While I Was Out: The BOE Is In Deep Trouble

April 26th, 2017

California has not one but three tax agencies. The Franchise Tax Board (FTB) administers income tax. The Employment Development Department (EDD) administers payroll taxes. And the Board of Equalization (BOE) administers sales tax (and a few other miscellaneous taxes and fees); the BOE also hears appeals from the Franchise Tax Board. Most states have one tax agency but as Scott would say, “California.” Until this year the most notoriety the BOE has received was over its building. That changed last month when the California Department of Finance released a scathing audit report on the BOE.

The Executive Summary notes,

…Specifically, certain board member practices have intervened in administrative activities and created inconsistencies in operations, breakdowns in centralized processes, and in certain instances result in activities contrary to state law and budgetary and legislative directives.

During our evaluation, BOE had difficulty providing complete and accurate documentation in response to our evaluation inquiries and in some instances various levels of management were not aware of and could not speak to certain district activities for which they held oversight responsibilities. Specific examples include the informal establishment of a call center, creating an unofficial office location, and inconsistent use of community liaisons.

This sounds bad. It looks like the BOE is ignoring its budget, violating the law, and ignoring the legislature. Continuing:

In addition, staff resource utilization practices have negatively impacted personnel and accounting records. These records do not accurately depict current operational activities. Despite having dedicated staff and operating budgets of $1.5 million, some board members routinely supplement their staff by redirecting revenue generating staff to perform non-revenue generating board member activities, including outreach activities. These redirections violate Provision 1 of the Budget Act. Additionally, BOE is unable to accurately reflect revenue and cost impacts in its accounting records and Annual Report on Sales and Use Tax Audit and Collection Activities, Statewide Compliance and Outreach Program and Audit Selection Improvements (supplemental annual report).

Yikes! They’re spending money when they’re not authorized to. But I’m sure they’re handling their core function, collecting sales tax, just fine. Right?

Lastly, BOE provided 11 different versions of its proposed sales and use tax allocation adjustment and with each version, Finance continued to find errors and omissions. Since the proposed adjustment continues to change and BOE has not prepared a comprehensive explanation of its assumptions and methodologies, further review of the proposed allocation adjustment is imperative.

The report is devastating, and the reactions have been uniform across both sides of the aisle in Sacramento. Governor Brown has sanctioned the agency. Democrats and Republicans in the legislature are asking tough questions.

This isn’t the first time the BOE had a problem with money. As the San Francisco Chronicle noted in an editorial, the BOE mishandled $47.8 million in sales tax money back in 2015.

Several years ago (when I resided in California) I suggested that the FTB and BOE should merge. I wouldn’t be surprised if that now becomes reality.

That Was the Tax Season that Was

April 23rd, 2017

April 15th, err, make that April 18th, has come and gone. Every Tax Season is different, and this one had its ups and downs. So let’s take a look at eight observations I have of the first part of the 2017 Tax Season:

1. The IRS did a good job with telephone service for tax professionals. My average wait time on hold with the Practitioner Priority Service was three minutes. That’s superb. I was told by several agents that the IRS added personnel to help tax professionals. That made my life easier, but…

2. The IRS didn’t do as good a job with taxpayers. I had a couple of clients who called the IRS note the hour-plus hold times.

3. The new law mandating interviews with taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit is annoying for tax professionals and will only stop the lowest of low hanging fruit of tax cheats. Most tax professionals know their clients, and simply aren’t committing tax fraud. My clients were more bemused than anything else with some of the questions I had to ask about their children.

4. More of my clients filed without extensions than in the past. This result appears to differ from the national average (the latest report I saw was that there were five million fewer returns filed year-to-date than last), and differs from the long-term trend that I’ve seen the last few years (that more returns were going on extension).

5. The new FBAR deadline will make my life far easier. Officially, the deadline coincides with the tax filing deadline, but there’s an automatic six-month extension. This will allow FBARs to generally be filed coincidentally with tax returns.

6. It would be impossible to run our tax practice without using tax software; however, tax software isn’t a panacea for thinking about the returns themselves. I’ve seen some self-prepared returns this Tax Season that were, to be kind, amusing. Tax software is great in automating the mundane but not so great in thinking for you.

