From Russ Fox, E.A., of Clayton Financial and Tax of Las Vegas, NV & Bethesda, MD. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
The goal of must businesses is to make money. There aren’t many businesses that can lose on each sale and make it up in volume. In fact, I don’t know of any. But I digress….
So let’s take Sam and Edna, two successful individuals who love horses. They decide to start raising horses. They remember their accountant telling them that if they had a business that loses money they can take the loss and offset some of their income. That’s true. They don’t remember their accountant telling them that the business does need to be structured to make money eventually.
Hobby losses are not allowed. The IRS has a webpage that notes the major factors used in determining whether or not your business is a business or a hobby:
The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
– Does the time and effort put into the activity indicate an intention to make a profit?
– Do you depend on income from the activity?
– If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
– Have you changed methods of operation to improve profitability?
– Do you have the knowledge needed to carry on the activity as a successful business?
– Have you made a profit in similar activities in the past?
– Does the activity make a profit in some years?
– Do you expect to make a profit in the future from the appreciation of assets used in the activity?
If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware! Your “business” might be a hobby. Yes, circumstances can cause any business to fail (and the IRS knows this). But when your business is losing money every year and you make no effort to change your business, at least on the surface you’re looking like a hobby. The eternal hobby loss is a good way to head to an IRS audit.
That’s it for our Bozo Tax Tips for the 2014 Tax Filing Season. I hope you’ve enjoyed them. We’ll be back with actual tax posts at the end of the week.
Congress has decided to legislate through the Tax Code. There are hundreds of tax credits that now exist. These range from the Earned Income Credit, education credits, electric vehicle credits, and adoption credits. Some of these credits, such as the Earned Income Credit, are refundable credits: You can get a refund based on the credit even if you don’t have income.
Now, the Bozo mind works differently than yours and mine. They see a tax credit and think, “How can I get some free money? I’ll find a tax credit and the government will just send me money!” So our Bozo looks and finds there’s a tax credit available for recovering methane (CH4) from landfills. Our enterprising Bozo sets up the Hot Air Gas Company, and starts claiming the credit. Our Bozo skips the somewhat important step of actually obtaining some methane from a landfill.
The IRS does investigate such tax credits, and when you claim that you are recovering natural gas when you’re not, that’s tax fraud, a criminal offense. And that leads straight to ClubFed.
The Tax Code is far too complex. Our Congresscritters have decided to legislate through the Tax Code, leading to a myriad of deductions and credits. The best solution to this issue would be for Congress to simplify the Tax Code but that’s not going to happen any time soon. Until then, if you legitimately qualify for a tax credit you should take it. But if the only hot air you possess is exhaling from your mouth, don’t claim a tax credit for it unless you want to visit ClubFed.
Another repeat, but one that is a continual issue with cash business. It may be “cash and carry,” but cash is taxable in all ways. And cash reporting (or lack thereof) can be a problem. Anyway, let’s be suspicious:
Given my practice area, I deal with individuals who occasionally make large cash deposits. I tell them that they shouldn’t mind the completion of a Currency Transaction Report. The IRS gets so many of them that as long as you’re paying your taxes it’s not a big deal.
On the other hand, if you break up your $11,000 transaction into two $5,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and almost all of them are investigated. And that’s what leads into this tale of woe.
We’re focusing today on a public figure. He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.
But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.
Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.
So if you want to send money, go big-time. Send more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”
Ah, Spring is in the air. And with that come the inevitable wedding invitations. I had an invitation to a wedding on April 5th. No, I didn’t attend.
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 will in the long-run cause you nothing but downs.
Today is April 8th. The tax deadline is just seven days away.
What happens if you wake up and it’s April 15, 2013, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too.
By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.
But what do you do if you wait until April 16th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).
There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.
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.
Every tax season is a bit different. The last couple have been late seasons. Very few of my client could file until the end of March; everyone was waiting for paperwork. This year is different: Many of my clients have all their paperwork and want their returns done NOW!
