Cook County Politician on Trial for Tax Evasion

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I don’t know anything about William Beavers, the Cook County commissioner, but at age 78 shouldn’t he be living on a golf course somewhere in Arizona?

Instead Beavers is being tried for tax evasion.  Prosecutors allege that between the years 2006 – 2008 he took well over $200,000 from his campaign coffers and gambled it away at his favorite Indiana casino.  Beavers is not on trial for using campaign money for personal expenses, which is illegal in and of itself.  Instead he is on trial for failing to report the money as income.  Remember, to avoid IRS tax problems, all income must be reported, even illegal source income.  I suppose the misappropriation issue is a separate case.

The defendant has pleaded not guilty.  He previously announced that he would be testifying in his own defense once the prosecution had rested, but it looks like he will not take the stand afterall.  Beavers’ tax attorneys are trying to make the case that the money taken from his campaign was actually a series of loans that Beavers intended to pay back.  But so far there is no documentary evidence to substantiate this claim.

Nick Diaz' Tax Confession

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MMA fighter Nick Diaz needs to just keep his mouth shut on so many different levels.

Most of the time it is his barely inteligible taunting and trash-talking of his opponents (which he hasn’t always been able to back up in the octagon) that tarnishes his reputation.  But his most recent “foot-in-mouth” incident has to do with his taxes of all things.  In the press conference following his loss to UFC welterweight champion, Georges St-Pierre, on Saturday, Diaz said “I’ve never paid taxes in my life and I’ll probably go to jail.”

Diaz said that he didn’t want to make excuses, but I think that’s exactly what he’s doing bringing up his tax problems in such a setting.  It was completely out of context.  The message he is trying to send is that his personal life is such a mess that it’s impacting his performance during fights.  His manager, Cesar Gracie, said that Diaz misspoke and that he’s paid over $100,000 in taxes over the past two years.  But I’m not sure which version of reality is more disturbing, that he didn’t pay and his manager is trying to cover for him, or that he did pay but has such a loose grip on his personal obligations that he didn’t know about it or didn’t remember paying it.

Tax attorney and Forbes contributor, Robert Wood, pointed out that there are a few different levels of culpability when it comes to tax crimes, and at this point we aren’t sure which (if any) describes the situation of Nick Diaz.  Here is a very basic outline from most egregious to least egregious:

  1. Filing a false tax return
  2. Failing to file a tax return
  3. Filing an accurate return, but failing to pay the tax due

I’m less sympathetic when it comes to celebrity tax problems (and the IRS feels the same)because it’s usually a “can pay, but won’t” scenario as opposed to the ordinary Joe who simply can’t pay.

Nobody should be surprized if it turns out that Diaz hasn’t filed.  If he can’t take personal responsibility for getting himself to important events on time (or at all) then he certainly isn’t responsible enough to manage his finances.  Diaz desperately needs to hire a tax accountant, and possibly a tax attorney.

Refund News: Some Good, Some Bad

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The Good

The IRS is sitting on $917 million in refunds for people who haven’t yet filed their 2009 tax return.  They made the announcement today via IRS Newswire.  See IRS Newswire Issue Number IR-2013-29.  If you’re wondering why they waited until 3 years later to get the word out, well it is with good reason.  As you know, if you are due a refund, the only way to claim it is to file a return; the IRS won’t just write you a check on its own initiative.  But even if you are due a refund, you can only delay so long before the money becomes property of the US Treasury.  By law, taxpayers have 3 years from the date that the return is due to file and claim a refund.  2009 taxes would have been due on April 15, 2010, so the three year mark is coming up in about 30 days.  Over 984,000 people didn’t file their 2009 return, so many of the refunds are fairly small.  But the IRS estimates that over half of the unclaimed refunds are over $500.  Therefore, it is well worth the time and expense to file it, particularly if you can claim the Earned Income Tax Credit (EITC) for that year.

The Bad

The IRS swore that delaying the start of tax season would not result in delayed refunds, but this may have been a promise that was impossible to keep.  On March 12, the IRS released the following statement:

The IRS is aware of a problem with a limited number of software company products that affected some taxpayers filing Form 8863, Education Credits, between Feb. 14 and Feb. 22. The problem resulted in those tax returns requiring additional review by the IRS.

What this means for taxpayers who expect a refund is they may have to wait 4-6 weeks longer than previously expected as the IRS looks more closely at their Form 8863.  90% of those who claimed the education credits will get their refund right on time.  The software glitch was with H&R Block, so it is only the 8863s filed by that company that are subject to further IRS review.  I guess the silver lining here is with respect to balance due returns. Tax assessments will presumably be delayed as well, which could give people some extra time to figure out how to resolve their tax debt.

Tax Tips in an Improving Housing Market

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Stimulus Considerations

Over the past several years there have been various homebuyer tax credits and programs offered to stimulate the housing market. Homebuyer tax credits and programs, while they are great when you can claim them, can also be a tax trap. Therefore, it is important that you know the taxation terms of the credit or program you qualify for, or used to buy your home. This means read (and remember) the fine print as these terms can impact your tax exposure and should be considered when tax planning and considering the purchase or sale of a home. Depending on your tax credit taken or qualified program, you may take a tax hit depending on when you decide to sell.

