IRS Transcript Delivery System Down this Weekend

June 30th, 2016

The IRS’s Transcript Delivery System (TDS) will be down tomorrow beginning at 12:01am, and will not come back up until Tuesday morning. The IRS announcement indicates they will be performing maintenance during this period. TDS is supposed to be back up by 6:00am EDT on Tuesday, July 5th.

The Self-Employment Tax While Employed???

June 28th, 2016

One of my clients was quite upset this morning. She had received an IRS Automated Underreporting Unit (AUR) notice alleging that she owed about $4,000 in additional tax. She sent me a copy of the notice and I looked at the change: The IRS added self-employment tax to her return.

My client (and her husband) were both employees in the year in question. There was no self-employment tax on the original return because you have to be self-employed to owe self-employment tax. As I told my client, this ranks with the most ridiculous of IRS notices I’ve seen.

Still, my clients had to respond to the notice; if they didn’t tax would be assessed. My client completed the response form, included a short letter noting why they didn’t owe self-employment tax, and they mailed it off (certified mail, of course).

I don’t know why my client got “lucky” and got this notice. The only conclusion I can draw is the computer goofed. When I spoke to my client, I let her know that two-thirds of IRS notices are wrong in whole or in part. Yet the IRS keeps sending them out for a simple reason: People pay them blindly. “If it comes from the IRS it must be right,” they think. The reality is sadly different.

Most of the AUR notices I see (even those that are wrong) have at least a kernel of truth in them. Clients do forget to include 1099s, or they misclassify items on returns. This notice was one of the rarer ones where nothing on it made sense. Well, they did spell my clients’ names correctly….

A Train to Nowhere

June 22nd, 2016

I haven’t posted on California’s bullet train in some time (I’m no longer a resident of the Bronze Golden State), but it’s time to once more post about the train to nowhere. In theory, this train will connect Los Angeles and San Francisco. The first part of the route being built is between Shafter and Merced. Shafter is about 18 miles northwest of Bakersfield. How many riders do you think are interested in taking that segment when (or better put, if) it opens?

The whole idea of the train makes little sense given that airlines fly regularly between Southern and Northern California. The price-tag of the train has gone from about $10 billion to over $60 billion; meanwhile, funding from the federal government has dried up.

Yesterday the Los Angeles Times released a story that notes that almost every high-speed rail line needs taxpayer subsidies, a direct contradiction of what the high speed rail authority has stated. And this gem was noted from an April hearing:

Assemblyman Jim Patterson (R-Fresno) asked [rail authority Chairman Dan] Richard, “Do you know of any high-speed rail operations around the world that make substantial profit?”

Richard answered, “Actually all of them, virtually all of them, make operating profit.” He defined that as being able to cover costs after the expenditure of capital to build the systems.

“Ha, OK,” Patterson said.

The Spanish study showed that 3 of 111 high speed rail lines cover their costs, or 2.7%. Or better put, 97.3% do not cover their costs.

I’m glad I’m no longer a California taxpayer.

FBAR Deadline Approaches

June 20th, 2016

Ten days from today is June 30th. That’s the deadline for filing Form 114, the Report of Foreign Bank and Financial Accounts (the “FBAR”). There are no extensions available.

The FBAR is a report. There is no tax to pay. It’s simply a listing of the accounts and maximum balances. However, the penalties for not reporting the FBAR are egregious. Willful non-reporting has a minimum penalty of $100,000 or half the balance in the account, whichever is greater. So file the FBAR.

I’m getting asked lots of questions from non-clients, and I can’t answer them. The best advice I can give is when in doubt, file the FBAR. You can file it yourself using the BSA efile system.

The IRS has a chart showing many of the accounts that are required to be reported on an FBAR. However, the list is not complete. For example, online gambling accounts must be reported (I maintain a list of addresses of those accounts). (Note: Accounts with the legal/regulated sites in Nevada, New Jersey, and Delaware are US-based accounts and are not reported.)

One question I will answer: The FBAR must be filed by June 30th; it does not have to be accepted by then. That used to be the case, but FINCEN goes by the time (in your local time zone) when you transmit the return to them. (If you are sending it via tax software, it’s the time of transmittal to the tax software company.)

