Chihuahuas Don’t Evade Taxes

Posted on February 24, 2008 by Russ

Last week I had a story about a Taco Bell franchisee around the time that the chain had a talking chihuahua. Today I have a story where a tax evader compares himself to a chihuahua.

Bohdan Senyszyn is a CPA who worked for the IRS for 25 years. Back in 1998 Mr. Senyszyn did some accounting work for a New Jersey developer. As part of the work he set up shell companies for the developer so that the developer could hide income. However, the developer cooperated with the IRS which led to the arrest of Mr. Senyszyn. Oh yes, Mr. Senyszyn did one other thing: he skimmed money off the top from the developer and didn’t report the stolen money as income. The government put the tax loss at $80,000 on $250,000 of income.

Mr. Senyszyn earlier pleaded guilty to filing phony tax returns, tax evasion, structuring a financial transaction and bank fraud. On Thursday he tried to change his guilty plea to innocent on the tax evasion charge but the judge refused. Mr. Senyszyn then, in asking for leniency, said, “I’m nothing more than a Chihuahua. I run around and bark a lot, but I don’t bite anybody.”

However, his actions might be taken otherwise. The Star-Ledger reported, “Senyszyn’s conduct included writing letters to the prosecution team, government officials, witnesses and the victim, as well as vandalizing a sign on property be longing to the informant in the case, said Assistant U.S. Attorney Thomas Calcagni.” Judge William J. Martini told Mr. Senyszyn, “I can’t take the risk you’re a Chihuahua and find out you’re a bulldog.” Mr. Senyszyn received 34 months at ClubFed and a $12,500 fine.

There’s one certainty: Chihuahuas don’t evade taxes but people do.

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Legal Extortion in New Jersey

Posted on February 24, 2008 by Russ

States are having tax troubles, and New Jersey is one of those. The Tax Foundation has a great story about how a South Carolina company was forced to pay off New Jersey in order to get a truck released from a weigh station from a “jeopardy assessment.” States are trying to make anything appear as if it creates nexus.

Meanwhile, New Jersey has budget problems. Big problems. As the Wall Street Journal reports, “In 1990 the state was $3 billion in debt. Borrowing has since grown at a compound annual rate of about 13%, and now the state is $32 billion in the red. Throw in unfunded pensions and health benefits for retirees, and that number swells to $113 billion, or $3,400 for every man, woman and child in the state. That’s three times per capita higher than the national average, making New Jersey the nation’s fourth-most indebted state.”

Governor Jon Corzine (D) proposes huge toll increases (50% a year in 2010, 2014, 2018, and 2022) but legislators aren’t thrilled with the idea. Perhaps the idea of limited government might take hold in the swamplands. Where are the Sopranos when you need them?

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Athletes in Tax Trouble

Posted on February 24, 2008 by Russ

Two reports this weekend about athletes having tax troubles. First, former baseball player Lenny Dykstra refused to pay his accountant’s bill. Well, he was billed $111,097. I guess I don’t charge enough. Anyway, Dykstra told the New York Daily News, “Did they actually think I would pay that much for a tax return? That’s insane.” The accounting firm claims that such charges are “fair and reasonable” given their retainer agreement and that the charges have now grown to nearly $140,000 (including interest). (Hat tip: TaxProf Blog)

Meanwhile, seven current or former NFL players have been ensnared in a phony gold mining scheme sold as a tax shelter. Joe Kristan reported on this and a phony chicken farm scandal. I think it’s easy to see how a phony mining scheme can be done. But how do you invent a phony farm? Even better, the chickens on this farm laid liquid eggs. Sounds like a book about cows that give chocolate milk.

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Economic Stimulus Rebates & Tax Rebate Calculators

Posted on February 23, 2008 by Russ

If you’re wondering what your tax rebate will be, here are a couple methods to find out. Kiplinger has added a rebate calculator. And Spidell will soon add one to their website.

The IRS has updated their webpage on the rebates. The IRS has posted examples of how social security recipients who normally wouldn’t file a tax return should file in order to claim the rebate. That example also shows how recipients of veterans’ benefits should file. There’s more information here for social security recipients and here for recipients of veterans’ benefits.

