Taxable Talk

Al Franken, the likely Democrat-Farm Labor candidate for U.S. Senate in Minnesota, told the Minneapolis Star-Tribune that he has paid over $70,000 in back taxes to 17 states. That's not just California, but includes Delaware, Kentucky, Massachusetts, Michigan, New York, and Wisconsin.

Among the revelations in the Star-Tribune article are that he did not pay workers' compensation and disability insurance premiums for New York-based workers between 2002 and 2005, and that a default judgment was entered in New York last year for $25,000.

The Associated Press article states that Franken's communications director, Andy Barr, told the AP that none of the 17 states attempted to contact Franken or his accountant about the unpaid taxes. That's likely splitting hairs given that New York did attempt to collect the insurance premiums.

In any case, Republican Senator Norm Coleman (who Franken will likely be running against) made the obvious remark, "Paying taxes is an obligation that I think Minnesotans expect to be adhered to, and that Minnesotans do."

Do I think this was deliberate evasion by Franken? No; the amounts are too small. Will this be political hay for his opponent? Definitely for now, and depending on how Franken handles this, it could derail his campaign.

It reached 98 F here in Irvine today. That's hot. But I have three stories where the individuals involved have faced the heat of tax evasion.

First, yet another Bozo tax preparer. Well, she really wasn't a tax preparer but she did prepare returns. From Greenville, South Carolina comes a truly Bozo scheme. A mother, Martha Vernon, stole social security numbers and names from her job, and then filed tax returns with phony W-2s where the refunds were direct deposited into her bank account and that of her daughter, Tiffany Dunbar. All told they received $188,931 in refunds out of the $396,573 they looked to get. Why was this scheme truly Bozo? First, it's inevitable that the actual individuals would file their own tax returns, so the crime was destined to be discovered. Second, the mother and daughter had the money sent into their own bank accounts making it quite easy to figure out who was behind the crime. They pleaded guilty to tax evasion charges last week in Greenville; a sentencing date hasn't been announced.

Next, we head to Long Island, New York where Jay Kuhn was sentenced to six months at a halfway house, three years of supervised release, and restitution of $400,000. Mr. Kuhn employed illegal aliens in construction on Long Island and he paid them off the books. He didn't remit the income and payroll taxes owed, and that's tax evasion. He pleaded guilty and is cooperating in an investigation of building trades in the New York metro area.

Finally, we have a case of a slight difference of opinion. Perry Lee Rempas ran Norfolk Airport Express, presumably taking customers to and from Norfolk's airport. He told the IRS that his business was defunct in 2000 and 2001, but he had $1 million in gross receipts. Indeed, the business had the contract for ground transportation at Norfolk International Airport from 2003 through 2006 until it was canceled when the business didn't pay the airport. Mr. Rempas pleaded guilty to tax evasion and will have to make restitution of $79,000 and will spend five months at ClubFed. He also, according to this article in the Norfolk Pilot, faces a state court judgment of $86,987 for his failure to pay the airport authority.

It remains a lot cheaper to pay your taxes up front then to commit tax evasion, especially if you elect a truly Bozo method of evasion.

That's the headline of an article in Canada's National Post. The article looks at some notable (for all the wrong reasons) films that Wesley Snipes made. My favorite from the article:

Crime: Blade: Trinity (2004)

Verdict: The film that ruined Snipes' career; just look at the movies he made after this: 7 Seconds; The Marksman; Chaos; The Detonator; Hard Luck; The Detonator. Have you heard of a single one? How they messed this up after the awesomeness that is Blade 2 is a mystery to film geeks everywhere.

Sentence: Garlic and sunlight.

Read the entire article and I hope you're not sentence to three years of airline food.

Al Franken has had an interesting career. He's been a comedian and a screenwriter, and now he's running for the US Senate, hoping to get the nod of the Democrat-Farm Labor Party in Minnesota (and then, of course, in the general election).

However, Mr. Franken (or his accountant) has forgotten about California's rules on corporations. A California corporation must make a minimum franchise/income tax payment of $800 a year, even if the corporation has no income (or lost money, for that matter). Mr. Franken has a California corporation, Alan Franken Inc., which the Secretary of State's website shows as forfeited (it did not pay its state registration fees).

