Just One Digit Off

Posted on November 21, 2005 by Russ

What happens if you receive your W-2 and your company made a mistake on your social security number and it’s off by one digit? Being an unscrupulous individual, you sense opportunity! “I don’t have to report my wages from my employer! The IRS won’t be able to match up the wages!”

Of course, when the IRS receives the wage information (forwarded by the Social Security Administration), they’ll notice the mistake and send a letter to the employer. The employer will then check their records, and fix the error (or let the IRS know that their records match the data sent).

So what happens to the employee who doesn’t file? Problems, of course.

First, you did receive the W-2. Second, whether or not you receive a W-2, you are required to file your tax return each year. In fact, there’s even a form for you to use if you don’t get a W-2, Form 4852. And third, if you don’t file, sooner or later the IRS will catch up with you. There is no statute of limitations if you don’t file.

Today the Tax Court decided a case where the petitioner claimed he filed, but the IRS couldn’t find a record of his filing under his social security number, the incorrect SSN used by his employer, or his spouse’s SSN. The numbers didn’t make sense, either. And there was no record of him filing a state tax return. The Tax Court didn’t believe him. And he didn’t spend the $4.42 on certified mail, return receipt requested to prove he mailed his returns.

The court found him liable for his taxes, penalties for failure to file, and failure to make timely estimated payments. In the future, he might just let his employer know about the error and file his returns.

Case: Zakhem v. Commissioner, T.C. Summary 2005-171

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Voodoo Chief Convicted of Tax Evasion

Posted on November 20, 2005 by Russ

Sharon Lee Caulder, now of New Orleans, was convicted on Friday of failing to file tax returns and hiding assets during her bankruptcy. Ms. Caulder apparently made $1.7 million in gross income between 1998 and 2002, mostly from sale of her book, Mark of Voodoo. The Amazon cover photo (of the book) states that Ms. Caulder has a PhD. Apparently, she didn’t take any accounting or tax courses while at college.

Ms. Caulder will be sentenced in late February in Oakland. She faces up to 15 years in prison and fines of up to $1 million.

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).

News Story: The Daily Review

Posted in Tax Evasion | 4 Comments

Voter Approval Means Voter Approval

Posted on November 18, 2005 by Russ

The California Department of Finance thought it had a good idea to finance pension debt. Just issue $525 billion in bonds. Only one problem, the State Constitution says that all large loans (defined as anything over $300,000) must be approved by the voters.

The Department of Finance thought that these bonds, technically refinancing existing debt, didn’t require approval. Sacramento County Superior Court Judge Raymond Cadei felt otherwise. So voter approval still means voter approval. The Department of Finance plans an appeal.

As an aside, had this been presented to the voters as refinancing of existing debt at a lower interest rate, it is likely it would have been approved.

Coverage via AP

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Nissan to California: It’s Too Expensive There

Posted on November 11, 2005 by Russ

Nissan Motor Company will move its US headquarters from Gardena (suburban Los Angeles) to Williamson County, Tennessee (suburban Nashville) in order to save money. Nissan CEO Carlos Ghosn noted, “The costs of doing business in Southern California are much higher than the costs of doing business in Tennessee.” The move will directly cost 1300 jobs in Southern California. Jack Kysar, chief economist at the Los Angeles Economic Development Corporation estimates that it will cost an additional 1500 jobs through indirect impacts.

We wonder if the Democrats in the legislature have any thoughts about keeping business in California given their proposals to increase California’s already high income tax rates.

News Coverage: Washington Post (AP Story)

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Bemusement at the Tax Court

Posted on November 10, 2005 by Russ

Sometimes all you can do is laugh. And most likely Judge Powell, who decided today’s case, was laughing quite a bit.

The case involved taxpayers disputing the assessment of a penalty for the untimely filing of their tax return. Just one problem: the return was timely filed and the IRS did not assess such a penalty. Rather, the IRS assessed penalties for failure to pay estimated taxes and for failure to pay tax. As the judge noted, “It is sufficient to say that these are separate additions to tax for different actions.”

