IRS: DFS Sites Liable for Excise Tax on Wagering

August 13th, 2020

Back in 2015, I asked and answered the question on whether the DFS sites were liable for the excise tax on wagering. I came to the conclusion they were. In late July, the IRS came to the same conclusion: DFS sites are liable for this tax.

The IRS legal opinion (which cannot be cited, but does give the IRS’s reasoning) notes that clearly DFS entry fees are wagers, and that DFS events are wagering pools. The opinion cites Tschetschot v. Commissioner and also notes the dictionary definition of a wager.

The IRS opinion notes some obvious realities about skill and chance in DFS:

DFS participants may be educated on the sports games, players, expected weather conditions, and other factors. Regardless of how educated a DFS participant is, their chosen player(s) may perform poorly that day, become injured, not play in a given game, or be affected by uncontrollable circumstances such as weather and officiating. The existence of chance indicates that DFS contests are distinguishable from the type of contest described in Rev. Rul. 57-521. We conclude that the “skill” involved in selecting fantasy players is similar to the skill involved in selecting winners of individual professional sports games, horse races, or other traditional sports gambling activities.

The DFS tax rate is 0.25% on legal (authorized) wagers and 2% on any non-authorized wagers. If a DFS site operates only in states that authorized the wagers, they’ll owe 0.25% of the wagers collected; otherwise, they will owe 2%.

There’s a corollary to this that I’ve mentioned on several occasions. If DFS is a wagering activity for one aspect of tax law, it almost certainly it is for other aspects of tax law. The DFS sites have been issuing Form 1099-MISC’s as “skill contests.” It’s quite likely that DFS games are gambling and that W-2Gs should be issued instead of 1099-MISC’s.

Finally, I should point out that this legal opinion is just the IRS’s opinion. A DFS site, if audited on this issue, could appeal the decision into the courts. It’s possible, of course, a court could rule differently than the IRS legal opinion (though I doubt it).

Charitable Organizations and the Election

August 13th, 2020

Unless you’re hiding under a rock you know that in less than three months there will be an election for President (and many other offices). EideBailly has a timely reminder today that a 501(c)(3) organization (a charitable organization) cannot support one candidate over another. This is for all 501(c)(3) organizations including private foundations.

So what does this cover? It includes the obvious (making political contributions, endorsing candidates, or speaking in favor or against a candidate) and some less obvious items (leasing space to a political campaign and using the organization’s mailing or email list for a campaign). There’s no de minimis rule, so if your 501(c)(3) gives $1 to the Trump or Biden campaigns, you could lose your 501(c)(3) status. (The EideBailley article also covers what 501(c)(3) organizations can do.)

There’s a corollary that is briefly noted in the article that I want to emphasize: Officers (and employees) of 501(c)(3) charitable organizations must be very careful about their public statements for (or against) any candidate or cause. Let’s say that I have a 501(c)(3) private foundation, and I’m for Assemblyman Smith in her candidacy for Nevada State Senate. I publicly endorse her. Of course, I, as an individual, can endorse whomever I wish. But I’m also an officer of a 501(c)(3). In my endorsement, did I note that this was my endorsement, and that nothing I’m saying is attributable to the Russell Fox Foundation? Am I careful doing that in all social media?

From a practical sense, it’s unlikely the IRS would go after a private foundation. But they can, and an ounce of prevention is worth a pound of cure. If you’re an officer of a 501(c)(3) organization, it’s an excellent idea to make sure all officers and employees are aware of the rules.

How High Is Too High?

August 4th, 2020

California, like many states, has financial difficulties because of the Covid pandemic. So is the legislature looking at cutting spending? A little. How about raising taxes? Definitely, especially on the rich.

California’s top marginal tax rate today is 13.3% (on those earning $1 million or more). Proposed legislation would increase the tax rate to 14.3% on those earning more than $1 million, to 16.3% on those earning more than $2 million, and to a whopping 16.8% on those earning more than $5 million.

Today, California gets 40% of its revenues from the top 0.5% of taxpayers. But something lost by the California legislature is what happened after the last tax increase (to 13.3%). As Josuha Rauh notes,

The problem is that high earners do not simply sit there and take it when the state goes after their income.

In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.

The reason?

High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.

This is an obvious corollary to the Laffer Curve. Economist Arthur Laffer noted that at 0%, no taxes are collected and that at 100%, no taxes would be collected. So there must be a curve that describes tax collection by tax rate.

