Taxable Talk

There are all sorts of awards given, but the award I give is special. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

In 2005 Sharon Lee Caulder won the inaugural award. Quoting from my post, "Sharon Lee Caulder, formerly of Oakland and now from New Orleans, our voodoo priestess who wrote a book and was convicted of tax evasion. She did not include the $1.7 million she earned between 1998 and 2002 (mainly from sales of her book, Mark of Voodoo, on her tax returns". As I wrote when she was convicted, "Voodoo is more profitable than I realized, especially if your net income after taxes is the same as your net income before taxes (until Uncle Sam catches you)."

Now, on to 2007. There have been lots of tax fraudsters this year. But one stands out. No, it's not Wesley Snipes. Mr. Snipes hasn't been convicted yet, so technically he's not an offender. (He certainly has a good shot at the 2008 award, though.)

The story begins back in 2000. A Camarillo, California company is sued for patent infringement and settles the case for "tens of millions of dollars." Now, if you owned that business what would you do? Would you look for new income producing lines of business? Would you develop workarounds so that you wouldn't be infinging on the patents? Or would you decide to commit tax fraud just to get back at the federal judge who allowed the miscarriage of justice (in your view) to happen?

If you're thinking that no one could have such a bad motive to commit tax fraud you'd be wrong. This actually happened.

As I detailed earlier this year, Gene Haas did exactly that. The former CEO and owner of Haas Automation, Inc. created a phony Nevada company and enlisted the help of his then CFO to commit tax fraud. Here's what I wrote:

So, enlisting the help of his then CFO, John Phillips, the business created a phony company in Nevada called "Supermill," and then paid the phony company from phony invoices. Then Mr. Haas and Mr. Phillips got in a business dispute, Mr. Haas sued Mr. Phillips for $27 million (apparently related to the phony transactions), and Mr. Phillips went to the FBI and told them of the scheme. (Mr. Phillips was not indicted.) It's not a good idea when you commit tax fraud to get a co-conspirator angry enough to go to the FBI.

The DOJ, in a press release announcing Haas' indictment, claimed that the tax fraud was upwards of $20 million. Now, with a $5 million fine added in, penalties, and interest, the total judgment is somewhere around $70 million. And Mr. Haas will be receiving two years at ClubFed.

If you find yourself losing a court case, I strongly recommend that you do not follow Mr. Haas' path, and decide that committing tax fraud is a way of getting back at the judge. Kenneth Barish, an attorney for Mr. Haas, in describing the plea deal, noted, "[u]nder the circumstances, it was a good result." When paying $70 million and getting two years at ClubFed is a good result, you wonder what a bad result would be.

As for Gene Haas, he was formally sentenced in November to two years at ClubFed, payment of the taxes, penalties, and interest (totaling about $70 million), and a fine of $5 million. Added to the $30 million or so he paid for the patent infringement case, that's a whopping $105 million plus two years at ClubFed. Yes, Mr. Haas threw away two years of his life and $75 million.

That's a wrap for 2007. While I'd love to not have anyone commit such a bozo tax crime as Mr. Haas did, I fully expect to see at least one similar story in the coming year. I have complete confidence in Americans to commit bozo tax crimes.

In most of the world, economics follows the rules you learned in school. If prices increase and the supply stays constant, demand falls; if supply decreases and demand stay constant, price increases, etc. But I'm a resident of California.

California faces a $14 billion budget deficit. As I earlier noted, Governor Schwarzenegger will be calling a special session of the Legislature in early January to deal with the deficit. Given that Assembly Republicans are vowing no new taxes and Assembly Democrats don't like the idea of cutting programs, it should be interesting.

But that's not the point of this article. Given the budget situation, what sane politician would propose a new tax? How about new taxes? Well, Governor Schwarzenegger and Assembly Democrats have brokered just such a package with their health care initiative.

This proposal, if it passes the Legislature, introduces three new taxes: an additional $1.75/pack cigarette tax, an employer health care tax, and a 4% surcharge on hospital stays.

Let me first note basic economics. These taxes will raise prices, thus causing demand to drop. The revenue projections won't be met, and taxes will need to be increased further in order for the program to be funded at the level proposed.

Second, consider California's business climate. It's bad—California ranks 47th out of 50 states. What sane business owner would expand a business in California when neighboring states offer a much better business climate?

Third, the proposal likely violates federal law. There's a federal law, ERISA, which courts have held prohibits states and local governments from mandating employee benefits. Indeed, just last week U.S. District Judge Jeffrey White ruled that San Francisco's law mandating health insurance violates ERISA and threw it out. While San Francisco plans on appealing the decision, there's lots of precedent that they'll have to fight through.

For California's future the state's political leaders need to look at cutting taxes. Though this may sound difficult to impossible in a time of budget deficits, the Laffer curve has shown that lowering tax rates increases tax collections. But I'll be shocked if we see any tax decreases.

Perhaps I'll be surprised at the Legislature's actions in 2008. And perhaps pigs do fly....

Wall Street Journal Editorial
Assemblyman Doug LaMalfa on California's health care plans

I remember the Michael Myers movie, So I Married an Axe Murderer. Today the Tax Court looked at a related issue: What happens if you marry a tax cheat but don't know about it?

