Bozo Tax Tip #7: 300 Million Witnesses Can’t Be Right

Posted on April 6, 2010 by Russ

I keep thinking that I’ll be able to drop this Bozo tax tip one year (well, it did fall to #7). 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.

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Bozo Tax Tip #8: Use a Bozo Accountant

Posted on April 5, 2010 by Russ

I’ve come to the conclusion that everything in life is normally distributed. You may remember the normal distribution from a class you took on probability theory. It’s the bell curve. Most things are in the middle, but some are outliers stuck at both ends.

It’s that way in the world of tax accounting. There are good accountants, there are average accountants, and there are, of course, bad accountants. But it takes a special set of skills to be a Bozo accountant.

I’ve written several stories about Bozo tax practitioners. Here are some helpful hints on what to look for in a Bozo tax practitioner:

* 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’ll 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 think you get the idea. If your tax preparer starts exhibiting symptoms like these, make sure you find someone else. File an extension and seek someone who is not a Bozo.

Like it or not, taxes are part of life. Tax preparers who follow one of the items on the Tax Protester FAQ are Bozos. If you follow a Bozo’s advice you’re just asking for trouble.

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Bozo Tax Tip #9: The 44¢ Solution

Posted on April 2, 2010 by Russ

With Tax Day fast approaching it’s time to look into the 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 15th), 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 a client 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. Efile (and you don’t have to worry at all about the Post Office), or spend the $2.70! And you can go all out and get a return receipt, too (though you can now track certified mail online). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

A warning for those who save the money and do not use return receipt service. The postal service only keeps the computerized (online) records up for two years. So you must print that record of delivery off the postal service’s website. Or you can spend an additional $2.30 for a return receipt postcard or $1.10 for an electronic return receipt. Paper counts, so make sure you get a receipt of some sort.

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Bozo Tax Tip #10: Use Consecutive Social Security Numbers When Cheating the IRS

Posted on April 1, 2010 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.

Here’s a repeat for the third year:

Let’s thank Michael Graham of Queens, New York for coming up with this gem. Mr. Graham decided to file phony tax returns with the IRS. He used consecutive social security numbers on his tax returns.

He did get one tax refund through the system and collected $900. However, the other 1,799 returns were caught by the IRS and he didn’t get the $1.6 million he attempted to collect. He did find his way to court, though….

I strongly suggest that you do not try anything like this. The IRS and state tax agencies do have systems in place to catch bozos who attempt crimes like this. Instead of trying to bilk the system, ask your tax preparer about legitimate deductions that are available for you to take. The regular IRA allows you to deduct $5,000 ($6,000 if you’re 50 or older) from your income (if you’re eligible). You have until April 15th to make your contributions.

And if you’re self-employed, you may be able to contribute to a SEP IRA. You have until your return is timely filed, including extensions, to contribute to a SEP IRA. You can contribute 20% of your net self-employment income up to a maximum of $49,000 to a SEP. This is one tax deduction that’s available until October 15th if you file an extension.

Phony tax returns will likely lead you to a stint at ClubFed (where Mr. Graham went). We recommend the IRA or SEP IRA over ClubFed….

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Annual Blog Hiatus

Posted on March 28, 2010 by Russ

With just about 2½ weeks left before Tax Day, it’s time for my annual blog hiatus. I’ve written my annual top ten Bozo Tax Tips (they’ll start appearing in a couple of days), but between now and April 15th my clients are paying me to get their work done. Of course, if anything, really, really big in the world of tax happens I’ll interrupt the hiatus and post about it. Otherwise, to you and my fellow tax bloggers, have a Happy Tax Day!

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Why I’m an Hour South of Los Angeles

Posted on March 25, 2010 by Russ

There was a small blurb on the Internet today: “New LA law cuts Internet business taxes.” Los Angeles has a gross receipts tax. When I was in the telecommunications industry, I relocated a business from Sherman Oaks (part of Los Angeles) to nearby Burbank (a separate city) to avoid this tax. Why pay additional money when there’s no need to?

When I started my business I chose Irvine because it’s a low tax environment (for California) with a strong pro-business climate. If I were in Los Angeles, I’d pay a business gross receipts tax at the highest percentage for Los Angeles. My City of Irvine business license costs $50 a year. I’d pay at least ten times that much in Los Angeles.

When you’re looking at where you locate your business take a look at local taxation. Burbank is less than ten miles from Sherman Oaks, but the taxation is quite different in the two locations.

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Not All Publicity Is Good Publicity

Posted on March 23, 2010 by Russ

There’s an old saying, “All publicity is good publicity.” Sometimes, though, it’s not. Especially if you’re a Bozo.

Take Scott Mitchell, the owner of Central Iowa Amusements. Mr. Mitchell’s company got some good words in the Des Moines Register; his company had $464,676 of revenues from touch screen lottery terminals in Iowa. Unfortunately, Mr. Mitchell neglected to tell his accountant about that income. Even more unfortunately for Mr. Mitchell, the IRS does read the newspaper. Mr. Mitchell is likely heading to ClubFed after being found guilty of tax evasion.

