A New Meaning for Variable Income

Posted on January 3, 2008 by Russ

If you ask a financial institution for a loan for your business, the bank will likely want to see your tax returns and/or financial statements. One sure way to get in trouble is to tell the bank all about your positive earnings but tell Uncle Sam that your business was a loser.

That’s a new definition for variable income—it depends on whom you’re talking to. Unfortunately, when you deceive the IRS it’s also called tax evasion. Sabi Atteyih owned a popular Madison, Wisconsin restaurant called Casbah. He did exactly what I described above and on Wednesday he pleaded guilty to tax evasion. Based on federal sentencing guidelines Mr. Atteyih is looking at somewhere under two years at ClubFed.

So if you’re going to ask a bank for a loan, you should tell the truth (doing otherwise is fraud). And tell the truth to the IRS or you could see tax evasion in your future.

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IRS Street Addresses

Posted on January 2, 2008 by Russ

Most taxpayers use the Postal Service to send their returns to the IRS. However, you can use Federal Express, UPS, or DHL. The problem is the IRS hides the street addresses of their service centers on their website if you need those to use a private delivery service. (They’re listed in the back of Publication 1546.) As a public service, here are the street addresses of the Service Centers. (Note that the addresses of the Kansas City and Ogden service centers have changed during the past two years.)

Andover Service Center
310 Lowell St
Andover, MA 01810
[978-474-9701]

Atlanta Service Center
4800 Buford Hwy
Chamblee, GA 30341
[770-936-4500]

Austin Service Center
3651 S IH 35
Austin, TX 78741
[512-460-0176]

Brookhaven Service Center
1040 Waverly Ave
Holtsville, NY 11742
[631-654-6583]

Cincinnati Service Center
201 W. Rivercenter Blvd
Covington, KY 41011-1424
[859-292-5185]

Fresno Service Center
5485 E Butler Ave
Fresno, CA 93727
[559-454-6334]

Kansas City Service Center
333 W Pershing Rd
Kansas City, MO 64108
[816-823-2076]

Memphis Service Center
5333 Getwell Rd
Memphis, TN 38118-7733
[901-546-4115]

Ogden Service Center
1973 N Rulon White Blvd
Ogden, UT 84404
[801-620-4249]

Philadelphia Service Center
11601 Roosevelt Blvd
Philadelphia, PA 19154-2100
[215-516-5994]

Franchise Tax Board
9645 Butterfield Way
Sacramento, CA 95827

It’s very important to note that these addresses should be used only for private delivery services. Regular mail sent to these street addresses may be rejected as sent to a non-deliverable address and returned to the sender! Mail sent to a service center should be sent to the “normal” address of the service center; for example, here is where taxpayers filing their own Form 1040 returns should mail the returns to (look at page 90 of this pdf).

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Vote Early and Often, 2008 Edition

Posted on January 2, 2008 by Russ

With the Iowa caucuses tomorrow, it’s time to remember that Californians will vote three times this year. We have our presidential primary on Tuesday, February 7th, our “normal” June primary on Tuesday, June 3rd, and Election Day on Tuesday, November 4th. Remember to vote each time (but unlike Chicagoans, one vote per person per election is enough).

I’ll be reviewing the three propositions on the February ballot. And let’s start with the easiest proposition ever to review: Proposition 91.

Proposition 91 duplicates the work of Proposition 1A (which passed in November 2006). Supporters of Proposition 91 urge a no vote. Given that its supporters want you to vote no, there’s no reason to go further with analyzing this proposition.

I’ll be returning to this ballot over the next two weeks as Propositions 92 and 93 aren’t as easy to analyze.

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The Swamplands Also Face Budget Troubles

Posted on January 1, 2008 by Russ

California is not the only state with a budget crisis. The swamplands, aka New Jersey, face a projected $3 billion deficit for the next fiscal year according to this story.

Governor Jim Corzine (D) has asked his administration to find $3 billion to cut. Interestingly, New Jersey instituted one of the largest state tax increases ever in 2006. New Jersey is considered by the Tax Foundation to have the third worst tax climate for business (even surpassing California).

Governor Corzine has complained about debt (presumably bond interest) that costs New Jersey about $3 billion annually. But who has proposed that debt, and signed the laws allowing that debt to be borrowed? New Jersey’s legislature is controlled by Democrats, and its governor is a Democrat.

This summer is going to be very interesting for state budgets throughout the United States. Special interest groups will say, ‘Cut them, not us.’ The problem is that today almost everyone considers themselves a special interest group. Will governors actually cut programs? Will they increase taxes? Or will they try to balance their budgets with smoke and mirrors?

If you’re a New Jersey resident, make your views known with your local representatives. It’s an election year, and they ought to listen.

As to what will happen, given New Jersey’s past I suspect smoke and mirrors will win out.

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The 2007 Tax Offender of the Year

Posted on December 30, 2007 by Russ

There are all sorts of awards given, but the award I give is special. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

In 2005 Sharon Lee Caulder won the inaugural award. Quoting from my post, “Sharon Lee Caulder, formerly of Oakland and now from New Orleans, our voodoo priestess who wrote a book and was convicted of tax evasion. She did not include the $1.7 million she earned between 1998 and 2002 (mainly from sales of her book, Mark of Voodoo, on her tax returns”. As I wrote when she was convicted, “Voodoo is more profitable than I realized, especially if your net income after taxes is the same as your net income before taxes (until Uncle Sam catches you).”

