No Face to Face Appointments

Posted on March 12, 2020 by Russ

Taxes are a personal business, and providing service to our clients is what we’re about. That means face-to-face interactions. But I’m also an employer, and I must look at the health of my employees. Thus, beginning tomorrow we are no longer having any face-to-face meetings. We are happy to use Skype, phone, or any other interaction for any scheduled appointments. We encourage all clients to use our Web Portal (we will email any of you who need that information), fax, or mail.

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Will the April 15th Deadline be Extended?

Posted on March 11, 2020 by Russ

The Wall Street Journal has a story (pay link) this morning speculating that the Department of the Treasury will push back the April 15th deadline.  There are no specifics given in the story, but given that politicians on both sides of the aisle are talking about this, there’s a reasonable chance this will happen.

The reason, of course, is the current coronavirus (Covid-19) outbreak.  As the outbreak worsens (which, it appears, it will), there will be disruptions.  Consider tax professionals in Seattle, where a large number of individuals have fallen ill.  Do you want to meet with someone right now, especially given asymptomatic individuals can spread the disease?  And for those who are ill (or are treating family members, or who have to deal witch their children who are now home on an extended ‘break’) they have more important things to deal with.

It’s something I, as a business owner, have to deal with.  We wash our hands after seeing someone, but let’s face reality: we operate in close quarters.  If one of us gets this, it’s likely that all of us in the office would get this.  As for working at home, that’s near impossible for our office given the technology infrastructure we use.

I had initially thought we would see a larger number of extensions (and it’s something I think still could happen).  I now suspect we will see this extension–probably something similar to the automatic two-month extension given to individuals outside the United States on April 15th.  Whether it will include a waiving of interest is to be determined.

I’ll close with something that’s obvious.  This week long-time clients called me and said they had colds, and wished to postpone their appointment.  We fit them in in two weeks.  If you’re sick, use some common sense (be it a cold, the flu, or anything else): Don’t take actions that will infect others!  We have a rule in our office that if you have a fever, you go home, and you cannot come into work until 24 hours after the fever has broke.  If all of us use some common sense and good hygiene, we will likely whether this storm with minimal damage.

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Online Gambling and Offshore Cryptocurrency Exchange Mailing Addresses for 2020

Posted on February 27, 2020 by Russ

If you have one or more foreign financial accounts and you have $10,000 aggregate in those account(s) at any time during 2019, you must file the Report of Foreign Bank and Financial Accounts (the “FBAR”). This is Form 114 from FINCEN. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.) You also should consider filing an FBAR if you have $10,000 or more in a non-US Cryptocurrency Exchange.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have an address for Bodog. If anyone has a current mailing address, please leave it in the comments or email me with it.

There remains debate over whether you need to file an FBAR for foreign cryptocurrency exchanges. At a presentation last year, an IRS employee stated that for the FBAR foreign cryptocurrency exchanges did not have to be reported. Unfortunately, the instructions for the FBAR do NOT state this. (See here, here, and here.) Thus, I strongly advise that foreign cryptocurrency exchanges continue to be reported on the FBAR. There is no penalty for overreporting; there are severe penalties for underreporting.

There is no dispute, though, about reporting foreign cryptocurrency exchanges on Form 8938: They must be reported on Form 8938 (if you have a Form 8938 filing requirement).

Note: This list is presented for informational purposes only. It is believed accurate as of February 27, 2020. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

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California 7, Arizona 2

Posted on February 27, 2020 by Russ

The state of Arizona (specifically, Arizona Attorney General Mark Brnovich) is not happy with California’s policy of coming after any Arizona business that is even remotely doing business in California (passive or not) to collect the $800 minimum California franchise tax. Arizona tried to do something about it: The Grand Canyon State asked the US Supreme Court for leave to sue California over the policy. On Monday, the Supreme Court said that Arizona couldn’t sue.

That said, I suspect one day someone will get legal assistance from a foundation and try to stop the process in federal court. The Southeastern Legal Foundation and the Cato Institute filed a joint Amicus Curiae brief in favor of Arizona. Sooner or later California’s extraterritorial grabbing of money will be stopped.

