IRS Proposes Session Method for Slot Machine Play and a Revision to the Regulations on Gambling Information Returns

March 3rd, 2015

This morning the IRS proposed a new Revenue Procedure for individual taxpayers to determine wagering (gambling) gains and losses from slot machine play. Additionally, the IRS proposed an update to the regulations on information returns for gambling from slot machines.

There’s a lot to like in IRS Notice 2015-21, the IRS’s proposal for a “Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play.” The proposal is for a daily session for slot machine play where there are electronic records. Let’s say an individual plays slot machines at Bellagio from 10:00am – 12:00pm and from 3:300pm – 5:00pm. That can all be combined into one session per this revenue procedure (if it is finalized).

Some things are not allowed. The day ends at midnight, so if a player is playing slot machines from 11:00pm to 1:00am, that would be two sessions (11:00pm – 11:59pm and 12:00am – 1:00am). Additionally, play at different casinos cannot be combined. Finally, each session stands on its own; a gambling loss from a session cannot be netted with a gambling win from another session.

The IRS doesn’t really have a choice in allowing session reporting of gambling; court decisions and an opinion from the IRS General Counsel have endorsed this. The proposed Safe Harbor procedure appears, at first glance, to strike a reasonable balance of session reporting with IRS verification. The only issue I see is that daily reporting is not normally provided to patrons by casinos.

Coincidentally, the IRS released a proposed regulation on reporting gambling winnings from slot machines (and bingo and keno). The IRS will be holding a public hearing on June 17th in Washington on the proposal.

The proposed regulation does not change the reporting threshold for when a W-2G is issued for slot play:

Under the proposed regulations, the reporting thresholds for winnings from bingo, keno and slot machine play (other than electronically tracked slot machine play) remain the same as under the existing regulations. These thresholds are intended to reach a balance between reporting burden and compliance risk. Based on over 35 years of experience with the current thresholds, the IRS thinks they are sufficient at this time to verify correct reporting of wagering income. Accordingly, §1.6041-10(b) of the proposed regulations provides that reportable gambling winnings means (i) $1,200 or more in the case of one bingo game or slot machine play, and (ii) $1,500 or more in the case of one keno game. However, advances in technology in the nearly four decades since the existing rules were adopted may overcome the compliance concerns that prompted the higher reporting thresholds and may warrant reducing the thresholds for bingo, keno, and slots to $600, consistent with other information reporting thresholds under §6041(a). Accordingly, the IRS and Treasury will continue to monitor the effectiveness of the existing (and proposed) reporting thresholds, and may propose to reduce those thresholds at a future time. Comments are specifically requested regarding the proposed reporting thresholds, including the feasibility of reducing those thresholds to $600 at a future time, whether electronically tracked slot machine play should have a separate reporting threshold, and whether the amounts should be uniform for bingo, keno, and slot machine play.

If anything, the threshold should be raised, not lowered. The value of a 1977 dollar today is a bit over $4. Thus, an equivalent threshold today is $4,800. I doubt the IRS will like my opinion on this. I am certain that casinos will not want the threshold lowered.

There’s more in this (this notice runs 30 pages), but it is Tax Season and I have a lot of work. I will report on this again after April 15th.

Don’t Call Us

March 2nd, 2015

Today I attempted to call the IRS Practitioner Priority Service (PPS). I had an outstanding issue I needed to resolve. I didn’t get through.

I’m used to being on hold for two hours when calling the IRS. Unfortunately, the IRS has cut staff in customer service. When I called today I reached the normal recording, but every time I attempted to obtain help for an individual not in collections (that’s one of the options when calling the PPS) all I got was, “Due to extremely high call volumes that option is not available now. Please try your call again later.” Sigh.

I imagine the regular phone numbers are just as bad. The IRS estimates that only 53% of phone calls will be answered this tax season. (Of course, given that the IRS’s accuracy in answering tax help questions isn’t particularly good, some of the missed calls may be to a taxpayer’s benefit.)

Still, I have to wonder about the IRS’s priorities. First, the IRS eliminated the ability for tax professionals to use e-services to enter Power of Attorney forms; that increased call volume. The IRS has apparently cut staff at the CAF Unit–the unit that processes the POAs that we now must fax in. It’s taking over a week for those POAs to be processed (the IRS “promised” four business days). That’s increased call volume. Adding the complexity of the new property regulations and the Affordable Care Act is making things worse for everyone.

There’s no moral here–this is more of a rant. But it’s a rant with a consequence: If tax professionals can’t get through on the phone to resolve issues, we’re forced to write letters. This causes delays in resolving matters, leading to more phone calls, more letters, and more cost to the IRS. Unless I’m missing something this is the path we’re heading down.

It Was the Sisterly Thing To Do

March 1st, 2015

Three Wisconsin sisters allegedly decided that tax fraud and identity theft should stay in the family. They’ve been accused of filing 2,000 phony returns by the Wisconsin Department of Revenue.