That’s a good thing for business, of course, but it’s going to be bad for this blog…for the next month. Yes, my annual blog hiatus is here a week early. Never fear, I’ve already written my Bozo Tax Tips; they’ll start appearing automatically on April 1st (no fooling!). There will be a couple of other posts about various deadlines, and if something major should happen in the world of tax I’ll interrupt the blog hiatus to post about it.
It’s time once more for that most prestigious of prestigious awards, the 2013 Tax Offender of the Year. The winner of this award must do more than just cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. While one year I’m hoping to have a shortage of nominees, that wasn’t the case in 2013.
As you will see, this year it took a lot to win. Last year, a murder for hire plot (mixed with tax charges) won the award; this year, a similar case merited only third place. That individual was Phillip Monroe Ballard of Fort Worth, Texas. Mr. Ballard attempted to channel the idea of last year’s winner, Stephen Martinez. Mr. Ballard approached another inmate and told him he’d pay $100,000 to kill the judge in his tax evasion case so his case would be transferred. The inmate informed authorities, and Mr. Ballard has not only a sentence on tax evasion to look forward to, he has a murder for hire conviction. Given that Mr. Ballard is 72, he’s unlikely to ever again be outside of ClubFed.
Coming in second place this year is the Miccosukee Tribe of Indians in Florida. In most years the Miccosukees would have easily won the award (but not in 2013). Let’s start with what we knew in 2012.
The Miccosukees run a successful casino near Miami. The tribe is exempt from taxes (they’re considered a sovereign nation), but the members of the tribe must pay taxes.
The Miccosukees allegedly decided to ignore the last part of the above and didn’t withhold income tax on distributions to tribe members (from casino profits).
Their attorney supposedly advised them that wasn’t a good idea. So the tribe sued the attorney for malpractice!
The tribe allegedly did not forward federal income tax withheld from patrons to the IRS.
The IRS had filed liens against the tribe (totaling $170 million) and has asked for financial records on the Miccosukee tribe from various financial institutions.
That’s where we left off in 2012. There have been a number of additional developments in 2013:
In August, a judge ordered Morgan Stanley, Citibank, Wachovia (Wells Fargo), and American Express to turn over financial records on the tribe to the IRS.
Then IRS Commissioner, Douglas Shulman stated in March 2012, “Yes, I can give you assurances…that we are a nonpolitical non-partisan organization…There is absolutely no targeting….” Here’s the clip:
In late June 2012, Congressman Darrell Issa (R-CA) sent a letter to J. Russell George, Inspector General for Tax Administration of the Treasury Inspector General for Tax Administration (TIGTA). In this letter, Congressman Issa notes the alleged scrutiny of Tea Party groups and also notes that TIGTA is investigating.
Let’s fast forward to Friday, May 10, 2013. Up to that date, I (along with almost everyone) believed former Commissioner Shulman. It was just a conspiracy theory. Joe Kristan put it well:
Confession: I never took seriously complaints that the IRS was harassing Tea Party organizations who filed for tax-exempt status. It didn’t seem impossible, but the IRS can be difficult to anybody, regardless of political affiliation. Don’t be paranoid!
We were wrong.
“IRS admits targeting conservatives for tax scrutiny in 2012 election,” screamed one headline. Lois Lerner, Deputy Commissioner of the IRS for Exempt Organizations, noted that actions were taken:
“That was wrong. That was absolutely incorrect, it was insensitive and it was inappropriate. That’s not how we go about selecting cases for further review,” Lerner said at a conference sponsored by the American Bar Association.
“The IRS would like to apologize for that,” she added.
“I have ordered an investigation to be done,” Holder said. “The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters,” he added. “We are examining the facts to see if there were criminal violations.”
