Taxable Talk

It's time for my annual vacation. I'll be back on August 4th. If you need to learn the latest on the California budget mess, I recommend the Flash Report. If you need a tax fix, check out one of the tax bloggers listed in the blogroll on the right.

Rhode Island has joined 17 other states including California to mandate that state tax returns prepared by professionals be electronically filed. The mandate goes into effect in January.

Under Rhode Island's new law individual taxpayers can opt-out of e-filing. Additionally, the mandate only applies to preparers who submitted 100 or more returns to Rhode Island. And returns that aren't eligible for electronic filing (generally, certain complex returns) aren't covered by the new law.

Every year I attend the California Society of Enrolled Agents SuperSeminar. I'll be here through the weekend, and posting will be very light.

I feel so behind on so many items. I guess that's normal when you return from a vacation...and you look at your calendar and realize that you're heading out of town again in just a week for your annual continuing education seminar.

Back in April the proprietor of Tax Fool sent me an email right at the end of tax season. I've finally gotten around to looking at his site, and it's another site that debunks tax protester myths. I'm adding it to my links (on the right).

Roni Deutsch also has a tax blog worth reading. I'm linking it, too. I'm removing a link to a blog that hasn't been updated in a long time (and I presume is dead).

And as hard as it is for me to believe, in less than a month the second quarter estimated tax payment is due. Time just keeps on moving....

I'm heading to Chicago for the next week, including Friday's game at Wrigley Field. I'll apparently need my long-sleeve shirts as the temperature is supposed to drop 30 F over the next two days.

In any case, posting will be light while I'm in Chicago visiting friends and family.

Let's assume you've procrastinated on your taxes, and you (all of a sudden) notice it's April 15th. You'll just call your accountant, and you're sure he'll drop everything for you.

No chance.

If you called me today, and I haven't yet received your paperwork, you will be going on extension. We'll make a quick and dirty estimate of your income, pay the appropriate amounts with your extension (and any estimated taxes for 2008), and we'll come back to your return when we both have time.

And if you call me at 4:45pm on Tuesday, April 15th expecting me to drop everything and complete your return I might start to laugh. Indeed, I will be dropping everything at 5:00pm this Tuesday—my brother, sister-in-law, and niece are in town and we're going to dinner.

Let's assume your business has been successful. Very successful. What should you do with all that money, especially if you'd prefer to not send a lot of it to Uncle Sam?

Well, you can take the Bozo method of hiding it in foreign bank accounts. I'll just transfer the funds to my account in Liechtenstein/Luxembourg/Switzerland/Cayman Islands/Isle of Man/etc. The IRS will never find me. And, voila, I have a lot less income to report.

There's nothing illegal about having a foreign bank account. There's a lot illegal about not reporting foreign financial accounts if you have $10,000 or more in one or more such accounts. That $10,000 figure is determined by adding the maximum balance in each account at any time during the year. If you do have foreign bank accounts you would need to report them by checking a box at the bottom of Schedule B on your tax return and by filing Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30th.

Heh, if you're going to violate one law (tax fraud, by not reporting all your income), what's another couple of laws? Well, foreign bank accounts come under tremendous scrutiny. Consider the recent mess in Liechtenstein. Germany is quite annoyed with the tiny principality, and many countries are now finding out about some of the individuals who have bank accounts in Liechtenstein. Or take Neteller, an Isle of Man based financial intermediary, which sent all of its records to the Department of Justice. A reasonable assumption is those records have made their way to the IRS computing center in West Virginia.

The penalties for breaking the foreign bank account reporting laws are stiff. The minimum penalty for willfully not reporting a foreign financial account is $100,000.

Instead of trying to beat the system by violating the law a much better non-Bozo strategy is to work with your tax professional to find ways of working within the law to lower your taxes. But Bozos will be Bozos....

While Joe Kristan suffers from watching snow falling in Des Moines, I have the opposite problem. Here's the local forecast for Irvine:

* Today: Sunny. Hot. High near 90F. Winds NE at 5 to 10 mph.
* Tonight: Mostly clear. Low 57F. Winds light and variable.
* Tomorrow: Mainly sunny. Very warm. High 87F. Winds light and variable.
* Tomorrow night: A mostly clear sky. Low 57F. Winds light and variable.
* Monday: Mainly sunny. Highs in the upper 70s and lows in the low 50s.

