Bozo Tax Tip #9: Who Needs to Pay Employment Taxes?!?

April 3rd, 2017

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.

Bozo Tax Tip #10: Email Your Social Security Number

April 2nd, 2017

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 for the fourth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response is pitiful. Indeed, last year the IRS decided that identity theft victims should get hit a second time! Let’s hear it for the IRS’s wonderful view of “service!”

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

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 mother, it might go in a straight line to her. 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.

Annual Blog Hiatus

March 21st, 2017

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.)

Do Not Blindly Pay IRS Notices, Reason ∞

March 20th, 2017

One of my clients angrily sent me a message today. She received an IRS Automated Underreporting Unit (AUR) notice alleging that she did not include $50,000 of W-2Gs on her 2015 tax return. She’s a professional gambler, so I looked at her Schedule C and shockingly (not) there was the $50,000 of W-2Gs included in her gross receipts. Attached to the return was a schedule helpfully breaking this out for the IRS (she also received a 1099-MISC that was included in her gambling gross receipts).

The IRS AUR program is a huge (or should I say “bigly”) money maker for the agency. People blindly pay these notices; after all, if the IRS sends it out it must be right? Well, the last survey I saw showed that two-thirds of IRS notices are wrong in whole or in part. AUR notices are not screened before being sent out. The recipient is literally the first person to have read it.

Do not assume an IRS notice is correct.
Most are not. If you blindly pay it, you have agreed to the tax. Had a human taken two minutes to read the return, they would have seen the income and the breakout schedule and the notice would have never been sent. But that simply doesn’t happen with the AUR program.

Additionally, you have a limited amount of time to respond to the notice (typically 30 days). Make sure you timely respond, and if you mail your response send it certified mail, return receipt requested. You want proof your response got there. Be prepared to wait many weeks for the IRS to send you a reply to what you’ve written; the average IRS time to respond to correspondence is now 14 weeks.

My client now understands this issue, and I provided her a pdf of the Schedule C and supporting documents to show that no tax is owed. If you get an AUR notice, make sure you carefully review it and then respond. While blindly paying an IRS notice did not make my Bozo Tax Tips for this Tax Season, I’m definitely considering it for the future.

The Other March 15th Deadlines

March 15th, 2017

Today’s the deadline for filing partnership and S-Corporation returns. An extension is available by filing Form 7004. Most (but not all) states grant an automatic extension. Do realize that if your state charges a tax for your entity (i.e. New York and Illinois), you need to pay that tax even if you file an extension.

There are two other deadlines today. Form 1042-S (report of withholding of foreign individuals) must be filed today, either electronically using the IRS’s FIRE system or by mail. Also, Form 3520-A (Annual Information Report of Foreign Trusts) is due today. An extension is available for Form 3520-A by mailing in Form 7004 (Part III, Code 27). There are ridiculous penalties for late-filing Form 3520-A, so if this applies to you and you’re not ready mail that extension (certified mail, return receipt requested) today.

Even Minor Celebrities Should Pay their Taxes

March 12th, 2017

I never saw Discovery’s “American Guns” reality show. The former owner of a store called “Gunsmoke” ran into trouble with both gun selling laws and filing tax returns. He’s likely heading to ClubFed.

Richard Wyatt is the former owner of a gun store called Gunsmoke in Wheat Ridge, Colorado. Getting your store on television is a good way to increase sales; he appeared on 26 episodes of American Guns. Of course, you might want to make sure you follow the law. As the Department of Justice press release notes, “On Feb. 17, 2012, Wyatt conspired with others to deal in firearms without a license. In April 2012, the defendant surrendered his Federal Firearms License (FFL) due to his violations of federal laws and regulations.”

That might have been a good time to change careers. According to the DOJ (and later a jury), Mr. Wyatt simply ignored his lack of a federal license and sold guns using someone else’s license (a decidedly illegal thing to do). While gun laws violations don’t really interest me, tax violations do. They also really interest the DOJ.

In addition to the alleged firearms violations, Wyatt failed to pay personal income tax in years 2009, when he made approximately $290,000, in 2010, when he made approximately $123,000, and in 2012, when he made approximately $689,000. Further, in 2010, 2011 and 2012, Wyatt failed to pay corporate taxes. In 2012, Wyatt willfully filed a tax return he knew to be false, stating that he lost money, when in fact he made at least $350,000 that he failed to disclose.

Let’s see, go on television promoting a business that shouldn’t exist. Don’t pay taxes on income at the same time. Those are two real good ways to head to ClubFed.

Two too Many Sets of Books Leads to 41 Months at ClubFed

March 6th, 2017

I maintain one set of books for my business. It tells me my income, expenses, and balance sheet for the year. Owners of a Las Vegas liquor store decided that one set of books wasn’t enough and had three sets of books. That was a decidedly bad idea, but it does lead to good blog content.

As I first reported on last year, Jeffrey Nowak and Ramzi Suliman owned liquor stores here in Las Vegas. That’s a good business here; this is a decidedly partying type of town. There are many good strategies to reduce income but Mr. Nowak and Mr. Suliman came from the Bozo taxpaying community. They created a second set of books to give to their accountant. Shockingly (well, not really), not all of their income went on that set of books.

But what gets them a nomination for Tax Offender of the Year is how they kept track of the difference between the correct books and the falsified books: They used a third set of books that showed the difference between the two sets of books. I’m sure it was helpful for IRS Criminal Investigation. And, yes, the IRS did indeed discover the bookkeeping shenanigans.

Earlier, Mr. Suliman pleaded guilty and received 12 months at ClubFed. Mr. Nowak was convicted of conspiring to defraud the United States and tax evasion; he was sentenced today to 41 months at ClubFed and restitution to the IRS.

Do yourself a favor if you’re in business: Keep one good set of books. Your tax professional will appreciate it.

Casinos and ITINs: IRS Confirms Cease and Desist Letters Sent to “Several Large Casinos” (Update #2)

March 3rd, 2017

My stakeholder liaison at the IRS got back to me this morning and told me that the IRS has indeed sent letters to “several large casinos” ordering them to cease and desist issuing Individual Taxpayer Identification Numbers (ITINs). She was told by an IRS Attorney involved in this issue that:

Language in the PATH Act states that, “ITIN applicants residing outside of the United States must submit an application by mail or in person to the IRS (or to a consular officer). [emphasis added]”

This left no wiggle room for the IRS (in their view); thus, the letters to the casinos. Although no specific casinos were identified to me, the implication is that all casinos that had been authorized to issue ITINs have received the letter. It is a certainty that impacted casinos have either stopped issuing ITINs or will soon cease doing so.

The liaison also confirmed that a technical corrections bill is somewhere in the Congressional stream. This could mitigate this issue if it’s signed into law in the next couple of months. However, given the acrimony we’re seeing out of Washington I’m not holding my breath on that happening anytime soon.

This means it is close to a certainty that non-Americans who do not have an ITIN and are from tax treaty countries [1] will face 30% withholding on tournament winnings of more than $5,000, including at this summer’s World Series of Poker (WSOP). The earlier Twitter comments from the WSOP are simply wrong. Impacted individuals can eventually get their money back (by filing a Form 1040NR after year-end along with an application for an ITIN); however, any impacted players will wait months to get money back that they should not have had withheld in the first place.

Should a technical corrections bill show some progress I will post on it.

Prior Coverage: Original Post, Update #1

[1] As noted in Publication 515, “Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.”

The Hidden Bitcoin Trap: FBAR

February 26th, 2017

A lot of my clients have invested in Bitcoins. For those who aren’t aware Bitcoins are a “cryptocurrency.” For tax purposes, Bitcoins are treated like stocks and bonds; realized gains (and losses) are reported on Schedule D. And that’s everything you need to know, right? Definitely not.

Most holders of Bitcoins use a Bitcoin wallet such as Coinbase or Blockchain. A wallet is used like a brokerage account. That means if you have a foreign Bitcoin wallet, you may have an FBAR reporting requirement.

Coinbase is located in San Francisco; it’s not a foreign financial firm. However, Blockchain is based in Luxembourg. Any American who is using Blockchain who has a tax filing requirement must note they have a foreign financial account on Question 7a. And such an individual may have to file an FBAR (Report of Foreign Bank and Financial Accounts, Form 114) to note this account (if they have $10,000 or more aggregate at any time during 2016). Additionally, it’s also possible such and individual will need to file Form 8938 with their tax return.

I suspect that many holders of Bitcoins and other cryptocurrencies are unaware of this issue. Many Bitcoin holders use multiple wallets and never look at the location of the wallet. Also, many individuals deliberately choose a wallet outside of the US to avoid possible scrutiny. Given that FBAR penalties can be ridiculously high this is an issue that tax professionals and taxpayers need to be concerned about.

While I have used Bitcoin wallet Blockchain as an example, there are many such wallets located outside the United States. I will begin to include such wallets in my list of offshore gambling sites (I’ll probably split the lists next year).

FTB Not Appealing Swart Decision

February 22nd, 2017

Last month a California appellate court ruled that California’s Franchise Tax Board was wrong in trying to assess an Iowa corporation with a 0.2% ownership in an LLC that invested in California the California minimum Franchise Tax. It was announced today that the FTB will not appeal the decision. The court’s conclusion was,

We conclude Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC. The Attorney General’s conclusion that a taxation election could transmute Swart into a general partner for purposes of the franchise tax, and that the business activities of Cypress can therefore be imputed to Swart, is not supported by citation to appropriate legal authority and, in our view, defies a commonsense understanding of what it means to be “doing business.”

This is good news for passive business entity investors who happen to be investing in California. It’s likely that other cases that are winding way through the courts will now be settled and that the FTB will adopt a common-sense approach on this issue. Chris Smith, the FTB’s Trade Media Liaison, sent an email noting that, “[The] FTB is working on providing information to taxpayers in light of the decision which it expects to release soon.” I will link to that information when it becomes available.