The basic facts weren't in dispute. The petitioner's ex-wife was a parking lot cashier at the Philadelphia Airport in the early 1990s. She participated in a scheme to steal money from the airport. She earned about $90,000 in illegal (stolen) income. As you might expect, when the theft was discovered her employment was terminated.

There's no dispute that illegal income is taxable. There's also no argument that when a joint return is filed, both spouses are responsible for paying the tax on the income. In this case, both the IRS and the petitioner agree that about $36,000 in tax is owed.

However, there is a protection for the true innocent spouse. Section 6015(c) of the Tax Code:

"...That section limits an individual’s liability for a deficiency to the portion of the deficiency properly allocable to that individual under section 6015(d). In general, an item that gives rise to a deficiency on a joint Federal income tax return will be allocated to the individuals who file the return in the same manner as that item would have been allocated had those individuals filed separate returns."

Given that when the returns were signed the petitioner knew nothing about the ex-wife's illegal income, all of the income would be attributable to the wife.

However, the IRS disputed whether the petitioner had actual knowledge of the illegal income. If that were the case, he would not be eligible for relief by filing a Section 6015(c) election.

Luckily for the petitioner, for this section of the Tax Code the burden of proof is with the IRS (per Section 6015(c)(2)). While petitioner's ex-spouse testified that the petitioner knew about the illegal income, that was apparently the only evidence that the IRS had. The petitioner also testified that he had no knowledge of the illegal income, and "...we find petitioner’s version of the events to be the more credible. Other evidence supports our finding in this regard. "

So if you marry a tax cheat, don't despair. The Tax Code does actually offer you some protection. On the other hand, if you marry an axe murderer....

Case: Eller v. Commissioner, T.C. Summary 2007-215

The IRS announced today that most taxpayers will be able to file their tax returns normally. However, about 3 to 4 million taxpayers who use just a few forms will need to wait until February 11th. (While about 13.5 million taxpayers use these forms, most do not file early.)

Here are the forms that will cause delays:

• Form 8863, Education Credits;
  
• Form 5695, Residential Energy Credits;
  
• Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; and
  
• Form 8859, District of Columbia First-Time Homebuyer Credit.

Remember, the forms you get in the mail will be incorrect. Specifically, the exemption amounts on Form 6251 (Alternative Minimum Tax) are wrong. Other forms and instructions that reference these amounts will also be incorrect.

The IRS stated in today's press release that they will need seven weeks to update their computer system for those specific forms, but that individuals who don't use those forms should be able to file normally.

Congratulations to the IRS in working expediently to fix the mess that Congress created. As to Congress, can you do your 2008 AMT patch before Election Day next year?

Wesley Snipes will be tried in Ocala, Florida, not New York City. That was just one of the rulings made yesterday by Judge William Hodges. The judge found that a jury in Florida would likely consist of the same racial percentages as one would find in Central Florida, and that's the important constitutional question, not the racial percentage differences between Florida and New York. Additionally, the judge ruled that the trial will not be delayed until April.

So Snipes' trial is set to begin on January 14th in Ocala. We'll see how big of a media circus the trial is in just a few weeks. In any case, Snipes' trial will probably be just the tonic for tax preparers while we prepare 2007 returns.

A partnership changes its address. What should it do to notify the IRS? Well, that's fairly simple: Like any taxpayer it should send in Form 8822. Today, the Tax Court looked at a case where the partnership didn't follow the normal procedure.

Partnerships are required to designate a "Tax Matters Partner" (TMP). When the IRS has questions/issues/needs to send a notice, it sends the same to the TMP. In this case, the IRS sent 14 final partnership administrative adjustment (FPAA) notices to three different addresses. As the Tax Court said, "By mailing FPAAs to multiple addressees at multiple addresses, respondent made a good faith effort to notify all affected parties of the partnership adjustments, thus satisfying the notice requirement of sec. 6223(a)." And one of the addresses was the last address of the Form 1065, thus making it a correct address to mail the FPAAs.

The partnership wanted to challenge the FPAAs. (Among other issues, the IRS believes the partnership is a sham.) From this case and two related cases the Tax Court ruled on, it's unclear whether or not the partnership received the FPAAs timely. It's quite clear that they didn't respond timely (the Tax Court case was brought two years after mailing of the FPAAs). Because the IRS mailed the FPAAs to a correct address, the Tax Court dismissed the partnership's petition.

Consider what would have happened to the case had the partnership correctly filed a change of address—there's a good chance their case would be heard at the Tax Court. (Whether or not they would prevail is unknown, as the issues involved were never argued.) Certified mail costs under $5.00. I guarantee that the IRS asked the partnership for more than $5.00.

Case: Stone Canyon Partners v. Commissioner, T.C. Memo 2007-377

The Tax Court looked at another gambler's attempt to write off substantial gambling losses. She claimed a losing year, but the IRS felt otherwise. Did she really have gambling losses, or were they a mirage?

Gamblers, both professional or amateur, must keep a contemporaneous written log. If you do keep such a log, you'll be able to substantiate your wins and losses. In today's case, however, the gambler didn't keep a log. She claimed $244,744 in losses, but the IRS only allowed $127,165 (after the gambler found casino ATM receipts, canceled checks made payable to casinos, carbon copies of checks made payable to casinos, and credit card statements stating that cash was advanced at the casinos). What about the remaining $117,579?

