Yet Another Reason Why Requiring Tax Professionals to Obtain a License Won’t Stop Tax Professionals from Behaving Badly

Posted on December 6, 2015 by Russ

In California, everyone who prepares a tax return for money must have a license. Individuals must either be an Enrolled Agent, a CPA, an attorney, or obtain a license from the California Tax Education Council. Of course, that means that no California tax professional would commit tax fraud, right?

Of course not. Where there’s money involved there will always be people trying to obtain that money fraudulently. That’s the case whether you need no license, one license, or 100 licenses to prepare a tax return. Take the case of Melissa Ann Vega (aka Lisa Vega).

Ms. Vega owned L&T Works, a tax preparation firm in San Diego. Last year, stories in San Diego media describe deductions that were $3,000 that became $31,000. The IRS raided the facility in April 2014.

Come January 2015, Ms. Vega was arrested and released on bond. What she then did has gotten her a coveted nomination for Tax Offender of the Year:

Vega was released on bond in this case on January 28, 2015. Although the court informed her not to commit another federal crime, Vega once again began filing false tax returns with the IRS within days of her release. Without the clients’ knowledge, Vega fraudulently inflated or created credits and deductions to maximize her clients’ false returns. The IRS uncovered her fraud, and Vega was arrested on February 25, 2015. In furtherance of her conspiracy, Vega agreed with Deanna Dave (charged in Criminal Case No. 15CR2715-JM) to misrepresent to the grand jury that Dave was the owner and paid-return preparer for the tax returns filed in February 2015. In truth, Vega continued as the owner of her tax preparation business and prepared the false tax returns which she filed for her clients. On November 17, 2015, Dave pleaded guilty to making a false declaration before the grand jury, and her sentencing is scheduled for February 5, 2016 before Judge Miller.

As for her initial crimes, these are detailed in the DOJ press release:

Vega told her co-conspirators and employees that they should maximize clients’ refunds by filing for a $4,000 education credit, even though the client did not attend school for that tax year. To conceal her role in the fraud, Vega intentionally omitted her name and tax return preparer identification number on the false tax returns she prepared for her clients. In total, Vega’s fraud caused the IRS to pay more than $7 million in artificially-inflated tax refunds based solely on the false education credits. Moreover, Vega admitted that she and her co-conspirators stole the identities of other persons, including minors, and used them on the false tax returns in order to further inflate the amount of the tax refund paid by the IRS.

Vega did not shy away from personally profiting from her fraudulent scheme. In addition to charging her clients between $150 and $200 per return, Vega also admitted that she stole more than $300,000 in false tax refunds from her clients by directing their refunds into bank accounts that she controlled. Vega spent this money for her own personal benefit. Vega also admitted that she evaded her own income taxes and filed false personal tax returns in which she fraudulently claimed withholding credits, education credits, and tax credits for minor dependents that she did not support and were not related to her. According to court documents, Vega evaded more than $156,000 in taxes due to the IRS for tax years 2009 through 2013.

As noted above, Ms. Vega was in California; she needed a license to prepare tax returns. That included annual continuing education in ethics. She apparently missed that, along with the commandment, “Thou shalt not steal.” Given she prepared more than 4,000 false tax returns with the IRS (and presumably an equal number of false returns with California’s Franchise Tax Board) in attempting to obtain more than $7 million in phony refunds, she’s likely heading to ClubFed.

Posted in Tax Fraud | 1 Comment

Third Party Transcript Requests Reportedly Will No Longer be Processed by the IRS

Posted on December 2, 2015 by Russ

Form 4506-T allows a third-party to obtain a transcript with your signed permission. One use of the form has been to obtain a tax return transcript when obtaining a mortgage. There have been reports that some individuals who completed this form didn’t have the transcripts sent on. Well, it appears that the IRS is no longer honoring this form unless there’s a Tax Information Authorization (Form 8821) or a Power of Attorney (Form 2848) on file. (Of course, either a Form 8821 or a Form 2848 allows a transcript to be generated.)

This news came out today via individuals calling the IRS’s Practitioner Priority Service. This policy has not been officially published anywhere by the IRS, but based on IRS actions it appears that this policy was put in place because of identity theft concerns.

