Last week there was an interesting case out of Iowa regarding domicile. A man was working in South Dakota but his family home was in Iowa. He decided to file as a South Dakota resident. Could it be that South Dakota’s 0% state income tax rate was more appealing than Iowa’s 8.9% rate? Perhaps I’m too cynical (not).
In any case, the taxpayer lost because he did many of the things that are necessary wrong. For those wondering about domicile cases, Joe Kristan’s report on the case is must reading.
Over two years ago the Patient Protection Act–aka Obamacare–passed Congress. At the time, no one knew what was in the law. Famously, then Speaker of the House Nancy Pelosi (D-CA) said that, “We have to pass the law to know what’s in the law.” Really?
Well, back in March 2010 I thought that the law would impact amateur gamblers. I based this on the title of the provision and how Congress wrote and the IRS interpreted the Kiddie Tax. The Kiddie Tax is also a tax on unearned income. The exact title of the law is the Unearned Income Medicare Contribution Tax. Since the Kiddie Tax is theoretically a tax on investment income but it applies to amateur gamblers, I felt that the IRS would interpret this law similarly.
However, that does not appear to be the case. Section 1402 of the law notes that it is on 3.8% of the lesser of:
‘‘(A) net investment income for such taxable year, or
‘‘(B) the excess (if any) of—
‘‘(i) the modified adjusted gross income for such taxable year, over
‘‘(ii) the threshold amount.
So what is Net Investment Income? Section 1411(c) has the definition:
‘‘(c) NET INVESTMENT INCOME.—For purposes of this chapter—
‘‘(1) IN GENERAL.—The term ‘net investment income’ means the excess (if any) of—
‘‘(A) the sum of—
‘‘(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade
or business not described in paragraph (2)….
Based on how the law is written it will not apply to “Other Income” such as gambling income, sweepstakes, and contests.
Thus, my initial fear back in 2010 of how the law would be interpreted should be wrong.
I should note that the IRS has yet to issue most of the regulations on Obamacare, so they could interpret this provision differently. However, I think that would be very unlikely. Additionally, it is very possible that some tax software will make errors in this calculation. The Kiddie Tax, a tax on unearned income, uses a different basis than this tax. A lazy software writer might not notice the difference so this is definitely something I’ll be checking when we get to 2013 returns. (This new tax goes into effect with 2013 tax returns filed in 2014.)
The IRS is allowed to impose a penalty on the filing of a frivolous tax return (Internal Revenue Code Section 6702(a)). Today, the Tax Court looked at a taxpayer who filed a normal tax return, but then filed an amended return where she claimed she wasn’t a “person.”
Well, we’re all people (I hope), and the petitioner, one Marla Crites, also said that wages aren’t taxable (helpful hint: they are taxable). When the IRS imposed a $5,000 penalty on the frivolous amended return, she asked for a Collection Due Process Hearing. Ms. Crites filed four amended returns (not one), and they all appear to have said that she wasn’t liable for tax. At the CDP, the Appeals officer upheld the IRS. She then went to Tax Court.
I’m not going to go over the arguments that wages aren’t taxable, or that she’s not a person; neither argument is worth any time. Nor is her argument that an amended return isn’t a return under IRC Section 6702; the Tax Court (and other courts) have held that it is.
The interesting issue is whether the statute of limitations time bars the IRS from imposing a frivolous return penalty on an amended return that the IRS does not process. The Tax Court notes,
As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not just frivolous “returns”–and even here Congress was careful to penalize not just returns but “what purports to be a return”–but frivolous “submissions”. It would be odd if penalties keyed to “submissions” had somehow to be tied to the limitations period for tax that is supposed to be shown on a “return”…
But let us assume–and here we are expressly assuming without deciding–that Crites is right that the filing date of her “return” is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it.
The IRS then asked the Court to impose a penalty for filing a frivolous case at the Tax Court. I hope Ms. Crites looks carefully at the last line of the decision:
…[T]his is Crites’s first trip to Tax Court, and by submitting the case under Rule 122, she did save us the burden of trial. And one of her arguments, the statute-of-limitations issue as applied to frivolous amended returns, was one we had not yet addressed and was not itself obviously frivolous. We will therefore exercise our discretion not to sanction her under section 6673.
This time.
John McCauley, Jr. is the Deputy Speaker of the Rhode Island House. He’s not running for reelection. Given that he will be pleading guilty to one count of tax fraud and one count of conspiracy, that’s likely a good decision.
Mr. McCauley and his partner in an insurance adjustor business, William L’Europa, were accused of underreporting $1.8 million in their business. That equates to a tax loss of over $500,000 to the IRS. Mr. L’Europa will also be pleading guilty to the same charges.
Mr. McCauley is the sixth Rhode Island legislator to face criminal charges during 2012. It hasn’t been a good year in Providence.