Next year, the deadline for FBARs will advance to mid-April (hopefully matching the tax deadline), with an extension available for six months. It’s unclear how this will impact expatriates (who have a June tax deadline) or if a separate extension will be required. But that’s an issue where I can honestly say, “Wait ’til next year.”

Identity Thief Gets 17 1/2 Years

June 12th, 2016

Frantz Pierre, formerly of Parkland, Florida but soon to be residing at ClubFed, was sentenced last week to 210 months at ClubFed and must make restitution of $906,556. What did he do? I’ll let the Department of Justice press release tell the story:

According documents filed in court, from July 2010 through May 2011, PIERRE was the leader and organizer of a scheme to steal from the federal government by filling hundreds of fraudulent income tax returns. PIERRE and his co-conspirators used stolen social security numbers and other personal identifiers as well as fabricated employment and income information to complete hundreds of income tax returns and to claim millions of dollars in fraudulent tax refunds.

According to documents filed in court, as part of the scheme, PIERRE and his co-conspirators would establish fictitious tax preparation businesses and then open multiple bank accounts in the names of the fictitious businesses. In addition, PIERRE directed the IRS to deposit the fraudulently obtained income tax refunds into the bank accounts set up by the defendant and his co-conspirators. In total, PIERRE and his co-conspirators submitted approximately 776 fraudulent tax returns to the IRS, resulting in $5,249,935 in tax refunds to be deposited into the fictitious companies’ bank accounts.

There’s not much to add here. I’m glad to see crooks like this get very lengthy terms. Identity theft is miserable for the victims, and many victims did nothing wrong and are victimized. Now, if the IRS could start fully assisting victims instead of putting them through the wringer….

Why You Use Certified Mail

June 12th, 2016

A client was in IRS Appeals contesting the late filing penalty for his 2012 tax return. His return, which was ineligible for electronic filing, was on extension. The extension was timely electronically filed. The client believes he went to the Post Office and mailed his return on October 15, 2013. The IRS said it was mailed one week later. Unfortunately, in a move his records were lost by the movers. The problem is that if you don’t file timely (within the extension period), it’s as if you never had an extension!

The IRS Account Transcript shows the return was late filed. Using the Freedom of Information Act, we obtained a copy of the Administrative Record for his return; that included a copy of the envelope he mailed the return in. It clearly shows the postage being purchased at a post office on October 15, 2013. The envelope has two postmarks: The original (purchased at a post office) and a second from halfway across the country a week later! Most likely, the Postal Service routed the envelope incorrectly, so it ended up going through the system twice. In any case, I showed the Appeals Officer the copy of the envelope, and he agrees that the return was timely filed (for purposes of the late filing penalty) and my client now owes nothing. (My client had already paid the tax, interest, and the late payment penalty.)

Yes, my client was lucky that the administrative record showed the envelope. Yes, it would have been easier had he still had the certified mail receipt (or had the movers not lost that particular box).

Consider what would have happened if he had not used certified mail (or the envelope had not been shown in the record): He would be writing a check for about $20,000. Certified mail costs $3.30 (a return receipt will add $1.35 or $2.70 to that cost depending on whether you have it emailed or mailed to you). Yes, you have to wait in line at a post office, but that’s well worth it when you compare the alternative.

Withholding Notice Snafu in California

June 8th, 2016

The Franchise Tax Board, California’s income tax agency, apparently issued a boatload of withholding mismatch notices. Some (but not all) of those notices appear to be in error; additionally, the FTB’s phone and chat lines have been swamped.

The FTB is taking two actions. First, they are giving all taxpayers who received these notices two additional weeks to respond. Second, those impacted by the erroneous notices will receive a “notice of this action” that will be mailed on Monday, June 13th.

Here is the text of the FTB’s announcement:

FTB facing high call, chat volumes, many questions about withholding

The number of calls to FTB’s call centers, as well as its LiveChat program, has spiked in recent weeks. We also saw a corresponding increase in district office foot traffic.

