Bozo Tax Tip #7: Who Needs to Pay Employment Taxes?!

Posted on April 7, 2016 by Russ

This Bozo Tax Tip—and do remember, these are things you really, really, really shouldn’t try—is aimed at the business owner who is having problems. Business owners, unlike the federal government, can’t just print money. So let’s assume our hypothetical business owner has payroll tomorrow but doesn’t have the money for everything. What should he do?

Well, one strategy is to not remit the payroll taxes. Sure, they’re “trust fund” taxes but the government can print money and I can’t, so they’ll just let it slip by. And my state government won’t care either, right?

The above strategy is likely one of two quick and easy ways to get on the road to ClubFed. The IRS doesn’t like it when trust fund taxes don’t make it to the government. The penalties are substantial. The liability goes to the owners (and check signers) of the business. IRS Criminal Investigation will investigate this. Don’t do this!

One of my clients recently was interviewed about such a case. He was paid, but apparently the IRS wasn’t. It’s not hard for the IRS to find out about this: After all, every employee is going to file a tax return claiming withholding but the IRS won’t find it. That’s exactly what happened in this case. I suspect that very soon two nice looking individuals (accountants with badges and guns; now that’s a scary thought) will be knocking on a door and saying, “You have the right to remain silent….”

Business troubles aren’t fun. However, if you don’t pay the IRS your employment taxes you will find your troubles multiplying.

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Bozo Tax Tip #8: Ignoring California

Posted on April 6, 2016 by Russ

Perhaps I should call this Bozo Tax Tip “Forming a California Trust.” Why? Let me explain.

Let’s assume John and Jane, two California residents, form a trust to benefit their children, Ann and Bob. Ann lives in Florida; Bob resides in California. The trust is an irrevocable trust, so it files its own tax return (a Form 1041). The income to the beneficiaries is reported on Schedule K-1s. Ann is surprised and calls her accountant when she receives both a federal K-1 and a California K-1.

The issue is simple: The trust is a California trust, so the income is California-source. California requires that a Schedule K-1 for Form 541 (California’s trust tax return) be included. Yes, Ann must pay California tax on the income. Ann’s CPA called me and asked me why I included the K-1 from California. My response was succinct: I have to and Ann has to pay the tax.

California’s desire to have anyone and everyone pay California tax has led to many trusts relocating to Nevada (which has no state income tax) and other trust-friendly states. California isn’t one of those states. Ann’s parents, John and Jane, could have formed the trust in Nevada but because they didn’t Ann is stuck in the Hotel California. You can check out any time but you can never leave.

Ignoring the California K-1 is a Bozo idea. Instead of just paying tax, you will get the joy of paying tax, penalties, and interest. If your parents are in California and thinking of forming a trust to benefit you, it may be worth your time to talk about Nevada to them. Otherwise, welcome to the Hotel California.

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Bozo Tax Tip #9: Nevada Corporations

Posted on April 5, 2016 by Russ

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

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Bozo Tax Tip #9 1/2: 300 Million Witnesses Can’t Be Right!

Posted on April 4, 2016 by Russ

I am a sad person this year as I’m writing my Bozo Tax Tips. Richard Hatch did nothing this past year to keep him in my top ten tax tips. Thus, Mr. Hatch is no longer part of the top ten. But since Tax Season has been extended one business day, I am giving Mr. Hatch his own special place in my tips this year.

One tip I can give any celebrity: Be careful about your taxes. The IRS loves going after Bozo tax celebrities. So here’s the story that refuses to die.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.

2009 Update: Richard Hatch continues to look for that needle in the haystack. He’s filed another appeal, though to this non-lawyer it’s more likely that he’ll be released after serving his 51 months at ClubFed than getting a favorable ruling.

2010 Update: Mr. Hatch was released in mid-2009. He then violated the terms of his release and was sent back to ClubFed. Finally, in October, Mr. Hatch was released. He’ll be spending the next couple of years in his home state of Rhode Island.

2011 Update: As part of his sentence, Mr. Hatch was supposed to amend his tax returns and declare the $1 million of income. He neglected to do that. Judge William Smith didn’t neglect to give Mr. Hatch a piece of his mind this past March: He sentenced Mr. Hatch to nine more months at ClubFed. Following his release from ClubFed (in December), Mr. Hatch will have 26 months of supervised release.

