IRSAC Report Has Hits and Errors

Posted on November 18, 2015 by Russ

The Internal Revenue Service Advisory Council (IRSAC) issued its annual report today. I agree with some of the recommendations but strongly disagree with others.

IRSAC laments IRS funding. While I agree it would be nice to have the IRS fully funded, the problem was caused by the IRS (and especially Chairman Koskinen) and the IRS scandal. Until the IRS comes clean, Republicans in Congress rightly will not allow full funding. The IRS scandal is not noted in the report, but that’s the cause of the problem. Is IRSAC right? Yes, but their complaints will fall on deaf ears.

IRSAC commits an error when they advocate the IRS be granted statutory authority to regulate tax professionals (return preparers). IRSAC is absolutely correct that congressional action is needed for the IRS to have the authority to regulate tax professionals. IRSAC is, however, silent on the current tools available against unscrupulous preparers. The law of supply and demand applies to tax preparation (just like anything else); if tax preparation is regulated, the supply will decrease and prices will increase. It won’t hurt me (I’m already a licensed professional) but it will hurt numerous “mom and pop” preparers and their clients. It will disproportionately help the large tax chains.

IRSAC hits it out of the park on some of their recommendations. I agree with their comments on IRS online applications (which are generally excellent), authentication of 1040 forms, and improving penalty administration.

Even where I disagree with IRSAC I want to commend them for the report. It’s a thorough analysis of a host of issues (some of which are out of my purview), and their recommendations–even those I disagree with–should be analyzed.

Posted in IRS | Tagged | 1 Comment

Yes, Two States Rank Lower than California

Posted on November 17, 2015 by Russ

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

Here are the bottom ten states:

41. Maryland
42. Ohio
43. Wisconsin
44. Connecticut
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

Posted in California, Nevada, New Jersey, New York | 1 Comment

Wrong Font Size Costs 30 Employees Their Jobs in Chico, California

Posted on November 17, 2015 by Russ

I had never heard of Woof & Poof. The company makes handcrafted baby products, but apparently not for long in their home of Chico, California. According to this news story, the company is stopping production.

Why? The CEO, Roger Hart, said, “The high cost of doing business in California coupled with ridiculous regulatory environment makes it virtually impossible to do business.” The news story contains the following:

A recent visit by an inspector with the Department of Consumer Affairs set the company back. The inspector from Sacramento cited him for having the wrong size font on the decorative pillow labels. He was told to take the labels out, or they would have his inventory seized.

My next story (above) notes California’s low standing on the 2016 State Business Tax Climate Index. California’s standing in the regulatory realm is even lower.

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Don’t Go to Lawrence Siegel to Have Your Taxes Done

Posted on November 15, 2015 by Russ

There are good tax preparers, bad tax preparers, and then there’s Lawrence Seigel. Mr. Siegel, who resigned from the California bar in 1994 and lost his CPA license in 1997 after being convicted of tax evasion (among other crimes) also faces a 20-count criminal complaint “…charging him with Medi-Cal fraud, grand theft, forgery, identity theft, financial dependent adult abuse and tax evasion.” The US Department of Justice filed a civil action against him, and he was a no-show for the court date last Monday.

As for what Mr. Siegel is alleged to have done, he supposedly has impersonated California attorneys, used multiple aliases, and proposed tax fraud schemes. From the DOJ press release:

Siegel falsely advised his customers, typically high earners who own profitable businesses, that they can establish companies in another state, usually Nevada, then treat their California home as an out-of-state corporate office. Siegel claimed that doing so would transform a vast array of non-deductible personal expenses into tax deductible business expenses, according to the complaint. The complaint details how Siegel boasted about this tax fraud scheme in e-mails, including one where Siegel falsely claimed that his customers are entitled to free housing as tax-free compensation from their out-of-state companies and that “[t]he housing can [b]e luxurious and cost thousands a month” because “[t]here is an assumption that corporations don’t waste money.”

Well, housing can be expensive in California. That said, personal expenses aren’t deductible.

For example, the complaint states that Siegel deducted on one couple’s tax returns purchases at Tiffany & Company, Royal Caribbean Cruise Lines, Louis Vuitton and Princess Cruise Lines. Siegel allegedly attempted to conceal these fraudulent deductions from the Internal Revenue Service (IRS) by lumping them together and reporting them as large expenses for “supplies” or “medical records and supplies.”