Unfortunately, the problem with individual businesses doing anything about it is the cost. California’s tax is $800 per year. The cost of filing a federal court lawsuit is probably in the tens of thousands of dollars. This case isn’t “sexy”; it’s about routine commerce. Now, if it could be a class action case (I’m not an attorney so I can’t speak to whether that’s possible or not) then there would be a good shot of that happening. Until then, I suspect California will successfully extort millions of dollars, $800 at a time.

As to the title of the post, the reason it’s seven to two is because two Supreme Court justices thought the case should be heard and dissented. It takes four justices for a case to be heard, so Arizona lost.

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The Case of the Missing K-1

Posted on February 19, 2020 by Russ

John and Mary Smith came by my office yesterday. “We normally get to you in June,” Mrs. Smith told me, “but this year we have everything so we’d like to file today.” Well, they had almost everything.

Unfortunately, there was one K-1 from a partnership that they didn’t have. They own about 2% of a rental property; their share of income has been around $100 every year. Mrs. Smith pulled out her cellphone and called her uncle (who is responsible for the K-1) and asked when it’s coming. I could only hear her end of the conversation, but the response of “August” wasn’t what she wanted to hear…especially since the Smiths are getting a $2,000 (or so) refund from the IRS.

“Can’t you just file the return using an approximation for the K-1? After all, we know the income will be about $100 because it always is.” I told them no.

I can’t knowingly sign an incorrect tax return. We don’t have the K-1, and while it has been $100 of income for the last several years (and her uncle estimates $100 for this year) there’s no guarantee it will be. The estimated income is fine for determining what to pay with an extension; however, it’s not acceptable for filing a tax return. This is one of the drawbacks when you participate in a partnership: You must wait for all of your K-1s before filing your taxes. If one of your investments that generates a K-1 takes an extension, you are forced to extend your personal returns.

Tax returns need to report your exact income, not your estimated income. Yes, the Smiths’ estimated and exact incomes should be similar, but “should be” isn’t good enough here.

I did give the Smiths one piece of good news after we filed their extension: When you file a return after April 15th and are getting a refund, the IRS pays you interest. Interest works both ways in tax…but that interest the Smiths will receive is taxable.

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The Best Tax Blog Is Back

Posted on February 14, 2020 by Russ

As a published author I’m biased about my writing ability. But as my mother told me (and, yes, my mother is a published author, too), know your abilities! The best tax blog up until May 2017 was Joe Kristan’s Roth Tax Updates. But in 2017 the firm Joe worked for merged into Eide Bailly; at the time I wrote: “…[P]erhaps there’s an Eide Bailly Tax Updates in the future. (I can always hope.)”

Well, nearly three years later I’m pleased to report there is now an Eide Bailley Tax News & Views Blog. It will be listed momentarily in the blogroll on the right, and it appears to be must-read every morning for those of us in the world of tax.

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New York DFS & Gambling: It’s the Constitution

Posted on February 12, 2020 by Russ

There’s a quick way of doing many things that, in the long-run, doesn’t work so well; there’s a slower way of doing those same things that will always work. That’s true in tax, and it’s true for a legislature that’s trying to raise money.

Back in 2016, the New York state legislature amended a law so that DFS could be legalized. Almost immediately, a lawsuit was filed that said the new law violated the New York Constitution. The New York Supreme Court (which is the original trial court) ruled that the law was unconstitutional (as it relates to DFS). Both sides appealed the ruling, and last Friday a decision from the Appellate Division was released. That decision mostly upheld the original ruling.

The key points within that ruling are (1) that gambling only needs an element of chance and (2) it is not the job of the courts to look at the “…wisdom of the Legislature’s enactment of laws, but on whether the NY Constitution prohibited the Legislature from enacting such laws.”

This ruling is not good news for those who would like to see DFS or online gambling in New York state. It will take amending the New York constitution–and that’s a much harder road to go than simply passing a law. It also takes far more time. But if the constitution is amended, the law would be clearly constitutional (and legal).