Profit Considerations

Regardless of whether you’re a buyer or seller, profit on the property is undoubtedly an influencing consideration when deciding to buy or sell your home. The primary tax concern is whether you will pay income taxes on the money you receive from the sale of your home. Your tax exposure depends on how you used the property, your actual selling price, and your cost basis (generally, the cost of the home).

Now that the housing market is showing some signs of improvement, if you’re selling your home you may just be lucky enough to actually profit from the sale of your primary residence. If you do profit from the sale of your home, and as long as it’s your primary residence, you may qualify to exclude from taxation up to $250,000 or $500,000 of the profit received, depending on your filing status. To qualify for the exclusion, you must meet both the ownership test and the use test.

Subject to some exceptions, generally you are eligible for the tax exclusion if, prior to the sale of your home, you have both owned your home and used it as your primary residence for a combined total of two years in the previous five years. You are not eligible for the exclusion if you excluded the profit from the sale of another home during the two year period prior to the sale of your home.

Loss Considerations

If you’re not yet optimistic about a housing market turnaround, you may need to act quickly if you want to adjust your payment terms or get out of your home that’s underwater. While a loss on your home is not deductible, cancellation of a debt generally is taxable and there are tax consequences you really need to consider now as these transactions take time to complete.

The Mortgage Debt Relief Act of 2007 was recently extended through the end of 2013 by the American Taxpayer Relief Act of 2012. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a short sale, qualifies as excludable income. If you wait until 2014 to get out of your home or modify the payment terms, you may receive an unexpected tax hit by way of additional taxable income.

Caution Upon Contact

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I have written before about the Potentially Dangerous Taxpayer (PDT) designation that can be given to those who are stupid enough to harm or threaten IRS employees.  A recent audit done by the Treasury Inspector General for Tax Administration (TIGTA) finds that IRS employees have been well trained in the criteria and procedures having to do with PDT, but are not as familiar with the less grievous CAU (Caution Upon Contact) designation.

Your tax account will be coded PDT if you harm, threaten, or intimidate IRS employees with specific acts, or if you affiliate with groups that advocate such actions.  You can also be labeled PDT if you have demonstrated a clear propensity towards acts of violence in the previous 5 years.  The CAU designation is just one step below this and includes any “threat of physical harm that is less severe or immediate than necessary to satisfy PDT criteria” — a catch all for taxpayers who are really, really annoying, but not obviously dangerous.

These designations are important because they dictate how IRS personnel are to approach (or not approach) certain taxpayers, and they dictate what kinds of “back up” they are entitled to during field visits.  According to the TIGTA report, failure to report (and accurately designate) dangerous or threatening taxpayers creates an undue risk for other IRS employees who may have future interactions with them.

Can PDT or CAU taxpayers be forgiven of their bad behavior?  Yes, after 5 years.  But the 5-year period begins afresh if any of the following occur:

  • additional PDT/CAU referral
  • IRS employee physically assaulted
  • taxpayer arrested for threats or actual violence towards IRS employee
  • “current IRS activity” on their account

This final criterion is interesting.  The report indicates that examples of “current IRS activity” are an audit or a balance due.  In other words, somebody who threatens an IRS employee and then doesn’t pay off his tax debt within 5 years must endure the ugly label of PDT/CAU for a minimum of 10 years.  Remember, you don’t have to like the person who issued a tax levy against you, just be civil!

The IRS and Public Perception

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In the United States, payment of taxes is based on “voluntary compliance.”  We figure out what we owe on our own (or we pay somebody else to do it), and then we pay what we owe based on the honor system that we all learned in Kindergarden.  Of course, when you pay less than your legal share, the IRS will bare its teeth and audit you to make sure you don’t get away without paying your tax debt.  The IRS can impose severe penalties and criminal sanctions as well.

The IRS doesn’t have the resources to find and punish each and every tax cheat, so they must do what they can to control public perception.  They do this by publicizing and leveraging stories, events, and statistics that motivate taxpayers to play by the rules.  The IRS is very strategic about the timing of these stories.  Unless you live under a rock, you have probably noticed that they can be found at every turn right around tax time.

Sometimes the message is “Look, U.S. taxpayers are honest with their taxes, and you should be too” (see IRS Tax Cheat Poll).  But, by far the more common message is “Look what this guy did, and how much trouble he got into; you should avoid this.”  Sometimes the intended audience is the taxpayer and sometimes the intended audience is the tax professional.

Here is a current example of the latter.  The IRS recently went public with the disbarment of an Enrolled Agent named Lorna Walker.  An Enrolled Agent is neither an accountant nor a tax attorney, but may represent taxpayers before the IRS.  Their conduct is governed by Circular 230.  Walker will be taking a mandatory 5-year vacation from her EA work because she stole money from her client that was intended for the IRS.  She also prepared tax returns with phony Schedule C deductions.