7. We need tax reform, and soon. The Tax Code is far, far too complex. I’m now preparing returns that are close to “basic.” And I practice in a state where there’s no income tax. (Yes, I prepare returns for many states, but my local clients generally don’t have to deal with state income tax.) Yet these clients find the Code so complex that they can’t do their own returns.

8. Deadlines matter. Almost every tax professional I know sets deadlines for receiving paperwork from clients; ours was set at March 15th. We did get to many returns that came after that date, but for the client who wondered why I stifled a laugh when he dropped his paperwork off on April 17th and said he’d be in tomorrow to pick up his completed return. He’s on extension, of course. If you’re using a tax professional to prepare your returns, he almost certainly has also set a deadline for receiving paperwork prior to the October 16th extension deadline. You should pay attention to that, and get your paperwork in to your professional timely.

I’m hopeful my thoughts in October will be just as kind about the second half of the Tax Season; only time will tell.

Bozo Tax Tip #1: Declare More Income than You Earned!

April 13th, 2017

Why in the world would anyone of sound mind and body declare more income than they actually earned? He or she would owe more tax, so there’s no reason to do this, right?

No, there are actually two reasons people do this. They’re both part of the Bozo contingent, and I strongly advise you not to follow their lead, but here goes:

The first (less common) reason is to qualify for a loan (typically a mortgage). Let’s say you found your dream home, but you need to show income of $100,000 a year…but you only earned $90,000. Simple solution: Declare an additional $10,000 of income! Now you qualify, and next year you plan on cheating on your taxes by that $10,000. Of course, the fact that you committed a felony by lying on your loan application doesn’t concern you. And the IRS is unlikely to come after you for the extra income; after all, if you do get audited in some future year you will simply admit the error. Some who practice this simply file an amended return a year or so later. You own the home, you’re making mortgage payments, so no one’s the wiser, right? (We’ll continue to ignore that felony you committed.)

The more common reason is the Earned Income Credit. This welfare program is part of the Tax Code. Let’s say you earn nothing; you’re not eligible for it. But if you have some income (but not huge income), you’re eligible for “free money.” (And we’ll throw in a phony child or two or nineteen so you can get the Child Tax Credit and, voila, you have even more “free money.”) Of course it’s not free—it comes out of our tax dollars. And you’re committing a crime (lying on your tax return). However, given how the Tax Code works and the monetary reasons for individuals to seek the Earned Income Credit, the Bozo contingent looks at it as “free money.”

(That’s the reason Congress requires tax professionals to conduct a mandatory interview for people who are claiming this credit. There are penalties on tax professionals who evade this requirement. Of course, if you’re running an Earned Income Credit fraud program, you’re probably more than willing to lie on the tax professional’s mandatory questionnaire.)

A tax return is supposed to show the exact amount of income you made: no more, no less. If you get caught adding income that didn’t exist to your return for one of the two reasons I’ve highlighted you’ve committed at least one crime. I’d like Congress to end Tax Code welfare (end the Earned Income Credit) but that’s not going to happen. But if you get caught adding phony income (especially if you’re a tax professional running an EIC fraud mill) you can be sent to a very real prison.


That’s the last of our Bozo Tax Tips for the 2017 Tax Season. I’ll be back in about one week with normal blog content.

Bozo Tax Tip #2: Cash Isn’t Taxable

April 12th, 2017

I haven’t run this Bozo Tax Tip in a few years, but it reared its head again just a couple of weeks ago (as you read this). A new client came into my office for the preparation of his tax return. Everything went smoothly, and an hour or so later his returns were complete and electronically filed, he had his copies of the returns, and the Bozo festivities (unknowingly to me) were about to begin.

He asked me if I’d take cash. “Sure,” I replied.

The client then handed me an amount exactly 10% less than the amount of the invoice. “This way you don’t have to report it—after all, it’s cash so there won’t be any record.”

“Cash income is just as taxable as any other source,” I replied. “I’m ethical, and I report all my income.”

“Oh, come on,” he replied. “When I was self-employed everyone did that.” Thankfully, my client is currently not self-employed.

