Taxable Talk

Given its tax time, you will likely find long lines at your local post office. Individuals are filing tax returns, so those who don’t efile must mail the returns. When you mail anything, you should seal the envelope; that’s especially true for anything with your social security number on it.

Yet here’s an unfortunately true story told to me by a fellow tax professional. One of her clients mailed his tax return to the IRS but forgot to seal the envelope. The return did make it to the IRS, but without page two of Schedule C. The first that the client found out there was a problem was when the IRS sent him a letter noting the omission. The second time he knew that there was a problem was when she found she was a victim of identity theft.

The client blames himself for his stupdity. This particular identity thief was caught, and the damage done to the individual who forgot to seal the envelope was minimal.

So when you file your tax return, do seal the envelope. Or better yet, use electronic filing and you can avoid the post office and this issue completely.

We’re running some repeats, but there is some new Bozo material coming. It’s just that people keep trying the same things over and over again.

It’s tough 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.

Another repeat, but it again popped up this past weekend.

It’s springtime, and that means weddings. With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.

Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.

There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.

Marriage has its ups and downs. Claiming you’re single on your tax return when you’re not will in the long-run cause you nothing but downs.

With just about three weeks left before Tax Day, it’s time for our annual blog hiatus. We’ve written our annual top ten Bozo Tax Tips (they’ll start appearing on April 1st), but between now and April 15th our clients are paying us to get their work done. Of course, if anything really, really big in the world of tax happens we’ll interrupt the hiatus and post about it. Otherwise to you and our fellow tax bloggers, have a Happy Tax Day!

I’ve been writing this blog now for eight years. A lot has changed in tax since I started, some for the good and some for the bad. I’ve had fun writing this, and my goals remain the same for the next eight years: To enlighten readers about tax issues impacting my clients (generally, related to gambling and small business owners) and other tax issues that I think are interesting and/or important.

One of my favorite sayings about tax is that it’s a combination of common sense and arcane rules. I try to have fun with this blog because tax is, to be honest, a dry topic. It’s also not much fun for most individuals; tax separates money from your wallet. It may be the price of civilization, but it’s not a fun price to pay. Thus, I try to have fun with the topics I cover.

So at eight years and eight days, happy belated birthday to my blog.

I finally received my copies of my new book, Tax Strategies for the Small Business Owner. While Amazon has had the book for a month, my publisher, APress, now has it in stock.

What’s in Tax Strategies for the Small Business Owner? The book is a practical guide to taxes, emphasizing what a small business owner needs to know whether or not he or she prepares his own taxes. Here’s the description of the book:

Tax Strategies for the Small Business Owner: Reduce Your Taxes and Fatten Your Profits will help the small business owner increase profits while feeling more comfortable dealing with taxes. It begins by looking at the often overlooked critical decision small business owners face when they start a business: the choice of business entity. The book then examines all the deductions that a business owner can take legally to reduce taxes. It also provides advice business owners need to make good tax-related decisions: Should I lease or buy? Should I hire an employee or outsource the task? How much will buying a building reduce my taxes and for how long?

Many people freeze up when they are forced to prepare or even think about taxes. Some receive a notice from the IRS and put it aside: They’re too scared to open it! Yet taxes for the most part follow common sense rules. You just need to know what they are and how they affect your decisions. In this book, readers will learn about the different business entities, the different taxes you must deal with (primarily income taxes), documentation procedures, how to work with a tax professional, how to handle an audit, and, in general, how to use the U.S. Tax Code to your advantage. Among other things, readers learn to take full advantage of tax benefits and avoid potholes hidden in things like:

• Startup and ongoing expenses
• Cost of goods sold
• Depreciation
• Payroll
• Retirement plans

In short, Tax Strategies for the Small Business Owner will not only help you relax when you deal with your taxes—it’ll show you how to use tax law to your financial benefit.

