It’s 1099 Time

January 3rd, 2017

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

This year there are new deadlines for submitting 1099-MISCs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS: Those 1099s must be filed by Tuesday, January 31st.

Here are the deadlines for 2016 information returns:

  • Tuesday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Tuesday, January 31st: Deadline for submitting 1099-MISCs for Nonemployee Compensation to IRS;
  • Tuesday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Wednesday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Friday, March 31st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Start Your 2017 Mileage Log Now

January 2nd, 2017

I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:

Tuesday is the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 69,678). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.

Here’s the other things you should do:

On the cover of your log, write “2017 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/5 70315-70350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.52/mile, the 35 miles in this hypothetical trip would be worth a deduction of $18. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year?
There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

The 2016 Tax Offender of the Year

December 27th, 2016

Every year I hope that I won’t find any deserving individuals of the Tax Offender of the Year Award. To win this award, you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

Coming in third this year is the Internal Revenue Service. What did the IRS do to deserve this award? Well, we have the IRS Scandal; it’s still unresolved. If we were to believe the IRS nothing untoward happened! I’m sure that’s why Commissioner Koskinen faced an impeachment resolution. And remember the data breaches? It wasn’t 104,000 people who were victimized back in 2015 (the “Get Transcript Hack) nor was it 334,000 taxpayers. There were over 700,000 people impacted (and over 500,000 unsuccessful attempts)! As Joe Kristan says, “The IRS: Protecting your identity since 1913.” Or not.

Coming in second place this year is the Miccosukee tribe of Indians in Florida. They’ve been fighting in both US District Court and US Tax Court that income to members of the tribe from a casino isn’t taxable. To date, they’ve lost every single case. Most recently, in August US District Judge Ceclilia Altonaga ruled that a tribal member must pay nearly $279,000 in taxes, penalties, and interest stemming from not filing a 2001 tax return. The Tax Court cases have been inching along; most recently, the Tax Court ruled that a trial will be held and that the tribe cannot subpoena witnesses from the Department of the Interior to interpret statutes (the judges will do that). In March, the tribe lost an appeal that they were immune from US taxes. (The lawsuit alleged that the US had waived sovereign immunity for the tribe. The lawsuit was dismissed in US District Court; the tribe appealed and lost that appeal.)


A husband and wife from Minnesota were indicted in April on tax evasion charges. The charges, detailed in the indictment, are very typical tax charges. The couple were alleged to have fraudulently claimed personal expenses as business expenses, including rent, utilities, garbage removal, household cleaning, remodeling windows, interior design fees, a dishwasher, furniture to stage a house for sale, Pilates classes, jewelry, wine club fees, and grooming expenses. (There are more, but that’s a good range of the expenses they claimed on their returns.)

They were also alleged to have not reported income from a sale of land in South Dakota, and to have not reported canceled debt income. Adding to their troubles, they were alleged to have lied to an IRS Office Examiner during an audit of their 2004 and 2005 tax returns in 2006. It’s a very bad idea to lie to an IRS employee; that’s a felony. They then allegedly lied again during an audit of their 2009 and 2010 returns (in 2012). One would think they had learned but….

Of course, they allegedly lied to their tax professional regarding all of the returns, grossly understating their income. They ended up owing an additional $500,000 in taxes, penalties, and interest.

Unfortunately, this kind of tax crime (taking personal expenses as business expenses) is fairly common. Most individuals believe that they just won’t get caught. As the Tax Court has noted,

Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term “ordinary and necessary business expenses” means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. The term does not include personal, living, or family expenses. Simply because an expense would not have been incurred but for the taxpayer’s engaging in a trade or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible.

There are many expenses that are helpful, even essential, to one’s business, but which are not deductible in our tax system. Expenses of driving to and from work, for example, are not deductible. Expenses for clothing worn in a taxpayer’s trade or business, and the costs of laundering the clothing, are not deductible if the clothing is adaptable for nonbusiness wear.

The judge who wrote that decision is Diane Kroupa. Ms. Kroupa was a US Tax Court judge from June 2003 until her resignation in June 2014. She’s also one of the two defendants in this case. Yes, a former Tax Court judge committed tax evasion. And that is why she is the 2016 Tax Offender of the Year.

