A Retroactive Tax Bill: What Can Go Wrong?

February 1st, 2024

Last night, the House of Representatives passed tax legislation that would increase the Child Tax Credit for 2023, allow businesses to expense research and development expenses, tax relief for wildfires and the train derailment in East Palestine, Ohio, and some other provisions.  This legislation is now in the hands of the Senate, and it’s possible it won’t go anywhere (or it could pass tomorrow).  Issues that could derail the bill in the Senate include the SALT cap (the limit of $10,000 deduction on federal tax returns for state taxes paid), election year politics, and the fact that little has come out of the Senate.  And if it gets amended in the Senate, back to the House it goes.

Let’s assume it passes; that would require the IRS to reprogram its computers.  The IRS uses the best of 1959 technology, so this would take a month or so.  Do we file tax returns for individuals (and businesses) impacted by this?  If this passes, impacted individuals (and businesses) who file now might need to amend their returns.  The IRS isn’t expedient in processing amended returns, so that’s not a great option.

Unfortunately, there is no best option.  Each impacted taxpayer is going to have to decide whether or not to file now or extend.  If we get an indication from the Senate whether this bill will pass or not, we may be able to make better decisions. Even though I reside in the capital of gambling and odds, I can’t provide you a quote of the chance this bill passes as written and gets signed into law.

I was hoping for a nice, simple straightforward Tax Season.  Unfortunately, Congress had different ideas.

IRS Announces Simple Notice Initiative; Boy, Is It Needed

January 24th, 2024

Clients of ours received an IRS CP2000 alleging they owed additional tax.  The clients called us, and we reviewed their return; it turns out that the items the IRS thought weren’t included on their return were included (so we believe no tax is owed). We sent a response in early December.

Last week our clients received a response (we were supposed to have been copied, but we weren’t):

Our clients were perplexed by the response. Frankly, the following paragraph would perplex anyone:

Before we can resolve this matter, we need information from , and we haven’t received it yet. You should receive our complete response within   days. We don’t need any further information from you right now.

Most likely, this paragraph wasn’t supposed to be included (and only the previous paragraph noting that we’d receive another response within 90 days should have been included).  If you think this is a one-off, it’s not; a second client (who responded to an IRS notice on her own) received the identical response.

About an hour after the phone call I received an email from the IRS noting, “IRS launches Simple Notice Initiative resdesign effort.”  That’s needed, along with someone proofreading notices and responses before sending them.  The IRS is promising to redesign “up to 200 notices that make up about 90% of total notice volume sent to individual taxpayers.”  We shall see.

IRS Officially Announces Delay in Reporting Cryptocurrency Transactions on Form 8300

January 16th, 2024

The IRS officially announced today that businesses do not have to report the receipt of digital assets on Form 8300 until the Treasury and the IRS issue regulations implementing the new law.  The IRS officially announced this in Announcement 2024-4.  Per the announcement:

The Treasury Department and the IRS intend to implement section 80603(b)(3) of the Infrastructure Act by publishing regulations specifically addressing the application of section 6050I to digital assets and by providing forms and instructions for reporting that address the inclusion of digital assets. Accordingly, until the Treasury Department and the IRS publish regulations under section 6050I to implement section 80603(b)(3) of the Infrastructure Act, persons engaged in a trade or business who, in the course of that trade or business, receive digital assets or digital assets and other cash in one transaction (or two or more related transactions) will not be required to include those digital assets when determining whether cash received has a value in excess of the $10,000 reporting threshold for purposes of determining if reporting is required under section 6050I with respect to those transactions.  Persons engaged in a trade or business who, in the course of that trade or business, receive cash (other than digital assets) in excess of $10,000 in one transaction (or two or more related transactions) must continue to file an information return under section 6050I with respect to that cash received.

The news release notes that proposed regulations will be issued; a comment period is required by law and a public hearing might be held.  As usual, we await further guidance.