I expect this decision to be appealed to the New York Court of Appeals (New York’s highest court), and it’s likely the case will be taken up (there was a dissent, and the case is about a constitutional question–the kind of case that appeals to higher courts). The problem, though, is that the plain language of the state constitution is quite specific about how to add more gambling. And it’s by amending the constitution. While a stay on enforcing this ruling may be granted (allowing DFS contests to continue in New York), unless the New York state constitution is changed the future of DFS (and online gambling) in New York looks quite bleak.

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Take the Five Minutes: Reconcile Your Checking Account Each Month

Posted on February 11, 2020 by Russ

If you’re in business, you’re required to keep books and records. Those books and records need to accurately reflect the income and expenses of your business. Seems simple, right? But as Tax Season is now here something I (and most tax professionals) see from small business owners is that they reconcile their checking accounts once a year rather than each month.

It’s not hard to balance the checkbook. Every month in QuickBooks I do it, and I’ve never seen an error…until this month. An invoice I paid for $50.00 got recorded on the bank statement as $60.00. What’s humorous about it is that my bank provides a picture of the cleared check. Not only was this an electronic payment (that generated a check), it clearly shows “Pay “FIFTY and 00/100.” When I called the bank they apologized and immediately corrected their error.

Mistakes happen, but there’s a more important reason to look at your bank statement. Suppose that you’re not the only person who writes checks from your account. Perhaps someone embezzled funds from you. Twice in the twenty years I’ve been a tax professional I’ve seen this. In the first instance, there were some checks not in the bank register. In the second case, the person doing the embezzling also balanced the checkbook. (Hint: Except for sole owners of businesses, people who can write checks should never balance the checkbook.) One month he was out with the flu and the malefaction was discovered.

There’s a cliche, “garbage in, garbage out.” With financial records, you need your inputs to be accurate. That means you need an accurate bank statement. Take the time to balance your checkbook each month.

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You Heard About that May 29th Filing Deadline, Right?

Posted on January 8, 2020 by Russ

So let’s look at important tax deadlines this year. There’s January 31st (the deadline to mail and file many 1099s and to distribute and file W-2s), March 15th (the deadline to file S-Corporation and partnership tax returns, and Forms 3520-A), April 15th (the deadline to file personal, C-Corporation, trust/estate/fiduciary returns, and FBARs), and May 29th, of course.

What? There’s no tax deadline on Friday, May 29th. That’s technically true, but there is a filing deadline on May 29th : the Benchmark Survey of U.S. Direct Investment Abroad (BE-10).

The BE-10 is due every five years, and five years ago it was quite a surprise to the tax professional community. Adding to the fun last time was that the Bureau of Economic Analysis (the government agency where the Survey is filed) was completely unprepared for the volume of reports. There were major issues with filing, and let’s just say that the experience was not good for everyone who had to deal with this.

So who must file?

All U.S. persons that owned, directly or indirectly, 10% or more of the voting stock of a foreign corporation, or an equivalent interest in an unincorporated foreign business enterprise (e.g. a partnership), at any time during the 2019 fiscal year, are required to file a BE-10 Report.

I’m giving an early heads-up on this, as I suspect few are aware of this required report. There are both possible civil and criminal penalties. If you’re a tax professional and have any clients who are owners of foreign entities, make sure they’re aware of this filing. The BEA webpage on the BE-10 isn’t fully ready (for example, the link to getting on their mailing list for updates is not working), but any tax professional who deals with this should bookmark this page and discuss this with your clients. And if you happen to be the owner of a foreign entity, make sure you’re aware of the May 29th deadline.

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It’s Time to Start Your 2020 Mileage Log

Posted on January 7, 2020 by Russ

I’m going to start the new year with a couple reposts of essential information. Yes, you do need to keep a mileage log:

Last Thursday was the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 80,008). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer;

Here’s the other things you should do:

On the cover of your log, write “2020 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/4 90315-90350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.575/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car. Be careful if you (or your family) have multiple vehicles. You will need to separate out your expenses by vehicle.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

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