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…

If You’re a Sole Proprietor, Get an EIN…Now!

Posted on March 10, 2013 by Russ

Most business entities have an Employer Identification Number (EIN) that they use. An EIN is for a business what a social security number is for an individual: It’s their taxpayer identification number. Some sole proprietors must have EINs (if they have employees, have withholding, or certain other situations). The IRS’s official position is that most sole proprietors do not need an EIN.

I beg to differ.

The problem today is identity theft. It’s rampant, and sometimes involves actual theft of your personal information from files. There’s a story out of Miami of a police officer stealing identities; there have been cases where hospital employees and others steal social security numbers. What’s to stop an employee of a business from stealing social security numbers? Nothing but most individuals’ inherent honesty. Unfortunately, I don’t think that’s enough today.

If you are a sole proprietor and you will have to complete a Form W-9 (giving your social security number to someone) or you issue Form 1099s, you should be using an EIN instead of your social security number. There is no cost to obtain an EIN (except about ten minutes of time). You can do so online at the IRS’s website.

Posted in IRS | Tagged | 1 Comment

When the IRS Changes the Rules Midstream in a Legal Matter…

Posted on March 7, 2013 by Russ

Janet Novack has an interesting post in Forbes. It revolves around the Offshore Voluntary Disclosure Program.

The idea behind the OVDP is that a taxpayer who the IRS doesn’t know about who has (for example) secreted away funds in a foreign bank account (or accounts) overseas comes clean. He files amended tax returns, FBARs, pays a fine but does not face criminal prosecution. As Ms. Novack notes, the way it normally works is that a tax attorney will send a name and social security number to the IRS; the IRS will tell the attorney to go ahead or not to. The client (through the attorney) sends the IRS a detailed questionnaire; the IRS then sends a formal letter approving entry into the program.

All should go smoothly then, right?

Well, apparently not so for certain individuals who used Bank Leumi. The IRS has apparently sent rescission letters to some individuals who used Bank Leumi for hiding their funds. A tax attorney who I’ve met and highly respect, Robert McKenzie, is quoted in the piece, “I’m upset that I gave advice, relying on the government letter, only to find I couldn’t rely on my government to do it properly.’’

I suspect there will be significant legal ramifications from this. Consider if you are one of those individuals, and you are subsequently a subject of a criminal prosecution. I’m certain an argument will be made that the IRS cannot rescind the acceptance; that constitutes some form of “double jeopardy.” I’m not an attorney, so once again I’m sailing into waters I should avoid (well, I’m definitely not giving legal advice here). At minimum, how many tax attorneys are going to trust the IRS the next time?

When I see Mr. McKenzie later this year (he’s usually an instructor at a continuing education seminar I take), I’ll ask him about this. I suspect the words I hear will be the ones he uses to excoriate White Sox fans.

Posted in IRS | Tagged , | 1 Comment

Who Knew? Iowa Has a $50 Loss Limit on Fantasy Sports

Posted on March 7, 2013 by Russ

As I end a very long work day, I notice that Jason Dinesen sent out a tweet that an Iowa legislator is attempting to increase the daily fantasy sports betting, er, skill, well gambling (in Iowa) limit from $50 to $500. In Iowa, fantasy sports are currently considered a form of gambling. As many states begin to consider online gambling, it will be interesting to see what kind of patchwork of rules we end up with.

Posted in Gambling, Iowa | Tagged | Comments Off on Who Knew? Iowa Has a $50 Loss Limit on Fantasy Sports

Did the IRS Write Law?

Posted on March 5, 2013 by Russ

I received a special e-news for tax professionals. It states the following:

Federal budget sequestration has resulted in required cuts to certain credits and awards, effective March 1. These required cuts include a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers, a reduction in award payments to whistleblowers, and a reduction to refundable credits applicable to certain qualified bonds.

I have a serious questions for anyone who knows: Is this legal?

I am unaware of anything in the Tax Code that allows the IRS to change the rate of tax credits. I may be misreading the law (I am not an attorney), but my understanding is that, for example, whistleblower awards are set by statute. If I’m correct, the IRS cannot change the rate of credits.

Unfortunately, this is the height of tax season so my time to dig through the minutia of the Code is nonexistent. If anyone can cite chapter and verse (or I should say, Code Section) that allows the IRS to do this, please let me know.

Here’s what the IRS is using as justification for the whistleblower change:

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic reductions will take place as of March 1, 2013. These required reductions include a reduction to awards paid under Internal Revenue Code section 7623. As a result, the sequestration reduction is applied to award payments to whistleblowers issued pursuant to Internal Revenue Code section 7623 on or after March 1, 2013. The sequestration reduction rate will be applied until the end of the fiscal year (September 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change. As determined by the Department in conjunction with the Office of Management and Budget, whistleblower payments subject to the reduction will be reduced by 8.7%. The reduction required by the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage under section 7623. The Whistleblower Office will then compute the award that would have been paid, and then apply the reduction. Whistleblowers will be advised of the reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.

The other changes have similar verbiage. I suspect the IRS has erred.

Posted in IRS | 1 Comment

IRS Opens for All

Posted on March 4, 2013 by Russ

The IRS announced this morning that they are now accepting all forms for all returns. All of those delayed forms (including passive activities and a host of tax credit forms) are now being supported through both electronic filing and paper filing. I received this news from my software provider; I will update this post later with a link to the IRS announcement (when it is available).

UPDATE: Link to IRS Announcement

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