Do Call Us, We Won’t Call You

August 28th, 2014

The IRS does not initiate collection activities by phone calls. If you owe money to the IRS, the first notice will always be a letter delivered by the Postal Service. Unfortunately, scammers are continuing to pray on people. The IRS issued this press release today:

Scam Phone Calls Continue; IRS Identifies Five Easy Ways to Spot Suspicious Calls

WASHINGTON — The Internal Revenue Service issued a consumer alert today providing taxpayers with additional tips to protect themselves from telephone scam artists calling and pretending to be with the IRS.

These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con artists can sound convincing when they call. They may know a lot about you, and they usually alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS identification badge numbers. If you don’t answer, they often leave an “urgent” callback request.

“These telephone scams are being seen in every part of the country, and we urge people not to be deceived by these threatening phone calls,” IRS Commissioner John Koskinen said. “We have formal processes in place for people with tax issues. The IRS respects taxpayer rights, and these angry, shake-down calls are not how we do business.”

The IRS reminds people that they can know pretty easily when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:
1. Call you about taxes you owe without first mailing you an official notice.
2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
4. Ask for credit or debit card numbers over the phone.
5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:
• If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.
• If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or at www.tigta.gov.
• If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Remember, too, the IRS does not use email, text messages or any social media to discuss your personal tax issue. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box.

For all the grief that the IRS has (rightly) gotten over the IRS Scandal, they deserve no grief from these scam artists. The tips the IRS gives are completely accurate. If you get a phone call from the IRS demanding money, call TIGTA and report all the details.

Remember Those Missing IRS Emails? They Appear to Exist….

August 25th, 2014

“There’s no such thing as Lois Lerner’s missing emails. It’s all been a big lie. They’ve been lying to the courts, to the American people, and to Contgess. It is really outrageous.” That’s Tom Filton, President of Judicial Watch:

The reason that the IRS allegedly hasn’t attempted to recover the missing emails? “It would be too difficult.”

Now, I do need to point out that all we have at this point is Mr. Filton’s stating that Department of Justice attorneys stated this (along with a statement released by Judicial Watch). It’s possible that this isn’t true. That said, it makes sense that there are backup systems in place. I backup information and I have nowhere near the critical needs of the government.

Assuming that what Mr. Filton stated is true, both Congress and the Courts have been lied to by the current IRS Commissioner John Koskinen and by various attorneys. This isn’t deceit, this isn’t misstatements; this is out-and-out lying. If I were a federal judge being told today that the emails exist (after telling you they didn’t) but it’s too hard to get them, I know what my reaction would be. I suspect most judges will have the same reaction.

The next court hearing involving this scandal should be mighty interesting….

Tax Preparers Behaving Badly

August 24th, 2014

There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.

Our first preparer might be saying, “Well, I did get two returns correct.” Unfortunately, the IRS and the US Department of Justice allege he get 74 others wrong. The DOJ asked a federal court to bar Ernice Joseph and his Miami tax preparation firms, Ebenezer Tax Services Inc and Primo Tax Service Inc, from preparing federal returns for others. Why? Here’s what the DOJ states:

The complaint alleges that Joseph and his businesses prepared returns that unlawfully claim the Earned Income Tax Credit by reporting fictitious businesses or business income on clients’ Schedule C – Profit or Loss From Business. Joseph and his businesses prepare returns that claim education and other credits to which the taxpayers are not entitled in order to overstate their refunds. According to the complaint, the Internal Revenue Service (IRS) examined 76 returns prepared by Joseph and/or Ebenezer Tax Services and found that 74 contained a deficiency. The complaint alleges that, altogether, Joseph and Ebenezer Tax Service’s activities may have caused more than $20 million in loss to the U.S. Treasury. In addition, the complaint alleges that the revenue lost from Primo Tax Service’s activities could exceed $25 million.

Our next preparer is one step further along than Mr. Joseph. William Naes of St. Charles, Missouri, was permanently barred from preparing returns for others. Why? Well, things were too good to be true:

The government alleged that Naes prepared returns that fraudulently claimed tax deductions for his customers, including bogus deductions for charitable contributions and unreimbursed employee business expenses. According to the complaint, Naes also fabricated business expenses on Schedules C-Profit or Loss From Business, concocted a fake business for at least one customer and failed to properly identify himself as the paid preparer on many of the returns he prepared.

Neither Mr. Joseph nor Mr. Naes appear to be under criminal indictment; our other two preparers weren’t so lucky. Julius Williams owned and ran his tax preparation business in College Park, Maryland. He catered to temporary workers from Jamaica. His clients got a great deal: Phony Schedule C businesses, phony deductions, phony Earned Income tax credits, and phony education credits led to real refunds. Mr. Williams did one nasty thing to those clients: He stole those ex-clients’ identities to help his current clients. After all, they were back in Jamaica, unlikely to file another US tax return, so why waste a good identity? Finally, Mr. Williams cheated on his own taxes. He pleaded guilty and must make restitution of $1 million; he’s also looking at a term at ClubFed.

Our final Bozo preparer is Daniel Jones of Fredericksburg, Virginia. Mr. Jones operated a business called Tax Doctor Plus. I use the past tense because Mr. Jones will be heading to ClubFed for the next 37 months. He did have a lot of satisfied clients: he used phony tax credits, phony Schedule C’s, phony Schedule A expenses, and phony W-2s to increase his clients’ refunds. He also falsely claimed to be a CPA.

