Reporting Gambling Winnings

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Joe goes to Las Vegas for the weekend with $1,000 to spend.  On Saturday he wins $9,000 playing blackjack.  Then on Sunday he loses $8,950 playing blackjack.  He comes home with  $1,050.  Joe knows that he must report his gambling winnings because the tax code defines gross income as “all income from whatever source derived.”  Assuming this was the only time he gambled all year, he can report $50 in gambling winnings as income on his tax return, right?

Wrong.  Taxpayers must include the full amount of gambling winnings in gross income.  They may not reduce gambling winnings by gambling losses with only the net difference included, otherwise it ceases to be gross income.  Instead, taxpayers can deduct gambling losses (up to the amount of gambling winnings) as an itemized deduction [see Internal Revenue Code section 165(d)].

So Joe needs to report his $9,000 in winnings and then claim his $8,950 in losses as an itemized deduction.

Deceptive Tax Lien Mailers

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If you owe enough in back taxes, the IRS will file a lien against your property which secures an interest in that property. The IRS “Notice of Federal Tax Lien” would inform you of the recording of the lien, which becomes public record. If you have received this notice, then chances are you have also received a stack of mail from various tax resolution firms wanting your business.

These “FTL mailers” are often given the appearance of an official IRS notice, complete with an official-looking seal, fabricated notice numbers, and meaningless codes.  Some letters contain tables and formatting that is also meant to replicate the style of IRS correspondences.  Most of these mailers, if read carefully and completely, do divulge the true identity of the sender. However, the firm name is usually somewhere near the bottom of the page, in a small font, and missing any contact information other than a toll-free phone number.

If you have received any mailers that fit this description, please shoot me an email (jwetenkamp@mwattorneys.com).  Also, I would love it if you could send copies to me; I’m sort of collecting them:)

IRS’ Tips are Self-Serving this Time

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Installment #14 in the IRS’ Summertime Tax Tips series is for people who owe money to the IRS.

Here is what the IRS recommends:

1. Get a loan and/or pay what is owed with a credit card. Fair enough. If the interest rate on the loan or the card is better than what will accrue in interest and penalties, sometimes it is best to just pay it off.

2. Request additional time to pay. Ok, but the most you will get is probably 90 days.

3. Pay it back in installments, pay it back through Electronic Funds Transfer, or pay it back online. Great tips IF you can afford to pay, but a lot of people owe the IRS because they can’t afford to pay.

4. Set up an installment agreement by mail (balances under $25k), or complete a Form 433F (balances over $25k).

5. Save money on the installment agreement processing fee allowing the IRS to automatically deduct payments from your bank account.

6. Change your withholdings so you don’t owe again.

Are you seeing a theme here? Almost all of these “tips” involve paying the IRS back in full, in one form or another. What is lacking from this set of tips is any guidance for taxpayers who really can’t pay what they owe. But I also understand that the IRS doesn’t want to advertise the other options; that would not be in their best interest.

Tax Crimes

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Ever wonder what it would take to be convicted of a tax crime? It’s probably less than what you would think. Hopefully you continue reading this post to satisfy your curiosity and not because you have any real need to know. Obtaining tax relief early in the game will usually help you avoid criminal investigations.

So for inquiring minds, here are some of the more common tax violations:

1. Evasion of Assessment

2. Evasion of Payment

3. Failure to Collect or Pay over Tax

4. Failure to File

5. Fraud & False Statements

All of these offenses require wilfulness, or criminal intent. Take “Failure to File,” for example. You may be guilty under Internal Revenue Code section 7203 for failure to file a return if (1) you are required to file a return, and (2) you willfully fail to file the return when it is required to be filed. Simple as that. If convicted, the penalty can be as high as $25,000, or imprisonment for up to one year, or both.

The “Evasion of Assessment” and “Evasion of Payment” crimes may be applicable even if the tax assessment or payment was not ultimately evaded. For example, you may be found guilty under Internal Revenue Code section 7201 for attempting to evade or defeat a tax if (1) a tax is due and owing, and (2) you willfully attempt to evade or defeat a tax or the payment of a tax. If convicted, the penalty can be as high as $100,000, or imprisonment for up to five years, or both. See the IRS Tax Crimes Handbook for more information.

The silver lining here is that wilfulness is usually a subjective standard in the tax code, meaning that a defendant’s good faith belief that he is not violating the tax laws, no matter how objectively unreasonable that belief may be, is a defense in a tax prosecution.

Outsourcing Payroll Duties: Employers Beware

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Many employers hire third-parties to handle payroll and keep track of related tax filing obligations. However, whether or not the payroll service provider is liable for failure to file and/or pay the employment taxes, depends on the nature of the relationship. Most payroll arrangements fall under one of three categories:

1. Standard Payroll Service Provider (PSP)

2. Form 8655 Reporting Agent (RA)

3. Form 2678 Agent

Neither the PSP nor the RA are liable for ensuring that tax returns are filed timely and deposits and payments are made timely. Even though they may be responsible to do so under their agreement with the employer, the employer retains sole responsibility from the IRS’ perspective. But the 2678 Agent is a different creature. It files and pays the taxes of the employer using its own EIN and it shares joint and several liability with its clients (the employers) should penalties be assessed for failure to file or pay. See the IRS’ Third Party Arrangement Chart for a more detailed breakdown of the differences among these three relationship options.

