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February

Beanie Baby Billionaire Seeks to Avoid Jail for Tax Evasion

JANUARY 3, 2014

BY DAVID VOREACOS

BLOOMBERG

 

H. Ty Warner, the billionaire creator of Beanie Baby plush toys, asked a judge to give him probation, not prison, for evading taxes on secret Swiss accounts that held as much as $107 million.

Warner, 69, faces 46 months to 57 months in prison under nonbinding guidelines when he’s sentenced Jan. 14 in Chicago. The maker of plush toys and hotel operator asked U.S. District Judge Charles Kocoras to impose a term of probation with community service, according to a Dec. 31 court filing.

Warner is among more than 100 people prosecuted in the past five years during a U.S. crackdown on offshore tax evasion. His lawyers argued that “dozens of individuals who engaged in the exact same conduct with respect to undisclosed overseas accounts” got probation.

“This case concerns an isolated event in Ty’s otherwise law-abiding life, during which he has paid approximately $1 billion in taxes,” according to the filing. “There is no reason to believe prison time is necessary to prevent him from engaging in tax evasion again.”

Warner owns Ty Inc., which makes Beanie Babies, and Ty Warner Hotels & Resorts, whose operations include the Four Seasons Hotel in New York. He pleaded guilty Oct. 2 to evading more than $5.5 million in taxes on assets in Swiss accounts he hid from the Internal Revenue Service.

Mitigating Factors

Under the guidelines, Kocoras can consider such factors as other sentences around the U.S., Warner’s charitable gifts and his pledge to pay penalties, back taxes and interest of more than $69 million. Warner also asked the judge to weigh the fact that he was denied entry into an IRS amnesty program that has let more than 38,000 Americans with offshore accounts avoid prosecution.

Warner’s name was on a list of account data for 285 Americans that his former bank, UBS AG, gave to the Justice Department in avoiding prosecution in February 2009. Zurich- based UBS, the biggest Swiss bank, also paid $780 million and admitted to fostering tax evasion. UBS later turned over 4,450 more names.

After Warner applied for the voluntary disclosure program in September 2009, the IRS rejected him because it wasn’t available to those already known to the agency, according to the filing. A U.S. presentence report cited by Warner’s lawyers said the IRS learned of his Swiss accounts “a few years before UBS turned over client account information” to the U.S.

‘No Different’

“Ty’s behavior was no different legally or factually from that of tens of thousands of taxpayers who were never sentenced—or even prosecuted—because they were admitted into IRS voluntary disclosure programs,” according to the filing, a sentencing memorandum.

Warner’s lawyers proposed that the judge impose “substantial community service,” including work at the Ellen H. Richards Career Academy High School and the Edward Tilden Career Community Academy High School, both in Chicago.

The Justice Department hasn’t filed its sentencing memo.

Warner’s filing describes how he became a “self-made American success story” despite growing up in an unhappy Chicago family with “little financial or emotional support.” His mother was a paranoid schizophrenic, and his father played “little or no role” in her care, according to the document.

After attending military school in Wisconsin, he worked in menial jobs and dropped out of Kalamazoo College because he couldn’t afford tuition, his lawyers wrote. He was a busboy, bellman, valet car parker, fruit market vendor and door-to-door encyclopedia salesman.

Top Seller

He then became the top seller for Dakin Toy Co., which made plush toys.

In 1985, he founded Ty Inc., designing and selling toy cats out of his condominium, according to the filing. In the early 1990s, he designed the Beanie Baby, a plush toy filled with plastic pellets. By the mid-1990s, Westmont, Illinois-based Ty Inc. was a multibillion-dollar company, his lawyers wrote.

“While he entrusted corporate matters to the executives, lawyers, and accountants he employed, Ty treated the final decision about the particular fabric or color of the company’s next Beanie Baby as a non-delegable assignment,” the filing said.

He entered the hotel and resort industry, also delegating “property management, legal, and financial affairs to others, leaving himself the time and space to focus on his passion for design,” his lawyers wrote.

Financial ‘Novice’

“For all his sophistication with respect to the design and manufacture of plush dolls, and the beauty and design of hotel properties, he remains a relative novice when it comes to financial issues,” according to the filing.

Ty Inc. created thousands of jobs, and Warner gave away $140 million in cash and toys after 1995 to organizations such as the Children’s Hunger Fund and the Princess Diana Memorial Fund, according to the filing.

In pleading guilty, Warner admitted to opening an account at UBS in 1996 and transferring $93.6 million in 2002 to Zuercher Kantonalbank, a small Swiss bank.

He filed a false tax return in 2002 that reported income of $49.1 million, while omitting his UBS income of $3.2 million. He also didn’t file a Treasury Department form called a Report of Foreign Bank and Financial Accounts, known as an FBAR. He amended his 2002 return in 2007, yet still understated his tax by $885,300.

In pleading guilty, Warner acknowledged that from 1999 through 2007, he underreported his gross income by $24.4 million.

Warner, whose tax returns contain thousands of pages, has been tax compliant since 2008, according to his lawyer. He will pay an FBAR penalty of $53.6 million and back taxes and interest of at least $16 million, according to the filing.

The case is U.S. v. Warner, 13-cr-00731, U.S. District Court, Northern District of Illinois (Chicago

 

The Three Fundamentals You Need to Succeed

JANUARY 7, 2014

BY GUY GAGE

After watching a weekend of football, it is obvious how important the fundamentals are to success. The teams that rely on the big play are inconsistent. Basic blocking and tackling aren’t that interesting, but without them, they will prevent teams from winning. The same is true with your performance as a professional accountant.

If you ignore the basics, you will find yourself losing—losing energy and losing focus. And eventually it translates into losing engagements and losing clients. In the end, you lose your professional stature and career fulfillment. And to think it all started with ignoring the fundamentals. So let’s review the three essential practices that will ensure success.

