Taxable Talk

In the United States, when you're accused of tax evasion you have lots of legal recourse, including fighting the charges within the IRS' appeals process, and then Tax Court. However, in Argentina it appears things work differently.

Just two days before Argentina's match in the World Cup, Buenos Aires Province tax authorities confiscated a taxpayers' $2000 plasma television. According to Juan Manuel Prada, a provincial tax official, quoted in All Headline News, "We've taken the plasma as a guarantee against the debt he owes."

The unlucky taxpayer will have to either find a sports bar or perhaps his old television will suffice.

Senator Charles Grassley (R-Iowa) has proposed making some tax crimes felonies if the underlying issue is a pimp or sex trafficker who fails to file employment tax forms. The penalties would be a 10-year prison sentence and a $50,000 fine for each offense. Senator Grassley commented to the Associated Press, "The thugs who run these trafficking rings are exploiting society's poorest girls and women for personal gain. The IRS goes after drug traffickers. It can go after sex traffickers."

Grassley plans on introducing the legislation in his committee tomorrow.

News Story: USA Today (from AP)

Today the Tax Court decided two cases where the Court basically said, you're right, the law is unfair, but tough—you have to obey it.

The first case involves a gambler who wanted to net her wins and losses. If you're a regular reader of this blog, you know that only professional gamblers can do this. In this case, both the IRS and the taxpayer agree that the wife lost more than she won. However, the amount she won—some $13,400—will have to be included as income (Other Income, line 21). As the taxpayer is retired, this caused some social security income to be taxable and that a credit for qualified retirement savings was eliminated. The taxpayer was allowed to deduct her gambling losses as an itemized deduction. The Court noted,

"Petitioners are [non-professional gamblers], and their only entitlement to the deduction for their gambling losses is the manner in which respondent determined it as an itemized deduction. Petitioners have cited no authority, and indeed there is no authority to support their argument that unrelated income and credits are immune from the effects of the manner in which respondent treated their gambling winnings and losses."

The second case deals with a divorce decree, and which parent gets the tax exemption. The decree, granted in state court, gives the father the exemption as long as he has made child support payments. The father took the exemption, but so did the mother for the year in question. The IRS took away the father's exemption, and he went to Tax Court.

The Tax Code states that if you're the non-custodial parent (which the father was), in order to claim the exemption, you must have the other spouse sign and complete Form 8332. That apparently didn't happen here, so the Tax Court ruled for the IRS and noted, "State courts, by their decisions, cannot determine issues of Federal tax law...His recourse, if any, lies in the State court for enforcement of the divorce decree."

Cases:
Spencer and Egerton v. Commissioner, Colozza v. Commissioner

There's one task that I insist that my business clients do not perform themselves: payroll processing. Given the penalties and legal liability issues, I urge them to go with an extremely reputable company. There are several that do an excellent job; this post is not about which one is my favorite.

Rather, I was reminded by Joe Kristan's post yesterday in Roth Tax Updates about the dangers of using certain companies. If an employee of a payroll company steals your tax deposits, what would happen? If you're with a large, reputable firm, the deposit will be made, and the payroll company will go after the employees involved. If you're with Fly-By-Night Payroll, expect the IRS and the FTB to knock on your door.

Here are three questions you should always ask of your payroll service company:

- Will they make all appropriate/required tax deposits in all the jurisdictions in which we operate? Will they be done on a timely basis?

- Assume that the deposit is not timely made. Who will be liable for the interest and/or penalties?

- Will you put this guarantee in writing?

Of course, you should get references, especially for small companies. Yes, cost is a factor you need to consider when choosing a payroll company. But so is the ability to handle the inevitable errors that will occur.

I joke with my writing partner about New Jersey being one giant swamp. At least the Garden State's politics are fun to watch—at a distance. Today, the New York Times reports that a few Democrats are now supporting Governor Corzine's proposal to increase the sales tax by one full percent, from 6% to 7%. However, the Speaker of the New Jersey Assembly, Joseph Roberts Jr. (D-Camden) opposes the increase. Given that Roberts has final say as to whether anything comes to a vote in the Assembly, the sales tax increase is in danger.

New Jersey's constitution requires a balanced budget by July 1st; it's unlikely that this will occur. Governor Corzine is, according to the Times article, making plans to "...close parks, historic sites, campgrounds and casino and halt highway construction and the lottery should the state miss the deadline." That sounds particularly brilliant. Let's stop the lottery and casinos, two of New Jersey's biggest sources of revenues. Of course, given New Jersey's politics, perhaps this is inevitable.

