Judge Sullivan Not Impressed by the “Dog Ate my Homework” Excuse

Posted on August 17, 2014 by Russ

Judicial Watch filed a Freedom of Information Act (FOIA) request with the IRS for information on the targeting of conservative groups. When the FOIA request went nowhere, Judicial Watch filed a lawsuit against the IRS. In July, Judge Emmet Sullivan required the IRS to issue a written response (due last week) on what happened. The IRS response was insufficient for Judge Sullivan:

MINUTE ORDER. In light of [26] the Declarations filed by the IRS, the IRS is hereby ORDERED to file a sworn Declaration, by an official with the authority to speak under oath for the Agency, by no later than August 22, 2014.

In this Declaration, the IRS must:

(1) provide information about its efforts, if any, to recover missing Lois Lerner emails from alternate sources (i.e., Blackberry, iPhone, iPad);

(2) provide additional information explaining the IRS’s policy of tracking inventory through use of bar code property tags, including whether component parts, such as hard drives, receive a bar code tag when serviced. If individual components do not receive a bar code tag, provide information on how the IRS tracks component parts, such as hard drives, when being serviced;

(3) provide information about the IRS’s policy to degauss hard drives, including whether the IRS records whose hard drive is degaussed, either by tracking the employee’s name or the particular machine with which the hard drive was associated; and

(4) provide information about the outside vendor who can verify the IRS’s destruction policies concerning hard drives.

Signed by Judge Emmet G. Sullivan on August 14, 2014. [paragraphing added for ease of reading]

The Hill noted,

Tom Fitton, Judicial Watch’s president, celebrated Sullivan’s new order, saying it proved the government had offered little in their filings on Monday.

“Today’s order confirms Judicial Watch’s read of this week’s IRS’ filings that treated as a joke Judge Sullivan’s order,” Fitton said in a statement.

In a statement to The Hill, Fitton later called Sullivan’s order “an incredible court intervention.”

“Judicial Watch has filed hundreds of FOIA lawsuits,” Fitton said.” I have never seen this type of court action in all my 16 years at Judicial Watch.”

We’ll see what response the IRS comes up with this week….

Posted in IRS | Tagged | 1 Comment

The Hom Decision and the Past (2008 – 2012)

Posted on August 17, 2014 by Russ

Back in June, a federal district court ruled in United States v. Hom that foreign online gambling accounts are reportable for FBAR purposes. An obvious question is what does this mean for prior years.

First, these are just my thoughts. I am not giving advice here on what any individual should or should not do. You need to consult with your own tax professional and possibly an attorney knowledgeable in FBAR issues.

There are three different foreign account reporting requirements for Americans:
1. The boxes on Schedule B of Form 1040;
2. The FBAR; and
3. Form 8938.

Each of these has a different statute of limitations. Form 8938 has only been in existence for two years, so it only applies for 2012 and 2013. The statute of limitations on tax returns is generally three years (though there are exceptions), so the boxes on Schedule B apply only to 2011 – 2013. The statute of limitations on the FBAR is six years; 2007 and earlier years are beyond the statute date. Finally, online gambling accounts were reportable for 2008 and 2009 (even before the Hom decision), so the years we’re concerned with for the FBAR are 2010-2013.

There are also different financial thresholds for these reports. On Schedule B, any foreign financial account must be reported. For the FBAR, the requirement kicks in at an aggregate balance of $10,000. Form 8938 must be filed if you are in the US and have $50,000 aggregate on December 31st or $75,000 aggregate on any other day of the year. If you are filing Married Filing Jointly (MFJ), the balance amounts double for Form 8938. If you are outside of the US, the limits are $200,000 aggregate on December 31st or $300,000 on any other day of the year (again, the balance limits double if you file MFJ).

Because I am a licensed tax professional, the only advice I can give is to comply with the law.

But Russ, you ask, what is the law? The IRS told us back in 2011 we didn’t have to report online gambling accounts; now a judge says we do. What’s right?

Unfortunately, no one knows. We’re left to make guesses. Oh yes, it’s a well known principle that the IRS is not bound by the answers they give. This makes no sense to me (or most tax professionals) but this, too, is the law.

So let’s look at some scenarios:

1. An individual has online gambling accounts with more than $100,000 in them since before 2008. This individual also has not filed tax returns claiming the income from one or more of his online gambling accounts. He also maintains foreign bank accounts. Anyone in this situation should speak to a tax attorney familiar with FBAR issues immediately. This individual has major compliance issues and is definitely a potential target of criminal prosecution. Usually, if you go first to the IRS before they find you, criminal prosecution is unlikely.

2. An individual began online gambling in 2012, but just in the Nevada and New Jersey legal sites. She has filed her tax returns noting her income (including the gambling income). There are no FBAR or other foreign account issues. The current regulated online gambling sites in Delaware, Nevada, and New Jersey are not foreign financial accounts.