The court summarized the problem most ably:

"In order to establish entitlement to a deduction for gambling losses in this Court, the taxpayer must prove the losses sustained during the taxable year...Petitioner failed to present credible evidence of gambling losses beyond those respondent conceded. Petitioner did not maintain a diary or any other contemporaneous record reflecting either her winnings or her losses from gambling during 2002. Further, petitioner’s gambling income of $265,795 for 2002 was established only by an examination of her Forms W-2G, Certain Gambling Winnings, and petitioner appeared unaware of the specific figure until confronted by respondent. At trial, petitioner submitted no evidence to validate her claimed gambling losses, relying only on the theory that her losses must have equaled her earnings because she found herself in debt at the end of the year. We conclude that petitioner has failed to satisfy her burden of substantiating her losses."

There are two problems. First, the Court is very suspicious of a gambler whose only winnings are those reported on the W-2Gs. It's almost certain that the petitioner had other slot winnings which didn't result in the issuance of a Form W-2G.

Second, and most importantly, she had no documentation to prove her losses. Telling the Court, "I'm broke, so I must have lost," may be logical (and may indeed by factual), but it doesn't show proof of the facts. She had no proof, and the petitioner got three lemons for her decision.

Case: Jackson v. Commissioner, T.C. Memo 2007-373

There's been lots of fraud over the past few days. People seem to be forgetting that cash sales are just as taxable as other sales.

Let's start in New York City. The New York Yankees may be one of baseball's most successful franchises, but one former employee has learned the hard way that tips are taxable income. David Szen is the Yankees' former Traveling Secretary (he arranged for charter buses, hotel rooms, etc.), and, as is customary in baseball, received tips from players and coaches. All fine and good, until he forgot to note the tips on his tax return. Oops. He admitted his wrong-doing last week and pleaded guilty to tax evasion. He'll make restitution of just over $10,000 and may face a short stay at ClubFed or a fine.

Staying in the Big Apple, an art gallery owner found out the hard way that sales tax laws apply to big ticket items, too. Michael Weisbrod owns the Weisbrod Chinese Art Gallery. They feature Chinese objects, such as the beautiful jade horse:



Unfortunately, the gallery forgot to collect sales tax on its purchases, and the owner pleaded guilty to both personal and corporate state tax fraud. The amount of the fraud could be as high as $1.1 million, so that's a lot of fraud. Sentencing is scheduled for April.

Next, from Lansing, Michigan comes the story of a former nightclub owner who decided to double his work on how he kept his books. One set of books wasn't enough for Thomas Donall—he kept two. One was accurate; the other didn't show the cash that he skimmed off the top. He provided the inaccurate one to his tax preparer. All was fine until the IRS discovered the double books. Mr. Donall was sentenced to a fine of $25,000 and two years probation. He must also make restitution of $180,000.

Finally, we head south to Dawsonville, Georgia. Robert Merickle ran East Coast Marketing (aka Blue Haven Pools). He used to methods to lower his tax bill: cash sales didn't make it onto the books and personal expenses did. Neither of those methods is legal, and when the government found out, trouble ensued. Mr. Merickle pleaded guilty to tax evasion, and faces up to three years at ClubFed plus restitution. As U.S. Attorney David Nahmias said, "Those who choose this criminal course of action [tax evasion] face federal prison time, which is far worse than paying the tax that was owed."

Last week the IRS announced in Revenue Rule 2008-05 that wash sale rules impact transactions into an IRA. This could have a major impact to the unaware.

A "wash sale" is when you sell shares of stock at a loss, and in the thirty day period before or after the sale you buy replacement shares. When that happens your capital loss is postponed; the disallowed loss increases your basis in the replacement shares (assuming the replacement shares are not purchased in an IRA).

In the ruling announced last week, the IRS determined that if one buys replacement shares in an IRA, the loss is lost forever. This ruling makes doing a wash sale into an IRA a very bad decision.

Other Coverage:
Roth Tax Update
TaxProf Blog

In California's last fiscal year (July 1, 2006 to June 30, 2007), 89,000 more people moved out of California than moved into the state. This is according to the annual report of the California Department of Finance. The state still grew in populations, based on births and immigrants from abroad.

Why are families emigrating from the Golden State? Could it be California's high individual income tax, which it makes it much less of a Golden State for retirees than neighboring states such as Nevada? Could it be that California's abysmal business climate (the state ranks 47th) is driving businesses from the state? Perhaps it's a combination of both.

The Los Angeles Times quotes Howard Roth, Chief Economist of the Department of Finance, as stating, "[The exodus] won't be the lasting problem we had in the 1990s. It will go away." Is he correct?

I have my doubts. The state has a $14 billion budget deficit. Democrats in the legislature are talking about cutting various tax deductions, such as the mortgage interest deduction, and are looking at other schemes to close the gap such as increased user fees and tax increases.

If and when Sacramento gets serious about cutting the state's bureaucracy I'll agree with Mr. Roth that the exodus is temporary. If not, it may be something that's much longer lasting.

News Story: Los Angeles Times

Heading into Christmas, I hope you've completed your shopping. The IRS gave out its list on Friday: A list debunking some of the most popular of the frivolous arguments used by tax protesters.

