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.

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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.

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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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