Friday, April 25, 2014

Fall into a Fortune

Getting an audit notice is never anyone's idea of fun. But getting audited isn't always the disaster it might seem. In fact, for fiscal 2012, 107,820 lucky winners got refunds after their audits. Granted, that's still shy of seven percent of everyone audited that year. But it proves you can walk away from the IRS a winner.
Here's a clever strategy one taxpayer used to walk away from the IRS with a windfall. But you might want to be careful before you try it yourself!
William Berroyer owned an HVAC contracting company on Long Island. On July 3, 2008, he met with the IRS at their Hauppauge office to discuss a $60,000 payroll tax bill he owed on behalf of his business. The agent in charge of his case directed Berroyer to a conference table, where he nervously worked out a payment plan. As he stood up to leave, he twisted his foot in about 15 feet of telephone cord, spun around, hit a metal file cabinet, and landed flat on the floor.
At first he said he felt fine — he just wanted to get out of that conference room and back to his office. But then he called the auditor from the parking lot to say he had lost feeling in his lower leg. He made it back to his shop alright, but soon felt even worse and headed for the hospital. Berroyer wound up spending seven days in the emergency room and 10 days in rehab. Five years after the accident, he spends most of his time in a wheelchair and can't walk more than a few feet without canes. His injuries have interfered with all aspects of his life, including his work, his boating, his golf game, and even his no-longer-twice-weekly "special time" with Mrs. Berroyer.
(You already know where we're headed, don't you?) Naturally, Bennoyer sued. For $10 million.
There wasn't much argument over liability. The real contest focused on the extent of the injury. (Translation — was he just faking it?) Hospital records reported his diagnosis as "acute paraplegia, psychogenic in origin." Another doctor noted "Neuro exam and MRI findings not consistent with subjective complaints . . . . Affect is somewhat inappropriately bright." At trial, the government's medical expert conceded Berroyer had probably bruised his spinal cord, but that mild injury should long since have passed. Asked directly if Berroyer was faking or malingering, he replied "I don't use the terms faking or malingering. I use the term nonphysiological." (And really, doesn't "nonphysiological" sound so much better than "faking"?)
Judge Arthur Spatt ultimately ruled that the IRS's negligence had caused a "mild spinal cord injury." He awarded Berroyer $112,000 in medical expenses, plus $350,000 for past pain and suffering, plus another $250,000 for future pain and suffering. Oh, and he threw in another $150,000 for Mrs. Berroyer's "loss of services." And the best part . . .? Internal Revenue Code Section 104 says that compensation for injuries and sickness are nontaxable. That means the Berroyers get to keep all $862,000!
So, what do you think? An easy way to earn nearly a million bucks? Or would you rather skip the physical therapy and take advantage of easier strategies, like choosing the right entity for your business, the right plan for your retirement, and the right benefits for your family? We're sorry to confess we can't help you with a loose phone cord. But we can help you with the plan you need to pay the least tax allowed by law. So call us if you want to save tax — but don't want to wheel yourself into a courtroom to do it! 

James E. Mahoney, EA
228 E. Walnut St.
Suite A
Galion, OH 44833
(419) 468-8509

Thursday, April 17, 2014

Master This Green!

