Annual Blog Hiatus

March 21st, 2017

It’s time for my annual blog hiatus. The annual Bozo Tax Tips have been written and will start appearing around April 1st. I’ll be back with new blog content about April 21st. (If something truly momentous happens in the tax world while I’m on hiatus, I will post about it.)

Do Not Blindly Pay IRS Notices, Reason ∞

March 20th, 2017

One of my clients angrily sent me a message today. She received an IRS Automated Underreporting Unit (AUR) notice alleging that she did not include $50,000 of W-2Gs on her 2015 tax return. She’s a professional gambler, so I looked at her Schedule C and shockingly (not) there was the $50,000 of W-2Gs included in her gross receipts. Attached to the return was a schedule helpfully breaking this out for the IRS (she also received a 1099-MISC that was included in her gambling gross receipts).

The IRS AUR program is a huge (or should I say “bigly”) money maker for the agency. People blindly pay these notices; after all, if the IRS sends it out it must be right? Well, the last survey I saw showed that two-thirds of IRS notices are wrong in whole or in part. AUR notices are not screened before being sent out. The recipient is literally the first person to have read it.

Do not assume an IRS notice is correct.
Most are not. If you blindly pay it, you have agreed to the tax. Had a human taken two minutes to read the return, they would have seen the income and the breakout schedule and the notice would have never been sent. But that simply doesn’t happen with the AUR program.

Additionally, you have a limited amount of time to respond to the notice (typically 30 days). Make sure you timely respond, and if you mail your response send it certified mail, return receipt requested. You want proof your response got there. Be prepared to wait many weeks for the IRS to send you a reply to what you’ve written; the average IRS time to respond to correspondence is now 14 weeks.

My client now understands this issue, and I provided her a pdf of the Schedule C and supporting documents to show that no tax is owed. If you get an AUR notice, make sure you carefully review it and then respond. While blindly paying an IRS notice did not make my Bozo Tax Tips for this Tax Season, I’m definitely considering it for the future.

The Other March 15th Deadlines

March 15th, 2017

Today’s the deadline for filing partnership and S-Corporation returns. An extension is available by filing Form 7004. Most (but not all) states grant an automatic extension. Do realize that if your state charges a tax for your entity (i.e. New York and Illinois), you need to pay that tax even if you file an extension.

There are two other deadlines today. Form 1042-S (report of withholding of foreign individuals) must be filed today, either electronically using the IRS’s FIRE system or by mail. Also, Form 3520-A (Annual Information Report of Foreign Trusts) is due today. An extension is available for Form 3520-A by mailing in Form 7004 (Part III, Code 27). There are ridiculous penalties for late-filing Form 3520-A, so if this applies to you and you’re not ready mail that extension (certified mail, return receipt requested) today.

Even Minor Celebrities Should Pay their Taxes

March 12th, 2017

I never saw Discovery’s “American Guns” reality show. The former owner of a store called “Gunsmoke” ran into trouble with both gun selling laws and filing tax returns. He’s likely heading to ClubFed.

Richard Wyatt is the former owner of a gun store called Gunsmoke in Wheat Ridge, Colorado. Getting your store on television is a good way to increase sales; he appeared on 26 episodes of American Guns. Of course, you might want to make sure you follow the law. As the Department of Justice press release notes, “On Feb. 17, 2012, Wyatt conspired with others to deal in firearms without a license. In April 2012, the defendant surrendered his Federal Firearms License (FFL) due to his violations of federal laws and regulations.”

That might have been a good time to change careers. According to the DOJ (and later a jury), Mr. Wyatt simply ignored his lack of a federal license and sold guns using someone else’s license (a decidedly illegal thing to do). While gun laws violations don’t really interest me, tax violations do. They also really interest the DOJ.

In addition to the alleged firearms violations, Wyatt failed to pay personal income tax in years 2009, when he made approximately $290,000, in 2010, when he made approximately $123,000, and in 2012, when he made approximately $689,000. Further, in 2010, 2011 and 2012, Wyatt failed to pay corporate taxes. In 2012, Wyatt willfully filed a tax return he knew to be false, stating that he lost money, when in fact he made at least $350,000 that he failed to disclose.