This is apparently becoming big news in Minnesota, as the Minneapolis Star-Tribune is covering this story. Andy Barr, a spokesman for the Franken campaign, is quoted by the Star-Tribune: "Al feels that because his name is at the top of the organization, he takes ultimate responsibility for everything that goes on. But if there's a mistake that's been made, he's pretty insistent that the accountant fix it. He's been pretty vocal with [the accountant] on this point."

We're not talking big bucks here. The tax owed (including penalties) is $5,800 for not making the required minimum payments from 2003 - 2008. The corporation will likely also the Secretary of State's office $25/year plus a $250 penalty for each year that the required registration form wasn't filed. Once all of that paperwork is filed, and the state income tax returns for 2003 - 2008 are filed, Mr. Franken can dissolve his corporation.

So is Mr. Franken the next celebrity tax scofflaw? Only if he allows this mess to percolate for several weeks rather than insisting to his accountant that he prepare the appropriate returns and file them. Otherwise, the DFL in Minnesota will likely have to find a different candidate to run against Republican Senator Norm Coleman.

Joe Kristan has an excellent round-up of tax bloggers' reactions to Wesley Snipes' sentencing. Joe's conclusion is worth noting (especially if you have ideas of following Mr. Snipes' attempts at not paying federal taxes):

Mr. Snipes' acquittal on the felony charges still is important - I estimate that he would have served at least 3 more years had he been convicted. Still, the sentences ought to give some food for thought to the "show me the law" crowd -- especially that given to Eddie Kahn, who refused to recognize the authority of the court. If you don't think there is a law requiring them to pay income tax, but the federal judges, U.S. Marshals, and the Bureau of Prisons think there is such a law, your opinions won't help you avoid prison any more than it helped Eddie Kahn or Wesley Snipes.

Wesley Snipes will be spending three years at ClubFed. Judge William Terrel Hodges sentenced Snipes to the maximum possible sentence on his three misdemeanor charges. The Associated Press noted that Judge Hodges said that Snipes had shown a "history of contempt over a period of time."

During the sentencing hearing Snipes' Attorney Daniel Meachum handed Judge Hodges three envelopes containing $5 million in checks. The judge didn't accept them, nor did Assistant US Attorney Scot Morris. Later, an agent from the IRS did accept the funds. However, Morris later noted, "Your honor, that was a grandstanding move. It's essentially a down payment on his taxes. It is in no way a settlement of his taxes. It will be a fraction of what he owes."

Snipes will also spend one year on supervised release following his prison sentence. Snipes requested, and Judge Hodges will recommend, that he serve his time near his family's home in New Jersey. Snipes will report at a date to be determined by the Bureau of Prisons.

Also sentenced today were Snipes' co-defendants. Eddie Kahn also got the maximum sentence, 10 years at Club Fed, and Douglas Rosile received 4 1/2 years.

After the sentencing, Linda Moreno, another of Snipes' attorneys, told Ocala.com, "We were hoping for a complete acquittal. I have faith in the process, and I have faith in the jury system. We will appeal."

I've been on the phone all morning, but Joe Kristan has been watching Ocala.com. The sentencing hearing has broken for lunch (I suspect since it's 4:09 p.m. as I type this they've reconvened), and Judge William Terrel Hodges remarked:

He noted that the maximum three-year sentence - which is one year on each misdemeanor count - is "squarely in the middle of that sentencing range.

"Why should I go any further than that," Hodges asked.

This doesn't look good for Mr. Snipes.

I'll have the sentence when it's announced.

Wesley Snipes will be sentenced tomorrow in Ocala, Florida, for his conviction on three misdameaner charges of failure to file a tax return. The prosecution has asked that Snipes get the maximum sentence: three years at ClubFed. Snipes' attorneys are asking for probation.

Linda Moreno, one of Snipes' attorneys, told the Orlando Sentinel, "Mr. Snipes has led an otherwise exemplary life and is deeply sorry for his wrongful conduct. He has retained reputable tax professionals to assist him in resolving his tax liability and will make amends."

Actors Denzel Washington and Woody Harrelson both wrote letters to Judge William Terrel Hodges asking for leniency. Judge Hodges will make his decision tomorrow, and I'll let you know what the sentence is when it's released.

I spent the last couple of days relaxing (along with printing tax returns). Unsurprisingly there's some fraud to report on in just those last few days.

