It’s time for my annual blog hiatus. The annual Bozo Tax Tips have been written and will start appearing around April 1st. I’ll be back with new blog content about April 21st. (If something truly momentous happens in the tax world while I’m on hiatus, I will post about it.)
Archive for the ‘Taxable Talk’ Category
I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:
Tuesday is the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).
Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.
The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 69,678). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.
Here’s the other things you should do:
On the cover of your log, write “2017 Mileage Log for [Your Name].”
Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:
1/5 70315-70350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries
It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.52/mile, the 35 miles in this hypothetical trip would be worth a deduction of $18. That deduction does add up.
Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.
That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.
2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.
3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.
4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car.
So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.
Every year I hope that I won’t find any deserving individuals of the Tax Offender of the Year Award. To win this award, you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.
Coming in third this year is the Internal Revenue Service. What did the IRS do to deserve this award? Well, we have the IRS Scandal; it’s still unresolved. If we were to believe the IRS nothing untoward happened! I’m sure that’s why Commissioner Koskinen faced an impeachment resolution. And remember the data breaches? It wasn’t 104,000 people who were victimized back in 2015 (the “Get Transcript Hack) nor was it 334,000 taxpayers. There were over 700,000 people impacted (and over 500,000 unsuccessful attempts)! As Joe Kristan says, “The IRS: Protecting your identity since 1913.” Or not.
Coming in second place this year is the Miccosukee tribe of Indians in Florida. They’ve been fighting in both US District Court and US Tax Court that income to members of the tribe from a casino isn’t taxable. To date, they’ve lost every single case. Most recently, in August US District Judge Ceclilia Altonaga ruled that a tribal member must pay nearly $279,000 in taxes, penalties, and interest stemming from not filing a 2001 tax return. The Tax Court cases have been inching along; most recently, the Tax Court ruled that a trial will be held and that the tribe cannot subpoena witnesses from the Department of the Interior to interpret statutes (the judges will do that). In March, the tribe lost an appeal that they were immune from US taxes. (The lawsuit alleged that the US had waived sovereign immunity for the tribe. The lawsuit was dismissed in US District Court; the tribe appealed and lost that appeal.)
A husband and wife from Minnesota were indicted in April on tax evasion charges. The charges, detailed in the indictment, are very typical tax charges. The couple were alleged to have fraudulently claimed personal expenses as business expenses, including rent, utilities, garbage removal, household cleaning, remodeling windows, interior design fees, a dishwasher, furniture to stage a house for sale, Pilates classes, jewelry, wine club fees, and grooming expenses. (There are more, but that’s a good range of the expenses they claimed on their returns.)
They were also alleged to have not reported income from a sale of land in South Dakota, and to have not reported canceled debt income. Adding to their troubles, they were alleged to have lied to an IRS Office Examiner during an audit of their 2004 and 2005 tax returns in 2006. It’s a very bad idea to lie to an IRS employee; that’s a felony. They then allegedly lied again during an audit of their 2009 and 2010 returns (in 2012). One would think they had learned but….
Of course, they allegedly lied to their tax professional regarding all of the returns, grossly understating their income. They ended up owing an additional $500,000 in taxes, penalties, and interest.
Unfortunately, this kind of tax crime (taking personal expenses as business expenses) is fairly common. Most individuals believe that they just won’t get caught. As the Tax Court has noted,
Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term “ordinary and necessary business expenses” means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. The term does not include personal, living, or family expenses. Simply because an expense would not have been incurred but for the taxpayer’s engaging in a trade or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible.
There are many expenses that are helpful, even essential, to one’s business, but which are not deductible in our tax system. Expenses of driving to and from work, for example, are not deductible. Expenses for clothing worn in a taxpayer’s trade or business, and the costs of laundering the clothing, are not deductible if the clothing is adaptable for nonbusiness wear.
The judge who wrote that decision is Diane Kroupa. Ms. Kroupa was a US Tax Court judge from June 2003 until her resignation in June 2014. She’s also one of the two defendants in this case. Yes, a former Tax Court judge committed tax evasion. And that is why she is the 2016 Tax Offender of the Year.
When Judge Kroupa and her husband were indicted, my reaction was the same as Law Professor Dennis Ventry, Jr. of the UC Davis Law School:
Smart people do dumb things all the time but this is a head-scratcher. If you’re a high-level government employee, you side on saying ‘no’ to a deduction; you take the conservative approach.
I didn’t report on this case when the indictment was issued in early April (it was during the annual down-time for my blog). I had noticed the story, of course, but basically couldn’t believe it. However, both Robert Fackler (Judge Kroupa’s husband) and Judge Kroupa pleaded guilty.
