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Tax Update Blog: July 2011 Archives

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Bad tax advice: 'A little business makes the whole vacation deductible'

July 29, 2011

The recent case shutting down a Central Iowa tax practice was almost a catalog of bad tax ideas I've heard from clients or would-be clients over the years. The opinion includes this confection:

On October 11, 2003, [Defendant] received the following questions by e-mail from her client, Shirley Tyson:
We are leaving next Wednesday with our whole family . . . to go to California for a[n] 11 day vacation. We’re actually going to my cousin’s daughter’s wedding, but we’re seeing all the sites in Southern Calif. Like Disneyland & The New California Adventure (5 day pass), Sea World, Universal Studios, and we have tickets to the Price Is Right. . . .

Also, [my personal coach] lives 13 miles form where we are flying in at Santa Ana, CA, and we were both wanting to get together in order that we could meet each other. We were
planning on meeting when we first got to Calif, because we can’t check in the hotel until later in the day, so I thought that would be a good time. Could any of the trip be a tax deduction since I’ll be meeting with my coach, and then attending a wedding of one of my best customers who purchases $500 every other month?

In her response, [Defendant] advised:

To answer you[r] questions, yes, you can write off the plane tickets and the hotel and food for the days you are gone. Since you are taking your distributors, if you are paying, you can write off their hotel and food as well. You cannot take off the various tickets you have purchased.

Defendants took a $4,209 deduction for travel in 2003 for Tyson’s company, RS Tyson, Inc.

As you might guess, that explanation isn't quite how the tax law works. From IRS Publication 463:

If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.

A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.

And what about the food? Even if the meal expense is business-related, it is only 50% deductible. Of course, no travel or meal expenses are deductible at all unless you meet the special substantiation rules that apply. As the Tax Court has explained:

...the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) The amount of the expenditure or use; (2) the time and place of the expenditure or use; (3) the business purpose of the expenditure or use; and in the case of entertainment, (4) the business relationship to the taxpayer of each expenditure or use. See sec. 274(d).

To meet the adequate records requirements of section 274(d) a taxpayer must maintain some form of records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use.

So a touch of business doesn't leaven the whole trip with business purpose. And as the Central Iowa practitioners have learned, preparing returns that way is hazardous to your practice.

Related:

CPA: Can't Prepare Anymore
Bad tax advice: deducting your 'image'

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Department of Revenue explains what Branstad didn't veto

July 29, 2011

The Iowa Department of Revenue explains in an e-mail to practitioners the provisions enacted this week when Governor Branstad signed most of SF 533:

Immediate Income Tax Changes for Iowa Taxpayers


Senate File 533 enacted on July 27, 2011 made changes impacting Iowa income tax provisions for tax years 2008, 2010, and 2011.


This legislation retroactively coupled with the following federal provisions for 2008:

• Tuition and Fees Deduction

• Educator Expenses Deduction

• Casualty Loss (10% limit; $100 floor)

Taxpayers who are impacted by these changes and have already filed returns for tax year 2008 may want to consider filing an amended Iowa tax return. Amended returns may be filed within three years of the original due date. No interest will be paid on refunds resulting from this legislation. NOTE: These changes are allowed only for the 2008 tax year. These changes are not allowed for the 2009 tax year since Iowa did not couple with tax changes affecting the 2009 tax year.

For 2010 and 2011 Individual Income Tax Filers Only:


• Taxpayers can make an adjustment on the 2011 tax year return for Iowa’s coupling with the federal Tuition & Fees Deduction and Educator Expenses Deduction for 2010. The taxpayer has the option to amend 2010 or adjust 2011.

For 2010 and 2011 Individual Income Tax Filers, as well as Corporate Income Tax (including S Corporations), Partnership, Fiduciary and Franchise Tax:

• Taxpayers can make an adjustment on the 2011 tax year return for Iowa’s coupling with the federal Section 179 expensing limit for 2010. The taxpayer has the option to amend 2010 or adjust 2011.

The Governor item-vetoed an increase in the Iowa Earned Income Tax Credit included in the bill.

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But competency testing for legislators is on hold indefinitely

July 29, 2011

Tax Analysts reports ($link) on testimony of the IRS directory of preparer regulation that "competency testing" for return preparers is "likely" to begin in October.

If the tax law itself were drafted competently, preparer competency wouldn't be an issue. Yet competency testing for Congresscritters and Treasury Secretaries doesn't seem to be on the table.