First, I have to look at a Bozo tax preparer. From nearby Rialto, California comes the story of Matthew Carl Berry. Mr. Berry was a partner in a tax preparation business. He definitely wanted his clients to get lots of deductions. In fact, if you used his services you didn't need to own a house to get the mortgage interest deduction. There's only one problem with that, and it's called tax fraud. The IRS audited about 4,500 returns and found an average tax loss of $3,150 per return. That's $14,175,000.

But that wasn't all. Mr. Berry and other members of his firm created false documents for audits and he didn't pay taxes on the income they received out of this scheme. Other members of his family have already been barred from preparing tax returns, too. He and his family are also facing a civil lawsuit from the IRS. Mr. Berry will almost certainly be spending some time at ClubFed.

Suppose you are audited by the IRS, and you lose, and are ordered to pay an additional $238,800 in taxes. Would you (a) pay the bill, (b) file an appeal and, if necessary, take the case to Tax Court, or (c) ignore the notices sent by the IRS to pay the bill and stop filing tax returns? Since I'm writing this it's clear which course Edward Barrier of Wildwood, Missouri took.

Back in 1995 Mr. Barrier was audited for 1987 through 1994. He lost, and the bills started coming. He got his revenge by ignoring those and not filing any more tax returns. He also decided to begin "structuring" his financial transactions. He apparently structured around $700,000 of transactions.

Unfortunately for Mr. Barrier eventually the IRS caught up to him. He had done business in cash, lived with his mother, and not owned assets in his own name. He did have a good job from 2002 - 2005—He was a project manager in high-end real estate in the St. Louis area. He had income of $2.4 million, but didn't pay the nearly $800,000 in taxes he owed.

Last week he pleaded guilty to one count of felony tax evasion in St. Louis. Mr. Barrier will be sentenced July 3rd and is looking at a maximum of five years at ClubFed, a fine of $250,000 and restitution. His bill is at $1.03 million...and that's before interest.

As I usually state, it's a lot easier in the long-run to pay the taxes you owe than to commit Bozo acts.

Back in February California's legislature passed legislation that helped cut $8 billion from the projected $16 billion budget deficit. That's good. Unfortunately, the deficit is growing as the state's revenues aren't. The San Francisco Chronicle has a story on the issue, and they think the deficit might now be as high as $14 billion.

Democrats are pushing for tax hikes while Republicans are now saying they may allow some fee increases. I know I'll be a voice in the wilderness but what California really needs are tax cuts.

Are you nuts, Russ, suggesting tax cuts when California is in dire financial straits? No. California cannot get out of this mess by increasing taxes. The state must fundamentally reform spending, and this will be painful. Cuts will have to be made—significant cuts in programs that many legislators will consider their "pet projects."

But as the Democrats state this might not be enough. So instead of increasing tax rates we should cut them. Cutting tax rates leads to increased tax revenues. This has been shown time and time again (the Laffer curve). California needs to do everything in its power to cause businesses to relocate to the Golden State. If the Democrats in Sacramento had their way every business that could would relocate.

It is time for a change.

By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.

First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors' trusts are another useful vehicle.

But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)...and many times these tax structures have been challenged successfully by the IRS.

And those are the domestic trusts.

The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you'll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them.

Remember: If it sounds too good to be true it probably is.

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That concludes the 2007 series of Bozo Tax Tips. Don't be a Bozo: Use legitimate tax savings vehicles rather than Bozo methods.

The IRS loves Bozo tax celebrities. They get a chance to show you and I that Bozo celebrities must pay their taxes. And if they go to court and win, it's guaranteed that there will be plenty of publicity. So without further ado, here's Bozo Tax Tip #2, a repeat from last year.

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.

2008 Update: And they were slim. Last February, Hatch's appeal was denied. As you might expect, 300 million witnesses can't be wrong.

Tomorrow, I'll be posting my number one Bozo Tax Tip for 2008. I guarantee that if you follow that tip you will be certifiably Bozo.

Let's assume you've procrastinated on your taxes, and you (all of a sudden) notice it's April 15th. You'll just call your accountant, and you're sure he'll drop everything for you.

No chance.

If you called me today, and I haven't yet received your paperwork, you will be going on extension. We'll make a quick and dirty estimate of your income, pay the appropriate amounts with your extension (and any estimated taxes for 2008), and we'll come back to your return when we both have time.