Case: Goldman v. Commissioner, T.C. Summary 2005-165

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Converting Lottery Winnings Into a Lump Sum

Posted on November 8, 2005 by Russ

If you’re lucky enough to win the lottery (tonight’s MegaMillions jackpot is somewhere around $225 Million), and you elect the annuity option (you’ll receive your winnings over an extended period of time, probably around 25 years), each of your payments is ordinary income (and may be exempt from your state’s income tax—California exempts lottery winnings from the California lottery). But there’s no exemption from federal income tax.

What happens if you take the annuity option but then convert it into a lump sum? Do you now magically have a capital gain? The 9th Circuit Court of Appeals ruled in United States v. Maginnis that such a sale was taxable as ordinary income. Today, the tax court decided another case where the petitioner received a 1099-B for her conversion. Not surprisingly, the Tax Court felt that it’s still ordinary income no matter what piece of paper is used for disclosing the transaction.

Case: Prebola v. Commissioner, T.C. Memo 2005-261

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Loveland, OH Backs Down

Posted on November 8, 2005 by Russ

Many cities in the Eastern U.S. have city income taxes. One of these is Loveland, Ohio. Deborah Combs did not pay her $1.16 city income tax bill.

Loveland decided to press criminal charges. For $1.16.

Ms. Combs, who said she has “…been down on [her] luck…” will no longer face late fees of over $200, possible fines up to $4,000 and potential jail time. Loveland will no longer look like the Grinch.

Coverage available here.

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Vote Early but Not Often

Posted on November 8, 2005 by Russ

…unless you live in Chicago (well, there’s no election in Illinois on Tuesday).

Californians will go to the polls on Tuesday to decide several propositions. There are also some local ballot initiatives. Here in Orange County, we have Propositions B, C, D & E. These take part of the $0.005 sales tax approved by the voters (Proposition 172) and reallocate it (except for Proposition B, which leaves the allocation alone).

If you’re confused by these propositions, you’re not alone. The firefighters gathered signatures to put Proposition D on the ballot (this increases the allocation to firefighters and decreases the allocation to the Sheriff). Guess who is against Proposition D?

The supervisors apparently didn’t like Proposition D, either, so they added B, C and E to the ballot, in an effort to confuse the voters (it’s working, too). One note about the OCFA (Orange County Fire Authority)–the firefighters of Orange County are among the highest paid in the country.

But whatever you do, exercise your right and vote in tomorrow’s election. Make sure your voice is heard—take a few minutes and vote.

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The Tax Reform Panel’s Report: Why It’s Irrelevant

Posted on November 2, 2005 by Russ

Yesterday, the Tax Reform Panel issued its final report (available here). I have come to the conclusion that no matter the merits of the reforms mentioned (which I previously commented on), this plan (really, plans) are dead-on-arrival in Congress.

A quick search of Google news shows the following:
—Senior US Senator From Iowa Opposed to Panel’s Recommendations
—Realtors Upset With Tax Reform Panel
—LA Times: Popular Tax Breaks Put on Chopping Block
—New York Congresswoman: Unfair Tax Increase

You get the idea.

Now, the merits of the proposals are quite different than the rhetoric. But given that this proposal will be opposed by the delegations in New York, California, and other high-tax states, and is apparently opposed by Senator Grassley of Iowa, it has no chance of passage.

If you want to read more about the reaction to the panel’s report, the TaxProfBlog has a series of links to think tank reactions to the report.

Posted in Legislation | Comments Off on The Tax Reform Panel’s Report: Why It’s Irrelevant

Supreme Court: NY Can Tax Worker in TN

Posted on November 1, 2005 by Russ

Suppose you work as a telecommuter in one state, but your corporate headquarters is in another state. To which state must you pay state income taxes? The obvious answer is the state you live in. Of course, if you visit your corporate headquarters, you will owe state taxes to that state based on the number of days you are at the corporate headquarters.

However, in a case decided earlier this year, the New York Court of Appeals (the highest state court in New York) ruled that a telecommuter who works outside of New York State but works for a New York based company must pay New York state income taxes. The 4-3 decision in Huckaby v. New York State Division of Tax Appeals may have aided New York’s coffers, but it certainly made New York less attractive to corporations that encourage telecommuting. New York has a rule that allows the state to tax out-of-state employees if they work out of state “for the convenience of the employer.” Luckily, California doesn’t have that rule—yet.

The Supreme Court yesterday refused to review the case. This means that if you work for a New York based employer but telecommute, you owe New York state income tax.

Posted in New York | 2 Comments