A Housekeeping Message

Posted on November 20, 2016 by Russ

We will soon be changing hosting companies. If you subscribe to this blog you may need to resubscribe once this occurs. The changeover should happen in the next couple of weeks.

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This Isn’t What I Think of When I Hear “Law School”

Posted on November 13, 2016 by Russ

When I think of a law school, I think of a university teaching students how to be attorneys. My cousin is a professor at the University of Chicago Law School; that’s a law school. That’s not what I’m writing about today.

From Point Richmond, California comes the story of Richard Thomas Grant. Mr. Grant was a partner in an engineering firm in Richmond (in the San Francisco Bay Area). Back in 2001, he stopped filing personal tax returns. In 2003, he stopped filing partnership tax returns for his partnership (although he still paid a tax professional to prepare those returns). Mr. Grant joined “Freedom Law School.”

I had never heard of this law school, but perhaps I should have. Back in 2015, Joe Krsitan had this to say about it:

Through its conferences, materials, and service packages, the Freedom Law School promoted various techniques for evading the payment of federal income taxes. The techniques included:

-Minimize financial records.

-Do not give information to the IRS.

-Do not file tax returns.

And it also offered multi-level marketing opportunities!

Freedom Law School notes its victories and, their web site still states,

There is no statute that makes any American Citizen who works and lives in the United States of America liable or responsible to pay an income tax. Individuals only become liable to pay the income tax when they “VOLUNTARILY” file a tax return and the IRS follows their assessment procedures as outlined in the Internal Revenue Code.

Hint: This is still snake oil advice. If you follow it and you make substantial income, ClubFed will be in your future. Mr. Grant likely wishes he had never heard of Freedom Law School. I’ll let the DOJ press release continue with the case:

While the Internal Revenue Service (IRS) attempted to collect unpaid taxes owed by Grant for 2001 and 2002, and attempted to examine Grant’s taxes for subsequent years, Grant, with the assistance of Freedom Law School and its founder, Peymon Mottahedeh, attempted to frustrate the IRS’s actions by, among other things, filing multiple and ultimately unsuccessful law suits in various jurisdictions.

For the charged years 2005 through 2009, Grant’s partnership income was $509,339, $566,741, $486,062, $598,977 and $604,706, respectively.

So what did Mr. Grant do? He hid his funds in a warehouse bank. That only worked for a few years; he then converted his funds to cash and cashier’s checks.

After the federal government shut down MyICIS, Grant used another bank to convert his partnership distributions to cashier’s checks and cash in order to avoid depositing the funds into a bank account and used the cashier’s checks to pay his mortgage and other high-dollar personal expenses. He also used cash to purchase dozens of U.S. Postal money orders to pay other bills and expenses, including utilities, taxes and expenses related to his classic aircraft.

I’m sure his mortgage company issued a Form 1098 to report his mortgage interest paid. Although not noted in the press release, I’m certain IRS Criminal Investigation contacted the mortgage company; they were able to produce the cashier’s checks that were used. And then it was a simple procedure to find out how Mr. Grant paid for those cashier’s checks.

Earlier this year Mr. Grant was found guilty of three counts of tax evasion. Last week he was sentenced to 33 months at ClubFed plus he must make restitution of $402,457.39. He’ll also have to serve three years of supervised release.

Mr. Grant paid “thousands of dollars” in yearly membership fees to avoid timely paying his taxes. That got him…very little unless you want to spend 33 months behind bars.

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What Will President Trump Do To Our Taxes?

Posted on November 9, 2016 by Russ

When I woke up this morning I discovered yet another impossible item just happened (the Cubs really did win the World Series, right?). The media was saying that Hillary Clinton was going to be President. Oops. So what will President-Elect Trump likely mean for taxes?

1. John Koskinen will soon be the ex-IRS Commissioner. This is one prediction I’m very confident in. Republicans believe that he is one of the reasons we don’t know who ordered the IRS scandal. President-Elect Trump will ask for his resignation and get it.

1A. We will know the truth behind the IRS scandal within two years.

2. Obamacare will die. Even if Hillary had been elected, it’s been clear that the measure’s days were numbered. From a health care standpoint, I have no idea what (if anything) will replace it. But Obamacare is still unpopular, unworkable, and insane; its loss will be grieved by only a few.

From a tax standpoint, this means that the Net Investment Income Tax could also die, along with the additional Medicare tax. I’m far more confident in predicting the death of Obamacare than guessing what its replacement will be. It’s definitely possible we’ll see the status quo ante come back.