And if you call me at 4:45pm on Tuesday, April 15th expecting me to drop everything and complete your return I might start to laugh. Indeed, I will be dropping everything at 5:00pm this Tuesday—my brother, sister-in-law, and niece are in town and we're going to dinner.

Let's assume your business has been successful. Very successful. What should you do with all that money, especially if you'd prefer to not send a lot of it to Uncle Sam?

Well, you can take the Bozo method of hiding it in foreign bank accounts. I'll just transfer the funds to my account in Liechtenstein/Luxembourg/Switzerland/Cayman Islands/Isle of Man/etc. The IRS will never find me. And, voila, I have a lot less income to report.

There's nothing illegal about having a foreign bank account. There's a lot illegal about not reporting foreign financial accounts if you have $10,000 or more in one or more such accounts. That $10,000 figure is determined by adding the maximum balance in each account at any time during the year. If you do have foreign bank accounts you would need to report them by checking a box at the bottom of Schedule B on your tax return and by filing Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30th.

Heh, if you're going to violate one law (tax fraud, by not reporting all your income), what's another couple of laws? Well, foreign bank accounts come under tremendous scrutiny. Consider the recent mess in Liechtenstein. Germany is quite annoyed with the tiny principality, and many countries are now finding out about some of the individuals who have bank accounts in Liechtenstein. Or take Neteller, an Isle of Man based financial intermediary, which sent all of its records to the Department of Justice. A reasonable assumption is those records have made their way to the IRS computing center in West Virginia.

The penalties for breaking the foreign bank account reporting laws are stiff. The minimum penalty for willfully not reporting a foreign financial account is $100,000.

Instead of trying to beat the system by violating the law a much better non-Bozo strategy is to work with your tax professional to find ways of working within the law to lower your taxes. But Bozos will be Bozos....

While Joe Kristan suffers from watching snow falling in Des Moines, I have the opposite problem. Here's the local forecast for Irvine:

* Today: Sunny. Hot. High near 90F. Winds NE at 5 to 10 mph.
* Tonight: Mostly clear. Low 57F. Winds light and variable.
* Tomorrow: Mainly sunny. Very warm. High 87F. Winds light and variable.
* Tomorrow night: A mostly clear sky. Low 57F. Winds light and variable.
* Monday: Mainly sunny. Highs in the upper 70s and lows in the low 50s.

Almost time to go back to work here....

With Tax Day fast approaching it's time to look into the Bozo method of courting disaster. And it doesn't, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that's not really the Postal Service's motto. It's just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You've paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (before April 15th), and you've just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $2.65 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

I just had a client's return go awry. The client received a letter from the IRS stating that the IRS had lost their return, but they knew they had received it. They had proof that it had been mailed, so it wasn't a big deal.

About three years ago a client saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1000...but he did save $2.42.

Don't be a Bozo. Efile (and you don't have to worry at all about the Post Office), or spend the $2.65! And you can go all out and get a return receipt, too (though you can now track certified mail online). There's a reason every client letter notes, "using certified mail."

It's getting more and more difficult to avoid the tax system. There are currency transaction reports (cash transactions of $10,000 or more) and suspicious activity reports (theoretically can be done on any transaction, but usually starts at $3,000 or more) done with cash. Businesses must send out 1099s on payments of $600 or more to individuals. Barter organizations must send out 1099s.

But that doesn't stop the Bozo contingent. "They'll never catch me," they believe. Until the IRS or the Franchise Tax Board (substitute your state tax agency if you're not in California) knocks on their door. There's no statute of limitations if you don't file.

Paying taxes isn't fun. Avoiding the system and living on the edge may give you a thrill, but if you get caught you'll be given a bill...and possibly a trip to ClubFed.

If you're a Californian don't forget that the second installment of property taxes is due tomorrow, Thursday, April 10th. That's a postmark deadline. Most California tax collector offices have online payment systems set up, too.

A few weeks ago I received an email from Robert Bernhoft, the lead defense attorney for Wesley Snipes during his recent trial for tax evasion. For those who don't remember, Mr. Snipes was found not guilty of the most serious offenses (tax fraud) but was found guilty on three of six charges of not filing a tax return.

I've received permission to post Mr. Bernhoft's remarks:

After the Snipes' trial I came across several articles and posts you authored while sifting through some of the voluminous media and web material that my staff had collected. In those articles you stated that Mr. Snipes had been convicted of three counts of tax evasion. This is untrue. Mr. Snipes was convicted on three of six counts of failure to file a return.