The unspoken issue for California is, “Will this increase drive the top 0.5% out of the Golden State?” Mr. Rauh, a Senior Fellow at the Hoover Institution and a Professor of Finance at Stanford, clearly believes the answer is yes. When this measure passes (and given the makeup of the legislature, it will pass), the question is not will top-earners leave, but how many will leave. Alan Greenspan famously said, “Whatever you tax, you get less of.” California is conducting an experiment, and we will find out the results in a year or two. I believe that if you’re a realtor specializing in high-end properties in Nevada, Texas, Florida, or Arizona, you’re about to get more business.

Signed, Mickey Mouse

July 31st, 2020

The General Treasurer of Rhode Island is Seth Magaziner. When the state pays its bills, his signature (along with that of State Controller Peter Keenan) appears on the checks that are issued. Imagine the surprise when some business owners received tax refunds and instead of Mr. Magaziner’s signature, they looked down and saw “Mickey Mouse and Walt Disney.” Oops.

“As a result of a technical error in the Division of Taxation’s automated refund check printing system, approximately 176 checks with invalid signature lines were printed and mailed to taxpayers on Monday 7/27/2020. The invalid signature lines were incorrectly sourced from the Division’s test print files,” said Jade Borgeson, Chief of Staff for the [Rhode Island] Department of Revenue.

The checks were issued for business tax refunds, and impacted taxpayers are being contacted and presumably replacement checks are being issued.

On a more serious note, what should you do if you receive a tax refund you’re not due? I’ve had clients who receive such erroneous refunds. Do not cash the checks: If the money is not due to you, you’re not allowed to keep the funds. Contact the tax agency that sent you the refund, and follow their instructions to return the check.

Taking Some Bites Out of Tax Crime

July 25th, 2020

Many cities have cuisines that they are noted for. New Orleans is famous for the excellent Cajun food. I think of seafood and lobster with Boston. And cheesesteaks–a mixture of chopped steak with grilled onions and cheese on a roll–goes with Philadelphia. One cheesesteak restaurant allegedly had a unique (and illegal) way of making a profit.

Tony Luke’s is one of the 21 best cheesesteak restaurants per Eater of Philadelphia. Its flagship location is in South Philly, near the stadiums. But that’s not why I’m writing this post. Instead, let’s look at some not-so-good ideas on ways of improving profitability.

First, we can deposit just some of the daily receipts into the bank account and use the other cash for paying employees off the books and using the money for personal expenses. Second, paying our employees off the books saves on payroll taxes. Third, when you think the scheme may be caught we’ll amend the prior tax returns to correct the income but we’ll add phony expenses to keep the profitability low. Sure, these methods are illegal but no one will know.

And that’s what the owners of Tony Luke allegedly did. And we’re talking millions of dollars of income ($8 million was allegedly hid from the IRS), and a long-running scheme that ran for 11 years. As I’ve mentioned in the past, if you want to head to ClubFed one of the easiest methods is to deliberately defraud the US on payroll taxes. It appears that’s what happened hear, along with major tax evasion. If the owners are found guilty, they’re looking at plenty of time to reconsider their actions.

Phony Donations Yield Real Tax Evasion and Tax Fraud

July 23rd, 2020

Have I got a deal for you! You can give me a donation of, say, $500,000, and I’ll give you $450,000 back! Yet get a write-off on your tax return for all $500,000 but you really only spent $50,000. Isn’t that great?

Yes, if it were legal it would be super. But it’s not, and the story here is one that apparently spans decades, involves an unrelated shooting incident that stunned the nation, and a still ongoing investigation into others.

Yisroel Goldstein is the former director at Chabad of Poway (California). You may remember that name from the horrible shooting that occurred at his synagogue in April 2019. Rabbi Goldstein lost parts of his hand in the shooting. One congregant was killed and two others were injured in the attack. After the shooting Rabbi Goldstein met with President Trump at the White House and Vice President Pence visited the synagogue.

But what we didn’t know was that the IRS and Department of Justice had been investigating the rabbi for two years preceding the shooting. So what was the fraud?

It’s a scheme known as the 90-10 fraud. Rabbi Goldtein collected $6.2 million in donations. He returned 90% of that to the donors with phony receipts; meanwhile, he kept 10% (or around $620,000) for himself. That resulted in a tax loss of $1.5 million over the last 8 years. That’s bad, but the scheme actually dates back decades: One taxpayer began participating in this scheme in the 1980s!

Rabbi Goldstein pleaded guilty last week, along with five other individuals. Given that at least 20 taxpayers total were involved in this (and only six have pleaded), it’s quite possible more indictments are coming. Rabbi Goldstein is cooperating with the IRS and Department of Justice in the ongoing investigation.

The DOJ is expected to recommend that Rabbi Goldstein be sentenced to probation because of his work in the shooting. The five others benefited with phony deductions and one conducted his own Ponzi scheme. All six have agreed to pay restitution.