When Judge Kroupa and her husband were indicted, my reaction was the same as Law Professor Dennis Ventry, Jr. of the UC Davis Law School:

Smart people do dumb things all the time but this is a head-scratcher. If you’re a high-level government employee, you side on saying ‘no’ to a deduction; you take the conservative approach.

I didn’t report on this case when the indictment was issued in early April (it was during the annual down-time for my blog). I had noticed the story, of course, but basically couldn’t believe it. However, both Robert Fackler (Judge Kroupa’s husband) and Judge Kroupa pleaded guilty.

In the plea examination, Judge Kroupa admitted her crime:

Q. And neither you nor Mr. Fackler told the tax preparer the amounts reflected in the information, spreadsheets, or tax organizers that you gave him included personal expenses that were disguised as business expenses?
A. No.
Q. That fact is true?
A. That fact is true, we did not provide that information.
Q. And by doing that, you thereby significantly and fraudulently increased Grassroots Consulting’s business expenses, which then reduced the amount of taxes that you jointly owed to the IRS?
A. Correct.
Q. And on page 4 and page 5 of this plea agreement there is a list of descriptions of specific expenses that were included supposedly as business expenses which were, in fact, personal expenses, correct?
A. Correct.
Q. You’ve looked at this list and either you know that these are ones that were included or else you have seen evidence to that effect?
A. Correct.
Q. So in total from 2004 through 2010 did you and Mr. Fackler fraudulently deduct at least 500,000 of personal expenses as purported Schedule C business expenses?
A. Yes.

Judge Kroupa certainly knew the law; her resume is quite impressive:

Judge. b. South Dakota. B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section). Volunteer of the Year Award, Junior League of Minneapolis (1993) and Community Volunteer of the Year, Minnesota State Bar Association (1998). Appointed by President George W. Bush as Judge, United States Tax Court, on June 13, 2003, for a term ending June 12, 2018.

Unfortunately, we must add, “Pleaded guilty to tax charges (2016)” to that list.

Judge Kroupa’s actions—a former Tax Court judge committing tax evasion—make her a worthy recipient of the 2016 Tax Offender of the Year Award.


That’s a wrap on 2016! While I am hopeful 2017 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

FINCEN Announces Due Dates for 2016 FBARs

December 19th, 2016

The Financial Crimes Enforcement Network (FINCEN) announced the due dates for 2016 Report of Foreign Bank and Financial Accounts (FBAR, Form 114). The FBAR will now be due on the same day as tax returns with an automatic extension for six months. There is no need to file a separate extension with FINCEN for the FBAR. Basically, this means the FBAR is now effectively due on October 15th.

The new rule was required per an act passed by Congress last year. Kudos to FINCEN in implementing this in the simplest, easiest-to-comply version that was possible.

My E-Services Follies

December 15th, 2016

The IRS is trying to become a bit more security conscious. As part of their efforts, the IRS is having all e-Services account users who use the IRS’s “Transcript Delivery Service” re-validate their identities. Letters are being sent to impacted tax professionals. I received such a letter last week so I had the joy of re-validating my identity.

The IRS wants tax professionals to do this online using the “Get Transcript” online registration. I started to do this, entering my name, address, date of birth, social security number, and tax filing status. The IRS system said the information I entered wasn’t correct. I tried again, making sure I didn’t make any typographical errors. It was correct. I hit “Enter” and, of course, the IRS said it was wrong. Further, because it was wrong they locked me out of the system for 24 hours.

So I called the IRS e-Services help desk to re-validate my identity. After being on hold for 30 minutes, a gentleman picked up, but told me his computer was down so he transferred me to someone else. The new hold time was going to be an hour, and I had an appointment, so this got pushed back a day.

The next day I tried again online. The IRS application accepted that I knew my name, address, and other information. It accepted that I knew my credit card number. It then sends you a text message on your phone. Just one step was left: Entering that number on the screen and I would be re-validated! I got the text just moments later, entered it in, and…the system crashed.

Well, if it worked once it would work again, right? Wrong. When I entered my name and other personal information the system told me I had mis-entered the information and it was locking me out. I called IRS e-Services. After being on hold for 21 minutes a woman picked up and was able to ask me the same questions that the IRS computer did (I also had to read a code off the letter I had received). I’m now validated as me!

