Cash and Carry Didn’t Work

Posted on July 23, 2011 by Russ

There’s nothing wrong with paying employees in cash. Indeed, in some industries it’s the norm. However, you still must withhold payroll taxes and properly report the earnings. The owners of a Massachusetts temporary agency found that out this week.

Michael Powers and John Mahan owned Commonwealth Temporary Services, Inc. in Stoughton, Massachusetts. Powers and Mahan believed that if it wasn’t written down or reported, it didn’t happen. Unfortunately for them, the US Department of Justice proved that they paid employees more than $25 million in cash and didn’t report it. They did save $7 million in taxes (and saved more on workers compensation).

But they’re not going to get to enjoy that money; they were convicted of one count of conspiracy to defraud the Internal Revenue Service and their workers compensation insurers, one count of mail fraud and two counts of false tax returns. Instead of making a little less money but complying with the law, they’ll likely pay a lot of fines and enjoy ClubFed.

As I’ve said before, the government takes trust fund taxes very seriously. This isn’t the area to mess around in.

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Foreign Money Service Businesses May Need to Register with FINCEN

Posted on July 23, 2011 by Russ

Consider a foreign company that takes in, via wire transfers or other bank transfers, money from Americans. This company is located in, say, Costa Rica. Under new regulations published this week in the Federal Register, that company must register with the Financial Crimes Enforcement Network (FINCEN).

First, who must register with FINCEN?

Currently, the MSB [Money Service Business] regulations apply to persons engaged in specified activities that exceed $1,000 for any person in any day (‘‘activity threshold’’). The activity threshold applies to all MSB categories except money transmitters, which do not have an activity threshold.

One change in the regulation is that foreign entities are now covered.

FinCEN proposed to amend 31 CFR 1010.100(ff) to provide that foreign located persons engaging in MSB activities in the United States are subject to the BSA rules. Specifically, FinCEN proposed to revise 31 CFR 1010.100(ff) so that an entity qualifies as an MSB based on its activity within the United States, not the physical presence of one or more of its agents, agencies, branches, or offices in the United States. This proposal arose out of the recognition that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations.

The new regulations require a foreign MSBs to register with FINCEN, and designate a US-person to accept service of papers. The new regulation goes into effect in 60 days.

So what businesses must register? “A commenter also noted that foreign banks, broker dealers, and possibly other financial institutions might be subject to the MSB regulations. FinCEN does not intend to include these institutions in the MSB definition.” That leaves foreign businesses that take in money from US customers but aren’t regulated by US regulators. One obvious category is Internet gambling.

Take an entity like Bodog. They offer sports betting and online poker to Americans. Bodog tells Americans to wire money or transfer money into various accounts outside of the United States. It’s almost certain that Bodog takes in over $1,000 a day from Americans, so they definitely fall under this regulation.

The Wire Act makes offering sports betting to Americans decidedly illegal; Bodog hasn’t been deterred in the least. I doubt this will have any impact on them. However, it may have an impact on the online poker companies that still offer games to Americans. In 60 days, there will be yet another law that can be used against them. We’ll see what happens.

Posted in Gambling, International | Tagged | Comments Off on Foreign Money Service Businesses May Need to Register with FINCEN

Electronic Filing Now Available for FBAR

Posted on July 23, 2011 by Russ

The Financial Crimes Enforcement Network (FINCEN) announced this week that you can now file an FBAR (Form TD F 90-22.1) electronically.

Electronic filing of an FBAR is different than electronic filing for a tax return. You must complete an application, and download a special forms reader (used for transmitting the FBAR). Under FINCEN rules, tax professionals cannot file an FBAR on a client’s behalf.

And it appears that FINCEN is working on linking the FBAR to tax preparation software. Given the pace that government works, this is probably still at least a year away.

Note that you can still paper file your FBARs.

Hat Tip: Taxdood

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Liening the Wrong Way

Posted on July 19, 2011 by Russ

Liens are useful legal devices. They are rightly used when someone owes another party money, so that property or other collateral is attached. Of course, if there’s a right way there’s also a wrong way. Today, we’re going to look at the wrong way.

