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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$200,000,000 Refund Letters Come in Ohio, but the Refunds Won’t

Posted on March 15, 2011 by Russ

Some things are too good to be true. Imagine receiving a letter in the mail saying you will receive an income tax refund of $200,000,000. Yes, $200 million.

Well, 9,701 taxpayers in the Buckeye State got such letters. As first reported in the Sandusky Register, taxpayers were told that that because their refunds had been split into a paper check and direct deposit, just a paper check would be issued…for $200 million.

The letters were in error, of course, and according to the Ohio Department of Taxation the problem has been fixed. But it does bring up an interesting issue that a few of my clients have faced: What do you do if you receive a refund you are not entitled to? Let’s say that you actually receive a check from the Ohio Department of Taxation for $200 million.

If you receive a tax refund you are not entitled to, the government can and will ask for that money back…plus interest. If you get such a check, don’t cash it — it’s not your money. Contact the tax agency and let them know of the problem. They’ll likely direct you to mail the check back to the agency.

In any case, Ohio, which is facing an $8 billion budget deficit, won’t be sending out $200 million refunds. The letters themselves and the resultant publicity have added a minor amount of money to their deficit (and some humor to tax season).

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Will California Start Their Own Online Poker Sites?

Posted on March 14, 2011 by Russ

Unless you’ve been under a rock, you know that California is broke. The budget deficit for next year is projected at somewhere between $25 and $30 billion. That has caused legislators in the Bronze Golden State to look at online poker as a revenue source.

Back in 2006, Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA). The UIGEA made it illegal to accept bets from illegal Internet gambling operators. But the law didn’t criminalize any gambling; rather, the law looks to state laws to see if the gambling activity is legal or illegal. Online poker sites exist, but the operators are overseas. The two largest sites, PokerStars and Full Tilt Poker, operate in European tax havens.

California legislators have looked at the amount of money being bet, and decided they’d like to get their hands on it. Is it to help make better poker sites for the players? Of course not; it’s a simple revenue grab. The state needs money, and for Democratic legislators who want to increase the size of state government (or keep it as large as it is today), revenue is needed (California voters haven’t approved a statewide tax increase in some time and aren’t likely to in the near future). This is an easy way to get money, right?

The problem for the legislators proposing this is that everyone wants a piece of the pie. Indian tribes (who control most gambling in California) want a piece, the legal cardrooms in California (i.e. Commerce Casino, Bicycle Casino, etc.) want their piece, and the Indian tribes that don’t have gambling want their piece. As for the players, well, if you expect anything player-friendly out of the California legislature, you’re betting with a pair of sevens into a full house. If anything passes in Sacramento it’s almost certain that the existing sites will be made illegal (under California law).

This news story gives an accurate flavor of what’s happening in Sacramento. As for what’s next, probably more bickering and dithering. After all, that’s one thing the California legislature is good at.

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Corporate Filing Deadline Tuesday

Posted on March 14, 2011 by Russ

The deadline for calendar year corporations to file their federal (and most state) tax returns is Tuesday, March 15th. This applies to both C-Corporations (filing Form 1120) and S-Corporations (filing Form 1120S). If you’re not ready to file, avoid penalties, make an estimate of what tax you owe and file Form 7004 (instructions here).

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More Trouble for Marijuana Dispensaries from the IRS

Posted on March 14, 2011 by Russ

Back in 2007, the Tax Court ruled that a non-profit that supplied medical marijuana to terminally ill patients could not deduct business expenses related to that activity but could deduct the expenses related to their counseling and caregiving activities. It appears that the IRS has now started to audit medical marijuana dispensaries throughout California.

The Marin Independent Journal is reporting that a Fairfax, California medical marijuana dispensary has been audited and told that they will not be able to deduct any business expenses. The case is in the audit stage, so this case will percolate for some time. (Hat Tip: TaxProfBlog)

Medical marijuana is legal under California law. However, it is illegal under federal law. While the Obama Administration pledged to not go after medical marijuana dispensaries, it appears the IRS hasn’t heard the news. And this is likely to pose a real problem for the dispensaries.

In the case the Tax Court previously decided, the non-profit was providing end-of-life counseling:

By conducting its recurring discussion groups, regularly distributing food and hygiene supplies, advertising and making available the services of personal counselors, coordinating social events and field trips, hosting educational classes, and providing other social services, petitioner’s caregiving business stood on its own, separate and apart from petitioner’s provision of medical marijuana.

But a medical marijuana dispensary likely has one purpose: distributing marijuana to those who medically need the drug. While a San Francisco lawyer in the newspaper article I referenced suggests that counseling users on which type of marijuana to use is another type of business, I think this will be a much tougher sell to the Tax Court. The problem is this is all related to the act of selling and distributing (a.k.a. trafficking) marijuana.

It may take some time for this issue to reach the Tax Court; the case is apparently just in the audit stage. There will likely be an appeal before it heads to court. That said, I do expect this case to head to Tax Court in about a year, with a ruling in a couple of years.

Posted in California, IRS | Tagged | 1 Comment

He’s Back!

Posted on March 13, 2011 by Russ

Just when you think you can finally put Richard Hatch out of mind, he fumbles back into the spotlight. Mr. Hatch is, of course, the winner of the very first Survivor; he thought that the $1 million he won on the reality show wasn’t taxable. He served 51 months at ClubFed but still believes that to be the case.

Apparently, that wasn’t long enough to realize a basic truth about taxes: All income is taxable unless Congress exempts it; nothing is deductible unless Congress allows it. Winning money on reality television is taxable.

Well, Mr. Hatch never bothered to amend his tax returns (as he was supposed to). In January, he was found guilty of violating terms of his supervised release. On Friday, US District Court Judge William Smith sentenced Hatch to nine months at ClubFed with that sentence beginning on Monday. Judge Smith also ordered Hatch to have 26 months of supervised release (following his sentence), with 25% of his earnings during that time being garnished to the IRS. Adding in the tax, penalties, and interest, Mr. Hatch owes about $2 million to the IRS.

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.

News Stories: Providence News, The Hollywood Reporter, and ABC

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Stanford Athletes Sacked

Posted on March 11, 2011 by Russ

As a graduate of the University of California, Berkeley, it’s always nice to see our Bay Area rival, Stanford, suffer some ignominious defeat. Courtesy of the TaxProfBlog, we discover that Stanford maintained for nearly a decade a list of “easy classes” for its athletes.

After California Watch discovered the list, it’s been discontinued. No more “Beginning Improvising” for Cardinal athletes.

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