Seriously, I’m underwhelmed by this process. This is a prototypical example of a kluge (“A Workaround or quick and dirty solution that is clumsy, inelegant, inefficient, difficult to extend and hard to maintain.”). There’s no reason the IRS system accepted my personal information only one of four tries (it was entered correctly all four times). There’s no reason it should crash as frequently as it does. If you’re an IRS e-Services user, maybe you’ll get lucky and be able to re-validate your identity online…but don’t count on it.

How to Go to Jail

December 14th, 2016

A few years ago, Steven Martinez won the coveted (not really) Tax Offender of the Year Award. His scheme was to tell clients that they had an amount due to the IRS and California. He then prepared a second set of tax returns showing a lesser amount due (or a small refund). He had his clients make checks out to his “client trust account.” He filed the second set of tax returns, and pocketed the difference. (He won the Tax Offender of the Year Award for hiring a hit man after his scheme was uncovered.) A New Jersey woman copied Mr. Martinez’s scheme (less the hit man, thankfully) with the expected result.

Doreen Gentile ran an accounting and tax practice in Toms River, New Jersey. As the Department of Justice press release notes,

Gentile admitted that as part of her scheme, she would show her clients a tax return that indicated that they had no tax or refund due, owed a minimal amount of tax, or were due a refund that was far less than the amount to which they were entitled. Gentile then prepared a second set of tax returns, signed without her clients’ permission, that she submitted to the IRS or the State of New Jersey for the full tax refund.

This was not a brilliant scheme by Ms. Gentile. Sooner or later one of her clients would be audited, or the client would obtain a transcript on their own; the return that was filed wouldn’t match their copy of the return. Indeed, inevitably this crime would be discovered and so it was. Ms. Gentile was indicted in 2014 and pleaded guilty to mail fraud and filing a false income tax return last year (she also didn’t include all of her income on her tax return—yes, the funds that were stolen were taxable income to her). She was sentenced earlier today to 37 months at ClubFed; she must also make restitution of $1,863,013.

Former French Budget Minister Heading to Prison for Tax Evasion

December 11th, 2016

We have yet another late nominee for Tax Offender of the Year. From Paris, France comes the story of Jérôme Cahuzac, former Budget Minister under President François Hollande and soon to be resident of the Bastille French Prison System.

The story begins in the 1990s. Then Dr. Cahuzac (a cosmetic surgeon) had a successful practice specializing in hair transplants. He was elected to Parliament in 1997. Around the same time, the Cahuzacs decided to move some money offshore. It’s apparent that French law here mimics US law: There’s nothing wrong with having foreign financial accounts; however, you better report them and the income you receive. That apparently didn’t happen. Meanwhile, Mr. Cahuzac was appointed to lead a finance commission for Parliament in 2010. In 2013 Mr. Cahuzac served as Budget Minister.

Unfortunately for Mr. Cahuzac, news of his foreign accounts came out. It was discovered later in 2013 he had a secret Swiss bank account for ten years (from 2000-2010). That led to his resignation in 2013. Mr. Cahuzac lied to the French Parliament, lied to the French government (not revealing another secret bank account—this one on the Isle of Man–that was used in moving €2.7 Million ($2.85 Million) to the Swiss bank account), and admitted his lies on his own blog. Oops! He was tried and convicted this past September for tax fraud.

Mr. Cahuzac received three years in prison; his wife received two years. Reyl Bank of Geneva, the bank that the Cahuzacs used, was fined €1.875 Million ($1.98 Million). Mrs. Cahuzac received a €100,000 ($106,000) fine; Mr. Cahuzac and two intermediaries he used must also pay a €100,000 fine.

Mr. Cahuzac’s attorney is arguing that the sentence is too long and that they will appeal asking for a lesser sentence. Apparently in the French justice system an appeal opens up both a lesser sentence (what Mr. Cahuzac’s attorney wants) and a longer sentence. In any case, it will like be several months before the appeal is heard.

This is yet another case of the fox guarding the henhouse. Mr. Cahuzac was also barred from seeking public office for five years. The French Socialist Party also kicked him out, and I suspect the chances of his successfully running for office is today zero.

