M Is for Mistake, But the IRS Has a Cure

Posted on March 8, 2010 by Russ

This year two brand new schedules appeared on federal tax returns: Schedules L and M. Schedule L is for the Standard Deduction for certain individuals, and hasn’t been a problem for most individuals or preparers. The same can’t be said for Schedule M.

Schedule M is used for the Making Work Pay and Government Retiree Credits. The schedule has caused problems for all. Did the client have a government pension or didn’t they receive a $250 Economic Recovery Payment (ERP)? How much was it? As the NAEA said,

IRS, anticipating some difficulty with completing Schedule M, punted at the beginning of the filing season. The agency advised taxpayers to confirm payments with SSA, VA, or the Railroad Retirement Board. Only IRS would think this helpful…

The folks at the NAEA are beginning to get just as cynical as I am. But I digress….

There is good news, though. According to the NAEA, there is now a toll-free telephone number that can be used to check whether or not a taxpayer received the one-time ERP. You can call (866) 234-2942 to find this out. You will need the taxpayer’s social security number, their date of birth, and their ZIP Code from their last filed tax return. Note: You must check individual taxpayers separately, even if the taxpayers filed joint returns. There will also be an Internet application; however, that application is not yet available

I tried the telephone system for a client, and it is up and running. The whole process of data entering the SSN, ZIP, and DOB took about two and a half minutes.

My thanks to the NAEA

Posted in IRS | Tagged | Comments Off on M Is for Mistake, But the IRS Has a Cure

California to Conform to Haitian Earthquake Charitable Contributions

Posted on March 8, 2010 by Russ

AB347 which will conform California law to the federal election to deduct 2010 cash contribution to Haitian earthquake relief on 2009 returns, is waiting for Governor Schwarzenegger’s signature. He will sign the measure in the next couple of days; when he does, Californians can then claim such contributions as charitable donations on their 2009 returns. They will also be able to make separate elections for federal and California purposes…just to make life more interesting for tax professionals.

Posted in California | Comments Off on California to Conform to Haitian Earthquake Charitable Contributions

Best Structuring In a Supporting Role…

Posted on March 7, 2010 by Russ

With the Academy Awards being broadcast this evening, it’s appropriate to look at a case from the movies. Cindy Ondracek and her husband owned a drive-in movie theater in Port Orchard, Washington; they also owned another cinema in Bremerton, Washington. The businesses were successful: they generated over $2 million in gross revenues, most of this in cash.

But Mrs. Ondracek and her husband didn’t like the idea of the government getting the cash. So Mrs. Ondracek structured her deposits. She deliberately deposited less than $10,000 to avoid currency transaction reporting rules. That in itself is a felony.

Mrs. Ondracek, though, took this one better: She and her husband failed to file tax returns for the years in issue (2002 through 2005). And she can’t claim ignorance: Her bank sent her a warning letting her know about the currency reporting rules.

Mrs. Ondracek pleaded guilty to not paying tax on the more than $197,000 of income that came from the theaters. The government calculates the lost tax revenue at $68,000. Mrs. Ondracek is on the hook for that, and will likely get to visit ClubFed.

Here’s my helpful hint for any would be Structurers: If you bank sends you a notice warning you about currency transaction reporting, it’s time to either come clean or find a good attorney fast.

Posted in Tax Evasion | Tagged | Comments Off on Best Structuring In a Supporting Role…

Soon to be On the Street?

Posted on March 7, 2010 by Russ

Chriss Street is Orange County’s Treasurer-Tax Collector. He’s the person responsible for collecting the property tax bills for Irvine, and the rest of Orange County. Mr. Street is up for re-election this June, and he’ll likely face a tough fight. On Friday, he was ordered to pay $7,068,765 for breaching his fiduciary duty in liquidating a trust.

Judge Richard M. Neiter of the US Bankruptcy Court said, “The overwhelming evidence at trial showed that the Defendant willfully engaged in self-dealing to advance his personal interest ahead of that of the Trust’s beneficiaries.” The Orange County Register reports that Mr. Street also used the trust to pay personal expenses including a dinner at Spago, Botox treatments, and paying a traffic ticket.

Mr. Street’s attorney refused to comment on the case until he could study the verdict.

Posted in Orange County | Tagged | Comments Off on Soon to be On the Street?

The “B” Word

Posted on March 7, 2010 by Russ

Notwithstanding sections 109 (d) and 301 of this title, a case under this chapter concerning an unincorporated tax or special assessment district that does not have such district’s own officials is commenced by the filing under section 301 of this title of a petition under this chapter by such district’s governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district.

Thus begins Section 921 of Title 11, Chapter 9, Subchapter II of the US Bankruptcy Code. I bring this up because I read over the weekend that the Bronze Golden State is in “de facto bankruptcy.”

Such is the title of Steven Greenhut’s OpEd. Unfortunately, it appears dead-on accurate. You can’t spend more than you take in yet the “solution” to those in Sacramento (especially Democrats) and Washington is to spend more. It’s sort of like what I learned in business school: If you’re losing money on a per-item basis, just increase your sales!

Oh, yes: If you lose money on a per-item basis, selling more will just make your problem worse.

The solution has been obvious from day one, but it’s anathema to public employees, public employee unions, and the people they contribute to (Democrats, generally): there needs to be fewer of them making a lot less per person. California has the 48th worst business climate in the country, yet Service Employees International Union California President Bill Lloyd said, “The only way to do that is to make sure that everyone in the state pays their share, including the corporations who keep getting a free pass from the governor and the Legislature.” I guess Mr. Lloyd would like us to be at number 50.

