Wendell Cox and Steve Malanga penned an op-ed in the Los Angeles Times that’s worth your perusal. They argue what I’ve been saying for some time: “Unless Sacramento moves to improve the business climate, California’s reputation as one of the country’s most toxic business environments will make it hard for the Golden State to regain its luster.”
There’s a lot more in the article, and it’s well worth your time.
I’ve written about Sharon Kukhahn before. Ms. Kukhahn thought that there was some magical way to decode your IRS file and magically make your taxes disappear! Ms. Kukhahn sold her packages to the public and pocketed $2,000 – $3,000 per sale. As P.T. Barnum said, “There’s one born every minute.”
Back in 2008, the Department of Justice obtained an injunction against her from selling her worthless decoding scheme. (There is no secret IRS file to decode that will make your taxes disappear.) One would think that Ms. Kukhahn would fade into the sunset.
Nope.
In April 2010 Ms. Kukhahn was arrested, charged with conspiracy and tax evasion. Not only did Ms. Kukhahn allegedly promote phony tax schemes, she also supposedly orchestrated a letter writing campaign to stop the IRS from collecting taxes.
Ms. Kukhahn was found guilty back in May. Ms. Kukhahn supposedly used the proceeds from her scheme to buy a yacht and other worldly goods; meanwhile, many of her clients are suffering under tax debts they’ll never be able to repay.
Sentencing is set for Wednesday.
Now, if you really want a decoder ring, here’s an offer from nearly 60 years ago that (at the time) would get you one. It wouldn’t have removed your taxes, but it was a decoder ring:
October is usually a good month for California collections (of taxes). After all, it’s the extension deadline and many residents send more money to Sacramento. This month, though, revenues were $810 million below budget; the deficit year to date is somewhere between $1.5 billion and $1.7 billion.
That deficit is just for four months. Projected for a full year, that’s a nearly $5 billion budget deficit.
As I’ve mentioned in the past, the solution is to make California a more business friendly state so that businesses have a reason to be in the Bronze Golden State. Instead, it’s state employees who get raises while the people are threatened by the Governor with higher taxes.
My budget ideas would have no chance of passing in Sacramento, but are simple and to the point:
1. End redundant state agencies.
2. Cut unnecessary state agencies.
3. End public employee unions.
4. Eliminate defined benefit pensions for state employees.
5. Have a two-year term of the Legislature where the legislature is required to cut 20% of state regulations and or laws.
6. Cut state tax rates by 5%. (I am not stating that California’s top income tax bracket should be reduced from 9.3% to 4.3%; rather, that it should be reduced by 5%: From 9.3% to 8.85%.)
I’ve written about the redundant and unnecessary state agencies in the past. I’ll be posting on the other ideas in the next couple of weeks.
California needs to face reality: The state is broke. Radical change is necessary. It won’t be pretty to many but the state can’t continue to spend money it doesn’t have.
Nine individuals came to Las Vegas this past weekend to compete for the championship at the World Series of Poker. Who would be the lucky winner? And who really got to keep the money?
This year’s World Series of Poker concluded late last night at the Rio Hotel and Casino in Las Vegas. The winner of the main event won $8,715,638 but would he actually end up with all that money?
This year we have the first winner ever from Germany. Congratulation to Pius Heinz of Cologne.
First, Mr. Heinz benefits from the US-Germany Tax Treaty. Under that Tax Treaty, gambling income earned in the US is exempt from US taxation. (Without a tax treaty, he’d lose 30% of his winnings to the IRS.) Next, Germany considers gambling to be a use of after-tax (earned) money so for gamblers it’s tax free. (German casinos, however, are heavily taxed: They pay die Spielbankabgabe and other taxes to the German states.) Thus, Mr. Heinz gets to keep all $8,715,638 of his winnings.
Martin Stazko of Trinec in the Czech Republic placed second for $5,433,086. Mr. Stazko is yet another player who thanks the diplomats of his country; the US-Czech Tax Treaty also exempts gambling winnings so he owes nothing to the IRS. It is unclear if gambling winnings are taxed in the Czech Republic. It appears that they may be taxed if you are a professional gambler but are not taxed if you are an amateur. Mr. Stazko has called himself a professional, so we’ll assume he pays the 15% tax rate and will lose $814,963 in taxes.