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The dark side of RAGBRAI?

July 29, 2011

"Bikies arrested for 'significant' tax fraud"

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Sporting life Cavalcade!

July 29, 2011

Do you know that the only sport riskier than cheerleading is Cave Diving? This is just one of the valuable insights at the new Cavalcade of Risk!

My Personal Finance Journey hosts this edition of the greatest roundup of insurance and risk-management posts in recorded history. So hang up the cell phone, hoist that canoe, and portage over there now!

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Governor Branstad item vetoes increase in Iowa earned income tax credit

July 28, 2011

Governor Branstad has vetoed the increase in the Iowa earned income tax credit enacted in the closing hours of Iowa's recently-ended legislative session. SF 533 would have increased the credit to 10% of the federal credit, from the current 7%. The refundable credit would have cost $28.5 million, according to the Governor. No other tax provisions were vetoed. From the veto message:

It is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state's ability to compete for new business and jobs.

Comprehensive and holistic? I got your comprehensive and holistic right here.

Related: Legislature allows Iowans to take some 2010 deductions on 2011 returns

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Is the income tax doomed?

July 28, 2011

Christopehr Bergen thinks so:

The deadlock on the debt is perfect proof that we won’t see tax reform, not in this decade and maybe not ever. So, to add to all this good news on the debt that we can’t get away from, let me add to our mutual depression: THE INCOME TAX IS DOOMED!

I'm not sure just how depressing that news is, but since the income tax is what I do for a living, maybe I should view its doom like St. Augustine is said to have viewed virtue in his rakish youth: "Grant me chastity and continence, but not yet."

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Costs of regulation: What Robert is missing

July 28, 2011

Robert D. Flach finds fault with my prediction that the IRS preparer regulation power grab will increase preparer and taxpayer costs:

Joe has said in the past that the new regime will add unnecessary costs for tax preparers, and materially increase tax preparation fees. Horse pucky. $65.25 per year is a pittance, less than $1,00 per 1040 client (in my case at most 20 cents more per client). While there will be a one-time fee to take the competency test (which I still firmly believe should have some kind of grandfathering exemption), it is a one-time fee.

Experience with bureaucracy and the law of supply and demand support me. The real costs to preparers are the time and expense of navigating the IRS preparer bureacracy -- ask the folks who had trouble getting their preparer IDs last year using the IRS system -- and in dealing with the inevitable IRS screw-ups. These costs aren't evenly distributed -- not everyone will have their paperwork eaten by the IRS computers -- but they're no less real.

You can also count on the regulation bureaucracy to cater to its biggest fans -- the big national tax prep franchises and the national accounting firms. They have the compliance departments to deal with the IRS paperwork demands, which will only get worse over time. The Robert D. Flachs of the world will have to use their valuable time to deal with the IRS -- time that comes out of making a living.

Robert doesn't dispute that the system will reduce the number of preparers. When supply goes down and demand doesn't, prices go up. It's the law.

If these rules actually provided benefits that exceed their costs, there would be an argument for them. But even Robert admits that the competency test will be perfunctory. The burden is on supporters of the costs to justify them, and you'd be hard pressed to say that the rules have done any good after one season.

Image via Wikipedia.

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It's a small world, but it's plenty big when somebody steals your Social Security number

July 28, 2011

TaxDood tells the story of an Illinois man who, frustrated by years of mysterious tax problems because somebody else's income was being reported under his Social Security number, took matters into his own hands. In tracking down the ID thief, he solved two mysteries:

A few years ago, Goodenough got a lead when the annual IRS notice contained someone else’s name: Joseph Richard Sandelli. Sandelli was a casino worker in Las Vegas. Goodenough finally got suspicious, and an investigation commenced.

Authorities learned that Joseph Richard Sandelli was in fact Arthur Gerald Jones, who had been declared deceased by an Illinois court back in 1986.

Jones disappeared in 1979 after running from gambling debts and mob connections. In order to remain under the radar, he purchased Goodenough’s stolen security number and began to use it.

Mr. Jones' family assumed he had been liquidated as a result of his gambling debts.

It turns out that Mr. Goodenough is the little brother of my sister's best friend. Let's hope somebody else doesn't buy his number now.

