Archive for 'Taxes'

Jul 21

As a Blade fan, I am sorry to see that Wesley Snipes lost his appeal of a three-year prison sentence last week. Snipes had not filed tax returns for 1999, 2000 and 2001. This was not insignificant, as the government had proved in court that Snipes had earned more than $14,000,000 over that period.

In February, 2008 Snipes was convicted of three misdemeanor counts of willful failure to file tax returns.

Snipes had fallen under the sway of tax huckster Eddie Ray Kahn, whose organization, American Rights Litigators, helped clients with “resisting” the Internal Revenue Service.  Snipes accountant Douglas Rosile was an employee of this outfit. 

Snipes apparently drank deep from this Kool-Aid, and he argued that he did not owe tax because:

  •  he was a “non-resident alien to the United States”
  •  earned income must come from “sources wholly outside the United States”
  •  “a taxpayer is defined by law as one who operates a distilled spirit plant”
  • the Internal Revenue Code’s taxing authority “is limited to the District of Columbia and insular possessions of the United States, exclusive of the 50 States of the Union.”
  • he was a “fiduciary of God, who is a “nontaxpayer. ” He therefore was a “foreign diplomat” who was not obliged to pay taxes.

When Snipes consulted his long-time attorneys about his tax resistance, they advised that his position was contrary to the law and that he was required to file tax returns. Snipes refused to file his tax returns. The firm fired him.

One would think that having your tax lawyers fire you would be a clue.

If he felt so strongly, I cannot wonder why he did not expatriate from the U.S. He would have had company.  Fox News has reported that over 500 people renounced U.S. citizenship in the fourth quarter of 2009. That is a larger number than all of 2007 and more than twice the number in 2008.

Folks, you may hate the tax system with all your might.  However, the system is grounded in the law – and the Constitution. There is no win at the top of this hill.

Jul 20

Good news, of a sort.

This past Tuesday, July 13, Senator Baucus, the chairman of the Senate Finance Committee, said that he is looking at ways to keep dividend income from returning to the ordinary income tax rate in 2011.

You may remember that the top marginal tax rate on dividend income will rise from 15% to 39.6% on January 1, 2011.

You may also remember that dividend income will have an additional surtax of 2.8% beginning in 2013.

The senator acknowledged that there is some interest in keeping the dividend rate the same as the capital gain rate, but he did not reassure that the committee could do so. He did say the “we can’t let dividends go to ordinary rates.”

The senator and I agree.

Jul 19

I have been holding on to a Morgan silver dollar for many years now. I think of it because an acquaintance of mine is a numismatist, and he asks me about the coin occasionally. I have promised to find where I hid it and show the coin to him.

… so I was recently skimming over a website for coin collectors and found the following item:

Effective January 1, 2012 coin shops and collectors will have to issue a 1099 for buys and sells over $600. Think about this. I can see – although it strikes me as ridiculous – someone issuing me a 1099 if I sold my Morgan silver dollar. But to issue me a 1099 if I bought one?

The trade group – The Industry Council for Tangible Assets – is seeking modification of this provision.

Jul 16

No surprise: another lobby is looking for a tax break.

Here is the story. Two days ago the U.S. Chamber of Commerce reported that Treasury may be getting ready to grant plaintiff’s attorneys a long-sought tax break. The trial bar was having its annual meeting in Vancouver (heh!) when John Bowman, the head of federal relations, said he was expecting a Treasury ruling imminently.

The issue is simple. Trial lawyers accept cases on a contingency basis. The attorneys have to pay certain expenses relating to the suit – witness fees, filing fees, etc. These expenses add up. These expenses are not deductible until the suit is settled. This is pursuant to a case from 1995 called Boccardo. The trial lawyers of course want an immediate write-off.

In April Senators Baucus (D, MT) and Durbin (D, IL) sent a letter to the assistant secretary for tax policy. They stated they were seeking “clarity.” They were following in the footsteps of Sen. Arlen Specter (D, PA), who tried to place this tax provision in 2009.