Ben Lamb, a professional poker player originally from Tulsa, Oklahoma, finished third. Mr. Lamb was the World Series of Poker Player of the Year. The $4,021,038 he won is on top of the $1,332,832 he won previously at this year’s World Series of Poker. Of Mr. Lamb’s $4.0 million, I estimate he’ll owe $1,524,011 to the IRS and $241,268 to the Oklahoma State Tax Commission. Mr. Lamb will owe 37.9% of his income to taxes.
Edit: I have been informed that Mr. Lamb now resides in Las Vegas and has done so for all of 2011. Thus, he will not owe any tax to Oklahoma.
Matt Giannetti of Las Vegas was the fourth place finisher and earned $3,012,700. As a resident of Las Vegas, he doesn’t have to worry about state income taxes. However, the IRS will take an estimated $1,048,642 of his winnings (35%).
Phil Collins finished fifth. No, not that Phil Collins. Although Mr. Collins was named after the famous singer, this Phil Collins is the only married participant and is a professional gambler residing in Las Vegas. He earned $2,269,599 for his finish and will owe an estimated $852,480 to the IRS (38%).
Eoghan O’Dea of Dublin, Ireland finished sixth. Mr. O’Dea was in position to knock out Ben Lamb on Sunday; Mr. Lamb needed one of three eights left in the deck to fall “on the river” to avoid elimination. Unfortunately for Mr. O’Dea, that’s exactly what happened and Mr. O’Dea was crippled and was soon eliminated. The $1,720,831 will likely assuage some of the bitterness of that final eight.
Mr. O’Dea is also thankful that Irish diplomats did a good job with their tax treaty with the United States; gambling income for Irish citizens is also exempt from US taxation. However, gambling income in Ireland is taxable for professionals (there is no tax for amateurs). Mr. O’Dea, a professional gambler, is subject to a tax rate of 20% on his first €36,400; the tax rate is 41% thereafter. I estimate that Mr. O’Dea will owe $695,018 to the Office of Revenue Commissioners (40.4%). That’s the highest percentage in tax of any participant.
Bob Bounahra of Belize City, Belize finished in seventh place. The native of Chicago earned $1,314,097 for his efforts. The only amateur in the final nine, he wished that Belize diplomats were as good negotiators as those in Germany, the Czech Republic, the Ukraine, or the United Kingdom. He loses 30% of his winnings, $394,229, to the IRS. Normally he’d owe the 15% income tax to Belize. However, he’ll likely get a tax credit from his withholding to the IRS so that he is not double-taxed.
Anton Makiievskyi of Dnipropetrovsk, Ukraine earned $1,010,015 for finishing eighth. Another professional gambler, Mr. Makiievskyi doesn’t have to deal with the IRS; the US-Ukraine tax treaty exempts gambling. Unfortunately, gambling income is taxable in the Ukraine. The Ukraine tax rate is based on monthly income: 15% on the first ₴9,410 (the “₴” stands for the hryvnya, the Ukrainian currency), and 17% thereafter. Mr. Makiievskyi will owe an estimated equivalent of $171,656 to the State Tax Service of the Ukraine.
Sam Holden of Sussex in the United Kingdom finished ninth and earned $782,115. The US-UK tax treaty exempts gambling so he loses nothing to the IRS. And like Germany, the United Kingdom currently does not tax gambling winnings of players so he loses nothing to HM Revenue & Customs. (As an aside, I like the old name, Inland Revenue, much more than the current name.)
Here’s a table summarizing the tax bite:
| Amount won at Final Table | $28,279,219 |
| Tax to IRS | $3,819,362 |
| Tax to Czech Tax Administration | $814,963 |
| Tax to Office of Revenue Commissioners (Ireland) | $695,018 |
| Tax to State Tax Service (Ukraine) | $171,656 |
| Total Taxes | $5,500,999 |
That’s a total tax bite of 19.45%. Interestingly, last year’s tax bite was much higher (42.99%). That’s because last year every participant at the final table was subject to taxation; this year, two individuals are exempt.