In the plea examination, Judge Kroupa admitted her crime:
Q. And neither you nor Mr. Fackler told the tax preparer the amounts reflected in the information, spreadsheets, or tax organizers that you gave him included personal expenses that were disguised as business expenses?
Q. That fact is true?
A. That fact is true, we did not provide that information.
Q. And by doing that, you thereby significantly and fraudulently increased Grassroots Consulting’s business expenses, which then reduced the amount of taxes that you jointly owed to the IRS?
Q. And on page 4 and page 5 of this plea agreement there is a list of descriptions of specific expenses that were included supposedly as business expenses which were, in fact, personal expenses, correct?
Q. You’ve looked at this list and either you know that these are ones that were included or else you have seen evidence to that effect?
Q. So in total from 2004 through 2010 did you and Mr. Fackler fraudulently deduct at least 500,000 of personal expenses as purported Schedule C business expenses?
Judge Kroupa certainly knew the law; her resume is quite impressive:
Judge. b. South Dakota. B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section). Volunteer of the Year Award, Junior League of Minneapolis (1993) and Community Volunteer of the Year, Minnesota State Bar Association (1998). Appointed by President George W. Bush as Judge, United States Tax Court, on June 13, 2003, for a term ending June 12, 2018.
Unfortunately, we must add, “Pleaded guilty to tax charges (2016)” to that list.
Judge Kroupa’s actions—a former Tax Court judge committing tax evasion—make her a worthy recipient of the 2016 Tax Offender of the Year Award.
That’s a wrap on 2016! While I am hopeful 2017 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect that I’ll have plenty of choices.
I wish you and yours a happy, healthy, and prosperous New Year!
In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) 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:
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder
I am the guest on this week’s Gambling With an Edge Podcast. We discuss year-end tax planning, Caesars’ bankruptcy, tax deadline changes for 2016 returns, and how the final table players of the main event of the World Series of Poker made out with taxes. This was my third appearance on Gambling With an Edge; my other appearances are available on their website or iTunes.
We will soon be changing hosting companies. If you subscribe to this blog you may need to resubscribe once this occurs. The changeover should happen in the next couple of weeks.
It’s time for my annual vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right.
I’ll be back on Tuesday, August 9th.
We’ve completed our move into our new larger office. While the telephone and Internet were quickly moved and are working just fine, the fax line didn’t make it. It has finally made it’s way to our new office so we can now receive faxes.
Clayton Financial and Tax’s offices are moving this week. It is likely that phone and Internet will be down on Wednesday (July 20th) and Thursday (July 21st) during the move. Our new address is:
Clayton Financial and Tax
1919 S Jones Blvd, Suite G
Las Vegas, NV 89146-1299
While I’m hopeful that the phone and Internet come back up quickly, I’ve learned these things always run into unforeseen difficulties.
It actually went fairly smooth this year. Some thoughts (in no particular order):
1. The IRS help lines for tax professionals were well staffed. Hold times were way, way down from prior years (especially last year). The average hold time for me was about ten minutes. In the 2015 tax season, hold times were above one hour.
2. Deadlines matter. We set a fairly early deadline this year (March 16th). While we did get to returns received after that (we got to returns through March 30th), some clients were not happy with the deadline. That’s reality: There are only so many hours in the day. We told you back in January what our deadline was.
3. K-1s are coming later and later. Many of my clients had to extend this year because a K-1 from a partnership is missing. I’m definitely seeing more business entities filing extensions, and that leads to more individuals filing extensions.
4. While tax software may be somewhat flawed, it’s essential for any tax professional. A tax return still must always pass the smell test, but it would be impossible for most tax professionals to complete complex returns without it.
5. Next year could be very interesting for my practice because of the FBAR deadline. For 2015 FBARs filed in 2016, the deadline is June 30th. The law will change next year and the deadline will be April 15th. Will this deadline be literally April 15th no matter what day of the week that falls on or will it match tax deadlines? Will FINCEN accept the federal tax extension or will it require its own extension to be filed? I’ll have more on this issue in a post that’s coming tomorrow.
6. Federal refunds appear to be fairly smooth this year. None of my clients have noted any issues with those. The same cannot be said for state tax refunds, though. Many states are drastically slowing refunds and/or requiring additional information prior to the refund being issued.
I cannot complain overall, though. Of course, now that Tax Season is over comes my paperwork season: shredding and invoicing. And more than six hours of sleep each night.