Coinbase To Comply With IRS Summons

Posted on February 24, 2018 by Russ

Two of my clients received an email from Coinbase:

Dear Mr. Smith,
In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government. After a long process, the court issued an order that represents a partial, but still significant, victory for Coinbase and its customers: the order requires Coinbase to produce only certain limited categories of information from the accounts of approximately 13,000 customers. We are writing to let you know that the above-described court order requires us to produce information specific to your account. If you have concerns about this, we encourage you to seek legal advice from an attorney promptly. Coinbase expects to produce the information covered by the court’s order within 21 days. For your reference, the court’s judgment can be found here. The case was filed in the United States District Court for the Northern District of California, Case No. 17-cv-01431-JSC. In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.
Regards, The Coinbase Team

Let me clear up a few points made by Coinbase:

1. This is not a significant victory for Coinbase. As most tax professionals thought, Coinbase must comply with US law and comply with most of the IRS summons.

2. The statute of limitations for impacted taxpayers was extended for about nine months by the battle over the summons. Coinbase is absolutely correct about this. Where this gets important for individuals who may not have included all of their Coinbase transactions on their returns is if they substantially underreported their income. Timely filed 2013 tax returns are “beyond the statute date,” even including the extra nine months. (They were due in April 2014, so adding an extra nine months takes to the normal three year statute of limitations takes us to January 2018.) However, timely filed 2014 returns impacted by this will have an extra nine months added to the statute date (until January 2019).

Additionally, anyone who substantially understated their income (20% or more) has a six-year statute length rather than three years. Timely filed 2013 returns are well within the extended statute length.

3. Coinbase’s suggestion of consulting with your tax advisor is an excellent one. If you file an amended return before the IRS comes after you or has knowledge of your error, you generally are looking at just paying tax and interest. Coinbase has told those impacted by this that you have less than 21 days to correct your mistakes; take advantage of that now!

If you included your cryptocurrency transactions on your tax returns, you’re likely not going to be a target. But if you didn’t, you have been given a short period of time to file amended tax returns.

Finally, this is not the end of this issue; expect the IRS to send summonses to all the other US-based Exchanges. I would not be surprised if the IRS targets foreign Exchanges that service Americans. This is a black and white issue under US tax law: Any accession to wealth not exempted from taxation under the law results in taxable income. Cryptocurrency gains are not exempt from taxation under US law.

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The Good, Bad, and Ugly of the Tax Extenders

Posted on February 22, 2018 by Russ

As write this it’s February 21st. About ten days ago Congress, in its unending wisdom, decided to extend certain “Tax Extenders” that they had let expire at the end of 2017. Yes, the undead have risen again! As soon as the IRS allows it, these are back for 2017. You can find a complete list of the extenders here. The major ones that impact individuals are:

– Exclusion from gross income of discharge of qualified principal residence indebtedness
– Mortgage Insurance premiums treated as qualified residence interest
– Tuition and Fees deduction
– Certain energy credits.

Of course, there are some esoteric deductions and credits like the American Samoa economic development credit and that certain race horses are now classified as three-year property.

The Good: The IRS has already implemented a couple of these items. I can already efile returns with mortgage insurance, and tomorrow I’ll be able to efile returns with the tuition and fees deduction. That’s also great work by my software provider (ProSeries).

The Bad: Sooner or later the bill comes due. As Samuel Johnson said, “Whatever you have, spend less.” That’s something that both Democrats and Republicans in Congress need to learn. Our government, at almost all levels, is bloated and needs to be cut. It would also be nice if Congress either codified these extenders into law permanently, extended them timely, or just ended these items.

The Ugly: If you are taking one of those esoteric deductions or credits, you may need to wait a while before filing your return. The IRS is starting with the more popular (as far as implementing the extenders), so for those taking the carbon dioxide sequestration credit, you may need to file an extension; as always, it’s far better to extend than amend.

Overall, kudos to the IRS for quickly implementing many of these extenders. And for those of you who take the excise tax credit on alternative fuels are happy, too.

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Driver’s Licenses and Tax Filings

Posted on February 5, 2018 by Russ

Nevada Driver's License

Many states are now requiring we obtain your driver’s license information (or state ID) in order to file your return. Currently, these states are requiring this information:

– Alabama
– California
– Colorado
– Illinois
– Kansas
– Louisiana
– New Mexico
– New York
– Ohio
– Virginia
– Wisconsin

States are using this in order to combat identity theft. So if you are filing one of these state’s tax returns, your tax professional will need your driver’s license number, date the driver’s license was issued, and the expiration date. (If the driver’s license or state ID is from New York, the first three characters of the New York document number will also be needed.)

