1040 Toilet Paper

Posted on December 20, 2009 by Russ

Courtesy of the TaxProf Blog comes PrankPlace’s Form 1040 Toilet Paper. Per PrankPlace, “A collage of the 1040 IRS Form is printed throughout the whole roll!” It’s only $3.40 a roll. Somehow I hope that this gift isn’t on my list….

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Hopefully Their Treatments Weren’t Shams

Posted on December 14, 2009 by Russ

Some of us believe in Santa Claus; some of us don’t. Almost all of us know that there’s an income tax. But there are a few nonbelievers out there.

Dr. William Steiniger and his wife Diane are two of those nonbelivers. They run an alcohol and drug treatment center in picturesque Sedona, Arizona. They didn’t pay $390,000 in income tax from 2002 through 2005. They were arrested, tried, and today convicted of tax evasion. Dr. Steiniger and his wife used sham accounts to funnel income to themselves to avoid the income tax.

The AP Story notes, “Steiniger said he plans to appeal the conviction. In an interview with The Associated Press, Steiniger said he does not believe there is a personal income tax that exists.” Dr. Steiniger may know a lot about treating alcoholism, but his idea of taxes is a sham. Yes Virginia (and William and Diane), there is an income tax and you do have to pay it or suffer the consequences.

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Bad Advice: Holding the Check ’til 2010

Posted on December 14, 2009 by Russ

Most of the advice given in the tax blogosphere is good. However, I saw this posted today:

My business had a really profitable month. Do you have any ideas on last minute expenses to help lower my taxable income?

Depending on how many purchases you want to make, you could consider office furniture or computer equipment. Alternatively if you are looking for something cheaper, you could pay your January office rent early, or any other major bills such as your telephone service fee. On the other hand, you could defer some of your income until next year by waiting until after the end of the month to cash a check or two. [emphasis added]

The first part of the answer is generally good. In most cases, making a purchase of a major piece of equipment, especially if you can utilize Section 179 Depreciation, is an excellent way to lower your taxable income. And there’s nothing wrong with paying some bills early (if you’re a cash basis taxpayer). However, the last sentence is just bad advice because of constructive receipt.

The doctrine of constructive receipt governs when income is considered received. Section 1.451-2 of the Income Tax Regulations states, in part:

(a) General rule. Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

From Sainte Claire Corporation, et. al, v. Commissioner (T.C. Memo. 1997-171):

…[A] taxpayer will be found to be in constructive receipt of income where the taxpayer had an unrestricted right to receive the income, the taxpayer was able to collect it, and the failure to receive it resulted from the exercise of the taxpayer’s own choice. [citations omitted]

If you receive a check in 2009 but let it age in your office until 2010 it’s still income in 2009 because you deliberately chose not to cash the check.

If you have an unexpectedly good December and can take Section 179, buy the new computer (I’m getting one on Wednesday). Get a new desk (I got that yesterday). Pay a bill or too early if you’re a cash-basis entity. But don’t hold onto the check until 2010.

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The “I Was Kidnapped” Defense to Tax Evasion

Posted on December 13, 2009 by Russ

If you’re accused of tax evasion, there are a myriad of good defense strategies. However, claiming you were kidnapped by IRS Agents isn’t one of them.

Judge William Terrell Hodges rejected that claim along with several others made by Mark Maggert. If the judge’s name sounds familiar, it should; Judge Hodges presided over the Wesley Snipes trial. And there’s more linking this case to Mr. Snipes.

Mr. Maggert, a dentist in Lake Lady, Florida, is being called an associate of Eddie Ray Kahn and American Rights Litigators by the Department of Justice. Mr. Kahn, tried with Mr. Snipes, is currently serving a ten-year term at ClubFed.

And Mr. Maggert’s other arguments are equally frivolous. He claimed the court has no authority and, according to the Orlando Sentinel, “[that the federal court] has no jurisdiction whatsoever over Me and is not a part of…a government of, by and for the people….” Mr. Maggert made other laughable claims, but Judge Hodges was having none of it. Judge Hodges called Mr. Maggert’s claims “patently frivolous.”

Mr. Maggert’s trial in Ocala is scheduled for January 4th.

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Knocked Out From California

Posted on December 13, 2009 by Russ

Once a month the Irvine Marriott holds boxing matches. I’ve been told that they’re selling out, so it’s apparent that boxing does draw well in California. It’s likely that a major prize fight would also draw well.

Bob Arum is the promoter who will be selecting the location of the Manny Pacquiao vs. Floyd Mayweather Jr. fight taking place next Spring. New York’s Yankee Stadium was already ruled out due to New York’s high taxes. Now, the Staples Center in Los Angeles has also been ruled out.

