Bozo Tax Tip #9: Just Don’t File

Posted on April 5, 2011 by Russ

We’re running some repeats, but there is some new Bozo material coming. It’s just that people keep trying the same things over and over again.

It’s tough to avoid the tax system. There are currency transaction reports (cash transactions of $10,000 or more) and suspicious activity reports (theoretically can be done on any transaction, but usually starts at $3,000 or more) done with cash. Businesses must send out 1099s on payments of $600 or more to individuals. Barter organizations must send out 1099s.

But that doesn’t stop the Bozo contingent. “They’ll never catch me,” they believe. Until the IRS or the Franchise Tax Board (substitute your state tax agency if you’re not in California) knocks on their door. There’s no statute of limitations if you don’t file.

Paying taxes isn’t fun. Avoiding the system and living on the edge may give you a thrill, but if you get caught you’ll be given a bill…and possibly a trip to ClubFed.

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Bozo Tax Tip #10: Hot Air

Posted on April 4, 2011 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

We start off with a brand new Bozo Tax Tip (new to us, but not to the Bozo world). Congress has decided to legislate through the Tax Code. There are hundreds of tax credits that now exist. These range from the Earned Income Credit, education credits, electric vehicle credits, and adoption credits. Some of these credits, such as the Earned Income Credit, are refundable credits: You can get a refund based on the credit even if you don’t have income.

Now, the Bozo mind works differently than yours and mine. They see a tax credit and think, “How can I get some free money? I’ll find a tax credit and the government will just send me money!” So our Bozo looks and finds there’s a tax credit available for recovering methane (CH4) from landfills. Our enterprising Bozo sets up the Hot Air Gas Company, and starts claiming the credit. Our Bozo skips the somewhat important step of actually obtaining some methane from a landfill.

The IRS does investigate such tax credits, and when you claim that you are recovering natural gas when you’re not, that’s tax fraud, a criminal offense. And that leads straight to ClubFed.

The Tax Code is far too complex. Our Congresscritters have decided to legislate through the Tax Code, leading to a myriad of deductions and credits. The best solution to this issue would be for Congress to simplify the Tax Code but that’s not going to happen any time soon. Until then, if you legitimately qualify for a tax credit you should take it. But if the only hot air you possess is exhaling from your mouth, don’t claim a tax credit for it unless you want to visit ClubFed.

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Annual Blog Hiatus

Posted on March 28, 2011 by Russ

With just about three weeks left before Tax Day, it’s time for my annual blog hiatus. I’ve written my annual top ten Bozo Tax Tips (they’ll start appearing next week), but between now and April 15th my clients are paying me to get their work done. Of course, if anything, really, really big in the world of tax happens I’ll interrupt the hiatus and post about it. Otherwise, to you and my fellow tax bloggers, have a Happy Tax Day!

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What Do South Dakota, Nebraska, Virginia, and Texas Have in Common?

Posted on March 28, 2011 by Russ

No, they’re not the home states of the schools in the NCAA Final Four. They’re the states that would like Caterpillar to relocate from Illinois. Why would Caterpillar look to leave the Land of Lincoln and fly away?

Taxes and the business environment.

As this story in the Wall Street Journal notes, Illinois increased is personal income tax rate from 3% to 5% and the corporate tax from 4.8% to 7%. Businesses look at their bottom lines, and when it becomes too expensive to do business in one state, there are others that are far more welcoming.

In a letter to Governor Pat Quinn, Doug Oberhelman, Caterpillar’s CEO stated,

I want to stay here. But as the leader of this business, I have to do what’s right for Caterpillar when making decisions about where to invest. The direction that this state is headed in is not favorable to business, and I’d like to work with you to change that.

Will the Democrats in the state, who voted on a party-line basis for higher taxes, look to make the business environment friendlier?

I’m not holding my breath.

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Could You be Doing Business in California Without Knowing It?

Posted on March 28, 2011 by Russ

Let’s say your Florida-based company manufactures and sells widgets. You used to be located in California, but decided the Sunshine State was a better business location than the Bronze Golden State. You have no employees, property, or any other ties to California. You do sell to California, but those sales are all shipped from your plant in Florida. Your sales to California businesses totaled $287,012 (out of your $1 million in total sales) in 2011. As you open your mail you see a letter from California’s Franchise Tax Board (the income tax agency here in California) saying that you have economic nexus to California and you must file and pay California taxes. Could this happen?

Yes, it could. Under a law passed by California’s legislature, effective as of January 1, 2011, any business will be considered to have economic nexus to California if:

  • It is organized or domiciled in California;
  • Its sales exceed the lesser of $500,000 or 25% of total sales;
  • Its payroll exceeds the lesser of $50,000 or 25% of its total compensation; or
  • Its real and tangible personal property exceed the lesser of $50,000 or 25% of the entity’s total real and tangible personal property.

According to the law as passed the Florida company would have economic nexus with California, as more than 25% of its sales were to the state. Of course, it is highly unlikely that the FTB would be able to discover this, and very unlikely that a notice would ever find its way to that company.

There’s also the dubious legal nature of this. The US Constitution that only the federal government can regulate interstate commerce. The constitutionality of economic nexus is very debatable. Additionally, the ability of California to collect such a tax is doubtful.

(Do note that the other areas of economic nexus–employees within the state, property within the state, or being a California entity–almost certainly are legal and California has every right to tax such entities.)

Just another way that California leads the country….

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Rappin’ Your Way to ClubFed

Posted on March 23, 2011 by Russ

Of course, not only are there Bozo tax professionals, there are Bozos in all professions–especially the arts.

Ja Rule is a famous rapper (well, famous in the world of rap). He also followed the tax practice that income after tax should be the same as income before tax. When you’re famous, that’s not a good idea.

