From Russ Fox, E.A., of Clayton Financial and Tax of Las Vegas, NV & Bethesda, MD. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
The couple, who are married and were the proprietors of the aforementioned web site, decided to claim to have received “…hundreds of thousands of dollars in 1099-OID income and that the entire amount had been withheld and paid over to the IRS on their behalf.” The couple even put down real bank tax identification numbers on their phony paperwork. Unfortunately, the IRS didn’t detect the fraud until after the fact. Yet it was certain that sooner or later the IRS would find the fraud given that the IRS document matching system wouldn’t match their phony paperwork to real 1099s.
One good fraud deserves another, so the couple then bought real estate and transferred it into a trust titled “POKE-A-BOTTOM.” (No, I didn’t make that up.) Then they were facing foreclosure, so they sent fake tax returns and frivolous documents to their bank. (In all seriousness, lying on a loan document can be a federal felony.) “The documents included fake tax forms and a “Bonded Promissory Note” for $10,000,000, along with instructions that the financial institution should use the document to pay off their $266,000 mortgage and keep the remaining funds.” Somehow the bank decided that wasn’t a good idea. I imagine that the RV and gold coins purchased by the couple with some of the proceeds will be used to pay back the United States Treasury.
The couple will have plenty of time to think of non-idiotic behaviors they can do in the future. There wasn’t anything idiotic about their sentencing for one count each of Conspiracy to Defraud the United States and two counts each of False Claims Against the United States: Mark Garcia received 30 months at ClubFed; his wife, Patricia McQuarry, received 40 months.
The IRS released a new version of Publication 1345 today (html version only is available for now). Included in it is the following:
Note: An electronic signature via remote transaction does not include handwritten signatures on Forms 8878 or 8879 sent to the ERO by hand delivery, U.S. mail, private delivery service, fax, email or an Internet website.
Thus, if a client signs a signature document in ink, hands it to me, mails it to me, faxes it to me, or uploads it to me via our web portal (or even if he emails it to me), it’s not an electronic signature and I don’t have to check id, etc. (So, mom, I don’t need to see your ID.)
Additionally, the IRS will accept Form 3115 as a pdf attachment to an electronically filed return. This is one less bad thing with the new property repair/capitalization regulations.
If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.
There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations. Let’s look at them seriatim.
1. Tax Extenders. Stop me if you’ve heard this before: Congress has essential tax legislation, but sits around and does nothing on it until after the November elections. Yes, that’s happened again. If Congress acts on extender legislation in the next couple of weeks, there likely won’t be much of a delay (if any) on the opening of the 2015 Tax Season. However, if Congress dallies or punts this to the new Congress in January, the 2015 Tax Season will be significantly delayed. This will also hurt the IRS’s resources when there’s a lot going on (see below). I’m hopeful that something will be passed by the first week of December but that’s just hope on my part. I have no idea if the extenders will be timely extended.
Odds that this impacts Tax Season: 95%
Odds of a significant impact: 50%
2. Budget Issues the IRS Faces. The IRS’s budget has been cut the last two years. The House of Representatives has done this because of anger over the IRS scandal; it’s clear to any objective observer that the IRS knows more about the scandal than they’ve revealed. The only thing that the GOP can do to impact the IRS is cut the budget.
Unfortunately, the budget cuts impact service that the public and tax professionals receive. Additionally, the cuts limit the IRS’s ability to adapt to new legislation. It’s not a recipe for good service. Given the major changes coming for the 2015 Tax Season, it’s a recipe for disaster.
Odds that this impacts Tax Season: 100%
Odds of a significant impact: 80%
3. The Affordable Care Act (aka ObamaCare) This is the first year that reporting on health insurance is required on tax returns. However, reporting isn’t required this year by insurance companies. Insureds who believe they qualify for an exemption must apply for that exemption; that exemption must be noted on the return.
For most individuals, the new law will not change their taxes. They have employer provided health insurance. However, for the other 20% the new law will change their returns. They’ll have their own insurance, or receive a subsidy, don’t have insurance, have an exemption, or any of the other ‘edge cases.’ There are two new forms that tax professionals will have to deal with, and the complications are an unknown.
Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%
- You’re a business entity that manufacturers anything (you produce property); or
- You’re a business entity or an individual with a business that has depreciation; or
- You’re an individual (or a business) that owns rental property.