The calendar may say that spring officially begins on March 21. But for millions of golfers across the country, the season didn't really start until this weekend — specifically, when Bubba Watson outplayed 20-year-old phenom Jordan Spieth to
claim his second green jacket at the 2014 Masters.
Augusta National Country Club, home of the Masters, is America's temple of golf. Augusta's "perennial ryegrass" fairways are manicured to a smoother finish than your living room carpet, and its greens are so hard and fast you could play billiards on them. So, with all that lush green stretching as far as the eye can see, would it surprise you to learn that the residents of Augusta have "mastered" a lucrative tax break? It's become so identified with the legendary golf tournament that it's known as "the Augusta rule." But if you own your own business, you may be able to take advantage of it yourself.
Augusta, Georgia, is a small city with about 200,000 year-round residents. But for the second week of April every year, it becomes the center of the sports universe. Wealthy golfers descend upon the town from around the world. They want quality accommodations. But the nearest Ritz-Carlton is a looong drive away. (81 miles, to be exact. You don't even want to know what par that is.)
For many of those fans, the answer is to rent a house in town, just a chip shot from the tournament. Augusta National and the Augusta Metro Chamber of Commerce have even teamed up to create the Masters Housing Bureau to pitch week-long rentals — for up to $40,000. For lots of Augusta homeowners, that's a hole in one! (Of course, homeowners outside Augusta have taken advantage of the same rule for events like the Olympic games, the Final Four, and the Super Bowl.)
Now, ordinarily the IRS would take a big divot out of that $40,000 windfall. (Pro golfers typically tip their caddies 10% of their winnings, and if you think that's enough for Uncle Sam, think again!) But here's where the Augusta rule comes in. Code Section 280(A)(g)(2) provides that if you rent your home (or vacation home) for less than 15 days a year, there's no tax due on that income. In fact, IRS Publication 527 says you shouldn't even report it. So, if you have a house in Augusta, you've got that going for you! Which is nice.
Don't have a house in Augusta? Don't despair! Let's say you own your own business, and you want to host a customer appreciation event. You could hold it at your house and deduct the cost of meals and entertainment you provide for your customers. But the Augusta rule also lets you rent your home to your business — for a commercially reasonable "fair market value," of course. Your business will deduct the rent it pays, which gives you a birdie on your tax bill. But so long as you don't do it more than 14 days per year, you won't have to report the income on your personal return. Pretty slick, right?
If you're a golfer, you've almost certainly dreamed of someday playing Augusta. But you wouldn't dream of doing it without an experienced caddy — because, when you sign that scorecard, you want as few strokes as possible. When it comes to taxes, that's our job. We give you the plan you need, so that when you sign your 1040 . . . well, you get the picture. So call us before you "hit the course." And remember, we're here for the rest of your foursome as well! (419) 468-8509

Wednesday, April 9, 2014

A Little Bit of Tax

It seems like every day brings new questions about the digital currency called bitcoin, which first appeared in 2009. Who is the shadowy "Satoshi Nakamoto" who created the currency's protocol and software? Who stole $450 million worth of bitcoin from the Tokyo-based Mt. Gox exchange? Who was the mystery buyer who used bitcoin to snag a $500,000 house on the Indonesian island of Bali?
Last week, the IRS solved a mystery by ruling on how bitcoin would be taxed, at least here in the United States. And their answer to that question may shoot a hole in bitcoin's hope to become more widely accepted. Notice 2014-21 holds that virtual currencies like bitcoin will be treated as property — not currency — for U.S. tax purposes. That means, among other things, that if you take payment in bitcoin at your business, those payments will be taxable (at the fair market value of the currency at the time you earn it), subject to the same rules as if you had accepted cash. If you earn wages in bitcoin, they'll also be taxable, must be reported on a Form W-2, and will be subject to income and payroll tax withholding as if you had earned those wages in cash.
But those rules come as no surprise. The real headache comes when you use bitcoin to buy or sell something. Let's say you acquire two bitcoins for $500 each. A week later, they're worth $520, and you use them to pay an independent contractor across the country or even in the Phillipines. You'll have to report that $40 gain on your taxes. "That's not such a big deal," you might think. "My bitcoin is worth more; I'm ok with paying tax on my gain." But now imagine having to report gains or losses on every bitcoin transaction you make!
If bitcoin is going to succeed as an actual currency, it has to pass three strict tests. (Getting an "A" for effort won't work here.) First, it has to be a medium of exchange, meaning it has to be widely accepted as payment for goods and services. (Everyone takes U.S. dollars, but most people have never used bitcoin — at least, not yet. Although, Virgin Atlantic has announced that you can use bitcoin for their $250,000 flights into space.) Second, it has to be a store of value, meaning users feel safe holding it without worrying that its value will fall. (You can take payment in cash knowing that it will be worth the same amount tomorrow.) And third, it has to serve as a unit of account, meaning it has a standard value and every bitcoin is the same as every other bitcoin. (If you have a wallet full of $20 bills, it doesn't matter which one you use to pay for your morning latte.)
The IRS's ruling that bitcoin is property means bitcoin fails that last test. Let's say you have three bitcoins: one that you acquired when it was trading at $280, one that you acquired at $480, and one that you acquired at $880. It makes a real difference which one you spend! It's no wonder the New York Times headlined one story on the IRS notice: "Taxes Won't Kill Bitcoin, But Tax Reporting Might."
There's a "bit" of good news in the ruling. If you hold bitcoins for investment, you benefit from lower rates on long-term capital gains. But that's going to be scant comfort for most users who really want to see bitcoin succeed as a true currency.
We've got a long time to go before most clients have to worry about bitcoin in anything but the most theoretical sense. But keeping an eye out on the future is what separates us from the vast majority of tax professionals who just settle for recording history. Your job is to go out and make money, in dollars, bitcoin, or whatever else works best for you. Let us worry about helping you keep it!

