IRS Issues Priority Guidance Plan; Targets Include Poker Tournaments

Posted on August 17, 2005 by Russ

The IRS and the US Department of the Treasury issued their “Priority Guidance Plan”. A total of 254 projects are mentioned. The ones that the IRS has highlighted are:

—Additional legal requirements for tax shelters;
—Guidance on how to report distributions from Roth IRAs;
—Guidance on impact of a 2.5 month grace period for flexible spending accounts on HSAs;
—Regulations under Section 529 regarding qualified tuition programs for higher education;
—How charities should report automobile donations they receive; and
—Legal requirements to withhold on the winner’s prizes at poker tournaments

As part of my ongoing series on online gambling and taxes, I will include a piece on taxes and poker tournaments. That article will appear in a couple of weeks.

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Deadline Day 2

Posted on August 15, 2005 by Russ

Today, August 15th, is the deadline for individuals who filed extensions to actually file their 2004 Federal tax returns. A second extension is available (until October 17th), but you need to have a reason (and have the IRS accept the reason); use Form 2688 to file for the second extension. For Californians, your extension to file is for six months; you need not file your State return until October 17th.

Next year, the automatic Federal extension will be for six months.

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Taxes and Online Gambling, Part I

Posted on August 11, 2005 by Russ

I’m a poker player. I’ve been playing competitive poker, including tournaments, for several years, quite successfully. And yes, I claim my winnings on my tax return. I’m also co-author of a poker book.

I’ve had a natural fascination with gambling and taxes for several years, and that’s a primary reason why one of my areas of emphasis is gambling taxes. Several individuals have asked me to give an overview on online gambling and taxes. Given the out-and-out lies and falsehoods that I see on the Internet, I’m going to present a short series on online gambling and taxes.

“If I gamble online, it’s overseas, and I don’t have to pay tax on it.” I see this statement all the time, and it’s absolutely false. Under the US Tax Code, all income for US citizens is taxable, whether earned in the US, overseas or on the Internet. Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).

“Internet gambling is illegal, so I don’t have to pay taxes on it.” Ignoring (for the moment) the legality of Internet gambling, this is also false. The US taxes legal and illegal income. Remember Al Capone? He went to prison not for the murders he committed, but for tax evasion.

“The government has no way of tracking how much I win, so I’m not going to report it, and they’ll never find out.” If you’re not audited for some other reason, the government is not likely to find out. However, if for whatever reason you are audited, and you have unreported income that the government finds out about, you will, at a minimum, pay tax, penalties and interest. If the IRS determines that you willfully evaded taxes, you could even be subject to imprisonment.

“I didn’t receive a W-2G, so I don’t have to report the gambling income.” Another falsehood. Whether you receive paperwork or not, all gambling income is taxable.

“I can net my gambling wins and losses.” Some gamblers can net their wins and losses—if they are professional gamblers. Most gamblers, however, must put their gambling income on line 21 (Other Income) and take their losses, up to the amount of their winnings, as an itemized deduction on Schedule A. This deduction is not subject to the 2% AGI limitation.

Finally, “I don’t have to claim my online gambling winnings until the money is repatriated into the United States.” This is yet another falsehood for gambling income. When you win your wager, you have gambling income, no matter if the bet is in the United States, the United Kingdom, or any other country. This falsehood, though, deserves a complete debunking and that will be the subject of the next installment of this series, next week.

Posted in Gambling | 4 Comments

“Doctored Receipts and Implausible Testimony”

Posted on August 11, 2005 by Russ

It’s not a good thing for you when the Tax Court begins its opinion with “…[the petitioner] seeks to deduct expenses by relying mostly — if not quite entirely — on doctored receipts and implausible testimony.” The opinion includes such gems as a flood that didn’t occur, a receipt dated on the top as 1999 but at the bottom 1996 (and the seller says 1996), “…the next two deductions at least sound valid….” Needless to say, the petitioner didn’t do well.

Case: Obot v. Commissioner

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Vacation

Posted on July 29, 2005 by Russ

I’ll be, in general, out of the office until August 9th, enjoying some time away from the office. While I’m away, take a look at some of the other excellent tax blogs noted in the blogroll on the right.

Posted in Taxable Talk | 1 Comment

Pork or Pork?

Posted on July 29, 2005 by Russ

As a member of the National Association of Enrolled Agents, every Friday I get an email with a summary of tax news. Today, I received the Ways & Means Committee’s Version of the new Highway Bill. You can find this document here. On the good news front, the requirement of prepaying offers-in-compromise has been eliminated.

Did you know that there’s up to a $10 excise tax on fishing rods? Yep, and it’s mentioned in the summary. I have no idea what the funds are used for.

On the other hand, the energy bill is also about to pass Congress. As Roth Tax Updates notes, “Pork is Good.” I know there are ethanol provisions in the legislation (ethanol mandates for gasoline), and who knows what other provisions are included in this mammoth, $14.5 billion legislation.

Hat tip: Roth Tax Updates

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Porn Website Tax?

Posted on July 28, 2005 by Russ

According to a wire service story, Senator Blanche Lincoln (D-AR) plans on introducing legislation this week that would add a 25% federal excise tax on pornography and additional requirements on adult websites. Lincoln’s spokesman wouldn’t comment on the bill’s provisions, stating, “We prefer to wait until the bill is introduced to discuss it.” As of this morning, the legislation has not been introduced.

I’m naturally skeptical about efforts to regulate sin. Sure, child pornography is bad, children viewing pornography is bad, etc.; however, if this legislation were to pass and it was effective, wouldn’t pornographic websites just move across the borders away from the US?

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IRS Help Centers: How Valuable?

Posted on July 27, 2005 by Russ

The Orange County Register reports today (one time subscriprtion required) that the IRS cannot tell whether its 400 help centers help taxpayers. The report, from independent auditor J. Russell George, the Treasury Department’s Inspector General for Tax Administration, was disputed by the IRS.

Of course, the telephone help has been plagued by possible incorrect answers—anywhere from 22% to 50% of the answers have been wrong, according to reports (see here, here, and here).

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Technical Corrections Act

Posted on July 27, 2005 by Russ

Today’s Wall Street Journal also reports that Senators Grassley (R-IA) and Baucus (D-MT) have introduced a “technical corrections act” to fix errors in last year’s tax law and other recent legislation. The Tax Technical Corrections Act of 2005 was also introduced in the House.

While this act, if passed, may fix problems, unfortunately these acts have, in the past, been used to add pork and other problems to the Tax Code. Time will tell.

Hat Tips: The TaxProf Blog

Posted in Legislation | Comments Off on Technical Corrections Act

New Rules on Tax Shelters for Accounting Firms

Posted on July 27, 2005 by Russ

The Public Company Accounting Oversight Board announced new standards for tax shelters yesterday. The Wall Street Journal reported on this in today’s editions.

The rules, which must be approved by the SEC, state that firms will be prohibited from auditing clients to which they sell aggressive tax shelters. Of course, there’s an exception to this: if the firms reasonably believe they have at least a 50% chance of prevailing in an audit with the IRS.

This new regulation stems from the continuing KPMG scandal. The US Department of Justice has not yet announced whether they will pursue criminal charges against KPMG.

Posted in IRS | 2 Comments