I do not know what mortgage companies will do in the future, but I would assume they will add a Form 8821 to their requests. I’m not sure how a mortgage company sending over two pieces of paper to the IRS rather than one lowers the risk of identity theft, but whatever.

In related news, the Oklahoma Tax Commission is no longer accepting Oklahoma Power of Attorney forms via fax; they must be mailed to the tax agency. It’s not clear what prompted this change but I’m guessing it’s also identity theft concerns.

Posted in IRS, Oklahoma | Tagged | 1 Comment

My Love/Hate Relationship with the FTB

Posted on December 1, 2015 by Russ

For those who don’t know, I used to reside in California. I prepare more California tax returns than any other state’s returns (though it is no longer a majority–or even close to a majority–of my clients). I have a lot of experience in dealing with California’s income tax agency, the Franchise Tax Board.

The FTB, like the IRS, has a practitioner priority service. And you actually get through to humans when you call the number. Though not available on the FTB’s practitioner line, several FTB numbers have “call back” service. The recording tells you how long the average wait time is (e.g., between 45 minutes and 72 minutes), and you can elect to wait on hold or enter your phone number and the system will call you back when it’s your turn to be first in the queue. The system has one “flaw”: I’ve been called back faster than the average wait time.

The FTB also has an annual meeting with the California Society of Enrolled Agents (CSEA). The FTB posted in its December Tax News how to deal with partial year dispositions and late partial disposition elections for tax years 2012-2014.

Yet for all the excellence in how the FTB communicates some of the FTB’s practices leave a lot to be desired. Back in 2013, the FTB invented law related to qualified small business stock. The FTB was convicted of committing fraud and intentional infliction of emotional distress in the Gilbert Hyatt matter. This case will be heard for the second time at the US Supreme Court next week. The Hyatt case is just one example of what appears to me to be the normal FTB strategy: Delay cases and make things as expensive as possible for litigants.

And the FTB has also been persnippity and literal at times. You definitely want your paperwork to be exactly right when dealing with them. So you have to take the bad with the good when dealing with the FTB.

Posted in California | Tagged | 1 Comment

Nominations Due for 2015 Tax Offender of the Year

Posted on November 30, 2015 by Russ

With just about one month left in 2015, it’s time for a reminder to submit nominations for the 2015 Tax Offender of the Year. To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

Posted in Taxable Talk | Tagged | 1 Comment

De Minimis Rule Change Is Better than I First Thought

Posted on November 29, 2015 by Russ

My flight home last night was delayed, so I got the chance to read the IRS’s new de minimis rule for small businesses allowing expensing of items costing $2,500 or less. Normally when you read something that’s from the IRS, you expect to find “gotchas.”

Instead, I found good news for taxpayers. While the rule explicitly applies to tax years beginning after December 31, 2015, the IRS states,

AUDIT PROTECTION

For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in § 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements of § 1.263(a)-1(f)(1)(ii). Moreover, if the taxpayer’s use of the de minimis safe harbor provided in § 1.263(a)-1(f)(1)(ii) is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount (or amounts) that does not exceed $2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise satisfies the requirements of § 1.263(a)-1(f)(1)(ii), then the IRS will not further pursue the issue.

This means that the new de minimis rule is really effective now, and it may make sense for some taxpayers who qualify for the de minimis rule to amend one or more prior year returns. It is the Holiday Season, and here the IRS was in the spirit of giving and wasn’t the Grinch.

Posted in IRS | Tagged | 2 Comments

The 14th Time Wasn’t the Charm

Posted on November 24, 2015 by Russ

For most of us the saying “If you don’t succeed at first, try, try again,” is good advice. However, it’s not good to try to deduct personal expenses as business expenses on your tax return. It’s an especially bad idea to then try justifying that at Tax Court repeatedly. Of course, that happened today.

Petitioners are no strangers to this Court. This case constitutes, at the minimum, their 14th case, involving at least one of petitioners, spanning almost 30 taxable years from 1981 to 2010. Most recently they litigated the consolidated cases at docket Nos. 16195-12S, 26201-12S, and 1070-13S, which were decided by this Court’s T.C. Summary Opinion 2014-105. Those cases, like this one, addressed similar continuing issues arising primarily from petitioners’ efforts to substantiate and deduct expenses which they attribute to Mr. Boring’s Schedule C sole proprietorship d.b.a. Rambor Technology (Rambor) or his partnership Board Automation. The substantive tax disputes emanate from petitioners’ misunderstanding of the terms “ordinary” and “necessary” as used in defining deductible business expenses pursuant to section 162 and the interrelationship of that section with section 262, defining nondeductible personal expenses. [footnotes omitted]

The issues in this case were deducting expenses without backup, including what appear to be numerous personal expenses. In order to deduct business expenses, they must be both ordinary and necessary for the business.