It might be easier to list those taxpayers who aren’t impacted by this: The typical family who works, owns a home, and has a simple situation. Put another way, if you file a Schedule C, E, or F, or you file a business return, you will likely be impacted by this change.
So Russ, you ask, what’s changing with these new regulations? Since most of you aren’t tax professionals and don’t care about the minutiae, the IRS changed the rules on what must be capitalized (and depreciated over time) and what must be expensed. That didn’t seem like such a huge deal back in May when I first heard about this (at a continuing education course). However, how the IRS is implementing this change will impact you if you’re a taxpayer impacted by this.
At the continuing education course I took, we were told that every impacted taxpayer would need to sign a statement noting compliance with the new regulations. That didn’t seem too bad–get a draft statement, and make the necessary modifications depending on the type of business. Unfortunately, that’s not what’s going to happen.
Instead, the IRS wants every impacted taxpayer to include Form 3115 on their tax return. This form is anything but easy or straightforward. You must make several calculations based on the past. The IRS estimates that it will take a taxpayer, on average, 23 hours and 48 minutes to be able to complete and file just this form. This is nuts.
Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero. [emphasis in original]
Joe calls this insane; I agree completely. Yet as of now I’m required to do this procedure. No wonder it was stated, “…taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.” Consider a hypothetical client, Joe Lessor. Mr. Lessor has one rental property he’s leased out for the last four years. He has rent received, a mortgage, property tax, management fees, and every so often repairs. Do you think he’s going to pay me an additional $5,000 to get his return done to comply with this requirement? Or do you think he’ll tell me to make the numbers zero because the return was done right in the past and it will be done right in the future? (If you don’t like this scenario, choose your own.)
But there’s more. Form 3115 is (at least with my tax software) not a form that can be electronically filed. That means the IRS will have a lot more paper returns this year. Given the IRS’s staffing issues, that sure figures to work well. UPDATE: Form 3115 can be attached as a pdf to electronically filed returns. That’s been clarified in Publication 1345. Thus, it can be (effectively) electronically filed.
I am hopeful that the IRS’s view on this will change. I know that the AICPA sent a request to the IRS for a de minimis exception to this. Maybe the IRS will see the light.
Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%
The 2015 Tax Season looked to be bad just given the first two issues. Adding ObamaCare and the new property/capitalization regulations to this just makes what was going to be a bad tax season into what will likely be a disastrous tax season. Nina Olson, the National Taxpayer Advocate, compared the upcoming tax season to 1985. In that tax season, the IRS Philadelphia Service Center “lost” about 20% of the paperwork they received. (This was back when returns were all paper-filed.) This will likely be a very bad tax season for tax professionals and taxpayers.
Nine individuals came to Las Vegas on Monday and Tuesday to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?
You will notice a theme to this year’s winners: London. Four of the players reside in the capital city of the United Kingdom yet none are from London. Indeed, they’re all from other European countries. The reason they’ve chosen the United Kingdom is simple: taxes.
Tax rates in Europe are notoriously high. But citizens of the European Union are allowed to move and reside in another E.U. country (as long as they pay that country’s taxes). The United Kingdom beckons to poker players for a simple reason–gambling income is not taxed in the U.K. A tax rate of 0% looks quite good in comparison to tax rates of 75% in some E.U. countries.
One other note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.
Congratulations to Martin Jacobson. Mr. Jacobson’s pair of tens beat an Ace-Nine to win the championship. The native of Sweden won an even $10 million. Mr. Jacobson resides in London, and the reason is obvious. Had he still been living in Sweden he would have faced a 56% marginal tax rate to Sweden’s very aggressive tax agency, Skatteverket. Being able to enjoy 100% of your income rather that 44% sure sounds good to me! Saving $5.6 million in taxes by residing in London sounds like a no-brainer to me.
Finishing second was yet another resident of the United Kingdom, Felix Stephenson. The native of Norway has to console himself with $5,147,911 for finishing second. Had he still been living in Norway, he would owe $2,007,685 in tax to Skatteetaten, the Norwegian tax agency (39%). Instead, he owes nothing.
