You Mean My Checking Account Became a Savings Account?

May 31st, 2018

In what is definitely an “Oops” moment, two tax software products from Intuit (Lacerte and Intuit ProConnect Online) incorrectly transmitted information for 2018 California estimated payments. Checking accounts became savings accounts in the transmittal and the payments were rejected:

As a result, electronically transmitted estimated tax payments (Form 540-ES) for tax year 2018 transmitted to us between January 23, 2018, and April 25, 2018, could have been rejected by your client’s financial institution. Future scheduled payments transmitted during this timeframe could be impacted as well.

We are collaborating with Intuit to identify impacted taxpayers and assist with resolution. Intuit sent letters directly to affected tax practitioners. We will waive FTB-imposed dishonored check fees on impacted taxpayers’ accounts and will give taxpayers an opportunity to submit first quarter estimated tax payment that will be considered timely.

We are not impacted by this, but if you’re a tax professional using either software package and are impacted by this you should have been contacted directly by Intuit (on or about May 9th). If you’re a taxpayer and your first quarter 2018 California estimated payment was not debited by the Franchise Tax Board and should have been, contact your tax professional immediately.

Kudos to the FTB in working with Intuit and giving impacted taxpayers time to get this resolved.

WSOP and Taxes: 2018 Update

May 30th, 2018

The 2018 World Series of Poker (WSOP) begins today here in Las Vegas. There are also several other tournament series that have either begun or will soon begin at the Venetian, Wynn/Encore, Aria, Planet Hollywood, Binion’s, Golden Nugget, and Orleans hotels. Very little has changed from 2017, but I am updating the post I did last year with some new information.

The WSOP has made one change that could impact some Americans: If you use a passport for identification, you must bring a second piece of identification (such as a state ID card). From the WSOP FAQs:

What Photo ID’s are acceptable?
The following forms of ID are acceptable:
US Passport [and Passport Card] (A second form, an unexpired governmental ID verifying physical address such as a valid Driver’s License will also be required with this first form of ID).

(A driver’s license or state ID by itself is sufficient.)

Good luck to those participating in this year’s WSOP! And now on to the meat of the post:

The tax environment has changed, so I’ve decided to do a thorough update of the tax situation for those attending the WSOP (and other summer poker tournament series here in Las Vegas). I’ll cover the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued.

The Tax Basics

Backing by Americans of Americans

Backing: Non-Americans

Non-Americans and ITINs

[Note 1]: I recently became aware of a lawsuit in the Midwest where Caesars’ policy is being challenged. The lawsuit is scheduled for trial in late January 2018.

[Note 2]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.

Back to the Old Drawing Board

May 23rd, 2018

I’ve written before about certain states’ efforts to get around the new $10,000 cap on state and local taxes that can be deducted on federal tax returns. The IRS announced today they will be proposing regulations later this year on this issue. Here’s an excerpt:

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

This is anything but promising for the efforts of California and New York. Words like “circumvent,” “despite,” and “mindful” pretty much tell us how this is going to turn out. If the IRS were going to allow this, the notice would not have such negative words. Instead, it’s all but a certainty that the doctrine of “Substance Over Form” will dictate that these so-called charitable donations are anything but charitable donations and, instead, will be treated as state tax payments on federal tax returns.

The California and New York legislatures would be far better off looking for things to cut in their states’ budgets. I know of a certain railroad in California that could save the state at least $77 billion….

The Deep State and Cryptocurrency

May 17th, 2018

There have been plenty of articles about the “Deep State” vis-a-vis President Trump. I’m not going into that; if you’re interested, Google is your friend. Rather, I’m going to look at the Deep State and cryptocurrency.

On May 1st the Wall Street Journal published an article titled, “World’s Second Most Valuable Cryptocurrency Under Regulatory Scrutiny” [pay link]. In the article, the Journal discusses possible regulatory action against Ether:

Bitcoin has largely escaped government oversight, but regulators are examining whether other widely traded cryptocurrencies should be regulated as securities, according to people familiar with the matter.

And today I received an email from the Securities and Exchange Commission (SEC):

If you’ve ever been tempted to buy into a hot investment opportunity linked with luxury travel, the Securities and Exchange Commission has a deal for you.

Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.

The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.

“The rapid growth of the ‘ICO’ market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors,” said SEC Chairman Jay Clayton. “We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.”