It’s great if you can get away with it. Mr. Siegel appears to be lucky to have escaped a federal indictment, given that he is also accused of providing false documents to the IRS and lying to IRS officials. In any case, Mr. Siegel, if found, faces trial in California on that criminal complaint.

As a reminder, if it sounds too good to be true it probably is. No, you can’t deduct personal expenses if you run them through a corporation. And while I wish I could take a deduction for the cruise to New Zealand and Australia that I took last year, I also know the law–and you just can’t do that.

Posted in Tax Fraud | 1 Comment

Colorado Voters to Get the Chance to Add 10% Payroll Tax for Single-Payer Health Insurance

Posted on November 15, 2015 by Russ

Colorado voters will get the chance to add a 10% payroll tax next year to fund universal health insurance. The 10% payroll tax–which is on top of all other federal and state taxes–would be on employees pay. Self-employed individuals would owe 10% of their net income (presumably their Schedule C income).

Of course, one has to wonder if Colorado voters will approve a plan to tax themselves in this manner. Proponents say that, “ColoradoCare would slash administrative costs of private insurance and negotiate bulk rates for pharmaceuticals.” Really? The government will be more efficient than private industry? Let’s just say I have my doubts.

In any case, I suspect that voters will look at a 10% tax increase and say, “You must be kidding.” This will certainly drive anti-tax voters to the polls next year.

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The Real Winners of the World Series of Poker (2015 Edition)

Posted on November 10, 2015 by Russ

Nine individuals came to Las Vegas over the last three days to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?

Last year the winner was London, so to speak. Most of the participants hailed from the United Kingdom (well, resided there) to save on taxes. The United Kingdom does not tax gambling winnings and the US-UK Tax Treaty exempts gambling winnings from taxation. This year, only one of the participants escaped paying tax on his winnings; he is not from the UK.

It’s back to normal this year. As you will soon see, the big winner, almost doubling the amount of the after-tax winnings of the “winner,” was the Internal Revenue Service. The IRS collected $8,467,091 out of the $24,806,976 awarded at the final table (34.13%).

One other note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.

Congratulations to Joe McKeehen of North Wales, Pennsylvania. The professional poker player dominated play at the final table. He came in with the chip lead and never relinquished it and never looked challenged. For finishing first out of 6,420 entrants (each of whom paid the $10,000 entry fee) he won $7,683,346. As a professional poker player, he’ll owe self-employment tax along with his federal income tax ($3,073,240), Pennsylvania state income tax ($235,879), and the local township (North Wales Boro) Earned Income Tax ($76,833), a total of $3,385,952 (44.07%). He’ll get to keep an estimated $4,297,394 of his winnings.

Finishing second was Joshua Beckley of Marlton, New Jersey. Mr. Beckley won $4,470,896 for his second place finish. His percentage tax burden is higher than the winners at 46.56%; that’s because New Jersey is decidedly not a low-tax state. Still, he’ll end up paying $2,081,719 in tax.

Neil Blumenfield of San Francisco finished in third place. In most years the 61-year old former technology executive would have been the oldest player at the final table. However, he was eclipsed this year by a 72-year old! Still, it makes me feel pretty good about my future poker prospects. Mr. Blumenfield was one of two amateurs at the table, so he’s not impacted by self-employment tax. However, he resides in California, so his tax burden is the largest of any of the Americans at 46.86%. I estimate he will keep just $1,805,764 of the $3,398,298 he won (losing $1,592,534 in tax).

In fourth place was Max Steinberg of Las Vegas. Mr. Steinberg, the only one of the nine individuals who had previously won a WSOP bracelet (for winning an event at the WSOP), is a professional Daily Fantasy Sports and poker player. He may be looking to relocate after Nevada effectively ended DFS within the Silver State. Of the individuals who owe income tax, Mr. Steinberg faces the lowest tax rate (40.99%). That’s because while he will owe federal income tax and self-employment tax (totaling $1,072,055 of the $2,615,361 he won), Nevada does not have a state income tax.

