Swamplands Looking at a Tax Hike?

Posted on March 15, 2009 by Russ

California isn’t the only state that’s looking to raise taxes during a recession. The swamplands (aka New Jersey) are also looking at this tactic.

Governor Jon Corzine (a Democrat), who coincidentally is up for reelection this fall, is proposing a 0.97% increase in taxes on those who make more than $500,000. The tax would be for just one year, and would help to close a $7 billion budget deficit. Governor Corzine’s budget proposal is $3 billion less than the current year.

Also included in Governor Corzine’s proposal is cutting payments into the New Jersey state pension system by $500 million. That may be problematic: Most state pension systems have funding shortfalls. Cutting payments into the system will only exacerbate these problems.

Severe budget cuts will likely be coming to a state near you, too. It’s not just a California issue.

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Weekend Mailbag

Posted on March 15, 2009 by Russ

Three questions of interest this weekend. The first deals with moving to Nevada, the second with the requirement to report foreign financial accounts, and the third deals with deducting clothing.

First, a reader asks: I want to move to Nevada. I will move my busines there also. However, most of my business will still be done in California. Will I still have to pay income taxes on my business profit and income from other investments?

If you truly move from California to Nevada, and are a Nevada resident, you will no longer owe California income tax. Similarly, if your business reincorporates (if it is a corporation) or otherwise changes its domicile to Nevada, and no longer is present in California, then it, too, will no longer be taxed by California.

This being tax, there are several caveats to be aware of. Among these are the following:

  • In the year you move, you will need to file a partial year California tax return. California will tax you on all California source income for that year.

  • Be aware that California, like many other states, will attempt to tax you if you spend two weeks (or more) in the Golden State on business.

There are several other “gotchas” that you should discuss with your tax professional.

Next, I’ve gotten several questions relating to the filing of the report of Foreign Bank and Financial Accounts. Here’s one of many: I read on your blog of the need to file the Report of Foreign Accounts. But I don’t want to because it will increase my risk of audits, and I don’t think it’s required. I read on 2+2 that online poker accounts are ‘transfer accounts’ and not foreign bank accounts. I’m not a big gambler, so why should I file this form?

First, Congress wrote this law. The IRS and the Department of the Treasury have the thankless task of interpreting this law.

And this law is fairly clear: Foreign financial accounts must be reported if an individual has $10,000 or more in one or more foreign financial accounts. Casinos in the United States fall under financial institution reporting requirements; why shouldn’t casinos in other countries be considered foreign financial institutions?

Additionally, many of these online casinos offered “echecks” and would take money directly from patrons’ checking accounts. Those are activities that banks perform.

As to why you should file this form, it’s simple: It’s required. If you don’t, and you are caught, you can face up to a $10,000 fine for non-willful non-reporting and a minimum $100,000 fine for willful non-reporting. You can also find yourself sent to ClubFed. If you think that the defense “I didn’t know about this” or “I was a small time player” will work, I’ll tell you now that neither will.

If you’re such a small-time gambler, you’re not a likely target for an audit (the IRS goes where the money is; generally, the more you make the higher your risk of audit). While the TwoPlusTwo poker forums have excellent poker information, you have to be very careful when you read legal and tax threads. The defense, “I relied on Joe Schmoe from TwoPlusTwo” will likely result in the judge asking you if he was your paid professional preparer.

Yes, you’re not likely to get caught. The odds are definitely in your favor. But it’s the law to report these accounts. You may not like the idea that the same people who enforce this law (the IRS and the Department of the Treasury) get to interpret this law. Unfortunately, that’s the way it is, and you will get no sympathy from the IRS, the Department of the Treasury, or a judge. I’m advising all my clients who have these accounts and meet the reporting requirements ($10,000 or more at one or more foreign financial accounts) to report them.

Here’s the third question. I’m a personal trainer, and I can’t believe the answers I’ve gotton [sic] from my accountant. I can’t believe that gym shoes aren’t deductible for me, and that gym memberships aren’t deductible for my clients. Tell me he’s wrong.

Sorry, your accountant is generally correct. For most individuals, health club memberships are not deductible. I’d probably go insane during tax season if I didn’t go to the gym but Congress says I can’t deduct that. Congress makes the laws, and that’s the way it is. (A few people who have to go to the gym for medical reasons may be able to take a gym membership as a deductible medical expense. Of course, that’s subject to a 7.5% Adjusted Gross Income limitation so not many will be able to deduct it that way, either.)

