Dotting the I’s and Crossing the T’s

Posted on July 17, 2016 by Russ

Assume there’s a California LLC filing its final tax return, and it is owed a refund of (say) $900. You timely file the return and are surprised when you receive a check for $100 rather than $900. What happened?

Years ago this occurred with one of my clients, and I discovered that the Franchise Tax Board (California’s income tax agency) will automatically deduct $800 from a business refund and apply it to the following year’s mandatory $800 tax (if that has not been paid). But that was a final return, so that shouldn’t happen, right?

Checking the box “Final Return” is just one of the steps a California entity must do when filing a return; it must also close the business with the California Secretary of State. When this happened to my client, the Secretary of State’s office hadn’t processed the LLC withdrawal paperwork (they were running about 90 days behind then). About 30 days later the FTB sent a second check for $800 (once they were notified by the Secretary of State’s office that the entity had closed).

Spidell Publishing highlighted this issue in its weekly podcast on California taxation. I do recommend this podcast for any tax professional dealing with California taxation.

Posted in California | Comments Off on Dotting the I’s and Crossing the T’s

Is Cost of Goods Sold Included in the Calculation of the LLC Fee for a California LLC in Real Estate?

Posted on July 14, 2016 by Russ

The Franchise Tax Board, California’s income tax agency, today issued a legal opinion on how to calculate the Limited Liability Company (LLC) fee for a real estate company selling real property. This is an important issue because if Cost of Goods Sold is included the LLC fee would be significantly higher.

California charges LLCs two fees. The first is an $800 a year tax that any California LLC (or a foreign LLC doing business in California) must pay. The second is a gross receipts fee. Gross receipts is calculated by taking gross income and adding back cost of goods sold. So for an LLC selling real estate is COGS added back to determine the basis for the fee?

The FTB ruled that it should be added back. The FTB looked at the history of the law, and whether COGS (which must be included in the calculation of the LLC fee) includes real property or not.

Accordingly, the term “cost of goods sold” as used by RTC section 17942, subdivision (b)(1)(A), includes real property held for sale to customers in the ordinary course of a trade or business. Therefore, LLCs that are dealers in real property must add the cost of goods sold (based on real property) back to gross income in calculating the LLC fee.

Do note that this is just the FTB’s opinion; courts could rule otherwise. However, a plain reading of the law would seem that the FTB is likely interpreting this correctly. This means an LLC may not always be the best choice of legal entity in California. (Do note that an LLC that elects a corporate form of taxation in California is treated as a corporation—either an S-Corp or a C-Corp—for tax purposes.)

Posted in California | Comments Off on Is Cost of Goods Sold Included in the Calculation of the LLC Fee for a California LLC in Real Estate?

Can a Non-Tax Treaty Country Resident Obtain a Refund of Gambling Withholding from the IRS?

Posted on July 10, 2016 by Russ

Every year during the World Series of Poker (WSOP) I receive several inquiries like the following:

I’m a resident of Brazil and I cashed in an event at the WSOP and won $100,000 (net). The Rio withheld 30% of that for your Internal [Revenue] Service. Can I get any of that back?

The good news is that a tax benefit is available. However, it’s not what you might think. Let’s look at the four methods of obtaining a tax benefit:

1. Tax Treaty. The US and Brazil don’t have a Tax Treaty, so there’s no way of getting the money back by claiming a Tax Treaty benefit.

2. Conducting a Business in the US. An individual conducting a business in the US must file a US tax return, and will owe tax based on the net income of the business. A poker player conducting a business in the US who has $100,000 of winnings and $100,000 of losses will have an income of $0 and not owe tax. Thus, that individual would be able to obtain a refund.

There’s a problem here, though: Is this individual conducting a business in the US? To be conducting a business in the US requires regularity: A business isn’t playing in one poker tournament or one event in one poker tournament. So is it possible for a non-American to be conducting a business in the US? Absolutely.

Consider a professional golfer from (say) Brazil playing on the PGA tour. That individual would almost certainly be conducting a business in the US, and be able to deduct losses and business expenses. (Indeed, that individual might even be considered a resident of the United States based on days in the US and have to file a Form 1040 rather than a Form 1040NR.)

Let’s go back to our Brazilian poker player. The IRS would almost certainly reject such a return at audit unless the person could demonstrate the regularity of a business. Playing in one tournament or one tournament series does not mean you’re conducting a business in the US. This means that for most non-Americans the conducting a business in the US method is not available.

3. Claim Gambling Losses on Form 1040NR. There’s a problem here: Only residents of Canada can claim gambling losses on a Form 1040NR. The IRS used to have a problem with this. However, the IRS redesigned Form 1040NR and put on the form that gambling losses can be taken only by residents of Canada and no longer issues incorrect refunds. This method will not work.

4. Claim a Foreign Tax Credit on a Brazil Tax Return. Almost every country has the ability on their tax returns to claim a foreign tax credit to avoid double taxation. It is likely that this method is available for a Brazilian poker player. It won’t be a refund from the IRS, but it will give you a tax benefit such that you will pay the higher of the two countries’ marginal tax rates. This is the only method that is available for most in this situation.