Form 8300 and Cryptocurrency: Implementation Postponed

January 12th, 2024

The IRS sent emails to two tax professionals regarding Form 8300 and cryptocurrency:

Treasury has postponed the effective day of 12/31/2023 for filing 8300 forms regarding digital asset transactions (Cryptocurrency). The updated [form] as well as guidance on electronic filing the 8300 form will be on the IRS.gov website soon.

Both FinCEN and the IRS are within the Department of the Treasury.  I’ll post a further update when it’s available.

Form 8300, Cryptocurrency, and Gambling: An Update

January 8th, 2024

Last August I wrote a post noting that as of January 1, 2024 cryptocurrency is considered to be cash for Form 8300 reporting requirements.  Here’s what I wrote last August:

A Twitter/X post from John Reed Stark reminded me about an issue that may soon impact you if you are a professional gambler playing on one of the current US-facing sites such as Ignition or America’s Card Room (ACR).  FINCEN (the Financial Crimes Enforcement Network) Form 8300 requires anyone in business–this includes individuals (sole proprietors), partnerships, LLCs, and corporations–to report cash transactions of more than $10,000.  This law isn’t new, and like almost anything related to money laundering/FINCEN there are draconian penalties for not complying.  What is new is that cryptocurrency is considered “cash” for this purpose under Section 6050I of the Infrastructure Act (which passed in November 2021).  This section of the law takes effect on January 1, 2024.

Form 8300 requires you to inform FINCEN (or the IRS if you’re not subject to electronic filing rules) within 15 days of any transaction of more than $10,000:

“Who must file. Each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form 8300. Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related transactions. Transactions are considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.”

I am receiving a steady stream of questions regarding this, so here’s a primer.

  1. There are two elements needed to have to report cryptocurrency you receive.  You need to (a) be in a trade or business and (b) receive more than $10,000 in cash (or cryptocurrency) in one or more related transactions.  If both elements aren’t there, no reporting is required.
  2. If you are an American professional gambler, you are covered by this rule.
  3. The rule covers only receiving cryptocurrency, not sending cryptocurrency.
  4. It only covers receiving cryptocurrency as part of a trade or business.  Let’s say you purchase $20,000 of cryptocurrency for investing; this generally wouldn’t be covered by the reporting requirements of Form 8300.
  5. Reporting is not required if the transaction occurs entirely outside of the United States.

So let’s look at a couple typical examples.

  1. You are a professional gambler residing in the United States.  You cash out from an online gambling site based in Costa Rica and receive $10,500: $5,000 as a bank transfer and $5,500 of cryptocurrency.  The transaction must be reported on Form 8300.
  2. You are a professional gambler.  You are “staked” (backed) by June.  She sends you a personal check for $20,000 to stake you.  Personal checks are specifically exempt from Form 8300 filing requirements.  “Cash does not include…[p]ersonal checks drawn on the account of the writer, a cashier’s check, bank draft, traveler’s check or money order with a face value of more than $10,000.”  (Similarly, wire transfers are not reportable on Form 8300.)

From the instructions of Form 8300 it is absolutely doable to report a cashout from an online gambling site such as America’s Cardroom.  You do not need to include a taxpayer identification number for a non-US business: “You are not required to provide the TIN of a…foreign organization that…[d]oes not have an office or place of business, or a fiscal or paying agent, in the United States.”  You may need to put a comment on Form 8300 (at the bottom of page 2) to note this. You likely also need to comment that the “cash” received was (say) Bitcoin.

Of course, we’re dealing with the federal government so there are issues.  While Form 8300 was revised as of  December 31st, the revision doesn’t include a place for cryptocurrency.  While it’s possible to report a business sending cash, the reporting always asks for the individual who sent it.  Well, that won’t be doable for most cryptocurrency transactions–again, a comment will be needed.

I suspect this will be a mess as FinCEN hasn’t thought this through; indeed, I think they’re just superficially aware of this issue and are really concentrating on BOI reporting.   In any case, I’ll see what comes of yet another government mandate.