During the same time, the department has collected and investigated a number of complaints about withholding adjustment notices. To accommodate taxpayers with questions, FTB is allowing two additional weeks for taxpayers to respond to the notices. No action (including collections) will be taken during that time.

We apologize for any inconvenience this has caused, and we are taking steps to reduce wait times for our customer service channels.

We have identified a population of taxpayers whose returns were affected by late withholding reports from employers. Some wage and retirement withholding data was not provided to the State of California before FTB processed and validated the associated taxpayers’ returns.

To remedy this, FTB is re-validating those returns to allow the original withholding amounts claimed. Impacted taxpayers will receive a notice of this action, which will go in the mail by Monday, June 13.

A sample copy of the letter is available at

Answering Some FBAR-Related Questions

June 5th, 2016

The FBAR–the Report of Foreign Bank and Financial Accounts (Form 114)–is due on June 30th. If you have $10,000 aggregate in one or more foreign financial accounts you must file the FBAR. There are no extensions available. Here are three of the many questions regarding the FBAR in the mailbag:

1. “I live in Denmark; my wife is a Danish citizen (I am a US citizen). We have elected to file a joint US tax return. Does my wife need to file the FBAR?”

No. The FBAR is required of US citizens and permanent residents, but not for non-US citizen/permanent resident spouses of US citizens residing outside of the US. However, if you have a Form 8938 filing requirement your wife’s accounts would need to be included on that form (since you have elected to file a joint tax return).

2. “I became a permanent resident in November [2015]. My one foreign account, a bank account in Mexico, has not had $10,000 (equivalent) in it since I became a permanent resident. Do I need to file an FBAR?”

Maybe. The requirement is based on the calendar year, not the two months you were a permanent resident. So if your Mexican bank account had $10,000 in it at any time during 2015, file the FBAR.

3. “Why do we have to file both the FBAR and Form 8938? It’s the same information!”

Because we live in the bureaucratic world, and our Congress gave us duplicative laws. The FBAR is not a tax law; it’s part of the Bank Secrecy Act (Title 31 of the US Code). Form 8938 is a tax law (Title 26 of the US Code) and comes from FATCA. Until Congress changes the law we’re stuck complying with it.

If You Want to Go to ClubFed…

June 5th, 2016

…The simplest, fastest, and easiest method (via the tax world) is to withhold employment taxes and not remit them to the IRS. This is always investigated. But at least once a month I see yet another example.

Take the case of Bernard Haag of Piedmont, South Dakota. Mr. Haag was the president and sole stockholder of a corporation, and the sole member of a limited liability company. Through these entities he owned a day care facility. So far, so good. He withheld taxes from his employees’ wages. And as the Department of Justice press release notes, “…[He] willfully failed to pay over those taxes to the United States for all of 2005 through 2011, and three quarters of 2012. Haag also willfully failed to pay the employer’s portion of taxes on wages paid to employees of Big Dog and Concept Development for all of 2005 to 2012. Rather than paying over the taxes, Haag used a portion of the withholdings for his own personal use.”

Adding to his misery he filed for bankruptcy, and also was convicted of concealment of bankruptcy assets. In total, he got 18 months at ClubFed and must make restitution of over $300,000. A helpful hint that I’ve repeated for over ten years: Don’t do this! You will get caught.

Lionel Messi On Trial For Tax Evasion

May 30th, 2016

Football–well, soccer for us colonials–is a big business. Lionel Messi is one of the world’s best players. The Spanish tax agency, Agencia Tributaria, accuses Mr. Messi (and his father) of evading €4.16 million of tax on his image rights. Mr. Messi says he just did what his father, Jorge Messi, said to do.

The trial of the two begins tomorrow in Barcelona; Lionel Messi is on trial even though prosecutors asked that the case against him be dismissed (the judge refused). The court will have to decide whether the Messis used a web of interlocking phony companies in Belize and Uruguay to avoid paying tax in Spain. Lionel Messi has made a protective payment of the tax.

The trial is expected to conclude this week. Both defendants face up to 22 1/2 months in prison and fines of up to €4.16 million.