Denver Madam Pleads Guilty

Posted on July 11, 2011 by Russ

Late last year, I reported on Brenda Stewart. Ms. Stewart owned Denver Sugar and Denver Players, a prostitution ring that, per the Denver Post, catered to the high-end of Denver society.

The problem for Ms. Stewart wasn’t the call-girl ring; rather, it was what she did not do with the profits. She forgot that you do need to pay taxes on all income, even income from being a call girl.

This past week Ms. Stewart changed her plea. In a plea bargain, she pleaded guilty to one count of tax evasion; in return, the government dropped 69 other charges (racketeering, money laundering, and witness tampering). She also agreed to make restitution of $45,000 in back taxes and penalties.While Ms. Stewart could receive up to five years at ClubFed, it’s far more likely she’s looking at one year at ClubFed.

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Hawaii Tries for #1

Posted on July 11, 2011 by Russ

What state has the highest individual income tax rate in the United States? No, it’s not California. Sorry, New York isn’t the place either. Oregon just misses out on the top spot.

It’s Hawaii.

And Hawaii is adding to the high taxation of high income individuals in the Aloha State. Forbes is reporting that Hawaii is limiting itemized deductions to $25,000 for individuals who earn over $100,000 ($50,000 for married residents who earn over $200,000). This limitation will be in effect from 2011 through 2015.

It may be time for some individuals to bid aloha to the Aloha State.

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When Your Computer Takes the Day Off

Posted on July 11, 2011 by Russ

Last Sunday, my computer decided that it wanted to take a vacation. Now, I believe there’s a religion where mechanical devices have souls (Shintoism?), but I don’t believe that. But try as I might my computer had enough of me.

It crashed.

Luckily, I learned the lesson of backing up data years ago. Not only did I have backups (in multiple places), but I’ve restored files off of them. That’s an important part of backing up your work–making sure you can restore your files. Otherwise, what’s the point of backing up your data?

As it turns out, my computer’s “illness” lasted about three days. That wasn’t the end of the world (thank goodness this isn’t early April or October), but it was an annoyance.

The reason I bring this up is that I’ve seen many clients who do not back up their computer’s data, and who have never tried to restore from their backups. My corollary to Murphy’s Law is that your computer will die at the least opportune moment. Thankfully for me, that didn’t happen this time. I hope that will also be the case for you.

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California Passes Amazon Tax; California to Lose Tax Revenue

Posted on June 30, 2011 by Russ

As part of the recent budget, California implemented an Amazon tax. There were two components of the tax. First, any business with affiliates in the Bronze Golden State must collect sales tax on Internet sales. Second, any business with subsidiaries in California even if they have separate administrative arms must collect sales tax.

Amazon did what everyone thought they’d do: They immediately dropped all affiliates in California. Here’s the notice I received:

Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned before today will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

But what about the second part of the tax, the corporate subsidiary? Well, that will also almost certainly be a non-starter. As this article from CNET notes, a California court has already rejected this tax. In Current, Inc. vs. State Board of Equalization, the court ruled that this tax was not legal because the company in that case had separate management, did not have integrated operations, and were separate and distinct corporate entities.

Amazon does have two such subsidiaries in California, but both are run as separate, distinct corporate entities. Amazon has good lawyers, so I’d expect that they will be following this decision exactly.

But I expect the Board of Equalization (California’s sales tax agency) to try to collect the tax. Amazon will fight it and very likely win. The fight will cost California, so the state will be out the legal fees.

Additionally, California will be out the income tax collected on the money received by affiliates. I didn’t make a fortune out of being an Amazon affiliate. However, all the income I received from Amazon was reported on my tax return. If we make a guesstimate of $1 million of income received by Californians from Amazon, that means that the state will lose about $93,000 a year in tax collections. Not much, but it all adds up.

Additionally, it’s likely that large affiliates may relocate out of California to another state so that they can maintain their status. That will exacerbate the hit to California.

In summary, all the Amazon tax does is cost California legal fees, decrease California tax revenues, and cause some California businesses to relocate to another state. That doesn’t sound like a formula for increasing tax collections to me.

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California Sales and Income Tax Rates Decrease Tomorrow

Posted on June 30, 2011 by Russ

As part of one of California’s bad budget deals, sales and income tax rates were temporarily increased by 1% and 0.25%, respectively, for two years. Despite the protests of Jerry Brown and Democrats in the California legislature, those temporary tax increases did turn out to be temporary.

Tomorrow, California sales tax rates decrease by 1%. In Orange County, this means that generally sales tax will fall from 8.75% to 7.75%.

Income tax rates will also fall; California’s top bracket (excluding the millionaire tax) will fall from 9.55% to 9.3%.

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Democrats Invent Revenue; Budget to Pass Later Today

Posted on June 28, 2011 by Russ

Jerry Brown faced one reality yesterday: The votes aren’t there for extension of the temporary tax increases passed two years ago. However, he and Democratic leaders of the California legislature will be passing a budget today that will on paper close a $10 billion deficit.