 

It’s Time to Start Your 2024 Mileage Log

January 3rd, 2024

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

Yesterday was the first business day of the new year for most. 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 133,599). 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. It’s also a good idea to take a picture of the odometer and email that picture to yourself. This will give you a time-stamp showing you accurately noted your beginning mileage.

Here’s the other things you should do:

On the cover of your log, write “2024 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:

1/4 133900-133935 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 $0.66/mile, the 35 miles in this hypothetical trip would be worth a deduction of $23. 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. Be careful if you (or your family) have multiple vehicles. You will need to separate out your expenses by vehicle.

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 2023 Tax Offender of the Year

December 29th, 2023

So many try every year for my award–The Tax Offender of the Year.  It’s not really something to be proud of; after all, to win this award you need to commit really big tax fraud or a series of Bozo-like actions (ideally, both).  As usual, there are plenty of candidates but there can only be one “winner.”

Just missing out of the top three were Ali Jaafar and Yousef Jaafar of Watertown, Massachusetts.  They came up with the not-so-brilliant idea of unlawfully claiming 14,000 winning Massachusetts lottery tickets, laundering the $20 million in proceeds, and lying on their tax returns.  They each get to spend five years at ClubFed and make restitution of $6,082,578 and must forfeit their profits on the scheme.

Also just missing the top three was Las Vegas resident Scott Lawrence.  Mr. Lawrence operated a real estate business that did quite well from 2009 through 2019; he just didn’t want to pay the $1,905,325 in taxes he owed.  He elected to deliberately thwart efforts to levy his bank account and caused his attorney to send a misleading letter to the IRS; he then deliberately paid his taxes using an overdrawn bank account.  He’ll enjoy a year and a day at ClubFed and must make restitution.

Coming in third place was Stephen Schechter, a resident of Monaco.  Mr. Schechter is an investment advisor and is doing quite well.  Back in 2011 he sold an apartment in Monaco for about €14,000,000.  Now, that wasn’t all profit–but quite a bit was.  Unfortunately, that sale didn’t make it onto his 2011 tax return.  Nor were various foreign financial accounts where the money went noted on his FBAR (FinCEN Form 114, the Report of Foreign Bank and Financial Accounts).  Somehow, the interest and dividends from those accounts also didn’t make it onto his returns.  Mr. Schechter pleaded guilty to concealing over $5,130,000 in income from the IRS.

Walter “Terry” Douglas Roberts II, of Flat Rock, North Carolina just missed out on the brass ring.  Mr. Roberts is an appraiser, and he did lots of appraising of conservation easements.  The IRS looks at Syndicated Conservation Easements as part of their “Dirty Dozen” tax scams. Now, not all conservation easements (or syndicated conservation easements) are scams; many are legitimate.  However, when you admit to fraudulently inflating the values of the easements by “…not following normal appraisal methods, making false statements and either personally manipulating or relying on knowingly manipulated data to reach a targeted appraisal value – communicated to him by co-conspirators…,” you’re looking at a problem.  And when those 18 appraisals end up having fraudulent tax deductions totaling $466,961,000 and a tax loss of $129 million, you’re talking big tax fraud.  He has to make restitution of that $129 million plus spend 12 months at ClubFed.


Back in 2004, Congress passed the “American Jobs Creation Act of 2004.” Included within this law was a biodiesel tax credit.  It was extended through various other legislation and allows a tax credit for the production of various biodiesel fuel.  The tax credit $1.00 per gallon of biodiesel and renewable diesel fuel.

Various businesses began throughout the United States to take advantage of this credit and produce environmentally “good” diesel fuel.  One such company was Washakie Renewable Energy, founded by Jacob Kingston.  As noted on their website,

Committed to producing fuel that is sustainable, clean-burning, and domestically accessible, Washakie Renewable Energy (WRE) is the most significant producer of biofuel in the Intermountain West region. By operating the largest seed crush press in the US, and relying on recycled waste materials like used kitchen grease and cooking oil, Washakie Renewable Energy produces over ten million gallons of biodiesel annually.