What you’ll learn:

• How to choose a business entity that’s right for your business.
• The requirements for deducting expenses.
• What you can deduct (and what you can’t).
• How to fund your retirement with help from the business.
• Using depreciation rules to reduce taxable income.
• Having benefit plans (medical and retirement) while complying with tax laws.
• How to take the tax implications into account when making strategic business decisions.
• What to do when you hear from the IRS.
• How to determine whether you need a tax professional to assist you.

Who this book is for:

Taxes for the Small Business Owner is designed for owners of small to medium-sized businesses and aspiring entrepreneurs—millions of people in the U.S. This practical guide on taxation is designed for those who want to lower their tax bills by maximizing deductions. It will appeal to any owner or manager who wants to pay less tax—legally.

You can purchase the book directly from the publisher, APress at this link. You can also buy the book from Amazon.com and other outlets.

With the probable demise of the IRS’s initiative to create Registered Tax Return Preparers (RTRPs), the alphabet soup of tax professionals is now down to EAs, CPAs, CTECs, and JDs. While Robert Flach argues that RTRPs should be resurrected as a voluntary designation, I doubt that will happen (and I don’t see a benefit from it). Before I respond to his post and an excellent post by Jason Dinesen (an EA in Iowa), here’s my thoughts on the designations.

I’m an Enrolled Agent (EA). Enrolled Agents are one of three professions with full rights to practice before the IRS (the other professions are CPAs and attorneys (JDs)). To become an Enrolled Agent, you must pass a difficult three-part exam or have worked for the IRS for a number of years in a variety of assignments (I passed the exam back when it was a four-part exam). EAs specialize in tax; the slogan “We SpEAk Tax” is on my business card because that’s truly what we specialize in.

The public associates Certified Public Accountants (CPAs) as the tax professionals; however, that’s not really the case. While many CPAs do specialize in tax (such as Joe Kristan), many others work in accounting, audit, and consulting. CPAs are licensed by each state (EAs are licensed by the federal government). The CPA exam is not a tax exam. While EAs must take continuing education that is tax related, CPAs must take continuing education that is accounting related (but not necessarily tax related).

The other enrolled preparers are attorneys (JDs). Few of the attorneys who specialize in tax actually prepare many returns; for the most part, they deal with representation issues that may end up in Tax Court.

The majority of tax professionals are unenrolled preparers. They’re not licensed as CPAs, EAs, or attorneys. Most states don’t require tax professionals to have licenses (only California, Oregon, Maryland, and New York require licenses). In California, all tax professionals must have a license; if a tax professional is not a CPA, EA, or attorney, they must obtain a license from the California Tax Education Council (CTEC). CTEC professionals must take continuing education each year, too. However, a tax professional in, say, Iowa need only print business cards and he or she can compete against CPAs, EAs, and attorneys.

There are far more unenrolled preparers than enrolled preparers. Among enrolled preparers there are far more CPAs than EAs. There are 48,000 practicing Enrolled Agents, 225,000 CPAs, and 350,000 or so unenrolled preparers. The fact that someone has a designation of any sort doesn’t necessarily mean anything. My business is almost all referral-based; this is my fourteenth tax season and my advertising expense consists of this blog. If my designation were MTP (Martian Tax Professional) I doubt my preparation clients would care. (It would have an impact on representation, but that’s another story for another day.)

Jason Dinesen noted that his state organization, the Iowa Association of Enrolled Agents, has been decimated by the IRS’s new rules on continuing education. A little over a year ago, the IRS mandated that continuing education providers pre-approve continuing education courses with the IRS. While the California Society of Enrolled Agents (CSEA) and the Nevada Society of Enrolled Agents (NVSEA) have not had problems dealing with this, some state organizations have had problems; apparently, Iowa is one of those states. It is unclear if the new rules on continuing education will survive last week’s court ruling. The IRS has not publicly commented on the ruling (though the decision was announced late Friday and the IRS was closed yesterday for the MLK holiday). I do expect the IRS to appeal the ruling.

Enrolled Agents have a done a miserable job of promoting themselves. While I’m hopeful my new book will help with some publicity, the reality is that if I tell the average cab driver that I’m an Enrolled Agent, the response I’ll get is, “You don’t look like you’re in law enforcement.” Sigh….