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Bad tax advice: deducting your 'image'

July 27, 2011

A Central Iowa couple was permanently barred earlier this month from preparing returns. The federal judge's opinion enjoining the preparers is a catalogue of bad ideas that keep cropping up when clients talk to their buddies at the club, over the surgery table, and so on. It's worth going over these bad ideas, if only to help avoid the need to talk future clients out of them, so the Tax Update will go over them individually as a service to our readers.

Today's installment: "Lifestyle Expenses." From the opinion:

Schwartz-Musin has given presentations to clients and potential clients, encouraging them to "write off their lifestyle." To that end, she urges people to “be creative . . . and look at the kind of lifestyle that you have . . . and if you can find a way to write that off because you’re now self-employed.”...

A common example of Schwartz-Musin’s “write-off-your-lifestyle” philosophy is the deduction of “image” expenses. In the same 2005 teleconference, she explains:

If you buy things that are either mandated by your company or that have a logo, a company logo on them, or they’re ordinary and necessary for what you’re doing, they are deductible business expenses. Now obviously for Mary Kay, Mary Kay has a director suit every year, so the director suit is deductible. But then you have to have shoes and a purse and a blouse and maybe a scarf to wear with that suit, that all becomes a deductible business expense, as well as the cost of having the suit cleaned or washing the blouses. If you have to buy formal clothes for a presentation or a suit for a presentation, that also is a deductible business expense. . . . Because again, it’s your entire image, and that is the image that’s listed on our sheet.

Longtime readers will remember the case of Anietra Hamper, the Columbus anchorwoman who took a similar approach to her wardrobe. Perhaps the U.S. District Court Judge who wrote the opinion is such a reader, as he cites Hamper (though, sadly, not the Tax Update):

In Hamper, the Tax Court held that a television news anchor improperly deducted expenses for work-related clothing, personal grooming, and a gym membership because they were “inherently personal expenses.” Even an employment contract requiring petitioner to maintain a neat appearance does not “elevate his expenses for personal grooming to a business expense.” (citations omitted)

So: no matter how sharp you need to look at your job, your wardrobe, manicure, hairdo and the like are not deductible.

Russ Fox has more: I Spilled my Coffee Thanks to Joe Kristan

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If time is money, why can't I deduct it?

July 27, 2011

That was the reasoning applied by an accountant for time he spent setting up his own internet business. The Tax Court was not amused:

Neither accounting principles, tax law, nor common sense supports a deduction by petitioners for contract labor as a result of an accrual of an amount “owed” by petitioner to himself for his own labor.

Peter Pappas has the scoop.

Cite: Mondello, T.C. Summ. Op. 2011-97

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The IRS is unwilling to take attorneys at their word

July 27, 2011

The IRS has isssued its new guide for auditing lawyers. Phil Hodgen, himself an attorney, has the details.

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Howdy, Stranger!

July 27, 2011

The Tax Policy Blog says Portland, Oregon has the worst discriminatory taxes on travelers, followed by Boston, Minneapolis, New York and Chicago. When you add the taxes that apply to locals as well as to travelers, Chicago and New York step to the top.

That's how you attract conventions, right?

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CPA: Can't Prepare Anymore

July 26, 2011

If you thought "CPA" only stood for "Certified Public Accountant," you can learn something from a recent U.S. District Court case decided in Des Moines. The government sued to bar an Iowa tax practice from continuing to prepare tax returns. The judge noted one of the practitioners had been in trouble with the IRS before for improperly claiming to be a CPA on a power of attorney form:

Schwartz-Musin appealed the District Director’s decision, stating "I used CPA to mean current power of attorney."

The explanation didn't work the first time, and things went badly for the preparers this time too. From the Department of Justice Press Release:

A federal court has permanently barred Howard Musin, his wife Jill Schwartz-Musin and their three companies from preparing federal tax returns for others, the Justice Department announced today. The three businesses named in the court’s civil injunction order are SSC Services Inc., M-S Services Inc. and Schwartz’s Systems Corporation. Trial evidence showed that the Musins reside in Clive, Iowa.

Following an eight-day trial, U.S. District Court Judge John A. Jarvey found that the defendants engaged in a wide variety of misconduct in preparing tax returns for their customers, many of which were distributors for Shaklee Corporation, a large multi-level marketing firm.

The range of conduct cited by the judge is extensive; some examples cited by the judge have been mentioned in prior Tax Update posts. The 40-page opinion contains so many examples of things not to do in tax practice that I will have to come back to them in future posts.