For example, some have contended that only foreign income is taxable. The IRS debunks this on page 19, noting that Section 61 of the Internal Revenue Code (which is a law, Title 26, U.S.C.) states, "'Gross income' means all income from whatever source derived and includes compensation for services."

So while Santa may be checking his list to see if you've been naughty or nice the IRS will check its list to see if your argument is reasonable or not. It's a shame that Richard Hatch and Wesley Snipes didn't peruse the list before they got themselves in trouble.

Hat Tip: TaxProf Blog

When we last saw Michael Domecq, former president and co-owner of Domecq Importers, he had just pleaded guilty to tax fraud and knew he would spend 10 years at ClubFed. However, he had to prepare 17 years of revised, accurate tax returns to determine what he owed the Treasury.

Well, the returns have been filed and the numbers have been added up, and the total is $4.5 million in restitution (tax, penalties, and interest). That's a lot of bottles of liquor.

The moral is the same as what we said back in July: "It would have been much simpler to just pay the tax in the first place...but somehow that thought never enters the mind of the tax evader."

Back in the 1960s Harry Kemelman began writing books about Rabbi David Small, including several bestsellers such as Friday the Rabbi Slept Late and Saturday the Rabbi Went Hungry. They're cozy mysteries, and are worth your perusal.

However, that's not what I'm writing about this evening. Naftali Tzi Weisz, head of an Orthodox Jewish group (he is "The Grand Rabbi of Spinka"), was indicted on charges of conspiracy to defraud the IRS, mail fraud, money laundering, and operating an illegal money remitting business. Weisz and other associates are accused of soliciting charitable contributions to Spinka charitable groups totaling in the millions by promising donors that they could take the tax deduction and that the charity allegedly would refund 95% of the donation. And that scheme is, if proved, definitely not kosher.

Weisz and his alleged co-conspirators are looking at several years at ClubFed if convicted on all counts.

CBS Story, San Jose Mercury Story

In the no surprise department, the House passed the AMT patch bill that did not contain any offsets. It now goes to President Bush who will likely sign it tomorrow or Friday.

The IRS previously said that it would take ten weeks for their computers to be reprogrammed with the new AMT exemption amounts ($66,250 for joint filers and $44,350 for single filers). Assuming that's the case, the IRS computers will be ready to process returns on February 29, 2008.

If your refund gets delayed, you will know who to blame: Congress—specifically the Democratic leaders in the House and the Senate. They waited to bring this measure up until late November knowing full well what the impact would be.

Finally, Joe Kristan ended his post on this with a wonderful thought: "As the patch only covers 2007, it kicks the problem into 2008 - an election year. More fun awaits." Thanks, Joe. It's the Holiday Season, a time for good cheer, not reasons for the rest of my hair turn to gray.

TaxProf Blog linkfest on the AMT patch passage
Roth Tax Update post

News reports state that the House will consider an AMT patch bill that has already passed the Senate. The Senate version of the AMT bill does not contain any tax offsets (or "paygo") provisions. Earlier, the House had passed an AMT patch that contained such offsets.

Last night the Senate again considered the House bill and it again failed (48 - 46, with 60 votes needed). All but one of the Republicans present voted against the bill while all Democrats present voted for the measure.

Thus, the House was left with no option but to consider the Senate version of the AMT patch, or the Democrats would end up being blamed for a tax increase on the middle class. Unfortunately, due to the lateness of the bill, the IRS forms that millions of taxpayers will receive will have incorrect information, and it's probable that the IRS will be unable to process individuals' tax returns until sometime in March.

I have had several individuals request that I repost an article that originally appeared on TwoPlusTwo.com's Internet Magazine. Without further ado, here is the article that first appeared in the February 2007 TwoPlusTwo Internet Magazine.

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TAX MYTHS FOR THE POKER PLAYER
By Russell Fox, E.A.

Note: This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

When I read a post on a poker site such as Two Plus Two or rec.gambling.poker that deals with U.S. taxes, it’s usually with fear and trepidation. Much of the time, the information presented is either wrong or only partially correct. In this article I will examine some of the major tax myths that I’ve seen and hopefully steer you in the right direction.

Myth #1. I’m a U.S. citizen, but I now live in Costa Rica. I don’t have to pay U.S. income tax. The United States taxes citizens on their worldwide income. If you’re a U.S. citizen, you must pay income tax on your income no matter where you reside, be it Moscow, Idaho or Moscow, Russia. You do, though, generally receive an extra two months (until June 15th) to both file and pay your income taxes if you’re outside of the U.S. on April 15th, but you will owe interest on the tax due.

Myth #2. I can renounce my U.S. citizenship, and then I won’t owe any tax. Well, that may be true, or it might not be. The United States has an Expatriation Tax (Section 877 of the Internal Revenue Code). From the ten years following your expatriation, you must file information returns. If you are in the U.S. for thirty days you will owe U.S. income tax for that year. Additionally, if you are considered a high-income individual under this section of the Code, you can owe tax. There are notification rules under this section of the Code, too. Warning: This is a complex area and you absolutely need to consult a tax professional and an attorney before renouncing your U.S. citizenship.

Myth #3. Online poker winnings aren’t taxable because the sites are overseas and/or it’s illegal and illegal income isn’t taxed. Not only does the United States impose an income tax on your worldwide legal income, illegal income is also taxable (see James v. United States, 366 U.S. 213, 218 (1961)). Early in 2006, a woman in Tullahoma, Tennessee pled guilty to four counts of tax evasion for not paying tax on $500,000 she embezzled. She will likely receive 18 to 24 months in prison. Internet gambling winnings are taxable income.