Job Search Deductions

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In the latest issue of its Summertime Tax Tips series, the IRS addresses deductions that may be claimed by job-seekers that could supply some tax relief come April:

1. The deduction is allowed only if you are searching for work within the same field in which you currently work.

2. Money spent on preparing and mailing resumes is deductible.

3. Employment agency fees are also deductible.

4. Money spent traveling in search of employment within the same occupation is deductible as long as the trip is undertaken primarily for the job search.

5. These types of job search deductions are not allowed if there was a substantial break between the end of the last job and the beginning of your search.

6. These types of deductions are not allowed for first time job searches (i.e., only for reemployment purposes).

7. You can claim job search expenses that amounts to more than 2% of your adjusted gross income.

IRS Warning to Taxpayers Nationwide

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The latest in the Internal Revenue Service’s “Summer Tax Tips” series is a firm warning about some of the most prevalent and dangerous tax scams. The IRS identifies 5 scams that pop up any time of the year:

1. Hiding Money in Offshore Accounts
2. Phishing / Identity Theft
3. Return Preparer Fraud
4. Filing Fraudulent Returns or Forms
5. Frivilous Tax Arguments

Some of these schemes are the product of fraud or deceipt on the part of a third party where the victim is the taxpayer. Numbers 2, 3 and 5 fall into this category. Others are the product of deceiptful activities undertaken by the taxpayer where the victim is the government. Numbers 1 and 4 fall into this category. And some of these probably fall into a third category whereby the hustle involves the taxpayer and the third party working together to deceive the government. Numbers 1, 4, and 5 fall into this category. However you want to categorize them, they are activities that you want to avoid. The IRS has taken great care to provide information to the public on how to recognize these activities, how to avoid them when they are encountered, and also what to do if you find yourself a victim.

Bank Levy: A Serious IRS Collection Tool

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The IRS has different collection tools at their disposal to ensure that a tax debt is paid. One such tool is a bank levy. The IRS has the ability to issue a bank levy on an account that bears the name of a person who owes the IRS a tax debt. When the IRS decides to take enforced collection action via a bank levy, a notice of levy is sent to the taxpayer’s bank and it attaches to all accounts in the name of the taxpayer whether a sole or joint account. The bank is then legally obligated to honor the levy. Once received, the levy freezes the funds on deposit in the account. The bank will not allow anyone access to the frozen funds for 21 days from the date of receipt of the levy unless released. This 21 day holding period allows time to resolve any issues about account funds ownership and collectability. After the 21 days have elapsed, the bank will send the money plus interest, if it applies, to the IRS if the levy has not been successfully released. Therefore, if you do not want the IRS to take the money in your bank account, you will need to seek a tax relief attorney before the 21st day since your bank received your bank levy.

Military: Tips, Benefits, and Incentives

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Its always preferrable to obtain tax relief on the front end rather than having to scramble for it after the IRS comes knocking. Today the IRS released another installment in its Summertime Tax Tips series, this time listing some special tax breaks for military personnel that can help them keep their tax bill low. Members of the military enjoy special benefits such as relaxed filing rules and deadlines, exempted combat pay, and deductions for moving and travel expenses. See the full article here.

After looking at this list, you may find yourself wondering what other classes of individuals qualify for special tax relief or benefits. One such group is the elderly. Another is the disabled. There are individual tax guides for each of these groups in case you want to read up:

  • Military: Pub 3
  • Seniors: Pub 554
  • Disabled: Pub 907

The government gives certain tax breaks to the elderly, and the disabled because we believe it is important to show compassion for these classes of individuals. As for the military, we are proud of what they are doing for our country and we want them to be able to focus more on the task at hand to increase the likelihood of success. Perhaps the military tax benefits are more akin to a different class of incentives that are offered to influence certain behaviors. Some of the behaviors that the government seeks to influence through tax incentives are energy efficiency, health, purchasing, education, and adoption. Maybe the tax benefits available to the military also work as an incentive for the youth of our country to join the armed forces. Of course whether or not tax incentives actually affect behavior is debatable.

Extension on Heavy Highway Use Tax

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Sometimes tax relief comes by way of an unexpected extension.

The heavy highway use tax applies to trucks, truck tractors and buses with a gross taxable weight of 55,000 pounds or more, and is filed using Form 2290. The tax is based on the weight of the vehicle and can be as much as $550. The IRS transmits information from the Form 2290 to the individual state Departments of Motor Vehicles and states are required to verify payment of the highway use tax prior to registering these types of vehicles.

Normally Form 2290 must be filed by August 31st, but this year the deadline has been extended to November 30th. The IRS recently advised the public that returns should not be filed and the tax should not be paid prior to November 1, 2011. The highway use tax is due to expire on September 30, 2011, and the IRS wants to try to avoid any confusion that might be caused if Congress decides to modify or reinstate the tax after that date.

Penalties and interest may be charged for failure to file/pay this tax (or filing/paying late) just like any other tax. Furthermore, if you are a trucker and you also owe personal 1040 taxes, the IRS will normally require that you get current on filing & paying your 2290 heavy highway tax form before they will agree to a resolution of your 1040 taxes.