A bit of humor to start the day. Courtesy of Spidell’s Tax Season Tribune, I discover that a video game has decided to emulate the Internal Revenue Service. Now, it’s been years since I played video games. Apparently the game Witcher 3 is quite successful. And in this game is the Deputy Tax Enumerator for Revenue and Customs for Occupied Temeria, Dorian Branch. Here’s a YouTube excerpt:
Archive for the ‘Uncategorized’ 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:
Monday 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 40,315). 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 “2016 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 40315-40350 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 $0.54/mile, the 35 miles in this hypothetical trip would be worth a deduction of $19. 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.
My favorite Tax Court judge, Mark Holmes, is out with an opinion where Ghostbusters makes an appearance. And once again keeping records would win the day but perhaps that would take a supernatural effort from today’s petitioner.
David Laudon is a chiropractor licensed in Minnesota. He made nearly $290,000 in bank deposits from 2007 to 2009 yet reported only a bit less than $210,000 in gross receipts on his returns. He deducted as business expenses for his chiropractic home office a Microsoft Xbox 360, Nintendo Wii, and numerous pieces of hair-salon equipment. He also claimed deductions for driving tens of thousands of miles throughout Minnesota and the Dakotas–both to treat patients and to perform an assortment of other services. The Commissioner thought this was a stretch and urges us to support his adjustments.
This doesn’t look good, especially when I see the words,
Some of Laudon’s stated reasons for making these trips strain credibility: for example, driving to a “schizophrenic” patient who was–on more than one occasion–“running scared of demons” down a rural Minnesota highway, or driving to a patient’s home in a Minneapolis suburb– expensing 261 miles–because he had received a call from police that she had overdosed on OxyContin prescribed by her physician. Laudon claimed to have driven hundreds of miles per day–sometimes without a valid license–to see patients, but several of these trips were for medical procedures he was not licensed to perform. Even his testimony about multiple entries in the logs where he wrote “DUI” was not credible: He claimed that these were not references to being stopped by police while under the influence, or driving while his license was suspended, but instead were his misspellings of a patient named “Dewey”–a supposed patient of his. [emphasis in original]
That’s just a taste of the decision. I won’t go into the minutiae, but I think you’ve got a taste of what’s going on. The details include unreported income (“But because he didn’t produce any evidence verifying that these amounts were deposited into the relevant accounts, Laudon hasn’t met his burden of proof.”), an automobile log that was “‘not a complete itemized thing'” led to those deductions being denied, and a home office that wasn’t exclusive (“We particularly disbelieve his claim that the Xbox, Wii, big-screen TVs, and other electronics in his basement were used exclusively for chiropractic purposes since this claim conflicts with his much more plausible admission to the IRS examiner during audit that his daughter and his girlfriend’s son would play these video games while he was on the phone.”) and had no substantiation led to that being denied.
As I’ve said in the past, keep a mileage log. Keep records of your deductions. Ask your tax professional about the rules to have a home office. And keep good records.
There are two deadlines today. First, individuals outside the United States must make file their tax returns (or an extension) today. Second, today is the due date for second quarter estimated payments (both for individuals and corporations). These are both postmark deadlines, so as long as your estimated payment is posted today (and I strongly recommend certified mail, return receipt requested so you have proof), it’s considered timely.
I have been trying to get into two different IRS websites since midday yesterday but can’t. It appears that the IRS may be a victim of a DDOS (distributed denial of service) attack or there website simply has gone down.
When the IRS is telling people to use the Internet and they see this:
Well, I guess this should happen on the day that we find that Lois Lerner won’t be prosecuted….
UPDATE: Whatever was wrong with the IRS websites was cured mid-morning.
It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!
This is a repeat from last year, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response is pitiful. We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!
If I send an email to my partner in Maryland, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?
A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.
If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.
Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.
Remember Rashia Wilson? How could anyone forget someone who brilliantly wrote on her Facebook page:
“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”
She also posted this wonderful picture:
She was sentenced to 21 years back in 2013, but appealed. The Court of Appeals ruled that there were procedural errors in her sentencing.
Robert Wood has the story of how Ms. Wilson got sentenced to 21 years at ClubFed again.