The case is noteworthy in another respect: it shows how useless competency exams and CPE requirements are in stopping rogue preparers. One of the preparers -- the one who signed all of the disputed returns -- was an Enrolled Agent. That meant he had to pass a competency test that is certainly more difficult than any that will be imposed by the new IRS preparer regulation regime. He also had to take continuing education to maintain that status. Yet the court found that his firm engaged in a pattern of misconduct so egregious that only a permanent ban on him and his firm could stop the alleged abuses.

If the much stricter rules for enrolled agents can't stop abuse, the new PTIN and competency exam rules won't either. They will only require law-abiding preparers to incur extra costs, while doing little to stop the cheaters. It would be far better to use the resources being diverted to the preparer regulation regime to upgrade IRS computer systems to spot abusive preparers. But that wouldn't create a whole new bureaucracy for the benefit of the big tax prep firms, so it just won't do.

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If the government doesn't restrain its spending, the rich guy isn't picking up the tab

July 26, 2011

I haven't followed the inside baseball of the debt ceiling debate; too me, it's a sideshow. The real issue is whether we will embrace a permanently larger government. A new paper by the Tax Policy Center shows that long-term, the problem is spending:

Some left-side tax activists, like Citizens for Tax Justice, like to point out that US tax levels are lower than many other countries. While that is true, it's also true that the tax burden falls heavier on "the rich" in the U.S. That means if the U.S. is going to pay for a bigger government, don't expect "the rich" to foot the bill. This kind of spending can only be sustained by bringing lower and middle income taxpayers back into the income tax system in a big way (see this post by the Tax Policy Blog) or by imposing a Value Added Tax, or something like it, that disregards incomes.

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Targeted tax breaks = Socialism?

July 26, 2011

Senator Tom Coburn, via TaxVox:

Tax expenditures are not tax cuts. Tax expenditures are socialism and corporate welfare. Tax expenditure are increases on anyone who does not receive the benefit or can’t hire a lobbyist…to manipulate the code to their favor.

Is it technically "Socialism"? No, but it's close enough for government work. It shares the same conceit that the government knows more than you do about where you should spend and invest.

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Spouses can be innocent longer

July 26, 2011

The IRS has abandoned its controversial two-year deadline for innocent spouse claims. From IR-2011-80:

The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.


Additional coverage:

TaxProf Blog
Peter Pappas
TaxDood

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Ten years before the Buzz

July 26, 2011

New Jersey tax man Robert D. Flach celebrates ten years of tax blogging with a new "Buzz" roundup of tax posts from far and wide.

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Congratulations, Robert!

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Vacation reading

July 25, 2011

While I kept my finger off the blogging trigger on vacation, I did do a little recreational Internet beach reading, including this from Reason.com:

Pulitzer-winning tax journalist David Cay Johnston has been forced to withdraw his first column for Reuters. Aptly named commenter OFF TOPIC notes in another thread that Johnston, whose unreliability and bullying style have put him in bad odor in various forums (including this one), has issued a rambling, self-dramatizing series of explanations for why he falsely claimed Rupert Murdoch’s News Corp. was paying negative income taxes.

The TaxProf was all over the story. Mr. Johnston's error: he mistook a positive tax expense number for a negative number in a financial report; he then based his report on News Corp on his misreading.

The incident reminded me of a comment Mr. Johnston made regarding a Tax Update post:

The reality is you have no facts to back up your positions, do not know the history of these matters and write from what you imagine to be facts.

Yes, I had fun on vacation.

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Beer again flows in Minnesota

July 25, 2011

The Minnesota State Government was shut down during almost my entire vacation there the last two weeks, until the threat of a beer shortage shocked legislators into action. The dire consequences:

- No fishing licenses were available.

Good thing nobody told the fish.

- The state parks were closed, so the usual weekly permits to visit state parks weren't available for purchase. That meant visitors to the state parks parked along the roads and went in anyway.

Somehow we all survived. The Tax Policy Blog draws some lessons:

Lessons for other states (and for the federal government, with its debt ceiling deadline)? Depending on exemptions, shutdowns may not create political pressure to end them. The end result may not be satisfactory to anyone, certainly not after the costs of a shutdown showdown. A bigger budget than the last one may still be called a "cut." Forcing a tiny percentage of people (i.e., high-income earners) to pay for the costs of government services to everyone may be a harder sell politically than it sounds.

Until the beer runs out, anyway.