Yesterday I happen to be at the Rio and overheard someone saying that anyone can apply for a refund of the withholding. That is simply incorrect. The reality is that most individuals subject to withholding on their gambling winnings will not be able to obtain a refund of their withholding.

Posted in Gambling, International | Tagged | Comments Off on Can a Non-Tax Treaty Country Resident Obtain a Refund of Gambling Withholding from the IRS?

IRS Transcript Delivery System Down this Weekend

Posted on June 30, 2016 by Russ

The IRS’s Transcript Delivery System (TDS) will be down tomorrow beginning at 12:01am, and will not come back up until Tuesday morning. The IRS announcement indicates they will be performing maintenance during this period. TDS is supposed to be back up by 6:00am EDT on Tuesday, July 5th.

Posted in IRS | Comments Off on IRS Transcript Delivery System Down this Weekend

The Self-Employment Tax While Employed???

Posted on June 28, 2016 by Russ

One of my clients was quite upset this morning. She had received an IRS Automated Underreporting Unit (AUR) notice alleging that she owed about $4,000 in additional tax. She sent me a copy of the notice and I looked at the change: The IRS added self-employment tax to her return.

My client (and her husband) were both employees in the year in question. There was no self-employment tax on the original return because you have to be self-employed to owe self-employment tax. As I told my client, this ranks with the most ridiculous of IRS notices I’ve seen.

Still, my clients had to respond to the notice; if they didn’t tax would be assessed. My client completed the response form, included a short letter noting why they didn’t owe self-employment tax, and they mailed it off (certified mail, of course).

I don’t know why my client got “lucky” and got this notice. The only conclusion I can draw is the computer goofed. When I spoke to my client, I let her know that two-thirds of IRS notices are wrong in whole or in part. Yet the IRS keeps sending them out for a simple reason: People pay them blindly. “If it comes from the IRS it must be right,” they think. The reality is sadly different.

Most of the AUR notices I see (even those that are wrong) have at least a kernel of truth in them. Clients do forget to include 1099s, or they misclassify items on returns. This notice was one of the rarer ones where nothing on it made sense. Well, they did spell my clients’ names correctly….

Posted in IRS | Tagged | Comments Off on The Self-Employment Tax While Employed???

A Train to Nowhere

Posted on June 22, 2016 by Russ

I haven’t posted on California’s bullet train in some time (I’m no longer a resident of the Bronze Golden State), but it’s time to once more post about the train to nowhere. In theory, this train will connect Los Angeles and San Francisco. The first part of the route being built is between Shafter and Merced. Shafter is about 18 miles northwest of Bakersfield. How many riders do you think are interested in taking that segment when (or better put, if) it opens?

The whole idea of the train makes little sense given that airlines fly regularly between Southern and Northern California. The price-tag of the train has gone from about $10 billion to over $60 billion; meanwhile, funding from the federal government has dried up.

Yesterday the Los Angeles Times released a story that notes that almost every high-speed rail line needs taxpayer subsidies, a direct contradiction of what the high speed rail authority has stated. And this gem was noted from an April hearing:

Assemblyman Jim Patterson (R-Fresno) asked [rail authority Chairman Dan] Richard, “Do you know of any high-speed rail operations around the world that make substantial profit?”

Richard answered, “Actually all of them, virtually all of them, make operating profit.” He defined that as being able to cover costs after the expenditure of capital to build the systems.

“Ha, OK,” Patterson said.

The Spanish study showed that 3 of 111 high speed rail lines cover their costs, or 2.7%. Or better put, 97.3% do not cover their costs.

I’m glad I’m no longer a California taxpayer.

Posted in California | Tagged | Comments Off on A Train to Nowhere

FBAR Deadline Approaches

Posted on June 20, 2016 by Russ

Ten days from today is June 30th. That’s the deadline for filing Form 114, the Report of Foreign Bank and Financial Accounts (the “FBAR”). There are no extensions available.

The FBAR is a report. There is no tax to pay. It’s simply a listing of the accounts and maximum balances. However, the penalties for not reporting the FBAR are egregious. Willful non-reporting has a minimum penalty of $100,000 or half the balance in the account, whichever is greater. So file the FBAR.

I’m getting asked lots of questions from non-clients, and I can’t answer them. The best advice I can give is when in doubt, file the FBAR. You can file it yourself using the BSA efile system.

The IRS has a chart showing many of the accounts that are required to be reported on an FBAR. However, the list is not complete. For example, online gambling accounts must be reported (I maintain a list of addresses of those accounts). (Note: Accounts with the legal/regulated sites in Nevada, New Jersey, and Delaware are US-based accounts and are not reported.)

One question I will answer: The FBAR must be filed by June 30th; it does not have to be accepted by then. That used to be the case, but FINCEN goes by the time (in your local time zone) when you transmit the return to them. (If you are sending it via tax software, it’s the time of transmittal to the tax software company.)

