Latest News on Tax Scams

IRS offers to settle with insurance tax scammers

Since 2014, the list of Dirty Dozen Tax Scams has included “captive” insurance companies. Although the law allows companies to create captive insurance companies to insure against legitimate risk. In that case, the insured company can deduct the premiums it pays for the insurance.

“However, in some “micro-captive” structures, promoters, accountants or wealth planners persuade business owners to participate in scams that lack many of the attributes of insurance.”

The IRS has pursued hundreds of cases against such schemes in Tax Court after auditing the taxpayer companies.  After prevailing in three recent U.S. Tax Court cases, the IRS said it has decided to offer settlements to 200 taxpayers who are currently under exam. The IRS began mailing out time-limited settlement offers spell out specific settlement terms. Taxpayers who don’t receive a letter aren’t eligible for this resolution, the IRS pointed out.

“The IRS noted that it has consistently disallowed the tax benefits claimed by taxpayers in abusive micro-captive structures. While some taxpayers have challenged the IRS position in court, none have been successful to date. The IRS said it would continue to disallow the tax benefits claimed in abusive micro-captive transactions and continue to defend its position in court. The IRS has decided, though, to offer to resolve some of the cases.”

What this means is that there are probably 1000s of these situations out there, but that only a few of them have been audited. Still fewer have been taken to court.

The famous “Son of Boss” resulted in 1,165 tax cases. The IRS is apparently attempting to clear out the individual cases by offering deals. The real target of this effort is to find the advisrrs pushing the illegal schemes & prosecute them. In ‘Son of Boss’ tax fraud case, KPMG pled guilty to tax fraud.

Taxpayers are unlikely to go to prison, but their advisers are likely to.

 

Some tax scams:

KPMG partner David Middendorf

Three former KPMG partners

Son of Boss

IRS Dirty Dozen

Genesis of the U.S. Tax System

Little Know Fact

Something very few people realize, the 16th amendment to the constitution created two tax systems, one for individuals and and one for businesses. And there’s a world of difference between them.

After proposing the new amendment, Congress began to worry that the amendment wouldn’t be ratified by the states. The issue was the way it was worded.

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

The specific language causing the concern was, “collect taxes on incomes from whatever source derived.” The concern was, the way it was written included money borrowed & the proceeds when selling at at loss in income subject to taxation.  Obviously, Congress had a good reason to be worried. So at the last moment, Congress took out ads in newspapers all over the country promising to ‘tax only profits’.

That relieved an uneasy electorate and the amendment passed unanimously among all the states that voted. Voters weren’t opposed to income tax, they were opposed to an unreasonable tax.

The 16th amendment was subsequently ratified by the Supreme Court in ‘Glenshaw Glass’ and added to the tax code in section 162 of the 1954 tax code. In their deliberations, both the Supreme Court & Congress considered those ads as ‘legislative intent’. Courts have subsequently looked back at those ads to determine Congress’ intent. Intent is crucial to determining how the law will be interpreted and enforced.

In the final analysis, this created to tax systems, which I will explain in my next post.

 

Good News About Tax Audits

Good news on the tax audit front for most taxpayers, but bad news on the penalty front.

The IRS trend of auditing fewer & fewer tax returns continued last year with an enormous leap forward. The IRS audited only 900,000 returns out of a total of 150 million individual tax returns filed. That amounts to only 0.06%. In 2011, they audited 12.3% of returns. Let’s face it. That’s not very many audits. That’s good news.

The IRS has been shifting its focus for raising funds from tax audits to penalties & fees for the last several years. As the audit rate has dropped, IRS penalties have become noticeably more expensive. It started with penalties of hundreds of thousands or millions of dollars for failure to report foreign assets. 1099’s have become a cesspool of penalties. But the most noticeable result is the declining audit rate for most taxpayers.

Nobody that we prepare tax returns for needs to worry about a tax audit anyway. In the first place, we absolutely won’t help anyone cheat. Life is too short for both of us to play that game. In the second place, we’ve never had a bad result in a tax audit. Sometimes, there is a disagreement on an audit, and we have to fight. (We absolutely will.) Sometimes, we have to push the issue all the way to the courthouse steps. But, so far, the IRS has always capitulated. Once they capitulated in the hallway in front of the court room. That was a case of a very disagreeable appeals agent.

Some people think the strategies we use are a little risky. Let me disabuse you of that impression. We don’t go anywhere near the dreaded gray areas. We stay right smack dab in the middle of the tax code. Everything we do is completely litigated. But we are not afraid of doing things that are not commonly done by privately owned businesses and their owners. In fact, most of the things we do fall into that category. Multinationals are subject to the same tax code you are subject to. We can do anything they do and many things that are impossible for them to do. Privately owned businesses like you are sitting in the sweet spot. Within reason, the sky is the limit. Unfortunately, it’s been my experience that most tax practitioners spend all their time & effort on preparing your tax return. We spend a good deal of our time trying to find ways to cut your tax, legally.