Now, on to 2007. There have been lots of tax fraudsters this year. But one stands out. No, it’s not Wesley Snipes. Mr. Snipes hasn’t been convicted yet, so technically he’s not an offender. (He certainly has a good shot at the 2008 award, though.)

The story begins back in 2000. A Camarillo, California company is sued for patent infringement and settles the case for “tens of millions of dollars.” Now, if you owned that business what would you do? Would you look for new income producing lines of business? Would you develop workarounds so that you wouldn’t be infinging on the patents? Or would you decide to commit tax fraud just to get back at the federal judge who allowed the miscarriage of justice (in your view) to happen?

If you’re thinking that no one could have such a bad motive to commit tax fraud you’d be wrong. This actually happened.

As I detailed earlier this year, Gene Haas did exactly that. The former CEO and owner of Haas Automation, Inc. created a phony Nevada company and enlisted the help of his then CFO to commit tax fraud. Here’s what I wrote:

So, enlisting the help of his then CFO, John Phillips, the business created a phony company in Nevada called “Supermill,” and then paid the phony company from phony invoices. Then Mr. Haas and Mr. Phillips got in a business dispute, Mr. Haas sued Mr. Phillips for $27 million (apparently related to the phony transactions), and Mr. Phillips went to the FBI and told them of the scheme. (Mr. Phillips was not indicted.) It’s not a good idea when you commit tax fraud to get a co-conspirator angry enough to go to the FBI.

The DOJ, in a press release announcing Haas’ indictment, claimed that the tax fraud was upwards of $20 million. Now, with a $5 million fine added in, penalties, and interest, the total judgment is somewhere around $70 million. And Mr. Haas will be receiving two years at ClubFed.

If you find yourself losing a court case, I strongly recommend that you do not follow Mr. Haas’ path, and decide that committing tax fraud is a way of getting back at the judge. Kenneth Barish, an attorney for Mr. Haas, in describing the plea deal, noted, “[u]nder the circumstances, it was a good result.” When paying $70 million and getting two years at ClubFed is a good result, you wonder what a bad result would be.

As for Gene Haas, he was formally sentenced in November to two years at ClubFed, payment of the taxes, penalties, and interest (totaling about $70 million), and a fine of $5 million. Added to the $30 million or so he paid for the patent infringement case, that’s a whopping $105 million plus two years at ClubFed. Yes, Mr. Haas threw away two years of his life and $75 million.

That’s a wrap for 2007. While I’d love to not have anyone commit such a bozo tax crime as Mr. Haas did, I fully expect to see at least one similar story in the coming year. I have complete confidence in Americans to commit bozo tax crimes.

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California Economics

Posted on December 30, 2007 by Russ

In most of the world, economics follows the rules you learned in school. If prices increase and the supply stays constant, demand falls; if supply decreases and demand stay constant, price increases, etc. But I’m a resident of California.

California faces a $14 billion budget deficit. As I earlier noted, Governor Schwarzenegger will be calling a special session of the Legislature in early January to deal with the deficit. Given that Assembly Republicans are vowing no new taxes and Assembly Democrats don’t like the idea of cutting programs, it should be interesting.

But that’s not the point of this article. Given the budget situation, what sane politician would propose a new tax? How about new taxes? Well, Governor Schwarzenegger and Assembly Democrats have brokered just such a package with their health care initiative.

This proposal, if it passes the Legislature, introduces three new taxes: an additional $1.75/pack cigarette tax, an employer health care tax, and a 4% surcharge on hospital stays.

Let me first note basic economics. These taxes will raise prices, thus causing demand to drop. The revenue projections won’t be met, and taxes will need to be increased further in order for the program to be funded at the level proposed.

Second, consider California’s business climate. It’s bad—California ranks 47th out of 50 states. What sane business owner would expand a business in California when neighboring states offer a much better business climate?

Third, the proposal likely violates federal law. There’s a federal law, ERISA, which courts have held prohibits states and local governments from mandating employee benefits. Indeed, just last week U.S. District Judge Jeffrey White ruled that San Francisco’s law mandating health insurance violates ERISA and threw it out. While San Francisco plans on appealing the decision, there’s lots of precedent that they’ll have to fight through.

For California’s future the state’s political leaders need to look at cutting taxes. Though this may sound difficult to impossible in a time of budget deficits, the Laffer curve has shown that lowering tax rates increases tax collections. But I’ll be shocked if we see any tax decreases.

Perhaps I’ll be surprised at the Legislature’s actions in 2008. And perhaps pigs do fly….

Wall Street Journal Editorial
Assemblyman Doug LaMalfa on California’s health care plans

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So I Married a Tax Cheat

Posted on December 27, 2007 by Russ

I remember the Michael Myers movie, So I Married an Axe Murderer. Today the Tax Court looked at a related issue: What happens if you marry a tax cheat but don’t know about it?