Last year I reported on the case of the misplaced tax refund. An Orange County, California women put in the wrong account number on her tax return. She used an account that she had closed years ago. However, Citibank reissued the account to one Stephen Reginald McDow. The woman wasn’t expecting a refund of $110. Rather, she was expecting $110,000. When the refund didn’t show up, she started investigating.
Mr. McDow had spent roughly 60% of the refund, and he told the unlucky woman what happened. When restitution never happened, she reported the theft to the local police. The Orange County District Attorney was going to prosecute the case. However, Mr. McDow pleaded guilty last week.
He got 60 days at the Orange County jail, 18 months of probation, and had to make restitution (which he has done).
As I mentioned when I first reported on this story, you can’t spend a tax refund that’s not yours. This has happened on a couple of occasions to my clients. I had one client receive a $1,500 check and another had over $10,000 incorrectly direct deposited into his account. Both returned the money and there were no other issues. If you instead elect to spend the money, you’re spending someone else’s money, be it the taxpayer who was expecting the refund or the tax agency that incorrectly sent it. That”s theft, and the local jail is likely no more comfortable than ClubFed.
Indeed, had Mr. McDow repaid this money when first contacted by the victim, all he’d be out is the money he should never have received. Instead, he gets 20 months to think this over.
The old cliche is, “A penny saved, a penny earned.” In real life, though, sometimes when you save some pennies you lose lots and lots of dollars. So was the case for two taxpayers who filed a case in Tax Court.
The Tax Court has very strict deadlines. You typically have 90 days from the date on a Notice of Deficiency to file a Tax Court case. Marcius and Andrea Scaggs wanted to file a Tax Court case. They were apparently procrastinators, so they waited to the last allowed day to file the case. They also didn’t trudge to the Post Office; had they done so and mailed their petition using certified mail, return receipt requested, they would have been fine.
Instead, they went to FedEx. There’s nothing wrong with using FedEx, but you need to use the right service. They used “Express Saver Third Business Day.” That is not an approved delivery method so the petition was considered filed on the date of receipt, not the date it was sent. So their case was thrown out. Had they spent a few more dollars and used FedEx Priority Overnight, FedEx Standard Overnight, or even FedEx Two-Day, they would have been fine.
As an aside, many post offices now have Automated Postal Centers. These will time stamp a letter as of the current date and time, so you can timely file on the last day after the post office has closed! I’ve had a couple of clients use this for filing tax returns at the very last minute, and they were successful.
For the Scaggses, they must now pay the tax and file a lawsuit in either Federal District Court or the Federal Court of Claims. And that’s far more expensive.
Joe Kristan and the TaxProf have more.
The issue of identity theft is growing. The IRS is faced with twin challenges on this front: The IRS needs to quickly process tax refunds but it also needs to combat this growing issue. The IRS’s current policy is to process the first return it sees with a given social security number and hold up processing on the second return. The major issue with this is that the second return is usually the correct return.
Consider hypothetical taxpayers, George & Jane Jetson. Mr. & Mrs. Jetson filed their tax return last year with, say, a Las Vegas address. Come January 17th, enterprising crooks in Tampa, Florida who have somehow stolen the Jetsons’ identity file a return claiming a refund. (I chose Tampa because it’s a hotbed of tax-related identity theft.) The IRS mails a refund check to the crooks (or direct deposits it). Weeks later, the Jetsons file their real return and the problem is uncovered.
I have a possible solution to this issue. The IRS should check the address of every filed return versus the address on file for the taxpayer. If the Jetsons’ return is filed with the same address as used last year, it’s likely the return is legitimate. If not, then the IRS should put a hold on processing the return, and send a letter to the taxpayers at the address used in the prior year (with forwarding requested). The letter would note that the IRS received a return from the taxpayers, but the address does not match the address on file with the IRS. The letter would further state that processing of the tax return is being held awaiting confirmation of the address change. (The post office does this with all submitted change of address forms; there’s no reason why the IRS can’t do this, too.)
If the filed return is valid–the taxpayers moved but did not inform the IRS–the taxpayers would be given a number to call where they could input some information from the prior return and the processing of the return would resume. If the filed return is not valid, the taxpayers would have a different number to call and the IRS would be able to quickly move after the probable crooks.
There is a second part to this program that would be necessary. The IRS would need to send confirming notices to individuals who send in Change of Address forms to the IRS. The reason for this is if this program is implemented, identity thieves would just submit Form 8822 and change the address. The confirming notice would ask the taxpayer to dial a specific phone number, input a code that’s on the letter, and then the change of address would be processed. The confirming notice would be sent to the address on file, of course.
I can see a few kinks with this proposal. For example, people who have been out of the system for some time would have issues. A second issue will be where an identity thief uses the correct address but has chosen direct deposit. Still, my proposal should stop a large percentage of tax-related identity theft. It would have the side benefit of forcing individuals and businesses to send change of address forms into the IRS. There would be some delays to taxpayers who have moved and have not informed the IRS, but that’s the only major drawback that I see in this system.
