Taxable Talk

Tomorrow is Tax Day in Canada. The Edmonton Journal has an article about how Revenue Canada (their equivalent to the IRS) is not feared though it perhaps should be.

There's an interesting quiz at the end of the article. The answers to those questions in the U.S. are almost identical to those in Canada.

It's always amazing to read the mail. I've received several items (mainly by email) that are interesting. So let's take a look at some of the mail. Of course, none of the answers are specific tax advice; anyone needing specific tax advice should speak to their own tax professional.

From Texas comes this question: My question is how can dog races, horse races, bingo, and the Texas lottery be legal, but gambling is illegal in the state of Texas. Isn't this hypocritical?

I'm a tax accountant, not a politician. Of course it's hypocritical, but do you expect logic and fair play from politicians? These are the same individuals responsible for crafting our tax system (at least, for you, Texas has no state income tax). By the way, dog races, horse races, bingo, and the lottery are forms of gambling...it's just poker (I assume) that you're upset about.

From New York City: I looked at how much my husband and I paid in taxes this year and was appalled. What can we do?

Move. New Hampshire doesn't have a state income tax. But make sure you're not telecommuting; New York has a "convenience of the employer" rule that mandates that telecommuters who work for a New York based company must pay New York income tax. Otherwise, without knowing your specific situation, it's impossible for me to comment.

From Missoula, Montana: I wear a suit each and every day to work. I should be able to deduct the expense of those clothes but my accountant told me I can't. My brother gets to deduct his clothes, so why can't I?

Because those are the rules. To deduct clothes, they can't be able to be worn during normal activities. Suits can be, so they can't be deduct. An example of clothing that can be deducted is a uniform [his brother is a police officer]. Yes, it's unfair; I'd love to deduct my polo shirts....

Finally, in the mail today I received a letter...but I can't tell anyone much about it. It came from Hollywood, Florida. About 1/3 of the envelope survived the Postal Service. Yes, I got a "Dear Valued Postal Customer" letter ("I want to extend my sincere apology as your Postmaster for the enclosed document that was inadvertently damaged in handling by your Postal Service." It appears that it was a flyer for "Stress Free Relocation." It would have been more fitting had it been for "Stress Free Tax Preparation," as I would have enjoyed April 17th much more. It would have been fitting to have that flyer damaged in handling by the USPS.

I've reported on the shenanigans committed by Renaissance, the Tax People, before. Today, former IRS District Director Jesse Cota pleaded guilty to defrauding the U.S. out of $1.3 million while he was with Renaissance. He also admitted to earning more than $300,000 from this scheme.

Renaissance was a multi-level marketing firm promoting tax savings products. There's nothing illegal about multi-level marketing firms, nor tax savings products. The problems come when you promote, "...[A] program designed to sell illegal tax deductions through false and misleading representations." Cota assured potential clients that the scheme was legal (and as a former IRS District Director, he knew (or should have known) it wasn't).

Cota is the seventh individual to plead guilty to Renaissance-related charges.

Hat Tip: Roth Tax Updates

I haven't blogged about the arrest, conviction, and sentencing of Ed & Elaine Brown. "Ed and Elaine Brown insist tax laws do not exist and have holed up in their hilltop home in Plainfield, which has a watchtower, concrete walls and the ability to run on wind and solar power. Ed Brown, 64, said he has stockpiled food and supplies...Elaine Brown, 66, said Monday that she doesn't recognize the government, and that its officials are 'a fiction in my life.'"

Roth Tax Updates has been covering this story from day one. Eventually, the Browns will surrender, and they'll find that instead of being self-imprisoned in their New Hampshire home, they'll be at a ClubFed facility.

Yesterday, the Tax Court decided Industrial Investors v. Commissioner. Industrial Investors, a corporation in Santa Monica, California, had fought the IRS in Tax Court. The case was then appealed to the 9th Circuit Court of Appeals. After the case was settled in court, the IRS attempted collection of the tax owed; Industrial owed tax for 1990 - 1992. Industrial requested a collection due process (CDP) hearing.

