Steinberg to Propose Local Income Taxes

Posted on April 25, 2011 by Russ

Democrats in California’s legislature are looking for ways to balance the budget. If you or I were spending $28 billion more than we were taking in, we would cut spending. But that’s not how Democrats in Sacramento approach the problem.

Instead, State Senator Darrell Steinberg wants to allow local school districts to impose income taxes in California. On the bright side, if such legislation were to pass California would likely end up with the top rating…as the worst business environment in the country.

Perhaps Senator Steinberg should look at an op-ed written by the president of CKE Restaurants, Andrew Puzder. Mr. Puzder asks how California can add jobs, and notes that cutting regulations, taming lawyers, and reducing the tax burden are essential. “We have some of the highest tax rates in the nation for businesses and personal incomes.” I doubt Mr. Puzder would say that adding local income taxes would help California businesses.

Luckily, it appears that Republicans in the state legislature are holding firm on their pledge for no new taxes. It’s likely that this, and the proposed tax on soft drinks, will both fizz out.

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Pound Wise, Penny Foolish

Posted on April 21, 2011 by Russ

Robert Flach states this morning that using certified mail, return receipt requested, when mailing tax returns to tax agencies is a waste of time and money.

But the extra you spend to get a return receipt is a total waste of money. It means absolutely nothing – only that the IRS received an envelope from you that was postmarked on April 18th. It doesn’t hurt to do this (except your wallet) – but it really doesn’t help either.

Mr. Flach tells the story of an individual who mailed empty envelopes to his tax agencies every year on April 15th just so something ended up at the agencies. I’m sure that Mr. Flach agrees with me about the Bozo quality of that strategy.

But I strongly disagree with Mr. Flach’s contention that you should not use certified mail, return receipt requested. I have had four clients directly impacted by this. The first individual had his estimated tax payment end up with the fishes. He had mailed his estimated tax payment to PO Box 510000 in San Francisco back in September 2005; as a result of a traffic accident his payment (and thousands of others) ended up in San Francisco Bay instead of the US Treasury. My client had no problem making his replacement payment considered timely when he showed his certified mail receipt. (The IRS did later develop a procedure for anyone impacted by this accident.)

My second client had his tax return “eaten” by the US Postal Service. He mailed it certified mail, return receipt requested, and it apparently looked liked confetti when it arrived at the IRS. The envelope, or what was left of it, showed up in late May. My client was able to resend his return, check, and a copy of his certified mail receipt, and the IRS considered the return and payment timely.

My third client filed electronically on October 15th (he had filed an extension), but his return was rejected. He then mailed his return to the IRS, with proof of the rejection, and used certified mail, return receipt requested. The IRS then attempted to impose the late filing penalty (claiming that the return was filed after the deadline for rejected e-filed returns). After sending the IRS a copy of the certified mail receipt, the IRS rescinded that penalty.

Unfortunately, my fourth client fell on to the Bozo side of things. He did not use certified mail, return receipt requested, and his tax return to a state tax agency vanished. As I note in one of my Bozo Tax Tips, he did save $2.42. He also paid over $1000 in penalties.

Yes, I’m sure that people use the Bozo strategy that Mr. Flach mentioned. But for the honest taxpayers (hopefully, all of us), not using certified mail, return receipt requested, when communicating with a tax agency is just Bozo.

Posted in IRS, Taxable Talk | 2 Comments

Roni Deutch In More Trouble

Posted on April 21, 2011 by Russ

California’s Attorney General would like to see “Tax Lady” Roni Deutch in prison. Yesterday, California Attorney General Kamala Harris asked a Sacramento court to send Ms. Deutch to prison for contempt. Why? Because Ms. Deutch and her law firm are accused of shredding 2.7 million pages of documents related to a case filed against her firm by the State of California.

Instead, it appears that the court has put a receiver in charge of her business and frozen her assets. Ms. Deutch will face a contempt charge in a hearing now scheduled for July 22nd.

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Apparently Much Faster than Neteller

Posted on April 20, 2011 by Russ

The one question I have been asked many times by my clients with money held up because of the Department of Justice’s action against online poker sites is, “When will I get my money back?” The answer appears to be sooner rather than later.

This morning, the Department of Justice announced that the DOJ has entered into agreements with PokerStars and Full Tilt Poker so that the domains that the DOJ seized will be allowed to be used by the sites so that player funds can be refunded.

The agreements allow for PokerStars and Full Tilt Poker to use the pokerstars.com and fulltiltpoker.com domain names to facilitate the withdrawal of U.S. players’ funds held in account with the companies. The deposit of funds by U.S. players is expressly prohibited. In addition, the agreements do not prohibit, and, in fact, expressly allow for, PokerStars and Full Tilt Poker to provide for, and facilitate, players outside of the United States to engage in playing online poker for real money. The agreements also require the appointment of an independent Monitor to verify PokerStars’ and Full Tilt Poker’s compliance with the agreements. The Government stands to enter the same agreement with Absolute Poker if it so chooses.

As expected, the agreement parallels that of the Neteller fiasco. The one major plus for players is that it took Neteller several months to reach that agreement with the DOJ; in this case, it took several days.

Additionally, like the Neteller agreement there’s an independent monitor. Clearly, the monitor will make sure that PokerStars and Full Tilt abide by the agreement. Additionally, while there is no mention in the press release of the DOJ getting a list of who is being paid, it is certainly possible the DOJ required such a list and that such a list will make its way to the IRS. We’ll likely not know unless (or until) audits begin.

There are still several unanswered questions. Unlike with Neteller (which was a payment processor), PokerStars and Full Tilt Poker must still get the money to Americans. Using payment processors is out (unless the DOJ suddenly changes its stripes). I am guessing that the two poker sites will contract with a European payment processor and cut checks and mail them to all impacted individuals.

As for Isai Scheinberg of PokerStars and Raymond Bitar of Full Tilt Poker ever standing trial in the US, the odds are about as good as it snowing in Irvine today. As the DOJ acknowledges in today’s press release, there is nothing illegal about PokerStars and Full Tilt Poker offering online poker for real money in other areas of the world. This likely makes extradition to the US very difficult.

So after a black Friday, a relatively pleasant Wednesday morning for online poker players in the US. Unfortunately, the DOJ has made quite clear that they believe that online poker is illegal, and continuing to offer real money games to Americans is a very bad idea.

Posted in Gambling | Comments Off on Apparently Much Faster than Neteller

We’re Almost Back

Posted on April 19, 2011 by Russ

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….

Posted in Taxable Talk | Comments Off on We’re Almost Back

DOJ Indicts Major Online Poker Sites

Posted on April 15, 2011 by Russ

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.

Posted in Gambling | 3 Comments

Bozo Tax Tip #1: 300 Million Witnesses Can’t Be Right

Posted on April 15, 2011 by Russ

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.

Posted in Uncategorized | Comments Off on Bozo Tax Tip #1: 300 Million Witnesses Can’t Be Right

Bozo Tax Tip #2: Procrastinate!

Posted on April 14, 2011 by Russ

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.

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Bozo Tax Tip #3: Honey, You Don’t Exist!

Posted on April 13, 2011 by Russ

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.

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Bozo Tax Tip #4: Use a Bozo Accountant

Posted on April 11, 2011 by Russ

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.

Posted in Illinois, IRS | Tagged , | Comments Off on Bozo Tax Tip #4: Use a Bozo Accountant