New York Times article

Civil rights attorney Stephen Yagman has been indicted on tax evasion, fraud, and money laundering charges. The charges stem from Yagman not paying all the tax he owed in the mid-1990s and accruing significant interest charges and penalties. Additionally, he is also charged with not paying payroll taxes owed by his law firm, Yagman & Yagman P.C. (Thanks to the TaxProf Blog for the hat tip.)

Also potentially in trouble is Grover Norquist, head of Americans for Tax Reform. A story in the Washington Post indicates that disgraced lobbyist Jack Abramoff sent cash for lobbying through Americans for Tax Reform. The article states, "as the money passed through, Norquist's organization kept a small cut, e-mails show."

While I'm not an attorney, this certainly sounds like a potential conspiracy charge. As Roth Tax Updates notes, "ATR and Mr. Norquist may be vulnerable to some serious problems with the IRS." I think that's an understatement. (Thanks to Roth Tax Updates for the hat tip.)

News Story:

Yagman Indictment (Los Angeles Times)

States have seen tax revenues flourish this year, leading to budget surpluses of various sizes. So, if you have a budget surplus what do you do? Do you:

(a) Increase spending, to help the people who supported you or groups who may support you? (Think unions and other constituency groups.)

(b) Decrease taxes, because it's our money that you're spending?

(c) Vociferously announce that you're going to decrease taxes, but do only a little bit of tax decreases while increasing spending as much as possible?

Never underestimate the cynical nature of politicians. Thus, (c) is almost always the correct answer, as this article in the Wall Street Journal notes (Pay $ Link).

Of course, we do need to point out that in Michigan, a state that is bleeding jobs with an industry in trouble (automobiles), a tax code that troubles business, and a dysfunctional state government, Governor Granholm, a Democrat, vetoed the Republican-led legislature's move to eliminate the state's business tax. Governor Granholm called the Wall Street Journal's reporting that Michigan's tax structure is anti-business "treasonous." We call it honesty in reporting.

Here in the Golden Bronze State, Governor Schwarzenegger has proposed a $68 billion bond measure to pay for infrastructure improvements; this measure will be part of a very crowded November ballot. Of course, the state has again missed the June 15th deadline for passing a budget. The more things change....

My parents live in the San Fernando Valley, an area within the City of Los Angeles. The Los Angeles Daily News has an interesting story on how Los Angeles increased the trash pickup fee by 254% without having to take the measure to a vote.

Californians passed two propositions, Proposition 13 and Proposition 218, that mandate votes on tax increases. So how did Los Angeles get around this? Well, the 254% increase wasn't an increase; rather, it was an elimination of the subsidy of trash pick-up fees.

Over the next few years Angelenos will see their trash fees increasing from $11/month to $28/month. Interestingly enough, here in Irvine we pay just under $36/quarter for trash service. And it is not subsidized, but it is privatized. Somehow, this is not surprising.

Californians have signed enough petitions so that two tax measures will be on the November ballot. One would increase the cigarette tax to make it the most expensive in the state; the other would add an 'oil severance' tax, taxing oil production in the state.

The proposed cigarette tax increase would add $2.60 to a pack of cigarettes, making the total cost over $6.50 per pack. That's a lot of quarters for the vending machine. The new tax would fund emergency rooms and health insurance for children. I expect this measure to pass easily.

The oil extraction tax would be used to fund alternative energy. Proponents also hope to decrease fossil fuel use by 25% in California. Given that the population in California continues to increase, their goal won't be reached no matter what. In any case, this measure will face fairly determined opposition, especially when Californians discover that increasing oil taxes will increase what they pay at the pump.

News Stories: Cigarette Tax, Oil Extraction Tax

That's one of the most vexing questions for the business owner. Is your staff employees, or can they be classified as independent contractors? The IRS has a webpage devoted to helping taxpayers make the classification choice.

Employers must withhold payroll taxes from employees, and match some of those taxes (FICA) and pay additional taxes (FUTA & SUI). However, independent contractors are responsible for their own taxes. There's a benefit to companies to have personnel as independent contractors rather than employees.

However, California has its own rules. And it's harder to be considered an independent contractor in California. California has a 24-fact test to determine whether someone is an independent contractor or an employee (it's available here).