Next year, the deadline for FBARs will advance to mid-April (hopefully matching the tax deadline), with an extension available for six months. It’s unclear how this will impact expatriates (who have a June tax deadline) or if a separate extension will be required. But that’s an issue where I can honestly say, “Wait ’til next year.”

Posted in FINCEN, International | Tagged | Comments Off on FBAR Deadline Approaches

Identity Thief Gets 17 1/2 Years

Posted on June 12, 2016 by Russ

Frantz Pierre, formerly of Parkland, Florida but soon to be residing at ClubFed, was sentenced last week to 210 months at ClubFed and must make restitution of $906,556. What did he do? I’ll let the Department of Justice press release tell the story:

According documents filed in court, from July 2010 through May 2011, PIERRE was the leader and organizer of a scheme to steal from the federal government by filling hundreds of fraudulent income tax returns. PIERRE and his co-conspirators used stolen social security numbers and other personal identifiers as well as fabricated employment and income information to complete hundreds of income tax returns and to claim millions of dollars in fraudulent tax refunds.

According to documents filed in court, as part of the scheme, PIERRE and his co-conspirators would establish fictitious tax preparation businesses and then open multiple bank accounts in the names of the fictitious businesses. In addition, PIERRE directed the IRS to deposit the fraudulently obtained income tax refunds into the bank accounts set up by the defendant and his co-conspirators. In total, PIERRE and his co-conspirators submitted approximately 776 fraudulent tax returns to the IRS, resulting in $5,249,935 in tax refunds to be deposited into the fictitious companies’ bank accounts.

There’s not much to add here. I’m glad to see crooks like this get very lengthy terms. Identity theft is miserable for the victims, and many victims did nothing wrong and are victimized. Now, if the IRS could start fully assisting victims instead of putting them through the wringer….

Posted in Tax Fraud | Tagged | Comments Off on Identity Thief Gets 17 1/2 Years

Why You Use Certified Mail

Posted on June 12, 2016 by Russ

A client was in IRS Appeals contesting the late filing penalty for his 2012 tax return. His return, which was ineligible for electronic filing, was on extension. The extension was timely electronically filed. The client believes he went to the Post Office and mailed his return on October 15, 2013. The IRS said it was mailed one week later. Unfortunately, in a move his records were lost by the movers. The problem is that if you don’t file timely (within the extension period), it’s as if you never had an extension!

The IRS Account Transcript shows the return was late filed. Using the Freedom of Information Act, we obtained a copy of the Administrative Record for his return; that included a copy of the envelope he mailed the return in. It clearly shows the postage being purchased at a post office on October 15, 2013. The envelope has two postmarks: The original (purchased at a post office) and a second from halfway across the country a week later! Most likely, the Postal Service routed the envelope incorrectly, so it ended up going through the system twice. In any case, I showed the Appeals Officer the copy of the envelope, and he agrees that the return was timely filed (for purposes of the late filing penalty) and my client now owes nothing. (My client had already paid the tax, interest, and the late payment penalty.)

Yes, my client was lucky that the administrative record showed the envelope. Yes, it would have been easier had he still had the certified mail receipt (or had the movers not lost that particular box).

Consider what would have happened if he had not used certified mail (or the envelope had not been shown in the record): He would be writing a check for about $20,000. Certified mail costs $3.30 (a return receipt will add $1.35 or $2.70 to that cost depending on whether you have it emailed or mailed to you). Yes, you have to wait in line at a post office, but that’s well worth it when you compare the alternative.

Posted in IRS | Tagged | Comments Off on Why You Use Certified Mail

Withholding Notice Snafu in California

Posted on June 8, 2016 by Russ

The Franchise Tax Board, California’s income tax agency, apparently issued a boatload of withholding mismatch notices. Some (but not all) of those notices appear to be in error; additionally, the FTB’s phone and chat lines have been swamped.

The FTB is taking two actions. First, they are giving all taxpayers who received these notices two additional weeks to respond. Second, those impacted by the erroneous notices will receive a “notice of this action” that will be mailed on Monday, June 13th.

Here is the text of the FTB’s announcement:

FTB facing high call, chat volumes, many questions about withholding

The number of calls to FTB’s call centers, as well as its LiveChat program, has spiked in recent weeks. We also saw a corresponding increase in district office foot traffic.

During the same time, the department has collected and investigated a number of complaints about withholding adjustment notices. To accommodate taxpayers with questions, FTB is allowing two additional weeks for taxpayers to respond to the notices. No action (including collections) will be taken during that time.

We apologize for any inconvenience this has caused, and we are taking steps to reduce wait times for our customer service channels.

We have identified a population of taxpayers whose returns were affected by late withholding reports from employers. Some wage and retirement withholding data was not provided to the State of California before FTB processed and validated the associated taxpayers’ returns.

To remedy this, FTB is re-validating those returns to allow the original withholding amounts claimed. Impacted taxpayers will receive a notice of this action, which will go in the mail by Monday, June 13.

A sample copy of the letter is available at https://www.ftb.ca.gov/current/sampleA.pdf.

Posted in California | Comments Off on Withholding Notice Snafu in California