Myth #4. I won $2,000 at the Grand Casino in Tunica, MS. They withheld $500. I can claim that $500 in tax on my state tax return. This is only a partial myth. Generally, you can only pay tax to one state for any specific income. On your state income tax return, you can receive a credit for tax paid to other states. For example, you’re a resident of California, and you get a W-2G from a casino in Mississippi for $500. You will have to file a Mississippi tax return, attach a copy of that return to your California return, and you can claim a credit for the tax paid on line 28 of Form 540. Warning: The treatment of credits for other states’ taxes varies depending on the states involved. Sometimes the credit will be taken on the other state’s tax return. Consult a professional tax advisor for the correct treatment in your situation.

Myth #5. I work in a salaried, full-time position. I can also file as a professional gambler. This is almost certainly not true. In Commissioner v. Groetzinger (480 U.S. 23), the Supreme Court noted, “…[W]e conclude that if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned.” The key terms herein are full time, good faith, regularity, and livelihood. If you have a full-time job, it’s unlikely you can file as a professional gambler.

Myth #6. I can net my wins and my losses. Unless you’re a professional, the sum of your winning sessions are Other Income (line 21, Form 1040); your losing sessions, up to the amount of your winning sessions, are an itemized deduction taken on Schedule A. Professionals do get to net their results and file using Schedule C (Profit or Loss From Business). Professionals, though, must pay self-employment tax on their net income, at 15.3% of the first $94,000 of net income, and 2.9% above this (2006 numbers). While half of the self-employment tax is a deduction (line 27 of Form 1040), unless the professional earns a substantial six-figure income, he can pay more in tax.

Myth #7. I can lump my play on the Internet for a full day (or week, month, or year) as a session. Unless there are specific rules stating otherwise, the tax treatment of the virtual world is the same as the brick and mortar world. I have previously written on the definition of a session. There’s no way that play for a year, month, or week will pass the IRS’ smell test. Indeed, I do not believe that defining a session as a day will be accepted unless you’re playing for a full, continual 24-hour period.

Myth #8. All states treat gamblers identically. This is definitely not the case. Some states don’t have an income tax or only tax interest and dividends (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). However, some states do not allow gambling losses as an itemized deduction. (Professionals can still take losses, as they would net their wins and losses on Schedule C or the state equivalent.) The states that gamblers should avoid residing in are Connecticut, Illinois, Indiana, Massachusetts, Michigan, Minnesota, Mississippi, New York, Ohio, West Virginia, and Wisconsin. Two states are today at the top of the “Don’t reside here list”: Washington and Ohio. I’m sure everyone is aware that Washington state made Internet gambling a felony. What you may not know is that Washington also has a Business & Occupation tax that a sole proprietorship, including a professional gambler, must pay. Ohio has a law that makes being a professional gambler a crime (Section 2915.02(A)(4), Ohio Revised Code). I’m not an attorney, and have no idea if this law is being enforced, but given how Ohio treats gamblers, I’d consider relocating if I were an Ohioan.

Myth #9. The IRS doesn’t share information with state tax agencies. Absolutely false. The IRS and state tax agencies actively share information. As far as I know the only state that does not share information with the IRS is Nevada. You can find a description of the information sharing program here.

Myth #10. I just won’t file. I’ll do everything with cash, and the IRS will never know. If you spend $10,000 or more, a currency transaction report is required to be generated and is sent to the IRS. Banking transactions of $10,000 or more in cash must be reported. So just keep everything small, right? Wrong. If you deliberately attempt to evade transaction reporting by engaging in a series of smaller transactions, you may be found guilty of the crime of “structuring,” which is a felony. Finally, banks and other financial institutions (casinos are considered a financial institution) are encouraged to report smaller transactions—anything that makes them suspicious.

Myth #11. The IRS can never catch me. On the contrary, they can, and probably will if you’re not paying your taxes and you owe an appreciable amount. First, the IRS has a reward program. The IRS’ largest source of tips are ex-spouses and girlfriends/boyfriends, so make sure your significant other is happy. Second, if you use a Neteller debit/credit card to avoid IRS scrutiny, think again. Neteller has cooperated with US government investigations in the past and undoubtedly will in the future. Indeed, Neteller obeys a Maryland state law and does not accept Maryland residents as customers. Additionally, all of the debit card networks (Stars, Cirrus, etc.) are owned and operated by U.S. entities and will cooperate with an IRS subpoena. The major credit card networks (Visa, MasterCard, and American Express) are also U.S. owned and operated and will cooperate with the IRS. If the IRS finds out about you, or you get audited and the IRS suspects something (e.g. you report income of $25,000 but you drive a Mercedes), the IRS will examine your financial records in depth. Tax evasion is a serious crime and you can find yourself in prison if you commit it (ask Richard Hatch about that). Note: Since this article first appeared, Neteller's founders were arrested, and Neteller settled various federal charges with the US Department of Justice. It is believed that Neteller turned over all of its records on all of its US customers to the Department of Justice.