3. A tax reform package will be introduced and gain traction, but the end result will be a compromise. Democrats didn’t win the Senate, but do hold enough seats to filibuster. It’s more likely that we will see business tax reform pass than personal tax reform. However, this will be the best opportunity for real tax reform since the 1986 tax reform.

4. There’s no chance of overall federal tax rates increasing in the next four years. Zero.

5. But there’s also state taxes, and in yesterday’s elections we saw so-called “blue” states generally pass tax increases (California and Maine). We will continue to see small businesses migrate away from high-tax states to low-tax states. There’s a corollary that will be happening: Pie-in-the-sky blue state projects such as California’s train to nowhere will be getting no federal funding. (That train isn’t going to be running in the next four years.) Similar projects nationally will also die.

6. None of this will impact 2016 taxes. In a rare (perhaps unique) intelligent act, Congress changed the tax law for both 2015 and 2016 so we know exactly what 2016 taxes will be.

7. Another major impact will be the Supreme Court. There’s now no chance that Merrick Garland’s nomination will move forward. It’s far more likely a conservative will be nominated for the Court. I’m definitely the wrong person to ask on what the impact will be on this, but this is another certain impact of Trump’s victory. It’s also probable that President-Elect Trump will have at least one other Supreme Court nomination during his term in office.

8. President Obama believes in regulations; President-Elect Trump has publicly stated that for each new regulation two existing regulations will be eliminated.

9. President Obama used executive orders to implement large portions of his agenda. President-Elect Trump has stated he will rescind those orders when he takes office. Most of these do not deal directly with tax policy, but there will be indirect impacts.

Overall, the times are a-changing. We’ll start getting a flavor for the new administration when President-Elect Trump start naming his cabinet officers and other appointments

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No Gambling Log, No Problem, Right?

Posted on November 8, 2016 by Russ

Two married poker players worked as house players (commonly called “proposition players” or “props”) in California. They were paid wages for their work, but they had gambling winnings that they didn’t include on their tax return. They state they lost money (more than their winnings) each month with their poker playing so the winnings needn’t be included on their returns. The IRS disagreed. The dispute made its way to Tax Court.

The petitioners worked at the Hustler Casino in Gardena, California (south of downtown Los Angeles), one of the card rooms (poker clubs) in the Los Angeles metropolitan region. They were hired by the Hustler to start poker games, and fill those games until other customers came. Such house players are common, and are used at off hours or to start games.

One of the petitioners happened to be at the right place at the right time and shared in a “Bad Beat” jackpot worth $16,800 (noted on a W-2G). Because their losses exceeded their wins, the petitioners simply ignored the W-2G. Although not specified in the Tax Court’s opinion, petitioners likely received an Automated Underreporting Unit Notice (probably a CP2000) noting the missing income. Eventually a Notice of Deficiency was issued, and the case made it to Tax Court.

Petitioners didn’t note what they won or lost. From the Opinion:

Petitioners assert that initially they tried to keep track of their poker winnings and losses by writing down the amount won or lost at the end of each day, but after a while they gave up that practice because it is “bad for your psyche * * * you need to be strong mentally” when playing cards.

The Opinion goes into how gambling losses for a proposition player should be noted (whether it’s an unreimbursed employee expense or a gambling loss), but the Court first had to determine the losses.

Regardless of whether petitioners were employees or independent contractors, they were engaged in a gambling activity and are required to substantiate their reported gambling losses. Accordingly we first look to the issue of whether petitioners substantiated their reported gambling losses.

Deductions and credits are a matter of legislative grace, and taxpayers must prove entitlement to the deductions and credits claimed. Taxpayers are required to identify each deduction, show that they have met all requirements, and keep books or records to substantiate items underlying all claimed deductions. To establish entitlement to a deduction for gambling losses the taxpayer must prove the losses sustained during the taxable year. The Commissioner has suggested that gamblers regularly maintain a diary, supplemented by verifiable documentation, of gambling winnings and losses. A taxpayer’s “contention that it was too difficult for him to maintain contemporaneous records of his gambling activities is without merit.”[citations omitted]

The “bad for your psyche” defense isn’t a good one at Tax Court. The petitioners didn’t provide any evidence of their losses. They could have used a phone app to note their gambling results or pen and paper. They provided no confirmation to the Court, so the Court was left with little choice but to affirm the Notice of Deficiency.

A helpful hint for props: Keep a gambling log! It’s not hard (there are even phone apps you can use). Yes, your psyche may be damaged by a bad day at the poker table but you won’t suffer a second loss in Tax Court if you keep that log.

