Bozo Tax Tip #5: Sales Tax is an Unnecessary Expense

Posted on April 10, 2011 by Russ

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.

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Bozo Tax Tip #6: Foreign Trusts

Posted on April 10, 2011 by Russ

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.

Posted in Tax Evasion, Tax Fraud | Tagged | 1 Comment

Bozo Tax Tip #7: Nevada Corporations

Posted on April 8, 2011 by Russ

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.

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Bozo Tax Tip #8: The $0.44 Solution

Posted on April 6, 2011 by Russ

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.”

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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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