Why? It’s all about taxes. If the fight were held in California, 8.8% of the prize pool would end up going to California. If the fight were held in Nevada or Texas, nothing would be withheld for state taxes. Nothing beats something (and in this case, a very big something), so the fight won’t be here.

As Bob Arum told the Associated Press, “Staples is not a factor at all. There is no possibility at all of Staples because of California’s tax situation.”

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“Cutting Spending” Isn’t In Congress’ Vocabulary

Posted on December 13, 2009 by Russ

When you or I run into cash flow problems, what do we do? We’re forced to cut spending, of course. It’s not as if we have a choice: We can’t print money, and robbing banks is usually not a good idea.

Congress, though, can spend money even if they don’t have any: It’s called deficit spending. But when the voting public starts complaining even Congress knows they have to do something. Of course, we we have Democrats in control of Congress so the idea of cutting programs is anathema to them.

The New York Times brings up the idea of the Value Added Tax (VAT). The VAT, popular in Europe, taxes at every step of the distribution process. The government doesn’t collect once; rather it gets to collect each time a product changes hands.

President Obama promised not to raise taxes on 95% of Americans. Of course, most of his proposals, including the health care plans being debated in Congress, will either directly or indirectly increase taxes. What Congress should do is cut programs, cut regulations, and cut the bureaucracy. Instead, expect the VAT to be championed by the Democrats in Congress.

Hat Tip: Hot Air

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Links from the Blogosphere

Posted on December 12, 2009 by Russ

Over the past few days there’s been plenty of good stuff in the tax blogosphere. Here are some highlights:

Joe Kristan wrote about William Benson. Mr. Benson wrote The Law That Never Was alleging that the 16th Amendment wasn’t ratified. He didn’t fare better with his appeal in an attempt to keep his tax reduction business alive. It’s as dead as the 16th Amendment is alive.

Mr. Kristan also wrote about yet another Renaissance, the Tax People, Inc. employee who will soon be residing at ClubFed. This time it’s the Tax Director, a definite misnomer for a business that practiced tax fraud.

It’s almost certain that 2010 will be the year of the Roth IRA Conversion. That said, Robert Flach has an excellent post about a pitfall that may hit some individuals who have IRAs with basis.

Strip clubs are a favorite of mine…er, that’s a favorite subject of mine when it comes to taxes. The TaxProf Blog reported on how the estate of a New York businessman was excused from paying $4 million in back taxes because the Mob thoroughly infiltrated the business.

Staying in the same area, the TaxGirl reported on a wise Madam who sent her help 1099-MISCs each year and paid her taxes. Yes, illegal income is taxable.

The Tax Lawyer’s Blog had 12 IRS Non-Filer Enforcement Stories. A couple of the stories highlighted had previously made Taxable Talk.

A busy week in the tax blogosphere as we head into the Christmas season. So whether you’re naughty or nice, remember to pay Uncle Sam.

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More Gambling Questions from the Mailbag

Posted on December 9, 2009 by Russ

A few interesting questions have come in recently on gambling and taxes:

Question. I think it’s ridiculous that you have to file an FBAR on an online gambling account. These aren’t bank accounts and I don’t think the government can force me to file this form.

Answer. The Department of the Treasury has the unlucky task of determining what Congress meant when they passed the various laws that mandate the foreign bank account reporting (FBAR). I agree that it’s definitely debatable whether an online gambling account is a foreign bank or financial account. That said, for a variety of reasons I’ve recommended to my clients that they file the Form TD F 90-22.1 with the Department of the Treasury.

First, in the United States casinos are considered financial institutions for bank and currency reporting requirements. Shouldn’t a casino headquartered outside of the United States also be considered in the same manner?

Second, the big objection to filing an FBAR (that some of my clients have mentioned to me) is the risk of audit. Years ago, that was definitely the case. However, in 2006 (the last year I’ve seen statistics for) the Department of the Treasury received over half a million FBARs. It’s impossible for the IRS to audit all (or most) of these individuals.

Finally, the IRS and Treasury have come to the conclusion that online casinos fall under the FBAR rules. If you are found guilty of willfully not filing an FBAR, the minimum fine is $100,000 (or half the value of the account, whichever is greater). The federal government is also the deepest pocket law firm in the world; you do not want them as your enemy. The government says to file the form. It’s far easier (and cheaper) to comply with this than to risk a battle and potentially cost yourself a lot of money.