When Industrial made the request, the IRS revenue officer working the case sent a letter to the IRS appeals office...in Oklahoma City. (An interesting point is why the appeal went to Oklahoma from California when the IRS has several offices that I'm all too familiar with in Southern California...but I digress.) An appeals officer is supposed to independently judge the facts; thus, ex parte communications are not allowed. Here are a few of the lines from the letter of the IRS revenue officer:

"Therefore, no CDP hearing on the recorded Notices of Federal Tax Liens should be considered. As for the Notice of Intent to Levy, this should proceed accordingly....

Since Mr. William G. Wells has had numerous opportunities to sell, refinance or secure a second mortgage on all real property owned by Industrial Investors Inc and has not done so to this date, it is time that the government secure any and all interest for all assets owned by the Corporation to pay the outstanding tax debts.

That's just part of this letter. I'm not an attorney, but I do know that this is an ex parte communication.

Among the other gems of the IRS' behavior is how quickly they forced Industrial to respond. On June 21, the IRS demands information by July 8; on July 8, the IRS schedules a telephonic CDP hearing on July 19, without checking that the representative from Industrial could make that time. He couldn't, as was under subpoena for that date and time. He wrote back, asking for a change of time/date, but the IRS didn't receive the request until after July 19.

The IRS' behavior was atrocious in this case. And the Tax Court rightly takes the IRS to task. The Court notes regarding the ex parte communications,

"The Commissioner then made the guarantee of impartiality part of the IRS’s standard operating procedure by issuing Revenue Procedure 2000-43, 2000-2 C.B. 404. This procedure prohibits ex parte communications by IRS employees that would appear to compromise the independence of an Appeals officer...There can’t be any suspense in our holding on this point--the cover letter sent to Talbott that accompanied the administrative file was precisely the sort of prohibited ex parte contact that the Commissioner and Congress wanted to ban."

The IRS also lost on other issues. Industrial impliedly requested a face-to-face CDP hearing. That request is required to be granted, and the hearing is required to be at a local IRS office, not one 1500 miles away. And the IRS should have allowed more time for a corporation to prepare for a hearing, "We merely note that eighteen business days from the date of initial contact hardly seems an adequate amount of time for a corporation to provide all relevant documentation, and putting Industrial into default when Wells left word that he was under subpoena to appear in court is inexplicable."

So Industrial Investors will get a CDP here in Southern California. This is a case the IRS deserved to lose, and hopefully the patterns of behavior that were shown in this case by the IRS will go into the trash heap...but I'm not holding my breath.

Case: Industrial Investors v. Commissioner, T.C. Memo 2007-93

Crime doesn't pay, especially when you get caught. As I mentioned yesterday, I've got another full slate for you tonight.

We'll start with some garden variety fraud in Georgia. Stephen Taylor operated 20/20 Payroll Solutions, and he made sure that your tax deposits went...mostly to his personal expenses. That's bad. When clients began to get dunning notices from the IRS and state tax agencies, he showed them false confirmation receipts. That's worse. Then he started using payroll tax monies from one client to pay other client's taxes—sort of a Ponzi scheme. In the end, it fell apart, and Taylor pleaded guilty last week to one count of fraud after diverting about $4 million in deposits. He's looking at a lengthy stay at ClubFed.

Trusts have a surgeon in Carthage, Missouri in trouble. He purchased trusts from Aegis Co., of Palos Hills, Illinois, in an attempt to avoid $1.6 million in income tax. The government alleges that the trusts are shams. Not only has the surgeon, Brian Ellefson, been arrested, the founders of Aegis are also awaiting trial. Remember our standard warning: if it sounds too good to be true, it probably is.

David Stewart of Bowling Green, Kentucky, had a rags to riches story. Unfortunately, it will now be featuring a trip to ClubFed after Stewart pleaded guilty to four counts of tax evasion. Stewart admitted to not paying about $169,000 in income tax while not filing returns from 1999 through 2002. Along with some time at ClubFed, he faces a fine of up to $1 million.

Heading now to South Florida, the owner of a tax preparation service is accused of setting up sham corporations in Panama and Nevada to get extra deductions for his clients. Robert Payne of Miramar is charged with conspiracy and preparing false tax returns. If the allegations are true, he's looking at a stint at ClubFed.

Finally, from Buffalo (and I'll be nearby Buffalo for a day next week) comes the story of another bozo tax preparer. Corwin Johnson used to manage the EZ Income Tax Service. However, he pleaded guilty to tax fraud and bank fraud. He admitted to falsifying W-2 forms, identity theft, and submitting false tax refund claims. He could spend up to 30 years at ClubFed.

