The BEA Responds, or Making IRS Customer Service Look Normal (Bad)

Posted on June 2, 2015 by Russ

On Sunday I penned the post, “Making IRS Customer Service Look Good.” I now need to take that back. Why? I was greeted at 7am this morning by a phone call from an analyst from the Bureau of Economic Affairs.

He apologized for the issues that I had last week and confirmed:

1. The survey is required for all owners of 10% (or more) of foreign entities and US-owned foreign entities. This report is done every five years and is mandatory.

2. The BEA was stunned with the volume on inquiries last week on this survey. (I don’t think the BEA should have been surprised, but that’s another thing.) There phone system literally couldn’t handle the volume so in the best traditions of technology, it hung up on a lot of people. The extension, which normally must be sent in (similar to an extension for federal tax filing, Form 4868, where it’s automatic as long as you send in the paper/electronically file it) was made automatic because the BEA realized that they couldn’t handle the volume of extension requests.

3. Thus, most filers of the BEA-10 (“Survey of US Direct Investment Abroad”) have until June 30th to file.

Kudos to the BEA in reaching out and answering my questions. I do give the BEA a demerit for not appropriately publicizing this requirement. I would imagine there are numerous owners of foreign entities that are required to file the BEA-10 who still have no idea of the requirement. That said, I’m not sure how the BEA should publicize this; perhaps a notice sent to the American Bar Association?

Contrast the BEA being proactive with my call to the IRS Practitioner Priority Service yesterday. One of my clients closed his corporation in 2013 (filing a final return, closing it with the Corporation Commission in his state, etc.) and has moved so we needed to change the address with the IRS. (Yes, it’s a good idea to change the address for contact purposes as the IRS could audit the corporation’s returns.) I have a Power of Attorney for this corporation through the 2013 tax year, and the woman I spoke with questioned my ability to give a change-of-address for 2015 stating I would need a POA covering 2015. I noted to the IRS representative that there is no 2015 (or 2014) for this corporation; it would be the same thing as obtaining a POA for a deceased individual for the year after he died–impossible. In the end, I gave the representative the new address even after she told me she couldn’t confirm the IRS would do anything with it because I don’t have a POA covering 2015. Sigh….

Posted in BEA, IRS | 1 Comment

I’m Shocked, Shocked! That a Chicago Attorney may have Committed Tax Evasion Related to Corruption

Posted on May 31, 2015 by Russ

There’s one thing about Illinois politics: Both Democrats and Republicans tend toward corruption. After all, which of the past few governors haven’t gone to prison?

The DOJ news release on the indictment of Daniel Soso makes for interesting reading. Sure, he’s accused of not paying approximately $779,615.86 in income tax (I’m not sure how approximate that is when there are pennies in the press release, but whatever). But it’s the preceding paragraph that makes for intrigue:

The indictment alleges that in 1996, the Illinois Attorney General entered into a written contract with several law firms who represented the State of Illinois in its lawsuit against certain tobacco companies to recover, among other things, money damages incurred by the State of Illinois as a result of the sale of tobacco products to residents of the State of Illinois. In addition, the contract provided that the law firms representing the State of Illinois, including Law Firm B, would share a “contingent fee” equal to ten percent of the total monetary recovery realized by the State of Illinois in its planned lawsuit. The indictment further alleges that Soso, Individual A (an individual formerly licensed to practice in Illinois) and Individual B (a partner of Law Firm B) entered into agreements to pay Soso and Individual A a portion of the attorney fees awarded in the tobacco lawsuit and concealed these agreements from the State of Illinois, the Illinois Attorney General and others.

The Chicago Sun-Times let’s us know who they think Individual A is.

[Edward] Vrdolyak isn’t identified by name in the Soso indictment and hasn’t been charged with any wrongdoing in the case. But the indictment cites an unnamed “Individual A.” Vrdolyak is Individual A, two sources with knowledge of the case told the Chicago Sun-Times.

Mr. Vrdolyak is a former Chicago Alderman who was convicted back in 2008 in a kickback scheme and received ten months at ClubFed.

Chicago is a beautiful city–one of my favorite places in the world–but you can have both its weather and its politics.

Posted in Illinois, Tax Evasion | 1 Comment

Chipco President Gets 10 Months

Posted on May 31, 2015 by Russ

Back in March I reported on the president of Chipco, John Kendall. Chipco closed a couple of years ago, and most of us in the poker world thought it had to do with the end of the poker boom. That was probably a contributing factor. Another factor was that Mr. Kendall withheld payroll taxes, but didn’t forward them on to the state of Maine. And he got caught.