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Personal Holding Company rules still have teeth

July 25, 2011

I explain at IowaBiz.com:

Every entrepreneur daydreams of cashing out someday. Sure, there will be taxes on the sale, but then we can just invest in safe stocks and bonds and pay tax on the interest at the nice low 15 percent corporation tax rate, right?

Be careful. A depression-era relic in the tax law could bite you.

I suspect many taxpayers are subject to this tax without realizing it.

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Me and the boys

July 25, 2011

All good vacations end with a return to work.

It's good to have a job to come back to, but it sure was nice to get away. Disappearing into Boundary Waters Canoe Area is a great way to start a vacation. Contact with the office was impossible, and I was so busy with not getting lost and not dying in the wilderness that I didn't brood about work. Usually it takes a week for my brain to disengage from work; this time it took about a day.

Still, it's nice to be back, and there's so much to catch up on!

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Summer Break 2011

July 08, 2011

It's time to head for the hills.

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We'll (maybe) run some greatest hits -- or summer reruns -- until regular programming resumes July 25 or so. The tax nerds in the blogroll to your right will handle your need for fresh tax programming until then.

UPDATE, 7/22. I'm back in town, more content soon!

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You can't squeeze $1.3 million into a $2,000 Roth IRA contribution. Not even in Kansas City.

July 07, 2011

A tax plan hatched by a Kansas City-area tax advisor met disaster in Tax Court this week. The plan was the braincraft of A. Blair Stover, a former Grant Thornton tax practitioner. Mr. Stover has since come under unpleasant government scrutiny for overly-imaginative tax planning.

If everything worked out, it would have moved about $1.3 million from a traditional IRA, where it would have been taxable when withdrawn, to a permanently tax-free Roth IRA.

The plan was simple, yet absurd. When the smoke cleared, it worked like this: the taxpayer set up a new Roth IRA with a $2,000 contribution. He then had the Roth IRA and his existing traditional IRA set up new corporations. The Roth IRA-owned corporation got the $2,000 Roth contribution, while the Traditional IRA corporation got the $1.3 million in Traditional IRA assets. The Traditional IRA corporation then merged into the Roth IRA corporation. Suddenly the Roth IRA magically owned $1.3 million in assets, rather than $2,000. What could go wrong?

Mr. Paschall, the taxpayer, paid accounting firm Grant Thornton $120,000 to set up this transaction. GT's Mr. Stover took care of the paperwork details. The taxpayer probably took comfort in this from the GT engagement letter:

The engagement letter contemplated a fee of $120,000 and contained a clause providing that Grant Thornton would represent and defend Mr. Paschall or any related entity at no additional cost in case of audit by the Internal Revenue Service (IRS). The engagement letter also contained an indemnity clause providing that Grant Thornton would reimburse and indemnify the Paschalls and any related entity for any civil negligence or fraud penalty assessed against them by Federal or State authorities.

Unfortunately for the taxpayer, Mr. Stover's tax planning came under IRS scrutiny. The Tax Court explains:

In either 2003 or 2004 Mr. Paschall received a letter stating that Grant Thornton was turning over the names of people who had engaged in Roth restructures to the IRS. Mr. Stover at this time advised Mr. Paschall that the Roth restructure was legal but that he "might want to disclose on [his] income tax returns the structure". Mr. Paschall thereafter attached to Telesis' and his personal tax returns Forms 8886, Reportable Transaction Disclosure Statement.

When the taxpayer set up his Roth IRA, the annual limit for contribuitons was $2,000. The tax law applies a 6% annual penalty for excess contributions until the excess contribution and earnings are eliminated. The IRS said the $1.3 million moved into the Roth IRA was an excess contribution; over five years, that added up to $425,513 in taxes, plus another $105,000 or so in penalties.

The taxpayer naturally objected. The taxpayer first argued that the statute of limitations had expired on the tax, because he had filed timely 1040s more than three years before the assessment. The court ruled that the three-year statute never started running because he had never filed Form 5329, the form for reporting excess IRA contributions.

As for the substance of the transaction, the Tax Court said:

The substance of what happened in the instant case is that approximately $1.3 million began the year in Mr. Paschall's traditional IRA and was transferred to his Roth IRA by the end of the year with no taxes being paid. Mr. Paschall did not attempt to provide a nontax business, financial, or investment purpose for what he did, and this Court cannot ascertain one. Instead, Mr. Paschall, incited by and at the urging of Mr. Stover, used corporate formations, transfers, and mergers in an attempt to avoid taxes and disguise excess contributions to his Roth IRA.