And I only posted a few of the stories from the last week....

There are many ways to catch tax scofflaws. California is trying something new—publicizing the worst offenders. Will shame cause payments?

The Board of Equalization collects sales and use tax in California. Under a law passed last year, both the BOE & the Franchise Tax Board must post lists of the worst offenders. The BOE has come out with their list of 227 who owe $219 million to California. A company can get off the list by paying the amount in full or by agreeing to a payment plan. Debts being appealed or in bankruptcy will not be listed.

The list will eventually grow to 250 names. For now, you need to owe $201,000 to make the list. Topping the list is Southland Federal Enterprises at $17,152,957.96 (we wouldn't want to forget those 96 cents); their debt dates back to 2000. Next on the list are Khaled Mohammed Tabbah of Walnut and Ammar Assad Tabbaa of Orange; each owes $16,887,211.88. In fourth place is the former owner of the Los Angeles Kings, Bruce McNall (also a former resident of ClubFed); he owes a measly $7,138,011.08 dating back from 1994.

Later this year the FTB will issue its list. As noted in the press release announcing the list, the BOE has received one payment of $300,000 and two payment plans totaling $1.5 million. So it appears that shame works.

California's legislature has plenty of warped ideas. Now there's a piece of legislation that would tax big vehicles to subsidize small vehicles. Under the "Clean Car Discount" bill, big vehicles that emit lots of Carbon Dioxide would pay a tax of up to $2500. This tax (after appropriate amounts are siphoned off by the state bureaucracy) would subsidize small cars through a rebate program.

Forgetting that global warming is a theory—a theory that is looking more dubious (to me) day by day—I doubt this will have any impact on global warming. In fact, the only thing this will do for certain is raise agriculture prices as farmers are big users of big vehicles (they need them), and they'll pass on their costs, of course.

Just another typical day in Sacramento....

I've recovered from Tax Day, and am back at work. While I've been gone, there's been a lot of fraud. That's typical for this time of year, as the government loves letting people know that tax fraud is bad. Indeed, I probably have enough material for two uber-posts.

Let's start off with the mob. Yes, that mob. It seems the government found that an alleged soldier in the Gambino family, Salvatore Scala, had attempted to extort money from the VIP Club in New York City. The VIP Club is an "adult entertainment" facility, but that doesn't change that extortion is illegal. So is tax evasion, and Scala was found guilty of two counts of extortion and four of evasion. He was sentenced to six years at ClubFed. His co-defendant, Thomas Sassano, was convicted on two extortion charges.

Heading south to North Carolina, we find a tax preparer who appeared to almost guarantee a refund. Indeed, 99% of his clients got one! Lloyd Batsfield accomplished this feat by having most of his 10,000 returns from 2002-2005 have education credits claimed. The trouble was, most of the clients didn't deserve the credits. Oops, and that became a big oops when the government knocked on his door. He pleaded guilty to filing $6 million in false claims for tax refunds. He also owes over $100,000 in back taxes to the IRS. He's looking at an extended stay at ClubFed.

A yoga instructor in New York found out that whether or not you receive a W-2 or 1099 doesn't change whether income is taxable. He pleaded guilty to evading $90,000 in taxes. That's a lot of yoga instruction.

Staying in New York, pop star Marc Anthony was in the news for the wrong reasons. Three of his companies forgot to pay New York state income tax, and they pleaded guilty to the charge. The total tax owed was $3 million. Anthony escaped prosecution under a plea bargain but he's going to have to pay $2.5 million in back taxes, penalties, and interest.

Remember the Ozbays? I've reported on this clan who didn't believe in taxes before, most recently when Birol Ozbay was sentenced to 10 years and must forfeit $6.8 million. Yalcin Ozbay got an identical sentence of 10 years and $6.8 million. The story notes that just about every federal and New York law enforcement agency was involved. Given that they tried to violate every tax law they could, I'm surprised that this story didn't get more play right before tax day.