Ofer Zvi Stern of Herzliya, Israel, finished in fifth place. Mr. Stern works in the technology industry in Israel and is an amateur gambler. The US-Israel Tax Treaty does not cover gambling, so Mr. Stern loses 30% of his winnings $573,427 of $1,911,423) to the IRS. Gambling income is taxed in Israel. While Mr. Stern should get a tax credit for the tax he paid to the IRS, he’ll still owe an additional $326,679 to the Israel Tax Authority–a total tax bite of 47.09%.

Thomas Cannuli of Cape May, New Jersey, finished in sixth place. Mr. Cannuli is a professional gambler, so he owes income tax to the IRS and New Jersey and self-employment tax. While he won $1,426,283 for finishing sixth, after taxes of $640,287 (44.89%) he’ll only get to keep $785,996.

Pierre Neuville, a retired businessman from Knokke-Heist, Belgium, finished seventh. Mr. Neuville was the oldest November Nine participant (he’s 72) ever. While he finished in seventh place by pre-tax winnings, Mr. Neuville finished in fifth place by after-tax winnings. The US-Belgium Tax Treaty exempts gambling winnings from US taxation, so Mr. Neuville owes nothing to the IRS. Belgium doesn’t tax gambling winnings of amateur gamblers, so he owes nothing to Belgium. That will likely soften the blow of being the third person eliminated at the final table.

The eighth place finisher was Federico Butteroni of Rome, Italy. Mr. Butteroni only played two hands at the final table, and his second hand ended his tournament. While he won $1,097,056, he’ll only get to keep $571,566 (a tax bite of 47.90%). The US-Italy Tax Treaty exempts gambling winnings from US taxation, so none of his winnings were withheld for the IRS. However, Italy does tax gambling winnings from non-European Union countries. (There is current litigation regarding taxes owed for winnings within the E.U., but it appears that, for the present, such winnings are not subject to taxation.) The tax appears to be a flat 47.90%. Mr. Butteroni faces the highest tax bite by percentage of any of the final table participants.

Patrick Chan of Brooklyn, New York was knocked out on the second hand of the final table. Unfortunately for Mr. Chan, he did not add anything to the $1,001,020 he took home in July. He only gets to keep an estimated $545,614 of his winnings (45.49%) because he owes federal income tax, self-employment tax (he is a professional poker player), state income tax, and New York City income tax.

Here’s a table summarizing the tax bite:

Amount won at Final Table $24,806,976
Tax to IRS $8,467,091
Tax to Agenzia delle Entrate (Italy) $525,490
Tax to New Jersey Division of Taxation $493,422
Tax to Franchise Tax Board (California) $425,550
Tax To Israel Tax Authority $326,679
Tax to Pennsylvania Department of Revenue $235,879
Tax to New York Dept of Taxation & Finance $102,605
Tax to North Wales Boro $76,833
Total Tax $10,080,122

That’s a total tax bite of 42.95%.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. Joe McKeehen $7,683,346 $4,297,394
2. Joshua Beckley $4,470,896 $2,389,177
3. Neil Blumenfield $3,398,298 $1,805,764
4. Max Steinberg $2,615,361 $1,543,306
7. Pierre Neuville $1,203,293 $1,203,293
5. Ofer Zvi Stern $1,911,423 $1,011,317
6. Thomas Cannuli $1,426,283 $785,996
8. Federico Butteroni $1,097,056 $571,566
9. Patrick Chan $1,001,020 $545,614
Totals $24,806,976 $14,153,427

While Pierre Neuville finished in seventh place, he ended up in fifth place based on his after-tax income. Unlike all of the other winners, Mr. Neuville gets to keep all of his winnings. It’s always nice when your after-tax income equals your before-tax income.

Last year, the IRS didn’t finish in first place. This year, the IRS was back in its normal spot: first place. The $8,467,091 it will receive exceeds the first place prize of $7,683,346 by 10%. As I noted before, it’s just less than double the after-tax winnings of the actual winner. That’s because we all know that the house (the IRS) always wins.