In third place was Jorryt van Hoof for $3,807,753. He didn’t earn sponsorship income from poker sites, though. While he could accept such income, the sites were informed by the Dutch gambling regulator, Kansspelautoriteit, that such sponsorship would be considered advertising to the Netherlands under Dutch law and is illegal. As for residing in London, that saved Mr. van Hoof $1,104,248. The Netherlands taxes gambling at a flat 29% rate. For an extra $1.1 million, even I would take the weather in London.
Finishing fourth was William Tonking, a professional poker player from Flemington, New Jersey; he won $2,849,763. Unlike the first three finishers Mr. Tonking does not get to enjoy all of his winnings. He will owe an estimated $1,073,024 to the IRS and $242,733 to the New Jersey Division of Taxation–a combined tax rate of over 46%.
An obvious question arises: Why doesn’t Mr. Tonking also move to London? Unlike his European competitors, Americans owe tax on their worldwide income. An American living abroad still must file a tax return with the IRS. Taxation for expatriates can be reduced by the Foreign Earned Income Exclusion, tax credits on income taxed by other countries, and tax treaties. For an American playing poker in the United Kingdom, the Exclusion is available. However, for a poker tournament in Las Vegas there are no legal means to reduce that taxation.
Billy Pappaconstantinou of Lowell, Massachusetts finished fifth for $2,143,794. But that’s before taxes. Mr. Pappaconstantinou is an amateur poker player (he’s a professional foosball player), so he’s not subject to the self-employment tax. I estimate he’ll owe $771,827 to the IRS and $111,477 to the Massachusetts Department of Revenue.
In sixth place was Andoni Larrabe. Mr. Larrabe earned $1,622,471 for his finish, and he’ll get to keep all of it. The native of Spain is the last of our London residents. Given the top marginal tax rate of 52% in Spain, I can understand why he now calls London his home. Interestingly, Mr. Larrabe effectively finished in fourth place; his after-tax income puts him ahead of the fourth and fifth place finishers.
Daniel Sindelar of Las Vegas ended up in seventh place. The professional poker player earned $1,236,084 before taxes. Nevada does not have a state income tax, so Mr. Sindelar will only owe tax to the IRS. I estimate he’ll owe $494,397 in tax (40.00%)
Finishing in eighth place was Bruno Politano of Forteleza, Cera, Brazil. The second amateur of the final nine players, Mr. Politano won $947,172. The US-Brazil Tax Treaty does not exempt gambling winnings from withholding, so an even 30% of his winnings ($284,152) were withheld and remitted to the IRS. It appears that Brazil taxes some gambling at 30%. It’s unclear if the poker income would normally be subject to taxation. However, even if it is it’s unlikely Mr. Politano will owe any tax to Brazil given that he can claim a tax credit on the money withheld to the IRS.
Mark Newhouse of Los Angeles finished in ninth place. A professional poker player, Mr. Newhouse did not win anything additional to the $730,725 he took home in July. I estimate he’ll lose just over 44% to tax ($324,167). If that name looks familiar to you, it should: Mr. Newhouse finished ninth last year, too. That’s an incredible accomplishment though I’m sure Mr. Newhouse is disappointed in not finishing higher.
Here’s a table summarizing the tax bite:
Amount won at Final Table
Tax to IRS
Tax to New Jersey Division of Taxation
Tax to Massachusetts Dept. of Revenue
Tax to Franchise Tax Board (California)
That’s a total tax bite of 11.59%.
Here’s a second table with the winners sorted by their estimated take-home winnings:
1. Martin Jacobson
2. Felix Stephenson
3. Jorryt van Hoof
6. Andoni Larrabe
4. William Tonking
5. Billy Pappaconstantinou
7. Daniel Sindelar
8. Bruno Politano
9. Mark Newhouse
While Andoni Larrabe finished in sixth place, he ended up in fourth place based on his after-tax income. Unlike the fifth through ninth place winners, Mr. Larrabe gets to keep all of his winnings. It’s always nice when your after-tax income equals your before-tax income.
I’ve been doing this analysis for several years, and this is the first year that the IRS didn’t finish in first place. Indeed, the IRS’s take of $2,869,698 puts it in fourth place. The tax agency can only hope that next year’s winners will not include individuals from the United Kingdom.