3. An individual began online gambling in 2012 with non-US-regulated sites. His aggregate balance has never reached $10,000. The question here is whether this individual should amend his 2012 returns to note the foreign financial accounts. (Question 7a of Schedule B asks, “At any time during 2012, did you have a financial interest in or signature over a financial account…located in a foreign country?”) Amending your return for this would not change your tax but would extend the statute of limitations on the return. Because I am a licensed tax professional, the only advice I can give is to amend your return. Of course, given that this issue is not settled law, and there is no specific penalty for answering Question 7a incorrectly, most individuals will not amend their tax returns for this.

4. An individual was playing on Full Tilt Poker from 2008 – 2011 (until “Black Friday”). Since April 15, 2011, he has not played on any of the unregulated sites. This individual filed FBARs for 2008 – 2009 but not for 2010 and 2011. Two weeks ago this individual received through remission the $20,000 balance that he had on Full Tilt Poker. He did include his 2008, 2009, and 2010 Full Tilt winnings on his tax returns. He did not include his 2011 winnings on his 2011 return (but he did not make any withdrawals during 2011, so based on constructive receipt he did not have any reportable 2011 winnings); he plans on including his 2011 winnings on his 2014 tax return (filed in 2015).

Based on the Hom decision, this individual has a foreign financial account for 2010 and 2011. (It’s somewhat unclear whether or not he really has a foreign financial account for 2011. The “balances” at Full Tilt in 2011 were effectively not real; the Department of Justice charged that Full Tilt Poker was a “massive Ponzi scheme.”) That said, I would conclude based on the Hom decision that this individual had FBAR reportable foreign financial accounts.

The problem here is that late-filed FBARs can be subject to penalties. An individual late filing because it was unclear whether the account should be reported would almost certainly not be subject to the “willful” penalties; however, the non-willful penalties can be up to $10,000 per account. Each individual will have to weigh reporting these or not.

If the taxpayer amends his 2011 return (to note that he has a foreign financial account and that he filed an FBAR), this extends the statute of limitations. The 2010 return is beyond the statute date and would not need to be amended to note the FBAR.

There are numerous other scenarios I could write; most will feature some version of the above scenarios. There are some conclusions we can draw:

1. Even with the Hom decision it is possible that other courts will rule differently. This was a decision of a US District Court. An appellate court or another US District Court could rule differently; it is not clear that online gambling accounts are really the same as banks.

2. However, prudence requires that for 2013 returns (and forward) that until FINCEN announces that they do not want online gambling accounts reported on the FBAR, and until the IRS (or Department of the Treasury) announces that they do not want online gambling accounts reported on Form 8938 and the check boxes on Schedule B of Form 1040, taxpayers should report these accounts.

3. When an individual has reportable online gambling accounts for the past, he or she will have to weigh reporting versus the consequences of reporting. Everyone’s situation is different so there is no one size fits all advice here.

4. That said, individuals with unreported foreign financial accounts (on an FBAR) and who haven’t filed tax returns for those years should run, not walk, to a tax attorney who specialized in FBAR matters.

The best advice I can give is that if you are impacted by this, speak to your tax professional. Everyone’s situation is different. If you let your tax professional know how you are impacted by the Hom decision, your tax professional should be able to give you good guidance.

Posted in Gambling | Tagged | Comments Off on The Hom Decision and the Past (2008 – 2012)

Lawsuits Against FATCA in Canada

Posted on August 14, 2014 by Russ

A lawsuit was filed in Federal Court in Vancouver, British Columbia, challenging Canada’s complying with the US Foreign Account Tax Compliance Act (FATCA). This is the law that spawned Form 8938 (the “Son of FBAR”). This law, passed in 2010, mandates that account information on Americans be shared with the IRS from foreign bank accounts or there will be mandatory 30% withholding on any US payments to those accounts.

The lawsuit alleges that disclosing information on Canadian account holder is a violation of privacy and property rights of the account holders in violation of the Canadian constitution.

I have no idea how slow the Canadian tax system works, but I suspect this lawsuit will take years to work its way through the court system.

Posted in International | Tagged , | 1 Comment

Bears Sacked; Lose Court Case Worth $4.1 Million

Posted on August 11, 2014 by Russ

No, Jay Cutler didn’t throw one of his usual interceptions. Instead, Judge Mary Mason of the 1st District Illinois Appellate Court ruled that the Chicago Bears had underpaid Cook County’s Amusement Tax.

The story begins when ancient Soldier Field was rebuilt in 2002 – 2003. The stadium was completely rebuilt, with premium suites added. Those suites are the subject of the dispute.