Finally (for this uber-post), a story that's closer to home. A Riverside (California) owner of a halfway house allegedly really liked the telephone tax refund. He's been charged with claiming $600,000 in telephone tax refunds. Peaches Mercer Turner, according to this story, has been charged with tax fraud, identity theft, wire fraud, and obstructing an IRS investigation. Apparently Turner allegedly used some of his halfway house patrons to file the telephone tax refund claims. One such individual, Alejandro Berdin, requested a $33,000 refund. Given that he was unemployed and in a halfway house, it seems improbable that he made $1 million worth of long-distance phone calls. If convicted, Berdin (who was also charged) and Turner may make the short-distance trip to ClubFed's Victorville facility....

Well, I've just scratched the surface of the deceit, fraud, and other items that have come across my desk in the last couple of weeks. I'll have another uber-post tomorrow, as there's plenty more tax crime.

Because of the storm in the Northeast U.S., the IRS has, according to an email I just received, extended the due date for returns for impacted taxpayers only until April 19th.

Taxpayers who are impacted and take advantage of the extra two days will be charged interest but will not be charged a late filing penalty.

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Update: The IRS has released its' FAQ on this issue. Some highlights:

Returns covered:
* Calendar-year 2006 federal individual income tax returns, whether filed electronically or on paper (Forms 1040, 1040A or 1040EZ).

* Requests for an automatic six-month tax-filing extension on an individual return for calendar-year 2006, whether submitted electronically or on Form 4868.

* Tax-year 2006 income tax balance-due payments, whether made electronically (direct debit or credit card) or by check.

* Corporation income tax returns, including S corporations (Forms 1120, 1120-A and 1120S) for a fiscal year ending on Jan. 31, 2007, and any balance due.

* Calendar-year estate and trust income tax returns (Form 1041) and any balance due.

* Calendar-year 2006 partnership returns (Form 1065).

* Annual information returns (Form 990) and unrelated business income tax returns (Form 990-T) for tax-exempt organizations with a fiscal year ending on Nov. 30, 2006.

* Calendar-year 2006 Form 990-T for certain employee trusts, retirement plans and education savings plans.

* Extension requests for any return.

Estimated Tax Payments are not covered.

More information is on the IRS website.

This sounds ludicrous (and it is, of course), but some tax protesters came up with this argument. And a very famous actor apparently bought it.

Wesley Snipes, star of Blade and Passenger 57, went to an accountant who believes this. Mr. Snipes allegedly amended his tax return and claimed that he should get a $12 million refund. The government says that the IRS sent letters to Snipes advising him of the error of his ways...but he continued to claim the refund. Snipes now stands charged with filing false tax returns and claiming false refunds. He's out on $1 million in bond.

The Internal Revenue Code (which is a law, Title 26 U.S.C.) says that all income is taxable. If the charges against Snipes are true, Snipes better hope that the judge he draws has a very good sense of humor.

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The U.S. Tax Code is a mess. I've basically completed my returns for the year, and I'm amazed at how ugly our tax system has become.

I hope you've enjoyed this series. One thing I do hope you realize is that almost all income is taxable. If you follow down the path of Snipes (allegedly, of course) and Hatch, you're asking for trouble. If you're famous, you'll get it, because the IRS likes to make examples of bozo celebrities.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don't remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here's what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I'll create one day). Let's look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn't declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won't file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He's offered a plea bargain: pay your taxes, and we'll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren't withheld but should have been. (Answer: you pay the taxes.)

4. Hatch's attorney can't find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he'll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

Tomorrow, you will see our number one bozo tax tip of the year. It's a real "winner," and one that I can guarantee will cause you nothing but problems (if you follow it).

It's a parody (of course), but it reminds us what confiscatory tax rates are like....

Hat Tip: AllahPundit (via HotAir)

California is not a low-tax state. The corporate tax rate is 8.84% for C Corporations (1.5% for S Corporations); both must pay a minimum $800 tax each year. If I'm in my car for any appreciable length of time, I'll hear a commercial advising you to establish a Nevada Corporation. And, of course, my clients who hear that call me.

There's a fundamental problem with having a Nevada corporation and doing business in California and hoping you will avoid California tax on the corporation: nexus. If a corporation is doing business in California (have a "nexus" in the state), the corporation is liable for California income tax. Yes, foreign (out-of-state) corporations must pay California income tax.

So if a California business reincorporates in Nevada, you will still have to pay California tax. Now, a Nevada corporation can make sense...if you're going to operate in both California and Nevada, for example, or if you plan on moving to Nevada. Just realize that if you have a Nevada corporation, and you operate in California, you are liable for California tax, and if you don't pay, you're committing a crime. ClubCal is no more fund than ClubFed....