Myth #12. The IRS can’t share information from my tax return with other government agencies because of the “Silver Platter” doctrine. Another falsehood. As noted above, the IRS routinely shares information with state tax agencies. In Garner v. United States (424 U.S. 648 (1976)) the Court held that the occupation listed on a tax return can be shared. If you are foolish enough to list your occupation on your tax return as “illegal drug dealer,” the IRS can forward your name to other law enforcement agencies.

Myth #13. The IRS will never go after a poker professional because we’re small potatoes. This may have been true a few years ago. Unfortunately, it’s no longer the case. The IRS announced in both its 2006-2007 and 2005-2006 Priority Guidance Plans that they wished to implement, “Legal requirements to withhold on the winner’s prizes at poker tournaments.” (To date such regulations have not been written.) Like it or not, poker players are celebrities. Prosecuting a high-profile poker player for tax evasion would likely have a deterrence effect on other gamblers. I think it’s only a question of when, not if. The IRS is looking at PayPal records from the time that PayPal was used to fund Internet gambling. It may take a year or two, but I think some gambler will be prosecuted because of this.

The U.S. Tax Code is complex. It’s unfair to gamblers. Parts of it are just plain stupid. But it’s the law. And when you break the law, there are consequences. It’s a whole lot easier to pay your taxes now than to wait for the IRS to find you and pay taxes, interest, penalties, and possibly find your way to prison.


© 2006, 2007 by Russell Fox, All Rights Reserved.

Russell Fox, E.A. is a tax practitioner enrolled to practice before the Internal Revenue Service. He is also a poker player and is the co-author of Why You Lose at Poker.

When NBC's Saturday Night Live looks saner than California's legislature, there's a problem.

Today, California's legislature will look at a new health insurance program, estimated to cost $14 billion. Interestingly enough, California's budget deficit for this fiscal year is now estimated at $14 billion.

California's budget crisis keeps getting worse. Reports have surfaced that the Governator will declare a "fiscal emergency" in early January; the deficit for this fiscal year is now forecast as somewhere between $10 and $15 billion. That's a lot of money, and will require significant monetary machinations.

The Instapundit predicts that the governor will propose a "moderate" tax increase. However, California is one of the few states where all tax increases need a 2/3 vote of both houses of the legislature. The Flash Report stated that Assembly Leader Mike Villines told Michael Der Manouel, Jr., the president of the Lincoln Club, "Tax increases are dead on arrival in the State Assembly, there isn't a revenue problem."

So we will likely see the unstoppable force (Democrats love of tax increases) running into the unmovable object (Assembly Republicans rejection of any tax increases). Things will likely be very, very nasty in Sacramento, and at a minimum expect "user fees" to increase dramatically. Add in a possible recession in 2008, and the political scene will be very ugly.

Christopher Kelly, a former adviser to Illinois Governor Rod Blagojevich, has been indicted on federal charges of tax fraud. Mr. Kelly is accused of understating more than $1.3 million on his business and personal income tax returns. If found guilty on all counts Mr. Kelly would be looking at a significant stay at ClubFed. Three other individuals were indicted: Abdelhamid Chaib, P. Nicholas Hurtgen, and Ali Ata. Mr. Chaib and Mr. Ata are accused of fraudulently trying to obtain a $2.6 million loan to buy a chain of pizzerias; Mr. Hurtgen is accused of trying to obtain kickbacks from hospital expansion projects.

But Mr. Kelly is the big target named as part of "Operation Board Games" today. He used to be Governor Blagojevich's main adviser on gambling issues (Illinois has several casinos). So what did Mr. Kelly allegedly do? The indictment alleges that he placed wagers worth millions with both bookies in Chicago and at Las Vegas casinos and then paid the debts off with corporate funds from his roofing business as business expenses. Governor Blagojevich, according to the Chicago Tribune, selected Mr. Kelly to be his gambling adviser "...because Kelly is an avid gambler and high-roller and he often travels to Las Vegas on weekends."

While Governor Blagojevich has not been accused of any wrongdoing this is the second major indictment of one of his advisers. Earlier, Antoin "Tony" Rezko was indicted on charges of attempting to extort businesses that were involved with the Illinois Health Facilities Planning Board and the Illinois Teachers' Retirement System board. His trial will be in February.

No trial date has been set yet for the individuals indicted today.

News Stories: AP and Chicago Tribune

Joe Kristan has the details on an IRS update on the correct procedure for S Corporation's 2% (or greater) owners' health insurance:

"This new Notice is a slight liberalization of the rules. The IRS announced in 2006 that only premiums paid directly by the S corporation qualified for the tax break. The new rule expands the line 29 deduction to premiums paid by the shareholder but reimbursed by the corporation."

Note that there are several 'gotchas' that must be followed; Joe details them.

If any clients have questions about this please call me as soon as possible so that we make sure your payroll service does the correct bookkeeping for your health insurance premiums.

Billionaire pays IRS $52 million in back taxes screams the headline in this morning's Orange County Register. Igor Olenicoff, a member of the Forbes 400 (the 400 wealthiest Americans) and owner of Olen Properties, used offshore bank accounts to hide income and assets from the IRS and other creditors; he accepted a plea agreement and will likely serve a few months at ClubFed. Forbes estimates that Mr. Olenicoff is worth $1.7 Billion.