In 2007, the Cook County Revenue Department audited the Bears. The Bears priced the tickets for the seats in the suites at $104 per game. However, the suite rents for more than 100 times that. As the Chicago Tribune reported,

But Mason took the Bears to task for the $104 value the team put on a seat in a luxury suite. If the average rent for a suite is $150,000, the judge said the suite holder paid about $15,000 per game, including eight regular season and two preseason games. Dividing that figure by 20 seats yields a per-ticket price of $750.

The Bears added various fees and non-amusement services to each ticket. Judge Mason’s ruling noted that these should be subject to the amusement tax:

The absurdity of excluding the vast majority of ticket revenues from the amusement tax when the generation of those revenues is driven by fans’ desire for the ‘privileges’ associated with premium seats renders the Bears’ position untenable.

The Bears can appeal to the Illinois Supreme Court.

Posted in Illinois | Tagged | 1 Comment

I’ll Drink to That!

Posted on August 11, 2014 by Russ

Some tax-related news today from the other side of the pond. In Birmingham, England, two stores have been barred from selling alcohol as they had fake export labels. The report in the Birmingham Mail notes that the shops had over 200 bottles of non-taxed liquor.

This is very similar to the smuggling of cigarettes in the United States. In New York City, state and local taxes on cigarettes will add nearly $10 to the cost of a pack; it’s $0.17 in Missouri. That kind of differential breeds illegal activity.

In any case, two stores lost £2,000 of alcohol and later lost their licenses.

Posted in International | Comments Off on I’ll Drink to That!

Where Karen Hawkins Disagrees With Me…

Posted on August 10, 2014 by Russ

Karen Hawkins is the Director of the Office of Professional Responsibility (OPR). OPR is the agency within the IRS that is in charge of preparer regulation and oversight; their vision is, “To be the standard-bearer for integrity in tax practice;” their mission is to, “Interpret and apply the standards of practice for tax professionals in a fair and equitable manner.”

I was a little surprised this evening to see that Ms. Hawkins commented on my post of earlier this week titled, “The IRS Apparently Thinks They Won the Loving Case.” Ms. Hawkins stated,

As the “owner” of Form 2848, I’d like to clarify what Loving did and did not say: IRS was enjoined from requiring a test be taken and passed before a PTIN could be obtained, and from requiring annual CPE in order to renew the PTIN. The District court also acknowledged that the IRS could register/license individuals on a voluntary basis. Nothing in the decision addressed the use of the RTRP designation. In fact, those who passed the RTRP exam before the injunction (nearly 75000) are being exempted from the annual federal update requirement put in place by the new voluntary record of completion program (see Rev Proc 2014-42). The President has also put forward a legislative recommendation to amend 31 USC 330 to provide for mandatory regulation of return preparers. This is a difficult issue to address in black and white terms but please don’t assume the IRS can’t figure out what the law says and doesn’t say.

I felt that Director Hawkins’s view on this deserved a wider audience than a comment on a previous blog post. (The comment would not be seen unless someone clicked on the post itself.)

I did not know that, as Ms. Hawkins states, “…those who passed the RTRP exam before the injunction (nearly 75000) are being exempted from the annual federal update requirement put in place by the new voluntary record of completion program (see Rev Proc 2014-42).” Ms. Hawkins is referring to the new “Annual Filing Season Program.” I should point out that it’s unclear whether this program will be in place for next tax season; the AICPA has filed a lawsuit seeking to enjoin the IRS from offering this program.

Here is the actual Court Order that Judge Boasberg issued in Loving v. IRS:

ORDER
For the reasons set forth in the accompanying Memorandum Opinion, the Court ORDERS that:
1. Plaintiffs’ Motion for Summary Judgment is GRANTED;
2. Defendants’ Motion for Summary Judgment is DENIED;
3. Defendants lack statutory authority to promulgate or enforce the new regulatory scheme for “registered tax return preparers” created by 76 Fed. Reg. 32,286;
4. Defendants are permanently enjoined from enforcing such scheme; and
5. Judgment is ENTERED in favor of Plaintiffs.
SO ORDERED. [emphasis in original]

Ms. Hawkins is technically correct that Judge Boasberg’s order says nothing about the use of an RTRP designation. However, the Order specifically states that the IRS has no authority to create such a regulatory scheme. If there isn’t such a regulation, what’s the use of the designation?

I do want to point out that Ms. Hawkins has a sometimes thankless job. As I’ve noted on numerous occasions, there are plenty of bad tax “professionals” out there. (As I frequently state when I comment on such professionals, if it sounds too good to be true it probably is.) Ms. Hawkins and her staff have the task of trying to ensure competency among tax professionals. Unfortunately, her job is never-ending and thankless.

Posted in IRS | Tagged | 1 Comment

Another Nothing to See Moment

Posted on August 10, 2014 by Russ

Via the Washington Examiner comes a letter from 47 Inspector Generals writing about obstructionism done by the Obama Administration on their work.

