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.

Online Gambling Addresses for 2017

February 20th, 2017

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.)

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have addresses for Bodog or Bovada. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of February 20, 2017. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions or corrections to the list feel free to email them to me.

Casinos and ITINs: Update #1

February 19th, 2017

On Monday I wrote about Las Vegas casinos receiving letters ordering them not to issue ITINs (Individual Taxpayer Identification Numbers). When I wrote the post, I knew of one major Las Vegas casino that had received this letter; I assumed the letter was sent to all casinos that had been authorized to issue ITINs. I noted that this could have a major impact on the World Series of Poker (WSOP); the WSOP posted on their Twitter account that everything was currently the same as it had been (they were still issuing ITINs).

Since I wrote that post:

1. I have confirmed that a letter was sent to a second Las Vegas casino. I still assume that all casinos that have been authorized to issue ITINs received this letter.

2. What I don’t know is how fast the IRS ordered casinos to cease and desist from issuing ITINs. The IRS would certainly give casinos some time to implement the new policy; I would think it’s somewhere between 30 and 90 days in the future (from the date of the letter). Unfortunately, I do not know what the deadline is. It’s possible that the deadline is, say, July 31st (conveniently after the end of the WSOP) but I think that’s unlikely.

3. I made an inquiry to my IRS Stakeholder Liaison to obtain the information from the IRS. Tax professionals have stakeholder liaisons at most tax agencies to help with systemic issues (and some other items). My liaison is looking into this, but has yet to give me any answers.

4. I also made an inquiry to the National Association of Enrolled Agents (NAEA), my professional society. They have contacts at IRS headquarters that may be able to get an answer faster than I can through the liaison.

5. The WSOP tweeted that this won’t impact them. If this IRS policy goes into effect before the WSOP, it will impact them. As I wrote earlier, there’s no way that Caesars Entertainment will be allowed to issue ITINs and all other casinos won’t be; that fails the smell test. That the Rio can issue an ITIN today is meaningless; the question is will they be able to do so in the future.

Like many policies that the IRS has implemented, this makes little sense. Unfortunately, the IRS is interpreting a law passed by Congress. While a ‘technical corrections’ bill is somewhere in the Congressional stream, it’s not likely to be enacted that quickly given the partisan bickering we’re seeing in Washington. I also believe that member casinos will complain to the American Gaming Association once the impact of this is realized.

The reason I made my initial post (and will continue to post on this issue) is to alert poker media, with the hope that this issue will get resolved favorably: either the IRS relents on their new dictum due to pressure from the casinos, a technical corrections bill passes, or some other action that results in a solution to this issue. We shall see.

San Francisco Supervisors Want a Local Income Tax

February 19th, 2017

California is not a low-tax state. Thankfully for Californians, there are no local income taxes. However, that soon may change.

Seven of the eleven members of the San Francisco Board of Supervisors [1] are sponsoring a measure that will ask California lawmakers to allow a local income tax to fund “sanctuary city” policies. The measure was supposed to come up for a vote last Tuesday; however, the vote has been postponed for two weeks.

If you’re a middle class resident of California or San Francisco, your government is telling you that your wallet will be far better off elsewhere.

[1] San Francisco is both a city and county; instead of a city council, there’s a Board of Supervisors (the county equivalent).

Casinos Can No Longer Issue ITINs

February 13th, 2017

Suppose you’re a resident of the United Kingdom and you come to Las Vegas to play in the World Series of Poker (WSOP) or just try your luck at a slot machine here. You have good luck and manage to win $10,000. Even better, given that the United States and the United Kingdom have a tax treaty you know you won’t owe any tax to the IRS. Imagine your surprise when the casino hands you $7,000 rather than $10,000. You’re informed that casinos are no longer allowed to issue Individual Taxpayer Identification Numbers (ITINs) by the IRS; unless you have a valid ITIN the casino must withhold 30% of your winnings.