Imagine you’ve been accused by the US Department of Justice of conspiracy to defraud the IRS. Now, you and I would get the best legal advice we could, but different methods appeal to the Bozo mind. Mark D. Leitner was so accused, and his method could lead himself to an award. First, from today’s DOJ press release:

During that jury trial and after the jury returned the guilty verdict, Leitner publicly filed false maritime liens against the property of the prosecutors, investigators and court personnel involved in the criminal trial. The liens falsely claimed that Leitner was owed $48.489 billion from each individual. On five of the seven false liens, Leitner publicly disclosed individuals’ correct Social Security numbers and other personal identifying information. Leitner also filed and mailed numerous harassing and frivolous documents to the courts and personnel involved in this case.

Mr. Leitner received five years at ClubFed for the conspiracy charge (as noted in the press release, he was found guilty); he’s looking at up to 13 years on these charges — he pleaded guilty to them today. Needless to say, this was an incredibly bozo act. But he did show some chutzpah: At $48.489 billion a piece, he could have made some money if there was a way of collecting….

On the bright side, I am looking for candidates for the Tax Offender of the Year, and I now have at least one entry.

Posted in IRS | Comments Off on Liening the Wrong Way

No Records and Other Issues Lead to a “Pro” Being an Amateur

Posted on July 19, 2011 by Russ

The Tax Court had to decide whether or not another individual was a professional gambler. On his return, he included his gambling winnings on a Schedule C (like a professional gambler). But was he truly a professional or was he an amateur?

Among the items I stress to my clients, first and foremost is keeping good records. (This is true for amateur gamblers, too, of course.) Did the petitioner keep good records? Well, did he keep any records? I think you know where this is going.

There’s a nine-factor test used by the Tax Court (and other courts) in determining whether an individual is a professional or an amateur in any profession. The nine factors are:

  1. Manner in which the taxpayer carries out  the activity.
  2. The expertise of the taxpayer or his advisors.
  3. The time or effort expended by the taxpayer in carrying out the activity.
  4. Expectation that assets used in the activity may appreciate in value.
  5. The success of the taxpayer in carrying out other similar or dissimilar activities.
  6. The taxpayer’s history of income or losses with respect to the activity.
  7. The amount of occasional profits, if any, earned.
  8. The financial status of the taxpayer.
  9. Elements of personal pleasure or recreation.

Today’s petitioner didn’t lose on all the factors; one was held not to apply.  That said, first impressions are meaningful in these ‘hobby loss’ cases.  The petitioner presented no records at the trial.  There were some records from the casinos, but they were deemed unreliable by the Court.  Finally, the petitioner gambled at slot machines, and it’s highly unlikely that any court will find someone who gambles on slots is ever a professional as it’s next to impossible for a player to win against slot machines in the long-run.

The petitioner was ruled to be an amateur gambler.  Taxdood has more.

Case: Moore v. Commissioner, T.C. Memo. 2011-173

Posted in Gambling, Tax Court | Comments Off on No Records and Other Issues Lead to a “Pro” Being an Amateur

Club Fed Is the Rule for Ja Rule

Posted on July 19, 2011 by Russ

Back in March I reported on rapper Jeffrey Atkins (aka Ja Rule). He decided that it was a good idea if his after tax income was the same as his before tax income. Given that the tax loss to the IRS was $1,137,912, that wasn’t a good idea.

Today, U.S. Magistrate Judge Patty Shwartz sentenced Mr. Atkins to 28 months (to be served with a state weapons count). “Taxpayers do not have the luxury of deciding whether to comply with laws,” Judge Shwartz noted. Well, they do have a choice but they have to face the consequences if they don’t. Mr. Atkins has agreed to make full restitution to the IRS.

Here’s another version of a classic:

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Illinois Increased Taxes But Is Still Broke

Posted on July 18, 2011 by Russ

You are insolvent when the money you owe (your liabilities) are more than the money you have (your assets). Illinois has been in desperate financial trouble for some time; this won’t be news to readers of this blog.