Fundamental #1: Always have your goals, targets and priorities in place before you begin. One of Stephen Covey’s seven habits of highly effective people is to begin with the end in mind. If you don’t, you’re too easily drawn off course because you don’t have a clear direction.

• What do you want to accomplish before this week concludes? 

• From what will you refuse to be distracted? 

• What do you need to complete by the end of the week so you can feel like it was a success?

Fundamental #2: Plan your work and yourself. Both of these are critical because, as a knowledge worker, you are your work. Knowing what you want to achieve but not having a plan is simply a wish or a dream. There is nothing real about it. The plan becomes the vehicle you use to get to your destination. Without it, you can only look from afar at where you want to go.

• When will you schedule your challenging, high-concentration work? 

• When will you take care of the administrative tasks that take little creativity? 

• What markers (time, day of week, percent complete) will you use to gauge your progress?

Fundamental #3: Anticipate by looking ahead. Unforeseen circumstances tend to arise in the midst of executing your plan. Name the last time you completed an engagement that went exactly as planned. I know the answer: never. It never works our perfectly. So why do you expect it? Rather, think ahead, look ahead and stay ahead. Recognize, adjust and stay in front. Otherwise, you’re left reacting from behind, which is precisely where the wheels fall off.

• What has changed from when you planned your week?

• What is moving more quickly or bogging you down that you didn’t count on?

• Who is likely to be the wildcard in executing your plan?

Returning to the fundamentals will keep you on top of your game—your “A” game.

Fundamentals will separate you from the others, make your clients love you, and bring a sense of professional fulfillment. It’s yours to pursue, achieve and enjoy. Make it happen.

Guy Gage is the owner of PartnersCoach, a coaching and consulting firm to professionals in private practice. He recently launched Partner-Pipeline, a new program for professional development that is designed to cultivate and develop the characteristics of high contributing partners.

 

IRS Crackdown on Automatic Gratuities Takes Effect January 1

December 30, 2013

By

Joseph Henchman

“Automatic gratuities” added onto the restaurant bills of large parties will be treated as wages and not tips starting January 1, 2014, as a suspended IRS ruling finally takes effect. Many restaurants add these charges to groups of 5 or 6 or 8 or more to prevent their servers from being undertipped when handling large parties.

Under the IRS ruling, Rev. Ruling 2012-18, a sharper distinction is drawn between tips and service charges. Both are taxable but tips are reported and cashed out that day. Under the new rules, to be a tip:

(1) the payment must be made free from compulsion;

(2) the customer must have the unrestricted right to determine the amount;

(3) the payment should not be the subject of negotiation or dictated by employer policy; and

(4) generally, the customer has the right to determine who receives the payment.

Automatic gratuities don’t meet these criteria, so they would be classified as service charges. Employers would have to cycle these charges through their payroll system to distribute to servers, delaying payment by up to two weeks, and factor them into hourly wage rates.

The likely result is that restaurants will discontinue automatic gratuities for large parties, to avoid additional compliance costs and to allow employees to take their tips home on the day they get them. Getting servers to work large parties will probably be harder.

The IRS views this as the latest step in their effort to crack down on underreported tip income although previous enforcement efforts (employee and employer reporting requirements and high-profile investigations) and the shift from cash to credit for most payments has ended this evasion for the most part. To the IRS, it’s just a clarification “in the best interest of tax administration.” But one that will make life a little bit harder for restaurants and their waitstaff.

 

Criminal Identity Theft Investigations Increase 66% at IRS

WASHINGTON, D.C. (JANUARY 9, 2014)

BY RICHARD RUBIN

BLOOMBERG

 

(Bloomberg) The Internal Revenue Service started 1,492 criminal investigations into the use of tax returns to commit identity theft in the year that ended Sept. 30, a 66 percent increase, the agency said Tuesday.

The data release comes less than a month before the start of the tax-filing season—the time when criminals most often file fake tax returns and claim refunds before legitimate taxpayers can do so.

In a meeting with reporters Wednesday, new IRS Commissioner John Koskinen said curbing identity theft is a priority for the agency.

Rich Weber, chief of criminal investigations at the IRS, said that as recently as two years ago, investigators were devoting less than 5 percent of their resources to identity theft. That’s now about 17 to 19 percent, and about 50 percent in places such as Miami and Tampa, Florida, he said in an interview.

Criminal investigators’ other priorities include offshore tax evasion, public corruption and narcotics, which often involve money laundering.

“We still continue to file significant cases, but obviously if we’re spending more time on ID theft we’re not spending as much time on some of those areas,” Weber said.

The IRS said the number of recommendations for prosecution and sentencings increased in 2013. Investigations totaled 276 in fiscal 2011 and 898 in fiscal 2012.

Among those prosecuted was a Florida woman, Rashia Wilson, who was ordered to forfeit $2.2 million, according to the IRS.

Some lawmakers and the national taxpayer advocates have criticized the IRS’s approach to handling identity theft. They say victims often don’t get enough assistance and that it can take too long to restore their accounts.

 

 

 

Why a Bag Tax Works Better Than a Reusable Bag Bonus

Government policies, no matter how well-intentioned, often fail to achieve their goals. Practitioners of the rapidly expanding field of behavioral economics, which seeks to better understand why people do what they do, are laboring to change that.

Now comes a newly minted Princeton Ph.D., Tatiana Homonoff, with some evidence on what works – and what doesn’t – in her three-part, 141-page dissertation:

The Case of the Bag Tax

Observing 16,251 shoppers at 16 grocery stores in Washington, D.C., neighboring Montgomery County, Md., and northern Virginia and data from grocery store scanners, she found that a 5-cent tax on disposable bags substantially decreased disposable bag use while a 5-cent bonus for using a reusable bag did not.

Before the tax, several stores offered a 5-cent bonus to shoppers who brought their own bags. In stores that offered no incentive, 84% of shoppers took at least one throwaway bag per shopping trip; in stores that offered the nickel lure, 82% did.