Unfortunately, Democrats in the Legislature continue to hope that tomorrow will bring good news. With a structural deficit, it won’t until the underlying problems are addressed. There really is no choice.

Posted in California | Tagged | Comments Off on The “B” Word

Starting a Business? A Good Resource from the IRS.

Posted on March 4, 2010 by Russ

Tax agencies may be annoying to deal with, but the IRS has one of the best websites of any entity in the U.S. A client told me about the IRS’ Virtual Small-Business/Self-Employed Business Workshop. It’s an excellent resource on what you need to do to deal with tax agencies. It’s well organized, and it has a lot of useful information.

My client who told me about it said to me, “I wish I had seen this when I was first starting out.” The video has examples like keeping a written mileage log, and what you need to do with it. It’s well worth the time to watch it.

Posted in IRS | Comments Off on Starting a Business? A Good Resource from the IRS.

Bad States for Amateur Gamblers

Posted on March 1, 2010 by Russ

All states are alike, right? That’s definitely not true in the world of tax. Some states don’t have an income tax. Other states have very high income tax rates. Amateur gamblers have a special concern: The ability (or lack thereof) to deduct gambling losses.

For an amateur gambler, gambling losses are an itemized deduction. On the federal tax return, an amateur gambler is allowed to deduct his losses up to the amount of his wins on Schedule A. However, some states do not allow any itemized deductions while some specifically do not allow gambling losses. Here is a list of the “bad” states for amateur gamblers:

  • Connecticut*
  • Hawaii*
  • Illinois*
  • Indiana*
  • Louisiana (Itemized Deduction Limitation)
  • Massachusetts*
  • Michigan*
  • Minnesota* (State AMT — Impacts Amateurs)
  • New Hampshire (10% Gambling Tax)
  • New York (Itemized Deduction Limitation)
  • Ohio*
  • West Virginia*
  • Wisconsin*

So while all men may be created equally, all gamblers are not taxed equally. Of course, you could reside in a state with no income tax and you’ll be more equal than others.

Posted in Gambling | 2 Comments

Hot Air Leads to Trouble

Posted on February 28, 2010 by Russ

When I was an undergraduate in college, I did research at the Lawrence Berkeley Laboratory on the catalyzed production of methane from graphite. I don’t believe that research led to commercial production of natural gas (which is methane, CH4.

The government likes the idea of obtaining methane from unconventional sources. There’s a tax credit available for recovering methane from landfills. Some enterprising individuals had the not-so-brilliant idea of just reporting that they recovered the methane from landfills without actually recovering any. They helped their clients obtain more than $30 million in phony tax credits.

Well, the government found out about 32 individuals. Twelve of them were permanently barred last week (23 of the 32 have now been barred). Additionally, four individuals pleaded guilty last year in a related criminal case.

If you were one of the lucky investors who bought some of the non-existent methane credits, you’re likely looking at a “Dear Valued Taxpayer” letter in your future. And if you knowingly participated in the scheme, it’s time to find an attorney. For if you’re going to take a tax credit based on methane, that methane has to be real.

Posted in Tax Fraud | 1 Comment

The Wyden/Gregg Tax Reform Bill: Interesting, but DOA

Posted on February 28, 2010 by Russ

Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) introduced a bill, “To amend the Internal Revenue Code of 1986 to make the Federal income tax system simpler, fairer, and more fiscally responsible, and for other purposes.” The bill would have a major impact on the US tax system. Though there are many good points about the bill, they really don’t matter: This legislation has no chance of passing this Congress in an election year.

The bill would lower the number of individual tax brackets from six to three (15%, 25%, and 35%). It would eliminate the dreaded Alternative Minimum Tax (AMT). It would triple the standard deduction. All Miscellaneous Itemized Deductions would be eliminated. The first 35% of capital gains would not be taxed (the remainder would be taxed as ordinary income). And the corporate tax would become flat, with a single 24% bracket.

There’s another aspect of the legislation that got my attention. I received a call from one of my gambling clients; he told me that the legislation would lead to regulated Internet Gambling in the United States. My client is correct: Subtitle C of the legislation would allow for legalized Internet Gambling in the United States, with licensing and record-keeping requirements.

Speaking of gambling, the measure does have a huge negative for amateur gamblers. Gambling losses are a miscellaneous itemized deduction; this measure would eliminate all such deductions. Amateur gamblers would be taxed on their winning sessions and would pay income tax on phantom wins that would no longer be offset by gambling losses.

However, this is all irrelevant. This measure has no chance of passing this Congress. Democrats in Congress are, for the most part, talking about massive tax increases rather than tax simplification. It’s also an election year, with Democrats running the risk of losing one or both houses of Congress. Finally, if Democrats are serious about moving health care legislation forward this will likely cause the failure of any other substantive legislation this year. Simply put, this measure is DOA.

Overall, though, I (like most tax professionals) would love to see a simpler Tax Code. It’s just not happening in 2010.

Posted in Gambling, Legislation | Tagged | 1 Comment

Dumb Criminals, Tax Evading Style

Posted on February 28, 2010 by Russ

If you commit a crime, it’s definitely not a good idea to brag about it to others. It’s an especially bad idea to brag about it on the Internet. Yes, law enforcement and the IRS read the Internet. Joe Kristan has the news of how two women in Des Moines allegedly stole from their employer…and are now in deep trouble because they bragged about it on social media.

Posted in Tax Evasion | Comments Off on Dumb Criminals, Tax Evading Style