Funding the Payroll Tax Cut Extension: Online Poker?

Posted on February 12, 2012 by Russ

Late last year, Congress extended the 2% cut in the payroll (FICA) tax for just two months. That extension expires in 18 days. Congress and the President appear to want it to be extended, but there’s a catch. The extension needs to be “revenue-neutral.” The two-month extension was linked to an increase in mortgage fees. Given the current housing crisis, I can’t imagine more mortgage fee increases. There’s no chance that a pure tax increase (or a millionaire’s tax increase, for that matter) can pass the Republican-controlled House. Will online poker come to the rescue?

Various sources in the gaming industry have reported over the last week that Senate Majority Leader Harry Reid (D-NV) and Senate Minority Whip Jon Kyl (R-AZ) have agreed to this. Senator Kyl has, in the past, been a fierce opponent of all things gambling-related, so this would be quite a turnaround for him. Senator Kyl admitted late last year that his stand on online poker had “softened.”

That said, it appears that the ten-month additional extension will pass Congress, and some source of revenue must be found in order to balance the books. Millions of Americans like poker, and if there were US-based sites a lot of tax revenues would be raised both from the sites themselves and from the players. This looks like a win-win to me. Still, until the measure is signed into law anything can happen including nothing at all.

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California Tax Revenues $528 Million Under Budget in January

Posted on February 11, 2012 by Russ

In what must be considered to be a complete non-shock to all but officials of the Brown Administration, California’s tax revenues came in $528 million under budget. According to Bloomberg, most of this is from a $525 billion shortfall in income taxes.

While California’s Department of Finance says it’s “too soon” to tell whether April income tax collections will make up for January, I can give them the answer now: They won’t be. When individuals lower their January estimated payments, it’s almost always because they know they made less during the previous year and don’t owe the money. I expect California collections in April to also be below forecast.

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FATCA Regulations Issued

Posted on February 11, 2012 by Russ

Earlier this week the IRS issued proposed regulations to implement the Foreign Account Tax Compliance Act (FATCA). The press release from the Department of the Treasury states,

After many months of intensive discussions with foreign governments, the Treasury Department today also jointly issued a statement with France, Germany, Italy, Spain and the United Kingdom expressing mutual intent to pursue a government-to-government framework for implementing FATCA – an important step toward addressing legal impediments to financial institutions’ ability to comply with the regulations.

The statement does not contemplate an exemption from FATCA for any jurisdiction, but instead offers a framework for information sharing pursuant to existing bilateral income tax treaties and allows FFIs to report the necessary information to their respective governments rather than to the IRS. [emphasis added]

Given what some countries have looked at as the US sticking its fingers into local law, it will be interesting to see how this plays out. A good test will be Canada, as our neighbor to the north is not happy with how previous discussions on FATCA have progressed.

Other coverage:
TaxProf Blog
Washington Post

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Burning Down the House

Posted on February 11, 2012 by Russ

Let’s say you own a fixer-upper of a home. Let’s suppose you find that home in another part of town, so you decide to donate your home to the local fire department so they can burn it down. You get a tax write-off, and the fire department can practice on something that’s an eyesore anyway. Everyone wins, right?

Well, there’s a problem with this strategy from a tax standpoint: What’s the fair market value of a home that’s about to be burned down? About zero, right? Joe Kristan has more on a tax strategy that went up in flames.

Here’s some music that backs that up:

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Good Riddance: Reconciliation of Credit Card Deposits on Tax Returns Won’t Happen

Posted on February 9, 2012 by Russ

As I noted last week, the problem of entering 1099-K’s for recipients of those forms was deferred until 2012. It turns out that the IRS acquiesced to complaints from tax professional and other groups, including the Retail Industry Leaders Association (RILA). In a letter to the RILA, Steven Miller, Deputy Commissioner of the IRS stated,

This is to confirm what I stated in our recent meeting with your organization and other industry representatives. There will be no reconciliation [of Form 1099-K’s] required on the 2012 form, nor do we intend to require reconciliation in future years. Our intention is that the reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms. No other changes to these forms related to payment card reporting are contemplated.

So which recipients of Form 1099-K’s need to be concerned? Well, you do need to be reporting your credit card receipts on your tax returns. If you’re not, and you’re audited, you can be certain the IRS will look at the 1099-K’s and ask the obvious questions.

Overall, this is great news for everyone. The problems with reconciling accounting systems designed for multiple types of payments to tax forms would have given everyone involved gray hair. This is no longer a problem deferred: It’s one less needless complexity to deal with.

Hat Tip: RILA

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New York State Street Addresses

Posted on February 9, 2012 by Russ

Earlier, I published a list of IRS Service Center Addresses. New York State has just published its list of street addresses to be used for FedEx, UPS, and DHL. The New York list is by form, and has 15 different addresses! You can find the list on Publication 55.

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New FBAR Requirement that Applies to Everyone

Posted on February 3, 2012 by Russ

I’ll be transmitting my first few tax returns to the IRS this coming week. As I looked at Schedule B, I noticed a change in the questions at the bottom of Schedule B:

7a At any time during 2011, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions

Hmmm, that’s different. Let’s see what the instructions have to say:

Line 7a–Question 1. Check the “Yes” box if at any time during 2011 you had a financial interest in or signature authority over a financial account located in a foreign country. See the definitions that follow. Check the “Yes” box even if you are not required to file Form TD F 90-22.1.