Well, if Baucus and Durbin obtain their Buddha-level “clarity,” this change is projected to cost the Treasury approximately $1.6 billion over 10 years.

Jul 14

LeBron James signed a 6 year deal worth $110 million with the Miami Heat. His salary for 2010/2011 works out to $14.5 million, and we haven’t discussed his endorsements.

Do you wonder what the tax effect of moving to Florida will be?

We can do some rough calculations. An NBA season is 82 games; one-half would be at home. For those games, LeBron will pay no state or local tax, as Florida does not have an income tax and Miami does not have a local tax.

LeBron will travel for the other 42 games. As a professional athlete, LeBron will likely pay state tax on those away games, as well as local tax.  Of the 24 states with professional sports teams, 20 impose taxes on nonresident athletes.  The remaining four – Florida, Tennessee, Texas and Washington D.C. – do not. And don’t forget the cities. Cleveland has a local tax, as does Philadelphia and Detroit, for example.

Let’s do the state taxes first. Using only the home games, LeBron will save 41 times $176,000 times 5.925% = $427,000. Let’s assume that the state taxes on the 41 away games “wash out” with what he would have paid anyway. This is not accurate as it does not consider states with lower tax rates than Ohio – Illinois comes to mind – but it is close enough for our discussion.

Next let’s do the Cleveland tax. Again, using only home games the amount is 41 times $176,000 times 2% = $144,000.

Without trying we have found $571,000 in tax savings on LeBron’s base salary for the 2010/2011 season. Or almost $14,000 per home game. Consider that approximately $330,000 of income will put you in the top one percent of taxpayers. LeBron’s tax savings – without really trying – easily exceed that amount.

Jul 12

The IRS has sent out questionnaires to approximately 1,200 employers on their 401(k) plans. The questionnaire has approximately 70 questions. The IRS is reviewing compliance issues (meaning updated documents) and operational issues (meaning what the plan is actually doing).

If you receive one please send it to your third party administrator or CPA. The IRS has indicated that failure to respond may trigger a plan audit.

Jul 08

The IRS Taxpayer Advocate has issued her Report to Congress.

It contains – and not surprisingly – a warning about a tax provision in the health care law. Beginning in 2012, self-employed, businesses, charities and government agencies are to issue 1099s to every vendor from whom they purchase more than $600 during the year.

Existing law requires 1099s when noncorporate taxpayers are paid more than $600 for the provision of services. Many tax professionals, including me, consider that threshold unrealistically low, but the new law expands this to require 1099s for the purchase of goods and supplies. Beginning in 2012, Kruse & Crawford, for example, will have to issue a 1099 to Staples for the purchase of office supplies. Does this make sense? Worse yet, someone is going to have to hire Kruse & Crawford to prepare 1099s for their purchases from Staples. What a waste of our time and their money.

The IRS Taxpayer Advocate Nina Olson said this law could force small businesses and charities to buy new software and pay higher accounting fees. She goes on to say “”I’m not sure that the information that we get from this will be so valuable that the burden it puts on taxpayers is justified.”

“We are concerned that as Congress is directing the IRS to administer more social benefit programs … the IRS in relative terms is becoming less of a service organization and more of an enforcement agency,” she warns.

You think?

As for me, I believe the new Congress will repeal this bone-head idea before it goes into effect in 2012.

Jul 01

I am pleased to see that Congress has extended the time for home purchasers qualifying for a tax credit to close on their homes.

You may recall that a first-time buyer could receive (up to) a $8,000 credit and a long-time homeowner could receive (up to) $6,500. You had to have a contract in place by April 30 and have closed by June 30.

Today is July 1st.

The National Association of Realtors has estimated that approximately 180,000 home purchasers are still waiting to close. For our nearby states, the NAR estimates the following pending sales:

Indiana                                 3,560

Kentucky                             2,540

Michigan                              6,470

Ohio                                      8,510

Pennsylvania                     5,830

Tennessee                          3,910

The new law extends the closing date to September 30. There will be no new qualifying sales, as those froze on April 30.