On Friday, the IRS sent a major casino here in Las Vegas a letter informing them that because of a provision in the PATH Act no one but the IRS can issue ITINs. I assume all casinos that had been authorized by the IRS to issue ITINs have received this letter and are implementing this policy.

If you have a valid ITIN (and have renewed it, if applicable), this new policy won’t matter to you. For all other non-Americans who would normally not be subject to withholding you need to obtain an ITIN. Unfortunately, this is anything but easy.

You used to be able to use a Certified Acceptance Agent (CAA). CAAs were in numerous countries and would be able to obtain an ITIN for those who could show a Tax Treaty reason for doing so. The PATH Act ended CAAs so that’s gone.

There used to be a few IRS employees outside the United States. You could make an appointment to see one of these individuals, show him or her the required documents, and you would have an ITIN issued. Unfortunately, there no longer are IRS employees abroad.

You can, of course, send in Form W-7 and all required attachments (this includes your passport) to the IRS. Given you just might need that passport this doesn’t look like a good solution.

That leaves just one method that I know of: Going to an IRS office, proving a Tax Treaty reason, and submitting the required documents. An IRS employee will make a copy of your passport. While you will not get the ITIN immediately (the paperwork is still sent to the ITIN office in Austin, Texas) you will still have your passport. In eight to sixteen weeks you will receive your ITIN in the mail.

But what about those winnings? If you take that money now, the casino will give you a Form 1042-S and withhold the 30%. You can then file a US tax return the following year, attaching a copy of the 1042-S, and six or so months later you will receive your withholding back. (This assumes you reside in a country that has a Tax Treaty with the US that exempts gambling winnings from taxation.)

The poker room manager I spoke with noted that you could leave the money with the casino and come back when you have your ITIN. That may work if you don’t need that money and the casino will allow that. Otherwise, you will likely be without the withheld funds for some time.

The National Association of Enrolled Agents (NAEA) sent a letter to the IRS requesting that CAAs continue to be allowed to issue ITINs. The IRS responded by saying “blame Congress, not us.” I expect the American Gaming Association to complain to both the IRS and Congress about the inability of casinos to issue ITINs.

There’s one last issue: You can no longer just walk into an IRS office and get assistance; you must make an appointment. You have to call the IRS (at 844-545-5640; this phone number works for making an appointment at any IRS office) to make an appointment at the IRS office in downtown Las Vegas. The last time I checked if you called today the earliest you would have your appointment is two weeks from today. If you don’t have an ITIN, reside in a Tax Treaty country, and plan on playing in the World Series of Poker this summer, you may want to make an appointment with the IRS so that you can start the process of obtaining your ITIN prior to playing.

Hopefully, the IRS and/or Congress will reconsider this policy. Until then, the IRS is playing the role of the Grinch for many gambling winners.

UPDATE: The World Series of poker tweeted that they will still be able to issue ITINs:

While I hope that @WSOP is correct, based on what I’ve been told they’re wrong (unless Congress changes the law or the IRS changes their mind). The problem is that the IRS has interpreted the PATH Act that only they can issue ITINs. The individual I spoke with is certainly in the know, and the casino he works act has issued ITINs in the past and would like to continue issuing ITINs. The IRS can’t discriminate and allow Caesars Entertainment’s casinos to issue ITINs while MGM/Mirage, Venetian, and Wynn/Encore cannot.

My hope in publicizing this decision is that the policy will change, either by Congress acting or groups such as the American Gaming Association pressuring the IRS.

Consulting, Gambling; There’s No Difference, Right?

February 6th, 2017

The Tax Court looked at an individual (call him “Mr. A.”) who looked like a professional poker player, appeared to have an income from poker, but was described on his tax return as a “consultant.” His tax return showed less than half the income that his W-2Gs totaled. The IRS added in a negligence penalty, and the whole dispute ended up in Tax Court.