The biodiesel produced by WRE is the only alternative fuel to complete the EPA’s study under the Clean Air Act regarding emissions and health effects. In comparison to conventional diesel, biodiesel produces only 14% of the greenhouse gases, 33% of the hydrocarbon emissions, and 53% of the particulate matter, while also being quickly biodegradable and less toxic than common table salt.

Washakie Renewable Energy’s commitment to conscientious resource management includes distributing several useful byproducts of its biodiesel operation, including high-quality animal feed and refined glycerin.

That seems great, doesn’t it? A business making money, giving back to the community, and helping the environment.  What could be wrong with that? Let’s just say that you can only sell 100% of something and follow along with what happened.

The conspiracy began in 2010 and continued through 2018 and involved multiple fraudulent schemes. One involved purchasing biodiesel from the East Coast of the United States (which had been produced by others who had already claimed the renewable fuel tax credit) and exporting it to foreign countries, including Panama, then doctoring transport documents to disguise and import the biodiesel as “feedstock.” Washakie used this false paperwork to claim it had produced biodiesel from the feedstock to support its filing of fraudulent claims for IRS biofuel tax credits. Washakie also fraudulently obtained millions of EPA renewable identification numbers that were then sold for approximately $65 million. Later, Dermen and the Kingstons conspired to purchase millions of gallons of biodiesel and rotate it though the U.S. shipping system to create the appearance that qualifying fuel was being produced and sold by Washakie. Washakie applied for and was paid by the IRS over $300 million for its claimed 2013 production and over $164 million for its claimed 2014 production. Evidence at Dermen’s trial showed that, to further create the appearance of legitimate business transactions, Dermen and the Kingstons schemed to cycle their and other co-conspirators’ fraud proceeds in more than $3 billion in financial transactions through multiple bank accounts.

I can’t say it was all a scam; however, it appears to have mostly been a scam.  Lots of the biodiesel they produced had already been produced and the biodiesel tax credit already taken.  So Washakie had low production costs (after all, they didn’t really produce it), a high profit margin, and lots and lots of refundable renewable fuel tax credits.  Indeed, the individuals involved: Lev Dermen, Jacob Kingston, Isaiah Kingston, Rachel Kingston, and Sally Kingston caused over $1 billion in fraudulent tax credits with $511 million paid to Washakie.

Where did that money end up?  A 150-foot yacht named the Queen Anne (seized in Lebanon and sold for over $10 million in Cyprus), $700,000 of land in Belize that was going to go for a casino, a 2010 Bugatti Veyron (worth $1.8 million), a Lamborghini and Ferrari, and a $3.5 million mansion; investments in other businesses; and, of course, millions sent to friends and family.

The individuals involved attempted to hide their actions by moving money to various countries outside the United States (primarily Turkey and Luxembourg).  Mr. Dermen also made an assurance to Jacob Kingston: “…Dermen falsely assured Jacob Kingston that Kingston and his family would be protected by Dermen’s “umbrella” of corrupt law enforcement and immune from criminal prosecution.” Oops.

Lev Derman (the president of Washakie) was found guilty back in 2020 of conspiracy to commit mail fraud, conspiracy to commit money laundering, and money laundering.  Jacob Kingston pleaded guilty in 2019 to various fraud and tax charges.  Isaiah Kingston and the other members of the Kingston family likewise pleaded guilty in 2019.

Mr. Dermen, who is 56, was sentenced to 40 years (essentially a life sentence), Jacob Kingston received 18 years with other members of the Kingston family receiving between six and 12 years at ClubFed.  Dermen was also ordered to make restitution of $442.6 million and to pay a money judgement of $181 million.  Jacob and Isaiah Kingston were each ordered to pay $511 million in restitution to the IRS. Meanwhile, the Department of Justice is continuing efforts to seize various assets to satisfy the $511 million in restitution.

A helpful hint to all: The Producers is a great play (and movie), but (a) don’t try to sell more than 100% of something and (b) conspicuous consumption while committing fraud usually doesn’t end well.  Lev Derman and the Kingston Family are worthy winners of the 2023 Tax Offender of the Year award.


