A few years ago, the IRS routinely sent notices to taxpayers who filed tax returns prior to April 15th but didn’t pay their taxes until April 15th. After complaints from taxpayers and tax professionals, the IRS supposedly stopped this practice. Unfortunately, they’ve started it up again.
Taxpayers have until April 15th to pay their taxes. That’s a postmark deadline, so the payment can be received days later. I had two clients who received CP14 notices. Both of these individuals paper-filed in March, but paid on April 15th (one using EFTPS and one mailing a check). Both individuals payments cleared (the individual who mailed his check also received his certified mail receipt), so both believed they didn’t owe anything. Telephone calls to the IRS confirmed this.
In the case of my client who paid by EFTPS, there was no reason for the notice at all. The payment was made for April 15th; there was no reason for a notice to be sent. My client who paid by check said his check cleared on April 17th. One would think that the IRS would wait beyond the 17th for generating this notice. When the IRS ended this practice, we were told the IRS would wait a couple of weeks after the deadline to make sure that almost all payments would be matched with returns.
Given that it takes the IRS about two weeks to generate and mail a notice, it’s clear these notices were generated prior to April 15th (even though both notices were dated April 28th). Perhaps the IRS is only issuing these notices for paper-filed returns, thinking that most taxpayers who paper-file include a check with the return. Still, payment of taxes is not due until April 15th; there really is no reason why the IRS can’t wait until the calendar has really turned to April 28th to send out their CP14 notices for 2013 tax returns.
The answer to this is, perhaps it’s against the law. And it is. Let me start at the beginning.
Back in 2008, Francis Chandler filed his 2007 tax return. He claimed he had quite a bit of interest income and even more withholding…$6,222,850 of withholding. He claimed a refund of $3,969,012. He got it, too. There was a problem, though: He should not have gotten the refund; the claim was false. Two years later, Mr. Chandler was indicted and charged with making a false claim against the United States.
Now, you and I would seek legal advice about the case, but Mr. Chandler had a “better” idea. I’ll file a lien against two federal judges, the US Attorney, and an Assistant US Attorney. That wasn’t a bright idea; that’s a false retaliatory lien, and that’s a crime, too. Eventually, Mr. Chandler pleaded guilty to the false claim and filing the lien.
Mr. Chandler was sentenced on Tuesday to 37 months at ClubFed; he must also make restitution of just over $3 million. A helpful hint to anyone who is thinking of emulating Mr. Chandler: Don’t!
I’ve recovered from Tax Day, my sleep is caught up, and it appears Las Vegas has moved smoothly towards summer (it reached 89 today). There has been a little bit of tax news during the past month:
Good News for Tax Professionals: The IRS announced that eServices has been updated and you can request a transcript for an individual where you have a Tax Information Authorization (Form 8821). I have not tested this new capability yet, but if this works we will no longer have to have a Power of Attorney in order to use eServices for transcripts.
That said, the IRS announcement (it came in late March) said that eServices was updated last fall. If it was, it wasn’t successfully updated; I tried to request a transcript for a client with an 8821 in December and couldn’t.
The IRS Scandal Continues to Percolate, with Bad News for Lois Lerner: Emails sent to and from the IRS and Lois Lerner have been made public, and these do not show Ms. Lerner in a good light. They show that Ms. Lerner was definitely involved in targeting conservative non-profits. They were obtained by Judicial Watch after filing a freedom of information act lawsuit against the IRS.
My favorite, though, is one where Cindy Thomas complains that Ms. Lerner and the White House through the Cincinnati “low-level” employees under the bus. I’ll let Ms. Thomas explain:
As you can imagine, employees and managers in EO Determinations are furious. I’ve been receiving comments about the use of your words from all parts of TEGE and from IRS employees outside of TEGE (as far away as Seattle, WA).
I wasn’t at the conference and obviously don’t know what was stated and what wasn’t. I realize that sometimes words are taken out of context. However, based on what is in print in the articles, it appears as though all the blame is being placed on Cincinnati. Joseph Grant and others who came to Cincinnati last year specially told the low-level workers in Cincinnati that no one would be “thrown under the bus.” Based on the articles, Cincinnati wasn’t publicly “thrown under the bus” instead was hit by a convoy of mack trucks.
Was it also communicated at that conference in Washington that the low-level workers in Cincinnati asked the Washington Office for assistance and the Washington Office took no action to provide guidance to the low-level workers?
One of the low-level workers in Cincinnati received a voice mail message this morning from the POA for one of his advocacy cases asking if the status would be changing per “Lois Lerner’s comments.” What would you like for us to tell the POA?
How am I supposed to keep the low-level workers motivated when the public believes they are nothing more than low-level and now will have no respect for how they are working cases? The attitude/morale of employees is the lowest it has ever been. We have employees leaving for the day and making comments to managers that “this low-level worker is leaving for the day.” Other employees are making sarcastic comments about not being thrown under the bus. And still other employees are upset about how their family and friends are going to react to these comments and how it portrays the quality of their work.
Another email shows that the IRS planned to meet with the Department of Justice over whether to prosecute conservative groups. I’ll leave it to the reader to decide whether or not there’s anything to see here.