In upholding penalties against the taxpayer, Judge Wherry said the taxpayer should have known better:

Mr. Paschall should have realized that the deal was too good to be true. See LaVerne v. Commissioner, supra at 652-653. Mr. Paschall is a highly educated and successful businessman. He explained to this Court that because he grew up in the Depression, he was conservative with his investments and worried "about having enough money" to last through retirement. Yet he paid $120,000 for a transaction that he "did not fully understand".

Mr. Paschall had doubts, repeatedly asking whether the Roth restructure was legal. Despite these doubts, he never asked for an opinion letter or sought the advice of an independent adviser, including Mr. Jaeger, who was preparing his tax returns at the time he met Mr. Stover. This was even after he received a letter warning him that there might be problems with the Roth restructure and that his name was being turned over to the IRS.

The cost of this do-it-yourself Roth IRA conversion was a lot more than it would have been to wait until 2010 to do a legal taxable conversion of his traditional IRA. It would be interesting to know how Grant Thrornton's indemnification will hold up.

The Moral? Just the obvious:

- If it sounds too good to be true, it probably is.
- If somebody wants to sell you a tax plan, run it by a tax advisor who isn't getting a cut of the deal.

Cite: Paschall, 137 T.C. No 2.

Same result: Swanson, T.C. Memo 2011-156

Related:

Kansas City attorney gets unwanted review of his tax work
Fool's gold and chicken shelter

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Another reason to insist on the ring

July 07, 2011

20110707-1.jpgA taxpayer moved in with her boyfriend. It probably only seemed fair that she would pay half the housing costs. It also probably seemed fair that she deduct the home mortgage interest she was financing.

It seemed less so to the IRS. The house and mortgage were still in Boyfriend's name. Girlfriend argued that she was an "equitable" owner of the house, so she should get her interest deduction. The IRS said otherwise, and the Tax Court yesterday sided with the taxman:

Specifically, petitioner did not have legal right to any rents or profits from the home, nor did she bear any of the risk of loss associated with it. Furthermore, petitioner has not shown that she was legally responsible for insuring the property or paying any taxes, assessments, or charges. There is also no indication that petitioner had the right to obtain legal title by paying the balance of the purchase price. Accordingly, we find that petitioner was not an equitable owner of the home before her name was added to the mortgage and deed in June 2007 and sustain respondent's determination in the notice of deficiency.

The Moral? Insist on the ring. Failing that, at least insist on title to the house you're paying for.

Cite: Wheeler, T.C. Summ. Op. 2011-83

Flickr image courtesy wwarby under Creative Commons license

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It's hard to keep a secret...

July 07, 2011

...and it's getting harder when the secret is a bank account. Jack Townsend passes on "Reports That the Swiss are Relaxing Tax Information Sharing Rules"

If your "tax planning" means "hiding cash overseas," you may well need a new plan.

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The kinder, gentler IRS goes after a dementia patient

July 06, 2011

Give the IRS credit: they don't let sad stories stand in the way of collecting taxes. On the other hand, the Tax Court apparently falls for sad stories.

Take the case yesterday where the IRS audited a return of a woman with dementia who failed to file her return for 2007. The IRS caught up with this tax scofflaw, whose attorney-in-fact brazenly attempted to offset her income with $49,580 paid to two "caregivers." She avoided more serious potential problems with the IRS via a technicality (she died), but the service still went after her estate, saying the caregiver expenses weren't deductible medical expense:

Citing Gardner v. Commissioner, T.C. Memo. 1983-541, and sec. 1.213-1(e)(1)(ii), respondent (IRS) noted that "expenses incurred which are merely beneficial to the general health of an individual are not deductible." Further, citing Borgmann v. Commissioner, 438 F.2d 1211 (9th Cir. 1971), affg. T.C. Memo. 1969-129, respondent asserted that "the salary and cost of room and board for housekeepers hired on the advice of a doctor are not deductible medical expenses." At trial respondent asserted that petitioner had not established that (1) decedent's "significant body functions were impaired" during 2007 or (2) services were provided to decedent "pursuant to a plan established by a qualified health care professional".

