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.
There’s no budget, but negotiations are scheduled to continue tomorrow. This story in the San Jose Mercury leads me to believe we’re still a couple of days away from an agreement, and likely at least a week from a vote.
This poses a dilemma for Governor Schwarzenegger: what to do with all the bills the legislature approved this year. Will he sign anything on or before September 30th (Thursday), or will he veto everything if there’s no budget? Governor Schwarzenegger isn’t commenting at all, but suspicions among individuals attending the CSEA Board meeting this past weekend is that one reason for the movement this past week was a likely veiled threat from Governor Schwarzenegger: Give me a budget that I like or all of your bills will be vetoed.
Newsreports state that a “framework for a budget deal has been reached” and that the Big Five (Governor Schwarzenegger and the Democratic and Republican legislative leaders) plan on working through the weekend to hammer out the details. The goal is to announce the budget on Monday with votes on the budget happening in early to mid-October.
No specifics were released, and while I hope a budget will be hammered out I’m less hopeful than others. The devil is always in the details…and those details don’t yet exist.
California doesn’t have a budget. When I return home from Sacramento on Sunday, California will not have a budget. It’s probable that when we vote in the mid-term elections in 40 days that California will not have a budget. Why is that?
Democrats complain that the reason is that Republicans are being intransigent; they are demanding cut, cut, cut to programs that can’t be cut any more; the only solution is that “some” taxes must go up (along with a whole lot of smoke and mirrors and a little bit of budget cutting).
Republicans say enough. Spending in California has grown massively; regulations have grown immensely; the only solution is cutting spending. Republicans say they won’t vote for one penny of new taxes. As I’ve said before it’s the unstoppable force meeting the immovable object.
However, there’s a hidden reality that’s known to both sides: The people–you know, those pesky voters like us–have said no to new taxes three times over the last two years. It’s quite apparent given the mood in the country that they’d say no again if asked. The Democrats are well aware that they will have to enact cuts.
The problem is that these cuts will now hit the Democrats’ core constituency: unions, especially public employee unions. Salaries, pensions, and the number of employees will be going down. Democrats don’t dare enact a new budget (that is, one that can pass the legislature) before Election Day; that would anger their constituents. Who cares that it’s costing California $50 million a day? If Democrats vote for what their constituents don’t like, they might be out of a job.
Why am I heading to Sacramento? The annual liaison meeting between California’s tax agencies (BOE, EDD, and FTB) and the California Society of Enrolled Agents (CSEA) and the quarterly Board of Directors meeting of CSEA.
I’m a small business owner. I’m now reasonably successful, but I look warily at what’s coming down the pipeline in Washington (and Sacramento, for that matter) and don’t like what I see.
Get the picture? Small businesses are very often about family. Interestingly, families are the very entities that Congress has deliberately exempted from many of the breaks offered to small businesses. I’m not sure how that’s supposed to make sense.
Last week, I read on RothTaxUpdates how the goal of letting the Bush Tax Cuts expire is to hurt small business. Joe Kristan links to the Tax Policy Blog and notes how the huge upcoming tax increase on pass-through entities is apparently the goal. Surprise, surprise: Most small businesses and most family businesses are organized as pass-through entities.
Let me ask you, what has Congress done in the past two years that has helped small businesses? The singular accomplishments are the Stimulus Plan, Cash for Clunkers, ObamaCare, and more regulations and taxes. If anyone wonders why incumbents are feeling the heat, they don’t have to go any further.
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.
Posted inTax Evasion|Comments Off on One From the Police Blotter
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.
Posted inTax Fraud|Comments Off on “Hello, students. I defrauded the government.”