The difference is significant, because tax evasion is a tax fraud felony, see 26 U.S.C. § 7201, whereas failure to file a return is a "non-fraud" misdemeanor, see 26 U.S.C. § 7203. The felony/misdemeanor distinction is very important for several reasons. First, a misdemeanor conviction does not ordinarily disenfranchise Mr. Snipes from voting or possessing firearms, does not ordinarily bar him from running for (or holding) national office, and carries a statutory maximum sentence of 1 year. (Felony tax evasion carries a 5-year statutory maximum sentence per conviction count). Moreover, the U.S. Sentencing Guidelines treats misdemeanor convictions much less severely than felony convictions in a number of ways other than the difference in statutory sentencing maximums, including giving the sentencing judge broad discretion to sentence to probation or other non-incarceration alternatives to actual imprisonment.

Lastly, I note you made some disparaging comments about Mr. Snipes' decision to discharge Attorney Billy Martin and hire my firm for his defense, opining, on at least one occasion, that Mr. Martin's "O.J" and "blame the advisors" defense would surely be better than some "lame tax protester arguments." Mr. Snipes faced a very real 16 years imprisonment if he was convicted on both felony tax fraud counts (conspiracy to defraud the IRS and filing a false claim), but now faces a statutory maximum of three years imprisonment on misdemeanors only, and without the opprobrium and loss of rights attached to felony tax fraud convictions. In retrospect, I think the trial worked out rather nicely for Mr. Snipes, don't you?

First, I absolutely agree with Mr. Bernhoft: The trial worked out very well for Mr. Snipes. Mr. Snipes likely would have been sentenced to a significant term at ClubFed had he been found guilty of both felony counts. If I should at some future point be accused of felony tax evasion I'd definitely consider Mr. Bernhoft for my defense.

I also assumed that when Mr. Bernhoft took over the defense that the defense strategy would be a typical "tax protester strategy." I told Mr. Bernhoft in an email that I was wrong, and I'll state it here. Mr. Snipes' defense was handled quite well. (Indeed, contrast Mr. Snipes' defense with that of his co-defendents, Eddie Ray Kahn and Douglas P. Rosile, who were found guilty of felony tax fraud.)

I think Mr. Bernhoft is splitting hairs about Mr. Snipes' conviction of failing to file a tax return. He accurately notes that I called it "tax evasion." Indeed, the headline on my post of February 1st said just that. However, the story noted that he was convicted of three misdemeanor counts. Mr. Bernhoft is correct, of course, that felony convictions are much more significant than misdemeanors.

In my post "Final Thoughts on the Snipes Trial" I noted that both the prosecution and the defense praised the Ocala, Florida jury. I noted that,

"Yes, Snipes was guilty of stupidity (if you believe you don't have to pay taxes...) and tax evasion failure to file a tax return (the government clearly proved that he didn't file tax returns while he was earning income) but was he the purveyor of a tax fraud scheme?

"I hadn't looked at the case in that manner but thinking about it I can see how a jury could decide that Snipes just bought the words of Kahn and Rosile. The verdict is not a repeat of the OJ Simpson case; Snipes was found guilty of three counts of tax evasion failure to file a tax return and could spend some time at ClubFed. He also faces the possibility of a civil suit by the IRS to recover the taxes. That might not happen, though, because his defense attorney says that Snipes intends to file and pay his taxes."

Here are two other conclusions that can be drawn from this case that I believe Mr. Bernhoft would agree with. First, it's a lot cheaper to file your tax returns and pay your taxes then to have to go to trial and defend yourself against tax fraud charges. And second, I don't think Mr. Bernhoft will be complaining about juries in Ocala, Florida and clamoring to move trials from that bucolic town again.

I've been talking about the Nevada Development Corporation's efforts to draw California businesses to Nevada. A business that moves to Nevada should strongly consider reincorporating in Nevada to avoid California taxes.

But assume you're in California. Should you follow one of the many radio advertisement's advice and incorporate in "tax-free Nevada?" Well, there's a problem with this. It's called nexus.

If your business is physically located in California you have to file a California tax return. Period. If you don't the Franchise Tax Board will likely be calling upon you. And trust me, ClubCal is no more fun than ClubFed.

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....