Taxable Talk

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 $2.65 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.

I just had a client’s return go awry. The client received a letter from the IRS stating that the IRS had lost their return, but they knew they had received it. They had proof that it had been mailed, so it wasn’t a big deal.

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…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 $2.65! 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.”

It’s getting more and more difficult to avoid the tax system. There are currency transaction reports (cash transactions of $10,000 or more) and suspicious activity reports (theoretically can be done on any transaction, but usually starts at $3,000 or more) done with cash. Businesses must send out 1099s on payments of $600 or more to individuals. Barter organizations must send out 1099s.

But that doesn’t stop the Bozo contingent. “They’ll never catch me,” they believe. Until the IRS or the Franchise Tax Board (substitute your state tax agency if you’re not in California) knocks on their door. There’s no statute of limitations if you don’t file.

Paying taxes isn’t fun. Avoiding the system and living on the edge may give you a thrill, but if you get caught you’ll be given a bill…and possibly a trip to ClubFed.

I’ve been talking about the Nevada Development Corporation’s efforts to draw California businesses to Nevada. A business that moves to Nevada should strongly consider reincorporating in Nevada to avoid California taxes.

But assume you’re in California. Should you follow one of the many radio advertisement’s advice and incorporate in “tax-free Nevada?” Well, there’s a problem with this. It’s called nexus.

If your business is physically located in California you have to file a California tax return. Period. If you don’t the Franchise Tax Board will likely be calling upon you. And trust me, ClubCal is no more fun than ClubFed.

Another repeat from last year, but with a better morale than before. Here’s what I wrote last 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 $4000 ($5000 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 25% of your net income up to a maximum of $45,000 to a SEP. This is one tax deduction that’s available until October 15th if you file an extension.

Amazingly, some who are wealthy scoff at taking this deduction. Both Democratic presidential candidates, Hillary Clinton and Barack Obama, had significant self-employment income over the past few years and put none of it in a SEP IRA. Given their tax brackets, they would save somewhere between $15,000 and $30,000 in taxes and have some savings for retirement. If you’re self-employed consider that the government is literally going to pay one-third of your retirement plan if you contribute to a SEP (depending, of course, on your tax bracket). This is a deduction you should absolutely discuss with your tax professional.

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….

Today’s Bozo Tax Tip is a repeat from last year. It’s just another of the tax protester myths, that only foreign income is taxable. It’s also one that has come up again during this tax season. So, without further ado, here’s what I wrote last year:

This is definitely an issue I’m aware of because of my practice areas. I deal with plenty of individuals who earn their living while residing abroad or through foreign sources of income. “It’s tax exempt, isn’t it?” They’re not happy when I let them know that’s not the case.

The Tax Code, which is law (Title 26, U.S.C.) states that Americans are taxed on their worldwide income. Basically, everything is taxable unless Congress specifically exempts it.

Anyway, about six months ago I was approached by an individual who was about to be levied by the IRS because of failure to pay taxes. He resided in the continental U.S., but earned all his income from royalties from the Far East. So I asked him a few questions:

“Are you an American citizen?” He was.
“Was this income taxed at its source? That is, had the countries where it comes from levied a tax on it?” No, he received all of the income.
“Do you pay income tax in any of these countries?” No, he didn’t.

In summary, the individual really owed the tax. But as much as I tried to tell him that, I was talking to a brick wall. Given my dislike of talking to brick walls and of taking bozos on as clients, I suggested he try to get someone else to represent him.

But if you do earn income abroad, there are some real tax tips you can take advantage of. If you have a genuine residence overseas or meet the physical presence test (generally, being abroad 330 days out of 365), you may be eligible for the Earned Income Exclusion. If eligible, you can exclude up to $85,700 in 2007. And the time period does not have to be a calendar year; if you’re overseas from May 1, 2007 through April 15, 2008, you would likely be eligible for a prorated credit.

If you earn income abroad and it’s taxed abroad, you are likely eligible for the Foreign Tax Credit. The general principle is that income should only be taxed once, so if (say) Japan taxes your income, you should get a credit of that tax on your US tax return.

Finally, anyone who is not in the United States on April 15th gets an extra two months (until June 15th) to file his tax return. (You need to attach an explanation to your tax return.) If you’re abroad, you won’t be subject to penalties but you will be subject to interest on what you owe (interest is statutory).

There are numerous caveats and gotchas, and numerous ways to lessen your tax if you either have foreign source income or live abroad. Talk to a professional who can help you if you’re contemplating living abroad or will soon have significant income from abroad.

I’m a big fan of Alfred Hitchcock movies. One of my favorites is The Trouble With Harry. Another movie with a similar plot is Weekend at Bernie’s.

These movies deal with death in a light-hearted manner. Since this is a Bozo tax tip, how does this apply? Well, a few weeks ago I had a meeting with a potential client, who wanted to claim his father as a dependent. I asked him if his father lived with him; he didn’t. I then asked where his father lived, and I was told he had passed away…in 2003.

There are rules about claiming dependents, and they do have to be alive sometime during the year. I expressed my sympathy to the potential client, and suggested he find a different tax professional to prepare his return.

There are some tax benefits to those who lose their spouse during the year. They still get to file as married for the year. If a decedent was a dependent at any time during the year you can claim them as a dependent. Widows or widowers who lost their spouse within the last two tax years preceding this year and have a dependent child may be able to file as a widow or widower with a dependent child.

But please don’t try to claim your relatives who passed away years ago on your tax returns. If you do, you’re likely going to be paying a visit to ClubFed.