From Russ Fox, EA, of Clayton Financial and Tax of Las Vegas, NV. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
When I last reported on this story, I noted that Gayle McIntyre only received 54 years the previous time she committed tax fraud. Luckily for her, that sentence was suspended. She didn’t learn from the past.
In January she was indicted on 23 new counts of tax fraud, identity theft, forgery, and other charges in Albuquerque. She pleaded guilty to 16 of those counts in April. She was sentenced today in Santa Fe to four years in prison, and five more years on probation.
Of course, when she was indicted in January she was on probation for five years. I am hopeful that she will learn from this mistake but I don’t want to set odds on that.
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Mr. Flach, who resides and practices in New Jersey, does not like the new IRS e-file mandate for tax professionals. He believes it does not apply to him. The new mandate requires that tax professionals who prepares more than 100 tax returns for 2010 or more than 10 for 2011. (Note that 2010 here means 2010 tax returns prepared in 2011, and 2011 means 2011 tax returns prepared in 2012.) The question comes down to a portion of the law that states, in part, “if (i) such return is filed by such tax preparer”.
Mr. Flach does not like commercial tax software. He considers software to be “…[P]otentially flawed and expensive….” He does e-file New Jersey returns today; New Jersey offers a free e-file solution on the state’s website. He prepares his returns using pencil and paper; he’s done it this way for decades and sees no reason to change. Today he asked whether his opinion of the law is correct (that is, the law provides an exception because he doesn’t file any returns but his own) or whether he’ll have to become an Electronic Return Originator (ERO) against his will.
There’s an interesting parallel in California. California has its own electronic filing requirement: Tax professionals in the Golden State who prepare 100 or more returns must electronically file all returns (unless the client opts-out or the return is not eligible for electronic filing). I fall under that requirement; there is no exception for hand-prepared returns. I haven’t read the statute, so I can’t tell if there’s any give or not. However, when the law passed I remember quite well the discussion at the Legislature; the intent was to force electronic filing for all returns. That’s the problem that Mr. Flach is going to face. It is quite clear that Congress’ intent was to force all tax professionals to file as many returns as possible electronically.
Mr. Flach will soon be forced to file all of his returns with a PTIN (if he does not do so already). Let’s assume that he files 400 returns in the 2010 season, all noting his PTIN, and that all of those returns are paper-filed. He’ll receive a letter from OPR (the Office of Professional Responsibility, the IRS’ enforcement arm for tax professionals) asking him why he didn’t comply with the law. He’ll respond that he’s exempt, and let’s assume the IRS disagrees. Mr. Flach will then find himself facing an administrative hearing. It’s likely he’ll lose; he’ll appeal and likely lose again. (Trying to win such a fight against the IRS at the administrative level would be difficult if not impossible.) Let’s further assume he then appeals the rulings to the court system.
The issue will boil down to legislative intent. I have not reviewed transcripts of Congress’ discussion of this legislation. It would not surprise me to find out that Congress’ intent was that all returns prepared by tax professionals be filed electronically. If that is the case then Mr. Flach will be facing a difficult fight.
That’s not to say that Mr. Flach can’t win. Technically, he’s likely correct that he does not have to file returns electronically. For him to win that fight would likely cost him tens of thousands of dollars in legal and court costs. Thus, from a practical standpoint it would be a Pyrrhic victory.
Unfortunately for Mr. Flach, this is one case where it’s fairly clear what the meaning of the word “is” is.
When I think of sugar, I think of the sweetener you put into a cup of coffee. Or perhaps this song:
But this is a tax blog, so we’re going to deal with something different…something very different. The Sugar House Lounge describes itself as “Denver’s most unique premium lounge and night club.” I’ll say that’s true.
It appears that the Sugar House Lounge was once a brothel, “where customers paid $300 for sex.” The former owner of the business, Scottie Ewing, sold the business back in 2005. Mr. Ewing received $150,000 plus a share of future revenues. Mr. Ewing then instructed the new owner for some time on how to run the business. That all seems normal (except for the prostitution).
I’m guessing, though, that Mr. Ewing left out to the new owners instructions on the necessity of filing tax returns. I say that because he didn’t. He did instruct the new owners on it being a good idea to use a “front company” to own the business.
In any case, last week Mr. Ewing pleaded guilty to one count of tax evasion in what appears to be a plea deal. (Both news stories emphasize the prostitution over the tax evasion.) He’ll be sentenced in late December.
A rather obvious case of Bozo behavior showed up this past week. Let’s head to Newark, New Jersey. Leslie Wofford was a police communications officer with the Newark Police Department. Back in 2004 Officer Wofford wanted to increase her take-home pay, so she increased her withholding exemptions. Now, did she got to 4? Perhaps 7? Remember, I said Bozo behavior.
Officer Wofford elected 99 exemptions. That’s a lot of exemptions.
Officer Wofford did increase her pay, but at a cost. When she filed her tax return, she would owe a lot more income tax. But Officer Wofford had a solution for that, too. She didn’t file a tax return. This did not end up well for Officer Wofford.