Let’s see, go on television promoting a business that shouldn’t exist. Don’t pay taxes on income at the same time. Those are two real good ways to head to ClubFed.

Two too Many Sets of Books Leads to 41 Months at ClubFed

March 6th, 2017

I maintain one set of books for my business. It tells me my income, expenses, and balance sheet for the year. Owners of a Las Vegas liquor store decided that one set of books wasn’t enough and had three sets of books. That was a decidedly bad idea, but it does lead to good blog content.

As I first reported on last year, Jeffrey Nowak and Ramzi Suliman owned liquor stores here in Las Vegas. That’s a good business here; this is a decidedly partying type of town. There are many good strategies to reduce income but Mr. Nowak and Mr. Suliman came from the Bozo taxpaying community. They created a second set of books to give to their accountant. Shockingly (well, not really), not all of their income went on that set of books.

But what gets them a nomination for Tax Offender of the Year is how they kept track of the difference between the correct books and the falsified books: They used a third set of books that showed the difference between the two sets of books. I’m sure it was helpful for IRS Criminal Investigation. And, yes, the IRS did indeed discover the bookkeeping shenanigans.

Earlier, Mr. Suliman pleaded guilty and received 12 months at ClubFed. Mr. Nowak was convicted of conspiring to defraud the United States and tax evasion; he was sentenced today to 41 months at ClubFed and restitution to the IRS.

Do yourself a favor if you’re in business: Keep one good set of books. Your tax professional will appreciate it.

Casinos and ITINs: IRS Confirms Cease and Desist Letters Sent to “Several Large Casinos” (Update #2)

March 3rd, 2017

My stakeholder liaison at the IRS got back to me this morning and told me that the IRS has indeed sent letters to “several large casinos” ordering them to cease and desist issuing Individual Taxpayer Identification Numbers (ITINs). She was told by an IRS Attorney involved in this issue that:

Language in the PATH Act states that, “ITIN applicants residing outside of the United States must submit an application by mail or in person to the IRS (or to a consular officer). [emphasis added]”

This left no wiggle room for the IRS (in their view); thus, the letters to the casinos. Although no specific casinos were identified to me, the implication is that all casinos that had been authorized to issue ITINs have received the letter. It is a certainty that impacted casinos have either stopped issuing ITINs or will soon cease doing so.

The liaison also confirmed that a technical corrections bill is somewhere in the Congressional stream. This could mitigate this issue if it’s signed into law in the next couple of months. However, given the acrimony we’re seeing out of Washington I’m not holding my breath on that happening anytime soon.

This means it is close to a certainty that non-Americans who do not have an ITIN and are from tax treaty countries [1] will face 30% withholding on tournament winnings of more than $5,000, including at this summer’s World Series of Poker (WSOP). The earlier Twitter comments from the WSOP are simply wrong. Impacted individuals can eventually get their money back (by filing a Form 1040NR after year-end along with an application for an ITIN); however, any impacted players will wait months to get money back that they should not have had withheld in the first place.

Should a technical corrections bill show some progress I will post on it.

Prior Coverage: Original Post, Update #1

[1] As noted in Publication 515, “Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.”

The Hidden Bitcoin Trap: FBAR

February 26th, 2017

A lot of my clients have invested in Bitcoins. For those who aren’t aware Bitcoins are a “cryptocurrency.” For tax purposes, Bitcoins are treated like stocks and bonds; realized gains (and losses) are reported on Schedule D. And that’s everything you need to know, right? Definitely not.

Most holders of Bitcoins use a Bitcoin wallet such as Coinbase or Blockchain. A wallet is used like a brokerage account. That means if you have a foreign Bitcoin wallet, you may have an FBAR reporting requirement.

Coinbase is located in San Francisco; it’s not a foreign financial firm. However, Blockchain is based in Luxembourg. Any American who is using Blockchain who has a tax filing requirement must note they have a foreign financial account on Question 7a. And such an individual may have to file an FBAR (Report of Foreign Bank and Financial Accounts, Form 114) to note this account (if they have $10,000 or more aggregate at any time during 2016). Additionally, it’s also possible such and individual will need to file Form 8938 with their tax return.