In contrast, some 82% of Montgomery County shoppers used at least one disposable bag per shopping trip before the bag tax was imposed; 40% did afterward. (Meanwhile, a survey by the D.C. government finds that only 16% of residents and 8% of businesses polled oppose the four-year-old bag tax law. )

Small incentives can lead to big changes in behavior if they are designed well, she concludes. Starbucks, she suggests, would have more success at reducing the use of paper cups if it abandoned its 10-cent discount for those who bring their own cup in favor of cutting the price of coffee by 10 cents and charging 10 cents extra for a paper cup.

Hidden Taxes vs. Posted Taxes

To old-school economists, a tax is a tax whether it’s built into the price of a pack of cigarettes or added at the cash register. To behavioral economists, there’s a difference.

Using cigarettes as a case study, and the fact that states vary in their use of excise (including the prices) and sales (imposed at the register) taxes, Ms. Homonoff discovered that higher- and lower-income consumers respond in different ways: “Low-income consumers reduce cigarette demand in response to both excise and sales taxes whereas higher-income consumers only reduce cigarette demand in response to excise taxes.” (The upper-income folks, it seems, look at the price on the shelf but don’t pay attention to what they pay at the register.)

One lesson she draws is that legislators who worry about the regressive nature of taxes on cigarettes (or soda) should levy them at the register because then more of the revenue will be paid by upper-income consumers.

Regulating Payday Lenders

The growth in payday lenders, which provide small-dollar loans that typically must be repaid within two weeks to a month, has drawn scrutiny from legislators and regulators because the interest charged on such loans is so high, often 400% at an annual rate.

Using government surveys of unbanked and underbanked households in four states, Ms. Homonoff finds that state restrictions on payday loans, not surprisingly, reduce their use; about 3% of residents used the loans before the restrictions and less than 1% afterward. But the decrease is almost entirely offset by an increase in the use of pawnshop and other high-interest-rate loans. (The number of pawnshops in the U.S., she notes, has increased from 5,000 in 1985 to 9,000 in 1992 to just over 12,000 today.)

“The issue of payday loans cannot be addressed in isolation without considering the availability and desirability of other forms of high interest credit,” she concludes. People who don’t have access to traditional forms of credit will find a way to borrow, even at high rates, for temporary, unexpected expenses.

Ms. Homonoff is now an assistant professor in policy analysis and management in Cornell University’s College of Human Ecology. Parts of her dissertation were co-authored with Jacob Goldin, a Ph.D. candidate at Princeton University who is also pursuing a law degree at Yale and will clerk for federal appeals court Judge Richard Posner next year.

 David Wessel is a contributing correspondent to The Wall Street Journal and director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. He can be reached at dwessel@brookings.edu 

 

 

 

The Intersection of Taxes and Economics

JANUARY 10, 2014

BY ROGER RUSSELL, SENIOR EDITOR, ACCOUNTING TODAY

There are already numerous studies attempting to peg the effect of tax rates on economic activity. There will undoubtedly be more, as politicians, economists and tax experts seek the magic formula to maximize both economic activity and government revenue.

A study just reissued by the Congressional Research Service actually suggests that taxes have little or no effect on economic growth.

“Historical data on labor participation rates and average hours worked compared to tax rates indicate little relationship with either top marginal rates or average marginal rates on labor income,” according to the report. “Relationships between tax rates and savings appear positively correlated (that is, lower savings are consistent with lower, not higher, tax rates), although this relationship may not be causal. Similarly, during historical periods, slower growth periods have generally been associated with lower, not higher, tax rates.”

The study went on to suggest that both labor supply and savings and investment are relatively insensitive to tax rates.

On the other hand, the National Center for Policy Analysis has just completed a tax reform study that projects a huge increase in benefits for everyone by reducing corporate taxes from the current 35 percent to a 9 percent flat tax on all profits. The study concludes that a 9 percent corporate flat tax would raise GDP by 6 percent; increase the capital stock by 17 percent initially and eventually by 30 percent; and increase wages by 6 percent in the short term, eventually increasing them by 9 percent.

Although the two studies used different methodologies and examined different slices of the tax system, you would still expect them to have conclusions that are in harmony with each other.

One reason the CRS study doesn’t comport with the general sense that taxes inhibit growth, according to William McBride, chief economist at the Tax Foundation, is that the CRS position is a “simplistic analysis that eyeballs tax rates and growth rates without controlling for any of the other factors that affect growth. Then it fails to reference the many studies which have done this more rigorously, 90 percent of which conclude taxes have a large negative effect on economic growth, particularly taxes on personal and corporate income,” he stated.

The NCPA study, conducted by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati and Laurence Kotlikoff, noted that there is disagreement over what the corporate tax does and who ultimately bears its burden. Contrary to the public perception that corporate owners bear the burden of the corporate tax, it posits the idea that workers, because they are immobile and rarely seek employment abroad, bear the major portion of the burden.

“On the other hand,” the study said, “capital that is invested domestically can be withdrawn and invested in other countries. When this capital flight occurs, the workers and their jobs are left behind, leading to lower labor demand and real wages for those able to retain their positions.”

The study found that eliminating the corporate income tax with no changes in the corporate tax rates of other regions can produce “rapid and dramatic increases in U.S. domestic investment, output, real wages and national saving. These economic improvements expand the economy’s tax base over time, reducing additional revenues that make up for a significant share of the loss in receipts from the corporate tax,” the study concluded.

Is the choice really between a static economy with higher taxes and little growth, or a dynamic economy with surging growth? If so, it’s easy to decide which is the more attractive option

 

 

Imelda Marcos’s Former Secretary Sentenced for Tax Evasion after Selling Monet Painting

NEW YORK (JANUARY 14, 2014)

BY MICHAEL COHN

The former secretary to Imelda Marcos, the one-time First Lady of the Philippines, has been sentenced to serve between two and six years in prison for tax evasion and ordered to pay the State of New York $3.5 million in taxes after she was accused of stealing and illegally selling a painting by the French Impressionist master Claude Monet for $28 million.