While I’m generally for anything that reduces identity theft, I’m not thrilled with this. Of course, I should point out that this adds extra work for tax professionals which just might be why I have this opinion….

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Have I Committed Malpractice?

Posted on February 2, 2018 by Russ

Let’s say John Smith is a consultant in Syracuse, New York. His business is conducted fully in Syracuse. He never travels outside of Syracuse. He writes reports on a niche area for businesses. Mr. Smith files and pay New York state income tax (as he’s a resident of New York) in addition to his federal income tax. Has he satisfied his income tax filing requirements? (There are no local income taxes in Syracuse.)

In my view, almost certainly. His activity is conducted solely within Syracuse, New York. He’s filed his tax returns every year. Yet in the view of the State of California he may owe tax to the Bronze Golden State. How, you might ask, might this be the case?

The State of California, in its unending wisdom, enacted legislation for “economic nexus.” If you have sales to California, a portion of your income is, in the view of California, subject to California tax. Here’s an excerpt from the FTB’s website:

Jill, a nonresident of California, owns a web design business that she holds as a sole proprietorship. She works from her home out of state but has customers in various states including California. For the 2013 taxable year, Jill’s sales receipts from California customers are $300,000 out of the total sales receipts everywhere of $1,000,000. Does Jill have a filing requirement in California?

Yes, nonresident individuals are taxed on all California source income. Jill’s sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Under market assignment, sales of services are assigned to California if the purchaser of the service received the benefit of the service in California. Accordingly, $300,000 will be assigned to the California sales factor numerator for Jill’s sole proprietorship and Jill would apportion 30% ($300,000 CA sales/$1,000,000 total sales) of its business income from her sole proprietorship to California. [emphasis in original]

In a tax professional’s forum I noted that while the California legislature enacted this law, there is a good chance that it’s unenforceable except for businesses with nexus to California. Consider a partnership with one of the partners a California resident and the other a New York resident. Here, there’s clearly nexus to California and California tax is owed.

However, in the example I give (above) Mr. Smith clearly has no nexus to California and while California thinks he has a filing requirement, he probably doesn’t because of court cases. I noted the following on that forum:

While I understand that’s the Franchise Tax Board’s position, the ability for a state to to force collection of taxes to a nonresident who resides in another state is governed also by Quill Corp. vs. North Dakota, the famous case on states having the ability to force collection of sales tax on nonresident companies. The background for this case is the “dormant commerce clause.” (Interestingly, the Supreme Court recently accepted another case on this same issue: South Dakota vs. Wayfair, so it’s possible Quill will be overturned.)

The principal of this is that California has the absolute right to tax individuals with nexus to the state. But does California have the right to tax me–a resident of Nevada with no nexus to California–on the (say) 10% of income I receive from California residents whose tax returns I prepare? Can California legally go after Jill who never sets foot in California? My suspicion is courts in Nevada and Jill’s home state would today look askance at such requests.

One tax professional said my response bordered on malpractice: advising clients to disobey laws. I don’t think that’s the case at all. What I am advising clients is that the California law is of dubious legality, and it is difficult for California to enforce on businesses without nexus to California (such as the hypothetical Mr. Smith). I am not ignoring what California is stating (and I’m informing clients who may be impacted by this). That said, based on current precedent federal courts would, in my opinion, rule for Mr. Smith. (Since Mr. Smith has no nexus to California, a court case would almost certainly be in federal court in New York–the only place he has nexus to.)

It’s important to realize that the law could change based on the decision in South Dakota vs. Wayfair. (South Dakota enacted a law regarding sales tax that allows for economic nexus to the state. South Dakota courts held the law was unconstitutional based on the Quill decision.) Today, though, the federal supremacy clause (the federal supremacy clause means that state constitutions and laws are subordinate to federal law) governs; current federal law holds that California cannot tax companies without nexus to the state–and today nexus means physical nexus.

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Online Gambling and Offshore Cryptocurrency Exchange Addresses for 2018

Posted on January 24, 2018 by Russ

This list has been superseded by the 2019 list.

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (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.

Note: This list is presented for informational purposes only. It is believed accurate as of January 24, 2018. 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.

If anyone has additions or corrections to the list feel free to email them to me.

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January 31st Tax Deadlines: 2016 Hurricane Extensions and Information Returns

Posted on January 24, 2018 by Russ

We’re one week away from the first tax deadline of the 2018 Tax Season along with the final tax deadline for filing 2016 tax returns.