Posted in Gambling | 8 Comments

DFS Gets the Boot in New York

Posted on November 10, 2015 by Russ

New York State’s Attorney General, Eric Schneiderman, sent a letter to DraftKings and Fan Duel ordering them to cease offering their Daily Fantasy Sports (DFS) wagers games to New Yorkers. According to both ABC and ESPN, Attorney General Schneiderman sent a letter to both companies calling contest entries “wagers.”

“Our review concludes that DraftKings’/FanDuel’s operations constitute illegal gambling under New York law,” Schneiderman wrote in the letter, obtained by ESPN’s David Purdum and Darren Rovell, and ABC News.

The two sites are apparently going to fight this action.

“Fantasy sports is a game of skill and legal under New York State law,” FanDuel said in a statement. “This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country. The game has been played — legally — in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal.”

DraftKings said they will look at legal options. (UPDATE: After I first posted this, there is a report that DraftKings will fight this.)

Let me state something that should be obvious to anyone who partakes in DFS: It’s gambling. Sure, it’s skillful gambling, but as I wrote in February 2014 it meets the criteria of what gambling is. And it is quite likely that FanDuel will be proven wrong under New York law.

The problem is that New York and many other states look at whether there’s an element of chance. Sure, skill predominates but there’s no way to honestly state there’s not an element of chance in DFS.

New York is definitely not going to be the last state where DFS gets the boot. I suspect Florida (where an Attorney General opinion makes legal DFS dubious at best) and Texas (where the politicians think gambling is a huge sin) are additional states in deep trouble.

What should DFS players do if they want to continue enjoying DFS? You should call your state representatives now. State legislators do listen to the public. And state legislators can absolutely influence what other elected politicians (e.g. state Attorney Generals) do.

Additionally, DFS players should consider keeping only the amount of money they need on the sites. The New York Attorney General statement used the words “criminal activity” to describe DFS. While I am hopeful that the DFS sites use segregated trust accounts, neither DraftKings nor FanDuel has confirmed that they do. It’s better safe than sorry, and that’s a good course of action today. (UPDATE: With the news that DraftKings will (apparently) fight this action, I now strongly advise that individuals keep just the minimum amount necessary on each site. I suspect that criminal charges are in the near future, and seizure of bank accounts is now a real possibility. The New York Attorney General will look at DraftKings’ continuing to operate in New York State as a slap in the face.)

DFS is in deep trouble, and the most likely outcome is a regime very similar to the current state of online poker in the United States–four to six states where DFS is legal. This doesn’t have to be how it winds up, but the arrogance of how the companies have been perceived to act (and are continuing to act) along with how gambling is traditionally regulated in the US makes that the most probable result.

UPDATE #2: Here is a link to a New York Times article that includes the letters to FanDuel and DraftKings. (Link to FanDuel letter; link to DraftKings letter. Note that the letters have basically identical content.) These letters warn that if the two sites do not cease operations, they will be subject to prosecution under various New York statutes. If these sites continue to operate in the face of the New York Attorney General notice, things are likely to get very ugly very fast.

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About 9,000 Businesses Left California During Good Economic Times

Posted on November 10, 2015 by Russ

Yesterday a friend sent me a link to Joseph Vranich’s report on businesses leaving California. I should know: I’m one of the 9,000 businesses that did so.

Mr. Vranich analyzed business relocations from 2008-2014. He identified 1,510 “disinvestment events”–companies leaving the Bronze Golden State for brighter horizons. Mr. Vranich notes that for every one company that publicly leaves, at least five others have left. Mr. Vranich also excluded all but primary employers,

…[W]hose customers are nationwide or worldwide (such employers bring wealth into a community.) All “secondary employers” (which exchange wealth already in a community) such as retail stores, restaurants, dry cleaners, beauty salons, nurseries – an inexhaustible list of enterprises – are excluded.

While some of these business closings and relocations are local businesses that just service locally, today with the Internet a business in Nevada and elsewhere can service clients anywhere in the world. Yes, you can only go to a restaurant locally or get your hair done where you are, but many other service businesses are no longer geographically constrained. This, too, likely causes an understatement of the impact of business relocations.

And things aren’t likely to get better for California:

Finally, California is considering imposing a broad set of new taxes, tax extensions and fees on businesses in 2016 and 2017 – a “tsunami” that may trigger the worst demands on private-sector finances ever organized by the state’s politicians. It is highly likely that one result will be an increasing number of disinvestments in California in favor of greener domestic or international pastures.

