2015 Tax Offender of the Year

Posted on December 30, 2015 by Russ

Once more it’s time to award that prestigious award, the 2015 Tax Offender of the Year. The winner of this award must do more than just cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Unfortunately, there were plenty of nominations.

Dissatisfied with only winning the Tax Offender of the Year award once, the US Congress made a strong push for the award. However, they snatched defeat from the jaws of victory (which is a good thing; this award really isn’t something to brag about). Just two weeks ago they passed both a budget and tax “extender” legislation, and even codified the Enrolled Agent profession as part of the legislation. That last item eliminated Congress from the running.

The Miccosukee tribe was in the running again. They’ve fought a quixotic battle against the IRS, alleging that their members are exempt from US taxation on their income from a casino. The tribe has been fighting the IRS in court (and losing, time after time). Most recently, the Tax Court ruled that an IRS levy wasn’t an abuse of discretion.

However, that’s not the most recent ruling against the tribe. Just last week the 11th Circuit Court of Appeals ruled against the tribe. The tribe had appealed a dismissal of a lawsuit against former tribal officials, attorneys, a law firm, and an investment firm:

Applying the Rule 9(b) standard to the present complaint, we note that the district court previously afforded the Tribe the opportunity to amend its complaint to add particularity. In doing so, the Tribe submitted a 314-page second amended complaint which, at first blush, appears to contain particularity…The complaint’s 314 pages, therefore, appear largely to be an attempt to create the impression of specificity through page-number “shock and awe.”

Let’s just say that the Court was neither shocked nor awed:

The deficiency of the pleadings exists at a more fundamental level. Looking first at the allegations concerning the attorney defendants, the complaint suffers from a wholesale lack of detail to satisfy the plausibility standard of Iqbal and Twombly or the heightened requirements of Rule 9(b)…No attempt is made, however, to articulate what services were deemed legitimate and proper, what services comprised part of the alleged fraudulent scheme, and what rates were inflated…There is, therefore, insufficient specificity to distinguish between what attorney matters the Tribe deems to have been legitimate and what the Tribe deems to have been illegitimate. Finally, the Tribe alleges a kickback scheme in which the attorneys received payment and refunded money to Cypress, but there are no factual references to support these allegations. [foonote omitted]

The decision of the lower court was affirmed. And, yes, there’s worse to come.

Our final runner up was IRS Commissioner John Koskinen. While I applaud the lead he appears to now be taking on identity theft, Commissioner Koskinen’s reaction to the IRS scandal has been ridiculous. I agree with Joe Kristan’s comment earlier this year:

His glib, arrogant and obstructionist response to the Tea Party scandal, full of denials of the existence of information that subsequently surfaced, has destroyed his credibility. There’s no hope that the IRS will get improved funding as long as he is around to spend it.

Yet Mr. Koskinen’s bad leadership pales to the amazing tale I’m about to tell.

Stillwater, Minnesota is like many small cities in the midwest. It’s a popular day trip for residents of the Twin Cities (Minneapolis and St. Paul), and it’s largest industry appears to be tourism.

In 2006, Kenneth Harycki owned Customized Payroll Solutions in Stillwater and was its mayor. He was a CPA and had a nice business. He took on new clients in 2007, Thurlee and Roylee Belfrey (brothers) who ran some home health care businesses. So far, nothing out of the ordinary.

Unbeknownst to Mr. Harycki, the Belfreys allegedly ran their business as their own personal piggy bank. That supposedly including defrauding the US Department of Health and Human Services and skimming off payroll tax deposits. Mr. Harycki discovered this after he took the Belfreys on as clients:

Within the first few payroll cycles for Model Health Care, Harycki “concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government,” according to his guilty plea.

Now, when I discover a defalcation against a client I will, of course, report it to them. If I discover a client is committing payroll tax fraud (thankfully, I’ve never had this happen), I’m required to tell them to stop, and to drop them as a client. Mr. Harycki, a CPA, certainly understood the ethical requirements of his profession.

Well, maybe not.

Mr. Harycki had other ideas of what to do. Back in January when I first reported on this, I gave the three choices that could have been considered:

(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Yes, Mr. Harycki decided to join the conspiracy. And boy did he do so!

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

There’s not much to add here. Mr. Harycki should have, once he discovered the fraud, told them of the law violations and quit the engagement. The only good that is coming from this is that Mr. Harycki appears to be cooperating with the Department of Justice in the cases against the Belfreys (who are now also facing a tax fraud charge).

That’s a wrap on 2015! While I’m hopeful that 2016 will find me bereft of candidates for the Tax Offender of the Year award, I suspect my cup will again run over.

I wish you and yours a happy, healthy and prosperous New Year.

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IRS: We’ll Trust You on Health Insurance for 2015 Because…

Posted on December 28, 2015 by Russ

Earlier today I saw a tweet from Joe Kristan:

The delay didn’t surprise me; I felt that given this was the first year that Form 1095-B and 1095-C were required that there would be issues. But I felt that taxpayers would eventually need to provide the forms to tax professionals.

I was wrong.