Jeffrey Atkins (Ja Rule’s legal name) was the sole stockholder of two corporations. They paid him royalties from his music tours and from royalties (from sales of his music). That income neglected to make it to his tax returns from 2004 through 2008 (because he apparently didn’t file). That’s a great idea only if you get away with it…and he didn’t.

Mr. Atkins pleaded guilty to three counts of failing to file a tax return. The Department of Justice press release notes that the loss to the government is “…approximately $1,137,912.” [1] Mr. Atkins has agreed to file accurate tax returns and pay his back taxes (and penalties and interest).

Mr. Atkins will be sentenced in June, and he’ll likely get to record a rap version of “I Fought the Law” while at ClubFed…as with that tax loss that’s his likely destination. Mr. Atkins is also looking at two years in prison on a weapons charge.

[1] I’m amazed at the exactness of this approximation. I guess that cents are where the variance lies.

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A License Didn’t Prevent This (and Won’t in the Future)

Posted on March 23, 2011 by Russ

There’s no doubt in my mind that even if every tax preparer in the country obtained a license, there would still be problems with tax professionals. It’s human nature: Some people are greedy and, as Willie Sutton didn’t state [when asked why he robbed banks], “That’s where the money is.”

Today’s story bears that out. A CPA in Springfield, Missouri was put in charge of two trusts for beneficiaries of estates. Instead of the money going where it was intended, a large portion of it went into his wallet. The CPA, Murphy Hubbard, pleaded guilty to two charges of mail fraud and one of tax evasion. He’s agreed to make full restitution to the victims (including the IRS). He’ll also enjoy 42 months at ClubFed.

The idea that just because people have a license there will be no bozo tax professionals is, well, bozo. There may be good reasons for licensing but this isn’t one of them.

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Finally, California Doesn’t Lead the Tax World In Something

Posted on March 21, 2011 by Russ

Officials in California sighed with relief when the recent IRS report on jailhouse tax fraud came out. In a delightful change, California finished second to Florida.

Enough with the humor. The reason I wrote this is that Senator Bill Nelson (D-FL) is rather upset about this. This past Friday, Senator Nelson said in a speech in Jacksonville,

I am concerned that more than eight months after Congress passed a measure to crack down on tax fraud by prison inmates at state correctional institutions, the Internal Revenue Service and Florida Department of Corrections have yet to reach an information-sharing agreement that will help state prison officials identify prisoners filing false tax returns.

While the IRS’ public response is that they are working hard on the problem, one fraud ring in a Key West jail was stopped only because, according to the Florida Sun-Sentinel, “…one of [the inmates] left a how-to note in his cell.”

Most of the time, criminals don’t stoop to that level of Bozo behavior. Senator Nelson and other Senators wrote IRS Commissioner Douglas Shulman complaining about the laxness of IRS efforts in stopping this fraud. In Florida, it will be the state corrections officials who will be doing some of the stopping; soon, all envelopes containing tax returns that will be filed from Florida prisons will be stamped with a notation noting that it came from an inmate. Hopefully, the IRS will read that.

Of course, tax professionals see the IRS’ efforts in making sure that every tax professional gets a license, and that continuing education programs are under an electron microscope for their curricula. Perhaps the IRS should look at utilizing some resources on prisoner fraud as it is costing the government and taxpayers money.

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Fallen from the Peak

Posted on March 21, 2011 by Russ

With the Final Four in full force, it seems fitting to look at one man who is probably not enjoying the NCAA Basketball championships. In prior years, Nathan Peake would likely be scouting players, to see if any would be willing to sign with him to represent them when they negotiated contracts with NBA teams. That’s definitely not happening now.

Mr. Peake ran Peake Management Group, Inc. in suburban Maryland. Mr. Peake’s profits after-tax were the same as they were before tax, and that doesn’t work (especially when the IRS finds out). From 2000 through 2007, Mr. Peake “neglected” to file his tax returns. Adding to his tax evasion, he moved $5,836,940 from his business account to various personal accounts in other names. He structured payments (made payments in cash of amounts less than $10,000 so as to avoid currency reporting), paid personal expenses from business accounts, and generally just did his best to avoid paying tax.

The trouble with that strategy is that when it fails, it usually fails spectacularly. It did here.

On Friday, Mr. Peake pleaded guilty to one count of tax evasion and one count of conspiring to commit bank and wire fraud. Given that the amount of the evasion is over $1 million in tax, Mr. Peake will likely be residing at ClubFed in the near future. Sentencing is scheduled for August 2nd.

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Avoiding Floor Decisions

Posted on March 15, 2011 by Russ

A number of people, especially my poker friends, have asked me why I would want to be a tax accountant. It does seem like an odd shift from professional poker player to tax accountant, at least on the surface. The bottom line is, of course, I am doing it because it is what is best for my family and me. That being said, it strikes me that there are a number of similarities in what is required of the two professions.

Some of these similarities are focus, persistence, attention to detail, willingness to work long hours, the seasonal nature (yeah, I want June to be my off season for a reason), and customer service (oh, that was really unlucky sir, so sorry.)

I think the single most important skill for both professions is knowing the rules. Both professions are all about that, and the Special Enrollment Exam series was all about that for the tax profession. More important than knowing the rules is making sure that you follow them in a way that minimizes the possibility of a floor decision. After all, a floor decision could be against you, so you might as well try to avoid the situation all together.

This, as an Enrolled Agent, is what I want to do for my poker customers: Make sure the rules are followed and try to avoid having floor rulings even come up. When they do come up, I can argue about the application of the rules if the ruling is unfavorable.

Good luck at the tables. If you keep your records straight and follow the rules, you will not need good luck with the IRS. If you do not know how to follow the rules, please consult a tax professional.

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