IRS Errs on Identity Theft PIN Letters

Posted on January 5, 2016 by Russ

One would think that the IRS proofed important letters and notices before they’re finalized. That didn’t happen with IRS Notice CP 01A, the notice used when sending out an Identity Theft PIN (personal identification number).

The IRS announcement is reproduced in full below:

Due to an error, taxpayers are receiving Identity Protection PIN letters with an incorrect year listed. Taxpayers and tax professionals should be advised the IP PIN listed on the CP 01A Notice dated Jan. 4, 2016, is valid for use on all individual tax returns filed in 2016.

The notice incorrectly indicates the IP PIN issued is to be used for filing the 2014 tax return when the number is actually to be used for the 2015 tax return. The IRS emphasizes the IP PIN listed on the CP 01A notice is valid for the 2015 returns. Taxpayers and their tax professionals should use this PIN number for 2015 tax returns, which the IRS will begin accepting from taxpayers starting Jan. 19, 2016.

The IRS apologizes for the confusion and any inconvenience.

For more information, see the questions and answers below.

Q. When were the CP01A notices mailed?

A. The notices are all dated Jan. 4, 2016, but were mailed in late December. Taxpayers are receiving these now through mid-January.

Q. What does an IP PIN do?

A. An IP PIN helps the IRS verify a taxpayer’s identity and accept their electronic or paper tax return. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN.

If a return is e-filed with your SSN and an incorrect or missing IP PIN, our system will reject it until you submit it with the correct IP PIN or you file on paper. If the same conditions occur on a paper-filed return, we will delay its processing and any refund you may be due for your protection while we determine if it’s yours.

Q. Does this issue affect anything else involving the IP PIN process?

A. No

The IRS will not be sending out replacement letters. Somehow, this all seems apropos when dealing with the IRS.

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My Day on Jury Duty

Posted on January 4, 2016 by Russ

Around Thanksgiving I received a summons for jury duty here in Las Vegas. I was asked to report on a day I had an Appeal scheduled (which had taken lots of negotiating to find a date that worked for everyone), so I had my summons date changed to January 4th. I thought you mind find my day interesting…for those who will be serving.

Back in 1989 I served on jury duty in Van Nuys, California. My then employer paid for wages for up to two weeks of jury duty. The one thing I remember most about the service was “Hurry up and wait.” A 15 minute break routinely lasted 20 – 25 minutes. It was, at times, excruciatingly slow.

Fast forward 27 years and change states. I was summoned for jury duty here in Las Vegas, with a report time of high noon. The first hour included thanking us for coming, instructions on parking, and instructions on what we could and could not do. After watching a video on the court process and a 15 minute break (yes, it ran 20 minutes), 60 of us were called for a criminal panel. (Either 14 or 16 jurors were needed–it’s a little unclear if there would be two or four alternates.)

The judge and the attorneys described the case and witnesses, and asked all of us (in turn) whether any of us had some reason why we couldn’t serve on the trial that would last an estimated four days, and whether we knew any of the witnesses. After questioning all of us generally, we were sent on a 15 minute break…that ran 25 minutes.

We then reentered the court, and the first 24 individuals received more extensive questioning on their backgrounds and whether or not they could fairly try the case. This took ninety minutes, and after that the attorneys began exercising their preemptory challenges on jurors. The preemptory challenges were done so that you didn’t know who was removed; rather, the judge played static (yes, static) on the court speakers so everyone in the court couldn’t hear a thing. The attorneys then went up for a discussion with the judge, then exited the court to talk. After another 15 25 minutes, the judge excused the first 24 prospective panelists with an order to return tomorrow. The other 30 or so individuals left (myself included) were then excused from jury duty. (Nevada has a rule: One day or one trial–if you serve for your one day be it sitting in the jury services room or are called for a case and are not needed, your jury service is done.) So I cannot be called back for jury duty for 18 months.

Some thoughts for prospective jurors:

1. Bring a book, your laptop/tablet, and lots of patience. The legal process reminds me of the IRS Practitioner Priority Service—slow.

2. I had nice conversations with fellow jurors while we were waiting (and waiting). Our panel was really a cross-section of Las Vegas: There were at least two surgeons, a legal counsel for one of the major hotel chains, several dealers (most of whom happen to work for the same hotel), a couple housewives, and several students. We were really diverse (in how we looked, too) and it’s clear to me that the defendant would be tried by a jury of his peers.

3. For a case where you summons a panel at 1:45pm (the time we headed up to the courtroom), realize that it will be impossible to complete voir dire on all 60 people in the three hours you have. Perhaps just taking 30 people and if more are needed, you get those individuals tomorrow? I suspect, though, the procedure in Nevada is to always take a panel of 60 no matter what.

4. I do appreciate the judge, the marshal, and the jury services personnel. All were friendly, and they did answer the questions we had.

So it’s back to the real world tomorrow.

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It’s Only Wrong by Three Days

Posted on January 3, 2016 by Russ

Friday’s Las Vegas Review-Journal included a free calendar (with a retail price of $2). Remember the cliche, “You get what you pay for”? Well, that was definitely the case with this free calendar.

Highlighted on Friday, April 15 is “Tax Day.” There’s only one problem with that—Tax Day is Monday, April 18th this year, not Friday, April 15th. Oops.

As the IRS noted,

The filing deadline to submit 2015 tax returns is Monday, April 18, 2016, rather than the traditional April 15 date. Washington, D.C., will celebrate Emancipation Day on that Friday, which pushes the deadline to the following Monday for most of the nation. (Due to Patriots Day, the deadline will be Tuesday, April 19, in Maine and Massachusetts.)

Well, one would hope that the Review-Journal would check with their accounting department or just do a basic search or maybe ask a local tax professional before printing their calendar…and one would be wrong.

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Yes, Start Your 2016 Mileage Log Now!

Posted on January 3, 2016 by Russ

I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:

Monday is the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 40,315). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.

Here’s the other things you should do:

On the cover of your log, write “2016 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/5 40315-40350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.54/mile, the 35 miles in this hypothetical trip would be worth a deduction of $19. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

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FTB Wins Gillette Appeal

Posted on January 1, 2016 by Russ

California’s Franchise Tax Board won the appeal of Gillette v. Franchise Tax Board. This opinion covers taxation of multi-state entities in California prior to 2012.

Gillette (and several other companies) argued that the FTB’s weighing of the “sales” factor higher than other factors was discriminatory based on a multi-state compact. (California specifically withdrew from the compact for years after 2011.) The California Supreme Court decided that the FTB’s interpretation of the California legislature is accurate.

Gillette and the other appellants can file a writ of certiorari to the US Supreme Court; however, this does not appear to be the kind of case that the US Supreme Court would take.

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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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