A Break in my Hiatus: Poker Chips and Tax Evasion

March 22nd, 2015

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.

Annual Blog Hiatus

March 16th, 2015

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.

Foreign Earned Income Exclusion Gets a Vegas Preparer in Hot Water

March 15th, 2015

I prepare quite a few returns with the Foreign Earned Income Exclusion. The Exclusion allows bona fide residents of a foreign country or individuals who are outside of the United States for 330 days out of a 365-consecutive day period to exclude about $99,000 from income tax. Of course, you do have to be outside of the US (or otherwise qualify) to take the Exclusion. That minor distinction was allegedly forgotten by a Las Vegas tax preparer.

Harvey Cage owns CSN Tax Services. He faces a lawsuit from the US Department of Justice alleging that he not be allowed to prepare returns containing the Foreign Earned Income Exclusion. The DOJ alleges in the lawsuit that Mr. Cage ignored the qualifications required to claim the Exclusion, and that he claimed it for lots of his clients who weren’t entitled to it. The tax loss to the US is estimated at $3.7 million. That’s a lot of clients taking the Exclusion.

What Mr. Cage allegedly did is noted in the complaint:

On behalf of these clients, Mr. Cage filed forms 2555 claiming a foreign earned income exclusion for which his clients were not entitled. Mr. Cage typically wrote on the top of form 2555 “CLAIMING WAIVER” and attaching a statement entitled “REQUEST FOR CONSIDERATION OF 330 DAY WAIVER.” These requests for waiver of the 330 day period were made irrespective of the Internal Revenue Code, associated Treasury Regulations, relevant Revenue Procedures listing of eligible countries, and IRS published guidance on the issue.

The waiver being referred to is noted in the DOJ Press Release:

This period can be waived when the Secretary of the Treasury determines, after consultation with the Secretary of State, that individuals were required to leave a foreign country due to war, civil unrest or other conditions that preclude the normal conduct of business, among other things. In implementing this waiver provision, each year the Secretary of the Treasury publishes a list of countries that have been determined eligible for waiver requests. According to the suit, Cage ignored the published list of waiver-eligible countries in filing for his customers’ exclusion of foreign earned income.

I’ve yet to file based a return with the Exclusion based on the waiver list. The DOJ allegations make it seem like Mr. Cage shouldn’t have filed any based on the waiver, too.

Gilbert Hyatt Loses in Federal Court

March 15th, 2015

A federal court in Sacramento ruled against inventor Gilbert Hyatt last week. Mr. Hyatt is involved in a 22-year old battle with California’s Franchise Tax Board (the state’s income tax agency). This all stems over when Mr. Hyatt moved to Las Vegas, and that seven month difference has resulted in a case that has already made it once to the US Supreme Court.

The underlying issue is a residency audit of Mr. Hyatt to discover when he moved to Nevada. Did he move at the end of September 1991 or April 1992? At audit, the FTB ruled it was April (leading to an additional $7.4 million of income tax owed to California). Mr. Hyatt appealed to the California Board of Equalization. That appeal remains unresolved and that got Mr. Hyatt upset.

He filed a federal court case in Sacramento demanding that the appeal be heard. The Court dismissed the case; Mr. Hyatt will appeal. Meanwhile, later this year I expect the retrial of Mr. Hyatt’s intentional infliction of emotional distress damage award against the FTB for committing fraud against him. Last year, the Nevada Supreme Court threw out most of a $500 million verdict for Mr. Hyatt, but did leave $1.4 million of damages (based on the FTB committing fraud) and ordered a retrial on the IIED damages related to the fraud.

Form 1042 Filing Deadline is Monday, March 16th

March 12th, 2015

Most people are aware of Form 1099; that’s the form you send individuals in the US to report various kinds of income. There’s a similar form used when you’re sending paperwork to non-Americans: It’s Form 1042-S. These forms must be mailed to the recipient and filed with the IRS by Monday, March 16th. If you file electronically with the FIRE system, no Form 1042-T (the cover page used with the 1042-S’s) is needed. Form 1042 is the annual report of withholding.

The deadline for filing these forms is Monday. Like the deadline for corporate tax returns, this is a postmark deadline. So if you need to mail these forms to the IRS, go to the Post Office and mail them certified mail, return receipt requested. It’s the only proof that’s accepted (other than efiling the forms).