Jun 29

Sometimes the IRS doesn’t believe that your “side gig” is an actual business activity. The common denominator is that the activity generates losses. The taxpayer, of course, has other activities (maybe a W-2, for example) that can offset those losses. Taxes go down, of course, but that was never the intent (wink, wink).

We are talking about hobby losses. The IRS says you can’t deduct losses from your hobby.

Let’s talk about Steve Lowe. Steve’s wife – Janice Lowe – had a sweet job as a controller for a steel company. She had been there for decades. For 2005 and 2006 she earned approximately $177,000 and $184,000 respectively. She also had a little side income from the board meetings.

Steve stayed home. Steve fished.  In 1999 Steve won a fishing tournament; the prize was $6,000. Enthused, Steve now went looking for tournaments. In 2005 he entered 26 tournaments, and in 2006 he entered 15. Steve hauled in approximately $15,000 over two years.

 Except that his expenses were almost $100,000.

The Tax Court was a little skeptical. Steve for example would enter his wife as a tournament partner, even though she didn’t fish and wasn’t there. Think about this for a moment. Steve is out there fishing against teams. He is fishing by himself. He would have to catch twice as many fish as the next best angler to win the tourney. The Court felt that Steve’s business strategy was not “fully consistent” with making a profit.

You think?

Steve did do some things right. The Court acknowledged his knowledge and expertise. It recognized that Steve consulted professional fishermen seeking to improve his profitability.

But Steve didn’t show a profit. According to the Court, Steve probably couldn’t show a profit, at least if he kept doing what he had done before.

Mr. Lowe lost in Court. He had to pay back taxes and interest. The Tax Court did waive the penalties, though. That was something.

Jun 23

There was a recent tax case that made me smirk. It has to do with TurboTax.

Let’s set this up. A couple of months ago Secretary of Treasury Geithner was speaking about tax compliance. Here is Geithner:

Today we are taking another important step toward those goals by ending indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by.

You may remember that Geithner had not paid his taxes from 2001 and 2002 until he was nominated to be secretary of the Treasury. He went before Congress and was grilled by Senator Bunning. The issue was relatively simple: Geithner had worked at the IMF. The IMF does not withhold social security taxes. As an American taxpayer, Geithner was supposed to pay social security tax on his IMF earnings when he filed his tax return. He did not. His excuse – now famous – is that TurboTax made him do it.

The Tax Court has decided a case where the taxpayer raised the Geithner defense. The case is Lam v Commissioner. The Lams prepared their tax returns for 2004 and 2005 using TurboTax. In the course of preparing, they entered their rental properties and capital losses on the wrong forms, leading to deductions to which they were not entitled. The IRS assessed penalties. Mrs. Lam protested, arguing that she had used TurboTax for years. The error was innocent, she argued, and – by the way – what is the difference between her and Geithner?

Here is the Tax Court:

[The IRS] claims that petitioners were negligent in the preparation of their 2004 and 2005 federal income tax returns. . . . At trial respondent argued that petitioners did not seek the help of a tax professional, consult the IRS, visit the IRS’ Web site, or otherwise read any instructions for filing a Schedule C and thus petitioners did not behave reasonably in filing their 2004 and 2005 tax returns.

We do not accept petitioners’ misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties on the basis of the facts presented. …  At trial Ms. Lam did not attempt to show a reasonable cause for petitioners’ underpayment of taxes. Instead, she analogized her situation to that of the Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia article, Ms. Lam essentially argues that, like Secretary Geithner, she used TurboTax, resulting in mistakes on her taxes. In short, it was not a flaw in the TurboTax software which caused petitioners’ tax deficiencies. “Tax preparation software is only as good as the information one inputs into it.” [Bunney v. Commissioner, 114 T.C. 259, 267 (2000).] Because petitioners have not “shown that any of the conceded issues were anything but the result of [their] own negligence or disregard of regulations”, they are liable for the § 6662(a) penalties.

I can see the IRS’ point. I can also see Mrs. Lam’s.

What I don’t see is the difference between the Lams and Geithner.