My brother turned me on to books by Jack Ries and Al Trout such as Positioning: The Battle for Your Mind. Like it or not, CPAs have won the positioning war with tax preparation; Enrolled Agents aren’t going to win that battle. Perhaps we can win the battle for representation but I doubt it. Overall, the Enrolled Agent profession and the National Society of Enrolled Agents are not good marketers. Banging our head against the brick wall that CPAs own (to the public, CPA equals tax professional) is a waste of time.

So where am I going with this? This post was more of a stream of consciousness than anything specific. I’d love to see the EA designation in its right place in the forefront of the tax world; the reality is that it’s not going to happen in my lifetime. Jason Dinesen notes that the EA designation has been marginalized. Perhaps EAs should make the most of it. I remember a company called Curtis Mathes that promoted themselves as the most expensive television sets made. (The company began to decline in the 1980s after the death of its chairman in an airplane accident.) I wouldn’t mind being labeled as the “Rolls Royce of tax preparation.”

On the day the world didn’t end, I was interviewed for the Thinking Poker podcast. The interview ran about an hour, and it was a lot lighter than most discussions on taxes and gambling. You can download the episode through the link above or on iTunes.

By the way, if you are a poker player I strongly recommend you regularly listen to the Thinking Poker podcast. There have been some excellent strategy discussions, along with discussions with interesting personalities.

It’s time once more for that prestigious award, the 2012 Tax Offender of the Year. To be considered for this 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.

Coming in third this year is the Miccosukee Tribe of Indians in Florida. The Miccouskees run a successful casino near Miami. While the tribe itself is exempt from taxes (they’re a sovereign nation), the members of the tribe are not. The Miccouskees allegedly decided to ignore that little aspect of the law. Their attorney apparently advised them that wasn’t a good idea. So did the Miccosukees start withholding taxes on distributions to its members? Or did they sue their attorney for malpractice? And did they also allegedly not forward federal income tax withheld from patrons’ winnings to the IRS?

The Miccosukees can’t win in 2012; these are still all allegations and nothing has been resolved. However, they are very strong contenders for the 2013 Tax Offender of the Year award.

Coming in second place is last year’s winner, the United States Congress. While I’m tempted to put them in first place–after all, there’s an excellent chance I won’t be filing any personal tax returns until late March–I can’t. There’s still a day for everyone to get on the same page, and this will have an impact in 2013, not 2012. True, the US Senate has not passed a budget in years (President Obama’s proposed 2012 budget received no votes from either the House or the Senate), and the Tax Code keeps getting more and more convoluted; however, most of the changes that are coming are the result of the passage of Obamacare. I already awarded the 2011 Tax Offender of the Year to Congress for that (and their other acts of ineptitude).

Steven Martinez used to work for the IRS. After leaving the IRS, he became a tax preparer. Mr. Martinez had a unique method of filing tax returns. He first prepared the returns, showing his clients owed money to the IRS and the Franchise Tax Board (California’s income tax agency). He then had his clients make out checks to a client trust account rather than the IRS or FTB. He also had estimated taxes made out through that account.

Of course, since I’m writing this you know where the money ended up: home improvements for himself, a beach house in Mexico, usage of a private airplane, investments (more than $2 million), and for $2 million of payments on credit cards and loans.

After preparing those returns showing clients owing money, Mr. Martinez prepared a second set of returns. These showed the clients owing either a small amount of money or no tax at all. He then submitted those returns to the IRS and FTB.

Sooner or later this fraud was bound to be discovered. A taxpayer would obtain a transcript of his return and notice the differences between what was filed with the IRS (or FTB) and what his copy of the return showed. Or perhaps some unlucky taxpayer was audited and the copy of the return that the taxpayer had and the return the IRS had would not match.

He committed Social Security fraud and identity theft by preparing false tax returns with the IRS. He mailed those returns to the IRS; that’s mail fraud. He used nominee bank accounts to conceal $2 million of income. Yes, he also prepared false tax returns for himself.