Thee are $4 billion of spending cuts (some will be challenged in court). There are some fee and tax increases (some of which will likely be challenged in court) to raise another $1 billion. And there’s a projected $4 billion increase in revenues…inserted because California had $1.2 billion in higher tax collections than projected in April. Finally, there’s the usual accounting gimmicks (moving certain payments to the following fiscal year) that will result in $1 billion of “savings”.

The budget includes the Amazon tax, forcing online retailers to collect California sales tax. Amazon vows that they will immediately drop all California affiliates, so that they will not have a physical presence in the state and, thus, will not have to collect California taxes.

If one is objective about the budget, it’s quite clear that this budget will leave about a $5 billion deficit for the new fiscal year…and that’s only if the economy doesn’t get worse. I’m not seeing many signs of an economic recovery.

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Standard Mileage Rates Increase on July 1st

Posted on June 23, 2011 by Russ

When a manager gets a vote of confidence in baseball, he should usually start worrying that his job is in danger. After the IRS earlier this year stated that they would not increase the mileage rates, I began to believe they would. Once again the cynics have been proven right.

The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

Also increasing are medical and moving expenses from $0.19 to $0.235 per mile. The charitable deduction mileage rate, $0.14, is set in a statute so only Congress can change that.

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Myriad of Foreign Accounts Claim Two Victims

Posted on June 22, 2011 by Russ

The Department of Justice press release reads like a Who’s Who of foreign tax havens. Sean and Nadia Roberts of Tehachapi, California (near Bakersfield) run the National Test Pilot School in Mojave. They’ve also pleaded guilty to one count of filing a false tax return though they admitted filing false tax returns for several years.

The Roberts had accounts on the Isle of Man, Switzerland, Hong Kong, South Africa, and New Zealand. I may have missed a country or two, too. There were nominees, and UBS aided the couple in purchasing at least one nominee. The Roberts didn’t declare the interest income they earned from the foreign accounts, and deducted transfers to foreign accounts as “interest payments.” The loss to the Treasury was $709,675. As part of the plea agreement, the Roberts will make restitution, pay an FBAR penalty of 50% of the high balance year in their foreign accounts (that amount wasn’t disclosed in the press release), and could each find themselves sentenced to ClubFed for one year.

While I have said that the IRS has, at times, looked like they’re using shotguns on jaywalkers (vis-a-vis foreign account enforcement), that’s not the case here. It appears that the Roberts were deliberately evading taxes.

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Chiang Docks the Legislature; Was Budget Just $1.86 Billion Off?

Posted on June 22, 2011 by Russ

California Controller John Chiang announced today that the budget proposed by the Democrats was not balanced and that therefore he would stop paying the legislature until a balanced budget is voted on. Mr. Chiang stated, “The numbers simply did not add up.” He said the budget had $1.86 billion more in spending than in revenues.

As you can imagine, Democrats in the legislature are livid. Democrats accused him of grandstanding and playing for a higher office. There are rumors of a lawsuit (I’m sure that would go over really well with Californians).

Frankly, Democrats should realize that the budget they proposed was yet another smoke and mirrors budget. Mr. Chiang included revenues in the proposed budget that were likely unconstitutional (he assumed all of the revenues would occur). The true budget deficit was significantly greater than $1.86 billion — probably $5 billion or more.

So will Democrats finally agree to stop kicking the can down the road, or will there be yet another episode of As the Budget Churns? Being a cynic, I’m voting for the soap opera to continue. Expect a lawsuit to be filed, and nothing to happen for more weeks. The losers, of course, are California taxpayers.

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Unhappy Clients of Roni Deutch Talk to the Bee

Posted on June 21, 2011 by Russ

If you want to follow the Roni Deutch case, I strongly urge you to read the coverage in the Sacramento Bee. For example, on Sunday they spoke with several unhappy clients of Ms. Deutch. For the most part it appears that these individuals received initial consultations and then…nothing.

As for the firms that still advertise and promise you that they’ll stop the IRS, and you will qualify to pay “pennies on the dollar,” remember that:

  • Only about 15% of Offers in Compromise successfully make it through the IRS;
  • It typically takes over one year for an OIC to make it through the IRS;
  • Most individuals will not qualify for an OIC; and
  • If you look at the fine print of the commercials, you will see, “Case not typical.  Your results may vary.”

Peter Pappas notes,

I am willing, however, to give Ms. Deutch the benefit of the doubt. I don’t believe that she set out to defraud her customers. I think what happened is that she let the marketing arm of the business outpace the operations arm. She simply accepted more clients than her firm could competently handle and committed the fatal mistake of continuing to accept more money and more engagements without properly ensuring that the work for which she had already been engaged was being done on a timely and competent basis.

This analysis sounds quite reasonable. Still, I feel for the individuals who contracted with Ms. Deutch’s firm expecting a service, but apparently getting nothing.

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