Gambler Craps Out

Posted on January 30, 2006 by Russ

What happens when you make a few bets and win? Well, besides ending up with more money in your pocket, you have something else to put on your tax return; gambling winnings are taxable in the United States and go on line 21 (Other Income) of Form 1040.

Many gamblers forget to tell their accountant about their winnings. The problems begin when you get caught as you can find yourself facing tax evasion charges. Cyrus Bland, of Campbellsville, KY was convicted on Thursday of filing false income tax returns. He played craps on riverboats in Indiana and came up a big winner — to the tune of nearly $500,000 in 1998 and almost $450,000 in 1999.

But he didn’t include his winnings on his tax return. And the IRS found out, and he’s looking at a possible six years in prison and a fine of $500,000. Oh, he has to pay the back taxes, interest, and penalties, too.

Sure, the tax code isn’t fair for gamblers. But I bet Mr. Bland is wishing he had paid the taxes on his winnings.


News Story: Central Kentucky News-Journal

Posted in Gambling | 4 Comments

Crack Tax

Posted on January 26, 2006 by Russ

Here’s an interesting idea. Why not put a special tax on illegal drugs? If a dealer gets arrested, and they don’t have a “crack stamp” on their cocaine, they’ll go to jail for tax evasion and drug possession/selling illegal drugs. Drug dealers are promised confidentiality.

Believe it or not, such a tax exists in Tennessee. And Tennessee raised $2 million in 2005 from the tax; all the money raised goes to fighting illegal drugs.

Of course, all drug dealers must declare their drug dealing income on their tax returns, or they risk following in Al Capone’s footsteps and landing in jail.

News Story: WBIR.com

Posted in Legislation | Comments Off on Crack Tax

Hatch Loses Immunity Challenge…

Posted on January 25, 2006 by Russ

…Next Stop: Prison

Richard Hatch, the first Survivor winner, was convicted today of failing to report $1,037,000 on his tax return. He was found not guilty of related fraud charges.

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

News Story: CBC
US Government Press Release
Roth Tax Updates post on Hatch’s Sentence

Posted in Tax Evasion | Tagged | 4 Comments

Survivor Trial to the Jury

Posted on January 24, 2006 by Russ

Richard Hatch’s fate now lies with a jury in Providence, RI.

Hatch, the former Survivor winner is either a greedy man who didn’t want to pay the taxes he owed or he did the best he could to understand the tax code.

Unfortunately for Hatch, his accountants did tell him about the taxes he owed, according to testimony during his trial. One even made him sign a statement that he wouldn’t file a return that didn’t include his Survivor winnings. He promptly filed that return.

Hatch faces up to 73 years in prison and millions in fines if convicted. Jury deliberations resume Wednesday morning.

News Story: AP via the Boston Globe

Posted in Tax Evasion | Tagged | 4 Comments

A Prison Scam of a Different Sort

Posted on January 23, 2006 by Russ

There’s been news of prisoners scamming the IRS by filing phony tax returns. Today we have the opposite happening—a tax professional and a jailer in Texarkana, AR allegedly filing phony returns using Social Security Numbers of prisoners.

The two were indicted by a federal grand jury and face 25 counts including filing false IRS claims. They allegedly only got $50,000 in phony refunds in 2003. That’s $2,000 per count….

News Story: Texarkana Gazette

Posted in Tax Evasion | Comments Off on A Prison Scam of a Different Sort

LLCs vs. S Corps in California

Posted on January 23, 2006 by Russ

In my practice, I see a lot of S Corporations, but very few LLCs (I can count the number on one hand). Yet, according to Christopher Hoyt of the University of Missouri at Kansas City (writing in the TaxProf Blog), this is the opposite of what’s being recommended in law school. So why the difference?

Hoyt notes the statistics, and presents a graph showing that S Corps remain twice as popular as LLCs (based on new S’s vs. new LLCs). Joe Kristan of Roth Tax Updates then speculates on the reasons behind this. His points on salaries, and the uncertainty of how LLCs are to be treated for self-employment taxes are on point.