Second Runner-Up for 2013 Tax Offender of the Year Gets 20 Years at ClubFed. Phillip Monroe Ballard decided to channel the spirit of 2012 Tax Offender of the Year Stephen Martinez: He decided to murder the judge of his tax evasion trial. Luckily for all concerned, an informer let authorities know of the plan. Mr. Ballard not only has a tax conviction but now a 20-year sentence for attempted murder-for-hire. Given he’s 72, he’ll likely spend the rest of his life at ClubFed.
The goal of must businesses is to make money. There aren’t many businesses that can lose on each sale and make it up in volume. In fact, I don’t know of any. But I digress….
So let’s take Sam and Edna, two successful individuals who love horses. They decide to start raising horses. They remember their accountant telling them that if they had a business that loses money they can take the loss and offset some of their income. That’s true. They don’t remember their accountant telling them that the business does need to be structured to make money eventually.
Hobby losses are not allowed. The IRS has a webpage that notes the major factors used in determining whether or not your business is a business or a hobby:
The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
– Does the time and effort put into the activity indicate an intention to make a profit?
– Do you depend on income from the activity?
– If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
– Have you changed methods of operation to improve profitability?
– Do you have the knowledge needed to carry on the activity as a successful business?
– Have you made a profit in similar activities in the past?
– Does the activity make a profit in some years?
– Do you expect to make a profit in the future from the appreciation of assets used in the activity?
If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware! Your “business” might be a hobby. Yes, circumstances can cause any business to fail (and the IRS knows this). But when your business is losing money every year and you make no effort to change your business, at least on the surface you’re looking like a hobby. The eternal hobby loss is a good way to head to an IRS audit.
That’s it for our Bozo Tax Tips for the 2014 Tax Filing Season. I hope you’ve enjoyed them. We’ll be back with actual tax posts at the end of the week.
Congress has decided to legislate through the Tax Code. There are hundreds of tax credits that now exist. These range from the Earned Income Credit, education credits, electric vehicle credits, and adoption credits. Some of these credits, such as the Earned Income Credit, are refundable credits: You can get a refund based on the credit even if you don’t have income.
Now, the Bozo mind works differently than yours and mine. They see a tax credit and think, “How can I get some free money? I’ll find a tax credit and the government will just send me money!” So our Bozo looks and finds there’s a tax credit available for recovering methane (CH4) from landfills. Our enterprising Bozo sets up the Hot Air Gas Company, and starts claiming the credit. Our Bozo skips the somewhat important step of actually obtaining some methane from a landfill.
The IRS does investigate such tax credits, and when you claim that you are recovering natural gas when you’re not, that’s tax fraud, a criminal offense. And that leads straight to ClubFed.
The Tax Code is far too complex. Our Congresscritters have decided to legislate through the Tax Code, leading to a myriad of deductions and credits. The best solution to this issue would be for Congress to simplify the Tax Code but that’s not going to happen any time soon. Until then, if you legitimately qualify for a tax credit you should take it. But if the only hot air you possess is exhaling from your mouth, don’t claim a tax credit for it unless you want to visit ClubFed.
Another repeat, but one that is a continual issue with cash business. It may be “cash and carry,” but cash is taxable in all ways. And cash reporting (or lack thereof) can be a problem. Anyway, let’s be suspicious:
Given my practice area, I deal with individuals who occasionally make large cash deposits. I tell them that they shouldn’t mind the completion of a Currency Transaction Report. The IRS gets so many of them that as long as you’re paying your taxes it’s not a big deal.
On the other hand, if you break up your $11,000 transaction into two $5,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and almost all of them are investigated. And that’s what leads into this tale of woe.
We’re focusing today on a public figure. He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.
But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.
Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.
So if you want to send money, go big-time. Send more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”
Ah, Spring is in the air. And with that come the inevitable wedding invitations. I had an invitation to a wedding on April 5th. No, I didn’t attend.
With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.
Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.
There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.
Marriage has its ups and downs. Claiming you’re single on your tax return will in the long-run cause you nothing but downs.
Today is April 8th. The tax deadline is just seven days away.
What happens if you wake up and it’s April 15, 2013, 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.
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 16th? 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.
We’re running some repeats, but there is some new Bozo material coming. It’s just that people keep trying the same things over and over again.
It’s tough to avoid the tax system. There are currency transaction reports (cash transactions of $10,000 or more) and suspicious activity reports (theoretically can be done on any transaction, but usually starts at $3,000 or more) done with cash. Businesses must send out 1099s on payments of $600 or more to individuals. Barter organizations must send out 1099s.
But that doesn’t stop the Bozo contingent. “They’ll never catch me,” they believe. Until the IRS or the Franchise Tax Board (substitute your state tax agency if you’re not in California) knocks on their door. There’s no statute of limitations if you don’t file.
Paying taxes isn’t fun. Avoiding the system and living on the edge may give you a thrill, but if you get caught you’ll be given a bill…and possibly a trip to ClubFed.
The Las Vegas Review Journal has a short article on the fact that online poker players must pay taxes. The article notes that winning players must pay taxes; of course, both winners and losers are supposed to include their winning sessions on their tax returns. There is one minor error in the article: Freeroll winnings of $600 or more should be reported on a Form 1099-MISC rather than a Form W-2G.
Both Brad Polizzano and I are quoted in the article. One point that I made with David Ferrara (the writer of the article) is that proposed legislation legalizing and regulating online poker in other states (than Nevada) explicitly requires reporting wins and losses to state tax agencies.