The painting actually belonged to the Philippine government, according to prosecutors. Imelda Marcos fled to the United States when her husband, longtime president Ferdinand Marcos, was deposed in 1986 amid allegations of vote rigging that led to massive protests. She famously left behind 1,060 pairs of shoes in the presidential palace. Ferdinand Marcos died in 1989, and his widow took up residence in New York.

The New York State Department of Taxation and Finance said Tuesday that Vilma Bautista, the former secretary to Imelda Marcos, was sentenced on January 13 in New York Supreme Court. A Manhattan jury had found Bautista, 75, guilty last November of first-degree criminal tax fraud, fourth-degree conspiracy, and first-degree offering a false instrument for filing.

Bautista had sold one of the paintings in Monet’s Water Lilies series, “Le Bassin aux Nympheas,” for $28 million, but the sale was not reported as income on Bautista’s 2010 personal income tax return. As a result she was ordered by the court to pay New York State $3.5 million in taxes on the sale.

Mrs. Marcos amassed a large art collection, including works that she claimed to be purchasing on behalf of the Philippine government. Many of the artworks disappeared from her townhouse on Manhattan's Upper East Side around the time that the Marcos regime was collapsing in the Philippines and the whereabouts were unknown until Bautista and two of her nephews began trying to quietly sell the paintings in 2010.

The Tax Department’s Criminal Investigations Division worked closely on the investigation and prosecution of the case with the office of Manhattan District Attorney Cyrus R. Vance, Jr.

“We commend District Attorney Vance for his successful prosecution of this extraordinary case,” said Commissioner of Taxation of Finance Thomas H. Mattox in a statement. “We will continue to work with all levels of law enforcement to bring individuals who commit tax crimes to justice.”

 

Tax Preparer Convicted of Identity Theft Charges

NEW YORK (JANUARY 14, 2014)

A New York City tax preparer has been convicted of stealing tax refunds using stolen identities and adding false dependents to his clients’ tax returns.

Mahamadou Daffe, who prepared taxes in Brooklyn and resided in Queens, was found guilty last Friday by a jury in a Manhattan federal court of conspiracy to steal government funds, theft of government funds, conspiracy to file false claims, wire fraud, and aggravated identity theft in connection with preparing and filing nearly 1,000 false tax returns that he submitted online using stolen identities. 

Daffe was also convicted of conspiracy to steal government funds, theft of government funds, and conspiracy to file false claims in connection with the use of stolen children’s identities to claim false dependents on his clients’ tax returns. 

The investigation that led to his arrest and conviction was undertaken by the Internal Revenue Service’s Criminal Investigation unit. Prosecutors estimate that Daffe attempted to steal more than $4.5 million from the government, and the government lost more than $1.5 million as a result of his crimes.

He was convicted after a one-week trial before U.S. District Judge Naomi Reice Buchwald.

 

You Can't Deduct Your Ex On Your Taxes

Some people get creative on their taxes. My advice? Don’t, but perhaps these examples will inspire you. The latest was William L. West, who claimed a theft loss deduction. The thief? His ex.

He claimed she took over his bank account and diverted money to his kids. William L. West divorced Jo Ann Morley in 2005, and quickly–but only briefly–was married to Sybilla Irwin the same year. In 2006, Mr. West called on his first ex-wife when he went into rehab for alcohol treatment.

He voluntarily signed over his accounts to his ex and told her to earmark $120,000 for their children’s education. His ex used the $120,000 to set up accounts for the kids for their education. But two years later, West claimed they were the wrong kind of accounts, tried to get the money back, and even sued her.

That’s when he got the idea to amend his 2006 tax return claiming the $120,000 that went to the kids as a theft loss. The tax code allows a deduction for theft losses, of course, but theft means a criminal taking of another’s property. The IRS said no way to this deduction, but Mr. West went to Tax Court.

The court agreed with the IRS, since plainly, West didn’t qualify. In fact, the court said it looked like his ex did exactly what West asked her to do. The court discounted Mr. West’s own recollection of the events, noting that when he asked his ex for help, he was going into rehab. Besides, West’s attempt several years later to claim a theft loss was an afterthought, said the court. See West, T.C. Memo 2014-2.

If you want a few other ideas, consider these other creative souls. Bruce hired his live-in girlfriend to manage his rental properties. Her duties included overseeing repairs and running his personal household. Although the IRS thought all the pay he gave her did not add up to a legitimate deduction, he went to Tax Court and won. The Tax Court said $2,500 of the $9,000 he paid her was deductible as a business expense. But it disallowed pay for her housekeeping chores as nondeductible personal services. See Bruce v. Commissioner.

Corey L. Wheir was a professional bodybuilder, and he went through a lot of body oil to make his muscles glisten during competitions. When he deducted the oil on his taxes, the IRS said no. The Tax Court came to the rescue. After all, this was a for-profit endeavor and the oil greased the way for more wins. See Wheir v. Commissioner.

Finally, consider that medical expenses come in all shapes and sizes, and subject to limits, many are deductible. Not cosmetic surgery, though. However, an exotic dancer whose stage name was “Chesty Love” tested this rule. Wanting bigger tips, she shelled out for breast implants to bloat her bra size to 56-FF. The IRS said it was nondeductible cosmetic surgery, but the Tax Court thought her business justification was real. The Tax Court called them depreciable assets, a kind of stage prop. See Hess v. Commissioner.

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

 

 

Bitcoin Tax Rules Needed for Clarity, Taxpayer Advocate Says

JANUARY 13, 2014

BY RICHARD RUBIN AND CARTER DOUGHERTY

BLOOMBERG

 

The Internal Revenue Service should give taxpayers clear rules on how it will handle transactions involving Bitcoin and other digital currencies, Nina Olson, the National Taxpayer Advocate, said.