Here’s a couple of charts to clarify things.

Individual Income Tax Returns Examined in Fiscal Year 2018
by Size of Adjusted Gross Income
Size of adjusted gross income (AGI)* Percentage of returns
filed in Calendar Year 2017**
Percentage of returns examined in
Fiscal Year 2018***
No adjusted gross income 1.68% 2.04%
$1 but less than $25,000 35.59% 0.69%
$25,000 but less than $50,000 23.65% 0.48%
$50,000 but less than $75,000 13.44% 0.54%
$75,000 but less than $100,000 8.66% 0.45%
$100,000 but less than $200,000 12.41% 0.44%
$200,000 but less than $500,000 3.72% 0.53%
$500,000 but less than
$1 million
0.58% 1.10%
$1 million but less than
$5 million
0.25% 2.21%
$5 million but less than
$10 million
0.02% 4.21%
$10 million or more 0.01% 6.66%

From the New York Times, here’s the trend. Trending down.

That’s a little small. Who knew? But you can see the trend from 2011 at it’s highest to 2017. Quite a drop.

There you go. Enjoy.

Good news on the tax audit front for most taxpayers, but bad news on the penalty front.

 

The IRS trend of auditing fewer & fewer tax returns continued last year with an enormous leap forward. The IRS audited only 900,000 returns out of a total of 150 million individual tax returns filed. That amounts to only 0.06%. In 2011, they audited 12.3% of returns. Let’s face it. That’s not very many audits. That’s good news.

 

The IRS has been shifting its focus for raising funds from tax audits to penalties & fees for the last several years. As the audit rate had dropped, IRS penalties have become noticeably more expensive. It started with penalties of hundreds of thousands or millions of dollars for failure to report foreign assets. 1099’s have become a cesspool of penalties. But the most noticeable result is the declining audit rate for most taxpayers.

 

Nobody that we prepare tax returns for needs to worry about a tax audit anyway. In the first place, we absolutely won’t help anyone cheat. Life is too short for both of us to play that game. In the second place, we’ve never had a bad result in a tax audit. Sometimes, there is a disagreement on an audit, and we have to fight. (We absolutely will.) Sometimes, we have to push the issue all the way to the courthouse steps. But, so far, the IRS has always capitulated. Once they capitulated in the hallway in front of the court room. That was a case of a very disagreeable appeals agent.

 

Some people think the strategies we use are a little risky. Let me disabuse you of that impression. We don’t go anywhere near the dreaded gray areas. We stay right smack dab in the middle of the tax code. Everything we do is completely litigated. But we are not afraid of doing things that are not commonly done by privately owned businesses and their owners. In fact, most of the things we do fall into that category. Multinationals are subject to the same tax code you are subject to. We can do anything they do and many things that are impossible for them to do. Privately owned businesses like you are sitting in the sweet spot. Within reason, the sky is the limit. Unfortunately, it’s been my experience that most tax practitioners spend all their time & effort on preparing your tax return. We spend a good deal of our time trying to find ways to cut your tax, legally.

 

Here’s a couple of charts to clarify things.

Individual Income Tax Returns Examined in Fiscal Year 2018
by Size of Adjusted Gross Income
Size of adjusted gross income (AGI)* Percentage of returns
filed in Calendar Year 2017**
Percentage of returns examined in
Fiscal Year 2018***
No adjusted gross income 1.68% 2.04%
$1 but less than $25,000 35.59% 0.69%
$25,000 but less than $50,000 23.65% 0.48%
$50,000 but less than $75,000 13.44% 0.54%
$75,000 but less than $100,000 8.66% 0.45%
$100,000 but less than $200,000 12.41% 0.44%
$200,000 but less than $500,000 3.72% 0.53%
$500,000 but less than
$1 million
0.58% 1.10%
$1 million but less than
$5 million
0.25% 2.21%
$5 million but less than
$10 million
0.02% 4.21%
$10 million or more 0.01% 6.66%

From the New York Times, here’s the trend. Trending down.

 

Apple: Best Company in the World?

The evidence is pretty clear to me, Apple is the best company in the world. If there was a hall of fame they would be the first inductee. Their computers, iPhones, etc. are arguably the best products in the world. But on the flip side of that, from what I can tell, they are the best in the world at tax avoidance. Whatever you think of their products, that’s a one, two punch that’s hard to overlook.

NEW YORK-JULY 24 – The Apple logo on the glass of the Apple Store, Fifth Avenue on July 24 2015 in Manhattan.

One of the biggest costs any Global company has to deal with is tax. There’s 50 different states and 200 different countries with different tax rates. Apple has been the absolute best at avoiding overseas tax (& state tax) since Jobs returned to Apple in 1997. Maybe longer.

