New IRS Form 944 for Very Small Businesses to Replace Form 941

Posted on October 5, 2005 by Russ

For the very small business owner, the IRS will introduce in 2006 a new form, Form 944. You can view a draft version of the form here. The new form is for businesses who pay $1,000 or less in employment taxes annually. The IRS believes that one-sixth of the 6 million total Form 941 filers will be able to use the new form.

The new form (Form 944) has to be filed only once per year, saving paperwork time. In most cases, the taxes can be paid when filing the form.

As the SSA/IRS Reporter states, “The IRS believes that filing and paying employment taxes should be as easy as possible. By simplifying the process of employment tax filing, more small employers will have the opportunity to more easily comply with the law.” And I agree.

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Bowling for Dollars

Posted on October 5, 2005 by Russ

I remember watching the television show Bowling for Dollars. Chick Hearn, the late Los Angeles Lakers broadcaster, was the host. Contestants bowled a couple of frames and got paid small cash prizes based on how well they did.

Charles Lanza, of Wolcott, CT, had a better Bowling for Dollars idea. Mr. Lanza owns three bowling alleys in Connecticut and told his employees to fill bags with cash proceeds from his lanes (from everything from bowling, the arcade, and shoe rentals); bags were labeled “O” if they held $500 or “X” if they had $1000. (“O” stands for a split in bowling while “X” stands for a strike. I guess “/”, the symbol for a spare, wasn’t needed.) The cash was then delivered to him and not included on his books.

What a wonderful scheme. And no taxes to be paid on the $2 million skimmed from his business.

And then the IRS showed up.

Mr. Lanza faces sentencing in December on felony tax evasion and conspiracy charges. He’s expected to have to serve 30 to 37 months in prison (the maximum is ten years) and to pay a fine of $350,000 plus make full restitution.

News Story: The Hartford Courant

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Offshore Shenanigans

Posted on September 30, 2005 by Russ

A company called Derivium Capital LLC is under investigation by the IRS and the Franchise Tax Board for making loans that allegedly weren’t loans, according to Forbes.

The scheme aided taxpayers who were sitting on large stock gains. According to Forbes, “The Derivium deal called for the customer to get a loan equal to 90% of the value of his shares. If the stock went up, he could get it back by repaying the loan, with interest. If the stock went down, he could walk away and owe nothing. And, supposedly, the initial loan was not a sale and thus not taxable.”

But the IRS and the FTB think otherwise, and Derivium sits in bankruptcy. The California Corporations Commission filed suit in 2002 to stop the loans (see this link); it appears Derivium stopped its activity in California soon thereafter. Derivium’s bankruptcy filing is noted in this article in the Times-Record of Middletown, NY. The firm either used “unique and proprietary business model for marketing and administering sophisticated loan transactions” or was “a giant Ponzi scheme.”

Arbitrators so far have ruled that Derivium owes ex-clients $80 million, with many more claims filed. Of course, the bankruptcy filing may forestall those complaints, along with the problems of Derivium’s lender, Bancroft Ventures of the Isle of Man. Forbes reports that Bancroft’s directors have quit, and that Bancroft moved to Cyprus and the new directors are from Beirut.

My usual advice applies to “loans” like these: If it sounds too good to be true, it probably is. So now Derivium’s clients are looking at both tax troubles and possible loss of their loan capital.

Posted in Tax Fraud | 1 Comment

Contumacious Conduct

Posted on September 29, 2005 by Russ

What happens when you battle the IRS in Tax Court, but lose? You have to pay what you owe. If you don’t, you can face a lien or levy. Today, the Tax Court stepped in when a one-time loser became a two-time loser.

The petitioner in today’s case lost in tax court in 1998 for his 1991 through 1994 taxes (he also received a $500 fine for a frivolous argument). He didn’t pay, so the IRS started the levy process. The petitioner again went to Tax Court where he disputed the levy, claiming the income tax is unconstitutional. His argument, according to the Tax Court, did not contain “a scintilla of merit.” Further, “Petitioner’s groundless arguments and contumacious conduct have wasted the time and resources of respondent and this Court.” So the levy was upheld and a $2500 fine added to the bill.

Case: Forrest v. Commissioner, T.C. Memo 2005-228

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Pork Aid

Posted on September 25, 2005 by Russ

According to this story, Louisiana’s senators have asked for $250 billion in aid solely for the state of Louisiana. That’s an interesting number given that current estimate of damage is $200 billion. The proposed relief package includes obvious pork, such as $5 million for a Louisiana hurricane forecast center at LSU, and $160 million to create a “federal city” in New Orleans.

Personally, I’d like to see most of the pork spending in the recently passed highway bill returned to the federal government to pay for relief. I doubt that will happen.

Posted in Katrina | 6 Comments

When You Don’t Withhold….

Posted on September 21, 2005 by Russ

Harrah’s Entertainment, the big casino conglomerate, apparently forgot to withhold from about 400 winners (mainly Canadians) at this year’s World Series of Poker®. Harrah’s is now “making up” for this by not allowing these players to play in another poker tournament until they repay Harrah’s. Most likely, the IRS demanded the withholdings that Harrah’s forgot about. For example, a casino must withhold 30% of the winnings of a Canadian (in most cases), though the Canadian can later file a Form 1040-NR to recover some of the withheld tax.