As for clothing, to be deductible it must not be usable outside of work. A policeman’s uniform, for example, is clearly deductible. However, his black socks wouldn’t be. Gym shoes aren’t deductible as they can be used outside of a health club.

Well, perhaps I made one of the three individuals who wrote me happy. As usual, I suggest you consult your own tax professional on any issues that you have.

Posted in California, Gambling, IRS, Nevada | Tagged | Comments Off on Weekend Mailbag

That’s a Strange God to Pray For

Posted on March 11, 2009 by Russ

There are many religions in this world. But one you won’t see is the Church of the IRS. Somehow, that just doesn’t seem right.

Well, from Oklahoma comes the antithesis of this. Lindsey Springer and Oscar Stilley formed the Bondage Breakers Ministry. Were they looking to completely eradicate slavery? Well, no. Were they looking to eliminate totalitarianism throughout the world so people could enjoy freedom to worship? Well, no. Were they looking to destroy the Internal Revenue Service? Allegedly, yes.

Lindsey Springer and Oscar Stilley are accused of tax evasion. The US Attorney’s Office and the IRS accuse them of using cash, money orders, and cashier’s checks to hide income. Allegedly, neither has filed a tax return since the late 1980s.

In any case, the pair is looking at a lengthy stay at ClubFed if found guilty.

Posted in Tax Fraud | 3 Comments

Online Gambling Addresses

Posted on March 10, 2009 by Russ

The IRS and Department of the Treasury recently stated that online gambling sites are foreign bank accounts that must be reported. There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form TD F 90-22.1 can subject you to a penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

Note: This list is presented for informational purposes only. It is believed accurate as of July 1, 2009. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions to the list feel free to email them to me.

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Doctor Penis Guilty of Tax Fraud

Posted on March 8, 2009 by Russ

Dr. Jørn Ege had a thriving plastic surgery practice in Copenhagen. Apparently it was very successful—successful enough that he took 12.6 million kroner and didn’t disclose that on his 2005 income tax returns. Denmark isn’t known as a low tax country, and when SKAT (the Danish tax agency) found out they had an arrest warrant issued. After fleeing Denmark, Dr. Ege turned himself in last December.

Dr. Ege was found guilty last week. Although the article only notes his sentence of two years in prison and a fine of 4.6 million kroner (about $780,000), I assume he’ll also have to pay the back taxes and penalties.

And how did Dr. Ege get his nickname? Well, you already guessed that he did penile procedures. No, it wasn’t how he advertised his business; rather, it was from complaints to Danish authorities.

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A Billion Here and a Billion There…

Posted on March 8, 2009 by Russ

A billion here, a billion there, pretty soon it adds up to real money.—Senator Everett Dirksen

Well, a billion dollars is just about the amount that February collections by California were under budget. It’s going to get worse.

April is the big month for California tax agencies. That’s when personal income tax returns (and payments) are due. Also due are first quarter estimated tax payments for individuals and corporations. Expect the April collections to be particularly grim.

I don’t know if the tax protests that have just begun in California will impact the coming budget debate in Sacramento—a debate that the Democrats really hope they avoided by passing the bad budget. But they won’t be able to sidestep the issue; states have to have balanced budgets and there’s no chance that California’s will be balanced based on the tax increases that just passed.

I’ve been a broken record on the subject. Massive cuts to state government are both needed and are coming. The legislature can postpone the day of reckoning, but they can’t stop it from happening. Of course, Democrats don’t want to cut union jobs (most government workers in California are unionized) but you can only squeeze so hard.

The signs are there for everyone to see as I wrote about earlier today. But many in Sacramento seem blind to the issue.

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Just Below the Surface

Posted on March 8, 2009 by Russ

As a tax professional I get to observe first-hand what taxpayers think of the current tax climate. I think Howard Beale put it well:

Somewhere between 8,000 and 15,000 protested in nearby Fullerton yesterday. These weren’t the usual left-wing protesters that you might see mobilized in Washington. These were the typical families that populate Orange County. My Congressman (John Campbell, R-Irvine), State Assemblyman (Chuck DeVore, R-Irvine), and State Senator (Tom Harman, R-Huntington Beach) understand the anger. I’m pretty sure my two Democratic US Senators (Dianne Feinstein and Barbara Boxer) have no comprehension of the anger that’s just below the surface. It’s certain that the Democratic leadership in Washington thinks these protests are irrelevant.