Corporate Tax Deadline is Monday, March 16th

March 12th, 2015

The deadline for calendar year corporations (both C-corporations and S-corporations) to file their 2014 tax returns is Monday, March 16th. If you’re not ready to file, simply file an extension. This can be done electronically, or download Form 7004 and mail it–using certified mail, return receipt requested, of course–with a postmark no later than Monday.

The penalty for late filing an S-Corp return is $195 per month per shareholder. That’s a hefty price for not filing an extension.

“Give us a tax code that is simple enough for taxpayers to comply with and simple enough for the IRS to administer, and you’ll dramatically reduce fraud.”

March 12th, 2015

It’s not brain surgery. Tom Giovanetti hits the nail squarely on the head in his op-ed in The Hill.

Mr. Giovanetti notes that keeping the voters happy is why fraud prevention hasn’t been a big issue. But it is now, when identity theft (which voters really dislike) is mixed into the fraud. Add in the IRS’s lackidaisical attitude in the past and you have a recipe for massive fraud.

It’s not as if the IRS didn’t know about the fraud.

A July 2012 TIGTA report noted that problems “had been brought to [IRS] management’s attention long ago” via a September 2002 report, but “management has failed to take sufficient action to address those deficiencies.”

For the IRS, it might be nice to shift priorities toward this and away from your Quixotic battle for regulating tax professionals (this year, the Annual Filing Season Program). Meanwhile, I’ve tried for three days to call the IRS Practitioner Priority Service only to hear, “We’re sorry, but due to extremely high call volumes on that particular subject you’re call cannot be answered at this time.”

You Have to Have an Unreimbursed Loss to Claim a Casualty Loss

March 8th, 2015

On Monday, February 23rd it was raining as I left for the gym. As I got to the gym, the road felt funny–slicker than in a normal rain. I realized that it was snowing. Now, our “blizzard” wasn’t crippling or anything like what people back east have gone through this winter, but it did inspire one of the best pictures I’ve seen this year:

vegas blizzard 2015

This came up because of a question I received from a reader on casualty losses:

Our business had a fire in 2014. We recently received a settlement from our insurance company for $225,000. We had estimated the amount of damages as $175,000, but the insurance company also paid us for relocation costs, and some other things, too. Can we claim a casualty loss on our tax return?

To claim a casualty loss, you need a casualty–an unexpected event that caused damage. You had that. You also must have suffered a financial loss. A fundamental rule of US taxation is you can only deduct things you pay for; a corollary is you can only take a loss on losses you incur. Here, you didn’t suffer a loss. You had excellent insurance coverage and there was no doubt you and your insurance agent did an excellent job. You did not suffer a financial loss as your losses were reimbursed. Thus, there’s no deductible casualty loss.

My reader has rebuilt. I’m happy to say Las Vegas has fully recovered from our blizzard, too.

Upon Further Review…

March 8th, 2015

Remember Rashia Wilson? How could anyone forget someone who brilliantly wrote on her Facebook page:

“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”

She also posted this wonderful picture:

Rashia Wilson (Image Credit: Tampa Police Department)

She was sentenced to 21 years back in 2013, but appealed. The Court of Appeals ruled that there were procedural errors in her sentencing.

Robert Wood has the story of how Ms. Wilson got sentenced to 21 years at ClubFed again.

I’m Sure This Will Endear Him To The Judge

March 8th, 2015

You’re about to be sentenced on 20 felony convictions. You wouldn’t just flee the country, would you? Well Alan Rodrigues tried to do just that.

Mr. Rodrigues was convicted last May on charges that he led a national scheme to defraud the IRS.

Oryan Management has developed a simple, “Turn-Key” method for you, the ordinary taxpayer to receive these Tax Credits and Deductions while keeping your costs low. Depending on how you pay your taxes, you could reduce your next quarterly payment by more than your out-of-pocket expenses for the year.

In addition to offering positive cash flow and business stability, Oryan assures your peace of mind by providing Pre-Paid Audit Protection on your tax return.

That was from their marketing materials. The IRS investigated, and things went downhill from there. Mr. Rodrigues was found guilty of 20 felonies.

On February 25th, Mr. Rodrigues boarded a bus to San Ysidro, California–just across the border from Tijuana, Mexico. He ended up in a jail cell here in Las Vegas after the FBI discovered his trip. That he was carrying $63,000 on him at the time may have cemented law enforcement making a quick but likely accurate judgment that Mr. Rodrigues longed to leave the US rather than face sentencing. No such luck; he’ll be sentenced on Monday.