I suspect that many holders of Bitcoins and other cryptocurrencies are unaware of this issue. Many Bitcoin holders use multiple wallets and never look at the location of the wallet. Also, many individuals deliberately choose a wallet outside of the US to avoid possible scrutiny. Given that FBAR penalties can be ridiculously high this is an issue that tax professionals and taxpayers need to be concerned about.

While I have used Bitcoin wallet Blockchain as an example, there are many such wallets located outside the United States. I will begin to include such wallets in my list of offshore gambling sites (I’ll probably split the lists next year).

FTB Not Appealing Swart Decision

February 22nd, 2017

Last month a California appellate court ruled that California’s Franchise Tax Board was wrong in trying to assess an Iowa corporation with a 0.2% ownership in an LLC that invested in California the California minimum Franchise Tax. It was announced today that the FTB will not appeal the decision. The court’s conclusion was,

We conclude Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC. The Attorney General’s conclusion that a taxation election could transmute Swart into a general partner for purposes of the franchise tax, and that the business activities of Cypress can therefore be imputed to Swart, is not supported by citation to appropriate legal authority and, in our view, defies a commonsense understanding of what it means to be “doing business.”

This is good news for passive business entity investors who happen to be investing in California. It’s likely that other cases that are winding way through the courts will now be settled and that the FTB will adopt a common-sense approach on this issue. Chris Smith, the FTB’s Trade Media Liaison, sent an email noting that, “[The] FTB is working on providing information to taxpayers in light of the decision which it expects to release soon.” I will link to that information when it becomes available.

Online Gambling Addresses for 2017

February 20th, 2017

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.)

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have addresses for Bodog or Bovada. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of February 20, 2017. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions or corrections to the list feel free to email them to me.

Casinos and ITINs: Update #1

February 19th, 2017

On Monday I wrote about Las Vegas casinos receiving letters ordering them not to issue ITINs (Individual Taxpayer Identification Numbers). When I wrote the post, I knew of one major Las Vegas casino that had received this letter; I assumed the letter was sent to all casinos that had been authorized to issue ITINs. I noted that this could have a major impact on the World Series of Poker (WSOP); the WSOP posted on their Twitter account that everything was currently the same as it had been (they were still issuing ITINs).

Since I wrote that post:

1. I have confirmed that a letter was sent to a second Las Vegas casino. I still assume that all casinos that have been authorized to issue ITINs received this letter.

2. What I don’t know is how fast the IRS ordered casinos to cease and desist from issuing ITINs. The IRS would certainly give casinos some time to implement the new policy; I would think it’s somewhere between 30 and 90 days in the future (from the date of the letter). Unfortunately, I do not know what the deadline is. It’s possible that the deadline is, say, July 31st (conveniently after the end of the WSOP) but I think that’s unlikely.

3. I made an inquiry to my IRS Stakeholder Liaison to obtain the information from the IRS. Tax professionals have stakeholder liaisons at most tax agencies to help with systemic issues (and some other items). My liaison is looking into this, but has yet to give me any answers.

4. I also made an inquiry to the National Association of Enrolled Agents (NAEA), my professional society. They have contacts at IRS headquarters that may be able to get an answer faster than I can through the liaison.

5. The WSOP tweeted that this won’t impact them. If this IRS policy goes into effect before the WSOP, it will impact them. As I wrote earlier, there’s no way that Caesars Entertainment will be allowed to issue ITINs and all other casinos won’t be; that fails the smell test. That the Rio can issue an ITIN today is meaningless; the question is will they be able to do so in the future.

Like many policies that the IRS has implemented, this makes little sense. Unfortunately, the IRS is interpreting a law passed by Congress. While a ‘technical corrections’ bill is somewhere in the Congressional stream, it’s not likely to be enacted that quickly given the partisan bickering we’re seeing in Washington. I also believe that member casinos will complain to the American Gaming Association once the impact of this is realized.

The reason I made my initial post (and will continue to post on this issue) is to alert poker media, with the hope that this issue will get resolved favorably: either the IRS relents on their new dictum due to pressure from the casinos, a technical corrections bill passes, or some other action that results in a solution to this issue. We shall see.