2012 Non-Update: Mr. Hatch was released from prison in late December 2011. He has filed a writ of certiorari with the Supreme Court. The chance of the Supreme Court taking his case is about the same as a blizzard in August in Las Vegas. The writ was denied.

2013 Update: Mr. Hatch’s non-payment of taxes extends north of the border. Mr. Hatch owned a piece of property in Sydney, Nova Scotia. That property was sold in a tax sale after Mr. Hatch didn’t pay the property taxes on it for at least six years.

2014 Update: Mr. Hatch still thinks he did nothing wrong. Last year, on Oprah: Where Are They Now, Hatch told Oprah Winfrey, I never did anything deserving of prison time…I never attempted to evade taxes, which was what I was convicted of.” I’ll let the reader decide on the veracity of Mr. Hatch’s statement.

Judge Smith’s remarks from over two years ago have not yet sunk in to Mr. Hatch. “You can continue to proclaim your innocence…You don’t have the option of engaging in this type of game or negotiation with the court. It needs to be a severe punishment. That’s the only thing that will deter you in the future.”

2015-2016 Non-Update: Mr. Hatch was silent on the tax front since his appearance on Oprah. It appears that this may be the last year I’ll have Mr. Hatch in my Bozo Tax Tips.

And to think I’d have had so little to write about if Mr. Hatch had just paid his $300,000 in tax in the first place.

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Bozo Tax Tip #10: Email Your Social Security Number!

Posted on April 1, 2016 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the third year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response is pitiful. Indeed, this year the IRS decided that identity theft victims should get hit a second time! Let’s hear it for the IRS’s wonderful view of “service!”

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.

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A Bad Day for the IRS in Court

Posted on March 22, 2016 by Russ

An appeals court decision today should end speculation on Democrats’ claims that the IRS scandal is a non-event. The Sixth Circuit Court of Appeals heard an appeal last week. The NorCal Tea Party Patriots had filed a class action suit regarding the IRS’s conduct in dealing with applications for non-profit status as a 501(c)(4) organization. The District Court had ordered the IRS to comply with discovery requests. The IRS asked for a “writ of mandamus;” basically, an order to stop the discovery. The first two paragraphs of the decision get to the crux of the matter:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Yet in this lawsuit the IRS has only compounded the conduct that gave rise to it. The plaintiffs seek damages on behalf of themselves and other groups whose applications the IRS treated in the manner described by the Inspector General. The lawsuit has progressed as slowly as the underlying applications themselves: at every turn the IRS has resisted the plaintiffs’ requests for information regarding the IRS’s treatment of the plaintiff class, eventually to the open frustration of the district court. At issue here are IRS “Be On the Lookout” lists of organizations allegedly targeted for unfavorable treatment because of their political beliefs. Those organizations in turn make up the plaintiff class. The district court ordered production of those lists, and did so again over an IRS motion to reconsider. Yet, almost a year later, the IRS still has not complied with the court’s orders. Instead the IRS now seeks from this court a writ of mandamus, an extraordinary remedy reserved to correct only the clearest abuses of power by a district court. We deny the petition.

Oh, but hasn’t the IRS cooperated with the lawsuit? Hardly. “On the record before us here, the IRS’s response has been one of continuous resistance.” The Court is also making a point by the speed of the decision. This case was heard on March 16th; the decision was released on March 22nd. The Court is sending a message to the IRS: Stop the delaying tactics!

There’s a lot more in this decision, and I hope some tax blogger with far more free time than I do opines on the decision. I’ll end with the Court’s conclusion:

In closing, we echo the district court’s observations about this case. The lawyers in the Department of Justice have a long and storied tradition of defending the nation’s interests and enforcing its laws—all of them, not just selective ones—in a manner worthy of the Department’s name. The conduct of the IRS’s attorneys in the district court falls outside that tradition. We expect that the IRS will do better going forward. And we order that the IRS comply with the district court’s discovery orders of April 1 and June 16, 2015—without redactions, and without further delay.

Case: United States v. NorCal Tea Party Patriots, et al

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March 15th Tax Deadlines

Posted on March 14, 2016 by Russ

There are a number of tax deadlines tomorrow, March 15th. Here’s what you need to know.