When you file a Form W-4 with 10 or more exemptions, it’s sent to the IRS. Now there are legitimate reasons why you might have that many exemptions, and if you do there’s not a problem in claiming them. However, when you don’t and when you don’t file tax returns, trouble will likely happen. Add in repeating this for a few years (through 2008) and the trouble will likely lead to ClubFed. Officer Wofford pleaded guilty to tax evasion this week.
In any case, Officer Wofford’s behavior really was Bozo, and she’ll likely get a chance to find out what it’s like on the other side of the fence.
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I don’t think highly of California’s business climate. Still, things could be worse: I could be in Philadelphia. The City of Brotherly Love has sunk to a new low.
After going after penny-ante bloggers the city’s Revenue Department has been tasked with administering a new Tobacco Tax. All businesses with a business tax account were sent a form that must be completed by September 30th, or they’ll have a new Tobacco Tax Form filing requirement…and there’s a $5,000 penalty for not filing the form.
The scheme included a phony investment fund on the Isle of Man. Investors with large gains could offset these gains with capital losses from the phony fund…for a price, of course. The scheme apparently allowed television producer Haim Saban (best known for bringing the Power Rangers to the United States) to avoid a large capital gain. The fund supposedly held over $9 billion in stock; however, it actually didn’t exist.
The DOJ noted that the individuals caught up in the scheme did not know it was fraudulent, and those individuals have voluntarily paid $240 million in back taxes. However, the DOJ believed that Mr. Greenstein and Mr. Wilk knew quite well of the phony nature of the fund. Also, the DOJ noted that a large portion of Quellos was legitimate (that portion was sold to BlackRock, Inc. in 2007).
And it appears that the DOJ was correct. The two pleaded guilty last week to tax fraud and will face at least two years and possibly as many as six when sentenced in January. They also agreed to pay $7 million in fines and $400,000 for the cost of prosecuting them.
In the end, though, this case goes back to a recurring theme in this blog over the last several years. If it sounds too good to be true, it probably is. If someone tempts you with a foreign tax shelter or foreign investment fund, be very, very careful.
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Hooray for new math,
New-hoo-hoo-math,
It won’t do you a bit of good to review math.
It’s so simple,
So very simple,
That only a child can do it!
–Tom Lehrer, “New Math”
That’s what I think of President Obama’s proposal for expensing of fixed assets. That was one part of his proposals to help the economy. Joe Kristan points out that it just speeds up depreciation from (say) five years to one year, but after five years the amount of income a company will have is identical. Of course, we’re also facing higher tax rates courtesy of the end of the Bush Tax Cuts…and that will wipe out any gains under this new plan.
But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.
If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.
What will the impact be of the elimination of the Bush Tax Cuts? Proponents of eliminating the cuts note that only 3% of small business owners will be impacted. Well, that’s true…but it’s anything but the whole story.
As Joe Kristan has noted, the real number is the amount of income that will be pushed up into higher tax brackets, and it’s a lot more than 3%. It’s 48%, as noted in a recent Wall Street Journal op-ed.
Joe has plenty more to say about it (here and here).
I don’t think that I’m revealing a secret when I tell you that most gamblers lose. The casinos in Las Vegas and elsewhere weren’t built by having more people win than lose.
The horse racing industry has struggled in recent years. Ignoring the economics of the horses (I’m definitely not an expert on equine genetics and economics), race tracks take up a large space, and the glamorous sport of the 1920s and 1930s isn’t that glamorous to individuals right now. Sure, individual races like the Kentucky Derby still draw huge crowds and large purses and betting, but most race tracks are struggling to keep afloat.
And it’s far, far harder to win as one who bets on the horses. Let’s say that there are five horses running in a race, and each of them has an equal chance of winning (a 20% chance, or odds of 4 to 1). But that’s before the house cut, and the government’s cut.
Under a new California law that’s awaiting Governor Schwarzenegger’s signature, the government’s take on two-horse wagers (exactas and daily doubles) will increase from 20.68% to 22.68%; the take on three or more horse wagers will increase from 20.68% to 23.68%. While this won’t change the odds, the purse will be reduced by 2% or 3% (depending on the bet being made). Adding in the take from the house and the government, that five-horse race is really a six-horse race…and that’s before you have to pay income tax on your winnings. Yikes!
The feeling among the legislators is that they’re dealing with a captive audience, and they won’t notice that the purse on the $1.4 million Pick-Six is now $1.37 million…and they’re probably right. Still, this does emphasize that the house always wins…especially in horse racing.
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Back in May I wrote about Sung Ho Choi. Mr. Choi was in the process of selling his business, AJ’s Green Dry Cleaners and Laundromat. He happened to show a prospective buyer the computerized sales records. Unfortunately for Mr. Choi, those quite accurate records showed sales that were $194,973 higher than on the tax returns for the business. It seems that Mr. Choi provided only the bank deposit records to his parents (who owned the business) and his accountant.
That prospective purchaser happened to be an undercover IRS investigator. Oops.
Mr. Choi was sentenced last week to ten months at ClubFed, and must also make restitution of $60,537 and pay a $5,000 fine. It would have been far, far easier to just provide accurate records…but that thought process rarely occurs to the Bozo contingent.