An expense is ordinary for purposes of this section if it is normal or customary within a particular trade, business, or industry…An expense is necessary if it is appropriate and helpful for the development of the business…Section 262, in contrast, generally precludes deduction of “personal, living, or family expenses.”

The breadth of section 162(a) is tempered by the requirement that any amount reported as a business expense must be substantiated, and taxpayers are required to maintain records sufficient therefor.[citations omitted]

Put simply, almost all of the expenses that were deducted on the return were either nondeductible personal expenses or had no substantiation.

The Court goes through great detail in this case. The reason is that the Court doesn’t want to hear the 15th case dealing with the same issues.

We warn petitioners, however, that their conduct is in material noncompliance with Federal tax law. Our opinions here and in T.C. Summary Opinion 2014-105 are tailored to explain what the law requires. Petitioners have been fairly warned; consequently, any further conduct in the same vein as that considered here and in our previous cases addressing their tax liabilities and tax payments may well, under present law, result in the application of a section 6673 penalty in an amount of up to $25,000.

Section 6673 is the penalty for filing a frivolous Tax Court case. The Court ruled that the case wasn’t entirely frivolous because of one issue. On the tax return, the petitioners took the home office deduction (including mortgage interest). That deduction was denied, but the mortgage interest taken on the home office deduction should have been moved to be an itemized deduction on Schedule A. If not for that, the petitioners might not only owe the tax, penalties (they were hit with the accuracy-related penalty), and interest, but the frivolous penalty too. They somehow avoided the late filing penalty (this was noted in a footnote on the return), so they should consider themselves lucky.

Case: Boring v. Commissioner, T.C. Summary Opinion 2015-68

Posted in Tax Court | Comments Off on The 14th Time Wasn’t the Charm

IRS Increases De Minimis Expense Threshold to $2,500 from $500 for 2016 Onward

Posted on November 24, 2015 by Russ

The IRS today announced that the de minimis expense threshhold for small taxpayers (which is the vast majority of all taxpayers) to $2,500 from $500 for tax years 2016 onward. Note that this does not apply for 2015 returns filed in 2016. This move will allow taxpayers to expense many items that currently must be depreciated. [Update: While the rules apply for 2016 returns, the IRS says they will not examine (audit) taxpayers who use the new $2,500 de minimis rule on open tax years. Thus, the rule effectively applies for 2012 returns onward. See this update.]

The IRS announcement notes that this will simplify taxes for small businesses.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Do note that you do need to keep a receipt (or other proof) of the expense.

Posted in IRS | Tagged | 1 Comment

The Turf Monster Striketh

Posted on November 20, 2015 by Russ

Every so often the turf monster trips a player in a football or baseball game. Here’s one example:

This post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing “rebates” to homeowners for replacing lawns (turf) with xeriscapes. It’s clear that such “rebates” are taxable for federal tax purposes. (California law specifically exempts such “rebates” for California tax purposes.)

Apparently, the Electric and Gas Industries Association (EGIA), which ran the program for the MWD, just discovered this. A correspondent sent me an email he received:

Dear Soon to be Taxed Homeowner:
Our records indicate that you received a rebate that exceeded $600 from SoCal Water$mart in 2015. In order to comply with Internal Revenue Service requirements you must complete and sign a W-9 form with your Social Security number or Tax ID. This form is available within the online application, and may be accessed by logging into your online account at https://mwdturf.conservationrebates.com/ and editing the application with the required tax information changes. The name on the W-9 form submitted for review must match the name that was on the rebate check…

Please log back into your online account at https://mwdturf.conservationrebates.com/, download and complete the W-9 form and upload the completed form back into the application. The W-9 will be reviewed, and a 1099 will be issued to you for tax and accounting purposes. If you have any concerns regarding whether your rebate is considered taxable income, please contact a qualified tax professional.

