Possible Problem With IRS Coding of Rejected Tax Payments

If you are a tax professional and have recently had a client (or clients) whose IRS payment shows as rejected on Form 9325, it is possible that the payment actually went through.

When an individual files his tax return electronically, he can also pay electronically. Sometimes that payment is rejected for various reasons. I have seen multiple clients in the past few days whose payments were “rejected” actually have their payments accepted. I do not know if this is an issue with my software vendor, the IRS, or some combination thereof. I am going to be talking with both the IRS and my software vendor tomorrow.

I will post an update tomorrow (Thursday) with what I discover.

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Recharacterization Deadline for Roth IRAs is October 17th

Many individuals converted their traditional IRA to a Roth IRA in 2010. It seemed like a great idea but then the stock market went down. Now, some of these individuals owe tax on money they no longer have.

You can actually get a do-over: You can reverse (recharacterize) your Roth back to a traditional IRA. The Smart Money blog has more.

Hat Tip: Roth Tax Updates

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Sometimes the Light at the End of the Tunnel Is an Oncoming Train

September revenue in California came in at a bit more than $300 million under forecast. That brings the fiscal year to somewhere between $700 and $800 million below forecast. (The California Controller’s office and the California Finance Department use slightly different numbers, so the exact shortfall number varies between the departments.)

No matter, if we take $700 million for three months and project that out for twelve months, you get $2.8 billion under forecast. As the Bloomberg article I linked to notes, automatics spending cuts in California are almost certain to happen.

The problems the Bronze Golden State face can be summed up simply in that the state hasn’t found a regulation that they don’t like and a tax they don’t want. Add in a recession nationally (no matter if the pundits haven’t officially called it a recession, the public is acting as if it is a recession) and neither businesses nor individuals want to spend money or do anything else that increases California collections.

California should, of course, cut regulations and make the state more business friendly. Unfortunately, that has as much chance as it snowing in Irvine today.

A good juxtaposition with this is that Governor Jerry Brown signed the so-called “Dream Act” into law. This law will consider illegal immigrants in California state residents and allow them to enter California state colleges and universities and pay resident rates (which are less than non-resident rates). That will, of course, increase the costs to the universities and increase the state’s deficit.

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Former NFL Player Sacked for Evasion

Jeffrey Lynn Walker played three seasons in the NFL in the 1980s with the San Diego Chargers and the New Orleans Saints. Mr. Walker was an offensive lineman, so he was trying to make holes for the offense. After his football career ended, he became a businessman.

Let’s fast forward twenty years. Mr. Walker purportedly became involved with a resort in China. He solicited funds from investors. Somehow, those funds went from a bank in Las Vegas to a bank in Mississippi to his own bank account and were used for buying personal items like a Hummer. The funds didn’t make it toward the Chinese resort.

The money did not go toward paying the Internal Revenue Service. That’s a problem because all income is taxable, even illegal income.

Mr. Walker pleaded guilty to wire fraud and tax evasion charges. He could face up to 23 years at ClubFed and a large fine.

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Bad News for Medical Marijuana

Yesterday the Associated Press reported that US Attorneys in California have sent letters ordering medical marijuana dispensaries to close. The problem is that while medical marijuana use in California is legal under state law, marijuana remains illegal under federal law.

Adding to the trouble is the results of an audit of a medical marijuana dispensary called Harborside in San Francisco. I’ve reported on the case before (most recently in March). It appears that Harborside received the results of its audit of 2007 and 2008 at the hands of the IRS: Send us $2.4 million and, oh yes, we’re auditing 2009 and 2010, too.

Under tax law, anyone who sells a Class I controlled substance cannot deduct business expenses. Effectively, you have a gross receipts income tax. And the law is on the IRS’s side here.

Harborside is appealing the results of the audit, and that appeal will likely not be heard until the end of this year or early next year. I expect the appeal to lose and the case to eventually go to Tax Court. Unfortunately for proponents of medical marijuana, the law is on the side of the IRS as are precedents.

Of course, one must wonder about the Obama Administration here. This is the same administration that publicly pronounced in its first year in office that they would not go after medical marijuana. Yeah, right.