And finally, if you still don’t think the IRS is concerned about PR and public perception, try explaining why they would consider spending $15 million on a PR contract.

Bartering: IRS Gets Theirs Even When Cash is not Involved

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Today the IRS reminds us that the value of goods or services received through bartering is taxable (IRS Tax Tip 2013-29).

Bartering is simply trading one product or service for another product or service without an exchange of currency.  I was introduced to bartering in about 3rd grade where the hottest products being traded were Garbage Pail Kids cards and (this is going to make me seem really old) . . . marbles.  You know, little colorful glass spheres that you shoot with your thumb.  Ok, nevermind.  The point is, most people move on from bartering when they grow up and get a job that pays in currency for the work they perform.  But not everyone.

Some people barter informally with people they know, such as the plumber who fixes a leaky pipe for his dentist friend in exchange for dental work (this is the IRS Tax Tip example).  Others barter through organized “exchanges” like the one I found on the internet with a highly redundant name: “Barter Trade Exchange.”  Their home page explains how it works:

In times past people traded live stock, vegetables, grain etc. for  things they needed. It worked fine if you located who needed what you had and had what you needed. It was hard to find them, that’s why money was invented; Stones, Beads, Shells, Pearls, Coins, Silver, Gold and finally paper money.

In an Exchange, you deal with fellow members buying/selling goods and services using trade dollars, not cash. Offer what you have to earn trade dollars to spend. It is an easier way (not free) to acquire what you need without money.

I’m not sure how common bartering is; it is definitely not on my short list of typical tax problems.  And I’m not sure the IRS knows either because my hunch is it doesn’t get reported like it should.  That’s why the IRS came out today (a few weeks before the filing deadline) with a few important points they would like taxpayers to know about bartering.  Here they are:

  1. Barter exchanges must issue form 1099-B to their members
  2. Trade dollars (and the value of goods/services) received in barter must be reported as income
  3. Besides income taxes, there may also be self-employment, employment, or excise tax implications for those who barter
  4. Be sure you understand the specific reporting requirements that apply (for additional information, see the IRS’ Bartering Tax Center)

 

Automated OIC Appeal Review

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Did you know that if your Offer in Compromise (OIC) is rejected, there is a “self-help tool” on the IRS website that will walk you through a series of steps to help you determine if you should appeal it or not?

This is yet another example of the IRS’ attempt to automate everything they do.  I guess it does make sense to explore all available options for replacing the best and brightest who will be leaving the IRS when they retire.  And I guess it makes sense to try to find cheaper alternatives, given that the IRS is not going to get the kind of funding they need to hire live bodies.  This just seems to cross the line.

I know how complicated and frustrating the OIC process can be.  When an OIC has been rejected, what the appellant really needs is to speak with a good tax attorney.  Or, at a minimum, he needs to be able to talk with a live body at the IRS who will explain the IRS’ determination and who will really consider a taxpayer’s individual circumstances.

It does have some value, don’t get me wrong.  I have spent a little time with this tool and, from what I can tell, it is perfect for identifying errors and oversights made by offer examiners.

Just Over One Month to Go In Tax Season and You Can Finally File Your Tax Return

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Over the weekend, the Internal Revenue Service (IRS) finally completed reprogramming and testing its systems for tax-year 2012. This includes the lingering updates mandated by the American Taxpayer Relief Act (ATRA) enacted by Congress back in January. This final update finally allows all taxpayers to prepare their tax returns. The final updates apply to taxpayers claiming residential energy credits on IRS Form 5695 and taxpayers claiming various business tax credits and deductions on their federal tax returns.

The IRS began accepting tax year 2012 returns in phases as it worked over the past several months to update various forms and make adjustments to processing systems to apply the current tax laws. Finally, with just six weeks to go before this year’s April 15, 2013 deadline, all IRS tax returns can now be filed. And, if you quickly find out that you’re in tax trouble, now that you can actually file your tax return, the tax relief attorneys at Montgomery & Wetenkamp will be able to resolve your IRS tax debt problems, call us toll free at (800) 454-7043.

IRS Nails "Non-filers" Too

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Some of our tax relief clients are concerned about the criminal implications of their case.  They want to know how we plan on helping them dig their way out of their tax debt, but they also want to know if they are going to be able to avoid a criminal investigation or conviction.  Some people (for various reasons) have multiple years of unfiled tax returns, and these are the clients who typically worry the most.  The IRS calls these people “non-filers.”

Do non-filers have to be concerned about being prosecuted for tax crimes?  Yes, they do.

Most people think of tax crimes as falling into one of the following categories:

  • abusive tax schemes
  • identity theft
  • money laundering
  • tax refund fraud

These are the types of tax crimes that get the most publicity.  However, it is important to know that non-filers can go to prison too.  The threshhold for “tax evasion” is lower than you might think.  Of course the IRS does not have the resources nor the desire to prosecute every taxpayer who fails to file.  In fact, most of the time, the IRS simply resorts to the Substitute for Return program rather than involving Criminal Investigation.  But you can’t rule it out!  The rule of thumb is to file your return every year, even if you know you aren’t going to be able to pay.