Taxable Talk

My brother is a wine connoisseur. As all my friends know, I’m anything but a wine aficionado. But I have learned one difference between fine wine and a notice from the IRS: Wine can age very well but IRS notices don’t.

Almost all IRS notices come with deadlines. You need to act to stop the IRS. If you ignore the notice, you usually will get a second notice. After that, you may receive a Notice of Deficiency. If that ages the tax is assessed.

Yet most IRS notices are wrong in whole or in part! The last study I saw showed that two-thirds of IRS notices are wrong. That’s a shockingly high percentage. An obvious question is why doesn’t the IRS change its procedures so that the bad notices aren’t issued? The answer is simple: People pay those notices. The IRS’s Automated Underreporting Unit is a huge profit center for the agency.

What does this mean for you? Put simply, if you get an IRS notice read it carefully. Let your tax professional know about it when you receive it, not on the day a response is due. It’s a lot easier (and cheaper) to act earlier in the process than later.

My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.

Ah, Spring is in the air. And with that come the inevitable wedding invitations. I had an invitation to a wedding on April 9th. No, I didn’t attend.

With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.

Perhaps it’s something in the water, but this year I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.

There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.

Marriage has its ups and downs. Claiming you’re single on your tax return when you’re married will in the long-run cause you nothing but downs.

You may have noticed that Bozo Tax Tip #1 appeared last week. Never fear, there’s another #1 Bozo Tax Tip that will appear on Friday. Now on with the countdown:

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2016, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 19th? (If you reside in Maine or Massachusetts, April 19th is your Tax Day this year.) Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

I was talking with a friend who is an attorney in the Midwest. She told me about an individual who decided to use ten layers of shell companies to hide his income. It worked so well that the Bozo had trouble accessing his income.

He was using the usual foreign shelter countries: the Cayman Islands (in the Caribbean), the Channel Islands (in the English Channel), the Isle of Man (in the Irish Sea), and Vanuatu (in the South Pacific). There was a land-based country in there, too: Panama. In any case, somehow the ownership got so messed up that one of the shells refused to deal with another.

My friend didn’t get involved to get the money situation resolved. No, she got involved because her client ended up going through a messy divorce, and her client happened to find one of the papers dealing with one of the shell companies. My friend’s a divorce attorney, and a good one, and she was able, with some help, find a lot of the hidden money. The judge was not as amused as I was hearing about the difficulties the man was having getting his money out. And neither was the IRS because he had “forgotten” to pay tax on a lot of income.

There are lots of good strategies for businesses to use to lower their taxes. Income balancing to C corporations can be a good strategy. Maximizing Section 179 depreciation is another. So is my least favorite deduction, the Domestic Production Activities Deduction (Section 199). There are many, many others. But hiding income in foreign jurisdictions is a very bad one, and if you get caught you are likely looking at a lengthy term at ClubFed.