Case: Pham v. Commissioner, T.C. Summary 216-73

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The 2016 Real Winners of the World Series of Poker

Posted on November 2, 2016 by Russ

Nine individuals came to Las Vegas over the last three days to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?

This year’s winner’s tax burden was nearly ten percent less than the second place finisher. Why? As my mother would say, “Location, location, location.” There are good tax states and bad tax states. Las Vegas may not have the beauty of the San Francisco Bay Area, but you sure do pay a lot in state taxes for living in California.

One other note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.

Congratulations to Qui Nguyen of Las Vegas for winning the 2016 World Series of Poker Main Event. Mr. Nguyen won $8,005,310 for the victory. Mr. Nguyen defeated second place finisher Gordon Vayo after a grueling eight hour heads-up battle. Mr. Nguyen is a professional gambler, combining poker playing with baccarat; he’ll owe self-employment tax and federal income tax; because Mr. Nguyen resides in Nevada he doesn’t have to pay state income tax. I estimate Mr. Nguyen will lose only 41.51% of his win ($3,323,157) to tax. That’s the second-lowest tax hit of any of the Americans at the final table.

Gordon Vayo of San Francisco was in some ways the biggest loser. Yes, he finished in second place and earned $4,661,228. However, that was before taxes. Mr. Vayo may have left his heart in San Francisco, but because he resides there he’s leaving a lot of money to California’s Franchise Tax Board. Indeed, Mr. Vayo is losing an estimated 51.46% of his winnings to federal and state tax ($2,398,800); his net winnings are just $2,262,428. He will pay California’s top tax rate of 13.30%, on top of self-employment tax and federal income tax. Mr. Vayo is only the second individual since I’ve been writing these summaries to lose over half his winnings to taxes.

In third place was Cliff Josephy of Syosset, Long Island, New York. Mr. Josephy came into the final table with the chip lead, but fell to third place. Still, he takes home $3,453,035 before taxes. Unfortunately, New York is not a low-tax state; Mr. Josephy loses an estimated 48.50% of his winnings ($1,674,568) to federal and state tax. This isn’t as bad as California, but it’s certainly not as pleasant as here in Nevada.

Finishing in fourth place was Michael Ruane of Maywood, New Jersey. Mr. Ruane earned $2,576,003 for his placing fourth; however, that was before federal and New Jersey income tax. The professional poker player loses an estimated 45.75% of his winnings ($1,178,525) to tax. Because of the impact of taxes, Mr. Ruane finished in sixth place based on after-tax winnings.

Vojtech Ruzicka of Prague (Czech Republic) finished in fifth place. Mr. Ruzicka was one of the two luckiest players from a tax perspective: the US and the Czech Republic have a tax treaty exempting his winnings from withholding by the IRS and the Czech Republic has a flat 15% income tax. Only $290,293 of Mr. Ruzicka’s $1,935,288 in winnings will go toward taxes. While Mr. Ruzicka finished in fifth place based on pre-tax winnings, he ends up in fourth place based on after-tax winnings.

Kenny Hallaert of Hansbeke, Belgium was a big winner in spite of finishing in sixth place. Mr. Hallaert is a poker tournament director in Belgium. Belgium does not tax gambling winnings of non-professional gamblers, so Mr. Hallaert’s pre-tax winnings of $1,464,258 are also his after-tax winnings! Even better, the US-Belgium Tax Treaty exempts gambling winnings, so Mr. Hallaert doesn’t owe any US income tax. Even though he finished in sixth place, his after-tax winnings put him in fifth place.

Griffin Benger, a professional poker player from Toronto, Ontario, Canada, finished in seventh place. The tax situation in Canada for gambling remains fluid. The Canada Revenue Agency (the Canadian equivalent of the IRS) believes that gambling winnings for professional gamblers should be taxed. However, Canadian courts have generally disagreed; thus, today Mr. Benger does not owe any tax to Canada. However, 30% of his $1,250,190 in winnings ($375,057) were withheld for US income tax. Mr. Benger can file a US income tax return (Form 1040NR) to recover gambling losses up to the amount of his gambling winnings.

In eighth place was Jerry Wong of South Florida. The Brooklyn native earned $1,100,076, but that’s before taxes. He’s a professional gambler, so he will owe self-employment tax along with income tax. However, as a Floridian he avoids state income tax. I estimate he will lose $419,776 (38.16%) to tax.

Fernando Pons, an account executive who resides in Palma, Spain, finished in ninth place. Spain taxes its residents on their gambling winnings no matter where the winnings are won. And Spanish tax rates make the US look good: Mr. Pons will lose nearly 45% of his $1,000,000 of gross winnings to tax.