Here’s a second table with the winners sorted by their estimated take-home winnings:
| Winner | Before-Tax Prize | After-Tax Prize |
| 1. Pius Heinz | $8,715,638 | $8,715,638 |
| 2. Martin Stazko | $5,433,086 | $4,618,123 |
| 3. Ben Lamb | $4,021,138 | $2,497,127 |
| 4. Matt Giannetti | $3,012,700 | $1,964,058 |
| 5. Phil Collins | $2,269,599 | $1,417,119 |
| 6. Eaoghan O’Dea | $1,720,831 | $1,025,813 |
| 7. Bob Bounahra | $1,314,097 | $919,868 |
| 8. Anton Makiievskyi | $1,010,015 | $838,359 |
| 9. Sam Holden | $782,115 | $782,115 |
| Totals | $28,279,219 | $22,778,220 |
Thanks to tax treaties and how Germany and the United Kingdom treat gambling winnings, this year the taxman wasn’t the big winner at the World Series (the IRS finished second). Still, consider that if Mr. Lamb won he would have finished second to Mr. Heinz in net winnings: Mr. Lamb would have kept only $5,412,349 of the $8,715,638 the winner received.
So congratulations to the winners. Just remember that a winner—perhaps the biggest winner of all—is the taxman. As we all know the house always wins.
An unenrolled tax professional found herself in Tax Court yesterday. The IRS claimed that her claimed deductions weren’t valid; she felt she had even more deductions coming. The Court had to determine who was right.
First, I’m an enrolled tax professional; I’m in one of three professions with full rights to practice at the IRS. I’m an Enrolled Agent. The petitioner was identified as just a tax preparer, so she wasn’t an EA, CPA, or attorney. There are some good unenrolled preparers (Robert Flach, for example), so being unenrolled isn’t necessarily a bad thing.
However, if you prepare tax returns you are supposed to know the rules about what is and isn’t deductible. You do have to have substantiation for the deductions you take. And the first problem was her records.
Petitioner presented canceled checks, bank account statements, receipts, and invoices purporting to substantiate various items claimed as business expense deductions. These records are not well organized and have not been submitted to the court in a fashion that allows for easy association with the portions of deductions that remain in dispute. Nevertheless, we make what sense we can with what we have to work with and summarize our findings in the following paragraphs.
The petitioner claimed nearly $35,000 of contract labor expense but there was a problem. “None of
the numerous receipts petitioner offered in support of her claimed contract labor expense were for contract labor.” She did have a few receipts mixed in with the contract labor items that were deductible elsewhere, but that was a major misstep. She tried to get something at trial, but wasn’t successful:
At trial petitioner attempted to claim a deduction for additional contract labor expenses. Petitioner introduced photocopies of checks and a few pages of someone’s handwritten timesheet. The checks are photocopied such that the dates are missing or incomplete, and the full amount cannot be determined for one of the checks. These records are incomplete, and there is not enough information to permit a reasonable estimate. Accordingly, respondent’s complete disallowance of petitioner’s $34,880 deduction for contract labor is sustained.
There’s more on specific deductions, but you should get the picture. This tax preparer didn’t do a particularly good job with her own records. The IRS asked the Court to impose an accuracy-related penalty.
The accuracy-related penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer shows that he or she acted with reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. Petitioner offered no evidence that she acted with reasonable cause and in good faith. Accordingly, we hold that petitioner is liable for a section 6662(a) accuracy-related penalty due to negligence or disregard of rules or regulations.
All tax professionals are held to a high standard if you end up at Tax Court: We are supposed to know the rules of substantiation. If we don’t, the Court isn’t going to be sympathetic at all.
While I just praised the Board of Equalization for doing something smart, it’s time for a dose of reality in dealing with the world of California bureaucracy. A gentleman named Aaron Greenspan developed a product called FaceCash. California has a statute regarding money transmission businesses, which is what FaceCash does. Mr. Greenspan desired to make sure that he complied with the law. If only it were like applying for a license (which it should be).
The whole saga is noted in an open letter to Governor Brown, a response from a senior advisor to Governor Brown, and various emails back and forth. Mr. Greenspan found that the state agencies had “…unwritten, arbitrary and capricious policies…” and that the experience reminded him of a novel by Kafka. Having read The Trial many years ago, it’s an apt comparison. For those who haven’t read Kafka, another comparison is to Lucy and Charlie Brown. Remember how Charlie Brown would try to kick the football, and every time she’d pull the football out so that Charlie Brown fell down? Well, Lucy is like the bureaucracy in California, making it impossible for an entrepreneur (Charlie Brown) to succeed.