FedEx has classified its ground delivery personnel in California as independent contractors. EDD ruled that they're employees. FedEx has appealed the ruling. The potential liability is $7.8 million.

FedEx News Story

The end of the phone tax that funded the Spanish-American War may impact California. According to this story in the San Jose Mercury-News, many local entities in California tied their telecommunications tax to the federal tax. Some of the ordinances have a clause that states if the federal tax becomes invalid, then the local tax will end.

Nervous local budget directors are checking their ordinances and seeing if they contain that clause. Compounding the matter is that there are several lawsuits challenging the tax on different grounds. The lawsuits have been filed by telecommunication providers, such as Verizon and AT&T, and community activists. In general, the previous challenges have alleged that the tax has no legal justification.

We'll keep you informed.

There's going to be a week when I won't be able to find a tax cheat. That will be the week I'm on vacation....

We start in Tucson, Arizona, where a California man took elderly Tucson residents as clients of his tax preparation business. He had an interesting method of making money. He promised his clients very large refunds. He got them, too, by exaggerating deductions. The refunds went into his bank account, rather than the clients. The IRS wasn't amused. He's looking at up to ten years in prison and a fine of up to $250,000. (News story: here)

We move on to Durham, North Carolina. Here, Steven Edwards was convicted of fraud and tax evasion and sentenced to 12 1/2 years in jail, and must make restitution of $4.4 million. He collected millions of dollars of insurance premiums from clients...but didn't buy the insurance. He must also forfeit the nearly $4 million he received from the scheme and pay a fine of $400,000.

Tax crime doesn't pay....

It's a nice, Spring day, and you're relaxing in your office at the Oregon Department of Revenue. All that's on your desk is a stack of tax returns. So why not browse some pornography on the Internet?

Well, you're now an ex-employee. And there was a Trojan on the Porn site. And those files you were working on? Someone, somewhere may have that data.

Hat Tip: TaxProf Blog

Oregon DOR Press Release

AP Story

We previously reported the sad case of William Campbell. The ex-Mayor of Atlanta was sentenced today to 2 1/2 years in prison for tax evasion.

Campbell plans on appealing the sentence.

News Story: MSNBC

The Tax Court today looked at three cases where Native Americans claimed that they did not owe income tax because they're Native Americans. Section 1 of the Tax Code states that all income is taxable. As the Court noted,

"Native Americans are subject to the same Federal income tax laws as are other U.S. citizens unless there is an exemption explicitly created by treaty or statute. Squire v. Capoeman, 351 U.S. 1, 6 (1956); Estate of Poletti v. Commissioner, 99 T.C. 554, 557-558 (1992), affd. 34 F.3d 742 (9th Cir. 1994); see Allen v. Commissioner, T.C. Memo. 2006-11; see also Rev. Rul. 2006-20, 2006-15 I.R.B. 746." [Gunton v. Commissioner, T.C. Memo 2006-122]

In all three cases the petitioners could not cite treaties or laws that exempted them from income tax. So they all struck out, and owe the tax.

Cases: Gunton v. Commissioner, T.C. Memo 2006-122
Metallic v. Commissioner, T.C. Memo 2006-123
George v. Commissioner, T.C. Memo 2006-121

My writing partner lives in Youngstown, Ohio. The last time I checked a map it was over 2000 miles from the Bronze Golden State. However, the Board of Equalization must look at different maps.

According to this column in the North Lake Tahoe Bonanza, the BOE ruled that if the managing member of an LLC is a California resident, the LLC must pay California taxes solely for this reason. I can't find the ruling online, so I do not know any of the other details.

But on its face this ruling seems ridiculous. Consider a hypothetical Ohio LLC, Youngstown Tubing, LLC. The business is located in Youngstown. The LLC has no sales effort in California. Its managing member resides in California, but he travels to Youngstown for all of the LLC's business. Yet (supposedly) because of the BOE's ruling, this Ohio LLC would owe California franchise tax and the (previously ruled unconstitutional) LLC fee tax. I can't see how this ruling can survive a challenge in federal court; then again, I was shocked that the Supreme Court declined to hear the Huckaby case (where a Tennessee telecommuter was forced to pay New York income tax).

I have requested additional information from the BOE; perhaps I'll be surprised when I read the ruling and find that this ruling makes sense. I'll keep you informed.

