheld for taxes, its somewhat surprising that he has fallen into tax trouble. Apparently, much of his winnings was not put aside for federal taxes as it should have been. I remember reading about him opening a restaurant in Merced, California (in the Central Valley). The article references him having paid his taxes and that he could retire on the interest he earned. Apparently, he didn’t keep enough money to pay the taxes he owed.

If you suddenly come into a lot of money–you win a lottery or a large gambling tournament–get professional advice on how much money you must put aside for taxes. You may not like the answer–tax rates are higher now than in 2007–but you should get a good idea of what you will owe. If I were to win a World Series of Poker bracelet, I wouldn’t want that memorabilia to be anywhere but in my possession.

Posted in Gambling, IRS | Tagged | Comments Off on If You Want a World Series of Poker Bracelet…