All of the above is definitely Bozo behavior. However, what I’ve written is just the beginning of the story. Mr. Martinez was indicted on April 15, 2011 for 49 counts of fraud, money laundering, and identity theft.

After being indicted, there are a number of possible strategies. Getting a good attorney would be the first thing I’d want to do. I’d look at the defense I have to the charges (if any). Perhaps a plea bargain is in order. Maybe I should hire a hit man to kill the prosecution witnesses.

Wait a second: Did I just bring up the idea of finding a hired killer to eliminate the prosecution witnesses? I did. After all, if you’re accused of 49 felonies, what’s a few more anyway? And yes, Mr. Martinez did exactly that.

Luckily for all concerned, the man that Mr. Martinez solicited to commit the murders called the FBI; a second meeting between the would-be assassin and Mr. Martinez was taped by the FBI. Mr. Martinez told the man that “he could make him rich for the rest of his life, $100,000 cash, if he eliminated the lady in Rancho Santa Fe and the lady in La Jolla.” Mr. Martinez also helpfully told the supposed hit man to use two different pistols and buy a silencer.

In the end, Mr. Martinez pleaded guilty to not only the tax fraud charges, but murder-for-hire, witness tampering involving attempted murder, and solicitation of a crime of violence. Mr. Martinez is truly deserving of the 2012 Tax Offender of the Year award.

That’s a wrap for 2012. Hopefully, 2013 will be a fruitful and prosperous year for everyone.

One year ago, I announced my move from, as Joe Kristan put it, “the perfumed air and divine weather of Orange County to the desert wastes of Nevada.” A friend asked me to expound on my move, both the good and the bad.

There isn’t much that’s bad for me to report on. My electric bill is painful in the summer; my July bill went up over 4000% [1]. I don’t have grass in my front lawn (but even in Irvine that was an issue). There’s nothing particularly old or historic to see in Las Vegas. When the historic relics are the old casinos such as the Golden Gate [2], historic items are few and far between.

There’s a lot, though, to love. I was told that I wouldn’t know my neighbors, that people aren’t friendly, and that it’s a transient community. I know my neighbors (who are very nice people), people went out of their way to introduce themselves, and while there are definitely transient neighborhoods (especially areas very hard hit by the housing bust), I live in a typical suburban neighborhood. I have a lot more house than I did in Irvine at a lot less cost. The cost of living here is less, and my state income tax bill is almost zero [3]. I’m reconnecting with friends who moved here, and I’m having fun.

The biggest surprise to me is that I’m doing far less driving than I used to. Las Vegas, like Orange County, is full of strip malls. Indeed, the area I live in (Summerlin) is modeled after Irvine. The Las Vegas valley is smaller, and the distances less. This ends up being a big saving. This is especially true when you add in the cost of gasoline; it’s $0.20 a gallon cheaper here than in California [4].

Knowing what I do now, would I have made the move? Absolutely–and maybe faster.

Notes:
[1] In Irvine, I rarely needed to run the air conditioning (I lived near the ocean which provided free air conditioning). I signed up for Southern California Edison’s air conditioning cycling program. That caused my summer electricity bills to fall by almost 90%. Here in Las Vegas, I have a larger home that must be air conditioned. In the summer, the air conditioning runs at all hours. I knew that I would have large bills…and it wasn’t a surprise.

[2] The Golden Gate Casino, originally the Sal Sagev, is Las Vegas’ first casino. It’s downtown at 1 Fremont Street. They have a great shrimp cocktail special ($1.99, though you must join their slot club for this price).

[3] Nevada has no state income tax. I will have to pay a small amount of Maryland income tax this year because of our Maryland office; it’s likely under $100.

[4] All gasoline is imported from other states into Nevada (there are no oil refineries in Nevada). Yet even including shipping costs you pay less for gasoline here than in California. The obvious (and true) conclusion is that state taxes drive up the cost of gasoline in California.