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.

San Francisco Supervisors Want a Local Income Tax

February 19th, 2017

California is not a low-tax state. Thankfully for Californians, there are no local income taxes. However, that soon may change.

Seven of the eleven members of the San Francisco Board of Supervisors [1] are sponsoring a measure that will ask California lawmakers to allow a local income tax to fund “sanctuary city” policies. The measure was supposed to come up for a vote last Tuesday; however, the vote has been postponed for two weeks.

If you’re a middle class resident of California or San Francisco, your government is telling you that your wallet will be far better off elsewhere.

[1] San Francisco is both a city and county; instead of a city council, there’s a Board of Supervisors (the county equivalent).

Casinos Can No Longer Issue ITINs

February 13th, 2017

Suppose you’re a resident of the United Kingdom and you come to Las Vegas to play in the World Series of Poker (WSOP) or just try your luck at a slot machine here. You have good luck and manage to win $10,000. Even better, given that the United States and the United Kingdom have a tax treaty you know you won’t owe any tax to the IRS. Imagine your surprise when the casino hands you $7,000 rather than $10,000. You’re informed that casinos are no longer allowed to issue Individual Taxpayer Identification Numbers (ITINs) by the IRS; unless you have a valid ITIN the casino must withhold 30% of your winnings.

On Friday, the IRS sent a major casino here in Las Vegas a letter informing them that because of a provision in the PATH Act no one but the IRS can issue ITINs. I assume all casinos that had been authorized by the IRS to issue ITINs have received this letter and are implementing this policy.

If you have a valid ITIN (and have renewed it, if applicable), this new policy won’t matter to you. For all other non-Americans who would normally not be subject to withholding you need to obtain an ITIN. Unfortunately, this is anything but easy.

You used to be able to use a Certified Acceptance Agent (CAA). CAAs were in numerous countries and would be able to obtain an ITIN for those who could show a Tax Treaty reason for doing so. The PATH Act ended CAAs so that’s gone.

There used to be a few IRS employees outside the United States. You could make an appointment to see one of these individuals, show him or her the required documents, and you would have an ITIN issued. Unfortunately, there no longer are IRS employees abroad.

You can, of course, send in Form W-7 and all required attachments (this includes your passport) to the IRS. Given you just might need that passport this doesn’t look like a good solution.

That leaves just one method that I know of: Going to an IRS office, proving a Tax Treaty reason, and submitting the required documents. An IRS employee will make a copy of your passport. While you will not get the ITIN immediately (the paperwork is still sent to the ITIN office in Austin, Texas) you will still have your passport. In eight to sixteen weeks you will receive your ITIN in the mail.

But what about those winnings? If you take that money now, the casino will give you a Form 1042-S and withhold the 30%. You can then file a US tax return the following year, attaching a copy of the 1042-S, and six or so months later you will receive your withholding back. (This assumes you reside in a country that has a Tax Treaty with the US that exempts gambling winnings from taxation.)

The poker room manager I spoke with noted that you could leave the money with the casino and come back when you have your ITIN. That may work if you don’t need that money and the casino will allow that. Otherwise, you will likely be without the withheld funds for some time.

The National Association of Enrolled Agents (NAEA) sent a letter to the IRS requesting that CAAs continue to be allowed to issue ITINs. The IRS responded by saying “blame Congress, not us.” I expect the American Gaming Association to complain to both the IRS and Congress about the inability of casinos to issue ITINs.

There’s one last issue: You can no longer just walk into an IRS office and get assistance; you must make an appointment. You have to call the IRS (at 844-545-5640; this phone number works for making an appointment at any IRS office) to make an appointment at the IRS office in downtown Las Vegas. The last time I checked if you called today the earliest you would have your appointment is two weeks from today. If you don’t have an ITIN, reside in a Tax Treaty country, and plan on playing in the World Series of Poker this summer, you may want to make an appointment with the IRS so that you can start the process of obtaining your ITIN prior to playing.

Hopefully, the IRS and/or Congress will reconsider this policy. Until then, the IRS is playing the role of the Grinch for many gambling winners.