Each of us strongly supports the principle that an inspector general must have complete, unfiltered, and timely access to all information and materials available to the agency that relate to that IG’s oversight activities, without unreasonable administrative burdens. The importance of this principle, which was codified by Congress in Section 6(a)(1) of the Inspector General Act of 1978, as amended (the IG Act), cannot be overstated. Refusing, restricting, or delaying an IG’s access to documents leads to incomplete, inaccurate, or significantly delayed findings or recommendations, which in turn may prevent the agency from promptly correcting serious problems and deprive Congress of timely information regarding the agency’s performance.

If one considers that without TIGTA Inspector General J. Russell George’s report on the IRS scandal we’d still be thinking that the idea of targeting conservative organizations was laughable, the handcuffs on IG’s that are described in the letter (you can find the letter within the linked story) are unconscionable. It’s not as if there isn’t any government waste or improper targeting, right?

We’ll let Lt. Frank Drebin tell it like it isn’t:

Posted in Uncategorized | Comments Off on Another Nothing to See Moment

Is a “Dealer Add-On” a Tip or a House Fee?

Posted on August 10, 2014 by Russ

Poker dealers are paid a low hourly wage; they make most of their money from gratuities (tips) from players. Those tips are, of course, taxable. In a poker tournament, dealers also receive tips. Some come from the prize pool while some come from the players themselves when they win or place high in the tournament. Some tournaments offer players a “Dealer Add-On.” The Dealer Add-On costs players a small fee–say, $5 to $50. In return, the player receives an additional amount of tournament chips.

Clearly, a dealer who receives a portion of that add-on must report it as income; all income is taxable unless exempted by Congress, and such Dealer Add-Ons haven’t been exempted. However, there’s a dispute in Florida as to whether the Dealer Add-On is considered income to the casino.

The Florida Division of Pari-Mutuel Wagering (which regulates non-Indian casinos in the state) now says the money is income to the casino, and tax must be paid to the state on it. Until this July, Florida said that Dealer Add-Ons were not income to the casino. The Isle Casino in Pompano Beach, Florida has sued the state charging the rule is, “an invalid exercise of delegated legislative authority.”

Given that Dealer Add-Ons are small compared to the other income that a casino brings in, this dispute will have a minor impact on the casinos. However, it could cause an increase in the fees that a casino charges for running tournaments; that could negatively impact poker tournaments.

Posted in Florida, Gambling | Comments Off on Is a “Dealer Add-On” a Tip or a House Fee?

Quite a Gamble to Workout There

Posted on August 10, 2014 by Russ

Runnemede, New Jersey is a small suburb of Philadelphia. Located in Camden County, the borough would be happy to let you know about its summer recreation program. The borough got some other publicity at what was once a Curves health club.

Curves is a health club for women. The Runnemede, New Jersey club closed some time ago. There are lots of things you can do with an empty health club. I wouldn’t recommend what was done here: An illegal poker club.

Gambling in the United States is regulated. To open a legal poker room, you need to have various government approvals. Thomas Rand of Williamstown, New Jersey and Ryan Dion of Blackwood, New Jersey ignored that small step. There’s also the other minor difficulty that the only legal live gambling in New Jersey is in Atlantic City, 52 miles from Runnemede.

The club, which ran no-limit Texas Hold’em games three times a week, was shut down by state police in March. New Jersey Attorney General John Hoffman stated, “These defendants operated an old-school gambling club, complete with cash cage, poker tables, and a wide-screen TV for patrons to watch the sports on which they gambled.” The club ran for eight years according to news reports, and included a link to an online sportsbetting website.

Mr. Rand and Mr. Dion pleaded guilty to gambling charges; they’ll be sentenced in early October.

Posted in Gambling | Comments Off on Quite a Gamble to Workout There

The IRS Apparently Thinks They Won the Loving Case

Posted on August 5, 2014 by Russ

Yesterday the IRS released a new version of the Power of Attorney form (Form 2848). The IRS has added the ability for a fourth representative for a taxpayer. They also noted two new matters for the POA (the Section 5000A Shared Responsibility Payment and the Section 4980H Shared Responsibility Payment).

Both the taxpayer and the taxpayer’s representative must sign the form (that’s not a change). When the representative signs the form, he or she must note his title. I was quite surprised to see the following as a choice for a representative’s designation:

i Registered Tax Return Preparer—registered as a tax return preparer under the requirements of section 10.4 of Circular 230. Your authority to practice before the Internal Revenue Service is limited. You must have been eligible to sign the return under examination and have prepared and signed the return. See Notice 2011-6 and Special rules for registered tax return preparers and unenrolled return preparers in the instructions (PTIN required for designation i).

In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms. I’ve sent the IRS a note reminding them that there is no such thing as an RTRP and this should be removed from Form 2848.

Overall, the new version of Form 2848 has just minor changes.

Posted in IRS | 5 Comments