The Staten sisters (Sharon, Tawanda, and Angela) face 22, 28, and 40 felony charges respectively. It appears the investigation began when Angela and an alleged accomplice, Anthony Coleman, were arrested at a traffic stop in East Troy, Wisconsin. The police found a fake income tax return along with other related evidence and forwarded that information to the Department of Revenue.

As to the scheme itself, it appears to be identity theft on a fairly large scale. With the help of accomplices, the sisters used the names of prison inmates to allegedly file the phony returns. While the DOR did stop many of the returns from being processed, the sisters allegedly took the department for $234,390. It’s a certainty that if the Wisconsin allegations are true that they took the IRS for more than that. The returns appeared to have been filed mainly with TurboTax.

At least one of the sisters is in prison with bail being set at $10,000. It’s quite probable that if that traffic stop hadn’t happened the sisters (if the allegations are true) would still be trying to fleece Wisconsin and the IRS.

Correctly Dealing with Tip Income

March 1st, 2015

Las Vegas is full of service workers, of course. With many of the world’s largest hotels and casinos in Sin City, there’s an army of workers to man the facilities. Last week, the Tax Court looked at a bartender that the IRS thought had unreported tip income. The bartender contended the IRS was drinking something. Who was right?

The petitioner did a lot of things right. He reported his tips to his employer, and they were included on his W-2. (The petitioner opted out of an automatic tip compliance program.) He kept meticulous records.

Petitioner testified about how his bar was set up and what a shift was like during the years at issue. He stated that his bar had only six stools and that customers would often sit at the stools playing poker for several hours and receive several comped drinks as a result. He testified that the only time his bar would be busy was when there was a big convention and then most of the drink sales tips would be on company credit cards rather than cash. He described the difficult economic times that Las Vegas faced during the years at issue and how his business had decreased as a result.

Petitioner also testified about the typical tipping behavior of his patrons. Most of his drinks served were comps, and he testified that customers rarely tipped on comp drinks and that if they did they might “throw [him] a buck or two” after several hours of sitting at his bar receiving the comped drinks. Petitioner additionally testified that college kids and foreigners rarely tipped.

As I tell my clients, document, document, and document some more and you usually will do well if you’re audited. The bartender wasn’t drinking but the IRS was.

Joe Kristan has more.

Case: Sabolic v. Commissioner, T.C. Memo 2015-32

10 = 2500 ?

February 25th, 2015

Of course ten doesn’t equal 2,500. However, in the brave new world of the United States Postal Service it does. On Monday, I mailed a Tax Organizer to a client here in Las Vegas; she’s about ten miles from where I am. I also mailed a completed tax return to a client in South Carolina. Both will be received today.

About one year ago the Postal Service noted their plans of slowing down first class mail delivery as a tool to save money. These have apparently now gone into full effect. Anything that isn’t a parcel (or Priority Mail) is being slowed down by one day. Mail that in the past would take one day to go from Summerlin to Henderson (two areas of Las Vegas) now takes two days. My Priority Mail package to Columbia, South Carolina takes the same two days.

This is just something to realize when you mail a letter (to your tax professional or anyone else); it may take a bit longer to get where it’s going. However, when you mail something to the IRS or a state tax agency, it’s the date of postmark that counts so while the slowdown will impact when your payment posts it does not impact the timeliness of the payment.

Taxes Impacting the Giants

February 24th, 2015

The San Francisco Giants have been one of baseball’s more successful teams; they’re the current world champions. But they haven’t been as freewheeling in spending money as other teams. Their General Manager blames California taxes.

The top tax rate for California is 13.3%, and it kicks in at $1 million of income. As you can imagine, most major league baseball players earn far more than that. In an interview with Hank Schulman of the San Francisco Chronicle, GM Brian Sabean stated:

“To entice a free agent to come to San Francisco, we’re almost in an overpay situation, so why get involved in all those battles where you’re not going to be able to go up the totem pole money-wise?” Sabean said.

When asked to elaborate on why the Giants have to overpay, Sabean said, “You’ve got the state of California taxes.” …Asked if the high California income tax has been a problem for a while, Sabean said, “To a certain extent. Things now are getting more and more about the signing bonus, more and more about your take-home. Exponentially, when you get involved in some of those numbers, it makes a sizable difference to some.”

There’s an obvious implication here: the big spending Los Angeles Dodgers and New York Yankees have inflated their salaries to cover high state taxes. Jon Lester, this year’s biggest free agent signee, ended up with the Chicago Cubs. Illinois’ income tax is now down to 3.75%; that’s a lot lower than California. This may be good news for Cubs fans like me.

“Ripping Off Your Refunds” In the Miami Herald

February 22nd, 2015

There is an excellent article in the Miami Herald on the identity theft tax fraud crisis. The epicenter of this is South Florida (as noted in the article). I don’t have much to add to the frustrations of victims with the IRS’s conduct in these cases. One quote:

“The IRS call center person acted as if we were the ones who had done something wrong.”