Almost time to go back to work here....

With Tax Day fast approaching it's time to look into the 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 (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 $2.65 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.

I just had a client's return go awry. The client received a letter from the IRS stating that the IRS had lost their return, but they knew they had received it. They had proof that it had been mailed, so it wasn't a big deal.

About three years ago a client 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 $1000...but he did save $2.42.

Don't be a Bozo. Efile (and you don't have to worry at all about the Post Office), or spend the $2.65! And you can go all out and get a return receipt, too (though you can now track certified mail online). There's a reason every client letter notes, "using certified mail."

A few weeks ago I received an email from Robert Bernhoft, the lead defense attorney for Wesley Snipes during his recent trial for tax evasion. For those who don't remember, Mr. Snipes was found not guilty of the most serious offenses (tax fraud) but was found guilty on three of six charges of not filing a tax return.

I've received permission to post Mr. Bernhoft's remarks:

After the Snipes' trial I came across several articles and posts you authored while sifting through some of the voluminous media and web material that my staff had collected. In those articles you stated that Mr. Snipes had been convicted of three counts of tax evasion. This is untrue. Mr. Snipes was convicted on three of six counts of failure to file a return.

The difference is significant, because tax evasion is a tax fraud felony, see 26 U.S.C. § 7201, whereas failure to file a return is a "non-fraud" misdemeanor, see 26 U.S.C. § 7203. The felony/misdemeanor distinction is very important for several reasons. First, a misdemeanor conviction does not ordinarily disenfranchise Mr. Snipes from voting or possessing firearms, does not ordinarily bar him from running for (or holding) national office, and carries a statutory maximum sentence of 1 year. (Felony tax evasion carries a 5-year statutory maximum sentence per conviction count). Moreover, the U.S. Sentencing Guidelines treats misdemeanor convictions much less severely than felony convictions in a number of ways other than the difference in statutory sentencing maximums, including giving the sentencing judge broad discretion to sentence to probation or other non-incarceration alternatives to actual imprisonment.

Lastly, I note you made some disparaging comments about Mr. Snipes' decision to discharge Attorney Billy Martin and hire my firm for his defense, opining, on at least one occasion, that Mr. Martin's "O.J" and "blame the advisors" defense would surely be better than some "lame tax protester arguments." Mr. Snipes faced a very real 16 years imprisonment if he was convicted on both felony tax fraud counts (conspiracy to defraud the IRS and filing a false claim), but now faces a statutory maximum of three years imprisonment on misdemeanors only, and without the opprobrium and loss of rights attached to felony tax fraud convictions. In retrospect, I think the trial worked out rather nicely for Mr. Snipes, don't you?

First, I absolutely agree with Mr. Bernhoft: The trial worked out very well for Mr. Snipes. Mr. Snipes likely would have been sentenced to a significant term at ClubFed had he been found guilty of both felony counts. If I should at some future point be accused of felony tax evasion I'd definitely consider Mr. Bernhoft for my defense.

I also assumed that when Mr. Bernhoft took over the defense that the defense strategy would be a typical "tax protester strategy." I told Mr. Bernhoft in an email that I was wrong, and I'll state it here. Mr. Snipes' defense was handled quite well. (Indeed, contrast Mr. Snipes' defense with that of his co-defendents, Eddie Ray Kahn and Douglas P. Rosile, who were found guilty of felony tax fraud.)

I think Mr. Bernhoft is splitting hairs about Mr. Snipes' conviction of failing to file a tax return. He accurately notes that I called it "tax evasion." Indeed, the headline on my post of February 1st said just that. However, the story noted that he was convicted of three misdemeanor counts. Mr. Bernhoft is correct, of course, that felony convictions are much more significant than misdemeanors.

In my post "Final Thoughts on the Snipes Trial" I noted that both the prosecution and the defense praised the Ocala, Florida jury. I noted that,

"Yes, Snipes was guilty of stupidity (if you believe you don't have to pay taxes...) and tax evasion failure to file a tax return (the government clearly proved that he didn't file tax returns while he was earning income) but was he the purveyor of a tax fraud scheme?