Mr. Greenspan has asked for a response to his complaints by November 2nd. If not, “[Mr. Greenspan] will bury the [California Department of Financial Institutions] in formal complaints….” Burying a bureaucracy in paperwork? This should be interesting!
One of my clients received a letter from the California Board of Equalization:
Our records of your qualified purchaser use tax account indicate that you have filed “zero returns” (no use tax to report) for three consecutive years. Therefore, this letter is to inform you that we are canceling your qualified purchaser use tax account….
My client was required to register for a use tax account as he had gross sales of over $100,000. He buys everything from retailers, so he’s never had a purchase subject to use tax. Yet he’s had to file use tax returns for the last three years.
Not anymore. The BOE has decided that California service businesses that have no purchases subject to use tax for three consecutive years will now not need to file use tax returns. Those returns are due on April 15th…a day tax professionals have something else to worry about.
That said, more and more jurisdictions are beginning to enforce use tax laws. We’re adding a form with our Organizers for 2011 regarding use tax as it’s clear where this is heading. Still, the BOE’s action is a ray of sunshine on the tax front.
Saku Koivu is a center for the Anaheim Ducks (they won in Minnesota last night,) and is a resident of Quebec. In September 2009 he received a tax refund of $140,899.04 from Quebec (Mr. Koivu used to play for the Montreal Canadiens). And that’s where the fun begins.
Someone stole that check from Mr. Koivu. That’s the first theft. That thief is unknown.
The person who stole the check goes to Go-Remit, a check cashing business in Côte-des-Neiges, Quebec. The former owner, David Nowak, thinks he’s dealing with an authorized agent of Mr. Koivu (the thief also has identity documents) and will cash the check. But he doesn’t keep $135,000 in his store, so he uses a third-party vendor to get the funds. He picks them up, and keeps them in a paper bag under the back seat of his car.
You’re a step ahead of me, right? Someone stole the bag containing the $135,000. That thief, too, hasn’t been found.
Meanwhile, what is Mr. Nowak to do? He decides to take small amounts from some of his clients to make up the $135,000.
Mr. Nowak’s fraud is discovered by the police after some of his clients think something is wrong. Mr. Nowak pleads guilty but gets a very lenient sentence of time served due to the unusual circumstances of the crime. He also is on probation for two years.
And I’ve only summarized the twists and turns of fate that move through this story.
Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.
So states the IRS in Publication 17 (“Your Income Tax”) and the courts have upheld this. Of course, most people who commit one crime are more than willing to commit a second crime. One Bay Area woman is probably regretting this.
Ann Ray, aka Georgia Engelhart, worked for a family business in San Carlos (in the San Francisco Bay Area). She was their bookkeeper and a trusted employee. She was also an embezzler.
Ms. Ray began liberating funds in the 1980s, and it appears to have started out small. But it kept growing and growing, and by the mid 2000s the take each year was in the hundreds of thousands of dollars. It appears that not only did Ms. Ray have full access to the bank accounts, she also balanced the checkbooks. A standard practice is that the person who balances the bank accounts cannot sign checks in the accounts. But I digress….
Ms. Ray used the funds for personal items, from paying her credit card bills to living the good life on fancy vacations. Somehow, the IRS discovered that something was up, and IRS Criminal Investigations looked into the matter. They discovered the embezzlement, though they apparently could only show that Ms. Ray didn’t pay the taxes on the ill gotten gains. That, though, is a crime, and Ms. Ray pleaded guilty back in July to six counts of tax evasion. Yesterday, Ms. Ray was sentenced to 46 months at ClubFed.
If Ms. Ray had only remembered line 21, she would have been out $1.2 million of the $4.7 million she had embezzled, but would probably still be free. Now, she must also make restitution of the proceeds of her embezzlement and pay the federal government the tax due on the embezzlement.
I just spoke with my software vendor and learned that the e-file deadline for those impacted by Hurricane Irene is 9am EDT on October 31st (6am PDT). Effectively, the deadline is Sunday night for me. As to why the IRS chose 9am instead of 5pm EDT, you’d have to ask them. Needless to say, if you are among those impacted by Irene or have clients who are impacted by Irene, you will need to file sooner rather than later.
