Taxable Talk

Richard Hatch, the Survivor winner who was convicted of tax evasion, won't be leaving the Morgantown, West Virginia Federal Correctional Institution anytime soon. The US Supreme Court declined to hear his appeal today.

Mr. Hatch had charged that the trial court didn't allow him to ask certain questions on cross-examination. The Appeals Court had ruled, "Here, the district court's limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive."

And that's it. There are no more immunity challenges left, no more places to appeal. Mr. Hatch will have to serve out the remaining twelve months of his sentence. In the end the 300 million witnesses were correct.

Hat Tip: How Appealing

The deadline for filing tax returns on extension is this Wednesday, October 15th. That's also the deadline for funding your SEP IRAs. If you procrastinate beyond this date you will be hit with the failure to file penalty (if you owe any tax) of 5% of the tax due per month.

Your paper-filed returns must be postmarked by the 15th. Electronically filed returns must be transmitted by the 15th.

Joe Kristan put it very well:

If you haven't gotten your tax information to your preparer yet, it is definitely time to panic. And if your preparer charges then you an arm and a leg for the doing the return because you brought your information in three days before the extended return deadline, well, don't do that next time.

The tax evaders were out in force this week. I could have filled several posts with their escapades. Here are the lowlights.

Let's start with a Bozo tax preparer. First, from Upper Darby, Pennsylvania comes the story of Nyon Geleh-Saylee. Mr. Geleh-Saylee truly wanted to help his tax preparation clients. He did this by inflating the deductions on their returns costing the federal government over $89,000. He was convicted back in June for filing false tax returns. He avoided ClubFed and will spend six months in home confinement.

Todd Newman is a CPA in Yonkers, New York. Mr. Newman was arraigned on Friday on charges of grand larceny and failure to file a state income tax return. Mr. Newman allegedly stole $1.6 million from one of his clients. He was supposed to send the money to New York state for payroll taxes withheld; instead, he allegedly wrote checks to himself. He's looking at a lengthy term in state prison if convicted.

Here's a scheme that sounds intriguing. Let's start a banking system to cater to the tax protester movement. We'll hide their money, give them access so they can print money orders when the need to, and we'll ignore those pesky banking and tax laws. Other than violating a few federal statutes (and possibly some state laws) it's sounds kosher, right? Well, the man who thought up this idea will likely get some time to consider it at ClubFed. Wayne Hicks, Sr. of Berryville, Arkansas pleaded guilty to one count of tax fraud conspiracy this past week. Mr. Hicks also admitted that he's neglected to file his own tax return for the last sixteen years.

Finally, a follow-up on the story of Kevin Morse of Austin, Minnesota. Mr. Morse was sentenced this past week to 30 months at ClubFed. Mr. Morse was told by his accountant that he owed about $100,000 in back taxes but chose to use a tax protester argument to avoid the taxes. The good news is that the promoters of the scheme that Mr. Morse used are awaiting trial in Oregon.

Remember, if it sounds too good to be true it probably is.

Christina Warthen appeared to have everything. She's a graduate of Stanford Law School. She's married to the founder of Ask Jeeves (now Ask.com). She's also allegedly a tax evader who ran a high priced escort service called TouchofBrazil.net.

Back in 2004 IRS agents raided her apartment and other locations seized over $61,000. That was just some of the funds that she allegedly earned from her business; the IRS alleges she cleared over $133,000 but didn't file a tax return. Whether her business was an escort service or an older profession isn't relevant—all income, legal or illegal, is generally taxable.

Mrs. Warthen will be arraigned later this week; she faces one count of tax evasion. So if you have an escort business try to remember to file your tax returns. If you don't you may find yourself escorted to ClubFed.

Over the past few weeks we received a couple of questions. Here they are with answers.

Timing of Online Gambling Income
Question—What if you are gambling on an online site over the course of a year and you win some money, however you don't make a withdrawal from the account that year? Say you save up what you win for two years then withdrawal some do you have to report it the year you win or when you actually withdraw it ad have in your hand?

The year your income is earned is the year that it is taxable. If an individual has online gambling income earned in 2008 but doesn't make a withdrawal in 2008 he still has 2008 income that must be reported on his 2008 tax returns.

Ohio and Gambling Losses
Question—I'm a resident of Ohio. I think it's ridiculous that even though I've been a net loser in gambling this year I must pay state income tax on my "wins." How can this be constitutional?

In several states, mostly in the Midwest, the state income tax is based on gross income (Federal Adjusted Gross Income with a few changes); no itemized deductions are allowed. Under the US Tax Code gambling income is considered Other Income included in Federal AGI; gambling losses are an itemized deduction allowed up to the amount of wins on Schedule A.

The situation you describe—being taxed on phantom gambling income—is quite possible. There is a Wisconsin case (Wisconsin also doesn't allow gambling loss deductions) which explains the philosophy. As I quoted in March 2007:

"Effective January 1, 2000, gambling losses were no longer offset against gambling winnings under the Wisconsin tax code because, effective on that date, Wisconsin no longer permitted as a deduction from Wisconsin taxable income “[m]iscellaneous itemized deductions under the Internal Revenue Code,” see Wis. Stat. § 71.07(5)(a)7 (2003–04), one of which, the Department contends and Dettwiler does not dispute, was the deduction for “wagering losses,” under section 165(d) of the Internal Revenue Code...His contention that he should nevertheless be permitted to subtract from his Wisconsin taxable income the offset permitted by section 165(d) of the Internal Revenue Code is not only circular and without merit, but is wholly contrary to the legislature’s decision to eliminate such offsets effective January 1, 2000.

"The Tax Appeals Commission decision is perfectly logical, appropriate, and correct. Accordingly, we affirm."

It's actually worse in Ohio. This will not only impact your Ohio income tax but your city income tax. Ohio is truly not a good location to be an amateur gambler. I suggest you contact your state legislators and request that the law be changed.