UPDATE: The World Series of poker tweeted that they will still be able to issue ITINs:

While I hope that @WSOP is correct, based on what I’ve been told they’re wrong (unless Congress changes the law or the IRS changes their mind). The problem is that the IRS has interpreted the PATH Act that only they can issue ITINs. The individual I spoke with is certainly in the know, and the casino he works act has issued ITINs in the past and would like to continue issuing ITINs. The IRS can’t discriminate and allow Caesars Entertainment’s casinos to issue ITINs while MGM/Mirage, Venetian, and Wynn/Encore cannot.

My hope in publicizing this decision is that the policy will change, either by Congress acting or groups such as the American Gaming Association pressuring the IRS.

Consulting, Gambling; There’s No Difference, Right?

February 6th, 2017

The Tax Court looked at an individual (call him “Mr. A.”) who looked like a professional poker player, appeared to have an income from poker, but was described on his tax return as a “consultant.” His tax return showed less than half the income that his W-2Gs totaled. The IRS added in a negligence penalty, and the whole dispute ended up in Tax Court.

Before I get into the meat of the case, a comment about gambling and the IRS (and the Tax Court). The IRS does not have a good understanding of the mechanics of poker tournaments. The petitioner today lost some deductions because of this (and that they didn’t explain things point by point). For example, the Court stated (in footnote 4):

The parties also stipulated the authenticity of two receipts showing that Mr. A had paid buy-ins as an “alternate” to participate in “$540 No Limit Hold’em” contests at the Bellagio on July 11 and 17, 2009. As the record does not disclose whether Mr. A in fact played–and if he did not, whether his buy-in was refunded–we conclude that petitioners have not shown that Mr. A paid these buy-ins.

That’s not how alternates in a poker tournament work. Alternates are just the people who get seated when original entrants are eliminated from the tournament. I’ve never seen or heard of an alternate not being seated. But the petitioners didn’t mention this in their briefs or testimony, so the Court used what they thought the term meant, not what really happens in poker tournaments. But I digress….

The problems began with the preparing of their 2009 return.

The return was prepared by petitioners’ accountant…who has a master’s degree in accounting and had previously prepared tax returns for professional poker players. For purposes of preparing the return, Mr. A advised the preparer that his exclusive source of income in 2009 was his poker tournament winnings. He further advised the preparer that he did not have records of the expenses he incurred in order to play in poker tournaments. The preparer concluded that Mr. A was a professional poker player on the basis that poker was his exclusive source of income. Given the absence of expense records, the preparer advised petitioners to report the net income from the gambling activity on Schedule C as gross receipts but not to report any offsetting business expenses.

Let’s look at the problems here. First, the IRS computer system was almost certain to hiccup on this return. If the W-2Gs totaled $42,000 and you report $21,000, there’s a problem. I’m certain that the petitioner received an IRS automated underreporting unit notice on this issue. The second problem deals with the preparer. Tax returns have places for expenses; they aren’t supposed to be lumped with gross receipts. Additionally, there are basic standards in preparing a return. The idea of a preparer putting down, say, $10,000 for expenses when a client says he has no records of those expenses makes no sense.

The taxpayers return showed a Schedule C—the only source of income—with $20,045 of net and gross income. The Schedule C was listed Mr. A’s occupation as “Consultant.” The IRS assumed that was the case, and saw $40,395 of wagering income to be added to the return. That was the first issue. This they won:

On the basis of Mr. A’s and his accountant’s testimony and the entire record, we agree with petitioners. Other than the reference on the Schedule C to Mr. A’s business as a “consultant”, there is no evidence that Mr. A engaged in any consulting activities for compensation during 2009. He denied doing so. When called upon to explain why Mr. A’s business was described as that of a “consultant” on the Schedule C, both he and his accountant dissembled. In the circumstances, we conclude that the business was described this way in a misguided attempt to head off the closer scrutiny of the return that would likely be triggered by a description of Mr. A’s business as “poker” or “gambling”–scrutiny that would likely unearth the inadequacies in the substantiation of Mr. A’s expenses.