When I was in college, I was taught that there is a right way journal entries should be written and many wrong ways. There's an appropriate structure to a journal entry, and you want to make sure you keep the appropriate backup.

That has nothing to do with this post.

Indeed, since we're dealing with bozos here, an incorrect structure is where we need to start. The United States has various financial and currency reporting requirements. If you deliberately structure transactions to avoid these laws, you're guilty of the crime of structuring.

So don't deposit $10,000 in cash; make sure your deposits are $9,000. I've written on several occasions about individuals who have structured transactions. One bozo did just this, and made sure he never used the same bank branch on the same day (he used $5,000 transactions). Unfortunately for him, the bank manager of the second branch he used happened to be visiting at the first branch he used earlier on the same day. When she wrote up the currency transaction report, she glanced at the account history and noticed the pattern...a pattern that the IRS learned about. That bozo is now spending time at ClubFed.

Today, transactions of as little as $3,000 can be reported if a bank employee is suspicious, and you probably won't be told of the report. What's the solution for the crooks of the world? Well, the simple solution is to report your income on your tax return, whether it's in cash, checks, or credit cards. For the bozos, unfortunately cash is very difficult to deal with, and money laundering is quite illegal.

The truth is that structuring continues, because many get away with. Just be aware you are committing a felony if you structure your transactions (in an attempt to avoid tax or reporting), and if you get caught ClubFed might be in your future.

A few weeks ago, I had lunch with a friend who is a fellow tax preparer. He told me a story of "Abe."

This Abe definitely wasn't like Honest Abe. He had gone fifteen years without filing a tax return. He had a cashed-based business, had owned his home for years, didn't have a bank account, and knew enough about currency rules (he never spent more than $7,000 in cash on anything) so he wouldn't get caught.

And then one day the IRS knocked on his door. And presented him with a very large bill.

Abe has no idea how the IRS found out about him, but my friend was going to prepare 15 years of tax returns for Abe, until he started saying that the tax system is voluntary, and no one has to pay taxes. My friend told Abe that he's about to find out otherwise.

The moral of the story is fairly obvious. In these days of currency records and suspicious bank activity reports on transactions of as little as $3,000, it's pretty difficult to escape the IRS and the FTB.

A few years ago, a prospective client came to me. He had used Western Tax Service, and the IRS was about to audit him. Western, for those unfamiliar with them, had a great way of attracting clients: they invented phony deductions, or padded the amounts of deductions. This went on for years, and once the IRS discovered it, they looked at another Western client, and discovered it was systemic fraud (see this press release).

So why not use the Western Tax Service method? What can go wrong if you change your charitable deductions from $100 to $10,000? And add a uniform deduction of $2500 (those business suits are expensive, you know). And $2500 for miscellaneous unreimbursed business expenses. And....

Because we know that the odds are that the IRS won't catch me, right? And what's the worst that can happen to me? I'll just pay the tax that I would have, right?

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Wrong.

What I've written above is fraud. When you sign your tax return, you're signing under "penalty of perjury." The IRS takes that seriously. That's why whether you prepare your return yourself, or use a professional, you should review your return carefully. And that's why every return sent from our office asks the client to review the return. We want you to understand what's on your tax return.

You should take all the deductions and credits you're entitled to. But try hard not to take the ones you're not entitled to, because if the IRS finds you deliberately falsely took those, you're looking at penalties...which can include fines and even jail time. That's what the founders of Western Tax Service faced.

One of the blogs that I read is the FlashReport, a blog on California's politics. They've alerted me to some of the tax proposals being circulated in the Legislature. Not surprisingly, all are being sponsored by Democrats.

Global Warming/Greenhouse Gases Car Tax (AB 493) Sponsored by Ira Ruskin (D-Redwood City), this would impose a tax on new car sales of as much as $2,500 for cars that emit "large" amounts of greenhouse gases.

Property Tax Increase (SB 34) Tom Torlakson (D-Antioch) is sponsoring legislation that would allow unelected "governing boards" to increase property taxes.

Changing the Tax Rules (ACA 8) This constitutional amendment is sponsored by Jared Huffman (D-San Rafael) would change the voting requirements for new taxes from 2/3 (66.67%) to 55%.