The basic facts weren’t in dispute. The petitioner’s ex-wife was a parking lot cashier at the Philadelphia Airport in the early 1990s. She participated in a scheme to steal money from the airport. She earned about $90,000 in illegal (stolen) income. As you might expect, when the theft was discovered her employment was terminated.

There’s no dispute that illegal income is taxable. There’s also no argument that when a joint return is filed, both spouses are responsible for paying the tax on the income. In this case, both the IRS and the petitioner agree that about $36,000 in tax is owed.

However, there is a protection for the true innocent spouse. Section 6015(c) of the Tax Code:

“…That section limits an individual’s liability for a deficiency to the portion of the deficiency properly allocable to that individual under section 6015(d). In general, an item that gives rise to a deficiency on a joint Federal income tax return will be allocated to the individuals who file the return in the same manner as that item would have been allocated had those individuals filed separate returns.”

Given that when the returns were signed the petitioner knew nothing about the ex-wife’s illegal income, all of the income would be attributable to the wife.

However, the IRS disputed whether the petitioner had actual knowledge of the illegal income. If that were the case, he would not be eligible for relief by filing a Section 6015(c) election.

Luckily for the petitioner, for this section of the Tax Code the burden of proof is with the IRS (per Section 6015(c)(2)). While petitioner’s ex-spouse testified that the petitioner knew about the illegal income, that was apparently the only evidence that the IRS had. The petitioner also testified that he had no knowledge of the illegal income, and “…we find petitioner’s version of the events to be the more credible. Other evidence supports our finding in this regard. “

So if you marry a tax cheat, don’t despair. The Tax Code does actually offer you some protection. On the other hand, if you marry an axe murderer….

Case: Eller v. Commissioner, T.C. Summary 2007-215

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IRS Announces Which Taxpayers’ Returns Will Be Delayed

Posted on December 27, 2007 by Russ

The IRS announced today that most taxpayers will be able to file their tax returns normally. However, about 3 to 4 million taxpayers who use just a few forms will need to wait until February 11th. (While about 13.5 million taxpayers use these forms, most do not file early.)

Here are the forms that will cause delays:

  • Form 8863, Education Credits;
  • Form 5695, Residential Energy Credits;
  • Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; and
  • Form 8859, District of Columbia First-Time Homebuyer Credit.

Remember, the forms you get in the mail will be incorrect. Specifically, the exemption amounts on Form 6251 (Alternative Minimum Tax) are wrong. Other forms and instructions that reference these amounts will also be incorrect.

The IRS stated in today’s press release that they will need seven weeks to update their computer system for those specific forms, but that individuals who don’t use those forms should be able to file normally.

Congratulations to the IRS in working expediently to fix the mess that Congress created. As to Congress, can you do your 2008 AMT patch before Election Day next year?

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Snipes’ Motions Don’t Fly

Posted on December 27, 2007 by Russ

Wesley Snipes will be tried in Ocala, Florida, not New York City. That was just one of the rulings made yesterday by Judge William Hodges. The judge found that a jury in Florida would likely consist of the same racial percentages as one would find in Central Florida, and that’s the important constitutional question, not the racial percentage differences between Florida and New York. Additionally, the judge ruled that the trial will not be delayed until April.

So Snipes’ trial is set to begin on January 14th in Ocala. We’ll see how big of a media circus the trial is in just a few weeks. In any case, Snipes’ trial will probably be just the tonic for tax preparers while we prepare 2007 returns.

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There’s a Good and a Bad Way to Change Your Address

Posted on December 26, 2007 by Russ

A partnership changes its address. What should it do to notify the IRS? Well, that’s fairly simple: Like any taxpayer it should send in Form 8822. Today, the Tax Court looked at a case where the partnership didn’t follow the normal procedure.

Partnerships are required to designate a “Tax Matters Partner” (TMP). When the IRS has questions/issues/needs to send a notice, it sends the same to the TMP. In this case, the IRS sent 14 final partnership administrative adjustment (FPAA) notices to three different addresses. As the Tax Court said, “By mailing FPAAs to multiple addressees at multiple addresses, respondent made a good faith effort to notify all affected parties of the partnership adjustments, thus satisfying the notice requirement of sec. 6223(a).” And one of the addresses was the last address of the Form 1065, thus making it a correct address to mail the FPAAs.

The partnership wanted to challenge the FPAAs. (Among other issues, the IRS believes the partnership is a sham.) From this case and two related cases the Tax Court ruled on, it’s unclear whether or not the partnership received the FPAAs timely. It’s quite clear that they didn’t respond timely (the Tax Court case was brought two years after mailing of the FPAAs). Because the IRS mailed the FPAAs to a correct address, the Tax Court dismissed the partnership’s petition.

Consider what would have happened to the case had the partnership correctly filed a change of address—there’s a good chance their case would be heard at the Tax Court. (Whether or not they would prevail is unknown, as the issues involved were never argued.) Certified mail costs under $5.00. I guarantee that the IRS asked the partnership for more than $5.00.

Case: Stone Canyon Partners v. Commissioner, T.C. Memo 2007-377

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