Taxable Talk

Another repeat from last year, but with a better morale than before. Here's what I wrote last year:

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 15th 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 $45,000 to a SEP. This is one tax deduction that's available until October 15th if you file an extension.

Amazingly, some who are wealthy scoff at taking this deduction. Both Democratic presidential candidates, Hillary Clinton and Barack Obama, had significant self-employment income over the past few years and put none of it in a SEP IRA. Given their tax brackets, they would save somewhere between $15,000 and $30,000 in taxes and have some savings for retirement. If you're self-employed consider that the government is literally going to pay one-third of your retirement plan if you contribute to a SEP (depending, of course, on your tax bracket). This is a deduction you should absolutely discuss with your tax professional.

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....

I can't believe this. As I reported in December, local billionaire Igor Olenicoff pleaded guilty to $52 million of tax fraud last December. In his plea agreement it appeared he would get a few months at ClubFed.

As Joe Kristan comments, "Yeah, that $3,500 fine and probation will really teach the guy worth $1,600,000,000 a lesson he won't soon forget." That's what Mr. Olenicoff has gotten according to this Forbes report.

I read that and have nothing to add.

Mr. Olenicoff be sentenced on April 14th in nearby Santa Ana.

Links: TaxProf Blog, Roth Tax Updates

Today's Bozo Tax Tip is a repeat from last year. It's just another of the tax protester myths, that only foreign income is taxable. It's also one that has come up again during this tax season. So, without further ado, here's what I wrote last year:

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 $85,700 in 2007. And the time period does not have to be a calendar year; if you're overseas from May 1, 2007 through April 15, 2008, 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 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.

I'm a big fan of Alfred Hitchcock movies. One of my favorites is The Trouble With Harry. Another movie with a similar plot is Weekend at Bernie's.

These movies deal with death in a light-hearted manner. Since this is a Bozo tax tip, how does this apply? Well, a few weeks ago I had a meeting with a potential client, who wanted to claim his father as a dependent. I asked him if his father lived with him; he didn't. I then asked where his father lived, and I was told he had passed away...in 2003.

There are rules about claiming dependents, and they do have to be alive sometime during the year. I expressed my sympathy to the potential client, and suggested he find a different tax professional to prepare his return.

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There are some tax benefits to those who lose their spouse during the year. They still get to file as married for the year. If a decedent was a dependent at any time during the year you can claim them as a dependent. Widows or widowers who lost their spouse within the last two tax years preceding this year and have a dependent child may be able to file as a widow or widower with a dependent child.

But please don't try to claim your relatives who passed away years ago on your tax returns. If you do, you're likely going to be paying a visit to ClubFed.

Other than my upcoming Bozo Tax Planning Series (which will begin later today), posting will be very light until after April 15th. I have lots of work in the in-basket, and not much time to get it all done. For it's not fooling around to say that April 15th is just two weeks away.

I'm not talking about a poll tax, but a pole tax as in strip clubs. Travis County (Texas) Judge Scott Jenkins ruled that the $5 admissions tax to Texas strip clubs was unconstitutional as a violation of freedom of expression under the First Amendment.

The sponsor of the legislation, State Representative Ellen Cohen (D-Houston) plans on reviving this "cutting-edge legislation." As Joe Kristan noted on Roth Tax Updates given that the goal of this program was to tax an enterprise with a higher ratio of women who work in it, I'm sure that Rep. Cohen will look to add additional taxes to nursing, day care, teachers, and manicurists. Yeah, right....

Another light week on the tax fraud front. But while it lacks depth, some of the cases are definitely amusing.

Three women in Maryland allegedly had a Bozo idea on how to make some money. Let's get some inmates at the local prisons to give us their social security numbers, and then we'll file phony returns on their behalf. What can go wrong?

Well, I can think of several felonies that the three committed. Unfortunately for our Bozo preparers the Postal Inspection Service, the IRS, and the FBI were not as amused by the scheme as I was. And since the Bozo preparers allegedly filed 101 claims totaling $365,599.41, the three are looking at lengthy terms at ClubFed if convicted on charges of mail fraud, conspiracy to defraud the US, and identity theft charges. You can read the press release on the indictment here.

Unfortunately, the three ladies in Maryland aren't the only Bozos in the tax profession. Trumbauersville, Pennsylvania is a tiny town—less than 1,000 people reside in the borough. The town got some notoriety this week, though.

Eugene DiNatale, a councilman, runs an accounting business in nearby Rockledge. Mr. DinNatale and an associate, Chakawarn Sirirathasuk, found the old fashioned way to allegedly deprive the government of tax revenues. They allegedly collected employment taxes on behalf of their clients and kept the money rather than remitting it to the IRS. This is a scheme that almost never works, and one where the IRS and the Department of Justice go after every time it occurs. And the amount of the alleged money they kept wasn't small: $4.9 million. Just for good measure the pair is also accused of overstating clients' business expense deductions. Mr. DiNatale is looking at a very long term at ClubFed if convicted.

The final story comes from Saginaw, Michigan. Two brothers and a bank manager are accused of structuring transactions and tax evasion. The brothers filed tax returns from 2001 through 2005 showing incomes under $55,000 a year according to this news story but somehow managed to make "extravagant" purchases. And when their homes were raided in January 2006 the IRS found over $1.3 million. The bank manager is accused of aiding and abetting structuring. The brothers face multiple structuring and tax evasion charges. All are looking at relocating to ClubFed if found guilty.

My suggestion to everyone is if you think you've found a foolproof scheme to cheat Uncle Sam think again. Most schemes have been tried before and failed.

Earlier this week I posted an advertisement from the Nevada Development Authority. The Los Angeles Times had an article today noting that Democrats in Sacramento are unhappy with the advertisements that portray California as a tax-happy state. Of course, Democrats in Sacramento are arguing for more taxes.

Somer Hollingsworth, President of the Authority, told the Times, "We can see what is going on in California as far as businesses are concerned...They've got workers' comp issues, a $16.5-billion deficit, employee retirement funds that are out of whack."

State Senator Mark Ridley-Thomas (D-Los Angeles) told the Times, "Businesses are here because they appreciate the powers of this economy...I suspect Nevada wishes it could be ranked as among one of the top economies in the world."

Perhaps the Democrats in the Legislature would like to talk with some of my corporate clients who are again contemplating leaving the Bronze Golden State because of high taxes and too many regulations. Maybe Nevada won't be the destination, but if California tries to close the deficit on the back of businesses other states will benefit. State Senator Ridley-Thomas is naive if he believes that taxes can increase forever without businesses reacting.