Mr. Kendall was sentenced on Friday to 3 1/2 years in prison, with all but ten months suspended. Mr. Kendall will remain free on bail while he appeals his conviction.

Posted in Tax Evasion | Comments Off on Chipco President Gets 10 Months

Making IRS Customer Service Look Good

Posted on May 31, 2015 by Russ

It’s hard to make the IRS’s customer service look good. If you get through–and it’s very difficult to reach the IRS, and you will usually be on hold for more than an hour before you do–there’s a good chance the information you receive will be wrong. Yet I have found another government agency that makes the IRS look superb.

Welcome to the Bureau of Economic Analysis. I’m trying to file an extension (which might be automatic, but the information on the website is inconclusive on that) for a client. Here’s the wonder of it all:

1. The website only worked without the “www.” That’s been fixed.
2. I attempted to efile the extension. That requires registration, and then approval by the BEA. But first-time filers can’t efile, so that didn’t work. Luckily, that extension (which I tried to file) doesn’t have to be filed: The BEA website now shows that the extension has been granted to June 30th for all new filers. (But I didn’t know that until late this weekend.)
3. Well, then I tried to fax the extension to the BEA. The BEA’s fax number rings busy…constantly.
4. I called the BEA, and got voice mail. A return phone call would be coming within 24 hours. No, it didn’t.
5. I’m now not even certain that the filing requirement exists for every business with foreign ownership. I’ve been told by someone else that he thinks only those contacted by the BEA have to file. Your guess is as good as mine on this.

In any case, I have lots of fax confirmation sheets showing I tried to fax the extension. And I have an understanding client who is as amused as I am with the BEA.

Posted in BEA | 1 Comment

Surprise! You Heard About that May 29th Filing Deadline, Right?

Posted on May 27, 2015 by Russ

You’re looking at the headline and wondering what I’m drinking. There’s no May 29th tax deadline, right? Well, yes, that’s correct; however, there is a May 29th government filing deadline that will impact some business owners.

The Bureau of Economic Analysis surveys all US owners of foreign (non-US) entities every five years. Via Jack Townsend’s Federal Tax Crimes blog is the news that the BEA survey is due as soon as this Friday, May 29th! He links to a report from Joseph Perera and Farley P. Katz titled, “Alert: Benchmark Survey of U.S. Direct Investment Abroad (BE-10 Report) Due May 29, 2015. This begins,

All U.S. persons that owned, directly or indirectly, 10% or more of the voting stock of a foreign corporation, or an equivalent interest in an unincorporated foreign business enterprise (e.g. a partnership), at any time during the 2014 fiscal year, are required to file a BE-10 Report.

There are both civil and criminal penalties if you ignore this.

Humorously, when I tried to access the BEA web site for forms I got a “Server Not Found” error. The reason? The BEA website only works if you do not put “www.” before the bea.

Here is the correct link to the forms. Note that the links given in Jack Townsend’s article and the article by Perera and Katz may not work but if you remove the “www” (so that they begin “http://bea…”) they should work.

Even more humorous, when the BEA emailed me the verification link to confirm my efiling, they included “www” in their link. I had to remove that to get the verification link to work.

Posted in BEA | 1 Comment

IRS “Get Transcript” Application Hacked; 104,000 Tax Returns Illegally Accessed

Posted on May 26, 2015 by Russ

This afternoon IRS Commissioner John Koskinen announced that criminals were able to use the IRS “Get Transcript” application to access approximately 104,000 tax returns. (An additional 100,000 or so attempts were unsuccessful.) From the Wall Street Journal:

Thieves used the information from prior years’ returns to help them file for fraudulent refunds, the IRS said.

The IRS said the matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’s Criminal Investigation unit. In addition, the agency said its “Get Transcript” application—which the identity thieves successfully penetrated—has been shut down temporarily.

The IRS said it would provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. The IRS said it identified 200,000 attempts to access data and will notify all of these taxpayers about the incident.

The Hill has the number of returns accessed at 104,000.

That the Get Transcript application is insecure isn’t a surprise. Over one year ago I wrote:

Meanwhile, the Get a Transcript has its own problems. My partner attempted to use the service, but it could not verify either him or his wife as living where he’s lived for years. Second, the verification information relies on publicly available information for many. (It did for my partner, myself, and one other individual.) This is anything but a secure system. (I have sent a request to TIGTA noting the weakness of the system and requesting that they audit it. If TIGTA audits this, it’s unlikely we will hear anything for many months–probably not until 2015.) [emphasis in original]

Last year TIGTA responded to my request and stated that there were no issues with “Get Transcript.” I suspect they’ve changed their mind on that.