For the past several years I’ve ended my post on the WSOP with, “That’s because we all know that the house–the IRS–always wins.” This year, that’s not the case for our four European winners. This year, the house doesn’t always win–when you’re a resident of London. The winners residing in London saved $9.55 million in tax! London is definitely calling for European professional poker players:
UPDATE: A commenter on Twitter asked about Caesars Entertainment’s tax bite. The results from the WSOP should be included in Caesars’ third quarter results. Caesars withheld 6% of each $10,000 entry fee ($600). There were 6,683 entrants, so Caesars earned from the players $4,009,800 before expenses of running the event (dealers, staff, incidentals, etc.). Caesars also has a contract with ESPN for televising the event.
I grew up in Chicago. It’s legendary in Chicago that the dead vote. My father told me that during the 1960 presidential election that Democrats waited to see how many of the dead they needed to vote to ensure that John F. Kennedy won Illinois over Republican Richard Nixon (I can’t vouch for the veracity of that story).
Cook County has begun to make sure that seniors are truly alive when taking the exemption. They’re combing the Social Security death list (this is a very legitimate use of that list) and have a contract with LexisNexis to find the living dead. Zombies aren’t eligible for that tax exemption. To date, they’ve discovered 3,809 cases representing $6.2 million of improper exemptions.
It looks like the living dead are on borrowed time in Cook County for this exemption.
Individuals with unusual returns will receive a letter in the mail asking them to go to an Internet website (or call the Alabama Department of Revenue) so that they can take the quiz. Once returns ‘pass,’ the refunds will be processed. The system is provided by LexisNexis.
While the story does not note what would cause a return to be unusual, I suspect the Alabama Department of Revenue has implemented a version of my modest proposal on identity theft: If the return’s address (or bank account for direct deposit) doesn’t match the prior year’s return, the quiz is sent.
Kudos to the Alabama Department of Revenue for trying this. While the Alabama Department of Revenue noted that they stopped $18 million of identity theft-related refunds in 2012 (the 2013 total is not yet available), undoubtedly many were processed. This seems like a relatively simple process that should stop many identity theft-related refunds.
Do you remember 1928? Well, that was the last time Nevada had a Republican governor, a Republican State Assembly, a Republican State Senate, and Republicans holding all major statewide offices. Well, 2015 will see that. As part of the tsunami nationally, any Republican that had a chance of winning won in the Silver State.
Coincidental with that, any measure which had the appearance of increasing taxes lost. The Margins Tax, supported by the Nevada Teachers Unions, was expected to lose by a 60% no vote. It got crushed, as the no vote was 78%. Nevadans don’t like the idea of state income taxes of any sort.
There was no Nevada senator on the ballot, but Democrat Harry Reid can’t be liking the results. He’ll remain Senate Majority Leader for the rest of 2014, but he will soon be Minority Leader. The GOP will likely hold 54 Senate seats come the next Congress.
The Nevada Congressional delegation to the House was split two Democrats, two Republicans. It will now be three Republicans as Democrat Steven Horseford lost his race.
The biggest shock was the State Assembly. No one predicted that the GOP would pick that up. The thoughts were that if this was a ‘wave’ election, Republicans might get to 21 of the 42 seats. The State Assembly will have at least 25 Republicans.
There was no surprise in that Republican Governor Brian Sandoval coasted to reelection. In the primary, “None of the Above” did better than his Democratic opponent. Governor Sandoval is hugely popular here in Nevada, and he is definitely a likely future Senator. Governor Sandoval won over 70% of the vote.
The Nevada legislature only meets every-other-year, so this election will have a big impact on coming policies. Nevada does have major issues: an education system that is poor, tax revenues that do need to grow, and major water issues. In the past, partisan bickering has been at a minimum in Carson City. We’ll see if having the GOP in charge of everything in the next term changes anything.
One of my favorite sayings at the poker table is, “Math is hard.” Yesterday, the Tax Court explained some basic math to a petitioner who almost completely struck out.
Eugene Kernan didn’t file tax returns since sometime before 2000. Eventually the IRS caught up to him and issued notices of deficiency for 2001 through 2006. The IRS wanted the tax due, interest, and penalties for fraudulent nonfiling (or late filing if that wasn’t upheld) and the late payment penalty. Mr. Kernan though he didn’t have to file at all.
When the findings of fact include the words “tax avoidance,” things aren’t looking up for the petitioner.
During the years at issue Mr. Kernan had income from at least two sources: he sold various tax avoidance products, and he performed various paralegal functions, including advising people in matters before the Internal Revenue Service (IRS). Deposits into Mr. Kernan’s personal checking account from those business activities exceeded $79,000 per year.