Here’s a table summarizing the tax bite:

Amount won at Final Table $25,445,388
Tax to IRS $8,108,024
Tax to Franchise Tax Board (California) $623,262
Tax to Agencia Tributeria (Spain) $449,584
Tax to New York Dept. of Taxation and Finance $422,752
Tax To Finanční Správa (Czech Republic) $290,293
Tax to New Jersey Division of Taxation $215,845
Total Tax $10,109,760

That’s a total tax bite of 39.73%.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. Qui Nguyen $8,005,310 $4,682,153
2. Gordon Vayo $4,661,228 $2,262,428
3. Cliff Josephy $3,453,035 $1,778,467
5. Vojtech Ruzicka $1,935,288 $1,644,995
6. Kenny Hallaert $1,464,258 $1,464,258
4. Michael Ruane $2,576,003 $1,397,478
7. Griffin Benger $1,250,190 $875,133
8. Jerry Wong $1,100,076 $680,300
9. Fernando Pons $1,000,000 $550,416
Totals $25,445,388 $15,335,628

While Michael Ruane finished in fourth place, he ends up in sixth place on an after-tax basis (passed by both the fifth and sixth place winners). While taxes may be the price of civilization, the price in the United States is high.

As usual, the IRS finished in first place: The $8,108,024 that the IRS will receive exceeds the first place prize of $8,005,310. That’s because we all know that the house (the IRS) always wins.

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Stealing From the Disabled Worked…For a While

Posted on October 30, 2016 by Russ

Virginia and Derma Miller, mother and daughter, had a good thing going. They took identities of the physically and mentally disabled and filed tax returns on their behalf. Of course, those returns all had refunds, with those refunds finding their way to the Millers.

All was well and good for the Millers until the IRS discovered the scheme. Earlier this year the Millers were tried and found guilty of conspiracy to steal tax refunds and aggravated identity theft. Virginia Miller had earlier been sentenced to 61 months at ClubFed; Derma Miller received seven years at ClubFed last week. Derma Miller must also make restitution of $493,697, the proceeds of her ill-gotten gains.

While I have nothing but kudos to the IRS and Department of Justice in putting the Millers behind bars, I still believe that the IRS is far more reactionary to the problem of identity theft than creating positive actions. Next season’s mandatory interviews of taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit will not stop dishonest tax professionals from committing identity theft related crime. After all, identity theft is already a crime; if you’re going to commit one felony what’s the harm of committing another.

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That Was the Tax Season That Was

Posted on October 19, 2016 by Russ

Well, my sixteenth Tax Season is in the books. Let’s see what was good, bad, and ugly–and I’ll include a warning for next year.

The Good: First, the IRS did a much better job with the Practitioner Priority Service (PPS). PPS is how tax professionals primarily interface with the IRS. During 2015, hold times were one hour or more…and that was on the good days. What a difference a year makes: In 2016, there were times the hold time was zero. For all the problems the IRS has, kudos on this issue.

And let’s give a thumbs up to Congress–yes, Congress. We had tax legislation for “extenders” that covers not only 2015 but 2016. I know what taxes are for the current calendar year…and it’s not December!

The Bad: Late, late, and later arriving paperwork for clients. Very few K-1s (what partnerships, S-Corporations, and trusts/estates issue) arrived timely. Congress changed the due dates for partnerships to March 15th for next year with the hope that recipients of K-1s would receive their K-1s earlier. Most tax professionals believe (and I agree with them) that all the moving of the due date will do is cause more partnerships to file extensions. Indeed, I expect K-1 paperwork to be even later next year; more, not less, individuals will be forced to file extensions.

The Ugly: I had more and more procrastinating clients. Some of it wasn’t the fault of the clients (again, lots of late arriving paperwork), but some of it was. I’m not happy with the “twin peaked” curve of work that I have. Further, the trends aren’t good for it getting any better next year.

And that’s where the warning for the 2017 Tax Season comes in. Next year there are expanded “due diligence” requirements on tax professionals. This has impacted the Earned Income Credit, but it (a) expands to include the American Opportunity Credit (an education credit) and (b) the Child Tax Credit. Congress, in the PATH Act, mandated this:

The PATH Act also extended due diligence requirements to returns claiming the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC). Last year due diligence only applied to EITC. See “Paid Preparer Due Diligence Penalties” below for information on how IRS can assess penalties.