Hat Tip: Taxdood

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Four Weeks of Freedom Could Cost Ten Years at ClubFed

I’ve reported on Tony and Micaela Dutson before. The couple, who were nominated for my prestigious Tax Offender of the Year award (but did not win in 2010), apparently wanted to try again in 2011. Back In June 2010 I reported on their convictions for tax evasion. Well, the Dutsons apparently didn’t like it when their crimes were called, “the epitome of disrespect of the law.” So they decided not to report to the Bureau of Prisons after sentencing; they were supposed to report on May 23rd of this year. Each of them removed the electronic monitoring devices that they wore.

The couple then fled from Elgin, Oregon to Phoenix. It only took a few weeks for the Marshals to pick them up.

They were found guilty this past week of failing to surrender to serve their original sentences. They’re truly most recent Bozo behavior could add ten additional years to their original ten-year sentence.

I hope those four weeks in Phoenix are worth the potential ten additional years at ClubFed.

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It Turns Out They Weren’t Brothers from Another Planet

It may be the High Holy Days for Jews around the world, but it appears that every day is a holy day for the Office of the Patriarch of the Gathering of the House of Israel. You never heard of that sect before? Strange, neither had I. But two Texans may be ruing the day they decided to invent it.

Timothy Patton and his wife Dawn didn’t like the federal income tax. (They’re Texans, so they missed out on state income tax.) They told their employer (a) they were single, and (b) they were exempt from income tax, and (c) to make their checks out to that sect. The Employer Identification of the sect was invalid, of course. Beginning in 2000, they stopped filing tax returns.

They were tried back in July and found guilty. During the trial they also insisted they be called “Brother T” and “Mimi” and weren’t the people named in the indictment. They asked for a new trial, and then “specifically stated that they had not filed a motion for [a] new trial.” It appears the rest of their motions were specious, and/or frivolous.

Well, Brother T and Mimi were sentenced last week: Timothy received 40 months at ClubFed and his wife got 36 months. They also must make restitution of $571,734.

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News Report: Full Tilt Sold

PokerFuse is reporting that Full Tilt Poker has been sold to Group Bernard Tapie. The deal is conditional on factors including a favorable resolution with the US Department of Justice. PokerFuse reports that the deal calls for repayment of all players…eventually.

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Draft Instructions Released for Son of FBAR; Gambling Accounts Will Not be Reportable

The draft instructions for the new Son of FBAR (Form 8938) were released today. (Here is a link to my discussion of the form itself.) Here are some highlights from a first skimming of the instructions:

  • For unmarried taxpayers living in the United States, the new form must be completed if you have either more than $50,000 in foreign financial accounts on the last day of your tax year (usually December 31st) or if you had more than $100,000 at any time during the tax year.  If you are married filing jointly, the amounts double (to $100,000/$200,000).
  • For unmarried taxpayers living outside of the United States who are either bona fide residents of a foreign country(ies) or passes the Physical Presence Test (Form 2555, the Foreign Earned Income Exclusion), you must file the form if you have more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.  If you are married filing jointly, the numbers increase to $400,000/$600,000.

As for the types of accounts and assets that are reportable:

  • Any financial account maintained by a foreign financial institution;
  • Other foreign financial assets, held for investment but not maintained by a financial institution, including stocks not issued by a US person, interests in foreign entities, and various financial instruments issued by non-US persons.
  • A foreign financial institution is a non-US financial institution that is a bank (or similar entity), hold financial assets for others, and is engaged in investing, holding partnership interests, or other financial roles.
  • Foreign mutual funds, foreign hedge funds, and foreign private equity funds are covered.
  • Online gambling accounts do not appear to be covered.

There is a transitional rule available for taxpayers who would have had to file this form in 2011 (generally, business entities filing on a fiscal year); they can file in 2012 without penalty.

The instructions are 11 pages long, and I don’t have time to delve into all of them at this point. Suffice to say that if you are covered by the new Son of FBAR, your tax return just became far more complicated and you will need to talk to your tax professional about this issue.

Posted in International, IRS | Tagged , | 2 Comments

Full Tilt Poker: $238 Million (54%) May Have Gone to Pay Taxes

As I noted last week, Full Tilt Poker allegedly paid their owners $440 million, much of that money supposedly coming from player deposits. One question I’ve been asked is, where did that money go?