Before I get into the meat of the case, a comment about gambling and the IRS (and the Tax Court). The IRS does not have a good understanding of the mechanics of poker tournaments. The petitioner today lost some deductions because of this (and that they didn’t explain things point by point). For example, the Court stated (in footnote 4):

The parties also stipulated the authenticity of two receipts showing that Mr. A had paid buy-ins as an “alternate” to participate in “$540 No Limit Hold’em” contests at the Bellagio on July 11 and 17, 2009. As the record does not disclose whether Mr. A in fact played–and if he did not, whether his buy-in was refunded–we conclude that petitioners have not shown that Mr. A paid these buy-ins.

That’s not how alternates in a poker tournament work. Alternates are just the people who get seated when original entrants are eliminated from the tournament. I’ve never seen or heard of an alternate not being seated. But the petitioners didn’t mention this in their briefs or testimony, so the Court used what they thought the term meant, not what really happens in poker tournaments. But I digress….

The problems began with the preparing of their 2009 return.

The return was prepared by petitioners’ accountant…who has a master’s degree in accounting and had previously prepared tax returns for professional poker players. For purposes of preparing the return, Mr. A advised the preparer that his exclusive source of income in 2009 was his poker tournament winnings. He further advised the preparer that he did not have records of the expenses he incurred in order to play in poker tournaments. The preparer concluded that Mr. A was a professional poker player on the basis that poker was his exclusive source of income. Given the absence of expense records, the preparer advised petitioners to report the net income from the gambling activity on Schedule C as gross receipts but not to report any offsetting business expenses.

Let’s look at the problems here. First, the IRS computer system was almost certain to hiccup on this return. If the W-2Gs totaled $42,000 and you report $21,000, there’s a problem. I’m certain that the petitioner received an IRS automated underreporting unit notice on this issue. The second problem deals with the preparer. Tax returns have places for expenses; they aren’t supposed to be lumped with gross receipts. Additionally, there are basic standards in preparing a return. The idea of a preparer putting down, say, $10,000 for expenses when a client says he has no records of those expenses makes no sense.

The taxpayers return showed a Schedule C—the only source of income—with $20,045 of net and gross income. The Schedule C was listed Mr. A’s occupation as “Consultant.” The IRS assumed that was the case, and saw $40,395 of wagering income to be added to the return. That was the first issue. This they won:

On the basis of Mr. A’s and his accountant’s testimony and the entire record, we agree with petitioners. Other than the reference on the Schedule C to Mr. A’s business as a “consultant”, there is no evidence that Mr. A engaged in any consulting activities for compensation during 2009. He denied doing so. When called upon to explain why Mr. A’s business was described as that of a “consultant” on the Schedule C, both he and his accountant dissembled. In the circumstances, we conclude that the business was described this way in a misguided attempt to head off the closer scrutiny of the return that would likely be triggered by a description of Mr. A’s business as “poker” or “gambling”–scrutiny that would likely unearth the inadequacies in the substantiation of Mr. A’s expenses.

The Court included gambling winnings that weren’t on W-2Gs. Yes, all income is taxable no matter if you receive a piece of paper or not. The Court noted, “On this record we find that Mr. A had poker tournament winnings of $48,686 for 2009. Given our conclusion that petitioners reported $20,045 of Mr. A’s gambling income on their return, it follows that they had unreported gains from wagering transactions of $28,641 for 2009.”

The IRS contended that the petitioner wasn’t a professional gambler. Given that the only source of income for the petitioner and his wife was his gambling, the petitioner won this argument. He also was able to deduct his losing poker tournament entries (save the “alternate” entries that the court got wrong).

The taxpayer ran into trouble with his business expenses. “Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed on a return.” Mr. A. was allowed to deduct those items that he had receipts for. There were almost certainly more expenses, but a line from Tom Clancy comes to mind: If you don’t write it down it never even happened. That’s definitely the case for business expenses: Keep receipts and good records!

The IRS also asserted an accuracy-related penalty for negligence or disregarding IRS rules and regulations.