There are two obvious implications of this. First, the EGIA realizes that they must issue 1099s to any impacted taxpayers. It’s another case of substance over form: These may be called “rebates” but they’re really an economic incentive to remove turf and replace it with something else. And that results in what is clearly taxable income.

Second, there will probably be an issue with some taxpayers ignoring the email. The email notes that you’re going to be issued tax paperwork; how many taxpayers will want that? Of course, whether or not the 1099 is received does not change that the income is taxable (it is). Still, I suspect EGIA will have quite a bit of work on their hands to obtain all the taxpayer identification numbers.

UPDATE: My correspondent told me that the EGIA is requesting that impacted taxpayers email their taxpayer identification numbers to the agency. If you are an impacted taxpayer, do not do this. Email is fast but it is not secure. EGIA is allowing you to mail the Form W-9 to the agency; that is a far more secure means of transmitting your social security number.

To the EGIA, what were you thinking in these days of identity theft?

Posted in California | 1 Comment

Update on the Future of Daily Fantasy Sports

Posted on November 19, 2015 by Russ

So far, I’ve been accurate on my predictions. Back in February 2014 I wrote,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws. [emphasis in original]

Last month I wrote,

I expect DFS to follow two different paths in the majority of states. Some states will simply declare it as gambling, making it effectively illegal in those states. Other states will tacitly declare it as gambling but allow regulation of the activity. There will be a minority of states that allow DFS to continue as an unregulated activity. Where one month ago you could play DFS in 45 of the 50 states, that number is down to 42 to 44 states (depending on the DFS site). I expect that number to continue to fall.

Events have moved faster than I thought they would. The New York Attorney General declared DFS to be gambling, and has asked a court for an injunction. One of the two major sites, FanDuel, has stopped offering contests for New Yorkers. The hearing will be next Wednesday. The Massachusetts Attorney General has proposed regulations.

As for New York, I think FanDuel is operating far wiser than DraftKings. DraftKings is still allowing New York residents to play on the site. Given that there is a non-zero chance that the company will find it outself ordered to stop, and that operating in violation of state law would be a predicate offense for possible federal charges, I think DraftKings is making the wrong decision. (I will point out again that I am not an attorney, and nothing I’m writing should be construed as legal advice.) If you ask me the most likely result of the New York Attorney General’s action, it’s that the sites will find themselves enjoined from serving New York customers. This isn’t a certainty, but if you’re going to place a bet on the results that’s the favored side.

I still think we will end up with a dichotomy within the states. States that are notoriously anti-gambling or have constitutional provisions against gambling (including much of the South: Texas, Florida, and Tennessee; Utah, and Hawaii) will ban DFS, either by Attorney General rulings or by court actions. Other states will regulate DFS. Some states will order the DFS companies to shut down until regulations are in place. A very small number of states will just ignore the issue, and leave DFS in an unregulated state.

DFS proponents need to remember that a regulator’s first instinct when confronted with something new is to ban it. Add that to the fact that DFS is legal by way of a loophole (in the view of regulators) and you get a strong inclination for them to end DFS.

That’s the most likely outcome. However, there is still the chance that DFS could end completely. There are federal investigations of the sites which could, if indictments result, end the industry.

This is a fascinating story–and the greed of the sites has sped up the story line. It was inevitable that DFS would attract scrutiny. The pace of that scrutiny sped up because the sites went overboard in their advertising and had very poor visuals. We’ll all be able to see the future of this product unfold in the next few weeks.

Posted in Gambling, Massachusetts, New York | Tagged | 2 Comments

Yo No Hablo Ni Leo Español

Posted on November 18, 2015 by Russ

Yes, Spanish is not one of my languages. Luckily for me, computer translators exist. Unluckily for one of my clients, he received an IRS notice in Spanish…when he doesn’t read or speak Spanish.

This is more humorous than anything else (errors do occur), but somehow my client has been apparently tagged by the all-knowing and all-seeing IRS computer as Spanish speaking or reading. Neither of us could figure out why, but with the help of the IRS Practitioner Priority Service we figured out that the notice was innocuous. Hopefully, the IRS computer will change his language of choice back to English.

Posted in IRS | Comments Off on Yo No Hablo Ni Leo Español