Spending Bitcoins to purchase goods may trigger capital gains and losses or ordinary income and losses, which have different tax rates, Olson said in her annual report to Congress last Thursday.
“It is the government’s responsibility to inform the public about the rules they are required to follow,” she wrote. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Olson, who runs an independent office within the IRS, listed digital currency as one of the 25 most serious issues encountered by taxpayers.

Atop Olson’s list was the absence of a clear set of taxpayer rights and the decline in IRS service and enforcement stemming from budget cuts, issues on which she has repeatedly urged change.
Olson has a new audience this year in John Koskinen, who was sworn in as IRS commissioner Dec. 23.

“What taxpayers need and deserve is the transformation of the IRS from a traditional enforcement-focused tax agency to a forward-looking modern agency that embraces technology even as it recognizes the specific needs of taxpayers for personal assistance,” she wrote.

Virtual Currencies
Introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, Bitcoin is the most prominent of a group of virtual currencies—money that exists mainly as a string of code—that have no central issuing authority. “Miners” unlock new Bitcoins by using ever-faster computers to solve complex mathematical problems, and transactions are recorded anonymously in a public ledger.

Today, even with its young age and regulatory uncertainties, Bitcoin can be used to pay for T-shirts, food or an appointment with a Manhattan psychiatrist.

The IRS hasn’t offered guidance on Bitcoin, beyond saying that it is working on the issue and that it has been monitoring digital currencies and transactions since 2007.

‘Black Market’
The IRS reiterated a statement last Thursday it issued in December.

“The IRS is aware of the potential tax compliance risks posed by virtual currencies,” it said in the statement. “The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual currency transactions.”

According to Olson’s report, a big distinction for the IRS to make is whether Bitcoin is property, in which case capital gains rules would apply with a top basic rate of 20 percent. If it’s treated like a “nonfunctional currency,” ordinary income tax rates would apply with a top rate of 39.6 percent.

The IRS can’t outlaw Bitcoin, said Joshua Blank, a tax law professor at New York University. It can use past experience to require information reporting about transactions.

Tax compliance rates are highest when there is third-party reporting, particularly with wage data that employers send to the IRS. Compliance rates are lowest with no such reporting, as with self-employment income.

“The danger is the creation of an electronic black market, similar to the cash economy,” Blank said. “That’s what the IRS wants to avoid.”

 

Stop Beating On The IRS

Martin Sullivan, Contributor

Tax Analysts has been suing the IRS and pestering its leaders with pointed inquiries for four decades. Our goal has been to get more accountability and disclosure from the IRS. So I have no problem with any tough scrutiny and criticism of a powerful agency that has the potential to do much harm. Despite that it is hard for me to see how the recent escalation of attacks on the IRS will do anything to improve tax administration. On the contrary, it will only make the mess worse.

The administration has proposed increasing the IRS budget of approximately $12 billion by $1 billion. House Republicans want to reduce it by $3 billion. They are mad as hell about the IRS’s treatment of conservative organizations that applied for 501(c)(3) and 501(c)(4) status. They believe it should be punished. They also believe it is wasting money. They cite the fact that the IRS is paying bonuses to employees. Even better, they have a video of IRS personnel line dancing at a training conference in California.

Specific problems and issues at the IRS should be addressed with targeted solutions. Of course, the IRS, like any large bureaucracy, has maddening inefficiency, personnel problems, and wasteful spending. But condemning the whole agency for those particular problems is not only unfair, it’s lousy management. Just as we shouldn’t throw money at a problem, we should not suppose meat-ax budget cuts will solve the problem either.

Losing one-quarter of its budget would certainly force the IRS to be more efficient. But Republicans are fooling themselves if they believe it won’t also reduce desperately needed customer service and enforcement. It is generally believed that for every dollar the IRS spends on enforcement, it gains $4 of additional revenue. So it is likely that IRS budget cuts will ultimately add to our budget problems.

The other problem with the recent escalation of attacks on the IRS is what it has done to the agency’s reputation. Who cares, you may say. Well, no matter what you may think of the IRS and no matter how much it may deserve criticism, the IRS like any organization, including private businesses, desperately needs to maintain its public image. This is critical for hiring top personnel. For the IRS it is particularly important because government salaries for tax experts are not even close to being competitive with the private sector. Reputation is also important to the IRS because it is so critically dependent on taxpayers’ voluntary compliance. If members of the public don’t respect it, some may be less inclined to pay Uncle Sam what is due.

It is, of course, great politics to beat on the agency that everybody loves to hate. There is a part of all of us that wishes the IRS would disappear, or maybe just become so feeble that it becomes impossible for it to catch us making mistakes. But these are irrational thoughts, and no responsible legislator should seriously encourage them. If Congress wants lower taxes and a simpler tax code, it should legislate to those ends. But once it has decided on what the law should be–like it or not–we need an agency that enforces the law fairly. Instead of scoring easy political points with budget cuts and endless public castigation, Congress should roll up its sleeves and start thinking of ways to help the IRS achieve its mission.

 

Court Rules in Favor of IRS on Obamacare Tax Credits

WASHINGTON, D.C. (JANUARY 15, 2014)

BY MICHAEL COHN

A federal district court judge has ruled in favor of the federal government in a lawsuit that claimed the Internal Revenue Service did not have the authority under the Affordable Care Act to write rules providing tax credits to individuals purchasing health insurance on the health insurance exchange set up by the federal government.

The IRS issued a final rule in May 2012 implementing the premium tax credit provision of the Affordable Care Act, in which it interpreted the ACA as authorizing the agency to grant tax credits to individuals who purchase insurance on either a state-run health insurance exchange or a federal exchange such as the one that has been available on the problem-prone HealthCare.gov site for people in states that have not set up state exchanges.