They’re not. This movement has legs. I was in high school when Proposition 13 was proposed and passed. I remember the rallies then. We’re seeing the beginning of a groundswell.

Sure, it could fade away. But when California has a $6 billion deficit (minimum—I think it could easily exceed $10 billion) come June, do you think our legislators will vote to cut the budget or increase taxes? While past performances don’t necessarily indicate future results, they’re usually your best bets. It’s certain that the Democratic legislature and the Governator will support more tax increases.

It’s also interesting which newspapers think the protest was significant. It was the lead story in the Orange County Register. Sure, it happened in the O.C. so the Register covered it. But it was also a big story for the Pasadena Star-News. Yet you wouldn’t find a word of it in the Los Angeles Times. Cutting taxes clashes with the Times’ liberal viewpoint.

I don’t know what will happen with this movement. It could wilt on the vine. Indeed, should the state legislature start doing what’s inevitable (massive cuts in state spending are just that), this movement might end in California. My suspicion is that Proposition 1A will fail in May, and that many politicians will find that its the citizens who control government and not vice versa. It may take a couple of years, but I think some major changes are going to happen.

Posted in California, Taxable Talk | Comments Off on Just Below the Surface

The Checks Are in the Mail

Posted on March 6, 2009 by Russ

California Controller John Chiang announced today that California state income tax refunds have been released, and those on hold (generally, those processed two or more weeks ago) will start going out the door. Refunds through the mail should start hitting mailboxes next week while it’s theoretically possible that someone will receive his direct deposited refund today. More likely, direct deposited refunds will hit bank accounts beginning on Monday.

Hat Tip: April15.com

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The Stop Tax Haven Abuse Act and Online Gambling

Posted on March 4, 2009 by Russ

Senator Carl Levin (D-MI) and others introduced the Stop Tax Haven Abuse Act on Monday. The Act targets financial transactions into (or out of) jurisdictions that are considered to be tax havens.

Senator Levin has posted a summary of the legislation. Given that I expect many Republicans to support this measure I think it has a good chance of passage.

There’s some interesting language in the bill, and online gambling may end up impacted by this. Many of the online gambling sites are located in tax havens, including the Isle of Man, Gibraltar, Malta, Costa Rica, and Antigua and Barbuda. The Act states the following for Transfers of Income:

Transfers of income – In a tax proceeding, any amount or thing of value –

* a) transferred to a U.S. person (other than a publicly-traded corporation) directly or indirectly from an account or entity in an Offshore Secrecy Jurisdiction, or
* b) transferred from such a U.S. person directly or indirectly to an account or entity in an Offshore Secrecy Jurisdiction, will be presumed to represent previously unreported income to the U.S. person in the year of transfer.

So if you’re not keeping records, everything moved to or from an online site would be considered income unless you could prove otherwise.

Additionally, the FBAR (foreign financial account reporting) would be strengthened. “Presumption is that any account in an Offshore Secrecy Jurisdiction contains funds sufficient to trigger this reporting requirement.” So all online gambling accounts would have to be reported in any of these countries.

There’s a lot in the act, and quite a bit of it is laudable. As the recent Swiss escapades have shown, there’s plenty of tax haven abuse occurring. Unfortunately, online gambling may get caught in the crossfire.

The TaxProf Blog has links to news commentary on the proposed legislation. Additionally, on Wednesday there will be a hearing on the Swiss tax scandal in Washington.

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Louisiana Bar Owner and Poker Player Accused of 505 Counts

Posted on March 1, 2009 by Russ

I usually don’t report on state tax fraud, but when I see someone accused of 505 counts, that gets my attention. From Lafayette, Louisiana, comes the story of Eric Cloutier. Mr. Cloutier is a former professional hockey player, and also has the same avocation as myself. He’s a poker player, with about $160,000 in career winnings.

Mr. Cloutier owns two bars in Lafayette, and the Louisiana Office of Alcohol and Tobacco Control (LATC) was suspicious of his bars. The LATC alleges that Mr. Cloutier manipulated his cash registers so that the sales reported were substantially less than the actual sales—$1.4 million of under-reporting.

That’s not the only thing he’s accused of. There’s one count of racketeering, two counts of theft and two counts of attempted theft, 67 counts of computer fraud, 92 counts of filing false public records, and a whopping 340 counts of obstruction of justice. Those 340 counts come from allegedly destroying evidence once the investigation had begun.

It doesn’t take a math genius to figure out that Mr. Cloutier is looking at spending a lot of years in a Louisiana prison if found guilty.

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