The website features several of the enticements that are common to fraudulent offerings, including a white paper with a complex yet vague explanation of the investment opportunity, promises of guaranteed returns, and a countdown clock that shows time is quickly running out on the deal of a lifetime.

As poker players know from “Black Friday,” regulators believe that which is not clearly legal is illegal. And regulators make up the deep state, and have made it quite clear what’s coming on the horizon. The regulators are going to act.

Are there legitimate ICOs? Of course, but given what regulators view as rampant fraud and abuse in cryptocurrency, the regulators are going to act. The Journal has this quote:

Peter Van Valkenburgh, director of research at Coin Center, said declaring ether a security “would make a shambles of U.S. innovation policy. It’s going to throw up a lot of barriers that aren’t necessarily sensible.”

Mr. Van Valkenburgh may be right, but there’s no doubt in my mind that’s the direction regulators want to, and will likely, go.

Taxes Matter (2018 Version), Part 1

May 3rd, 2018

Those on the left constantly chirp that taxes don’t matter. Those of us who prepare tax returns can state as fact you’re wrong. I moved my business because of taxes and regulations. Here are two other examples from today that illustrate this.

First, the city of Seattle is proposing a new tax on businesses with $20 million in gross receipts (or more): an employee tax of $0.26/employee-hour. Shockingly, Seattle’s largest employer, Amazon.com, has stopped planning on a new 17-story office tower in downtown Seattle. Are the two related? Drew Herdener, an Amazon Vice President told FoxBusiness,

I can confirm that pending the outcome of the head tax vote by City Council, Amazon has paused all construction planning on our Block 18 project in downtown Seattle and is evaluating options to sub-lease all space in our recently leased Rainer Square building.

From the Wall Street Journal comes a headline, “My Clients Are Fleeing NJ Like It’s on Fire.” An excerpt:

That headline arrives via email from a money manager in northern New Jersey. The Garden State already has the third largest overall tax burden and the country’s highest property tax collections per capita. Now that federal reform has limited the deduction for state and local taxes, the price of government is surging again among high-income earners in New Jersey and other blue states. Taxpayers are searching for the exits.

Read the whole thing (note: Pay Link).

For those who say taxes don’t matter, you’re wrong. From small businesses to large taxes absolutely matter.

Tax Deadline Extended One Day for IRS Purposes

April 17th, 2018

The IRS announced late today that due to the computer issues with IRS Direct Pay and the IRS e-filing systems, that individuals and businesses with a tax deadline of today (April 17th) have an extra day, until midnight, April 18th. Here is the IRS announcement:

WASHINGTON — The Internal Revenue Service announced today that it is providing taxpayers an additional day to file and pay their taxes following system issues that surfaced early on the April 17 tax deadline. Individuals and businesses with a filing or payment due date of April 17 will now have until midnight on Wednesday, April 18. Taxpayers do not need to do anything to receive this extra time.

The IRS encountered system issues Tuesday morning. Throughout the system outage, taxpayers were still able to file their tax returns electronically through their software providers and Free File. Taxpayers using paper to file and pay their taxes at the deadline were not affected by the system issue.

“This is the busiest tax day of the year, and the IRS apologizes for the inconvenience this system issue caused for taxpayers,” said Acting IRS Commissioner David Kautter. “The IRS appreciates everyone’s patience during this period. The extra time will help taxpayers affected by this situation.”

The IRS advised taxpayers to continue to file their taxes as normal Tuesday evening – whether electronically or on paper. Automatic six-month extensions are available to taxpayers who need additional time to file can visit https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return.

It is likely that most states will conform to this extension (California has already announced that they will).

IRS Direct Pay Down

April 17th, 2018

It’s not as if today is a big day, right? IRS Direct Pay is down. This is not impacting most tax professionals efiling and initiating direct debit (the information is being sent to our software providers), but it is causing an issue for the public. If you cannot use it, you can always pay by check and voucher (Form 1040-V). If you mail a check, make sure to use certified mail, return receipt requested.

Bozo Tax Tip #1: Ignore Cryptocurrency Sales!