A factor that Mr. Vranich didn’t consider is what will happen during the next economic downturn? California today relies largely on capital gains taxes from very wealthy individuals (and individuals receiving stock options) for state revenues. The next time there’s an economic downturn, that source of income will decline, almost certainly very substantially. Given the mindset in Sacramento, that’s likely to result in even higher taxes and regulations rather than starting to actually make California a place that businesses want to locate in.

Posted in California | 1 Comment

Cleveland Loses on Monday (and They Didn’t Even Play)

Posted on November 9, 2015 by Russ

Pity the poor Cleveland Browns. Last Thursday they lost to the Cincinnati Bengals 31-10. This morning, the City of Cleveland lost at the US Supreme Court, 2-0. The Supreme Court refused, without comment, to hear Cleveland’s appeal of their “Jock Tax” after its taxation scheme was ruled unconstitutional by the Ohio Supreme Court.

Former NFL players Jeff Saturday and Hunter Hillenmeyer had filed separate challenges to the City of Cleveland’s “Jock Tax.” As I previously noted,

Mr. Saturday’s case was the more egregious of the two. During 2008 “More than 72,000 other souls attended the Colts’ dismal 10-6 victory over the Browns.” Mr. Saturday didn’t step foot in Cleveland; he was injured and attended physical rehabilitation in Indianapolis. Mr. Saturday contended that Cleveland has no authority to impose its tax on the income of a nonresident who did not work within Cleveland’s city limits during the taxable year.

Yes, Cleveland’s regulation held that a player who was on the roster but didn’t set foot in Cleveland owed the tax. The Ohio Supreme Court used common sense (and constitutional law) to sack Cleveland.

Hunter Hillenmeyer, the former linebacker with the Chicago Bears, actually set foot in Cleveland. He challenged how Cleveland calculated the tax. Every other jurisdiction uses a duty days method, but Cleveland used a games played method. Cleveland was penalized for that:

Hillenmeyer’s statements were corroborated by the affidavit testimony of Cliff Stein, senior director of football administration and general counsel for the Chicago Bears. Stein confirmed that under the NFL standard player contract and from the time that Hillenmeyer joined the Bears in 2003, he was required to “provide services to his employer from the beginning of the preseason through the end of the post-season, including mandatory mini-camps, official preseason [sic] training camp, meetings, practice sessions, and all preseason, regular season, and post-season games.” Stein also stated that “[t]he compensation Hillenmeyer receives from the Bears is paid for all of these services and not only for games played” and that “[f]ailure to comply with these contractual requirements would subject Hillenmeyer to termination pursuant to Paragraph 12 of his NFL Player Contract and/or fines under Article VIII of the Collective Bargaining Agreement.”

Many former (and current) NFL players will be filing refunds with the Central Collection Agency, the agency that administers the income tax for Cleveland. The statute of limitations is three years (from the due date), so 2012 – 2014 returns are open for refund claims. Cleveland will likely lose about $1 million in income annually because of the change and could lose another $2 million in refunds. Of course, they shouldn’t have had the unconstitutional scheme in the first place.

And yes, it is time to say “Wait ’til next year” if you’re a Browns fan.

Posted in Ohio | Tagged | 1 Comment

Chaka Fattah, Jr. Guilty of Tax and Fraud Charges

Posted on November 8, 2015 by Russ

Chaka Fattah Jr., son of Democratic Congressman Chaka Fattah Sr. (D-PA), was found guilty on Friday of 22 of 23 tax and fraud charges. As the Department of Justice press release notes,

Between 2005 and 2012, Fattah Jr.: made false statements to banks to obtain loans; made false statements to banks and the Small Business Administration (SBA) to settle loans for less than what was owed; filed false federal income tax returns; failed to pay federal taxes; and stole from the Philadelphia School District, which had received federal funds for its operations.

His father, Chaka Fattah Sr., is under indictment on separate racketeering charges filed earlier this year.

Chaka Fattah Jr. is scheduled to be sentenced in February. He’s looking at a “substantial term” at ClubFed.

Posted in Tax Fraud | 1 Comment