But the Tax Court went all soft:

The caregivers are not licensed healthcare providers, and the payments to them were not for the diagnosis, cure, mitigation, treatment, or prevention of decedent's disease. However, the amounts paid to the caregivers are deductible if their services are qualified long-term care services as defined in section 7702B(c). See sec. 213(d)(1)(C).

...

A licensed health care practitioner means any physician, registered professional nurse, licensed social worker, or other individual who meets requirements that may be prescribed by the Secretary. Sec. 7702B(c)(4). Dr. Finkelstein, a physician, is a licensed healthcare professional. The December 2006 evaluation showed that decedent required assistance with activities of daily living but does not specify which activities of daily living. Thus, while we are unable to conclude that Dr. Finkelstein certified that decedent had the ADL level of disability, he diagnosed decedent as suffering from severe dementia; i.e., decedent was cognitively impaired.

The Tax Court sided with the patient, allowing the home health aide deductions.

I've seen similar cases where a spouse has incurred steep expenses for help to enable a chronically ill husband or wife to stay at home. It never occurred to me that the IRS would challenge such an expense. This case at least shows the IRS will have a hard time winning such a case, but it shows that it's worth getting a doctor to certify the need for health care assistance.

Cite: Estate of Baral, 137 T.C. No. 1

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Hot summer Carnival!

July 06, 2011

It's too hot to sleep, so grab your cigarettes and cigars, cameras and film, and head to the new Carnival of Taxes!

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Kay Bell has rounded up some of the best the tax blog world has to offer. Check it out.

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Area scientists discover complexity reduces tax compliance

July 06, 2011

Dan Meyer notes that the government has stumbled upon the obvious:

The Government Accountability Office recently released a study which indicated that the voluminous amount of content in the U. S. Tax Code and Regulations can lead to errors and understated taxes.

...


Ya think?!

Sometimes the obvious is the hardest to accept.

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Misguided nostalgia

July 05, 2011

Jim Maule knows a lot about taxes, but even a brilliant man can hit a wrong note. Here he pines wistfully for rationing:

Once upon a time, when it was necessary to defend the nation’s freedoms, everyone pitched in, one way or another. Some served in the military, almost everyone was subjected to rationing, almost everyone paid taxes, many stepped up to perform volunteer services, and almost everyone bore the burden of lifestyle restrictions. Today, claims that letting the poor get poorer, the sick sicker, the unemployed more desperate, and the rich richer will strengthen the freedoms on which this independent, and expensive, nation has been built resonate among those whose ability to see beyond the horizon and into the future is weak or missing.

This is looking at history through rose-colored glasses and the present through the wrong end of the telescope. Compared to today, the 1940s were awful. Carnage, death and conscription aside, things at home were dreary. You couldn't buy gas, you couldn't get new shoes, and wartime cookbooks made the best of ingredients you wouldn't think of eating today.

Meanwhile, life expectancy is better than ever, we take for granted comforts and conveniences that would have seemed like science fiction in World War II, and one of the biggest health problems of the poor today is not rickets, but obesity. Poverty is way down not only in the U.S., but worldwide. We're richer, healthier and living longer than ever, even during our current economic debacle. Yet to hear Jim Maule tell it, things are only getting worse.

Prof. Maule is especially off-key when he implies it's a bad thing to be "letting" the rich get richer. The alternative to allowing this is to forbid it. The 20th Century can be looked at as a big uncontrolled experiment in not letting the rich get richer -- an experiment that still twitches in Cuba and North Korea. That went badly. When it was "allowed," it worked out better for everyone.

Peter Pappas has more.

Related: George Washington, too poor to buy a radio

Update: The TaxProf has more.

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Film credits are a great idea, when you are the beneficiary

July 05, 2011

Not so much if you are the taxpayer. A new Tax Foundation commentary discusses recent New York and California studies touting fabulous returns from Film Tax Credits to taxpayers:

The New York study, conducted by Ernst & Young but commissioned by and paid for by the New York film office and the MPAA itself, reaches its positive numbers only by taking credit for all economic activity remotely related to film production. This is problematic because it ignores the concept of "opportunity cost"—the fact that the money used for film subsidies, and the labor and resources used by them, would have been used for something else in the absence of the program.

Even if the displaced activity is less productive, it still means there's some amount of economic activity that would occur without the incentive program. E&Y's studies attribute all economic activity remotely related to film production to the film incentive program's existence. This is especially problematic for New York (and California), as they draw a significant number of film and television productions even without incentives. (A just released study from the Los Angeles County Economic Development Corporation makes the same critical error.)