The draft Form 8867 and draft instructions are available. Something new for next year is that tax professionals not only need to get answers to various questions, we apparently must conduct an interview with the client. That means talking to the client. Consider Joe Taxpayer who submits his paperwork on October 10, 2017. You get to his return on the 14th and discover you need to talk to the client because he’s receiving the Child Tax Credit. There’s an obvious issue with that. Also consider that a typical interview is, say, ten to fifteen minutes. Assume you have 50 clients who need to be interviewed during the year; that’s an additional 500 minutes or eight hours of work. If you have 100 clients who qualify, that’s an additional sixteen hours of work. And there’s scheduling time. And yes, it appears the interview is mandatory.

That’s the warning for 2017: Taxpayers who procrastinate too long may run into an issue with their returns. Tax professionals have even more work coming up. Will tax professionals add an up-charge for this interview and compliance requirements? I’m certainly considering it.

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On Disclosure

Posted on October 10, 2016 by Russ

As you may have heard, there’s a Presidential campaign going on. I try hard to avoid politics in this blog, but one story that came out relates to Donald Trump taking a Net Operating Loss (NOL) on his tax return. Mr. Trump’s former accountant, Jack Mitnick, has talked to the media regarding the returns he prepared for Mr. Trump back in the 1990s. Is Mr. Mitnick supposed to talk about the returns he prepared?

Let’s start with the rules on returns I prepare. Suppose I get a phone call from the Las Vegas Review-Journal asking about a return I prepared for John Smith, a hypothetical client. Mr. Smith is running for office here in Nevada, and the Review-Journal has a copy of his 2008 tax return. I could neither tell the RJ I prepared the return nor could I tell them I didn’t prepare the return.

IRS Circular 230 governs the practice of tax professionals. Tax professionals are to keep client relationships confidential unless the client has authorized me to disclose the information. I’m also a member of the National Association of Enrolled Agents; NAEA rules also require that client relationships be confidential. That’s why when a mortgage company calls me and says that they want confirmation that I prepared the tax returns for Mr. Smith my response is, “Have Mr. Smith call me. If I prepared his returns, I will have him sign a ‘Consent to Disclosure’ notice that authorizes me to disclose information to you (should he wish me to do so).” An IRS regulation requires that the Consent to Disclosure be on my letterhead; thus, I can’t accept the ones that mortgage companies have clients sign. But I digress….

Mr. Mitnick is, of course, retired. He appears not to care about Circular 230 or confidentiality. Still, I think it’s wrong for him to say anything about clients (and former clients). When I retire–and for current clients, no worries, that’s many years down the road (I hope)–I don’t think it’s right for me to author a ‘tell-all’ book about my clients or talk to the media about them. The confidentiality rules should apply for as long as I’m around.

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As Relieable as You Might Have Thought

Posted on October 9, 2016 by Russ

That is not a typographical error in the headline. Yes, I meant to type, “Relieable.” Why? Because of a story of a Tampa, Florida tax professional who was as relieable, err, reliable as the headline.

Donna Demps was found guilty of wire fraud and aggravated identity theft. Here’s what the DOJ press release states:

According to testimony and evidence presented at trial, Demps formed the Florida corporation “D&D Honest Relieable [sic] Tax Services LLC.” She then used the corporation to open bank accounts into which she electronically transferred tax refunds obtained by stealing the identities of real people, many of whom were veterans, disabled, elderly, or otherwise unable to care for themselves. Demps never registered her tax preparation service with the Internal Revenue Service since she would have had to reveal that she was an eight-time convicted felon. Through her bank accounts, Demps stole more than $120,000 over a one-year period.

So we have someone opening up a corporation ending in “LLC” (limited liability companies are not corporations), with a misspelling of ‘reliable,’ and then stealing identities. There’s not much to add here, except that Ms. Demps will likely be spending quite a bit of time at ClubFed.

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On 1099 Due Dates in 2017

Posted on October 4, 2016 by Russ

You may have heard that Form 1099-MISC’s must be filed earlier next year. That’s true, but it only impacts some of the 1099s. Let’s look at the IRS instructions:

New filing date. Public Law 114-113, Division Q, section 201, requires Form 1099-MISC to be filed on or before January 31, 2017, when you are reporting nonemployee compensation payments in box 7. Otherwise, file by February 28, 2017, if you file on paper, or by March 31, 2017, if you file electronically. The due dates for furnishing payee statements remain the same.

What this means is that only 1099-MISC’s for independent contractors (nonemployee compensation) must be filed by January 31st, whether you file by paper or electronically. All other information returns, including 1099-MISC’s reporting “Other Income,” will have the same deadlines as this past year: paper returns on or before February 28th, and electronic on or before March 31st.

I’m certain there will be confusion this coming year over the deadline. Of course, there’s no penalty for filing all your information returns by January 31st (whether required or not).

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