So for the first time the IRS is demanding that if you had a foreign financial account and it had $1 in it, you must check the box. And since a tax return is signed under penalty of perjury, I will be asking you whether or not you had a foreign financial account in 2011.

Note that this is also a new reason someone may have to file a tax return. As noted on the instructions, this question must be completed if you had a foreign account during the year. Thus, some individuals who have no income but have small foreign financial accounts (valued at less than $10,000) will have to file a tax return for 2011.

As Joe Kristan and others have said, the IRS continues to aim its guns at the jaywalkers.

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A Problem Deferred: 1099-K’s

Posted on February 3, 2012 by Russ

This year sees the introduction of Form 1099-K. This form reports merchant and third-party payments you’ve received. We were supposed to note these on separate lines on our tax returns, but not any longer:

For tax year 2011 the IRS has deferred the requirement to separately report the amount of merchant card and third party network payments from Form 1099-K on your tax return. Instead, you should report all gross receipts of your trade or business as usual on the line indicated….

While I took this from a notice regarding Form 1040s, the same holds true for all tax returns. Everyone ignores the 1099-K’s…but the credit card and merchant service companies must continue to send them.

Last year I participated in a roundtable at my professional society regarding the 1099-K. The problems we foresaw were numerous; two of the most obvious were that accounting software normally tracks by product or type of product sold, and not by payment type and the issue of fiscal years (the 1099-K’s will all be on calendar years so the forms will be wrong for fiscal year clients). We found numerous other issues, and it appears the IRS realized that the 1099-K is not yet ready for prime time.

Still, it’s just a problem that’s been deferred until next year.

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Hiding a Golf Course and Millions

Posted on January 30, 2012 by Russ

It’s one thing to hide a few dollars. It’s quite another to hide a few million dollars. The IRS’s assault on UBS, the Swiss bank, has reaped some more indictments. This time, three individuals involved in venture capital are alleged to have hidden away millions of dollars and a golf course in Colorado through secret Swiss accounts.

Stephen M. Kerr and Michael Quiel were Phoenix businessmen; among their businesses were two venture capital firms. The goal of such firms is to invest in start-up companies, and hope to take a few “public” (on stock exchanges) and reap large rewards. If the Department of Justice is correct, Mr. Kerr and Mr. Quiel had an additional method of making money.

They are alleged to have partnered with a former San Diego attorney, Christopher Rusch, to have used UBS to hide money and control of corporations. From the Department of Justice press release:

Beginning in or before 2004, and continuing through at least December 2007, Kerr and Quiel obtained control of shares of stock of publicly traded domestic companies in a way that concealed their ownership of the stock. Kerr and Quiel then deposited the stock, or proceeds from the sale of the stock, to multiple undeclared bank accounts set up with the assistance of Rusch at UBS in Switzerland and at another Swiss bank. These accounts were all held in the names of nominee entities to further conceal Kerr’s and Quiel’s ownership. Kerr and Quiel also used the accounts to conceal income earned from the subsequent sale of this stock from the IRS. In 2007, the combined total net assets in Kerr’s accounts exceeded $5.6 million and Quiel’s accounts exceeded $2.6 million. Rusch maintained signature authority over the secret accounts and, with the assistance of a Swiss account manager and financial intermediary, facilitated transactions on behalf of Kerr and Quiel.

Mr. Rusch is also accused of having his own secret offshore accounts at UBS and a bank in Panama. It appears Mr. Rusch’s website is still active. The indictment was handed down in early December but was not released until the three were in custody (today). It probably wasn’t difficult for the DOJ to find Mr. Rusch; a quick Google search noted that he resided in Panama part-time as of 2010. I find it interesting to note that Mr. Rusch was a tax attorney.

In any case, the three are accused of conspiracy, FBAR violations, and filing false tax returns. All are looking at a lengthy stay at ClubFed if found guilty.

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Out of the Swamplands

Posted on January 29, 2012 by Russ

Over the years, I’ve referred to New Jersey as the swamplands. Their politics, corruption, and tax policies left a lot to be desired. But something unusual happened in 2010: Chris Christie, a Republican, was elected governor in the historically Democratic state. This past week Governor Christie decided he’d like to improve on the Tax Foundation’s ranking of New Jersey as the worst state in the country for taxes; he proposed a 10% across-the-board cut to the state’s income tax.

I do need to point out that even with a 10% cut New Jersey’s top income tax rate would be 8%. That’s quite high, but in comparison to the nearly 13% a New York City resident would pay it’s not that bad.

I have no idea if Governor Christie will be successful or not but the Wall Street Journal noted that his proposal has caused Democrats to propose lowering other taxes. Meanwhile, Governor Jerry Brown of California proposes higher taxes. If both Governors are succesful I suspect that next year California and New Jersey will swap places on the Tax Foundation’s rankings so that the Bronze Golden State will truly be tarnished.

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