Earlier this year on a party-line vote Democrats forced through a major tax increase: corporate income tax went up from 4.8% to 7% and personal income tax went from 3% to 5%. So would increasing revenue end the problems for Illinois?

No. Illinois pensions remain underfunded in the billions. The optimistic forecast is $54 billion; the pessimistic forecast is $80 billion. I think we can all agree it’s a lot.

This past week Senator Mark Kirk (R-IL) asked Federal Reserve Chairman Ben Bernanke if the Fed was watching Illinois and California; Mr. Bernanke said they are being watched.

Meanwhile, President Obama is demanding higher taxes for a debt ceiling deal. I’ll be as blunt as I can: The cause of the problem is government spending; the solution is cutting government spending. If spending is not cut, there is no long-term solution.

Of course, we’re dealing with Washington, so we’ll see what happens. Since Democrats control Springfield (Illinois), they chose the tax increase route. So far, Illinois remains in deep trouble.

Posted in Illinois | 1 Comment

I Hope You Enjoyed that $2.4 Million

Posted on July 18, 2011 by Russ

I’ve said this before, and I’m certain I’ll say it again: If you want to get in trouble with the IRS, the fastest way to do so is to not remit your federal employment taxes. These are called trust fund taxes, as employers remit money held in trust for the federal government. It’s the government’s money, and they want it.

That lesson has now been learned by Frank Bivings and his wife, Isabelle Blanco. The Washington D.C. residents own the Bivings Group, an Internet communications firm. With 30 employees (according to their web site), they certainly have employment taxes. However, the husband and wife felt that paying themselves larger salaries was more important than remitting those taxes. According to the Department of Justice, $1.8 million of the $2.4 million that wasn’t remitted were federal trust fund taxes. It’s probable the rest were local (District of Columbia) taxes, and that’s nearly as bad: The District is federal land.

Mr. Bivings pleaded guilty to one count of failing to pay employment taxes; Ms. Blanco pleaded guilty to one count of failure to pay a tax. Mr. Bivings’ charge is by far the more serious; he’s looking at a stay in ClubFed of 30 – 37 months. Ms. Blanco is likely to receive probation. The husband and wife have agreed to make restitution of the unpaid employment taxes.

I’ll repeat this again: Make sure that when you collect federal trust fund taxes that you remit them.

Posted in IRS, Payroll Taxes | Comments Off on I Hope You Enjoyed that $2.4 Million

New York $1.2 Million, Indians 0

Posted on July 18, 2011 by Russ

I may be a baseball fan, but this post has nothing to do with the Cleveland Indians. Rather, here’s the latest chapter in New York’s war against Indian tribes selling cigarettes. In June, a New York Appellate Court lifted an injunction that prevented New York from collecting cigarette taxes on cigarettes sold on Indian reservations in the Empire State. The Indian tribes vow an appeal, but unless this ruling is reversed, Indian tribes must collect tax on cigarettes imported onto their reservations.

So the tribes plan on emphasizing their own manufactured cigarettes. Because those are made on Indian lands, they are exempt from New York sales tax.

Meanwhile, New York has begun seizing tobacco products heading to Indian reservations that lack appropriate tax stamps. The total value of tobacco products seized was $1.2 million; this would have resulted in just under $300,000 of tobacco taxes collected by New York.

I doubt we’ve heard the last of this battle.

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IRS Philadelpia Service Center Has Moved

Posted on July 14, 2011 by Russ

In a phone call today with the Taxpayer Advocate in Philadelphia, I learned that the IRS Service Center in Philadelphia moved, with the final personnel moving into the “new” office in January. The new address is:

Internal Revenue Service
2970 Market St.
Philadelphia, PA 19104

Note that this address should be used only for overnight delivery, courier service, etc.; all other mail to the Philadelphia Service Center should go to the normal address (typically specified in the communication from the IRS).

The Philadelphia Service Center does not process returns; however, they do handle numerous “back-office” tasks including correspondence audits, international adjustments, and many others.

Posted in IRS | 2 Comments