Joe Kristan has more.

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Specifics Trumps General in Gambling Losses for Taxes

Posted on March 22, 2010 by Russ

Congress writes the Tax Code. That leads to many situations where there’s conflicting language between two sections of the Code. Section 162(a) allows for the deduction of necessary and ordinary business expenses. Section 165(d) limits gambling losses to the amount of gambling winnings. Which section wins out for a professional gambler who has a losing year?

The Tax Court today looked at the case of a professional gambler who in 2006 had a losing year. On his tax return, he put his gambling income and expenses on a Schedule C. But he did not limit his gambling losses to the amount of wins; rather, he took all his losses and attempted to have a net operating loss. The IRS examined his return, and adjusted the total so that he was limited to the gambling loss that was the amount of wins. The case made its way to the Tax Court. The Court noted,

Petitioner is not the first taxpayer to seek to use the Groetzinger holding in support of offsetting gambling losses against other income. See, e.g., Lyle v. Commissioner, T.C. Memo. 1999-184, affd. without published opinion 218 F.3d 744 (5th Cir. 2000). In each such instance the result has been the same–the explicit language of section 165(d) trumps the general language of section 162(a) and limits wagering losses to the amount of wagering gains. See, e.g., Valenti v. Commissioner, T.C. Memo. 1994-483.

Petitioner presented no argument that would cause this Court to reconsider its prior holdings. We accordingly hold that petitioner is not entitled to deduct his gambling losses that exceed the amount of his gambling gains.

The petitioner also attempted to deduct $2,400 for promotional expenses. However, he submitted no evidence of those expenses and the Court threw out that deduction.

Remember, gambling is a ‘sin’ in the eyes of Congress and professional gamblers are in one of the few professions where you can’t lose…at least, for taxes.

Case: Crawford v. Commissioner, T.C. Memo 2010-54

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A Companion to Tax Trouble

Posted on March 21, 2010 by Russ

After ranting on health care, it’s time for the lighter side of taxes. That means a visit to that old standby, the escort service, where tax trouble is apparently second nature.

Let’s head to Salt Lake City where companionship appeared to have problems. Jodi Hoskins and her then husband, Roy Hoskins, ran an escort service to help with those issues. Companions was its name, and it did quite well. However, you wouldn’t know it if you looked at the Hoskins’ tax return.

They reported income of just over $70,000 in 2002. Their math skills, though, weren’t as good as their ability to live quite well. It seems that they understated their income by just a bit. The actual gross receipts in 2002 were $1,204,354 higher than what they claimed on their return. A “missed it by that much” moment to be sure. That’s an understatement of $485,443 in tax.

Unfortunately for the Hoskinses, the IRS and the Department of Justice discovered the evasion. Roy Hoskins pleaded guilty earlier this year; he’ll be sentenced on April 15th (how appropriate). Last week, Jodi Hoskins was found guilty of one count of tax evasion. Besides the restitution that will undoubtedly be ordered Ms. Hoskins is likely looking at a visit to ClubFed.

So if you run an escort service, be mindful that the IRS is well aware that it’s a cash business. Just report the cash, pay your tax, and live a somewhat less lavish lifestyle.

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Why I’m Against This Health Care Bill

Posted on March 21, 2010 by Russ

Most tax professionals I know want a limited government and limited taxation. The measure that the House will likely approve tonight will be disastrous in so many ways.

First, there are twenty new taxes in the measure. I’ve talked about this before but an essential reality of taxes is that all taxes are passed on to consumers. If a business must pay $10 more for an item, you will be paying at least $10 more for that item.

The only way the measure scared up enough Democratic votes in Congress was using phony accounting. The Congressional Budget Office (CBO) “scored” the measure as a deficit reducer. Well, the CBO scores only the first ten years of the measure. The taxes go into effect in the near future, while the health plan doesn’t go into effect for four years. With ten years of revenues and six years of costs, of course it reduces the deficits.

But for our children and grandchildren, the Obama Administration is mortgaging their future. This measure can’t be paid for, and added to the “Stimulus” legislation that passed last year the disaster is huge. Taxes will continue to go up, probably to confiscatory levels in high-tax states such as California and New York.

Governor Chris Christie (R-NJ) has the right idea. Let’s live within our means. Let’s cut spending, eliminate government programs to what’s necessary (rather than having what’s nice). We need to do this in Washington.

This health care bill spends money, creates bureaucracy (I’ve read that 16,000 new individuals will be needed at the IRS to enforce this) and will hurt American industry. More money will leave our pockets for taxes to fund this bureaucracy–funding that’s not acknowledged in the measure.

Unfortunately, the current Administration has absolutely no desire to limit government spending. There’s an option, though, and it comes as we vote later this year for our Representatives and Senators. Ask yourself if the individuals you are voting for have your fiscal future in mind. A good proxy for this is how they voted on health care (assuming they are in Washington today). In June (for California) and in November (for the country) we’ll have an option to let Congress know what they should be doing by electing individuals who understand what limited government means.

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