Their overseas tax has essentially been zero for the entire time. They manage that with the techniques we describe in the following services on our website: Intellectual assets, interstate taxation & international taxation. That isn’t a coincidence. Ever since I saw a GAO article about multinationals paying less tax at lower rates than privately owned businesses, I have been studying Apples & other multinationals’ tax practices. Obviously, they are not advertising this stuff, but every now and then something happens that allows me to see behind the curtain. This article resulting from a leak of secret documents from Apple’s attorneys is one of them.

Their famous Double Irish with a Dutch Sandwich cut foreign sales outside the U.S. to zero tax until 2015. That arrangement became public in 2013 when Congress held Congressional hearings and Ireland was forced to alter their taxation practices. They restructured their tax strategies in 2014. If something happens again, they’ll restructure yet again. There’s too much money on the table to be lackadaisical about it.

Note. Apple’s Irish subsidiaries claimed that almost all of their income was not subject to taxes in Ireland or anywhere else in the world. And rightfully so. They were right. The Irish government agreed with them. They did nothing wrong. No charges were ever brought. But the EU got involved and Apple had to abandon the Double Irish tax strategy for (an island of Jersy) tax strategy.

This is about as important as it can get. Without out the billions they saved in overseas tax, Apple would never have become the most valuable business in the world. Neither would Google, Facebook, Caterpillar, etc. have achieved their massive valuations. I refer to Apple and other multinationals as businesses rather than a companies, because each of them have multiple companies under their umbrella. No multinational is a single company.

A leak of secret corporate records reveals some interesting things. By quietly transferring trademarks, patent rights and other intangible assets to offshore companies, global businesses cut their tax bills dramatically. Also, Apple’s attorneys mailed 14 questions for their attorneys’ offices in the Cayman Islands, the British Virgin Islands, Bermuda, the Isle of Man, Guernsey and Jersey, asking them to “confirm that an Irish company can conduct management activities . . . without being subject to taxation in your jurisdiction.” Apple also asked for assurances that the political climate would remain friendly: “Are there any developments suggesting that the law may change in an unfavorable way in the foreseeable future?”

For more interesting tax information you probably don’t know, visit our website [https:/elliscpafirm.com] or our blog [https:/bizztrategy.com].

We do the same things, absent agreements with tax jurisdictions for privately owned companies. If you qualify, you could save hundreds of thousands of dollars a year. Or, if you’re not that big, you could save thousands or tens of thousands of dollars. Apple saved billions.

 

 

Corporate Reorganization

Business reorganizing or restructuring is an action taken by businesses to significantly modify the structure or the operations of the company. This usually happens when a company is facing significant problems and is in financial jeopardy. But it often happens to enhance it’s competitive position, to protect its assets or to get out in front of a problem. It’s another tool in their tool box. Some examples of Global 500 companies:

Global 500 Re-orgs

  1. Forbes announced, Jeff Bezos is unloading a billion dollars of Amazon stock.
  2. In 2015 Caterpillar announced restructuring and cost cutting plans right before they were hit with a $2 billion penalty for tax fraud.
  3. In 2018 John Deere announced realignment of leadership responsibilities.
  4. Humana’s CEO-founder had twice before had shifted the company’s course to a brand-new industry.
  5. Chase Manhattan Bank and Chemical Bank used their merger as an opportunity to both reduce operating costs and achieve an important strategic objective.
  6. Scott Paper‘s chief executive officer (CEO) decided to implement the layoffs quickly—in less than a year—to minimize workplace disruptions and gain credibility with the capital market.

We’ll probably never know why they reorganized. What matters is they reorganized for some reason. Despite the massive size of Global 500 companies, and despite the difficulties presented by re-organizing a massive company, they are not afraid of re-orgs.

Privately owned business re-orgs

Privately owned businesses seldom re-organize.  It’s just not one of the clubs in their bag. They’ll ride their present structure right into the ground even when the company is collapsing around them.

Never fall in love with your company. You can fall in love with your business. A business has value because that’s how you make money. A company is a legal creation for operating a business. Nothing more & nothing less. Most people don’t think this through well enough and get the two confused. A few years of operating your company like it was your business can put you in vulnerable position.

If most companies lose a lawsuit, they could lose everything they’ve been building all their lives. If they win, the litigant can strip your company bare. We plug that hole through business re-org by removing everything of value from their operating company and putting it in an LLC that does no business what-so-ever. It never does anything to get itself sued. If everything of value is in the LLC, and the mothership loses a lawsuit, you can just shutter the doors and start over again with a new company the very next day with everything of value behind an impenetrable LLC barrier. The LLC just needs to license it to your new company, and you’re good to go. Since you own both of them, there are no barriers.