Las Vegas is full of service workers, of course. With many of the world’s largest hotels and casinos in Sin City, there’s an army of workers to man the facilities. Last week, the Tax Court looked at a bartender that the IRS thought had unreported tip income. The bartender contended the IRS was drinking something. Who was right?
The petitioner did a lot of things right. He reported his tips to his employer, and they were included on his W-2. (The petitioner opted out of an automatic tip compliance program.) He kept meticulous records.
Petitioner testified about how his bar was set up and what a shift was like during the years at issue. He stated that his bar had only six stools and that customers would often sit at the stools playing poker for several hours and receive several comped drinks as a result. He testified that the only time his bar would be busy was when there was a big convention and then most of the drink sales tips would be on company credit cards rather than cash. He described the difficult economic times that Las Vegas faced during the years at issue and how his business had decreased as a result.
Petitioner also testified about the typical tipping behavior of his patrons. Most of his drinks served were comps, and he testified that customers rarely tipped on comp drinks and that if they did they might “throw [him] a buck or two” after several hours of sitting at his bar receiving the comped drinks. Petitioner additionally testified that college kids and foreigners rarely tipped.
As I tell my clients, document, document, and document some more and you usually will do well if you’re audited. The bartender wasn’t drinking but the IRS was.
One of the more popular tax fraud schemes is the OID scheme. The idea is that there’s a “secret account” held by the US government and you can obtain a refund from that account. All you have to do is send in 1099-OIDs and magically you get a refund. A helpful hint to anyone so inclined: Don’t do it. There are no such secret accounts.
A tax preparer in California tried a variation of this scheme.
On Schedule B, Interest and Ordinary Dividends, of her 2008 return petitioner reported banks as the source of her interest income in the following amounts: Union Bank for $55,150, Washington Mutual for $9,071, Bank of America for $1,366 and $94, and Wells Fargo for $597…
Petitioner did not receive any interest from Union Bank, Washington Mutual, Bank of America, and Wells Fargo during 2008.
Well why would anyone lie and put extra income on their tax return? Because she claimed extra withholding–that most of the interest income never reached her because it was withheld by the banks. She claimed that $60,225 was withheld rather than the actual $573. Unfortunately, she received her refund based on the phony withholding.
But she wasn’t done; she filed an amended return asking for another $14,800 based on a “1099 OID erroneously included in income.” While her return was modified by the IRS, the refund wasn’t issued.
Before the amended return was filed, the petitioner had another “brilliant” idea. Why not transmit phony 1099-OIDs through the FIRE system? That way she could get big refunds for others! (The FIRE system is what tax professionals use to electronically file information returns, such as 1099-OIDs, with the IRS.)
When the IRS discovered the original issue–that there was no withholding–the petitioner attached five phony 1099-OID forms and five phony 1099-A forms to a letter where she alleged that these were filed through the FIRE system.
The petitioner continued with the same strategy on her 2009 and 2010 returns. Unfortunately, the IRS didn’t catch the phony withholding on her 2009 return until after they sent her an $83,976 refund.
When the IRS sent a notice of deficiency, the petitioner challenged it in Tax Court. She never filed a response to the IRS allegations, so they were deemed accepted. So she owes the tax and the fraud penalties.
What is amazing to me is that the petitioner has not, as far as I can tell, been criminally indicted. She should count her lucky stars on that.
Judge Kevin Gross ruled on Wednesday that the bankruptcy case of Caesars Entertainment Operating Company will be tried in Chicago, not Wilmington, Delaware. Caesars’ second-tier creditors wanted the case tried in Delaware; Caesars preferred the Windy City. As Bloomberg reported,
“Ultimately, the overriding consideration is that the debtors chose the Illinois court,” Gross said. Letting the creditors win would be “bad precedent,” he added.
Judge A. Benjamin Goldgar will now have to decide the official start date of the bankruptcy. Is it January 15th (when Caesars filed) or January 12th (when the second-tier creditors filed)? Will the prior-year reorganization of Caesars be undone (which could cause more of Caesars to fall into bankruptcy)? Stay tuned for the next installment of “Fail, Caesar.” Until then, here’s some music for my old home town: