Bozo Tax Tip #4: The $0.55 Solution

April 9th, 2019

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 15th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $3.50 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About fourteen years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $3.50! And you can go all out and spend $2.80 and get a return receipt, too (though you can now track certified mail online). For another $1.60, you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

Bozo Tax Tip #5: Procrastinate!

April 8th, 2019

Today is April 8th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 15, 2015, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 16th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

Bozo Tax Tip #6: They Shoot Jaywalkers, Don’t They? (Or Ignoring the FBAR)

April 5th, 2019

I have, unfortunately, become quite competent in the Report of Foreign Bank and Financial Accounts. That form is better known as the FBAR. It used to have the form number TD F 90-22.1 (yes, it really did) but now goes by Form 114. The form must be filed online through the bsaefiling center of FINCEN, the Financial Crimes Enforcement Network.

You must file an FBAR if you have $10,000 aggregate at any time during the year. The report for 2018 is due April 15, 2019. Do note that there is an automatic extension until October 15, 2019.

The form is fairly simple and straightforward: Note every foreign financial account you have with name, address, account number, and maximum balance at any time during the past year. Let’s say you have one foreign account, a bank account at the Royal Bank of Canada. You would take your maximum balance and convert it to US dollars from Canadian dollars (you should use the year-end Treasury Department conversion rates no matter when the high balance was). The form must be electronically filed and is filed separately from your tax return.

The penalties for not filing it are quite high. Willful non-filing has a minimum penalty of $100,000 or half the balance in the account–and that’s per account! There’s also possible jail time.

So what must be reported:
– Foreign Bank accounts;
– Bank accounts outside the US of a US financial institution;
– Foreign financial accounts where all you have is signature authority;
– Foreign securities accounts;
– Foreign mutual funds;
– Foreign life insurance with a cash or annuity value; and
– Online gambling accounts if outside the US.

There are probably others, too.

The IRS does have a chart that lists most things that need reporting on the FBAR and Form 8938. Form 8938 is the “cousin” of the FBAR; this form needs to be filed if you have larger balances in foreign accounts.

Millions of FBARs are filed each year. When I started in tax, filing an FBAR was a huge audit red flag; that’s no longer the case. There are just too many FBARs filed. Do note that if you have an FBAR filing requirement you must note that in question 7 at the bottom of Schedule B.

To end this with some humor, one of my pet peeves in dealing with taxes is that there are three different sets of abbreviations for foreign counties used in tax. The FBAR has one set; question 7 at the bottom of Schedule B has another set, and Form 8938 has a third set. Some countries are noted identically while others are not. On one of of the abbreviations Curacao is “CU” while that means Cuba in another.

In any case, the FBAR is no laughing matter. The IRS’s mantra here is to shoot jaywalkers. Don’t become such a person: If you have an FBAR filing requirement, file it! Again, the FBAR is due April 15th (but with an automatic extension until October 15th).

Bozo Tax Tip #7: Be Frivolous

April 4th, 2019

I’d love to be frivolous during tax season. But the inbox is full, the piles of paper don’t go anywhere unless I move them, and my next day off is April 16th. I can get a good laugh when I get an email letting me know that, “Russ, you’re full of ****. There is no law mandating anyone file a tax return or pay income tax.” Yes, I received such an email today. It appeared that it was over one page, but after the first sentence I hit the delete key.

I’ve written about Richard Hatch. He got 51 months at ClubFed for his bout of frivolity. Wesley Snipes tried to say that only foreign-source income was taxable. He got 36 months at ClubFed.

Tax Court judges don’t have the same sense of humor that I do about frivolous arguments. Michael Balice found that out:

Petitioner has responded to this motion by contending (among other things) that he is not subject to IRS deficiency procedures and that wages are not “income” because they result from the exercise of his “irrefutable right to work.” We will grant the motion for summary judgment and sustain the tax deficiencies and additions to tax determined by the IRS. We will also require petitioner to pay under section 6673(a) a penalty to the United States in the amount of $25,000 for asserting frivolous positions in this Court.

I’ll make this simple: Yes, Virginia, there is an income tax and you must pay it. Or as my favorite author, Rex Stout, put it, “Either pay [the income tax] or suffer a loss of privileges.”