The Court included gambling winnings that weren’t on W-2Gs. Yes, all income is taxable no matter if you receive a piece of paper or not. The Court noted, “On this record we find that Mr. A had poker tournament winnings of $48,686 for 2009. Given our conclusion that petitioners reported $20,045 of Mr. A’s gambling income on their return, it follows that they had unreported gains from wagering transactions of $28,641 for 2009.”

The IRS contended that the petitioner wasn’t a professional gambler. Given that the only source of income for the petitioner and his wife was his gambling, the petitioner won this argument. He also was able to deduct his losing poker tournament entries (save the “alternate” entries that the court got wrong).

The taxpayer ran into trouble with his business expenses. “Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed on a return.” Mr. A. was allowed to deduct those items that he had receipts for. There were almost certainly more expenses, but a line from Tom Clancy comes to mind: If you don’t write it down it never even happened. That’s definitely the case for business expenses: Keep receipts and good records!

The IRS also asserted an accuracy-related penalty for negligence or disregarding IRS rules and regulations.

“‘[N]egligence’ includes any failure to make a reasonable attempt to comply” with the internal revenue laws. Sec. 6662(c). It connotates “a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the
circumstances…This includes “any failure by the taxpayer to keep adequate books and records or to substantiate items properly.” Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules or regulations includes any careless, reckless, or intentional disregard of the Internal Revenue Code, the regulations, or certain Internal Revenue Service administrative guidance.”

Respondent contends that petitioners are liable for an accuracy-related penalty on the basis of negligence. We agree. They failed to maintain records of Mr. A’s gambling activities, including the related expenses. Lacking adequate records, they filed a return that reported an estimate of their net income as if it were gross receipts. As a consequence, they significantly understated both gross receipts and net income. They also participated in a misrepresentation of Mr. A’s business as being that of a consultant rather than a professional poker player. The failure to keep records is prima facie evidence of negligence, and the misrepresentation of the nature of Mr. A’s business falls short of a reasonable effort to comply with the internal revenue laws…

Petitioners have not shown reasonable cause and good faith with regard to any portion of the underpayment. While they were advised in the preparation of their return by an accountant, the return as prepared stated a gross receipts figure that Mr. A certainly knew to be inaccurate and further identified the nature of his business in a way that both petitioners knew to be inaccurate. Petitioners have not shown that they acted with reasonable cause and in good faith with respect to any portion of the underpayment. They are liable for the negligence penalty under section 6662(a).

Some helpful hints if you want to fade into the crowd: Accurately report your gross receipts. The IRS matches things reasonably well, and if they have records that show you have $50,000 of income and your report $20,000, there’s going to be a notice sent to you. If you’re a consultant, would you note your occupation as “professional gambler?” I assume not. The converse is also true; if you’re a professional gambler, you’re not a consultant.

Second, you sign your return, and you’re expected to review it. If you’re gross income is $50,000 and you report $20,000, that you used a tax professional will not absolve you from the accuracy-related penalty.

Finally, keep good records! Every time I get a new client I emphasize with them the importance of keeping good records. An audit is an inconvenience if you have records that substantiate what’s on your tax return. If you don’t, it will be a very painful, very expensive inconvenience.

Case: Alabsi v. Commissioner, T.C. Summary Opinion 2017-5

If You Were Paid for Protesting in North Dakota…

February 5th, 2017

There’s been a political firestorm over oil pipeline construction in the United States. That’s been the case with the Dakota Access Pipeline construction in North Dakota. I’ll ignore the politics of whether or not the pipeline should be built. (If you’re interested, you can find plenty of literature on that subject.) I’ll stick to taxes, thank you.

But one thing that is true regarding the Dakota Access pipeline protests: Paid protesters were brought in. Ryan Rauschenberger read about those paid protesters and had a thought: Shouldn’t those paid protesters be paying state income tax to North Dakota? After all, the protests were in North Dakota, the work was conducted in North Dakota, and there’s definite nexus to the state. Mr. Rauschenberger is more able than others to make sure that those taxes flow to the Peace Garden State; he’s the Tax Commissioner of the state.

The Washington Times interviewed Mr. Rauschenberger:

“If an organization is directly paying someone to come and do activities on their behalf, even protesting — if they’re receiving income and they’re here in North Dakota performing activities for an organization, they owe income tax from Day One,” Mr. Rauschenberger said. “And that entity should be issuing 1099s. Just like a contractor…

“I think a lot of people think that, ‘Oh, if something goes through GoFundMe, it’s just always considered a gift.’ But it can also be used as a way to funnel money just like an employer paying a contractor,” Mr. Rauschenberger said. “It can be a way to funnel money as well, and very well could be taxable. I’m not saying it is. I’m saying it could be. And it’s really on a case-by-case basis.”

It’s not likely that the North Dakota Office of State Tax Commissioner will go after individual protesters (unless they receive a W-2 or 1099 and don’t file); the office has a staff of only 128. However, it’s far more likely the state will go after organizations that paid for protesters; the state will get more bang for the buck there. So if you were paying protesters in North Dakota, make sure you file those 1099s and send a copy to Bismarck.

Breaking Bad Hits an IRS Attorney

February 1st, 2017

In the television show “Breaking Bad,” a high school chemistry teacher turns to selling methamphetamine to help his family; that’s a decidedly illegal activity. An IRS attorney is accused of pursuing the same activity.

Jack Vitayanon, an IRS attorney in the Office of Professional Responsibility, was arrested today and charged with conspiracy to distribute methamphetamine. According to the criminal complaint, Mr. Vitayanon has allegedly been trafficking drugs since 2014.

From the ICE press release,

“Selling methamphetamine is a serious crime which is made more egregious when it is committed by a U.S. government attorney assigned to the Office of Professional Responsibility of the IRS,” said Angel Melendez, special agent in charge HSI New York. “People that sell this highly addictive and destructive drug must be brought to justice before more lives are lost to this epidemic.”

The IRS Office of Professional Responsibility is to, “…[S]upport effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.” A CNBC news story states Mr. Vitayanon worked in investigating complaints against tax professionals for OPR.

Mr. Vitayanon faces several years at ClubFed if found guilty of the charge.

2017 Mailbag #2: The Case of the Deliberately Wrong 1099

January 29th, 2017

Our second mailbag post deals with an issue I’ve reported on before: an incorrect information return. Once again, there’s a twist.

In 2015 I did some consulting for them and was paid $10,000; I received a 2015 Form 1099-MISC that correctly noted the income. I just received a 1099-MISC from them for 2016; however, I didn’t do any work for them in 2016. I called them and there response to my asking them to correct the error was “no.” What should I do?

The advice I gave before still applies:

But what if he refuses [to correct the 1099? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $3000. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)

Unfortunately, my correspondent’s total of her correct 1099s exactly equals her gross receipts so this strategy won’t work. I think there are two things she should do. First, send a letter (via certified mail) to the issuer of the incorrect 1099 explaining the situation and requesting that they issue a corrected 1099. Make sure you keep a copy of the return receipt (or tracking).

Second, consider including the 1099 on your tax return and then subtracting out the income (as a “return and allowance”). The IRS suggests (in this situation) that you subtract it out within gross receipts; the problem with that is that you’re almost certain to get an AUR notice. This method is less likely to generate an IRS notice, and your income is still being accurately reported.

What if you’re unlucky enough to get an IRS notice or be audited on this issue? Most of the time the burden of proof is on you, not the IRS; however, with information returns the burden of proof is on the IRS. The only evidence of my correspondent earning this “income” is the Form 1099-MISC. She has a separate bank account for her business; her bank deposits in 2016 exactly equal her gross receipts. Everything backs her story.

Congress changed the law on when 1099s for nonemployee compensation (independent contractors); those 1099s must now be filed by Tuesday, January 31st. One unforeseen consequence for tax professionals (and for recipients of 1099s) is that there will be more issues with incorrect 1099s this year. Hopefully the IRS’s performance on dealing with corrected 1099s will improve. If not, we’ll be dealing with a score of IRS notices on this issue next year.