Calendar Year Corporations: If you have a calendar year corporation, your Form 1120 or Form 1120S is due tomorrow. If you’re not ready to file, simply file Form 7004. That can be electronically filed, or mail it. If you mail it, use certified mail, return receipt requested.

State Corporate Returns: Calendar year state returns are mostly due tomorrow, though not every state shares the March 15th deadline. (For example, Florida uses April 1st as its deadline.) Most, but not all, states allow a federal extension to apply for their state. If in doubt, check! For example, Pennsylvania requires a separate extension.

Form 3520-A: This is one of the forms for foreign trusts, and it has a due date of March 15th. (The other main form, Form 3520, is due on the same date as your personal tax return including extensions.) You can file an extension for Form 3520-A using Form 7004. This extension must be mailed to the IRS, so use certified mail, return receipt requested. The IRS does currently accept foreign postmarks so if you’re outside of the US go to your post office and mail it. Or use an approved private delivery service.

Form 1042-S (and Form 1042 series): This is a report of income paid to non-Americans. The filing due date (either electronic of mail) is March 15th. Other Form 1042s are also due tomorrow (the 1042 series of forms notes withholding on income paid to non-Americans).

If you are in doubt as to whether or not you will get your return done in time, simply file the extension now. There’s no harm with filing an extension today and filing your return tomorrow. There’s a big penalty if you don’t file your extension today or tomorrow and file your return on Wednesday.

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Online Gambling Addresses Updated for 2016

Posted on March 8, 2016 by Russ

This list has been superseded by the 2017 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.

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.

There is one major change for 2015. 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 addresses for Bodog or Bovada. 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 March 8, 2016. 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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Annual Blog Hiatus

Posted on March 7, 2016 by Russ

It’s time for my annual blog hiatus. There will be occasional posts regarding deadlines (the corporate tax deadline is in one week–Tuesday, March 15th) and my annual Bozo Tax Tips will appear beginning on April 1st (no foolin’). If anything truly momentous in the world of tax happens I’ll interrupt my hiatus and post on it; otherwise, I’ll be back no later than April 25th.

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What Part of “Permanent Injunction” Didn’t You Understand?

Posted on March 6, 2016 by Russ

Last September, Gerardo Herrera found himself the target of the IRS and the US Department of Justice. Mr. Herrera owned a tax preparation business, El Lobo Multiservicios Professionales Inc. in Colorado. According to the indictment issued last September, Mr. Herrera and his business invented dependents, claimed personal expenses as business expenses, and added phony deductions. The DOJ press release notes that the IRS audited more than 200 of their returns and found misrepresentations on more than 99 percent of them.

It reads like “normal” return preparer fraud.

Come January, a federal court issued a permanent injunction:

A federal court has permanently barred a Colorado man and his tax preparation business from preparing federal tax returns, the Justice Department announced today. The United States filed a civil complaint against Gerardo Herrera and his business, El Lobo Multiservicios Professionales Inc., contending that they fraudulently reduced their customers’ tax liabilities by reporting extra dependents and claiming bogus deductions. After the defendants failed to respond to the complaint, on Jan. 7, 2016, Judge John L. Kane entered an order permanently banning Herrera from preparing returns.

Again, what you would expect. Mr. Herrera was told to stop preparing returns and to turn over his customer list (he had 45 days to do that).

He didn’t do either. He continued to prepare returns and he didn’t supply his customer list. If a federal court orders you to stop doing something, you don’t get a choice (other than the right to appeal that decision).

The injunction also directed Herrera to provide a list of his customers to the United States, notify his customers of the injunction and file a sworn statement attesting that he had complied within 45 days of the injunction. The United States asked the court to hold Herrera in contempt for his failure to comply with these provisions and alleged that he continued to operate two tax preparation offices and/or assist others in operating the offices. After hearing testimony from two Internal Revenue Service (IRS) witnesses who had visited Herrera’s offices, Judge Kane found Herrera in contempt and ordered that he be held in custody until he purges his contempt by, among other things, notifying all his prior customers of the permanent injunction, providing a list of his customers to the United States, surrendering his Preparer Tax Identification Number (PTIN) and posting a copy of the injunction in his place of business.

Mr. Herrera is being held at ClubFed until he closes his business and complies with the injunction. Mr. Herrera earned one other thing: He’s the first nominee for the 2016 Tax Offender of the Year Award! Congratulations!

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