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We the Losers

Posted on February 22, 2008 by Russ

We the People, the tax protester organization headed by Robert Schulz, has been on the wrong ends of various court rulings. We the People believed that you could voluntarily stop withholding. The IRS and the Department of Justice didn’t like the idea of a $39.95 kit that allowed one to not pay taxes. So last year the IRS got a permanent injunction to stop the distribution of the packets. The IRS also asked PayPal for a list of who bought the packets (We the People accepted PayPal for payments) and last year won an appeal in the 8th Circuit: “[W]e conclude that Schulz’s constitutional arguments challenging the IRS’s authority to enforce the tax laws are without merit.”

The IRS also asked We the People for a list of who bought their packets. We the People refused, an the injunction was stayed pending an appeal to the 2nd Circuit. Today that Court said basically the same thing as the 8th Circuit: “We have considered all of defendants’ arguments and find them to be without merit. We affirm the judgment for substantially the reasons set forth in the district court’s decision. See United States v. Schulz, __ F. Supp. 2d __, 2007 U.S. Dist. LEXIS 58271 (N.D.N.Y. Aug. 9, 2007).”

As for the stay, that’s gone.

“The district court found that defendants’ illegal activities were harming individuals, who were exposing themselves to criminal liability by following the defendants’ ill-conceived instructions. Requiring defendants to provide the identity and contact information of the recipients of the tax materials enables the government to monitor the defendants’ obligation under the injunction to provide a copy of the district court’s order to recipients of the tax materials. Moreover, the district court found that the defendants’ illegal actions were harming the government, which was not receiving required tax payments and was forced to expend resources to collect the unpaid taxes. Requiring defendants to provide the identity and contact information of the recipients of the tax materials enables the government to monitor whether the recipients of defendants’ materials are violating the tax laws. Thus, we find no abuse of discretion with respect to the district court’s imposition of the reporting requirements in Paragraph C of the injunction.” [citations omitted]

So if you were one of those gullible enough to purchase a $39.95 package that would terminate your taxes you may soon receive a “Dear Valued Taxpayer” letter. In the end, we all have to pay our taxes.

Hat Tip: How Appealing

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$16 Billion and Growing

Posted on February 22, 2008 by Russ

California’s budget deficit has grown another 10%, from $14.5 billion to $16 billion. Why? Because all sources of tax revenues are down: sales tax, personal income tax, and corporate income tax. This will be the year that our Legislature has to make tough choices—band-aid fixes will no longer work.

The non-partisan Legislative Analyst, Elizabeth Hill, doesn’t think that Governor Schwarzengger’s 10% across the board budget cut will work. She proposes “a combination of cuts and $2.7-billion in new taxes, including reducing tax credits for dependents, adding a dime to every gallon of gasoline bought in the state, increasing tuition by 10-percent at all Cal State and U.C. campuses and closing the yacht tax loophole.”

There’s no way that this budget deficit will be closed without major program cuts. The math just doesn’t work without them. And there are many, many programs that a state shouldn’t have that California does. I’ll post about that over the weekend.

In any case, I think we’re going to have a very bad budget season in Sacramento. And we will see some new taxes and major cuts. Businesses will again start looking across the borders to Arizona, Nevada, and Oregon (and elsewhere) if the tax increases are too high.

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Germany Isn’t Happy with Liecthenstein

Posted on February 21, 2008 by Russ

The tiny principality of Liechtenstein is known as a tax haven. A few months ago an ex-employee at a bank in Liechtenstein apparently leaked details of some bank accounts held by Germans. The German finance ministry has said that they paid €4 million to get details of German accounts held in the tiny country.

To date one German, Klaus Zumwinkel, the former head of Deutche Post, has been hit by the scandal. He resigned from Deutche Post. AFP reports that Germany believes that there are 45,000 trusts with accounts in Liechtenstein and the German tax authorities would like details. Liechtenstein has, so far refused.

Germany might give an ultimatum to Liechtenstein. The German government would like a deal similar to the one that the principality has with the US (and the IRS). Crown Prince Alois told AFP, “Does a state have the right to obtain information by breaking the law in a friendly state and probably also contravening its own laws? Spying on our clients is unthinkable…We are going to see what we can do to protect our citizens and also our investors, who trust us, against such methods of investigation. The principle of confidentiality also applies to our foreign clients.”