The plaintiffs in the lawsuit, who include the conservative advocacy organization, the Competitive Enterprise Institute, contended that the IRS’s interpretation was contrary to the statute, which, they asserted, authorizes tax credits only for individuals who purchase insurance on state-run exchanges, but not on federal exchanges. The plaintiffs in the case, known as Jacqueline Halbig, et al v. Kathleen Sebelius, et al, claimed that the rule promulgated by the IRS exceeded the agency’s statutory authority and was arbitrary, capricious and contrary to law, in violation of the Administrative Procedure Act.

The U.S. District Court for the District of Columbia heard oral arguments in the case last month and a judge on the court tossed out the lawsuit Wednesday, agreeing with the federal government that the law made clear that the tax credits should be available on both state-run and federally run health insurance exchanges. 

“In sum, the Court finds that the plain text of the statute, the statutory structure, and the statutory purpose make clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated exchanges,” wrote U.S. District Judge Paul Friedman. “What little relevant legislative history exists further supports this conclusion and certainly—despite plaintiffs’ best efforts to suggest otherwise—it does not undermine it.”

Sam Kazman, general counsel for the Competitive Enterprise Institute, said he planned to appeal the judge’s ruling.

“The court’s ruling today delivers a major blow to the states that chose not to participate in the Obamacare insurance exchange program,” Kazman said in a statement Wednesday. “It is also a blow to the small businesses, employees and individuals who live in those states as well. In upholding this IRS regulation that is contrary to the law enacted by Congress, this decision guts the choice made by a majority of the states to stay out of the exchange program. It imposes Obamacare penalties on employers and on many individuals in those states, penalties that Congress never authorized, putting their livelihoods and the jobs of their employees at risk. Worst of all, it gives a stamp of approval to the Administration’s attempt to substitute its version of Obamacare for the law that Congress enacted.”

 

Taxpayer Scores $862,000 from IRS after Tripping over a Phone Cord

NEW YORK (JANUARY 21, 2014)

BY MICHAEL COHN

 

A taxpayer undergoing an audit at an Internal Revenue Service office on Long Island successfully sued the IRS for $862,000 after he was injured by tripping over a phone cord.

William Berrover claimed in his lawsuit that he could no longer play golf or have sex with his wife more than once a month after he fell during a 2008 audit at an IRS office in Hauppauge, N.Y., according to the New York Post. He had visited the offices to work out a payment agreement for a $60,000 tax bill when he tripped on the phone cord and fell against a cabinet.

After leaving the office, he telephoned the IRS auditor from the parking lot to inform him that he had lost the sense of feeling in his leg and was suffering from shoulder pain. He then spent 17 days in hospitals and rehabilitation centers recovering from his injury.

Attorneys for the IRS claimed he was exaggerating his injury, but the judge awarded him $862,000 for pain and suffering. He won't have to pay taxes on the damages either. However he was denied the full $10 million amount he was seeking. Berrover did not immediately respond to a request for comment.

 

 

The Tax Code In 2014 -- It Still Stinks

Christopher Bergin, Contributor forbes

 

Many taxpayers will have to get used to new taxes in 2014 as they complete their income tax returns for 2013. Here are my three favorites (and I am being totally sarcastic): PEP, Pease and the NII tax. Why do I loathe them? Because they’re stealth taxes; they are sneaky and cynical and a perfect illustration of the contempt our politicians have for the tax code and taxpayers – which is why the tax code is rotting, and why they don’t do a thing to address that.

PEP and Pease have returned from the dustbin of history, where they should have stayed. Introduced more than 20 years ago, they went away as part of the Bush tax cuts in 2001 and were resurrected in the fiscal cliff debacle because our federal government doesn’t know how to do a budget anymore. The NII tax is a result of Obamacare, and yet another example of what a mess that legislation really is (I’m still trying to figure out why we had to pass it to find out what was in it).

PEP stands for “personal exemption phaseout.” It limits a mechanism in the tax code that was designed to make things fairer for families. But for 2013 and years after, it phases that out for certain income levels until it disappears. The worksheet used to figure it out should come with aspirin.

Pease is named for Donald J. Pease, a lawmaker from Ohio who gets credit for nothing more than a pocket-picking technique. Pease caps itemized deductions for certain taxpayers – perfectly legitimate itemized deductions. If we want to increase tax revenue, why don’t we raise the marginal rates – and in a transparent way? To be fair, even the great Tax Reform Act of 1986 had a hidden marginal rate.

The NII tax is new for 2013 and applies to individuals, estates, and trusts. It is a 3.8 percent tax on, yes, income from investments. And that’s where the fun begins. What’s investment income? The draft instructions to fill out the form for this disaster are 20 pages long. The main drafters of the regulations, which supposedly help govern this new tax — and they are really good tax lawyers — will tell you, “We did our best.” Not a ringing endorsement of the underlying tax policy sense here. If the NII tax applies to you, you and your tax adviser will have a ball.

And that raises another question. Do any of these three taxes apply to you? Here’s where the cynicism comes in. The politicians will tell you these taxes only hit “the rich.” And the government decides who is the rich, except the government can’t quite seem to make up its mind who’s rich. These things all have different income thresholds. I mean, it’s brilliant tax policy.

I’ve always believed in progressive income taxation. This isn’t it. The conservatives have sold us on the notion that tax is a dirty word, and the liberals have sold us on the notion that class envy is a healthy state of mind.

And that, folks, is why the tax code stinks. And it won’t get any better in the new year.

 

 

In Life and Business, Learning to Be Ethical

JAN. 10, 2014

ALINA TUGEND

 

LOTS of New Year’s resolutions are being made — and no doubt ignored — at this time of year. But there’s one that’s probably not even on many lists and should be: Act more ethically.