There’s plenty to investigate, starting with all the different excuses coming from the Obama Administration for the scandal. We’ve heard the following causes excuses from the Obama Administration:
Two (or four) low-level IRS employees in Cincinnati;
88 rogue agents mostly in Cincinnati;
Mid-level managers from Cincinnati, Laguna Niguel, El Monte and maybe elsewhere implemented this policy; and
Incompetence by various IRS employees.
I don’t believe any of those excuses, and I doubt you do, too. The two, four, or 88 low-level or rogue IRS employees has been thoroughly discredited. The mid-level manager defense has gone out the window. The current excuse is gross incompetence. Unfortunately for the Obama Administration, I doubt that’s the case.
Occam’s razor states that among competing hypotheses, the hypothesis with the fewest assumptions should be selected. For this to be gross incompetence, it would have to be gross incompetence among a large number of employees at the IRS. A far simpler hypothesis is that one high-level manager ordered the targeting. It’s simple, straightforward, and explains everything.
This is where that massive investigation by the Department of Justice through the FBI comes into play. There’s a problem here: There’s no evidence that the DOJ or FBI has done any investigation. And that’s why the Department of Justice is the 2013 Tax Offender of the Year.
In any criminal investigation, the victims of the crime are interviewed. Yet that doesn’t appear to be the case here. There’s no good reason for why this hasn’t happened. Back in September the National Review asked if the FBI was actually doing anything? They hadn’t contacted the American Center for Law and Justice (ACLJ). The ACLJ is representing 41 Tea Party groups targeted by the IRS. Another attorney representing six Tea Party groups also hadn’t been contacted. That’s a red hot investigation in action.
Unfortunately, this scandal has a huge potential to harm US tax administration. As I’ve said before,
For the IRS to function effectively, it needs both a reasonable budget and to be apolitical. It’s vital that the Department of Justice go after individuals who turn the IRS into a political organization from an apolitical one. Yet the current Administration apparently doesn’t see the urgency in this issue. That’s a huge mistake, and one that will definitely come back to haunt them and all Americans. We need a well functioning IRS…and given what the Administration is doing (and not doing), it’s very likely the budget for the IRS will continue to shrink.
It shouldn’t be difficult to determine who caused this policy. I wrote in early June, “I’m reminded of one of my favorite lines in literature. Sir Arthur Conan Doyle wrote, ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth.’” This scandal was not the result of misguided IRS workers in Cincinnati. Someone decided to implement this policy. That individual had to be high up at the IRS.
Back in June I wrote,
3. A high-level employee in Washington decided to implement this policy. High level employees at the IRS do make policy. Thus, let’s examine the structure of the Tax Exempt & Government Entities division of the IRS.
The IRS provides a web page noting how it is structured. At the top is the Commissioner of the IRS (currently Daniel Werfel is the Acting Commissioner). Underneath him are two Deputy Commissioners: Deputy Commissioner for Services and Enforcement (DCSE) and Deputy Commissioner for Operations Support. It’s DCSE where we need to go, as here there are nine reports, including the Commissioner of Tax Exempt and Government Entities Division (TEGE). The DCSE? Well, it’s listed as former IRS Acting Commissioner Steven T. Miller, the Acting Commissioner for Tax Exempt and Government Entities is Michael Julianelle. (You can see the top-level of the IRS Organization Chart here.)
As you might remember, Ms. Lerner took the Fifth when testifying before Congress. She made a statement where she said she wasn’t guilty of anything. That might be true. However, if she didn’t implement the policy, her bosses had to order her to do so. It could not have been at a level below hers. Indeed, I suspect it was done above her level…but that’s just a suspicion.
4. The policy came from the White House. Today, there is absolutely no evidence of this. But the IRS is part of the Executive Branch. Could this have been ordered from the White House? Certainly. (Note that when I say “from the White House” I do not mean it had to be President Obama. It could have been the President, the Secretary of the Treasury, the White House Chief of Staff, etc.)