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Tax Protesters Targeted

Posted on February 21, 2008 by Russ

Thinking about using one of the creative arguments in the Tax Protester FAQ? You may want to think again. Besides the fact (and yes, it’s a fact) that all of those arguments won’t hold up the IRS and the Department of Justice have decided to step-up activity against the tax protester movement.

Bloomberg is reporting that beginning in March the DOJ and IRS will aim at the movement. Assitant US Attorney General Nathan Hochman, head of the Tax Division, told Bloomberg, “Too many people succumb to the fallacy, the illusion, that you don’t have to pay any tax under any set of conditions.”

Kay Bell of Don’t Mess With Taxes including a link to another webpage debunking tax protester myths (this page is from a law professor at George Washington University).

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Actors In Tax Trouble

Posted on February 21, 2008 by Russ

Fresh off the Wesley Snipes case two actors are having their own tax troubles. Joe Kristan found this story about Joe Pesci. Mr. Pesci besides appearing in movies has his own production company with employees. The regulation involved states, “You must make deposits using EFTPS for all depository tax liabilities for the current year if you made more than $200,000 in aggregate deposits for all types of Federal depository taxes in the year two years before the current year or if you were required to make electronic deposits in the previous year.”

Mr. Pesci’s production company didn’t use EFTPS, and the penalties were upheld.

Meanwhile, actor Nicolas Cage will be fighting the IRS in Tax Court. The TaxProf Blog quotes a story in Forbes:

The IRS says movie star Nicolas Cage used a company he owns to wrongly write off $3.3 million in personal expenses, including limos, meals, gifts, travel and his Gulfstream 1159A turbojet. … The feds hit Cage both ways, denying Saturn a deduction for the disputed expenses while taxing Cage individually on the perks as salary and “constructive dividends.”

Cage’s business manager, Samuel J. Levin, says in an e-mail that the expenses were proper as “customary in the entertainment industry” and were partly based on the actor’s “security needs.”

Mr. Cage’s Tax Court case will probably not be heard for many months, with a decision possible in 2009.

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The Wages of Sin

Posted on February 20, 2008 by Russ

A New Jersey couple frequented Atlantic City, and enjoyed playing the slot machines. In 2004, they were “lucky” enough to win $208,420 in jackpots for which they received W-2Gs. The couple, though, didn’t include that income on their tax return as they had lost overall while gambling in 2004 and they used simple logic to determine that overall losers don’t have to include gambling income on their tax returns.

Unfortunately, that’s not the case. The couple’s return was examined (audited) and the IRS added the $208,420 as gambling income (and did allow an itemized deduction of the same amount). However, because their adjusted gross income (AGI) changed several deductions were disallowed or negatively impacted. They ended up having a tax deficiency of $4,190. They appealed to the U.S. Tax Court.

Unfortunately for the New Jersey couple, gambling income must be included as part of your income even if you’re an overall loser for the year. As the Court noted,

“The jackpots that petitioners received constitute gambling income. A taxpayer in the trade or business of gambling may deduct wagering losses to the extent allowable in computing adjusted gross income. A taxpayer who was not in the trade or business of gambling may deduct wagering losses only to the extent allowable as an itemized deduction to compute taxable income.”

The couple were not professional gamblers (they both had full-time employment) so the IRS was correct—the $208,420 must be included as income (though they do get an itemized deduction for their losses up to the amount of their wins, $208,420).

The IRS also attempted to impose a negligence penalty under §6662(a). The petitioners explained that they had been preparing their returns in this manner for years without any problems and that they felt that logically losers wouldn’t have any income. Luckily, the Court saw the logic in their remarks (though the couple is incorrect on the law).

So the New Jersey couple will have to pay the $4,190 but do not have to pay an additional $838 for negligence. This case shows the unfairness of the US Tax Code toward gamblers—the couple lost and their taxes went up. The wages of sin, I suppose.

Case: Dawson v. Commissioner, T.C. Summary 2008-17

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