April 13th, 2018

Last week (as I write this), I met with a new client. He purchased a lot of cryptocurrency in 2016 but didn’t sell any of it until around Thanksgiving of 2017 (he had one small sale). He asked me if he had to report it; I told him he definitely did: I haven’t found anything in the Tax Code that exempts cryptocurrency from US taxation. We entered it, and the gain was duly noted on his return. He then asked me about his other purchases of cryptocurrency. He had heard about Coinbase complying with a summons (indeed, he received notification about this from Coinbase) and wondered about that. I told him there was nothing he need do about his purchases. The IRS ruled that cryptocurrency is property, so only disposals of cryptocurrency need be noted on tax returns. Your records may be going to the IRS, but there’s nothing you need to do about it or anything to worry about.

Contrast that with a different individual; let’s call him John. I met with John last week. Our Engagement Letter now specifically notes that cryptocurrency transactions must be included on tax returns. John said he had over 3,000 transactions of swapping various cryptocurrencies and, “There’s no way in hell I’m going to tell the IRS about them.” I told him it was nice meeting him, and he would need to find another tax professional to prepare his return because there’s no way in hell I’m going to be an accomplice to tax evasion.

I’m not enamored by the IRS’s decision to tax cryptocurrency as property rather than currency. If cryptocurrency were taxed as currency, calculating gains would be simple and straightforward. True, for some individuals who have bought a single cryptocurrency and have few trades, cryptocurrency taxation isn’t a big deal. However, we are dealing with lots of clients with huge trading volumes. And then we have the forks, airdrops, and who knows what else.

The IRS is looking for help in how to tax a fork. Is the correct analogy a stock split? Or do we have a stock dividend? Peter Reilly argues that the best course for individuals in this situation is to file an extension and hope that the IRS issues guidance by late summer. Unfortunately, no one knows when the IRS will issue guidance.

But there is one certainty: Ignoring your cryptocurrency realized gains is a bad idea. The IRS issued a reminder about this. An excerpt:

The Internal Revenue Service today reminded taxpayers that income from virtual currency transactions is reportable on their income tax returns.

Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency, also known as digital currency.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.

In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.

So if you’re a Bozo, just ignore that million you made selling Bitcoin. They’ll never catch you…you hope.

Bozo Tax Tip #2: Who Needs to Pay Employment Taxes?!?

April 12th, 2018

This Bozo Tax Tip—and do remember, these are things you really, really, really shouldn’t try—is aimed at the business owner who is having troubles. Business owners, unlike the federal government, can’t just print money. So let’s assume our hypothetical business owner has payroll tomorrow but doesn’t have the money for everything. What should he do?

Well, one strategy is to not remit the payroll taxes. Sure, they’re “trust fund” taxes but the government can print money and I can’t, so they’ll just let it slip by. And my state government won’t care either, right?


The above strategy is likely one of two quick and easy ways to get on the road to ClubFed. The IRS doesn’t like it when trust fund taxes don’t make it to the government. The penalties are substantial. The liability goes to the owners (and check signers) of the business. IRS Criminal Investigation will investigate this. Don’t do this!

One of my clients recently was interviewed about such a case. He was paid, but apparently the IRS wasn’t. It’s not hard for the IRS to find out about this: After all, every employee is going to file a tax return claiming withholding but the IRS won’t find it. That’s exactly what happened in this case. I suspect that very soon two nice looking individuals (accountants with badges and guns; now that’s a scary thought!) will be knocking on a door and saying, “You have the right to remain silent….”

Business troubles aren’t fun. However, if you don’t pay the IRS your employment taxes you will find your troubles multiplying.

Tomorrow is the last of the Bozo Tax Tips for 2018!

Bozo Tax Tip #3: Use a Foreign Trust to Avoid Taxes!

April 11th, 2018

By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.

First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle. Grantor trusts, another asset protection vehicle, are useful. Special Needs Trusts are extremely useful. There are plenty of ‘good’ trusts.

But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.

And those are the domestic trusts.

The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them. Yes, you have to report moving money into them.

But I’m smarter than the IRS, and they’ll never catch my trust set up in Luxembourg, Liechtenstein, or the Isle of Man. Well, you will spend thousands to set up your trust, and if the IRS does catch on–and in these days where governments are exchanging tax information, this can (and does) happen–your foreign trust will have served only one purpose: It will have enriched the promoters who set it up.

Remember: If it sounds too good to be true it probably is. A trust set up to evade taxes is just that.