The Five “Strangest” Things Clients Told Us This Tax Season

As I write this from an undisclosed location on my vacation, it’s now two days past the closing (for most of us) of the 2017 Tax Season (filing 2016 tax returns). Our clients told us some, shall we say, interesting things this year. Here are five lowlights:

5. “I sold things on the Internet, so I don’t owe state tax on it.” This client, call him Mr. Smith, sells products over the Internet. He’s a resident of a state with an income tax. “But Russ,” he said, “My customers use the Internet to purchase the products. This business isn’t located in my home.” Indeed, the products ship from Nevada, rather than his home state. Unfortunately, there are two arguments that outweigh his idea. First, he resides in a state with a state income tax; all of his worldwide income is subject to that tax. Second, he is conducting the business from his home: He directs it, manages it, and profits from it. His business may be conducted over the Internet, but it’s conducted by him in his home (in his home state). He eventually came around to paying state income tax. I did offer him a solution: Move to Nevada or some other state that doesn’t have a state income tax. His wife didn’t like that idea.

4. “I don’t want to file the New York tax return, even though I’m getting a full tax credit on my California return.” Mrs. Jones didn’t like it when her employer withheld New York income tax for a four week stint she did working in the Big Apple. “I’m a California resident; how dare New York tax me!” I asked her if she did spend that time in New York. She did. I explained she would get a full tax credit on her California tax return for the New York tax. She didn’t care. I then explained that if she didn’t pay the tax (after withholding, there was a small balance due to New York) she’d get a bill for penalties and interest in a couple of years, and she would pay a lot more than if she simply filed the return. She would also then have to amend her California return to get the tax credit; that would incur additional fees from me. That last point caused her to change her mind.

(The issue of nonresident taxation is a big one, though. Congress has been looking at making the rules for such taxation uniform, and that would be a godsend to both taxpayers and tax professionals.)

3. “I only had the foreign bank account for one week. I don’t want to file the FBAR.” A client inherited money in Spain; the money was moved into a Spanish bank account for exactly one week before being wired to her US account. Since the funds weren’t taxable (gifts aren’t taxable to the recipient) nor was it reportable (gifts from foreign individuals can be subject to reporting but this gift wasn’t large enough to trigger that) she felt it was none of the government’s business that she inherited funds. I explained that Congress felt otherwise. She didn’t care. I then told her there’s a minimum $100,000 penalty for willingly failing to file the FBAR. She then asked me how it was filed.

2. “The side income was only $30,000. Doesn’t that qualify for the de minimis exception to reporting income?” My response was simple: There is no de minimis exception to reporting income. (And even if there were, $30,000 is likely not de minimis.)

1. Twice I heard, “The 1099 never showed up. I don’t have to report the income, right?” Wrong: All income is taxable, no matter if you receive paperwork or not.

We have a bonus lowlight, too. An individual who I effectively turned down as a client apparently read up on Irwin Schiff. The late Mr. Schiff argued that the income tax was unconstitutional, and various other incorrect arguments about how one can legally stop paying the income tax. He was correct in that anyone can stop paying income tax; he was incorrect in saying that one can do that legally. Mr. Schiff died at ClubFed.

In any case, this unnamed individual called me and asked me if I believe in following the law on taxes. I do, of course. He then said that he was looking for a tax professional who believed in the law. So far, so good. He then said that since he had read that the income tax was voluntary he was only going to pay tax on a fraction of what he made; and he wanted me to prepare such a return. I told him that as long as the fraction was equal to 100% of his income, I’d be happy to do so. Strange, I never heard back from him.

I’ll likely have some serious thoughts about the Tax Season that was next week when I get back from my all-too-brief vacation.

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