"I hadn't looked at the case in that manner but thinking about it I can see how a jury could decide that Snipes just bought the words of Kahn and Rosile. The verdict is not a repeat of the OJ Simpson case; Snipes was found guilty of three counts of tax evasion failure to file a tax return and could spend some time at ClubFed. He also faces the possibility of a civil suit by the IRS to recover the taxes. That might not happen, though, because his defense attorney says that Snipes intends to file and pay his taxes."

Here are two other conclusions that can be drawn from this case that I believe Mr. Bernhoft would agree with. First, it's a lot cheaper to file your tax returns and pay your taxes then to have to go to trial and defend yourself against tax fraud charges. And second, I don't think Mr. Bernhoft will be complaining about juries in Ocala, Florida and clamoring to move trials from that bucolic town again.

I've been talking about the Nevada Development Corporation's efforts to draw California businesses to Nevada. A business that moves to Nevada should strongly consider reincorporating in Nevada to avoid California taxes.

But assume you're in California. Should you follow one of the many radio advertisement's advice and incorporate in "tax-free Nevada?" Well, there's a problem with this. It's called nexus.

If your business is physically located in California you have to file a California tax return. Period. If you don't the Franchise Tax Board will likely be calling upon you. And trust me, ClubCal is no more fun than ClubFed.

Another repeat from last year, but with a better morale than before. Here's what I wrote last year:

Let's thank Michael Graham of Queens, New York for coming up with this gem. Mr. Graham decided to file phony tax returns with the IRS. He used consecutive social security numbers on his tax returns.

He did get one tax refund through the system and collected $900. However, the other 1,799 returns were caught by the IRS and he didn't get the $1.6 million he attempted to collect. He did find his way to court, though....

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I strongly suggest that you do not try anything like this. The IRS and state tax agencies do have systems in place to catch bozos who attempt crimes like this. Instead of trying to bilk the system, ask your tax preparer about legitimate deductions that are available for you to take. The regular IRA allows you to deduct $4000 ($5000 if you're 50 or older) from your income (if you're eligible). You have until April 15th to make your contributions.

And if you're self-employed, you may be able to contribute to a SEP IRA. You have until your return is timely filed, including extensions, to contribute to a SEP IRA. You can contribute 25% of your net income up to a maximum of $45,000 to a SEP. This is one tax deduction that's available until October 15th if you file an extension.

Amazingly, some who are wealthy scoff at taking this deduction. Both Democratic presidential candidates, Hillary Clinton and Barack Obama, had significant self-employment income over the past few years and put none of it in a SEP IRA. Given their tax brackets, they would save somewhere between $15,000 and $30,000 in taxes and have some savings for retirement. If you're self-employed consider that the government is literally going to pay one-third of your retirement plan if you contribute to a SEP (depending, of course, on your tax bracket). This is a deduction you should absolutely discuss with your tax professional.

Phony tax returns will likely lead you to a stint at ClubFed (where Mr. Graham went). We recommend the IRA or SEP IRA over ClubFed....

Today's Bozo Tax Tip is a repeat from last year. It's just another of the tax protester myths, that only foreign income is taxable. It's also one that has come up again during this tax season. So, without further ado, here's what I wrote last year:

This is definitely an issue I'm aware of because of my practice areas. I deal with plenty of individuals who earn their living while residing abroad or through foreign sources of income. "It's tax exempt, isn't it?" They're not happy when I let them know that's not the case.

The Tax Code, which is law (Title 26, U.S.C.) states that Americans are taxed on their worldwide income. Basically, everything is taxable unless Congress specifically exempts it.

Anyway, about six months ago I was approached by an individual who was about to be levied by the IRS because of failure to pay taxes. He resided in the continental U.S., but earned all his income from royalties from the Far East. So I asked him a few questions:

"Are you an American citizen?" He was.
"Was this income taxed at its source? That is, had the countries where it comes from levied a tax on it?" No, he received all of the income.
"Do you pay income tax in any of these countries?" No, he didn't.

In summary, the individual really owed the tax. But as much as I tried to tell him that, I was talking to a brick wall. Given my dislike of talking to brick walls and of taking bozos on as clients, I suggested he try to get someone else to represent him.

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But if you do earn income abroad, there are some real tax tips you can take advantage of. If you have a genuine residence overseas or meet the physical presence test (generally, being abroad 330 days out of 365), you may be eligible for the Earned Income Exclusion. If eligible, you can exclude up to $85,700 in 2007. And the time period does not have to be a calendar year; if you're overseas from May 1, 2007 through April 15, 2008, you would likely be eligible for a prorated credit.