“Well, that’s a good way to get in trouble. That’s called tax evasion. I don’t need to get myself involved in that, and neither does anyone else today.” I pointed out to my client the number of business owners who have done what he thought was ‘normal’ who are now residing in ClubFed. It’s amazing how many owners of Gentlemen’s Clubs (which are definitely cash businesses) get in trouble, thinking that they only have to report some of the income.

My client, after some prodding, came up with the other ten percent of the fees, and he ended up (hopefully) a little wiser. You needn’t worry about this: Just report all of your income on your tax return. But if you want to live on the Bozo side of life, skip reporting the cash…until one day you find out that really was a Bozo move.

Bozo Tax Tip #3: Let Your IRS Notice Age Like Fine Wine!

April 11th, 2017

Here’s another repeat from last year, but it’s something that bears repeating.

My brother is a wine connoisseur. As all my friends know, I’m anything but a wine aficionado. But I have learned one difference between fine wine and a notice from the IRS: Wine can age very well but IRS notices don’t.

Almost all IRS notices come with deadlines. You need to act to stop the IRS. If you ignore the notice, you usually will get a second notice. After that, you may receive a Notice of Deficiency. If that ages the tax is assessed.

Yet most IRS notices are wrong in whole or in part! The last study I saw showed that two-thirds of IRS notices are wrong. That’s a shockingly high percentage. An obvious question is why doesn’t the IRS change its procedures so that the bad notices aren’t issued? The answer is simple: People pay those notices. The IRS’s Automated Underreporting Unit is a huge profit center for the agency.

What does this mean for you? Put simply, if you get an IRS notice read it carefully. Let your tax professional know about it when you receive it, not on the day a response is due. It’s a lot easier (and cheaper) to act earlier in the process than later.

My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.

Bozo Tax Tip #4: Procrastinate!

April 10th, 2017

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2017, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 19th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

Bozo Tax Tip #5: The $0.49 Solution

April 9th, 2017

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 18th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $3.30 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About eleven years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $3.30! And you can go all out and get a return receipt, too (though you can now track certified mail online). For another $1.35, you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

Bozo Tax Tips #6: Publicize Your Tax Crimes on Social Media!

April 6th, 2017

Social media is really, really big these days. You can follow me on Twitter. I may even update my Facebook page one of these days. Of course, I’m not a tax criminal, and my posts hopefully add knowledge for others.

Of course, where you and I won’t go the Bozo contingent is quite happy to do so. Take, for instance, Rashia Wilson. Ms. Wilson posted a wonderful picture on her Facebook page:

Rashia Wilson (Image Credit: Tampa Police Department)

In the same post, she bragged:

“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’s doing 21 years at ClubFed. Oops…

A helpful hint to the Bozo tax community: Law enforcement does read social media. Indeed, the IRS will do a search of you on the Internet prior to a field examination (audit). So if you decide to go on the dark side of life, don’t brag about it online. A better course would be not to go on that dark side to begin with, but that rarely occurs to the Bozo community.

Bozo Tax Tip #7: Nevada Corporations

April 5th, 2017

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Bozo Tax Tip #8: Lie to Your Tax Professional!

April 4th, 2017

Like almost all tax professionals, we use an Engagement Letter. The Engagement Letter has grown from one page to three pages. Some of this relates to items that my attorney wants on the document; some of the growth is from my insurance company. However, most of it is from IRS rules. One item that has been in every one of my Engagement Letters is the following:

You agree that you have provided us with and will provide us with all requested documents, that the information is and will be accurate and truthful, and that you will answer all of our questions fully so that we can properly prepare your returns.

Most tax professionals have similar language in their Engagement Letters. If we are to best prepare your tax returns, we have to know what’s going on. I’ve been told by my physician clients that their patients often don’t tell them the entire story. I can’t imagine doing that; how is my doctor going to do prescribe the best treatment if he only has half the picture? Tax professionals are no different; we can’t properly prepare your returns if we only have half the picture.

But if you want a tax return that’s inaccurate, and doesn’t have all the deductions and/or credits you’re entitled to, go ahead and deceive your tax professional. Don’t say I didn’t warn you!