So Harrah’s should have read the rules (but didn’t) or hired a good tax accountant (I happen to know one), and there are a bunch of “lucky” winners out there who Harrah’s would like to collect from.

Hat Tip: Steve Hall’s Poker Blog.

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Circular Funding Doesn’t Work

Posted on September 20, 2005 by Russ

When an S corporation has a loss, the loss flows through to its’ shareholders. But shareholders can only take the loss if they have a basis in the corporation; the basis is (in general) the shareholder’s share of the profits (to date), plus his share of the capital and his share of any loans made to the corporation.

In order for a shareholder to increase his basis in an S corporation, the shareholder must make a real outlay; as the Tax Court stated today,

“…to satisfy this requirement, even in circumstances where the taxpayer purports to have made a direct loan to the S corporation, the taxpayer must show that the claimed increase in basis was based on “‘some transaction which when fully consummated left the taxpayer poorer in a material sense.’” Bergman v. United States, 174 F.3d 928, 932 (8th Cir. 1999) (quoting Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971)); see Hitchins v. Commissioner, 103 T.C. 711, 715(1994). This doctrine ensures that the transaction has some economic substance beyond the creation of a tax deduction. Oren v. Commissioner, 357 F.3d 854, 857 (8th Cir. 2004), affg. T.C. Memo. 2002-172.” [Kaplan v. Commissioner, T.C. Memo 2005-218]

In the case decided today, an owner of multiple S corporations took out a bank loan, then “loaned” one of his S corporations money which loaned another S-corporation….The Tax Court decided that there was no economic basis for the transactions and sustained the IRS’ determination of a loss with no basis. Additionally, the petitioner claimed legal fees but had no back-up documentation; he lost that argument, too.

Case: Kaplan v. Commissioner, T.C. Memo 2005-218

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Pork

Posted on September 20, 2005 by Russ

With President Bush proposing (and Congress passing) extensive relief for Hurricane Katrina, and the possibility of perhaps another deadly strike by Hurricane Rita in Texas, one obvious question is how do we pay for this. I’ve seen estimates that the final bill for Katrina could be as high as $200 billion.

This morning, courtesy of the InstaPundit, are two new websites highlighting Pork spending by Congress: PorkBusters and PorkReports. Here are some sample pork projects that could (and should) be cut (all from the recently passed highway bill):

CA $100,000 Tiger Woods Foundation, Los Alamitos, to offer programs to at-risk youth (Fund for the Improvement of Education – Department of Education) I’m all for private foundations that do charitable work. But there’s no need for government funding here.

$2,320,000 for landscaping enhancements along the Ronald Reagan Freeway (Route 118), California. Unbelievably, the money is designated in the bill as “for aesthetic purpose.” This is particularly ironic considering that Reagan vetoed a highway bill containing “just” 152 earmarks. Need I say more?

This all harkens back to the days of Senator William Proxmire and his Golden Fleece Awards. A list of the “top ten” of the original Golden Fleece Awards can be found here.

Posted in Legislation | 1 Comment

Did Your Estimated Payment End Up in the Bay?

Posted on September 19, 2005 by Russ

There are traffic accidents and then there are traffic accidents. A courier transporting approximately 30,000 1040-ES payments lost his load on the San Mateo Bridge…and the payments fell into the San Francisco Bay. The accident occurred on September 11th and could impact any taxpayer mailing payments to the IRS’ San Francisco lockbox.

If you mail payments to PO Box 510000 in San Francisco and it could have been received on or about September 11th, then check your next bank statement to see if your payment clears. If it does, then you have nothing to worry about. If it doesn’t, then you may need to send in a replacement payment. If you’re one of our clients, contact us if you’re one of the unlucky taxpayers whose payments are now sleeping with the fishes.

This is why we strongly urge using certified mail, return receipt requested (and electronic filing/payments) for all correspondance sent to any tax agency. This puts the onus on the government, not you, regarding receipt of your payment. If your payment ended up in the bay and you have your mailing receipt and return receipt, you may have to go through a minor hassle with a second payment. But if you just mailed in your payment and it’s lost, good luck with your fight with the IRS.

Hat tips: Roth Tax Updates, TaxProf Blog

Posted in IRS | 2 Comments

Hatch Pleads Not Guilty; Return Shopping?

Posted on September 19, 2005 by Russ

Survivor Richard Hatch pled not guilty today to charges that he didn’t report his $1 million in winnings from the reality television show, and charges of filing a false S-corporation tax return, mail fraud, wire fraud, and bank fraud. Hatch told the Providence Journal that, “I’ve always, always, always paid my taxes and always will.”

However, the government alleges that he didn’t. The allegations include that Hatch shopped around for the tax return that had him pay as little as possible to the government. The Journal says that he visited two accountants. The first prepared a return where he would have owed over $400,000 to the IRS; the second prepared a return where he would have paid over $200,000 to the IRS. Both of these returns included the income from Survivor. Neither return was filed. The second accountant then prepared a return that did not include the Survivor income; it showed Hatch receiving a refund from the IRS of $4,483. The accountant noted that it was for informational purposes only and should not be filed. Hatch filed that return.

Hatch is free on $50,000 bond until his trial.

News story (Providence Journal)
The indictment

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