That’s a wrap on 2023.  I wish all of you and your families a happy, healthy, prosperous and safe New Year!

An IRS Identity Protection Unit Saga: Part 5

December 18th, 2023

When I last updated this saga (on September 22nd), I hadn’t heard a thing from the IRS or my request for the Taxpayer Advocate Office to take a look at the missing refund for my client (call him John Smith).  So in mid-November, I again called the Identity Protection Unit requesting status.  I discovered that this case had been assigned to the Taxpayer Advocate.  However, the IRS Identity Protection Unit couldn’t tell me who at the Taxpayer Advocate was assigned to the case: either they didn’t know or they’re simply not allowed to talk about anything assigned to the Taxpayer Advocate.

I called the Taxpayer Advocate hotline and was told the name of the individual who was assigned to the case.  I then called him, got his voice mail, and left a message with a promised callback coming within two weeks.  It’s been a month, and unsurprisingly (given how this case has gone) there’s been no callback.  I left another message requesting status this morning.  We’ll see if we have a callback by January 2nd (I’m not holding my breath).

Neither my client nor I have ever received any communication from the Taxpayer Advocate Office stating that the case has been assigned to someone.  We haven’t received any communications from anyone, for that matter, since my client successfully verified his identity.  Meanwhile, the interest owed to my client has passed $4,500–something you and I will be paying for.  It’s hard to see my client receiving his refund for at least another month; by the time this saga ends it’s likely interest will exceed $5,000.

Consider individuals who desperately need their tax refunds, and this large refund (approximately $30,000) is needed to pay bills.  Do I need say more? It shouldn’t take nine weeks to have a return processed after identity verification (but it does); my client has been waiting 39 weeks (and counting).

I will update this saga in the New Year.

Previous posts on this:

An Identity Protection Unit Saga: Part 1
An Identity Protection Unit Saga: Part 2
An Identity Protection Unit Saga: Part 3
An Identity Protection Unit Saga: Part 4

IRS Announces 2024 Standard Mileage Rates

December 14th, 2023

This morning, the IRS announced the 2024 standard mileage rates for automobile usage.  Those rates will be:

  • 67ȼ per mile for business use, up from 65.5ȼ per mile in 2023;
  • 21ȼ per mile for medical purposes, down from 22ȼ per mile in 2023; and
  • 14ȼ per mile for miles driven in service of charitable organizations (set by statute and unchanged for 2024).

I question how the annual study showed that any automobile expenses are less than in 2023, but the IRS conducts a study and that’s what the results show nationally.  Here in Nevada, costs have definitely risen from 2023 but “it is what it is.”

If you do use a car for business, remember to keep a mileage log (or use an app).

What’s $68 Billion and 1.1% Among Friends?

December 11th, 2023

As the late Senator Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking real money.”  California is staring at a $68 billion budget deficit.  Ouch.  California depends on personal income tax revenues for 65.9% of the budget–and on the top 1% for 50% of those revenues with the top 0.1% providing 33% of personal income tax revenues to the state.  Meanwhile, the middle class has been leaving California as fast as they can.  As Samuel Johnson said long ago, “Whatever you have, spend less.”

That’s the big issue in California: runaway spending.  What has the state legislature’s response been: Let’s increase tax rates!  Beginning in January, California’s top rate rises to 14.4% (from 13.3%); those in the middle class will see the rate rise from 9.3% to 10.4%.  This doesn’t sound like much, but if a family earns $100,000 a year they can save $1,100 by residing in no-tax Nevada.  The Greater Las Vegas Association of Realtors thanks California for their efforts in helping home sales in the Las Vegas metropolitan area!  And that 1.1% increase could easily increase another 0.4% (to a total of 1.5%).

Now, taxes aren’t everything (of course).  For businesses, regulations matter; California’s regulatory climate is abysmal.  “But Russ, there are a lot of people in California.”  Sure, but businesses that can move will.  I did twelve years ago; others are getting more and more reasons to do so.  The California legislature and Governor Newsom ignore this at their own peril.