Meanwhile, I continue to have issues with IRS notices. Today I spoke with the Practitioner Priority Service (after being on hold for 1.5 hours) regarding a client where I have both a Tax Information Authorization (Form 8821) and a Power of Attorney (Form 2848), either of which should have had me copied on the notices. PPS confirmed that the POA and Tax Information Authorization were on file for the year in question. They could not explain to me why I didn’t receive any of the notices sent to my client.

One solution to the identity theft fiasco is the modest proposal on identity theft I made back in 2012. Instead, identity theft continues to balloon, while the IRS limits the tools available to tax professionals. Is it any wonder the IRS is so loved?

UPDATE: The IRS released a statement on the breach. Here are excerpts:

The IRS announced today that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address.

These third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer. The matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation unit, and the “Get Transcript” application has been shut down temporarily. The IRS will provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident…

The IRS determined late last week that unusual activity had taken place on the application, which indicates that unauthorized third parties had access to some accounts on the transcript application. Following an initial review, it appears that access was gained to more than 100,000 accounts through the Get Transcript application.

In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer.

I question that the answers to these questions are only known by the taxpayer. The questions I was asked could be discovered through a search of public records. It would be time consuming but entirely possible for a stranger who had my social security number and date of birth to answer all the other verification questions.

Posted in IRS | Tagged | 4 Comments

Staking and the WSOP: 2015 Update

Posted on May 25, 2015 by Russ

The 2015 World Series of Poker begins on Wednesday at the Rio Hotel and Casino here in Las Vegas. While many things have changed for this year (for example, the WSOP will have a “Colossus” tournament this coming Friday and Saturday with possibly 20,000 entrants), some things have not. The Rio will continue to refuse to accept IRS Form 5754 for individuals backed (or ‘staked’) by others.

This player-unfriendly policy exists at few casinos, and it places a burden on players. Back in 2007 I wrote about this situation. It has now been eight years and nothing has changed. If you’re backed, you have to send out 1099-MISC’s or 1042-S’s for your backers:

  1. If you’re backed by an American get a signed and completed Form W-9 from him before you pay him. If someone refuses to complete a Form W-9, you are required to withhold.
  2. The issuance of 1099s is based on you backer profiting $600 or more for the entire year. So realize that if you have backers who profit $600 or more, the onus is on you for sending out Form 1099-MISC’s. (The 1099s are not sent until year-end.)
  3. If you’re backed by a non-American, the situation is far more complex. You will need to obtain a Form W-8BEN; make sure it’s the new version that was released this year. The form must be complete in order for you not to withhold. It must have an ITIN, a Tax Treaty Article noted, with reasoning why there is no withholding, and it must be signed and dated. If you don’t have the complete paperwork, you must withhold even if your backer is from a Tax Treaty friendly (for gambling) country. If you don’t, you could be held liable for the tax plus penalties and interest! For specific scenarios, see this article I wrote in 2011.

Contrast the policy of the Rio to the player-friendly policies at other venues in Las Vegas that will be running other tournament series. The Venetian (which will run its Deep Stack Extravaganza), Binion’s (which has the Binion’s Poker Classic), and Caesars’ owned Planet Hollywood (with its Goliath Series) will all issue multiple W-2Gs for winners.

The policy of the Rio violates IRS rules. Unfortunately, only two sets of individuals can force the Rio to change its policy: WSOP management or the IRS. It’s clear that WSOP management is willing to accept the risk of violating the rules. They’re likely thinking, ‘We’ve done it for seven years and nothing has happened; there’s no reason to make a change that will cost us money.” I know that players have complained about it to the powers that be at the WSOP but they haven’t budged.

The IRS could also get involved. I recently spoke to two individuals at the IRS and mentioned this issue to them. Unfortunately, I have no idea if either will do anything about it (though both took notes on what I told them). Even if something were to happen it’s not likely to happen quickly: The IRS is not know for expedience in the best of times. Meanwhile, I get to issue 1099s for clients impacted by the Rio’s policies.

If you’re coming to Las Vegas for the WSOP or any of the other tournament series in town, have fun and good luck at the tables. Just remember that you will likely need to issue your own 1099s or 1042-S’s if you are backed.

Posted in Gambling | 1 Comment

The Real Impact of the Wynne Decision

Posted on May 19, 2015 by Russ

Yesterday’s decision in Comptroller of the Treasury of Maryland v Wynne Et Ux generated some reporting in print media. Yet much of what I saw was incorrect in part or in whole.

