Taxable Talk

It’s April 16th. There was a deadline yesterday?

Well, this post was supposed to appear yesterday morning, but apparently I clicked on the 16th rather than the 15th when I wrote it. What a difference a day makes. Yesterday, you could still file an extension and save yourself the Failure to File Penalty (5% of the tax per month late). Today, you can’t.

So what do you do if you can’t file your tax? File an extension. If you wake up today and realize there was a deadline yesterday, 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.

I hope you enjoyed our Bozo Tax Tips for the 2009 filing season. We’ll be back next week resuming our normal coverage of tax events in the US and California.

Another repeat, but one that is a continual issue with cash business. It may be “cash and carry,” but cash is taxable in all ways. And cash reporting (or lack thereof) can be a problem. Our #1 Bozo Tax Tip is brand new for this year and it will be up tomorrow! Anyway, let’s be suspicious:

Given my practice area, I deal with individuals who occasionally make large cash deposits. I tell them that they shouldn’t mind the completion of a Currency Transaction Report. The IRS gets so many of them that as long as you’re paying your taxes it’s not a big deal.

On the other hand, if you break up your $11,000 transaction into two $5,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and a lot of them are investigated. And that’s what leads into this tale of woe.

We’re focusing today on a public figure. He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.

But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.

Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.

So if you want to send money, go big-time. Send more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”

Another repeat from last year, but just as apropros. Only last week I was offered the “Deal of a Lifetime” to invest in the guacamole fund. I’d rather eat my guacamole, thank you. Anyway:

Just today someone sent me an email noting the following “truth”:

Hey Russ, [redacted] sent me this video on how I can put all my wages and other income into this investment vehicle and I’ll no longer have to pay taxes on any of this.

I know, it sounds too good to be true, but it is true. I’ve read all of these documents and it sure seems legal….

I won’t bore you with all of the other details. Suffice to say, I was being asked to invest in a Cayman Islands Trust. Somehow, after spending lots of money in fees my taxable income will become sheltered from US income taxes. There’s no reporting, no tax, and no trouble from the IRS!

If it sounds too good to be true it probably is.

This is. We start with the first problem, the economic substance rule. In order for any transaction to be meaningful in the Tax Code, there must be some economic substance to it. For example, I sell John $10 worth of paper. That has economic substance: I now have $10 and John has a bunch of paper. But what economic substance can there possibly be when I magically turn my earned income into vanished income?

In order for a Trust to be recognized under federal tax law, a trust must have some real economic effects.

Next, federal law requires the grantor of a foreign trust to report that. So if you decide to obtain a foreign trust, you had better be prepared to disclose it or face severe penalties including possible time at ClubFed.

I hope you get the idea. If you follow this Bozo path you will likely get in deep trouble. Consider what happened to Lorin Sloan, as noted in United States v. Sloan, 939 F.2d 499 (7th Cir. 1991), cert. den. 112 S.Ct. 940 (1992). (My thanks to Dan Evans’ Tax Protester FAQ for this.)

Like moths to a flame, some people find themselves irresistibly drawn to the tax protestor movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like the moths, these people sometimes get burned. Lorin G. Sloan believed these claims and because he acted upon them now faces four months in a federal prison; there can be little doubt that he has been burned.

[. . . .]

The real tragedy of this case is the unconscionable waste of Mr. Sloan’s time, resources, and emotion in continuing to pursue these wholly defective and unsuccessful arguments about the validity of the income tax laws of the United States. Despite our rejection of Mr. Sloan’s legal analysis of the tax laws, we are not unmindful of the sincerity of his beliefs. On the other hand, we are less sure of the sincerity of the professional tax protestors who promote their views in literature and meetings to persons like Mr. Sloan, yet are unlikely ever to face the type of penalties incurred by him. It may be that our decision will not alter Mr. Sloan’s views regarding the tax laws of this country, for he has stated that if we affirm his conviction without applying the law as he understands it, our decision will be ‘a sham to which I WILL NOT SUBMIT.’ It may also be that serving his sentence in prison will not alter Mr. Sloan’s view. We hope this pessimistic assessment is incorrect.

A repeat for the third 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.

Last week a new client came into my office for the preparation of his tax return. Everything went smoothly, and an hour or so later his returns were complete and filed, he had his copies of the returns, and the Bozo festivities (unknowingly to me) were about to begin.

He asked me if I’d take cash. “Sure,” I replied.

The client then handed me an amount exactly 10% less than the amount of the invoice. “This way you don’t have to report it–after all, it’s cash so there won’t be any record.”

“Cash income is just as taxable as any other source,” I replied. “I’m ethical, and I report all my income.”

“Oh, come on,” he replied. “When I was self-employed everyone did that.” Thankfully, my client is currently not self-employed.

“Well, that’s a good way to get in trouble. That’s called tax evasion. I don’t need to get myself involved in that, and neither does anyone else today.” I pointed out to my client the number of business owners who have done what he thought was ‘normal’ who are now residing in ClubFed. It’s amazing how many owners of Gentlemen’s Clubs (which are definitely cash businesses) get in trouble, thinking that they only have to report some of the income.

My client, after some prodding, came up with the other ten percent of the fees, and he ended up (hopefully) a little wiser. You needn’t worry about this: Just report all of your income on your tax return. But if you want to live on the Bozo side of life, skip reporting the cash…until one day you find out that really was a Bozo move.

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.