The reason there are suspicions that this comes from above the IRS is the reports of individuals who filed the 501(c)(4) applications receiving scrutiny in other ways. The individuals were subject to audits (from another division of the IRS), scrutiny by the Bureau of Alcohol, Tobacco, and Firearms, the Department of Labor, etc. It is theoretically possible that these are all coincidences. Today, there’s no proof that these are not coincidences. But it sure feels improbable to me.
Those appear to me to be the only possible culprits. That’s a list of about ten individuals. It should not take the Department of Justice (and/or the FBI) that long to determine which individuals may be guilty.
But what if the DOJ/FBI has interviewed everyone, and every individual either denied everything or took the Fifth Amendment? That’s definitely possible; however, the DOJ then could coordinate with Congressman Issa’s committee and recommend giving immunity to one or more individuals and then those individuals would be compelled to testify. In the end, I suspect Congressman Issa’s committee will do just that; at that time, we will learn who really did order the policy.
I was asked why I’m not giving the 2013 Tax Offender of the Year award to the IRS. The reason is straightforward: The IRS likely didn’t order this policy. I believe one individual ordered this policy. The IRS faithfully implemented this policy. That individual is the culprit, not the IRS. (As an aside, almost every individual I’ve worked with at the IRS is doing his or her best, treat taxpayers well, and serve the Agency quite well.) The IRS didn’t commit this offense; some person did.
And that’s why the DOJ deserves the 2013 Tax Offender of the Year award. The DOJ could have (and should have) investigated this scandal. Instead, as best as anyone can tell they’ve done nothing.
The IRS accomplishes its mission by issuing clear, concise tax law guidance, providing assistance to taxpayers, enforcing current tax law, and collecting taxes used by the U.S. government. Reducing the IRS’s budget constrains IRS effectiveness and efficiency, which results in taxpayers’ loss of respect for the agency and our voluntary tax system. IRSAC is very concerned that prior year and proposed budget cutbacks have so diminished IRS effectiveness that most taxpayers are now experiencing increased compliance costs. This undermines the voluntary tax system, reduces government revenues and promotes the underground economy. The IRS must be provided sufficient resources to continue to operate as a world-class financial institution while maintaining the integrity of our voluntary tax system.
If the DOJ were to have investigated, and if the culprit were prosecuted, then the stigma of this scandal would have been removed. Instead, the IRS scandal continues to percolate, the budget of the IRS gets cut, and the ability for the IRS to effectively administer the tax laws of this country have been hurt. The Department of Justice is worthy of the 2013 Tax Offender of the Year Award.
(I apologize to the attorneys in the Department of Justice Tax Division for my selection of the DOJ as the Tax Offender of the Year. Tax Division attorneys pursue tax scofflaws and do, overall, an excellent job in enforcing the nation’s tax laws fully, fairly, and consistently. Unfortunately, the DOJ is, imho, responsible for the lack of a true investigation into the IRS scandal.)
That’s a wrap on 2013. I wish you and yours a happy, healthy, and prosperous new year.
With just under a week to go before 2013 is complete, it’s time for a final reminder to submit nominations for the Tax Offender of the Year. To be considered for the Tax Offender of the Year award, the individual must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:
The 2013 tax season began on January 30th on a limited basis; it took the IRS several weeks before they could accept all returns. It appears that this coming year the full tax season will open at the end of January, so that’s a plus in comparison to the most recent tax season.
Of course, most taxpayers will be unable to file until later in the year. The deadline for issuing W-2s and most 1099s is also January 31st. However, brokerage account 1099s do not have to be issued until February 18th this year (the 15th falls on a Saturday, the 17th is President’s Day, so the deadline gets moved back three days). Additionally, the IRS routinely grants extensions to brokerage firms that need more time. Unfortunately for preparers, that has led to tax season being more and more compressed each and every year. I doubt the upcoming tax season will be any different.
For our clients, we plan on beginning distribution of Organizers and related documents next week.