Money spent on film tax credits (and yes, it really is spending, even if it's run through a tax return) is money that can't be spent on other things. Unless the film activity is somehow magically better for the economy than any other business activity -- a case I've never seen made -- film credits just take your money and give it to Hollywood.

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Temporary = 35 years

July 05, 2011

The .2% FUTA surtax, enacted as a temporary measure during the 1970s, finally expired last week. Roger McEowen and Paul Neiffer have more.

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Amtrak's ridership forecasters must be taking outside work

July 05, 2011

From Going Concern:

PwC Report Finds That Wildly Optimistic Projections for Visitors to the NASCAR Hall of Fame Basically Came Out of Thin Air

The resemblance to Amtrak traffic projections is uncanny.

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Over Toulon, July 5, 1944

July 05, 2011

Photos from Sgt. John Kristan's last mission.

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Happy Independence Day!

July 04, 2011

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Troop 280 leads the West Des Moines parade.

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Darth Shulman to foreign account holders: I am altering the deal. Pray I don't alter it any further.

July 01, 2011

Jack Townsend explains the IRS bait and switch in its 2009 foreign account "amnesty":

...the Taxpayer Advocate criticizes the IRS's implementation of its statement in the 2009 OVDP that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.” The IRS did the old bait and switch on that seemingly clear statement.

He quotes the Taxpayer Advocate's report:

On March 1, 2011, more than a year after the 2009 OVDP ended, the IRS “clarified” its seemingly unambiguous statement.139 It would no longer consider whether taxpayers in the 2009 OVDP would pay less under existing statutes on the basis of non-willfulness or reasonable cause. Such taxpayers could either agree to pay more than they believed they owed or withdraw from the 2009 OVDP and face the possibility the IRS would assert massive civil penalties and seek criminal prosecution.

So remember, IRS Commissioner Doug Shulman is all about fairness.

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That's a lesson he'll never forget

July 01, 2011

After being sentenced to 20 years in federal prison on a breathtaking array of tax and fraud charges, is there any way to further bring down fallen Cedar Rapids real estate magnate Robert Miell?

Why, yes, there is:

The Iowa Real Estate Commission hereby revokes the real estate broker license of Robert K. Miell. The Commission also assesses Respondent a fee of $75.00 for costs associated with conducting the disciplinary hearing. In addition, the executive officer of the board may bill Mr. Miell for any witness fees and expenses or transcript costs associated with theis disciplinary hearing. Mr. Miell shall remit payment for these expenses within thirty days of receipt of the bill.

How did he get into such a fix? Mr. Miell was charged with submitting fraudulent insurance claims and evading taxes. His sentencing judge went into some detail:

According to Judge Bennett, the fraud in this case was not an aberration: "In the course of investigation of the criminal conduct at issue in the numerous charges against Miell, evidence was developed...that fraud was Miell’s everyday way of doing business." Judge Bennett says the fraud included:

- Submitting false damage claims to an insurance company to get reimbursed for non-existent hail damage to roofs of 145 properties.

- Using a phony home repair business, "The Home Doctor," to generate fake repair invoices for non-existent damages as a pretext for unjustly keeping tenant damage deposits.

- Forging notary signatures with a false notary stamp.

- Using the name of a former associate without his knowledge to cover up his involvement with "The Home Doctor."

But now he'll rethink his life.

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The Tax Preparation industry is an unregulated jungle of anarchy

July 01, 2011

Some headlines of non-regulation this week:

USDOJ: United States Sues Seattle-Area Man to Bar Him from Promoting Alleged “Form 1099-OID” Tax Fraud Scheme

Montana accountant sentenced for tax fraud

Rocket Refund owner gets prison for tax fraud convictions

FEDERAL COURT BARS ALABAMA WOMAN FROM PREPARING FEDERAL TAX RETURNS

JUSTICE DEPARTMENT SUES TO STOP ORANGE COUNTY, CALIFORNIA, MAN FROM SELLING BILLIONS IN FAKE TAX CREDITS

But that's apparently not real regulation. I'm sure none of this would have happened if they had Preparer Identification Numbers and IRS competency tests.

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Hot day Buzz

July 01, 2011

It's supposed to be another scorcher today, with highs in the mid-90s. So pour yourself a cold one and catch Robert D. Flach's special Friday Buzz.

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Flickr image by Misserion under Creative Commons license

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