Kristan also notes that state issues have a material impact. He notes that in Iowa (his home state), LLCs are tax-disfavored (versus S Corps) for multi-state operations.

In California, there are two major factors working against LLCs. First, all S Corps and LLCs in California must pay a minimum state franchise (income) tax of $800 per year (or 1.5% of net income, whichever is greater). But LLCs also face a gross receipts tax, so LLCs in California are triple-taxed! The current minimum gross receipts tax (called an LLC fee) is $865 per year. Second, some businesses are prohibited from being in an LLC. These include professionals, such as architects and accountants. (They can form LLPs, though).

If you’re at all interested in forming an LLC read the articles. They’ll enlighten you about some of the tax issues facing LLCs.

Hat Tip: TaxProf Blog & Roth Tax Updates

Posted in California, Entity Formation | 4 Comments

Hatch Trial Continues

Posted on January 22, 2006 by Russ

The trial of former Survivor winner Richard Hatch on ten counts including tax evasion continues in Providence, RI. Today’s New York Times has an excellent story on the trial, including reactions from some of his fellow contestants.

Hatch, who took the stand in his own defense on Friday, will return to the stand on Monday. Hatch claims that the producers of Survivor agreed to pay his taxes. However, his Form 1099 does not indicate this. Hatch faces up to 73 years in prison if convicted on all counts.

Posted in Tax Evasion | Tagged | Comments Off on Hatch Trial Continues

Throwing Out the Trash

Posted on January 21, 2006 by Russ

Over ten years ago, in the nearby City of Orange, a trash magnate was born. His name was Jeffrey Hambarian, and he was a hometown hero.

Mr. Hambarian had an interesting method of operating his business. He told his vendors that they had to make phony invoices and/or pad legitimate ones, and funnel most of the phony profits to him. He then laundered the ill-gotten gains through check cashing outlets.

This scam continued for some time, until an accountant noticed a problem during an audit. The accountant told the city, there was an investigation, and eventually Mr. Hambarian found himself convicted of 47 counts including grand theft and filing false income tax returns.

On Friday he was sentenced to 15 years in state prison and to pay $12 million in restitution. While his attorney complained that, “I don’t know what warehousing him in a state prison would do,” a prosecutor noted that, “…these are serious crimes.” Usually, those found guilty of 47 felonies find themselves behind bars.

News Story: Los Angeles Times

Posted in Tax Evasion | Comments Off on Throwing Out the Trash

Ohio Is Traded…Again

Posted on January 19, 2006 by Russ

Last year residents of Ohio who made estimated payments sent their payments in the second half of the year to San Francisco (the Fresno IRS Service Center). Well, Ohio has been moved (again), now to the Kansas City Service Center. On the bright side, it’s now much more difficult for your returns to fall into the San Francisco Bay.

This is just one of many changes the IRS announced. So check the label on your IRS package. Of course, if you efile this is irrelevant.

Also, don’t forget that it’s possible that the address you send estimated payments to has also changed.

Posted in IRS, Ohio | 1 Comment

H&R Block v. Intuit

Posted on January 17, 2006 by Russ

While driving this past week, I heard a radio commercial for Intuit’s TurboTax, stating that more returns were prepared on TurboTax than by H&R Block. Well, not so fast, says Block. The Kansas City based Block filed a lawsuit against Intuit in Kansas City on Friday.

Not so fast, says Intuit. We sued you first, in California.

H&R Block got a restraining order in Kansas City against Intuit using that advertisement (with Block’s name). Today, arguments were scheduled to be heard in Kansas City on ending the restraining order.

We’re often asked, by the way, about Turbo Tax and H&R Block. Both are fine (in our view) for simple, basic returns. TurboTax is excellent if, for example, you need to file an extension and you want to get an idea of what you owe (so you can make your payment with your estimate). But when you have a complicated return, you get what you pay for.

News Story: Kansas City Business Journal

Hat Tip: TaxProf Blog

Posted in Tax Preparation | 5 Comments