If you earn income abroad and it's taxed abroad, you are likely eligible for the Foreign Tax Credit. The general principle is that income should only be taxed once, so if (say) Japan taxes your income, you should get a credit of that tax on your US tax return.

Finally, anyone who is not in the United States on April 15th gets an extra two months (until June 15th) to file his tax return. (You need to attach an explanation to your tax return.) If you're abroad, you won't be subject to penalties but you will be subject to interest on what you owe (interest is statutory).

There are numerous caveats and gotchas, and numerous ways to lessen your tax if you either have foreign source income or live abroad. Talk to a professional who can help you if you're contemplating living abroad or will soon have significant income from abroad.

I'm a big fan of Alfred Hitchcock movies. One of my favorites is The Trouble With Harry. Another movie with a similar plot is Weekend at Bernie's.

These movies deal with death in a light-hearted manner. Since this is a Bozo tax tip, how does this apply? Well, a few weeks ago I had a meeting with a potential client, who wanted to claim his father as a dependent. I asked him if his father lived with him; he didn't. I then asked where his father lived, and I was told he had passed away...in 2003.

There are rules about claiming dependents, and they do have to be alive sometime during the year. I expressed my sympathy to the potential client, and suggested he find a different tax professional to prepare his return.

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There are some tax benefits to those who lose their spouse during the year. They still get to file as married for the year. If a decedent was a dependent at any time during the year you can claim them as a dependent. Widows or widowers who lost their spouse within the last two tax years preceding this year and have a dependent child may be able to file as a widow or widower with a dependent child.

But please don't try to claim your relatives who passed away years ago on your tax returns. If you do, you're likely going to be paying a visit to ClubFed.

Other than my upcoming Bozo Tax Planning Series (which will begin later today), posting will be very light until after April 15th. I have lots of work in the in-basket, and not much time to get it all done. For it's not fooling around to say that April 15th is just two weeks away.

Congratulations, California. The Tax Foundation released its list of when each state celebrates Tax Freedom Day. On average, it's April 23rd. But not here in the Bronze Golden State. For us, it's April 30th. What that means is from January 1st to April 30th you're not really working for yourself; rather, you've been working for the government. On average, one-third of Californians income goes towards taxes.

Somehow California doesn't rank #1. Yes, there are worse states for taxes:

1. Connecticut (May 8th)
2. New Jersey (May 7th)
3. New York (May 5th)
3A. District of Columbia (May 3rd)
4. California (April 30th)
5. Washington (April 29th)
6. Massachusetts (April 28th)
7. Maryland (April 28th)
8. Minnesota (April 27th)
9. Florida (April 26th)
10. Hawaii (April 26th)

There are a couple of surprises on this list: Florida and Washington, states without an income tax. The Tax Foundation looked at all taxes, including sales tax, property tax, and Washington state's business tax.

There are some states where you're almost working for yourself. Here are the top ten states in tax freedom:

50. Alaska (March 29th)
49. Mississippi (April 7th)
48. Montana (April 8th)
47. West Virginia (April 8th)
46. Alabama (April 9th)
45. Kentucky (April 10th)
44. Tennessee (April 11th)
43. Oklahoma (April 11th)
42. New Mexico (April 12th)
41. South Dakota (April 12th)

The press release for the Tax Foundation study is here. The only good news that I can see in the study is that Tax Freedom Day does come three days earlier in 2008 than in 2007...except in California.

Every year the Orange County chapter of the California Society of Enrolled Agents and local CPAs donate their time to answer tax questions by phone for four hours. Tomorrow (Tuesday) you can call 714-796-5000 between 5pm and 9pm PST and get your tax question answered. It's sponsored by the Orange County Register; I'll be one of the volunteers answering your questions.

It's not a dumb question. The TaxProf Blog quotes a piece in Tax Analysts that states that the IRS is aware of tax blogs.

"The tax press has played an increasingly important role in the IRS's communications strategy as the number and form of media outlets have proliferated over the last 25 to 35 years, IRS Chief Counsel Donald Korb said at a January 18 session of the American Bar Association Section of Taxation midyear meeting in Lake Las Vegas, Nev....