Solely a Way to Go to ClubFed

February 22nd, 2015

Until I became a tax professional I had never heard of a “Corporation Sole.” It’s a legal entity consisting of a single incorporated office, occupied by a single person. It’s a corporate structure used mainly for religions organizations so that office holders can have a successor for their office.

When used for a religious organization, a corporation sole doesn’t pay taxes. It has nothing to do with the corporation sole and everything to do with the fact that a church is a charitable (501(c)(3)) organization that generally doesn’t pay tax. Used properly, a corporation sole is a useful vehicle for churches.

Of course, where you and I wouldn’t go the bozo tax element quickly moves. Even though the IRS has warned about corporation soles since 2004, promoters still tried to sell the snake oil to the gullible. One such entity was Trioid International Group Inc. Trioid, here in nearby Henderson, currently markets itself as a company specializing in being a Nevada registered agent and will help individuals set up a Nevada corporation. That seems like a good, legal business (and it likely is).

However, a visit to the Internet wayback machine gives a very different picture of Trioid. Trioid was actively marketing corporation soles in 2005, and had this description of them:

Common law corporation soles are excluded from filing tax returns of any kind under a mandatory exception in the Internal Revenue Code pursuant United States Code, Title 26 §508(c)(1)(A) and there are no record keeping requirements which may be imposed by any taxing or revenue authority. Corporation soles are not required to make any application for this exclusion or exception and are not required to qualify under §501 (c)(3) as a “church”. In other words, the sole exists due to your natural right to freedom of belief and as such, there is no law respecting its establishment or operation which may impair it, including taxation. To tax the overseer is to tax the sole. The tax Code exception provides the corporation sole with the status of “nontaxpayer” in contradistinction to “taxpayer”. The federal courts have ruled that Congress makes no tax laws that apply to nontaxpayers!

The above paragraph is basically out-and-out tax fraud.

Helpfully to prosecutors, the names of the two individuals behind Trioid were in plain view on the web pages: Gerrit Timmerman and Carol Sing. They were indicted back in 2013 and were convicted on Friday of conspiracy to defraud the United States related to their promotion of a tax fraud scheme. They’ll likely get some time at ClubFed to think about what they did.

As always, the usual warning applies: If it sounds too good to be true, it probably is. If you use a corporation sole as a vehicle to avoid taxes, you’re heading down a road that leads to ClubFed.

Oops Gets Bigger

February 20th, 2015

Or, first California, now the United States.

Last week I reported on Cover California’s error impacting an estimated 100,000 individuals who received incorrect Form 1095-A’s. It turns out that was just the tip of the iceberg. As reported by AP:

About 800,000 HealthCare.gov customers got the wrong tax information from the government, the Obama administration said Friday, and officials are asking those affected to delay filing their 2014 returns.

This represents one-fifth of the Form 1095-A’s sent out by the federal exchange. That means there are a lot of people who can’t correctly file taxes until the corrected 1095-A’s are sent out. That should hapen in a couple of weeks but there’s an issue that’s implicit in the AP story: The government isn’t sure how the error happened. If that’s the case there’s an obvious question; how do you know that the ‘corrected’ 1095-A’s are correct?

Given that the majority of Americans would like to see ObamaCare go to the scrap heap, I’m sure these new revelations will inspire more confidence in the law. Given further that it is also quite likely that the majority of those who received subsidies for health care will have to repay some to all of the subsidy on their tax returns, I’m sure even more people will embrace ObamaCare….

Oops

February 16th, 2015

This past weekend I saw my first Form 1095-A. That’s the form that individuals covered by health insurance through a plan form an exchange will receive. In California, 800,000 of these were mailed. Unfortunately, 100,000 of these were wrong. Oops.

As reported by the Los Angeles Times, Covered California sent out the wrong forms:

Covered California said it sent incorrect information on some forms because its customer data didn’t match what health plans had on file.

For instance, there may have been a discrepancy for the person’s length of coverage in 2014 and amount of subsidy received.

Amy Palmer, an exchange spokeswoman, said the agency is reconciling that information and sending revised forms to the affected customers by later this month.

There’s another major issue here: No one knows which of the forms are correct until Covered California completes its review of all of the accounts. Heh, there’s only a 12.5% chance that any specific 1095-A is wrong….

And let’s give a huge demerit to Covered California’s webpages. One would think that if there’s a mistake impacting 12.5% of customers you would publicize it. That’s especially the case when this is a mistake that impacts these individuals when they file their tax returns. However, Covered California’s main webpage and its 1095-A page are both silent about this error.

No wonder customer dissatisfaction with ObamaCare remains high, and this is before many individuals discover that they’ll owe money on the advanced credits they received.