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.

Posted in Tax Fraud | Tagged , , , | 2 Comments

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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IRS Street Addresses (Updated)

Posted on January 29, 2012 by Russ

Most taxpayers use the Postal Service to send their returns to the IRS. However, you can use Federal Express or UPS. The problem is the IRS hides the street addresses of their service centers on their website if you need those to use a private delivery service. (They’re listed in the back of Publication 1546.) As a public service, here are the street addresses of the Service Centers. Note that since the last filing season the Philadelphia Service Center has moved.

Andover Service Center
310 Lowell St
Andover, MA 01810
[978-474-9701]

Atlanta Service Center
4800 Buford Hwy
Chamblee, GA 30341
[770-936-4500]

Austin Service Center
3651 S IH 35
Austin, TX 78741
[512-460-0176]

Brookhaven Service Center
1040 Waverly Ave
Holtsville, NY 11742
[631-654-6583]

Cincinnati Service Center
201 W. Rivercenter Blvd
Covington, KY 41011-1424
[859-292-5185]

Fresno Service Center
5485 E Butler Ave
Fresno, CA 93727
[559-454-6334]

Kansas City Service Center
333 W Pershing Rd
Kansas City, MO 64108
[816-823-2076]

Memphis Service Center
5333 Getwell Rd
Memphis, TN 38118-7733
[901-546-4115]

Ogden Service Center
1973 N Rulon White Blvd
Ogden, UT 84404
[801-620-4249]

Philadelphia Service Center
2970 Market St
Philadelphia, PA 19104
[215-516-5994]

California Franchise Tax Board
9645 Butterfield Way
Sacramento, CA 95827

It’s very important to note that these addresses should be used only for private delivery services. Regular mail sent to these street addresses may be rejected as sent to a non-deliverable address and returned to the sender! Mail sent to a service center should be sent to the “normal” address of the service center; for example, here is where taxpayers filing their own Form 1040 returns should mail the returns to (look at page 189 of this pdf).

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Tax Foundation Releases 2012 Business Tax Climate Index; California, New York and New Jersey at the Bottom

Posted on January 25, 2012 by Russ

The Tax Foundation released their 2012 State Business Tax Climate Index today. And it was no surprise to see the bottom three composed of California, New York and New Jersey. These states have high taxes overall (California adds high regulatory costs, too; however, the business climate index ignores this). Meanwhile, Wyoming, South Dakota, and Nevada are the top three states. No surprise: These states don’t have high taxes (they don’t have personal or corporate income taxes at all).

Here are the top ten:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah

And the bottom 10:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey

For those who wonder if business pay attention to taxes, I can speak from experience: They do.

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Illinois: Proving Laffer Correct

Posted on January 22, 2012 by Russ

Arthur Laffer popularized the Laffer curve. The father of Supply Side Economics noted that in many cases, increasing the tax rate decreases the amount of tax revenues. It appears that Illinois is proving Dr. Laffer correct.

Moody’s just downgraded Illinois’ bond rating to A2 from A1. Illinois now has the worst rating of all 50 states–even worse than California. But wait: Didn’t Illinois pass a massive tax increase a year ago? Wasn’t that supposed to help Illinois’ financial condition? Here’s how the Wall Street Journal put it:

So much for that. In its downgrade statement, Moody’s panned Illinois lawmakers for “a legislative session in which the state took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays.” An analysis by Bloomberg finds that the assets in the pension fund will only cover “45% of projected liabilities, the least of any state.” And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

There is some good news for Illinois. Governor Jerry Brown and other California Democrats are proposing a variety of tax increases for the Bronze Golden State (to be voted on in this fall’s election). It may well be that California will pass Illinois to the #1 spot.

Hat Tip: HotAir

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Heaven Can’t Wait

Posted on January 22, 2012 by Russ

My understanding is that we can’t take it with you: Our worldly possessions won’t be with us in the hereafter. One Florida man believes he is already a resident there, and is thus exempt from trivialities such as the income tax. The results are what you might expect.

