Bozo Tax Tip #4: Procrastinate!

Posted on April 8, 2015 by Russ

Today is April 8th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 15, 2015, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 16th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

Posted in IRS | Tagged | 1 Comment

Bozo Tax Tip #5: Ignoring California

Posted on April 6, 2015 by Russ

Perhaps I should call this Bozo Tax Tip “Forming a California Trust.” Why? Let me explain.

Let’s assume John and Jane, two California residents, form a trust to benefit their children, Ann and Bob. Ann lives in Florida; Bob resides in California. The trust is an irrevocable trust, so it files its own tax return (a Form 1041). The income to the beneficiaries is reported on Schedule K-1s. Ann is surprised and calls her accountant when she receives both a federal K-1 and a California K-1.

The issue is simple: The trust is a California trust, so the income is California-source. California requires that a Schedule K-1 for Form 541 (California’s trust tax return) be included. Yes, Ann must pay California tax on the income. Ann’s CPA called me and asked me why I included the K-1 from California. My response was succinct: I have to and Ann has to pay the tax.

California’s desire to have anyone and everyone pay California tax has led to many trusts relocating to Nevada (which has no state income tax) and other trust-friendly states. California isn’t one of those states. Ann’s parents, John and Jane, could have formed the trust in Nevada but because they didn’t Ann is stuck in the Hotel California. You can check out any time but you can never leave.

Ignoring the California K-1 is a Bozo idea. Instead of just paying tax, you will get the joy of paying tax, penalties, and interest. If your parents are in California and thinking of forming a trust to benefit you, it may be worth your time to talk about Nevada to them. Otherwise, welcome to the Hotel California.

Posted in California, Florida, Nevada | 1 Comment

Bozo Tax Tip #6: Nevada Corporations

Posted on April 5, 2015 by Russ

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Posted in California, Nevada | 1 Comment

Bozo Tax Tip #7: Be Suspicious!

Posted on April 2, 2015 by Russ

As I write this (in March), I just got off the phone with one of my clients. He’s had a very good year, and has $100,000 in cash to deposit. He had been keeping the money as cash because he thought he would need it for the high-stakes poker games he plays. Well, his February was really good so now he wants to deposit the $100,000. He was wondering about making a cash deposit of over $10,000 as there would be a Currency Transaction Report issued. He said shouldn’t he break-out his deposits into $9,000 transactions?

I told him that a Currency Transaction Report isn’t anything to worry about it. The IRS gets so many of them that as long as you’re paying your taxes they’re not a big deal. Just smile as the bank teller fills out the extra paperwork.

On the other hand, if you break up your $100,000 transaction into several $9,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and almost all of them are investigated. And you will never know when one is issued. (My client deposited his $100,000 all at once.)

You don’t believe me? Here’s a tale of woe that caused the downfall of a politician.

He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.

But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.

Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.

So if you want to deposit money, go big-time. Deposit more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”

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IRS Website and Electronic Services Down

Posted on April 2, 2015 by Russ

I have been trying to get into two different IRS websites since midday yesterday but can’t. It appears that the IRS may be a victim of a DDOS (distributed denial of service) attack or there website simply has gone down.

When the IRS is telling people to use the Internet and they see this:

Capture

Well, I guess this should happen on the day that we find that Lois Lerner won’t be prosecuted….

UPDATE: Whatever was wrong with the IRS websites was cured mid-morning.

Posted in Uncategorized | Comments Off on IRS Website and Electronic Services Down

Bozo Tax Tip #8: Be Frivolous!

Posted on April 1, 2015 by Russ

I’d love to be frivolous during tax season. But the inbox is full, the piles of paper don’t go anywhere unless I move them, and my next day off is April 16th. I can get a good laugh when I get an email letting me know that, “Russ, you’re full of ****. There is no law mandating anyone file a tax return or pay income tax.” Yes, I received such an email today. It appeared that it was over one page, but after the first sentence I hit the delete key.

Yesterday I wrote about Richard Hatch. He got 51 months at ClubFed for his bout of frivolity. Wesley Snipes tried to say that only foreign-source income was taxable. He got 36 months at ClubFed.

Tax Court judges don’t have the same sense of humor that I do about frivolous arguments. Michael Balice found that out:

Petitioner has responded to this motion by contending (among other things) that he is not subject to IRS deficiency procedures and that wages are not “income” because they result from the exercise of his “irrefutable right to work.” We will grant the motion for summary judgment and sustain the tax deficiencies and additions to tax determined by the IRS. We will also require petitioner to pay under section 6673(a) a penalty to the United States in the amount of $25,000 for asserting frivolous positions in this Court.

I’ll make this simple: Yes, Virginia, there is an income tax and you must pay it. Or as my favorite author, Rex Stout, put it, “Either pay [the income tax] or suffer a loss of privileges.”

Posted in IRS | 1 Comment

Bozo Tax Tip #9: 300 Million Witnesses Can’t Be Right!