From Notice 2016-04:

Similarly, some individual taxpayers may be affected by the extension of the due date for providers of minimum essential coverage to furnish information under section 6055 on either Form 1095-B or Form 1095-C. Individuals generally use this information to confirm that they had minimum essential coverage for purposes of sections 36B and 5000A. Because, as a result of the extension, individuals may not have received this information before they file their income tax returns, for 2015 only individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections. Individuals need not send this information to the Service when filing their returns but should keep it with their tax records. [emphasis added]

Do note that taxpayers aren’t getting a complete free ride here. The IRS reserves the right to challenge taxpayers who say they had coverage but didn’t (which is why the notice states to keep the information with the tax returns). However, given that the IRS can’t force taxpayers to pay penalties regarding health insurance coverage, it’s possible the IRS won’t be looking at this for 2015.

This is good news for tax professionals and taxpayers in another regard. We won’t have delays regarding filing returns because taxpayers haven’t received Forms 1095-B or 1095-C as long as they’re aware of their health insurance coverage. That’s a very good thing for all.

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Last Chance for Nominees for 2015 Tax Offender of the Year

Posted on December 27, 2015 by Russ

In just four days (December 31st) I’ll be announcing this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, 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

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Harvesting Capital Losses: Act Quickly on Shorts!

Posted on December 27, 2015 by Russ

One of the common techniques at year-end to reduce taxes is to harvest capital losses. Let’s say you own 100 share of some stock that hasn’t done well. If you sell it on or before December 31st, you can use the capital loss to offset capital gains (and take up to $3,000 of capital gains in excess of losses). You do have to remember not to repurchase the stock until the 31st day after the sale (including in any other brokerage account, even an IRA).

But what about a short position? You short a stock by selling the stock at first, and then you buy to cover the short. Where a normal stock sale is considered to occur on the date of sale, a short sale is considered to be consummated on the settlement date. The settlement date is typically three days after the trade date.

What this means is that if you’re going to harvest capital loss(es) with short sales you likely need to act on Monday, December 28th. (Your broker should be able to confirm how long it will take for a trade to settle.) If you wait on your short position until Tuesday the 29th, you may be too late for that sale to have occurred in 2015.

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Are Tips (Gratuities) at the Poker Table Deductible?

Posted on December 21, 2015 by Russ

You win a poker tournament, and the floorperson asks you, “Do you want to leave anything for the dealers?” That’s a tip (or gratuity). I was recently asked, “Is that tax deductible? And what about when you’re playing a cash game; is the dollar you tip the dealer deductible?”

The Tax Code states that those in business can take deductions of their business expenses. That IRC § 162:

(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….

The Tax Court has looked at this many times; for example, in Lychuk v. Commissioner (116 T.C. No. 27),

The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business…The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business…and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, [internal citations omitted]

So let’s look at tipping when you win a poker tournament. First, it’s definitely an ordinary expense. Tipping is part of the culture of gambling and poker tournaments; it’s expected that winners will tip (especially when nothing is taken from the prize pool specifically for dealers). As long as the tip is reasonable, it’s clear that a professional poker player can deduct the tip as a business expense.

However, that’s not the case for amateur gamblers. Only those who are in the business of gambling can take business deductions. Thus, an amateur gambler cannot deduct his gratuities.

A secondary question arose: Does a player’s net win for W-2G purposes subtract any gratuities left? The answer to this is clear: No. A gratuity is not required, and only professionals are allowed to deduct gratuities. Thus, a W-2G simply takes a player’s gross win (what he cashed for) and subtracts his entry fee to determine the amount noted on the W-2G.

Now, what about cash games? It’s customary when winning a hand of poker to take a dollar out of the pot and give it to the dealer (as a tip). The same rules apply for cash games as tournaments. For professionals, gratuities are deductible; for amateurs, they are not. Technically, an amateur player needs to add back any gratuities given for his net win or loss. However, from a practical standpoint the custom (and it is just that, a custom) of tipping out of the pot makes it effectively already included in a player’s net win or loss for the session. Few (if any) players will calculate the amount of tips in a session and adjust their session results accordingly. From a practical standpoint, tips in cash games are already included in a player’s sessions results. This also means that you can’t separately deduct gratuities in cash games because you’ve already included them in your sessions results.

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Tax Season to Open on January 19th

Posted on December 21, 2015 by Russ

The IRS announced today that the 2016 Tax Season (for filing 2015 tax returns) will begin on Tuesday, January 19th. The tax deadline will be Monday, April 18th (for federal individual returns) except for taxpayers in Maine and Massachusetts–they get an extra day until Tuesday, April 19th (because of Patriots Day).

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Once Again, the IRS Doesn’t Start by Calling You

Posted on December 20, 2015 by Russ

My mother received a phone call on Saturday morning at 6 am from “Agent Smith” of the IRS demanding immediate payment of her taxes or she would find herself “thrown in jail.” Yes, the scamsters are still out there.

Now imagine you’re a senior citizen, and you get a phone call waking you up telling you to pay the IRS or you’ll find yourself in prison. It doesn’t take a genius to know that these scamsters can intimidate their victims.