These were the worst of the bunch, but there are more listed...a lot more. You can read about the rest at the FlashReport.

Have you heard about Kyle McDonald, the guy who bartered his way from one red paperclip to a house in Saskatchewan? Yes, barter can do that for you.

Say you have a box of binders you don't need. Meanwhile, your neighbor has a box of pens he doesn't need. So you swap. Everyone's happy.

So Mr. McDonald bartered his way from one paperclip (worth less than $0.01) to a house (we'll estimate that it's worth $100,000). And he didn't have to pay a penny in taxes.

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Now to the real world. Mr. McDonald is Canadian, I believe, and exempt from US tax laws. For Americans, barter transactions must be reported to the IRS. If you swap a box of binders worth $10 for a box of pens worth $10, no one has gained any income. But suppose you swap $100 worth of pens for $10 worth of binders. The person who received the pens "earned" $90. And, yes, he must report that as income.

Barter exchanges have sprung up, and if you participate in one, they function as intermediaries and issue BarterDollars. You don't have to spend cash at Joe's pen shop, you just spend BarterDollars. And Joe buys his binders with BarterDollars. At year-end, you each will receive a 1099-B from the intermediary showing your sales.

Bartering can be a good idea. It's the first form of commerce for man. But the taxman expects his cut, and if you don't give it to him, and he finds out, you won't be very happy.

Another week, some more bites out of crime in the tax world. We'll hit both coasts today, and even have some pot tax news.

First, a man in Racine, Wisconsin apparently liked my Bozo Tax Tip #8. Yep, he allegedly sent off a bundle of phony returns to the IRS, and like Mr. Graham, he got caught. Samuel Burnette has been indicted on charges of filing more than 30 false tax returns. Mr. Burnette has pleaded not guilty to the charges.

Locally, a Newport Beach business owner pleaded guilty to evading about $356,000 in taxes. Robert Hanna owns Newport Tux and Uniform, a business servicing hotels and casinos both here in Southern California and in Las Vegas. He admitted to using bartering to hide income and taxes (by the way, I'll be writing about bartering in Bozo Tax Tip #7 tomorrow), and paying personal expenses from his business account. He faces five years at ClubFed and a $100,000 fine plus restitution.

Medical marijuana has been in the news throughout the country. It's legal status is still somewhat hazy as federal law enforcement agencies are still fighting state laws that make such sales "legal." That's one issue. Another is for California medical marijuana clubs. You better collect the sales tax, or the Board of Equalization will be calling. Yes, the BOE put out a notice reminding cannabis clubs to collect the sales tax or face interest and penalties.

Moving now to the East Coast, a Stamford, Connecticut attorney will probably not be the keynote speaker for any more Columbus Day parades. Joseph Richichi, a high profile attorney, will be sentenced in October after pleading guilty to one charge of tax evasion. Mr. Richichi failed to tell his tax preparer about $2.8 million in income he received, and he hid $1.8 million more. He's made restitution already, but he does face a term at ClubFed and a $100,000 fine.

Moving up the East Coast, the spotlight shifts to picturesque Cape Cod, where a concrete company's business may have sprung a leak. The father and son owners are accused of hiding income, structuring transactions through purchasing travelers checks, and understating their gross receipts. Robert and Steven Belanger face terms at ClubFed and possible fines if the allegations are proved in court.

A pretty busy week for the criminal element in the tax world. Remember my motto: If it sounds too good to be true, it probably is.

Last year, Illinois added a new tax to help the horse racing industry. The tax required Chicago-area casinos that make over $200 million a year to remit 3% of their gross revenues to a fund benefiting Illinois' nine horse racing tracks.

However, the law exempted five southern Illinois casinos, and Will County Judge Bobbi Petrungaro found that the law didn't pass muster. For the law to have been legal, all Illinois casinos would have had to pay the tax.

The lawsuit was brought by the four Chicago area riverboat casinos. The Illinois Attorney General has not decided whether to appeal the ruling.

Let's thank Michael Graham of Queens, New York for coming up with this gem. Mr. Graham decided to file phony tax returns with the IRS. He used consecutive social security numbers on his tax returns.

He did get one tax refund through the system and collected $900. However, the other 1,799 returns were caught by the IRS and he didn't get the $1.6 million he attempted to collect. He did find his way to court, though....