Well, I don’t know where all of it went, but I do know where a large percentage of it went: The IRS and California’s Franchise Tax Board.

Full Tilt Poker has a complicated structure (to say the least) but it appears that the main vehicle for ownership was Tiltware LLC. That’s a California LLC, still active, with one Raymond Bitar listed as the agent for service. (You can look it up here.) There’s also a Tiltware Merchandise Services, LLC (another California LLC) whose agent for service is one Chris Ferguson. Mr. Bitar is under indictment in the original Black Friday (April 15th) accusations against Full Tilt; Mr. Bitar and Mr. Ferguson are among the accused in last week’s expansion of the civil claims against Full Tilt.

In any case, there were approximately 19 owners of Full Tilt. Assuming that the payments went through Tiltware, California income tax would be owed on the entire amounts of the payments. A California LLC must withhold state income tax on foreign (non-California) members (owners) of the LLC. The withholding rate is 7%. (Some of the members are Californians, and would likely owe up to 10.55% on their income. But I’ll be conservative and use 7%.) That’s a little more than $31 million into the California treasury.

Next is federal income tax. Unless the members had incredibly bozo tax professionals, they’ve paid federal income tax on all of the income they’ve received from Full Tilt. Interestingly, there were no tax charges filed with the original Black Friday indictments. Given that it is routine in allegations of financial crimes for the US Attorney’s Office to check with IRS Criminal Investigations, it’s fairly certain that Ray Bitar paid his taxes.

Using an average federal tax rate of 33%, that’s over $146 million collected in US income tax.

I assume Full Tilt is being taxed as a partnership. An LLC can elect to be taxed as either a C-Corporation or an S-Corporation. Given that Full Tilt has foreign owners, it cannot elect S-Corporation status. While it could be taxed as a C-Corp, it’s more likely that it’s being taxed as the default option, as a partnership.

That leaves self-employment tax. General partners in a partnership (those involved in the business) pay self-employment tax on their income from the partnership. Self-employment tax is at 15.3% on the first $106,800 and 2.9% thereafter. Now, not all of the Full Tilt owners would pay this, but it’s likely that the majority who received distributions did pay this. I’ll use 2% rather than 2.9% as an overall estimated rate for the effect of the limited partners. Still, that’s nearly $9 million more to the Treasury.

The total is $186 million, but that’s an understatement. And that’s probably a significant understatement. Still, even this figure represents 42% of the money distributed.

The problem with this analysis is that for federal tax purposes, tax is owed on the full amount earned, no matter what the distributions were! Suppose you have an LLC that earns $1 million, but you don’t take any withdrawals. You still owe tax on the $1 million!

At this point it’s impossible to know what this excess income was. This would be money plowed back into Full Tilt for development, etc. The estimates I’ve seen state that Full Tilt made on average $150 million a year during this time frame; that would equate to $600 million during the four-year period of 2007 – 2010. That might mean another $52 million in federal income tax and $3 million in self-employment tax have been paid. (There would also be some additional California income tax paid, by the California resident members of Full Tilt. I’ll ignore that for this analysis, but this could mean that I’m still understating the total.)

That gives a high estimate of $238 million in taxes paid, or 54% of the total of money distributed. That would leave just over $200 million for the Full Tilt owners to have actually received after taxes.

I was asked why didn’t the Full Tilt owners just loan the company money back so that they could pay the American players after Black Friday? (The Department of Justice estimates that the amount owed to US players is $150 million.) It’s simple: They don’t have the money. Much of the money has been spent or invested; it’s likely that only a small portion of the $200 million was actually sitting in cash or like funds.

What does this mean for the future? For Full Tilt, lots of legal problems and difficulties in selling the business. Yet there is a rumor that a French firm is looking at acquiring Full Tilt and contributing enough capital to pay all current customers (an estimated $300 million); Americans can only hope that this is true. It’s far more likely that Full Tilt will end up in receivership with the pieces being doled out to high bidders, and all customers receiving pennies on the dollar for whatever they had on deposit at Full Tilt.

Posted in Gambling, Scams | Tagged | 2 Comments