With the emphasis on “almost,” Aaron and I plan on being back in the office on Wednesday. We’re enjoying the beautiful weather in Irvine and Bethesda today, and a lot of much needed sleep. If you’ve contacted our office today, you will get voice mail. We’ll be in the rest of this week but only for minimal hours. We’ll be back on a normal schedule next Monday, April 25th.
If you like 72 F and a few wispy clouds, I recommend a late day in April in Irvine….
As if my day wasn’t hectic enough, out of New York (and San Francisco) comes news that the DOJ has indicted the three largest US-facing online poker sites: Full Tilt, PokerStars, and Ultimate Bet/Absolute Poker. The indictment charges a variety of crimes, ranging from money laundering to unlawful gambling. I haven’t seen the actual indictment (it will likely be released in the next day or two), but a DOJ press release is available.
So what does this mean if you are a US-based online poker player and your taxes are due on Monday and you’ve been waiting for that wire transfer and it hasn’t shown up (and likely won’t)? Well, it you can’t file your tax return file an extension. Download Form 4868 and your state’s extension form, if applicable, and mail them by April 18th. This will give you six months more to file your return.
I’ve been asked several times today, “Does this mean I don’t have to pay tax on the money I won in 2010?” No. You had constructive receipt of the money, and it absolutely is taxable. The government’s view is that it’s your problem because you were gambling at an unlicensed (in the US) business.
Will you get your money from the sites? I can’t answer this for certain, but I suspect just like with Neteller you will eventually get your money. With Neteller, it took seven months. I’d expect this to take just as long, and you might get your money in Euros or some other currency. The DOJ’s target is the sites, not American players, so the money should eventually show up.
Will these sites continue to service US customers? I can’t imagine them continuing to serve the US market. I’ve been told that PokerStars has already stopped serving the US market (I’m otherwise occupied, so I have no idea if this is true); I’d expect all three to stop serving the US market. The companies have stated in the past that their attorneys felt that they were operating legally in the US. The Department of Justice has said that’s not true. I can’t imagine them continuing to operate here.
I’ve also been asked whether you have 2011 income from your winnings this year. The answer to this question is maybe. While you could gamble with that money (online) that you won, an argument can be made that you could never actually receive the money. In that case, you would not have had constructive receipt, and it’s all basically “play money.” I’ll likely have more on this post-April 18th.
Will online gambling be legalized in the US? I think it will, but not immediately. Like Napster, online gambling in the US was a creature ahead of its time. Napster violated US copyright laws. The current companies offering online poker in the US violate US laws (in the view of the DOJ).
Napster went away, but there are still illegal music file-sharing companies and there are now much better legal means of streaming music (Pandora, iTunes, etc.) I suspect that in the long-run we will see legal online poker in the US.
I’ll probably have a longer and more detailed post on this post-April 18th.
For tax bloggers like myself, Richard Hatch has been a godsend. His antics have been, well, remarkable. Mr. Hatch has regained the top spot in this year’s Bozo Tax Tips. It took a lot of effort (and stupidity), but he’s manged the feat.
I keep thinking that I’ll be able to drop this Bozo tax tip one year. Yet every time I think that’s going to happen Richard Hatch makes the news again. One tip I can give any celebrity: Be careful about your taxes. The IRS loves going after Bozo tax celebrities. So here’s the story that refuses to die.
For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.
Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)
Here’s what I wrote back in January 2006 when Hatch was convicted:
Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.
1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.
2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.
3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)
4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)
5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.
Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.
2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.
2009 Update: Richard Hatch continues to look for that needle in the haystack. He’s filed another appeal, though to this non-lawyer it’s more likely that he’ll be released after serving his 51 months at ClubFed than getting a favorable ruling.
2010 Update: Mr. Hatch was released in mid-2009. He then violated the terms of his release and was sent back to ClubFed. Finally, in October, Mr. Hatch was released. He’ll be spending the next couple of years in his home state of Rhode Island.
2011 Update: As part of his sentence, Mr. Hatch was supposed to amend his tax returns and declare the $1 million of income. He neglected to do that. Judge William Smith didn’t neglect to give Mr. Hatch a piece of his mind this past March: He sentenced Mr. Hatch to nine more months at ClubFed. Following his release from ClubFed (in December), Mr. Hatch will have 26 months of supervised release.
Judge Smith’s remarks hopefully will finally sink in to Mr. Hatch. “You can continue to proclaim your innocence…You don’t have the option of engaging in this type of game or negotiation with the court. It needs to be a severe punishment. That’s the only thing that will deter you in the future.”
And to think I’d have so little to write about if Mr. Hatch had just paid his $300,000 in tax in the first place.
Today is April 14th. Tomorrow is, well, was, the tax deadline. Thanks to a holiday in the District of Columbia we all have an extra three days to get the returns done.
What happens if you wake up and it’s April 18, 2011, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too.
But what do you do if you wait until April 19th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty.
There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that–the interest is taxable.
Ah, Spring is in the air. And with that come the inevitable wedding invitations. I was supposed to be in a wedding this weekend, but the three extra days of tax season put an end to that.
With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.
Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.
There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.
Marriage has its ups and downs. Claiming you’re single on your tax return will in the long-run cause you nothing but downs.
Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:
* He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.
* He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?
* Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2295 papers he sells you will be able to avoid the income tax.
* He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.
I am adding to the list for this year a new Bozo accountant symptom you want to look for:
* He refuses to turn over your records to you in a timely fashion.
I submit for your consideration today’s potential Bozo accountant as a sterling example. Mr. Christopher Jacobsen stands accused of embezzling $67,000 from the Libertyville Boys Club, as reported by Amy Alderman of the Trib Local/Libertyville.
If the accusations are correct, he not only stole $67,000 from the Boys Club, but he also managed to cover his tracks for some time just by making up BS excuses (hint: do not accept BS excuses from your accounting professional.)
Enrolled Agents, CPAs, and attorneys are bound by Circular 230 in how they prepare tax returns. Don’t accept less than an ethical tax professional or you, too, will be a Bozo.
Imagine you are running a business. Times are tough and you need to make some serious cuts in expenses to stay afloat. Or perhaps you are just greedy. In any case, let’s suppose you neglect to pay your payroll tax. Well, even many Bozos know that neglecting to pay your Federal payroll taxes is the quickest possible trip to ClubFed for a tax crime. So, no, that is not what today’s Bozo allegedly did.
Mr. Steven Scali was arrested recently for grand larceny in Happauge, NY, (as originally reported on HapauugePatch). Apparently, he was wanted for failure to pay $50,000 in sales tax to the state of NY. If convicted, he will be facing a very possible stay at SingSing.
Yes, if you are collecting sales tax, you must remit said sales tax to the taxing authority. If you do not, you are committing a Bozo act. Just like with payroll taxes, the government always goes after people taking “their” money.
By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.
First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle.
But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.
And those are the domestic trusts.
The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them.
Remember: If it sounds too good to be true it probably is.
A repeat for the fourth year follows, but it’s one again getting a lot of play due to business conditions here in California. While I’m focusing on California and Nevada, the principle applies to any pair of states.
Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.
If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.
Now, if you’re planning on moving to Nevada incorporating in the Silver State can be a very good idea. But thinking you’re going to avoid California taxes just because you’re a Nevada corporation is, well, bozo.
With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.
Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).
So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (before April 18th), and you’ve just committed a Bozo act.
If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $2.80 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.
About three years ago one of Russ’ clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1000 in penalties and interest…but he did save $2.42.
Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $2.80! And you can go all out and get a return receipt, too (though you can now track certified mail online). For another $2.30, you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”