Iowa Disbands Forfeiture Team; Settles Lawsuit from Poker Players

December 6th, 2016

Back in 2014 I mentioned (in passing) that two poker players had $100,000 seized while simply driving across Iowa on their way home to California. The Iowa Department of Public Safety (the state highway patrol) had a dedicated team on Interstate 80 assigned to seize money from motorists. What were signs of suspicious activity? They included:

– Driving too fast
– Driving too slow
– Driving the speed limit

A better question would have been, “What wasn’t a sign of suspicious activity?”

I am not a fan of civil forfeiture. It’s too easy for it to turn into a funding source for police agencies. The idea of civil forfeiture is to act as a deterrent, not to fund the government. That wasn’t the case in Iowa.

However, that’s in the past. Twin announcements out of Iowa are very good news on the civil forfeiture front. First, the two poker players who had their funds seized had filed a lawsuit alleging their civil rights were violated. Iowa has agreed to settle the lawsuit brought by William (Bart) Davis and John Newmer­zhycky for $60,000. (Iowa had earlier returned $90,000 of the cash that had been seized from the players.)

The second announcement is, in the long-run, more meaningful: Iowa is disbanding its state forfeiture team. The officers have been reassigned to traffic safety and special events. As the Institute for Justice reported,

“Today’s decision is an important step to protect Iowans’ property and due process rights from forfeiture abuse, but the state must do more,” noted Lee McGrath, legislative counsel at the Institute for Justice.

Unfortunately, Iowa still has civil forfeiture laws on the books. Perhaps this settlement and the change in Iowa policy will cause Iowa legislators to end civil forfeiture in the Hawkeye state.

IRS Appeals Implements Stupid Policy of Not Sending Initial Contact Letters

December 6th, 2016

I have a client who filed a Tax Court petition in late September. She is disputing additional tax from an Automated Underreporting Unit (AUR) notice. She didn’t respond to the initial AUR notice, so the way to resolve this is to file a Tax Court petition and get this in front of IRS Appeals. I have a Power of Attorney for my client; I expected to hear from IRS Appeals in three to five months.

When I got in yesterday morning I had a message from someone identifying themselves as an IRS Appeals officer out of Philadelphia. When I returned the call I discovered he was the assigned Appeals Officer in the case. I also discovered that:

– In the past for a case sent to Tax Court the IRS sent a letter to the petitioner (and her representative) noting that the case was being assigned to an IRS Appeals Officer with the hope of settling the case;
– IRS policy has changed, and these letters are no longer being sent;
– Now the initial contact would be by phone with no letter being sent; and
– Even after my calling the Appeals Officer there’s no way for me to receive correspondence showing that the Appeals Officer has been assigned to the case.

In this particular case I am certain that this Appeals Officer is working on the case (he had details of the case that were not public). However, I do not want to just take the say-so of a voice on the phone. Hasn’t the IRS Appeals Office heard of identity theft? Perhaps they’ve heard of the IRS Phone Scams? This week also is “National Tax Security Awareness Week;” it appears that the IRS Appeals Office should consider how their security appears to tax professionals.

The IRS recently mandated that, “ALL initial taxpayer contacts to commence an examination must be made by mail using approved form letters. [emphasis in original]” Similar rules now apply for payroll tax examinations and FTD Deposit Alerts. The Appeals Office policy of calling first is, to be blunt, stupid.

An initial contact letter (or fax) costs a couple of dollars to send out. It informs the taxpayer and his representative that a specific individual has been assigned to the case, their contact information (address, phone and fax numbers), and gives official notification of the assignment. (It also usually gives the name of the Appeals Officer’s Manager.) The cost for sending out this letter is likely less than five dollars. This is a minimal cost. I don’t know exactly how much the Appeals Officer I spoke to yesterday makes, but I can guarantee he spent more than five dollars worth of his salary proving to me that he was assigned to the case.

Hopefully the powers that be at the IRS will realize that this is a very penny-wise, pound-foolish policy. In these days of identity theft and phony IRS phone calls how am I to know that Appeals Officer Smith really is an Appeals Officer rather than a scammer?

IRS, please reconsider.

Nominations Due for 2016 Tax Offender of the Year

December 5th, 2016

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder