Bozo Tax Tip #7: Only Income Earned Outside the US Is Taxable

April 5th, 2018

A few days ago I was explaining to a client the basics of the US Tax Code: All income is taxable unless Congress exempts it; nothing is deducible unless Congress allows it. That’s the basics.

My office is in Las Vegas, Nevada. I’m a US citizen. So I owe US income tax on my earnings, right? Of course I do. But where few willingly go the Bozo contingent jumps in. Here’s a method of avoiding tax on all your income. It’s been used by celebrities such as Wesley Snipes. So let’s use Section 861 of the Tax Code to avoid tax!

Section 861 states that certain items are always considered as income from within the United States. It does not say that income earned in the US is exempt from tax. But tax protesters claim that’s the case; courts, though, basically state, ‘You must be kidding.’ This argument has never been used successfully. In an audit or in court, if you use the Section 861 argument you have no chance of success.

The US taxes its citizens on their worldwide income. That includes the United States. Indeed, if that weren’t the case I’d be out of a job. Mr. Snipes received three years at ClubFed. In the long-run it’s far, far easier to simply pay your tax.

Bozo Tax Tip #8: Publicize Your Tax Crimes on Social Media!

April 4th, 2018

Social media is really, really big these days. You can follow me on Twitter. I may even update my Facebook page one of these days. Of course, I’m not a tax criminal, and my posts hopefully add knowledge for others.

Of course, where you and I won’t go the Bozo contingent is quite happy to do so. Take, for instance, Rashia Wilson. Ms. Wilson posted a wonderful picture on her Facebook page:

Rashia Wilson (Image Credit: Tampa Police Department)

In the same post, she bragged:

“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’s doing 21 years at ClubFed. Oops…

A helpful hint to the Bozo tax community: Law enforcement does read social media. Indeed, the IRS will do a search of you on the Internet prior to a field examination (audit). So if you decide to go on the dark side of life, don’t brag about it online. A better course would be not to go on that dark side to begin with, but that rarely occurs to the Bozo community.

Bozo Tax Tip #9: Nevada Corporations

April 3rd, 2018

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Bozo Tax Tip #10: Email Your Social Security Number

April 2nd, 2018

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 fifth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response has been pitiful. (To be fair, it has improved somewhat over the last year, but that didn’t take much.)

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

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 16th, 2018

With the heart of the 2018 Tax Season upon us, it’s time for my annual blog hiatus. My series of Bozo Tax Tips will appear in early April, and if something truly earth-shattering happens in tax, I’ll still be here. Otherwise, I’ll be back post-April 17th.

S-Corp/Partnership/1042 Deadline Is Tomorrow

March 14th, 2018

Tomorrow is the deadline for calendar-year S-Corporations and partnerships to file their tax returns. In reality, most will file extensions. But let’s say you’re an S-Corp (or partnership) owner and you just realized there’s a deadline. What should you do?

“It’s better to extend than amend.” And the penalties for not filing an extension are, as President Trump would say, bigly.

That’s the answer–file an extension. Download Form 7004, follow the instructions, and mail the form using certified mail, return receipt requested, to the IRS. Or file your extension electronically.

Remember your state taxes. Some states have an automatic extension; some require a form to be filed. A few, such as Illinois and New York, have taxes on partnerships or S-Corporations. If you don’t know your income, make an estimate of what it is, calculate the tax, and send that with your extension.

The deadline is a postmark deadline, so as long as the extension is postmarked tomorrow you’re fine. If you are in an area hit by the recent winter storms (mainly in the northeast and mid-Atlantic), you have an extra five days (until March 20th) to file your extensions (or returns).

Tomorrow is also the deadline to file Forms 1042-S and 1042 with the IRS. These are reports of withholding to non-Americans. If you need to file those forms, make sure you get that done by tomorrow, too.

The deadline for individual tax returns, trust/estate returns, and calendar year C-Corporations is Tuesday, April 17th.

The Price Tag on California’s Train to Nowhere Jumps Another 17%

March 9th, 2018

What is the cost to fly from Los Angeles to San Francisco? I decided to check Southwest Airlines for a date one month out (April 11th); the cost is $50 each way or $100 for the round trip. I think you’d agree that’s not particularly expensive.

On the other hand, the cost for California’s “Train to Nowhere”–the planned high-speed rail line that will run from Los Angeles to San Francisco–is now estimated at $77 Billion. That’s up another $11 Billion from the $66 Billion I had heard last year. And the project is now estimated to start in 2029, with full service only in 2033. This is all buried in the Draft 2018 Business Plan of the California High-Speed Rail Authority.

There are also estimated revenue numbers and cash flow numbers that are, frankly, hysterical…unless you’re a California taxpayer. The project will magically have positive cash flow from operations the moment it begins running in 2029. Yet less than 3% of all high-speed rails systems make money. And this high-speed rail line will initially run from the booming metropolis of Shafter to the slightly more booming metropolis of Madera.

The breakeven analysis in the report states,

There is a 78 percent probability that the Silicon Valley to Central Valley Line farebox revenue covers its operations and maintenance costs in 2029; by the opening year of Phase 1, the breakeven probability rises to 96 percent, and is >99 percent by 2040. The breakeven analysis only considers farebox revenue; the probability of breaking even increases further when considering bus and ancillary revenue.

The reality is that there is almost no chance of that happening…if the project is ever completed. Frankly, the best bet for California is to end this boondoggle. Unfortunately, the unions love it (lots of union labor working on it); the project is giving new meaning to the self-perpetuating organization. As I wrote the last time I looked at this,

Meanwhile, Quentin Kopp, the man who introduced the rail line, now calls the line foolish. In an interview with reason.com he said,

It is foolish, and it is almost a crime to sell bonds and encumber the taxpayers of California at a time when this is no longer high-speed rail. And the litigation, which is pending, will result, I am confident, in the termination of the High-Speed Rail Authority’s deceiving plan…

[The selling of bonds is] deceit. That’s not a milestone, it’s desperation, because High-Speed Rail Authority is out of money.

The only good news is I get to use one of my favorite images again:

via GIPHY

IRS Interest Rates Rise for Second Quarter

March 7th, 2018

The IRS today announced the interest rates for the second quarter of 2018.

The interest rates will be 5 percent for overpayments (4 percent in the case of a corporation), 2.5 percent for the portion of a corporate overpayment exceeding $10,000, 5 percent for underpayments, and 7 percent for large corporate underpayments.

The interest rate had been 4 percent for overpayments.

SEC Reportedly Launches Cryptocurrency Probe on ICOs

February 28th, 2018

The Wall Street Journal is reporting (pay link) that the Securities and Exchange Commission (SEC) has issued “scores of subpoenas and information requests” regarding digital tokens (aka Initial Coin Offerings, or ICOs).

That regulators are starting to look into this market shoudn’t come as a surprise. The US government doesn’t move fast, but regulators have been giving messages regarding ICOs (and they’ve generally been, “You need to comply with securities laws”) for some time.

As someone involved in the poker industry before “Black Friday”, this has all the signs of a repeat performance (except in the world of cryptocurrency rather than online gambling). Before Black Friday US government officials said that online gambling was generally illegal (to be offered). The SEC sent a release in August 2017 on ICOs; the implication was that some involved market manipulation and other illegal activity. The Commodities Futures Trading Commission (CFTC) has also sent a release. And the chairs of the SEC and CFTC wrote an op-ed in the Wall Street Journal in January. An excerpt:

Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections…The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse…Distributed ledger technology may in fact be the next great disruptive and productivity-enhancing economic development. If history is any guide, DLT is likely to be followed by many more life-changing innovations. But we will not allow it or any other advancement to disrupt our commitment to fair and sound markets.

Coinbase To Comply With IRS Summons

February 24th, 2018

Two of my clients received an email from Coinbase:

Dear Mr. Smith,
In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government. After a long process, the court issued an order that represents a partial, but still significant, victory for Coinbase and its customers: the order requires Coinbase to produce only certain limited categories of information from the accounts of approximately 13,000 customers. We are writing to let you know that the above-described court order requires us to produce information specific to your account. If you have concerns about this, we encourage you to seek legal advice from an attorney promptly. Coinbase expects to produce the information covered by the court’s order within 21 days. For your reference, the court’s judgment can be found here. The case was filed in the United States District Court for the Northern District of California, Case No. 17-cv-01431-JSC. In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.
Regards, The Coinbase Team

Let me clear up a few points made by Coinbase:

1. This is not a significant victory for Coinbase. As most tax professionals thought, Coinbase must comply with US law and comply with most of the IRS summons.

2. The statute of limitations for impacted taxpayers was extended for about nine months by the battle over the summons. Coinbase is absolutely correct about this. Where this gets important for individuals who may not have included all of their Coinbase transactions on their returns is if they substantially underreported their income. Timely filed 2013 tax returns are “beyond the statute date,” even including the extra nine months. (They were due in April 2014, so adding an extra nine months takes to the normal three year statute of limitations takes us to January 2018.) However, timely filed 2014 returns impacted by this will have an extra nine months added to the statute date (until January 2019).

Additionally, anyone who substantially understated their income (20% or more) has a six-year statute length rather than three years. Timely filed 2013 returns are well within the extended statute length.

3. Coinbase’s suggestion of consulting with your tax advisor is an excellent one. If you file an amended return before the IRS comes after you or has knowledge of your error, you generally are looking at just paying tax and interest. Coinbase has told those impacted by this that you have less than 21 days to correct your mistakes; take advantage of that now!


If you included your cryptocurrency transactions on your tax returns, you’re likely not going to be a target. But if you didn’t, you have been given a short period of time to file amended tax returns.

Finally, this is not the end of this issue; expect the IRS to send summonses to all the other US-based Exchanges. I would not be surprised if the IRS targets foreign Exchanges that service Americans. This is a black and white issue under US tax law: Any accession to wealth not exempted from taxation under the law results in taxable income. Cryptocurrency gains are not exempt from taxation under US law.