Wednesday, April 2, 2014

Fast Track to the Presidency

Last week, we talked about the IRS Criminal Investigation unit's Fiscal 2013 annual report. We told you about four of the 2,812 offenders who drew prison sentences for their efforts: the drag racer who applied for $83 million in fraudulent gas tax refunds, the surgeon who "operated" on his tax bill using foreign trusts and shell companies, the Japanese restaurant owner who hid receipts in boxes marked "seasoned octopus," and the prisoner who filed false tax returns for his fellow inmates and sent the refund checks to his mother. But the IRS report detailed over 100 such stories — so, at the risk of beating a dead horse, we couldn't resist sharing just a few more:
  • They say everything is bigger in Texas. Apparently that includes public corruption, which is an IRS priority. Abel Limas was a former police officer and state judge in Brownsville who discovered he could supplement his government salary by turning his office into "a criminal enterprise to enrich himself and others through extortion." In 2008, Limas issued a series of pretrial rulings in a case involving a helicopter crash. Later that year, he joined a law firm working on behalf of victims in that same crash. It turns out the law firm had promised him a cool hundred grand, plus a share of their fees, in exchange for those rulings. Now Limas is spending six years in a federal prison camp.
  • Whitney Houston once sang that she believed "the children" are our future. But some people believe the children are just another meal ticket. Take Nehemiah Muzamhindo, for example. Customs officials were searching the Zimbabwe native's house for evidence of passport fraud when they discovered he had scammed one of the world's largest children's charities out of $800,000. You think he remembered to pay tax on that money? Special Agent in Charge Erick Martinez, who picked up the case for the IRS, said that Muzamhindo's crime was worse than the usual fraud because "he diverted money intended for children for his own greedy purposes." Now he'll spend six years in federal prison. Even worse, according to Muzamhindo's lawyer, the case has brought him "a great deal of shame"!
  • You've heard that the family that plays together, stays together. But some families take that advice a little too far. Angela Myers operated Angie's Tax Service in Baton Rouge, Louisiana. She used her daughter's preparer identification number to file false returns using names and social security numbers stolen from a nearby nursing home. Apparently, she needed the money to pay for a sweet RV. Now she's spending 11 years, not traveling in the RV, but in a prison in Alabama where she won't even need a driver's license. But wait (as they say in the TV infomercials) . . . there's more! The IRS is also investigating Angie's son for threatening a witness in the case!
  • Lots of Americans grow up wanting to be President. The usual path is to spend years working your way up the political ladder, then run for the office. But who has time for all that? Alabama's Tim Turner declared that our current government is an illegitimate sham, then proclaimed himself President of the Republic for the united States of America (RuSA). Next, he started teaching fellow citizens how to pay their taxes with fake bonds. (Apparently, special paper stock, financial terminology, and elaborate borders help make them at least look legit.) Oh, and when one of his followers asked what really happened when that spaceship crashed near Roswell back in 1947, he let the cat out of the bag that every industrialized nation on earth has a treaty with the aliens! Now he'll have 18 years to negotiate his own agreement with the little green men.
We realize people are willing to go a long way to pay less tax. But you don't have to set up your own government! There are hundreds of legitimate ways to work within the system we've already got. You just need a plan. So call us at (419) 468-8509 for your plan, before the aliens come and take over for good!