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I strongly suggest that you do not try anything like this. The IRS and state tax agencies do have systems in place to catch bozos who attempt crimes like this. Instead of trying to bilk the system, ask your tax preparer about legitimate deductions that are available for you to take. The regular IRA allows you to deduct $4000 ($5000 if you're 50 or older) from your income (if you're eligible). You have until April 17th to make your contributions.

And if you're self-employed, you may be able to contribute to a SEP IRA. You have until your return is timely filed, including extensions, to contribute to a SEP IRA. You can contribute 25% of your net income up to a maximum of $44,000 to a SEP.

Phony tax returns will likely lead you to a stint at ClubFed (where Mr. Graham went). We recommend the IRA or SEP IRA over ClubFed....

New York is known as a high-tax state. Those who live in New York City or Yonkers must pay state and city income tax. That's bad. The amateur gambler is in for a surprise, too. While New York allows itemized deductions for gambling losses, New York's tax rules give a very rude surprise for the gambler.

Let's take a typical case. John Smith makes $90,000 working in New York City. He also gambles, and nets $50,000. As I've written before, the amateur gambler cannot net his wins and losses. Wins are other income (line 21) while losses are an itemized deduction that is not subject to the 2% AGI restriction on miscellaneous itemized deductions.

Joe won $500,000 and lost $450,000. Those kinds of totals aren't atypical for the successful amateur. Joe discovers that when he substitutes his true totals for his net number, his federal tax has increased by $2600. He's shocked to find that his state tax jumps by $27,000!

If your Adjusted Gross Income (AGI) is over $500,000, you lose 50% of your itemized deductions on your New York tax return. You keep all of your itemized deductions when your AGI is $100,000 or less. There's a sliding scale between $100,000 and $500,000.

So New York joins my list of states for gamblers to avoid. For the record, here's the complete list:

Connecticut
Illinois
Indiana
Massachusetts
Michigan
Minnesota (because of its AMT)
Mississippi (Only MS gambling deductions are allowed)
New York
Ohio
West Virginia
Wisconsin

So New York may be the city that never sleeps, but New Jersey never looked so good for the amateur gambler.

This is definitely an issue I'm aware of because of my practice areas. I deal with plenty of individuals who earn their living while residing abroad or through foreign sources of income. "It's tax exempt, isn't it?" They're not happy when I let them know that's not the case.

The Tax Code, which is law (Title 26, U.S.C.) states that Americans are taxed on their worldwide income. Basically, everything is taxable unless Congress specifically exempts it.

Anyway, about six months ago I was approached by an individual who was about to be levied by the IRS because of failure to pay taxes. He resided in the continental U.S., but earned all his income from royalties from the Far East. So I asked him a few questions:

"Are you an American citizen?" He was.
"Was this income taxed at its source? That is, had the countries where it comes from levied a tax on it?" No, he received all of the income.
"Do you pay income tax in any of these countries?" No, he didn't.

In summary, the individual really owed the tax. But as much as I tried to tell him that, I was talking to a brick wall. Given my dislike of talking to brick walls and of taking bozos on as clients, I suggested he try to get someone else to represent him.

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But if you do earn income abroad, there are some real tax tips you can take advantage of. If you have a genuine residence overseas or meet the physical presence test (generally, being abroad 330 days out of 365), you may be eligible for the Earned Income Exclusion. If eligible, you can exclude up to $84,400 in 2006. And the time period does not have to be a calendar year; if you're overseas from May 1, 2006 through April 15, 2007, you would likely be eligible for a prorated credit.

If you earn income abroad and it's taxed abroad, you are likely eligible for the Foreign Tax Credit. The general principle is that income should only be taxed once, so if (say) Japan taxes your income, you should get a credit of that tax on your US tax return.

Finally, anyone who is not in the United States on April 15th (April 17th this year) gets an extra two months (until June 15th) to file his tax return. (You need to attach an explanation to your tax return.) If you're abroad, you won't be subject to penalties but you will be subject to interest on what you owe (interest is statutory).

There are numerous caveats and gotchas, and numerous ways to lessen your tax if you either have foreign source income or live abroad. Talk to a professional who can help you if you're contemplating living abroad or will soon have significant income from abroad.

Many taxpayers use chains such as H&R Block or Jackson Hewitt to prepare their returns. One Jackson Hewitt franchisee is in trouble having been accused of multiple charges of tax fraud.