Luckily, my mother is well trained. She’s already reported the scamster who called her. She knew it was phony because:

  1. The IRS never initiates collection activities with a phone call.
  2. The IRS will never call you in proscribed times without your permission. (It’s illegal to make collection calls at 6am on a Saturday morning.)
  3. The IRS will never demand payment without giving you appeal rights. And,
  4. “The IRS is a government agency. They wouldn’t have people working on a Saturday morning!”

I could add to that I’ve trained her pretty well on this. In any case, I hope that the lead passed on to TIGTA will result in one less scammer out there. And if you’re reading this Mr. Smith, don’t mess with my mother!

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The Great, the Good, and the Bad of the Extender Legislation

Posted on December 20, 2015 by Russ

Normally I would write about the good, the bad, and the ugly of the extender legislation. It’s different this year, because the legislation passed by Congress and signed into law doesn’t have much that’s ugly. Instead, there’s some great news, some good news, and a bit of bad news.

Let’s start with what I think are the two best things about the extender legislation. First, many provisions were made permanent:

  • Section 179 deduction of $500,000;
  • Taxpayers age 70 1/2 (or older) can make $100,000 annual charitable contributions from their IRAs that will not be included in their income;
  • The sales tax deduction (as an alternative to deducting state and local income taxes);
  • The educator expense deduction (and it’s also indexed for inflation); and
  • We have a sense of permanency on many of the extenders.  There are more items made permanent (some of which are detailed below), but the fact that these are made permanent makes it far easier to plan for taxes.

Second, a few states have barred Enrolled Agents (what I am) from calling themselves Enrolled Agents. While this provision has not impacted me directly, EAs in Ohio and North Carolina could not in the past call themselves EAs. This was due to lobbying from state CPA associations in those states. Section 410 of the PATH legislation (which is where the Extenders are) contains the following provision:

Section 410. Clarification of enrolled agent credentials. The provision permits enrolled agents approved by the IRS to use the designation “enrolled agent,” “EA,” or “E.A.” The provision is effective on the date of enactment.

So my colleagues in Ohio and North Carolina (and perhaps elsewhere) can now call themselves what they are.

There are a few more provisions that I would put in the “Good” section. The Child Tax Credit, the American Opportunity Tax Credit (an education/college credit), and the Enhanced Earned Income Credit were made permanent. The research credit and the five-year recognition period for the Built In Gains Tax (C Corporations converting to S Corporations) were also made permanent. (There are other items made permanent; I’m just noting the highlights.)

Some items were extended solely for five years. These include 50% bonus depreciation (which is being phased-out over five years), the new markets tax credit, the work opportunity tax credit, and a controlled foreign corporation provision.

Many other items were extended for just two years. Note that nothing was extended for simply one year, so we know today what 2016 taxes are going to be. This is likely the first time in ten years (or longer) that we’ve had a very good idea of what the Tax Code for a year would be on January 1st of that year. The two-year items include the ability to deduct mortgage insurance (as an itemized deduction), the “above-the-line” deduction for qualified tuition expenses, tax credits for renewable energy sources, and the exclusion for qualified mortgage debt forgiveness.

There are some bad items, and these include a couple of the points I’ve mentioned. I strongly dislike welfare being done through the Tax Code. It causes the Tax Code to be complex, and puts the IRS in a mission it shouldn’t be in. Second, I dislike refundable tax credits; they lead to fraud and are difficult for the IRS to manage.

Overall, the fact that this has passed means that Tax Season should be able to open around January 19th. And that’s perhaps the best news of all.

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2016 Standard Mileage Rates Released

Posted on December 17, 2015 by Russ

The IRS today announced the standard mileage rates for 2016:

  • $0.54/mile for business miles driven (down from $0.575/mile in 2015);
  • $0.19/mile for medical or moving purposes (down from $0.23/mile in 2015); and
  • $0.14/mile in service of a charitable organization (unchanged; set by statute).

You can either use this standard mileage rate or use actual expenses. Either way, it’s important to keep a mileage log!

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That’s A Lot of Roast Beef Sandwiches

Posted on December 15, 2015 by Russ

Nick’s Famous Roast Beef is in Beverly, Massachusetts. You can get a roast beef sandwich for $4.50 to $6.95, definitely a reasonable price. The Department of Justice is alleging that one reason the prices are low is that the owners skimmed $6 million from the business to lower their taxes. The owners of the business and the son of one of the owners have been charged with tax evasion.

Nick’s only takes cash, and the owners are alleged to have done a variation of the two sets of books idea: two sets of cash register tapes.

The indictment alleges that Eleni Koudanis had primary responsibility for the book-keeping functions of the business, and also recruited employees, including her son Steven Koudanis, to create false cash register receipts to use in connection with an IRS tax audit of Nick’s Famous Roast Beef. The true cash register receipts were allegedly destroyed and not provided to the tax preparer who prepared the business and personal tax returns.

Nicholas Koduanis, Nicholas Markos, and Eleni Koudanis were each charged with one count of conspiracy to defraud the US by obstructing the IRS and ten counts of aiding and assisting in the filing of false tax returns. If convicted, they are looking at spending some time at ClubFed.

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