Taxable Talk

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.