Overall, my proposal seems to me to be a solution that should be relatively easy to program into the IRS’s computers. And unless I’m missing something, it should stop a lot of tax-related identity theft.
Seven citizens from Zimbabwe opened Express Refund Center in Cincinnati in 2007. The business thrived, but not for those unfortunate souls who used the service. It seems that the operators allegedly decided that stealing their customers’ identities was a lot more lucrative than preparing tax returns. The seven are charged with various tax fraud and conspiracy charges.
Of the seven individuals charged in the case, one is in custody and one is expected to surrender to federal authorities next week. The five other individuals charged appear to have fled the country to Zimbabwe. The US does have an extradition treaty with Zimbabwe, so its possible the five will end up facing charges. The money that was lost in the case is likely lost for good, though.
As quoted in this story, Assistant US Attorney Tim Managan noted, “In later years, they didn’t operate a tax preparation service. They simply operated in wholesale theft.” There’s the issue of how do we stop identity theft. On that, I have a modest proposal (which will be in my next post).
After my last post on the Partouche Poker Tour electing to ignore a published guarantee, the people in charge either decided that the horrible publicity was bad or their attorneys let them know that French law on false advertising might lead to a term at ClubFrance. No matter, I’m happy to pass on the news that the 5 million Euro guarantee will be honored.
There’s a major poker tournament going on in France: The Partouche Poker Tournament Main Event. It had a €5 million guaranteed prize pool. Based on the actual number of entrants, the prize pool ended up being around €4.3 million. Normally when a prize pool is guaranteed, the host must cover any shortfall in the guarantee. Reports out of France are that’s not happening. The €700,000 shortfall is equivalent to $881,961 at today’s exchange rate.
In the United States, host casinos almost always make good on their word. Casinos are heavily regulated, and gaming commissions look askance when a casino starts lying. For example, the Commerce Casino in Los Angeles is running a tournament series right now. The second event of that series had a $250,000 guarantee. When the number of entrants caused the prize pool to not meet the guarantee, Commerce Casino added the $46,000 so that the guarantee was met.
Sometimes guarantees have to be removed. A couple of weeks ago a tournament series in Biloxi, Mississippi was running when Hurricane Isaac came calling. Clearly, people who were planning on traveling to Biloxi had to make other plans so the guarantees were dropped. An event like that is usually covered under a force majeure clause (basically, an act of God). Most casinos cover themselves by inserting a phrase in their advertising, “Management reserves the right to alter or cancel the tournament at any time.” (In the end, the Biloxi tournaments were cancelled because of Isaac.)
As for the situation in France, as of last report none of that is happening. The advertising clearly states a €5 million guarantee and there is no disclaimer. The prize pool has been announced at €4.3 million. Now the question becomes legal: Do the players who appear to be the victims of fraud have any recourse?
Well, the tournament is in France and presumably subject to French law. I’m not an attorney, and know just enough about US gambling law to be dangerous (and know less on French law). So can a lawsuit be filed? Maybe, but it likely has to go through the administrative side of the French regulatory agency, Française des Jeux first. (Unfortunately, French is not one of my languages so someone else will have to tell me about the regulatory rules on casinos in France. My understanding is that under French law a casino might be limited to adding €250,000 to the prize pool. Well, if that’s the maximum allowed, Partouche should do that and let the players know why they can’t do any more. It’s always the cover-up that gets you. But I digress….)
There is one other course of action player can take, and that’s already happening. Name players are rightfully annoyed with a company advertising a guarantee and then reneging on it for no reason. There are tweets and a thread on the poker website 2+2 complaining about this. While Partouche may think that all publicity is good publicity, trust me when I say that the bad words circulating in the poker community on Partouche will definitely have a future impact unless they restore the €700,000 to the prize pool.
UPDATE: This morning the head of the Partouche Poker Tour, Patrick Partouche, announced that this will be the last tournament ever in the series. Additionally, Mr. Partouche apparently denied that the tournament was ever guaranteed. (Here’s a helpful hint for Mr. Partouche–actually two helpful hints: First, if you deny something, make sure no one can prove you wrong within one minute. Second, it’s always the cover-up that gets you.) I don’t know what the laws on fraud are in France, but I suspect that Mr. Partouche and his legal staff may want to quickly investigate them.
For poker players, this does bring up some issues. Be careful regarding operators who are not well known or are in jurisdictions that aren’t well regulated. A tournament in the United States will rarely have any problems; American casinos are highly regulated. If someone duplicated the events of the Partouche debacle in the US, they’d likely be facing fraud charges. If you are playing online poker, make sure the company you play with is reputable.
Does the mean that all poker tournaments in France should be avoided? It certainly puts a black light on French poker, but the answer is no. For all of the issues that I have with Caesar’s, there is no way they would ever do anything like this with the WSOP-Europe (which will be in Cannes in October). Reputable operators–thankfully, most poker tournaments are run by reputable operators–would never do this.
UPDATE-2: The Partouche Poker Tour announced on Friday that the guarantee will be honored.
