Budgeting 101, Sacramento Democrat Style

Posted on March 18, 2009 by Russ

You’re facing yet another $4 – $8 billion deficit. You’re in the middle of a recession. So do you cut back on spending, or do you propose billions more in new programs which would have to be funded through even more tax increases?

Well, Russ, no one can be that stupid. The Democrats in the California legislature, having just gone through a months-long bruising budget battle, have to understand some basic economics, right?

Wrong.

We’re seeing proposals to charge shoppers for carry-out bags, to add fees on drivers licenses, pornography, and other targeted markets, and for universal health care.

State Senator George Runner (R-Lancaster) noted on the Flash Blog that the $46 billion proposal for universal health care has been resurrected in Sacramento. Just what California businesses need: more taxation that would drive them into neighboring states.

It appears I may have drastically underestimated the budget deficit as of June. I was thinking it would be on the order of $6 billion. Perhaps $16 billion is closer to the mark.

Posted in California | 1 Comment

Good News from the IRS on Madoff and NOLs

Posted on March 18, 2009 by Russ

This week the IRS handed some beleaguered taxpayers good news. First, the IRS announced that the new NOL provision (a five-year carryback) can be used for 2008 returns. This new NOL provision applies to certain partnerships and S Corporations. And, as Joe Kristan notes, the only entities that can use this provision average $15 million in gross receipts during the three-year period ending with the NOL. Best of all, the only testing will be done at the entity level.

Next, the victims of Ponzi schemes such as those perpetrated by Bernard Madoff, were given direction by the IRS on how to take their losses on their tax returns. Revenue Ruling 2009-09 and a Safe Harbor Procedure were issued by the IRS. These are about as good (for taxpayers) as one could hope for.

Among the highlights are that the theft loss deduction is available in the year the complaint was filed; that it’s considered a §165(b)(2) deduction and not subject to the 10% AGI restriction on theft losses; and impacted taxpayers may be eligible for the new NOL carryback procedure. Joe Kristan has more.

Posted in IRS | 1 Comment

My New Website

Posted on March 16, 2009 by Russ

My new website, http://www.claytontax.com/, is finally up. Believe it or not this has been in progress for several months, and everything is now working.

It’s still, to a degree, a work in progress. I’ll be adding some links to articles I’ve written in the coming weeks (after April 15th). Feel free to email me if you have a suggestion, comment, or correction.

Posted in Taxable Talk | Comments Off on My New Website

Two From the Bozo Tax Preparer Front

Posted on March 15, 2009 by Russ

Suppose you’re a tax “professional” and a client comes in who needs to file back tax returns. He presents his record of income for those years. You look at it and realize your client is going to owe a lot of tax. Do you (a) try to find every possible legal deduction for your client; (b) work with your client and the tax agencies to obtain a payment plan (or plans); or (c) tell him that if he shows that much income and he should just lower the amount—after all, he’ll never be caught?

Of course, since I headlined this as two from the Bozo preparer front, you know where this is heading. And yes, there are allegedly tax preparers who will do this. From Clarence, New York comes the story of Dara Lis. Ms. Lis’ client was an undercover investigator from the New York Department of Tax and Finance. Allegedly, Ms. Lis told the client (on tape), “As long as there’s no way for them to trace this income, you know, I would just lower it…real (income) numbers [are] going to kill you.”

Helpful tax hint: If your preparer tells you this, make a u-turn and find someone else.

The second story comes from Elm City, North Carolina. Raymond Renfrow used to be a professional tax preparer. He’s been barred from preparing future returns by a federal court. He promoted trusts that allegedly hid income without having any economic benefit. He used to be involved with Concept Marketing International. One of the founders of that entity was convicted of tax fraud, and a court order is prominently noted on their website. Mr. Renfrow allegedly started promoting similar trusts on his own.

Helpful tax hint #2: If your tax professional has a court order on his website that bars him from promoting tax fraud schemes, you may want to find someone else.

In any case, not only has Mr. Renfrow been barred, he’s also required to send a list of his customers to the Department of Justice. If you happen to be on that list you can expect a “Dear Valued Taxpayer” letter in your mailbox from the IRS very soon.

Posted in Tax Fraud, Tax Preparation | Tagged | 1 Comment

You Can’t Get Off the Mailing List

Posted on March 15, 2009 by Russ

I remember an old Peanuts where Snoopy asks to get off the IRS’ mailing list. It just doesn’t happen, and Barry Lusk of Easley, South Carolina may have learned his lesson.

This story begins back in 2000. Mr. Lusk was successful, and he owned two businesses. He proceeded to sell the businesses for $1.5 million. He wrote the IRS and said that the tax laws didn’t apply to him.

You’re already ahead of me, right?

The IRS let Mr. Lusk know that they didn’t appreciate frivolous correspondence. Indeed, Mr. Lusk’s own accountant advised him to file his returns. He didn’t, so the IRS came up with the amount of tax he owed: $843,000.

In 2003 Mr. Lusk filed his 2000 return; he said he owed nothing. Last week, a jury let him know the truth. His bill, when all is said and done, will be $843,000 in tax (plus penalties and interest), and up to five years at ClubFed and a $250,000 fine.

The tax laws apply to us all, and perhaps Mr. Lusk now realizes that.

Posted in Tax Evasion | 1 Comment

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.

Posted in New Jersey | Comments Off on Swamplands Looking at a Tax Hike?

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.

Posted in Gambling | Comments Off on Online Gambling Addresses

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.

Posted in Tax Fraud | Comments Off on Doctor Penis Guilty of Tax Fraud