Posted on March 31, 2015 by Russ

For tax bloggers like myself, Richard Hatch has been a godsend. His antics have been, well, remarkable. While he’s no longer at the top of my Bozo Tax Tips, his story is one that prospective tax offenders should learn. I keep thinking that I’ll be able to drop this Bozo tax tip one year. Yet every time I think that’s going to happen Richard Hatch makes the news again. One tip I can give any celebrity: Be careful about your taxes. The IRS loves going after Bozo tax celebrities. So here’s the story that refuses to die.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.

2009 Update: Richard Hatch continues to look for that needle in the haystack. He’s filed another appeal, though to this non-lawyer it’s more likely that he’ll be released after serving his 51 months at ClubFed than getting a favorable ruling.

2010 Update: Mr. Hatch was released in mid-2009. He then violated the terms of his release and was sent back to ClubFed. Finally, in October, Mr. Hatch was released. He’ll be spending the next couple of years in his home state of Rhode Island.

2011 Update: As part of his sentence, Mr. Hatch was supposed to amend his tax returns and declare the $1 million of income. He neglected to do that. Judge William Smith didn’t neglect to give Mr. Hatch a piece of his mind this past March: He sentenced Mr. Hatch to nine more months at ClubFed. Following his release from ClubFed (in December), Mr. Hatch will have 26 months of supervised release.

2012 Non-Update: Mr. Hatch was released from prison in late December 2011. He has filed a writ of certiorari with the Supreme Court. The chance of the Supreme Court taking his case is about the same as a blizzard in August in Las Vegas. The writ was denied.

2013 Update: Mr. Hatch’s non-payment of taxes extends north of the border. Mr. Hatch owned a piece of property in Sydney, Nova Scotia. That property was sold in a tax sale after Mr. Hatch didn’t pay the property taxes on it for at least six years.

2014 Update: Mr. Hatch still thinks he did nothing wrong. Last year, on Oprah: Where Are They Now, Hatch told Oprah Winfrey, I never did anything deserving of prison time…I never attempted to evade taxes, which was what I was convicted of.” I’ll let the reader decide on the veracity of Mr. Hatch’s statement.

Judge Smith’s remarks from over two years ago have not yet sunk in to Mr. Hatch. “You can continue to proclaim your innocence…You don’t have the option of engaging in this type of game or negotiation with the court. It needs to be a severe punishment. That’s the only thing that will deter you in the future.”

2015 Non-Update: Mr. Hatch was silent on the tax front since his appearance on Oprah. It appears that this may be the last year I’ll have Mr. Hatch in my Bozo Tax Tips.

And to think I’d have had so little to write about if Mr. Hatch had just paid his $300,000 in tax in the first place.

Posted in Tax Evasion | Tagged | 1 Comment

Bozo Tax Tip #10: Email Your Social Security Number

Posted on March 29, 2015 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat from last year, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response is pitiful. We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my partner in Maryland, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.

Posted in Uncategorized | 1 Comment

A Break in my Hiatus: Poker Chips and Tax Evasion

Posted on March 22, 2015 by Russ

When my friend Steve Evans posted a link to a story about Chipco’s president being arrested on tax evasion, that got my attention. Chipco was a Maine-based company that made high-quality poker chips. Many of the local casino here in Las Vegas have used Chipco chips. I have a particular fondness for them; one of my poker chip sets features these chips that I got to design back in 2002.

John Kendall was the president of Chipco (formally, Chipco International). They closed a couple of years ago. Those in the poker community thought that there closing was mostly due to the end of the poker boom. Another factor was Chipco’s method of paying employees: off the books.

Perhaps this could be my Bozo Tax Tip #11: Pay your employees off the books and don’t send withholding to the government. That’s exactly what Mr. Kendall did, and the money went exactly where you’d think it would go: his mortgage, country club dues, and legal fees for his personal bankruptcy. Maine Revenue Services investigated, and they weren’t happy. Add in underreporting of his own income on his 2009 tax return and you have the makings of six guilty verdicts. That’s what happened this past week in Portland, Maine. Mr. Kendall will be sentenced later this year.

A helpful hint to anyone wanting to emulate Mr. Kendall: Just pay employees in the normal way, on the books, and send the withholding where it belongs.

I now return to my regularly scheduled hiatus.

Posted in Tax Evasion | 2 Comments

Annual Blog Hiatus

Posted on March 16, 2015 by Russ

It’s been a busy Tax Season already, and it shows no signs of letting up. That means it’s time for my annual blog hiatus. You needn’t worry if you’re waiting for my annual Bozo Tax Tips; they’ve already been written and will begin appearing on Tuesday, March 31st. If anything truly momentous in the world of tax happens, I’ll interrupt my hiatus and post on it; otherwise, I’ll be back on April 21st.

Posted in Taxable Talk | 1 Comment