New York does give full tax credits for individuals with out-of-state income; I do not believe they will be impacted. However, many states do not give credits for local taxes. Joe Kristan highlighted Iowa today; Kentucky is another state that does not currently offer such tax credits. Under Wynne I believe they’ll be required to offer such credits. (I only know about Kentucky because I had a client impacted by this.) Joe noted that Tax Analysts saw that North Carolina and Wisconsin (along with a host of local governments) also don’t offer such credits. That’s where I think the real impact will be.

Posted in Kentucky, Maryland, New York, North Carolina, Supreme Court, Wisconsin | Tagged | 2 Comments

A Wynne for the Dormant Commerce Clause

Posted on May 18, 2015 by Russ

The US Supreme Court today decided Comptroller of Maryland v. Wynne. The Wynnes, Maryland residents, had out of state income duly reported on both their Maryland tax return and on other state tax returns. They wanted a full credit for the non-Maryland taxes paid on their Maryland tax return.

However, the Comptroller of Maryland denied the full credit. Maryland has a system where counties have add-on taxes to the state’s income tax. Maryland allowed the credit for state tax but not the county tax. The Wynnes appealed the decision. They lost at low levels but won in the Maryland Court of Appeals and the Maryland Supreme Court. The Comptroller of Maryland appealed to the US Supreme Court.

The US Supreme Court today held that the dormant commerce clause discrminates against interstate commerce and is unconstitutional:

Maryland’s income tax scheme discriminates against interstate commerce. The “internal consistency” test, which helps courts identify tax schemes that discriminate against interstate commerce, assumes that every State has the same tax structure. Maryland’s income tax scheme fails the internal consistency test because if everyState adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce. Maryland’s taxscheme is inherently discriminatory and operates as a tariff, which is fatal because tariffs are “[t]he paradigmatic example of a law discriminating against interstate commerce.” Petitioner [Comptroller of Maryland] emphasizes that by offeringresidents who earn income in interstate commerce a credit against the “state” portion of the income tax, Maryland actually receives lesstax revenue from residents who earn income from interstate commerce rather than intrastate commerce, but this argument is a red herring. The critical point is that the total tax burden on interstate commerce is higher. [citations omitted]

The easiest fix for Maryland is to offer a full credit for the county tax. The actual fix, though, is up to the Democratic legislature and the Republican governor to decide. Individuals who have been impacted by the discriminatory system may want to file protective claims for refunds if the statute of limitations for them is nearing expiration.

This case also highlights the difficulties facing a taxpayer without deep pockets. Mr. Wynne is an owner of Maxim Healthcare and likely has the funds to fight the matter. In cases like this, it’s rare to win at low levels. Most state boards of tax appeals will rule for the state as long as the matter could possibly be correct.

Posted in Maryland, Supreme Court | 2 Comments

Fake Businesses, Phony Dependents: What Could Go Wrong?

Posted on May 17, 2015 by Russ

I’ve seen reports of Bozo tax preparers inventing deductions and dependents. This is the first time I’ve heard of a tax preparer inventing a business from scratch on a tax return. The results were good…for a while.

Ramona Johnson was the manager of Tax Office One in Fort Worth, Texas; her daughter-in-law, Nekia Everson, was a tax preparer. From 2008 through 2011 the business earned in $1.9 million in fees, so it was producing a good amount of revenue. And they were probably getting good refunds for their clients. After all, they did the “normal” things for Bozo tax preparers; phony dependents and itemized deductions for personal expenses were the norm (so that taxpayers would qualify for the Earned Income Credit). But then:

On some returns, Johnson and Everson would completely fabricate a Schedule C business, including income and expense items. For some taxpayers, Johnson would create a false and fraudulent Schedule C reflecting the taxpayers had a profit from a nonexistent business. This false profit, together with claimed dependents (both fraudulent and actual), would be used to claim the taxpayer was entitled to an earned income tax credit.

Of course, while they had gross receipts of $1.9 million, somehow the gross receipts didn’t make it onto the personal tax returns. Ms. Johnson neglected to include tax preparation income on her 2009 and 2010 returns:

In addition, the government presented evidence that for calendar years 2009 and 2010, Johnson filed tax returns in which she reported total income of $2,850 and $16,906, respectively, when she well knew that the income amount was understated in that it did not include income she received for her work preparing tax returns.

Ms. Johnson and Ms. Everson will have plenty of time to think about whether preparing accurate tax returns would have been a better strategy. Ms. Johnson will be at ClubFed for 170 months (over 14 years); Ms. Everson will be there for 95 months (just under 8 years).

For taxpayers the usual rules apply: If it sounds too good to be true, it probably is.

Posted in Tax Evasion, Tax Preparation | Tagged | 1 Comment