Taxpayers on extension for filing 2016 tax returns because of Hurricanes Harvey, Irma or Maria have until next Wednesday, January 31st, to file their 2016 tax returns. Those tax returns can either be mailed, or beginning this coming Monday (January 29th) they can be electronically filed. This extension also holds for taxpayers impacted by the Northern California wildfires.

FBAR filers on extension because of Hurricanes Harvey, Irma, or Maria have until next Wednesday, January 31st, to file their 2016 FBARs. Those returns must be efiled through the BSA efiling system. This extension also holds for taxpayers impacted by the Northern California wildfires.

The deadline for mailing out most 1099s to recipients is next Wednesday, January 31st. That’s a postmark deadline, not a receipt deadline.

The deadline for filing 1099-MISC’s showing “Nonemployee Compensation” (box 7) with the IRS is next Wednesday, January 31st. Those 1099s can either be mailed (if mailed, Form 1096 must be included as a cover page) or efiled (if you’re an authorized e-filer of information returns) through the IRS FIRE system.

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IRS & FTB Give Tax Relief to Wildfire and Mudslide Victims in Southern California

Posted on January 22, 2018 by Russ

The IRS announced last week that they are giving tax relief to victims of the Southern California wildfires and mudslides. The IRS extended impacted taxpayers’ deadlines that fell (or will fall) between December 4, 2017 and April 29, 2018 to April 30, 2018. This includes the Form 1040 deadline of April 17th (it will be April 30th for impacted taxpayers). This impacts individuals and businesses who are in Los Angeles, San Diego, Santa Barbara, and Ventura Counties who were impacted by the disasters.

California’s Franchise Tax Board automatically follows federal tax disaster relief, so state tax deadlines will also be postponed on the state level for impacted taxpayers.

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IRS Releases New 2018 Withholding Tables

Posted on January 11, 2018 by Russ

The IRS announced today the release of new withholding tables reflecting the new tax law. These will be used for W-2s, and should be used no later than February 15th. The IRS is working on a new W-4 form that will reflect the new law. That will likely be out in February.

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It’s 1099 Time

Posted on January 9, 2018 by Russ

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Remember, the deadline for submitting 1099-MISCs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January: Those 1099s must be filed by Wednesday, January 31st.

Here are the deadlines for 2017 information returns:

  • Wednesday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Wednesday, January 31st: Deadline for submitting 1099-MISCs for Nonemployee Compensation to IRS;
  • Wednesday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Thursday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Tuesday, April 2nd: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

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Why California’s Attempt to Make State Taxes a Charitable Deduction is Doomed

Posted on January 8, 2018 by Russ

When your budget is out of balance there are two ways of getting it in balance: cutting spending or increasing revenue. For California’s Democratic politicians, the only way they want to balance the budget is to increase the revenue. The new tax law puts a crimp on California (and other “Blue” states) by limiting the deduction of state income taxes and property taxes to $10,000. Kevin de Leon, California Senate President Pro Tempore, came up with the idea of having Californians being able to make a charitable donation to the “California Excellence Fund” instead of paying state taxes; that would allow the deduction to be taken on the taxpayer’s tax return and getting around the $10,000 limitation. Senator de Leon’s measure, though, will not pass IRS scrutiny for four reasons.

First, a charitable donation must be voluntary, not mandatory. That the contribution is used for the “California Excellence Fund”–an that fund is used for the general budget–makes this the equivalent of state tax paid. That makes this a mandatory payment, not a voluntary one, and it is, thus, not a charitable donation.

Second, Senator de Leon cites previous state contributions such as in Arizona, where taxpayers made contributions to parochial schools via a state fund as a charitable contribution. There’s a big difference between that and this California proposal: Mr. de Leon’s proposal would be for the general fund, with the money used in normal state revenues. That’s not going to work.

Third, taxpayers cannot obtain any benefit from the contribution. For example, if you donate $100 to a charity and receive (say) a blanket worth $10, your deductible charitable contribution is $90. Since the whole idea of this is to give taxpayers a charitable contribution in return for taxes paid, the amount that is deductible would be a benefit received and not deductible.

Fourth, there’s a doctrine in tax called “Substance Over Form.” This doctrine basically says that the economic substance of a transaction determines how it is treated for tax purposes, even if its labeled as something else. If you label something as a charitable contribution but it’s really a tax payment, under “Substance Over Form” it will be treated as a tax payment.

Thus, I believe that the efforts by Democrats such as Kevin de Leon are doomed to failure. I expect the IRS to rule–if this measure becomes law–that contributions to the California Excellence Fund are only charitable contributions if they exceed the required amounts to be paid for state income tax.

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