The Tax Court decision notes that Mr. Kernan “…owned a Web site titled ‘The American Republic.’” I don’t know if he still owns it, but the website is still up and still advertising his CD-ROM titled “How to STOP the IRS.” A helpful hint to anyone who buys the cd: Yes, you must pay your taxes. But I digress….
A trial was held and the Court asked both parties (the IRS and the petitioner) to file briefs. The Court limited the size (in pages) of the briefs. Math is hard, but 88 is greater than both 75 and 30. The Court asked for a 75-page brief and a 30-page answer (those were the maximum lengths). I remember a commercial from when I was growing up: “When E.F. Hutton talks, people listen.” Well, when a judge tells you to limit something to x, you had better listen.
Mr. Kernan avoided the Court’s page limits in perhaps the least creative way of all; he just ignored them…
The generous page limit for the opening brief was to accommodate proposed findings of fact, yet Mr. Kernan’s proposed findings of fact were only two pages and consisted of argument, not findings of fact. Counting pages in the manner instructed by the Court, Mr. Kernan’s opening brief came in at 88 pages. The Court did not need to go to great effort to discover Mr. Kernan’s excess pages; he numbered them as instructed. His page 1 begins after his table of authorities, and his signature appears on page 88. Perhaps Mr. Kernan is fond of the number 88; his answering brief also came in at a whopping 88 pages, not counting attachments.
The petitioner’s briefs were stricken.
Indeed, Mr. Kernan acknowledged in his objection to respondent’s motion to strike that “there is no doubt that the Tax Court ‘has the right to set limit[s] as to brief length and has discretion as to whether to accept and/or not consider deficient briefs’.” Accordingly, we will deem Mr. Kernan’s opening and answering briefs stricken in a separate order.
However, Mr. Kernan did win one argument: He honestly believed (in the view of the Court) that he didn’t have to file a return, so the fraudulent failure to file penalty was not upheld. However, he does owe the failure to file and failure to pay penalties (and the estimated tax penalty). And the Court warned Mr. Kernan that if he keeps making frivolous arguments, he’ll likely have to pay a penalty in Tax Court for making frivolous arguments.
Of course, you as readers of this blog know that the above quote is true as long as those deductions relate to necessary and ordinary business expenses. And you do have to include all of your income on your tax return, including income from drug traffickers.
It appears that Tanya Marchiol of Phoenix forgot those minor points. She was accused of not paying tax on $1.4 million of income from 2008 to 2010. Last week, Ms. Marchiol pleaded guilty to three counts of tax evasion. A story in azcentral.com states, “A number of Marchiol’s former employees told authorities she engaged in money laundering for personal profit, according to court documents.” The case began when Ms. Marchiol allegedly took money from drug traffickers to purchase a home in Phoenix but then commingled the funds with proceeds from other clients (professional athletes). This led to the indictment on tax evasion and money laundering charges.
As usual, if it sounds too good to be true it probably is. For Ms. Marchiol, she’ll likely have some time at ClubFed to ponder the truth of this.
Today is Nevada Day! Exactly 150 years ago Nevada was admitted as a state. The Nevada Supreme Court yesterday ruled on a case that may make this day more celebratory for workers at adult entertainment facilities (strip clubs).
Several performers at Sapphire Gentleman’s Club sued the club alleging they were employees and not independent contractors. The district court ruled that they were independent contractors. They appealed to the Nevada Supreme Court.
The Court then ruled that the Fair Labor Standards Act (FLSA) economic realities test should be used to determine who the employer of the performers is. The Court noted that while it might appear that the performers weren’t under the control of the club (they could choose their own schedule, whether to dance or not, etc.), appearances were deceiving.
But by forcing them to make such “choices,” Sapphire is actually able to “heavily monitor [the performers], including dictating their appearance, interactions with customers, work schedules and minute to minute movements when working,” while ostensibly ceding control to them. This reality undermines Sapphire’s characterization of the “choices” it offers performers and the freedom it suggests that these choices allow them; the performers are, for all practical purposes, “not on a pedestal, but in a cage.” [citations omitted]
The Court noted that other economic realities test factors made the performers appear to be employees rather than independent contractors. The Court unanimously reversed the district court decision, and remanded it back to the district court for a trial on damages.