Mr. Olenicoff's story was at first a version of the true American dream. He came to the United States as a Russian refugee at age 15; his family had almost no assets. He built Olen Properties into a huge force in commercial and apartment properties; the company owns over 60 commercial properties in Orange County and over 11,000 apartments and many residential communities primarily in Las Vegas and Florida.

However, his plea agreement notes that he moved $346 million to overseas accounts from 1998 to 2004. (He will repatriate all those funds as part of his plea agreement.) Mr. Olenicoff had told Forbes that "...was actually owned by offshore companies in which he had no interest."

Mr. Olenicoff pleaded guilty to one county of filing a false tax return. While he could receive up to three years at ClubFed based on his plea agreement he will likely spend just a short stay there.

However, Mr. Olenicoff's tax troubles may continue. As Forbes notes, California is next in line. During his plea hearing, Mr. Olenicoff stated that he was a resident of California in 2002. The Franchise Tax Board will likely soon be knocking on Mr. Olenicoff's door.

News Stories: Forbes, Orange County Register

I recently received notice that if you attempted to access this site by going to http://taxabletalk.com you'd get an error. I've fixed that through the help of a friend who showed me "A" records and the like. You should be able to read this blog through either http://taxabletalk.com or http://www.taxabletalk.com

I used to work in Stockton. And I know that I have at least one reader who resides there (a former co-worker). He is probably already aware of the problems that the Sang family faces.

Richard Sang, his wife Amber Lao, and their sons Brooke Sang and Richie Sang own several restaurants: Mallards in Stockton and Modesto, the Cedar Creek Inn in Palm Springs, and the Fish Market and Grill on the Lake in nearby Mission Viejo. The Stockton Mallards closed in October; the Modesto Mallards closed in November. Many restaurants fail (it's a very tough business). However, both Mallards failed in spite of the owners allegedly pocketing payroll taxes withheld for the state.

San Joaquin County Deputy District Attorney Sudha Rajender told the Stockton Record that "[The owners] were withholding [the taxes], but they were pocketing it." In total, the four are facing 36 counts of fraud and tax evasion. The elder Sang has been through charges like these before; he was convicted on federal charges in Washington state in 1991.

Meanwhile, California's Employment Development Department (EDD) has already fined the owners $100,000 for not having workers compensation insurance at the Modesto Mallards. And the owners are facing a $1.6 million lawsuit over defaulted loans and owe $10,000 to Stanislaus County for unpaid property taxes.

Currently, the Mission Viejo restaurant remains open. I hope that continues (at least for the short-term); I am part of a group that has a breakfast meeting there every Friday morning. Given that Mr. Rajender told the Marin Independent Journal, "I've never seen a case like this before. These guys have gotten away with this for some time, and nobody has been interested in prosecuting them before. It's very complicated." I suspect we may soon be looking for a new location to meet.

Modesto Bee Story Here

Joe Kristan has a post describing the efforts of Frank Black of North Carolina. As Joe notes,

"- When he wrote checks to his college-age daughter, he deducted the amounts as 'supplies' and equipment purchases.

- He told the Tax Court that his six and eight-year old children worked 1,000 hours per year in his business."

Those are just two of the examples that led to over $70,000 of civil fraud penalties. You can read more here. As Joe said, "Don't do that stuff."

If you own property in California, Monday is the deadline to pay your first property tax bill. The bill must either be paid in person at your county's tax-collector's office or it must be postmarked by Monday. Your tax-collector may offer payments by credit card or over the Internet; you can check this by calling or looking at your county's web site.

The second payment is due on April 10th.

There's a sure-fire method to get the IRS upset with you. Just withhold trust fund taxes from your employees (FICA and income tax) and don't send them to the IRS. I can almost guarantee you that bad things will happen to you.

And if at the same time you don't file your annual FUTA (federal unemployment tax) returns and your personal income tax returns, the IRS may want to send you to ClubFed.

Just to make sure you get some attention you can also be accused of defrauding some of your customers. And as long as you're going this route, you might as well allegedly defraud your investors.

That's what Marengo, Illinois contractor John M. Volpentesta is accused of. He faces 23 counts of mail fraud, wire fraud, and tax fraud. He allegedly defrauded customers investors out of over $1 million and didn't remit federal trust fund taxes of $164,999. And, yes, it's alleged that he didn't file the FUTA tax returns from 2003 - 2005 and that he and his wife didn't file three years of personal tax returns. If found guilty, Mr. Volpentesta is looking at a lengthy stay at ClubFed.

Trial will probably be next summer in Rockford, Illinois.

Back in September, I noted the case of Lakeland, Florida dentist Nancy Montgomery-Ware. During her trial for tax evasion, she "figured out" that the income tax isn't allowed under the Constitution. She also said that her husband told her she was crazy. It didn't take long for a jury to find her guilty.

Last week was the sentencing hearing for Ms. Montgomery-Ware. She now said that it was her husband that made her commit the crime and that she didn't want to do it. She also said that she was in an abusive relationship and her attorney asked that the judge stray from the sentencing guidelines so that she could raise her child. And she paid the full $326,000 tax bill.

Still, some time at ClubFed was in the cards. Judge James Moody sentenced Ms. Montgomery-Ware to 33 months and a $25,000 fine. She had to pay the price for committing a crime.