Most people, if pressed, would acknowledge that they could use an ethical tuneup. Maybe last year they fudged some numbers at work. Dented a car and failed to leave a note. Remained silent when a friend made a racist joke.

The problem, research shows, is that how we think we’re going to act when faced with a moral decision and how we really do act are often vastly different.

Here’s just one of many examples from an experiment at Northeastern University: Subjects were told they should flip a coin to see who should do certain tasks. One task is long and laborious; the other is short and fun.

The participant flips the coin in private (though secretly watched by video cameras), said David DeSteno, a professor of psychology at Northeastern who conducted the experiment. Only 10 percent of them did it honestly. The others didn’t flip at all, or kept flipping until the coin came up the way they wanted.

Trying to become more ethical — or teaching people how to — would seem doomed then. But that’s not true. It’s just that how we teach ethics has to catch up with what we know about how the human mind works.

One area clearly in need of attention is business ethics, especially given the transgressions in the financial world in recent years. Some of the nation’s top researchers think so too. Next week, a group of them — most based at American universities — will officially introduce a new website,EthicalSystems.org. The site is the first to pull together extensive research and resources on the subject of business ethics with the aim of making the vast trove available to schools, government regulators and businesses — especially their compliance officers.

“It used to be business ethics grew out of philosophy, with a focus on the right thing to do,” said Jonathan Haidt, a professor of ethical leadership at New York University’s Leonard N. Stern School of Business. “In the last 10 years there’s been an explosion of research in behavioral economics” and the underlying reasons people act the way they do.

Some of the research was informed by the scandals at Enron and WorldCom unfolding at the time, as well as the global financial crises.

Those events, in part, “inspired a small group of researchers to develop a more psychologically realistic approach to business ethics,” said Professor Haidt, who spearheaded the website.

This approach — which applies to ethics in general, not just business ethics — incorporates what we now know about how people really act when faced with a moral dilemma and what tools can be used to nudge them toward doing the right thing.

First we need to be more aware of the ways we fool ourselves. We have to learn how to avoid subconsciously turning our backs when faced with a moral dilemma. And then we must be taught how to challenge people appropriately in those situations.

“When people predict how they’re going to act in a given situation, the ‘should’ self dominates — we should be fair, we should be generous, we should assert our values,” said Ann E. Tenbrunsel, a professor of business ethics at the University of Notre Dame who is involved in the EthicalSystems website. “But when the time for action comes, the ‘want’ self dominates” — I don’t want to look like a fool, I don’t want to be punished.

“Our survival instinct is to want to be liked and to be included,” said Brooke Deterline, chief executive of Courageous Leadership, a consulting firm that offers workshops and programs on dealing with ethical situations. “We don’t willfully do bad things, but when we’re under threat our initial instinct is to downplay or ignore problematic situations.”

Most people know the feeling: Something happens that we know is wrong and we mean to speak up or make it right. But we can’t quite figure out how to do it, and the moment passes. And then we justify that it was O.K. that we acted the way we did.

So how do we change this?

Using social and cognitive behavioral psychology as well as neuroscience, Ms. Deterline said, the first step is to become aware of our natural inclinations.

“Think back: When are you vulnerable to not speaking up and not saying what needs to be said?” she said. Is it when authority is present? When it might alienate you from friends? When it might cause subordinates to think less of you?

“We all have automatic thoughts when we feel anxious: ‘I’m going to get fired, I’m going to look like an idiot,’ ” she said. The point is not to listen to those thoughts, but to be aware of them and override them. And to do that, we need to practice.

Like pilots who use flight simulators, people need to work on situations that cause them anxiety before they occur. In her programs, Ms. Deterline has role-playing employees initiate potentially challenging conversations.

“When most of us feel uncomfortable, we shut up,” she said. “But we need to use discomfort to know that that is my signal to be courageous and a cue for action rather than inaction.”

The focus on why people do and don’t act ethically is not, of course, limited to the business world. After all, it takes good citizens to make good employees.

Philip G. Zimbardo, a professor emeritus of psychology at Stanford University, is a pioneer in the study of social power — for good and for evil — and started a program in 2007 called the Heroic Imagination Project. His interest in ethics dates far back; in 1971 he created the notorious Stanford Prison Experiment, where college student “guards” demeaned and humiliated student “prisoners.” The experiment had to be stopped early because it became so abusive.

After studying moral degradation for decades, Professor Zimbardo started wondering about the 10 to 20 percent of people in every situation who resisted. Who were these people he called heroes, and could anyone be taught to be one?

Through the Heroic Imagination Project — for which Ms. Deterline once worked — middle- and high-school and community college students learn about group dynamics, like the bystander effect, in which the more people who are on a scene, the less likely it is for anyone to help.

Using video clips and real-life situations, teachers explain how students can resist such behavior, and help them explore why they have acted — or failed to act — in specific situations.

While students are taught not to be “dumb heroes” and rush into danger, Professor Zimbardo said, “we teach them that knowledge obligates you to do something — to act heroically.”

His nonprofit program has made many of its resources available free and is in the final stages of receiving funding to train a group of teachers in Flint, Mich., starting in the spring. Graduate students at the University of Michigan will assist in the program and, it is hoped, develop longitudinal findings on its effectiveness, he said.

Kristen Renwick Monroe, a professor of political science at the University of California, Irvine, has long studied why some people act righteously and others fail to.

She has found in her research that “the rescuers say, ‘What else could I do?’ ” she said. “The bystander says, ‘I was just one person? What could I do?’ ”

“We have to think, ‘Who am I and how do my actions create who I am?’ ” Professor Monroe added. She recalled interviewing a Dutch woman who stood by and watched while Jews were thrown into a truck and taken away during World War II. But the woman later saved more than a dozen others.

Professor Monroe remembers what the woman told her: “We all have memories when we should have done something, and it gets in the way for the rest of your life.”