“‘[N]egligence’ includes any failure to make a reasonable attempt to comply” with the internal revenue laws. Sec. 6662(c). It connotates “a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the
circumstances…This includes “any failure by the taxpayer to keep adequate books and records or to substantiate items properly.” Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules or regulations includes any careless, reckless, or intentional disregard of the Internal Revenue Code, the regulations, or certain Internal Revenue Service administrative guidance.”

Respondent contends that petitioners are liable for an accuracy-related penalty on the basis of negligence. We agree. They failed to maintain records of Mr. A’s gambling activities, including the related expenses. Lacking adequate records, they filed a return that reported an estimate of their net income as if it were gross receipts. As a consequence, they significantly understated both gross receipts and net income. They also participated in a misrepresentation of Mr. A’s business as being that of a consultant rather than a professional poker player. The failure to keep records is prima facie evidence of negligence, and the misrepresentation of the nature of Mr. A’s business falls short of a reasonable effort to comply with the internal revenue laws…

Petitioners have not shown reasonable cause and good faith with regard to any portion of the underpayment. While they were advised in the preparation of their return by an accountant, the return as prepared stated a gross receipts figure that Mr. A certainly knew to be inaccurate and further identified the nature of his business in a way that both petitioners knew to be inaccurate. Petitioners have not shown that they acted with reasonable cause and in good faith with respect to any portion of the underpayment. They are liable for the negligence penalty under section 6662(a).

Some helpful hints if you want to fade into the crowd: Accurately report your gross receipts. The IRS matches things reasonably well, and if they have records that show you have $50,000 of income and your report $20,000, there’s going to be a notice sent to you. If you’re a consultant, would you note your occupation as “professional gambler?” I assume not. The converse is also true; if you’re a professional gambler, you’re not a consultant.

Second, you sign your return, and you’re expected to review it. If you’re gross income is $50,000 and you report $20,000, that you used a tax professional will not absolve you from the accuracy-related penalty.

Finally, keep good records! Every time I get a new client I emphasize with them the importance of keeping good records. An audit is an inconvenience if you have records that substantiate what’s on your tax return. If you don’t, it will be a very painful, very expensive inconvenience.

Case: Alabsi v. Commissioner, T.C. Summary Opinion 2017-5

If You Were Paid for Protesting in North Dakota…

February 5th, 2017

There’s been a political firestorm over oil pipeline construction in the United States. That’s been the case with the Dakota Access Pipeline construction in North Dakota. I’ll ignore the politics of whether or not the pipeline should be built. (If you’re interested, you can find plenty of literature on that subject.) I’ll stick to taxes, thank you.

But one thing that is true regarding the Dakota Access pipeline protests: Paid protesters were brought in. Ryan Rauschenberger read about those paid protesters and had a thought: Shouldn’t those paid protesters be paying state income tax to North Dakota? After all, the protests were in North Dakota, the work was conducted in North Dakota, and there’s definite nexus to the state. Mr. Rauschenberger is more able than others to make sure that those taxes flow to the Peace Garden State; he’s the Tax Commissioner of the state.

The Washington Times interviewed Mr. Rauschenberger:

“If an organization is directly paying someone to come and do activities on their behalf, even protesting — if they’re receiving income and they’re here in North Dakota performing activities for an organization, they owe income tax from Day One,” Mr. Rauschenberger said. “And that entity should be issuing 1099s. Just like a contractor…

“I think a lot of people think that, ‘Oh, if something goes through GoFundMe, it’s just always considered a gift.’ But it can also be used as a way to funnel money just like an employer paying a contractor,” Mr. Rauschenberger said. “It can be a way to funnel money as well, and very well could be taxable. I’m not saying it is. I’m saying it could be. And it’s really on a case-by-case basis.”

It’s not likely that the North Dakota Office of State Tax Commissioner will go after individual protesters (unless they receive a W-2 or 1099 and don’t file); the office has a staff of only 128. However, it’s far more likely the state will go after organizations that paid for protesters; the state will get more bang for the buck there. So if you were paying protesters in North Dakota, make sure you file those 1099s and send a copy to Bismarck.