That said, if you read the terse statement from the Department of Justice you wouldn’t know of the underlying issue. The statement does note that Russell Gentile of Melbourne is accused of:

[C]orruptly tried to obstruct and impede the IRS in performing its duties by sending a series of letters claiming that he was not a taxpayer, that he was an American National but not residing in Washington, D.C., that he was not subject to the tax laws, and by threatening individual IRS officers with lawsuits against them.

Mr. Gentile is correct that he is an American but not residing in Washington, DC. What the press release doesn’t tell you is where he thinks he resides: The Kingdom of Heaven.

Of course, I could add that Mr. Gentile’s threats are an especially good way to be sure that his case is referred to Criminal Investigations. I could also add that the idea that only citizens of Washington, DC are subject to the US income tax is as useful as a $3 bill.

Mr. Gentile is looking at another hearing in February. If he continues down the road of allegedly threatening federal officials and not paying income tax, he will likely soon be residing at ClubFed.

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Browns’ Convictions Upheld

Posted on January 20, 2012 by Russ

Tax protesters Edward and Elaine Brown were convicted in 2007 of tax evasion. They were sentenced to spend some time at ClubFed. Instead of reporting to prison, they decided to barricade themselves in their New Hampshire home. After a stand-off that ran many weeks, US Marshals arrested the Browns. They were tried and convicted on numerous weapons counts and received 37 and 35 additional years at ClubFed, respectively–effectively a life sentence (the Browns will be over 100 when their sentences are up). They appealed their sentences; yesterday, the 1st Circuit Court of Appeals upheld their sentences in a 48-page ruling.

I could go into a long discussion of their meritless claims, but the concluding paragraph of the opinion is enough: “After thorough consideration, we have found no merit in any of Edward’s or Elaine’s arguments. Their convictions are affirmed.”

The moral is simple: There is an income tax, and you must pay it. And armed resistance to a short term at ClubFed leads to a far, far longer term.

Posted in Tax Evasion | 1 Comment

It Pays to Read the Lease

Posted on January 19, 2012 by Russ

Today the Tax Court looked at whether a rental was passive or active. But there was a major difference from most such cases: The taxpayer claimed his lease was passive while the IRS thought it was not passive.

Most of the time, rental income is passive. There are some exceptions: The most common is a Realtor (who meets the time requirements). The petitioner in today’s case was a doctor, and in almost all cases the rental would be passive. However, the lessee was his business (a professional corporation), so the self-renting rules apply (unless there’s an exception).

The petitioner claimed he had a legal, binding contract (a lease) entered into in 1980. If there is a binding contract entered into on or before February 19, 1988, the exception applies. There was a problem, though. The lease called for payments that would increase by 5% per year (the lease had never been modified). The payments made as “rental expense” didn’t match what was required under the lease. That meant the lease was not a binding contract, and the taxpayer had non-passive income.

For the taxpayer, this could have been resolved had he (or his CPA) noted the terms of the lease and made payments based on the lease. Unfortunately for them, they didn’t read it.

Case: Samarasinghe v. Commissioner (T.C. Memo 2012-23)

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A Good Way to Get to ClubFed: Finance Porn Distribution and Don’t Report the Income

Posted on January 18, 2012 by Russ

If you want to paint a recipe for heading to ClubFed, Carolynne Tilga of Santa Fe, New Mexico couldn’t do it any better. First, begin by investing in a business that’s likely illegal: Distributing pornography over the Internet. Yes, the website she invested in was in Canada but the customers were in the United States.

Next, add not paying taxes on the income. As I’ve said numerous times, illegal income is just as taxable as legal income. Then add some conspicuous consumption: a $1.85 million house in Kilauea, a $1.38 million home in Las Campanas, and other property in Taos, Aspen, and Telluride.

She pleaded guilty to conspiracy, six counts of tax evasion, and filing false tax returns. She received eight months at ClubFed; her husband, who had pleaded guilty to one count of conspiracy, got probation. They must make restitution of $1.7 million to the IRS. If you’re looking for a nice house in Kilauea, I think I know of one that may soon be on the market.

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