According to the Fresno IRS Service Center, around 40,000 to 50,000 extensions filed using Form 4868 were wrongly denied at the Fresno IRS campus. Most of the forms were transmitted in bulk via paid preparers. The IRS is now notifying impacted taxpayers and preparers that the extension(s) is allowed and that they should ignore the previous communication.

If your extension was denied, and it was filed in Fresno, do nothing until July. Then if you feel it was wrongly denied, and you have not heard from the IRS, you should request a reconsideration using the process noted in the denial letter.

The error apparently stems from "human error" is misstamping the incoming Form 4868s.

Hat Tip: CSEA

Proposition 82, the mandatory preschool/tax increase/help Las Vegas, Phoenix, and Denver initiative, fell to defeat yesterday. With almost every precinct reporting, 39.1% favored the proposition, but 60.9% opposed it. Californians even defeated a library bond initiative, 53.1% to 46.9%. That's unusual because most bond measures are easily passed in the Golden State.

But we're not through dealing with tax increases. In the Democratic primary, Phil "I want to increase your taxes" Angelides defeated Steve Westly and will oppose Governor Schwarzenegger in the November general election.

I have a number of clients who receive income from outside of the United States. I've advised my clients that the US Tax Code is quite clear—income from all sources, legal or illegal, from within the United States or from outside the United States, is generally taxable. Anyone in a high profile occupation, such as an athlete or a contestant on a game show (eg Richard Hatch) should be aware of this.

Well, at least one surfer perhaps thought that the surfing lifestyle exempted him from paying taxes on winnings earned in Fiji, South Africa, Brazil and other foreign locales. Until the IRS found out. Sonny Garcia, perhaps the best ever Hawaiian surfer (he retired last year), now faces up to three years in jail and a fine of up to $100,000 after pleading guilty today to tax evasion. Garcia, born Vincent Sennan Garcia III, has won numerous surfing titles as this article notes.

The moral? Even if the surf's up, dude, you gotta pay your taxes.

No, I'm not talking about the Impossible Missions Force. I'm speaking about...well, to be honest, a lot of nothing. But several charlatans have been promoting an "IMF Decoding Service." Indeed, if you do a search on Google or some other search engine you'll find several of these listed.

The Deptartment of Justice and the IRS are not amused. Last week one of the promoters of this scheme found himself in court in Cincinnati, and now has a permanent injunction against promoting the IMF Decoding Service and the FOIA Generator. You don't need the Freedom of Information Act in order to obtain records from the IRS; you can request a transcript of your tax returns or even photocopies of your old returns just by filling out the appropriate forms.

A sucker is born every day. Hopefully you realize that you must pay your taxes. If you don't, there are several federal institutions just waiting for you. And for the promoters of these frauds.

Proposition 82, the pre-school for all, tax the wealthy, help Las Vegas, Phoenix, and Denver initiative, now trails, according to a Field Poll just released. For those, like me, who are against the initiative, vigilance is still required. Democrats are shown to be in favor of the initiative while Republicans are against it. However, there are no contested raced on the Republican primary ballot on Tuesday while there is a contentious Democratic races for Governor.

As always, you should exercise your right to vote this Tuesday no matter where you stand on this initiative. If you don't know where your polling place is, you can find your polling place here.

For those who don't remember, we had a long list of participants to choose from for the 2005 Tax Offender of the Year. Our lucky winner, Sharon Lee Caulder, formerly of New Orleans, recently of Oakland, and soon to be housed by the Bureau of Prisons, was sentenced on Thursday to 30 months in prison. Ms. Caulder earned $1.7 million (primarily from sales of her book, Mark of Voodoo, while simultaneously filing for bankruptcy. Oops.

Hat Tip: Roth Tax Updates

Proposition 82, the free preschool, tax increase, Help Las Vegas, Phoenix, and Denver Initiative, may now be trailing in polls. While no new polls have been released publicly, Bill Bradley of LA Weekly notes in a recent column that support has fallen below 50%. If you're a Californian and want to make sure that we don't have a new bureaucracy to deal with (along with higher taxes and fewer businesses to pay those taxes), make sure you express your opinion on election day next Tuesday.

By the way, both the Orange County Register and the Los Angeles Times have come out in editorials against Proposition 82. This may be the first time in some time that the state's most conservative paper (the Register) and the state's most liberal paper (the Times) have agreed on a controversial measure.