Q. I’m a resident of Washington state. My state considers online gambling a felony. Why do I have to file a tax return when I might be self-incriminating myself?

A. Because it’s the law, and you won’t be self-incriminating yourself. In the United States illegal income is just as taxable as legal income. Washington state does not have a state income tax so you just need to pay the federal income tax.

I wouldn’t list as my occupation “online professional gambler” if I resided in Washington state; you just need to list it as “professional gambler.” There are many professional gamblers (including online gamblers) who reside in Washington. While there are likely better locales from a legal standpoint it’s today unlikely that the Washington state authorities are seeking to arrest online gamblers.

I do need to point out that Washington does have a Business and Occupation Tax that a professional gambler may be liable for.

Q. I’m planning on traveling the world during 2010, spending no time in the United States. I plan on supporting myself by playing poker. I assume I won’t have to file or pay any US income tax. Is that correct?

A. No. All US citizens, no matter where they reside, must file a tax return (assuming they meet minimum filing/income requirements). There are some tax benefits if you are outside of the United States, though.

First, if you are not in the United States on April 15th you get an automatic two month extension to file your tax return. While you will owe interest if you pay after April 15th, there will be no penalties as long as you file and pay on or before June 15th.

Second, you may be eligible for the Foreign Earned Income Exclusion. This allows you to exclude up to $91,500 in 2010 from income tax. However, assuming you are a professional gambler you will still owe self-employment tax on all of your income.

Finally, you will still likely need to file a state income tax return. Not all states recognize the Foreign Earned Income Exclusion. For example, California does not recognize the Exclusion and if you are a California resident you will owe California tax on all of your income.

Some interesting questions, and perhaps some interesting answers though I expect some of the answers disappoint the individuals who asked the questions.

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$534,544 Is Greater Than $10,000

Posted on December 6, 2009 by Russ

I don’t think any of you have trouble with realizing that the title of this post is true. Yet for Terry Davis, formerly of New Haven, Connecticut and now a resident of Las Vegas, that simple statement posed a problem.

Mr. Davis wanted to lower his 2007 income taxes. He had earned $784,537 and that means a lot of tax. Did Mr. Davis seek out a tax professional to find some deductions he may have missed? Or did he use a SEP IRA to shelter $44,000 of income?

Mr. Davis had an additional issue: structuring. It’s illegal to deliberately structure transactions to avoid currency reporting requirements. On one day Mr. Davis withdrew $534,544 in cash from various banks, all in amounts under $10,000. That was not a good idea.

Sure, Mr. Davis avoided filling out a Currency Transaction Report (CTR). CTRs are issued whenever you withdraw $10,000 or more in cash. Additionally, if you receive a payment of $10,000 or more in cash you must complete a CTR. But I digress….

No CTR, no problem, right? Definitely not. Banks have automated programs to detect such financial shenanigans; when a bank becomes suspicious a Suspicious Activity Report (SAR) is generated. The IRS receives far fewer SARs than CTRs; they also investigate far more SARs than CTRs.

The news report doesn’t indicate what led the IRS and Department of Justice to Mr. Davis, but I’d bet it was a SAR (or multiple SARs). Mr. Davis pleaded guilty to structuring and filing a false tax return. The 2007 tax return he filed only showed $133,804 of his $784,537 of tax. He’ll be sentenced in February and is looking at a stay at ClubFed, restitution, and a probable fine.

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Next Time, Hide the Cash and Books Better

Posted on December 6, 2009 by Russ

I’ve commented from time-to-time that cash income is just as taxable as payments by check or credit card. I’ve also mentioned that certain businesses have more problems than others with that; strip clubs are one example.

Another example would be nightclubs. Abdul Khanu owned three successful nightclubs in Washington, DC: H2O, VIP, and Platinum. If you’ve ever been to a nightclub you might have noticed that many patrons use cash to pay their bills. For the ethical business owner, that’s not a big deal; the cash payments are recorded on their books just like payments made by credit cards.

However, if you’re unscrupulous getting lots of cash gives you an opportunity to evade the law. Just take a little bit of the cash and leave it off the books and you have some “free” money—free from income tax and problems…as long as you don’t get caught.

Mr. Khanu was indicted earlier this year on 22 counts of tax fraud. A search warrant was executed on his home and $1.9 million in cash and a double set of books was found. For the aspiring tax evader I strongly suggest that you avoid ever having the authorities find your real books as I guarantee that if they do ClubFed will be in your future.

Mr. Khanu was found guilty on two counts of tax evasion for 2002 and 2003. Given that $1 million in tax was evaded Mr. Khanu is looking at spending around three years at ClubFed.

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