The IRS alleges that 125 Jackson Hewitt stores in four states (Illinois, Michigan, North Carolina and Georgia), owned in full or in part by Farrukh Sohail, engaged in systematic tax fraud. The franchised stores allegedly created phony deductions, artificial earned income credits, fake W-2's, and false fuel credit claims. The IRS is asking for these stores to be closed.

According to the lawsuits filed on behalf of the IRS, a sample showed that 31% of the returns prepared in the impacted stores had major problems. The IRS also alleges that managers in the impacted stores received kickbacks for filing false returns.

Needless to say, you should always review your tax return whether you use a professional or you do it yourself. You are responsible for what's on it.

I don't like to see any portion of the tax preparation industry getting a black eye. This case reminds me of the Western Tax Service case of a few years ago. That one was local; this appears to be centered in Chicago. If these charges are proved correct, I'd expect criminal indictments in the future.

News Story: AP via the Naperville Sun

With just twelve days until Tax Day, it's time to present our annual list of things not to do. All of the items on this list have been done by bozo taxpayers. Some have been successful while others have had, shall we say, a not-so-positive outcome. I'll be presenting a Bozo Tax Tip each day until April 14th. By the way, for a very good list of some excellent tax tips, see Joe Kristan's list at Roth Tax Updates. So on with Tip #10.

Everyone is looking for that extra deduction. One of the benefits of having children is that they you do get an exemption for each of them. An enterprising disk jockey in Wyoming thought, "Hmmmm, if I can get an exemption for my son, why not get an exemption for my dog Red." And so he added a dependent on his Form 1040.

At that time, you didn't have to put the social security number of your dependents on your tax return, and the IRS never noticed. However, the law changed and the disk jockey was faced with putting down a social security number for a dog. Not having one (of course), he noted on the next return that Red was deceased.

Tip: Dogs are wonderful companions, but they're not deductible. Making up social security numbers is not a good idea either. So this Bozo scheme is gone forever, unless you want to commit multiple felonies.

A lot has been posted this weekend in the annals of tax crime. We'll venture from New York to the Gulf Coast to see if the government took a bite out of [tax] crime.

Another of the Ozbay clan has been sentenced. On Wednesday, Birol Ozbay of Schenectady, New York, found that he would receive 121 months (10 years) in prison and must forfeit $6.8 million. That's basically the same sentence that Ziya Ozbay received in mid-March. The Ozbays didn't pay their taxes, they structured their transactions, and they didn't remit withholding tax that was withheld from employees to the government. They scored the rare trifecta of three different kinds of tax fraud. Two more Ozbays await sentencing: Yalcin Ozbay (who was found guilty at trial) and Mustafa Ozbay (who pleaded guilty during the trial).

Meanwhile, a doctor in Louisiana allegedly kept two sets of books. It's a wonderful way to save on taxes...until you get caught. Garland Miller of Zwolle, Louisiana, was indicted on two counts of income tax evasion. Mr. Miller is also under indictment for theft in state court; he allegedly bilked "tens of thousands of dollars" from a local hospital. Mr. Miller faces up to ten years at ClubFed and up to $500,000 in fines if convicted in federal court for tax evasion.

A woman in Mississippi allegedly found an interesting way to profit from a corporate merger. Instead of closing the old bank accounts (as she was told to do), she allegedly kept them open, and transferred funds into them. She then allegedly moved them to her personal account. Donna Hardy has been charged with twelve counts of bank fraud and five counts of tax evasion. Oh yes, she didn't report the tax on the stolen money....

Three interesting ways to try to turn an illegal buck. The trouble is that not only can you get in trouble turning the illegal buck, you have to pay tax on it.

Congratulations to Minnesota! No, they're not in basketball's Final Four. Rather, Minnesota's State Senate passed a bill on Saturday to increase the top tax bracket in the state to 9.7%, the highest regular tax bracket in the country. You would need to make over $250,000 to be impacted by the new bracket ($141,250 if single).

The legislation was led by Minnesota's Democrat-Farm Labor Party (DFL). Luckily for Minnesotans, Governor Tim Pawlenty promises a veto. And it appears that the DFL doesn't have the votes to override it.

Hat Tip: Tax Prof Blog
News Story: AP