"Tax bloggers have gone a step beyond what traditional media can do and have 'democratized' the way tax news and other information reach people who may not have had access to such information before the Internet age, Korb said. People no longer have to have subscriptions to tax law publications or be in Washington to get that information, he said. Tax blogs such as TaxProf Blog, which is run by Paul Caron, a University of Cincinnati College of Law professor, 'are a great tool to get information out to a particular group,' he said."

The TaxProf Blog is, as Joe Kristan noted, "[the] king of our little tax blogging world." I do know that I have readers at California's Board of Equalization because they've emailed me about some stories I've written in the past. I believe (based on visitor logs) that some individuals at the Franchise Tax Board and the IRS have stopped in and perused Taxable Talk.

The media has definitely changed from even ten years ago. Today there are tax blogs, and tax issues are followed more by the general public. I think that's for the better as problems are discovered far quicker and the public is much better educated about the consequence of tax law.

Hat Tips: TaxProf Blog, Roth Tax Updates

One of my links is to the Bozo Criminal of the Day. During tax season I need all the humor I can get. Today's Bozo Criminal entry is one that I passed on, and involves two Miami gang members who challenged the cops on YouTube to arrest them. They did.

Here's a link to the video, and here's the news story I got it from.

There are all sorts of awards given, but the award I give is special. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

In 2005 Sharon Lee Caulder won the inaugural award. Quoting from my post, "Sharon Lee Caulder, formerly of Oakland and now from New Orleans, our voodoo priestess who wrote a book and was convicted of tax evasion. She did not include the $1.7 million she earned between 1998 and 2002 (mainly from sales of her book, Mark of Voodoo, on her tax returns". As I wrote when she was convicted, "Voodoo is more profitable than I realized, especially if your net income after taxes is the same as your net income before taxes (until Uncle Sam catches you)."

Now, on to 2007. There have been lots of tax fraudsters this year. But one stands out. No, it's not Wesley Snipes. Mr. Snipes hasn't been convicted yet, so technically he's not an offender. (He certainly has a good shot at the 2008 award, though.)

The story begins back in 2000. A Camarillo, California company is sued for patent infringement and settles the case for "tens of millions of dollars." Now, if you owned that business what would you do? Would you look for new income producing lines of business? Would you develop workarounds so that you wouldn't be infinging on the patents? Or would you decide to commit tax fraud just to get back at the federal judge who allowed the miscarriage of justice (in your view) to happen?

If you're thinking that no one could have such a bad motive to commit tax fraud you'd be wrong. This actually happened.

As I detailed earlier this year, Gene Haas did exactly that. The former CEO and owner of Haas Automation, Inc. created a phony Nevada company and enlisted the help of his then CFO to commit tax fraud. Here's what I wrote:

So, enlisting the help of his then CFO, John Phillips, the business created a phony company in Nevada called "Supermill," and then paid the phony company from phony invoices. Then Mr. Haas and Mr. Phillips got in a business dispute, Mr. Haas sued Mr. Phillips for $27 million (apparently related to the phony transactions), and Mr. Phillips went to the FBI and told them of the scheme. (Mr. Phillips was not indicted.) It's not a good idea when you commit tax fraud to get a co-conspirator angry enough to go to the FBI.

The DOJ, in a press release announcing Haas' indictment, claimed that the tax fraud was upwards of $20 million. Now, with a $5 million fine added in, penalties, and interest, the total judgment is somewhere around $70 million. And Mr. Haas will be receiving two years at ClubFed.

If you find yourself losing a court case, I strongly recommend that you do not follow Mr. Haas' path, and decide that committing tax fraud is a way of getting back at the judge. Kenneth Barish, an attorney for Mr. Haas, in describing the plea deal, noted, "[u]nder the circumstances, it was a good result." When paying $70 million and getting two years at ClubFed is a good result, you wonder what a bad result would be.

As for Gene Haas, he was formally sentenced in November to two years at ClubFed, payment of the taxes, penalties, and interest (totaling about $70 million), and a fine of $5 million. Added to the $30 million or so he paid for the patent infringement case, that's a whopping $105 million plus two years at ClubFed. Yes, Mr. Haas threw away two years of his life and $75 million.

That's a wrap for 2007. While I'd love to not have anyone commit such a bozo tax crime as Mr. Haas did, I fully expect to see at least one similar story in the coming year. I have complete confidence in Americans to commit bozo tax crimes.