There is no free lunch as far as making donations. If you donate to a church or synagogue, you actually have to donate the funds; kickback of the money is not allowed.

Bozo Tax Tip #1: Move Without Moving!

July 13th, 2020

Nearly nine years ago, we moved from Irvine, California to Las Vegas. The home in Irvine was sold, a home was purchased in Las Vegas, and the belongings went from the Golden State to the Silver State. Cars were re-registered, doctors changed, and no one would say that we didn’t become Las Vegas residents.

But some people like to have it both ways. Nevada’s income tax rate is a very round number (0%), while California’s maximum income tax rate is a ridiculous (in my opinion) 13.3%. That certainly could drive individuals to move in name only. California’s Franchise Tax Board (FTB) realizes that, and they (along with New York State) lead the country in residency audits.

If you really do relocate, a residency audit is a minor annoyance. But let’s say you reside in Silicon Valley, and you buy a home in Reno but keep your home in Los Altos. Did you move? Or did you just move in name?

The Bozo strategy is the latter: moving in name only. I’ll just have that little home in Reno, spend the ski season in Nevada but really continue to live in Los Altos.

In a residency audit, the FTB will look at where you’re actually spending time, where you’re spending money (if eight months of the year you’re patronizing businesses in Silicon Valley, it doesn’t look like you really moved), and a variety of other factors. ( The FTB has an excellent Residency and Sourcing Manual that explains California laws on the subject.)

Given the current pandemic, state revenues are being squeezed. The one government agency where increasing employees increases revenues is the tax agency (especially employees in audit). While I expect to see states cut employees, I’ll be surprised to see anything but minor cuts in tax agencies. We’re also likely to see an increase in audits looking at telecommuting issues. In any case, if you move in name only you’re painting a target on your back for a residency audit.

Bozo Tax Tip #2: They Shoot Jaywalkers, Don’t They?

July 12th, 2020

I have, unfortunately, become quite competent in the Report of Foreign Bank and Financial Accounts. That form is better known as the FBAR. It used to have the form number TD F 90-22.1 (yes, it really did) but now goes by Form 114. The form must be filed online through the BSAefiling center of FINCEN, the Financial Crimes Enforcement Network.

You must file an FBAR if you have $10,000 aggregate at any time during the year. The report for 2019 is due October 15th (it has a due date of April 15th with an automatic extension to October 15th).

The form is fairly simple and straightforward: Note every foreign financial account you have with name, address, account number, and maximum balance at any time during the past year. Let’s say you have one foreign account, a bank account at the Royal Bank of Canada. You would take your maximum balance and convert it to US dollars from Canadian dollars (you should use the Fiscal Service’s year-end exchange rates to determine the balance in US dollars no matter when the high balance was). The form must be electronically filed and is filed separately from your tax return.

The penalties for not filing it are quite high. Willful non-filing has a minimum penalty of $100,000 or half the balance in the account–and that’s per account! There’s also possible jail time.

So what must be reported:
– Foreign Bank accounts;
– Bank accounts outside the US of a US financial institution;
– Foreign financial accounts where all you have is signature authority;
– Foreign securities accounts;
– Foreign mutual funds;
– Foreign life insurance with a cash or annuity value; and
– Online gambling accounts if outside the US.

There are others, too.

The IRS does have a chart that lists most things that need reporting on the FBAR and Form 8938. Form 8938 is the “cousin” of the FBAR; this form needs to be filed if you have larger balances in foreign accounts.

Millions of FBARs are filed each year. When I started in tax, filing an FBAR was a huge audit red flag; that’s no longer the case. There are just too many FBARs filed. Do note that if you have an FBAR filing requirement you must note that in question 7 at the bottom of Schedule B.

To end this with some humor, one of my pet peeves in dealing with taxes is that there are three different sets of abbreviations for foreign counties used in tax. The FBAR has one set; question 7 at the bottom of Schedule B has another set, and Form 8938 has a third set. Some countries are noted identically while others are not. On one of of the abbreviations Curacao is “CU” while that means Cuba in another.

In any case, the FBAR is no laughing matter. The IRS’s mantra here is to shoot jaywalkers. Don’t become such a person: If you have an FBAR filing requirement, file it! Again, the FBAR is effectively due on October 15th.

Bozo Tax Tip #3: Lie to Your Tax Professional

July 10th, 2020

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!

Bozo Tax Tip #4: Procrastinate!

July 9th, 2020

Today is July 10th. The tax deadline is just five days away.

What happens if you wake up and it’s July 15, 2020, 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. 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. (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; most (but not all) states will, too. You can pay the IRS electronically, and more and more states offer this as well. (Those that don’t offer it directly through tax professionals almost always have it available on their web sites.)

But what do you do if you wait until July 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.