Bozo Tax Tip #8: The Shell

April 3rd, 2019

I was talking with a friend who is an attorney in the Midwest. She told me about an individual who decided to use ten layers of shell companies to hide his income. It worked so well that the Bozo had trouble accessing his income.

He was using the usual foreign shelter countries: the Cayman Islands (in the Caribbean), the Channel Islands (in the English Channel), the Isle of Man (in the Irish Sea), and Vanuatu (in the South Pacific). There was a land-based country in there, too: Panama. In any case, somehow the ownership got so messed up that one of the shells refused to deal with another.

My friend didn’t get involved to get the money situation resolved. No, she got involved because her client ended up going through a messy divorce, and her client’s now ex-wife happen to find one of the papers dealing with one of the shells companies. My friend’s a divorce attorney, and a good one, and she was able, with some help, find a lot of the hidden money. The judge was not as amused as I was hearing about the difficulties the man was having getting his money out. And neither was the IRS because he had “forgotten” to pay tax on a lot of income.


There are lots of good strategies for businesses to use to lower their taxes. Income balancing to C corporations can be a good strategy. Maximizing Section 179 depreciation is another. Retirement Accounts are another good strategy. There are many, many others. But hiding income in foreign jurisdictions is a very bad one, and if you get caught you are likely looking at a lengthy term at ClubFed.

Bozo Tax Tip #9: Nevada Corporations

April 2nd, 2019

Actually, this isn’t that much of a Bozo Tax Tip. Nevada is a great state to have your business in. But the key is being in Nevada (or operating in multiple states and selecting Nevada as your corporate domicile). You cannot escape California taxes by being a Nevada corporation if you’re still operating in the Bronze Golden State.

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 1st, 2019

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 sixth 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 two years, 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.

Oklahoma Limits Itemized Deductions; Big Hit for Amateur Gamblers

March 30th, 2019

Suppose you’re an Oklahoma resident and enjoy gambling one of the many casinos in the Sooner State. You have $100,000 of gambling winnings and $100,000 of gambling losses. You itemize on your federal return anyway (you have mortgage interest, state taxes, and charitable donations), and the wash is just fine. On your Oklahoma return, you’re surprised to find your Oklahoma charitable donations are limited to $17,000 (plus the amount of medical and charitable donations).

Yes, Oklahoma has joined the states that are bad for gamblers. In my hypothetical, an amateur gambler would pay tax on $83,000 of phantom income. This change is the result of a law passed in April 2018.

Annual Blog Hiatus

March 20th, 2019

It’s time for our annual blog hiatus. We’ll be back after April 15th. Our annual series of Bozo Tax Tips will come out beginning April 1st, and if something truly remarkable happens in the tax world between now and April 15th we will report on it.

Can a California or Massachusetts Professional Gambler Take a Business Loss on His or Her State Tax Return?

March 19th, 2019

The Tax Cuts and Jobs Act (TCJA) eliminated the ability of a professional gambler to take a loss on his Schedule C based on his business expenses; Congress specifically overrode the Mayo v Commissioner decision. But what about state taxes? Can a professional gambler who had a losing year take a loss on those returns?

First, no professional gambler can take a loss based on his gambling results. Internal Revenue Code Section 165(d) prohibits gambling losses in excess of wins. Every state with a state income tax conforms to this.

But state conformity to the TCJA is decidedly mixed. California does not conform to almost any part of the TCJA. The Franchise Tax Board produced a publication showing each change in law and the impact to California. At the bottom of page 89 is the beginning of the discussion on Section 11050 of the TCJA (which changed the rules for professional gamblers). The FTB publication notes:

California conforms, under the PITL, to the federal rules relating to the deduction for losses from wagering transaction[s] under IRC section 165(d), as of the specified date of January 1, 2015, but does not conform to the federal limitation on the deduction.

Thus, a California professional gambler can take a loss based on his business expenses on his state tax return.

Massachusetts also doesn’t conform to federal law in this area. However, Massachusetts does not allow losses from any business to be reported on its tax returns. Thus, a Massachusetts professional gambler wasn’t able to take a loss based on his business expenses in the past and cannot today.

State conformity on the provisions of the TCJA will vary among the states. If you reside in or must pay state taxes, this is a key issue that you must discuss with your tax professional.