Some common sense applies when you’re reviewing your tax return. First, always review it–don’t just sign it. And if it shows you worked at a business you didn’t or you have a credit for college education expenses when you attended college twenty years ago, there’s a problem. Remember, if it sounds too good to be true it probably is.

Today, Liechtenstein; Tomorrow, the World!

August 24th, 2014

Fellow Enrolled Agent Jason Dinesen calls EAs the Liechtenstein of the tax world. Personally, I think he may be overstating our case; when I tell people I’m an Enrolled Agent the most common reaction is, “You don’t look like you’re in law enforcement.” Sigh….

But kudos to the National Association of Enrolled Agents: The NAEA is doing some positive public relations. If you fly American Airlines in the coming months you will hear NAEA President Lonnie Gary explaining what an EA really is–America’s tax experts. Here’s a link to the video that will be running.

A Passive Activity Case Goes to the Taxpayers

August 20th, 2014

We’re going to see a lot more IRS activity regarding “passive” activities in the coming years. The Affordable Care Act (aka ObamaCare) added a new Net Investment Tax that impacts passive activities. Many taxpayers will be attempting to state activities are active (that the taxpayer materially participates) rather than passive to avoid this tax. Today, the Tax Court looked at a taxpayer who claimed large losses from his business (it will be a few years before we see Net Investment Tax cases at the Tax Court). He said he was actively involved in the businesses; the IRS said he wasn’t.

The Tax Court noted that a passive activity is one where a taxpayer is not materially participating in.

A taxpayer materially participates in an activity for a given year if, “[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year.” Id. A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity. See sec. 1.469-5T(b)(2)(ii) and (iii), (f)(2)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5726, 5727 (Feb. 25, 1988).

Yes, this relates to temporary regulations issued over 16 years ago. Perhaps we’ll see final regulations given the Net Investment Tax. But I digress….

In the decision, the Court noted that while the petitioner’s son managed the day-to-day business, the petitioner himself was anything but an absentee owner.

Although Mr. Wade took a step back when Ashley became involved in the companies’ management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous, regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon.

But what about the petitioner’s wife? The IRS argued that she wasn’t involved in the business (and she wasn’t), so her share of the loss is passive. The Court found that didn’t matter:

This argument is irrelevant because for purposes of the passive loss limitation, we treat married taxpayers who file a joint return as a single taxpayer, sec. 1.469-5T(f)(3), Temporary Income Tax Regs., supra, and because we treat participation by a married taxpayer as participation of his or her spouse, sec. 1.469-1T(j)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988). Mr. Wade’s material participation in the companies is sufficient to establish material participation for both petitioners.

In a footnote, the Court noted why the passive activity loss rules were enacted:

Congress enacted sec. 469 to reduce the opportunity “for taxpayers to offset income from one source with tax shelter deductions and credits from another.” S. Rept. No. 99-313, at 713 (1986), 1986-3 C.B. (Vol. 3) 1, 713. Congress’ concern was over taxpayers who invested in businesses simply to benefit from losses. The tests and standards in sec. 469 were not meant to apply to taxpayers in petitioners’ situation.

So here the petitioner was able to show he was active on a continuous basis in his businesses, and that made the losses active rather than passive. Hopefully the IRS can get more of these cases right at audit and appeals–they’ll be dealing with many more of these over the coming years.

Case: Wade v. Commissioner, T.C. Memo 2014-169

FBAR Filing Follies

August 18th, 2014

Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.

It appears that if you’re using an older version of Adobe Acrobat (Acrobat 9 or earlier), you will get a warning from FINCEN that the program isn’t right but the filing will go fine. However, the filing will not work with Acrobat X and XI; apparently Acrobat X or XI cannot even be installed on your computer for the filing to work. I guess I’m lucky in that I use Acrobat 9. (We also file most, but not all, of our FBARs using our tax software. Our tax software, ProSeries, added that ability in April.)

I echo what Joe wrote:

Requiring taxpayers to screw around with their computer setup just to meet their FBAR requirements is outrageous. Even if FBAR filing is not merely a sadistic plot — and it sure acts like one — it seems more designed as a hook to punish violators — purposeful and accidental — than a way to gather compliance information. As usual, Congress goes after a small set of violators by firing into the crowd.

The idea that an older piece of software works just fine but the new one doesn’t is ridiculous. It’s also par for the course when dealing with the FBAR.

A Golden Scheme Leads to ClubFed

August 17th, 2014

If there’s one phrase I’ve used over and over on this blog, it’s if it sounds too good to be true it probably is. But greed is a powerful motivating force. For example, consider Yamashita’s gold.

Yamashita’s gold is the supposed booty that Japan accumulated during World War II in the Philippine Islands. Though it’s unclear whether or not this gold treasure really existed, the legend and the hunting for it continue to today.

For a con man, Yamashita’s gold represents an opportunity. Freeman Carl “Buck” Reed told investors he found it (and had also found “gold certificates” worth millions). Mr. Reed raised $1.3 million to get the gold buried in the Philippines. Instead of treasure hunting, the $1.3 million was used for maintaining Mr. Reed’s “facade of wealth.”

Mr. Reed also didn’t believe in filing tax returns. When you have income, that’s a felony. Combined with the fraud, that’s multiple felonies. Mr. Reed was convicted of tax fraud and then pled guilty to the gold fraud. He was sentenced to 87 months at ClubFed (more than 7 years).

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

August 17th, 2014

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….

The Hom Decision and the Past (2008 – 2012)

August 17th, 2014

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.

Lawsuits Against FATCA in Canada

August 14th, 2014

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.