 

 

 

10 Accounting Myths

1) Accounting was Discovered by Some Nerdy Guy With a Pocket Protector. 

Accounting was actually discovered by Luca Pacioli, an Italian Monk. He’s commonly referred to as the “Father of Accounting.” Pacioli founded what’s referred to as “double-entry accounting” in 1494. His first accounts detailed the early systems used be Venetian Merchants for “accounts receivables” and “inventories” utilizing “journals” and “ledgers.” Pacioli uncovered principles and methods which are still used in our financial world on a daily basis. 

2) Accountants are Good at Math

This is one of the biggest fallacies I experience on a day-to-day basis. You know who’s good at math? Mathematicians. Oh and engineers and computer programmers. Accountants are forced to work within regulatory guidance and act as lawyers more often than they are practicing math nerds. They’re essentially lawyers who use numbers. While being good at addition, subtraction and basic algebra is a prerequisite for accounting (and life overall), not all accountants are good at math.

3) Every Accountant Knows How to Do Your Taxes

Every accountant has been asked to do a friend’s tax return. Accountants are not the same as auditors, auditors are not the same as tax accountants. While we all have an understanding of accounting principles, the majority of accountants are in no way qualified to do your taxes or give anyone tax advice. My favorite example of this is an auditor friend who was asked to do all his friends’ tax returns. What did he do? Charged them each $200 and bought turbo tax to perform their returns.

4) Technology is Eating Up the Accounting Profession 

Technology is certainly adding another layer of complexity to the life of accountants, but it will be a long time before technology totally eliminates the need for their positions. Public accounting firms hired a record number of college grads in 2012 (40,350) and expect those numbers to remain constant or even go up. Not to mention you see accounting on most “in-demand” careers lists that float around the internet.

5) Accounting is a Male Dominated Field 

60% of all accountants and auditors in the US are female, and 50% in Canada. That number declines significantly when it comes to partners at public accounting firms, where women only represent 18% of the total partners in the US. Is the reason glass ceiling or motherhood? No matter the answer, that number seems to be much lower than you’d expect.

6) Auditors = Tax Accountants = Bookkeepers = Corporate Accountants 

Going back to an earlier point about how all accountants don’t know how to do your taxes or which deductions you should take. The job of auditors is largely comprised of statistical sampling and regulatory guidance. Auditors don’t actually “account” for anything. Tax accountants can help you with deductions and perform your yearend return, but don’t ask them to help you file a 10-K. Bookkeepers typically account or keep track of financial transactions for small businesses, and corporate accountants do the same on a  much larger, more complex scale. But please, don’t treat us all the same.

7) Your Business Doesn’t Need an Accountant 

Said every failed business owner ever. The fact is, having a full-time internal or external accountant can save you much future heartburn. An accountant will help organize your finances in a timely fashion, allowing you to make good financial decisions and take advantage of opportunities for growth. Not to mention, they’ll make your life a lot easier around tax time.

8) Accountants are Boring 

Think again, check out this list of people who studied accounting or were actually accountants:

Chuck Liddell

Kenny G

Eddie Izzard

Bob Newhart

John Grisham

Robert Plant

Mick Jagger

Call Chuck Liddell boring and he’ll probably kick your ass.

 9) Accountants Just… Accountant for… Things? 

By now you should know that there are several different types of accountants. And not all of them count widgets everyday.

 10) Accountants like it when you make fun of them. 

They hate it, but for some reason every one seems to thinks accountants are the masochists of the professional world. We just work hard and don’t complain. So next time you have something mean to say go pick on the engineers, HR, the ops team, anybody but the accountants. Otherwise the reports you use to make all those important “business decisions” may be written in crayon next time.

 

Strangest Tax Deductions

The Minnesota Society of CPAs recently conducted its annual CPA member survey about the most strange and unusual tax deductions proposed by clients. The responses included everything from pets and wedding rings to gifts not given.

1. A fur coat worn to promote a cleaning business

As one tax filer learned, you’ll never outfox the IRS. And we can’t help but wonder, what would the fox say? 

2. A wedding ring

A diamond is forever, and so is a taxpayer’s inability to deduct the cost of a wedding ring. 

3. 101 dog deductions

Expenses for dogs, dogs as guard dogs, a small dog as a “burglar alarm,” dog adoption costs, and even a dog as a dependent. CPAs heard it all this year. That’s 101 “uh-uhs” from CPAs and the IRS.

4. An ATV as a medical deduction for stress relief

No doubt, it’s fun to go out and let ‘er rip on the trails. But, the CPA and the IRS weren’t buying the ATV as a medical deduction in this case. 

5. Placing a business sign on a personal automobile and writing off the car as an advertising expense

The CPA had to put this message in bright lights: “Not deductible

6. A family vacation:

Ahh, the crystal-clear emerald water, the exquisite sand beaches, the cool ocean breeze. We hope the family enjoyed the vacation more than the tax filer enjoyed hearing the news that it wasn’t deductible.

7. A $1 million dollar deduction for a contribution of land without an appraisal:

Beauty may be in the eye of the beholder, but this generous donor learned the hard way that property value is not. 

8. Infant “employee”

Sure, you can bring your children into the family business and count them as employees. But, as one business owner discovered, children who can’t yet walk or talk rarely qualify. Plus, they want everything handed to them.

9. A large charitable deduction for a gift not given

One taxpayer thought that everyone could deduct a certain percentage of their income as a charitable deduction. Good news: They can! Bad news: They need to actually make the donation. 

10. School lunches as a business expense

As one business owner learned, unless her child is closing business deals with other first-graders at the school, these lunches aren’t deductible. 

11. Claiming a home theater as “video conferencing equipment”

As soon as a CPA got her hands on this taxpayer’s return, that proposed deduction was “Gone with the Wind.” 

12. Botox and tanning

One poor filer couldn’t even furrow her brow upon learning that these expenses weren’t deductible.

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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