I will be traveling again over the next few days, so posting will be light until next Wednesday. Should an AMT patch make it to the President, I will definitely post on that.

Late today the Senate passed a one-year Alternative Minimum Tax (AMT) patch that did not have any corresponding tax increases. The measure will now go to the House where it faces an uncertain future.

The House had passed a two-year patch that contained corresponding tax increases. As I mentioned previously, there's no chance that an AMT patch which contains tax increases can pass the Senate nor would it be signed by President Bush. However, that doesn't mean that House Democrats have figured that out.

Other tax measures which are scheduled to expire were removed from the AMT legislation. A separate bill on those "extenders" will soon be introduced. However, because it will contain corresponding tax increases it, too, faces an uncertain future.

Meanwhile, tax forms (which will almost certainly be wrong) are being printed at the Government Printing Office, and I and other tax professionals will have to explain to clients why the forms are wrong. As I said before, I expect that by April 15, 2008 all of my hair will be gray.

Wesley Snipes' defense attorneys will ask next Tuesday to delay Mr. Snipes' trial until April. The trial is currently scheduled to begin in January in Ocala, Florida. The defense attorneys, according to Ocala.com, received 1.6 million pages of material from their discovery motions and need additional time to go over the material.

This request seems a lot more reasonable than their request to move the trial to New York City because a fair jury is impossible to come by in central Florida.

That's the score in the epic battle between Larry Harvey and Randall Preheim. Mr. Harvey has represented 61 taxpayers who resided in Antarctica and wanted to take the Foreign Earned Income Exclusion. Mr. Preheim represented the IRS.

Antarctica is still not a continent, and it's 61 losses and counting for Mr. Harvey. Joe Kristan likens this to the battle between the Roadrunner and Wile Coyote. I liken it to the Washington Generals, who achieved an enviable record of 6 wins to 13,000 losses.

I hear the Generals are due for a win soon....

Cases: Role v. Commissioner, McDonald v. Commissioner, and Owens v. Commissioner

Larry McCarthy, President of the California Taxpayers' Association, lost his struggle with cancer. He was 59.

Mr. McCarthy was a tireless champion of taxpayers in a state where many legislators' views of taxpayers is how do we find a new tax to impose. He fought for taxpayers rights for over 30 years. He will be missed.

A tribute page to Larry McCarthy is here.

Michigan is in a recession. In fact, it has been in a recession for several years. So what do you do to attract businesses in a down economy? Do you (a) lower taxes and cut government spending, (b) do nothing, or (c) raise taxes and continue to increase government spending?

Well, since I have a cynical outlook on how government works I wasn't surprised with the outcome. Michigan raised taxes and continued to increase government spending (albeit at a reduced rate of increase). Michigan imposed a business services sales tax of 6% effective December 1st.

That tax met with universal scorn among Michigan business owners and residents, and Michigan's legislature repealed it. Well, I should say they replaced it. Now Michigan has a 21.99% surcharge to Michigan's business tax.

The surcharge is supposed to bring in $600 million this fiscal year and $750 million next year. It's unlikely to generate that revenue. The natural reaction when a tax is imposed is to do whatever behavior you can to lessen the tax's impact. And one obvious impact will be for businesses that can to shift tax-generating activity out of Michigan and into other states.

Assume you're a business owner and have two manufacturing plants: one outside of Detroit and one outside of Phoenix. You need to expand operations. Will you do that in your Detroit plant and pay extra tax? In fact, might you not consider closing your Detroit plant and shifting all of your operations to Phoenix?

Michigan has slapped a Band-aid on a very leaky wound, and in the long-term it won't work. Businesses that can will still flea the state and Michigan's long-term recession will continue. The only solution is to make Michigan attractive to businesses, and that means lowering taxes. Cutting tax rates increases tax revenues—something Arthur Laffer discovered.

I have a few clients in Massachusetts. We joke that it's really "Taxachusetts." Massachusetts' state income tax is 5.3%, and is really more of a gross receipts income tax; few deductions are allowed. But that may change.

Citizens in Massachusetts have collected over 66,000 signatures on petitions—the first step in a drive to eliminate the state's income tax. While there are more steps involved in the process (including collecting a second set of 11,000 signatures early next year), it's likely that residents of the Commonwealth will have a chance to vote themselves out of the state's income tax.

It may be a very interesting election cycle in Massachusetts. Although, as the link notes, expect lots of politicians to say, "The sky is falling."

Earlier this year I wrote about Richard Hudec, Jr. Mr. Hudec had been accused of tax evasion and concealing material information. He pleaded guilty to those charges on Friday. While he faces up to ten years at ClubFed it's likely he'll receive about 3 years. First, though, he must testify against a co-defendant under his plea deal. Sentencing is scheduled for next February.

What does the IRS have to do with health care? Very little today. However, if one presidential candidate gets his wish, the IRS will be intimately involved in health care.

Former Senator John Edwards (D-NC) proposes that under his version of socialized medicine, Americans would have to submit proof of health insurance with their annual tax filings. If you didn't have insurance, the IRS would notify a newly created federal/regional bureaucracy; that individual would be required to obtain insurance (but would get a tax credit to help with his payments).

Now, I've probably got some of the details garbled, but I'm not apologizing for that. The IRS has enough difficulties administering taxes. Getting them involved in health care is a prescription for a headache that we'd all be sharing.