Business restructuring and reorganization is one of our strengths. I personally have been involved in two Fortune 500 re-orgs & countless re-orgs of private companies.  Not all of them have followed the approach we describe in this post. There are many ways to re-org and many things a business wants to accomplish. Every private re-org I was involved with succeeded without repercussion. We re-org our clients frequently for tax purposes. We have significant expertise in this area.

An actual example.

A few months ago I got a call from a client who was being sued by a marketing company. They had entered into a contract and the marketing business failed to perform, so my client quit paying the marketer. But there was a contract, and the contractor sued the company, but not the individuals. There was no way to sue the individuals. Their lawyer was vigorously defending the suit. He warned them it could cost several thousand dollars to defend suit. He also warned them, they could lose the suit.

For some reason they called me.

  1. I questioned them and discovered they hadn’t recorded any business assets. Their company was basically a vacant shell. There were assets, but no assets had been recorded in the company. They were still owned by the owners.
  2. I advised them to abandon the company.
  3. I also advised them to simultaneously form two new companies, an LLC to hold company assets, and a corporation to operate the business.
  4. I then advised them to legally transfer all the business assets into the first new company (an LLC), including web sites, trade names, trade secrets, and everything essential to carrying on businesses. Since they had never trademarked their name, I suggested the do that in the name of the LLC.
  5. Simultaneously again. I advised them to open new bank accounts in the name of the new corporation and begin conducting business in the new corporation.
  6. I also advised them to run this past their lawyer. He said it would work. The only thing he suggested is to file bankruptcy on the old company that had failed. That was a good final touch.
  7. It did work. The marketing company, rightly or wrongly, was got nothing but legal fees.

Tax savings

This methodology is one of my favorite re-orgs. It is used to protect vital assets and to change the character of earnings. It can also be used to eliminate C corp taxation by removing earnings from a C corporation and turning it into royalty income on the personal returns.

That eliminates an entire level of taxation.

 

CA reverses Tax Court’s decision to deny anonymity to serial whistleblower.

Whistle blower

Help them cheat, then turn them in?

I knew there was such a thing as an IRS whistle blower, but i didn’t know it was it’s own cottage industry. Which it apparently is. But I’m really having a hard time figuring out how it worked.

GINSBURGSenior Circuit Judge.

“The Appellant asked to proceed anonymously before the Tax Court when challenging the decision of the Internal Revenue Service (IRS) to deny his application for a whistleblower award. The Tax Court denied his request, concluding the balance of interests weighed against anonymity because the Appellant is a “serial filer” of whistleblower claims, which he bases upon publicly available information. The Tax Court’s rationale was that if it does not “identify serial filers by name, the public will be unable to judge accurately the extent to which the serial filer phenomenon has affected the work of the Tax Court.” Whistleblower 14377-16W v. Comm’r, 148 T.C. 510, 518-19 (2017).

Read more here.

My experience with cheating clients

If you’ve ever had clients tell you how to do your job, you can probably relate to this. Of course when it comes to taxation, it involves criminal charges with jail sentences. So I don’t go there. This year, I had a fairly successful client in the cannabis industry that tried to talk me into cheating in three different ways.

  1. First, he wanted to deduct ah investment he made in a company that was still operating and paying taxes. He claimed, probably correctly, he paid more than it was worth and wanted to deduct the difference. That would work for GAAP, but not for taxes. For tax, that’s a violation of law.
  2. Second he found a tax preparer who was willing to play loosey-goosey with 280(e), which limits the deductions that a cannabis business can deduct. He told me top notch cannabis preparers were paying less attention to 280(e). I checked around and some of the top people in cannabis taxation said it was bullshit, as I expected. It ‘s against the law to ignore 280(e). Of course you can do all kinds of things with 280(e), but you can’t just ignore what it says.
  3. Third, he wanted us to deduct accrued interest in a cash basis company. Accruals can only be deducted in an accrual basis company.

In everyone of those situations, I could lose my ticket. All of them involved thousands or hundreds of thousands of dollars in tax.

I refused, he got angry, left and started bad mouthing me.

Summary

If an accredited tax preparer helps a client cheat, they are both liable. The taxpayer for preparing a false return, and the taxpayer for providing false information.  If the client lies to the tax preparer and fails to product the documents, the tax preparer is still liable for not getting the documents. I see no way the tax preparer escapes unscathed.

How it should work

If someone goes to a tax preparer with the intention of cheating, it is the tax professional’s responsibility to tell the taxpayer(s) they could go to jail for cheating. If they persist, the tax preparers should resign from the engagement.

Something else that surprises me is this. The whistle blower bases his claims on “publicly available information.  I’m not sure what that means. Apparently this guy was a tax preparer and used publicly available information to turn in his clients for a reward.

This does not sound like the entire story. i’m guessing there is more here than meets the eye.

And why would the preparer want anonymity?

I have no inkling what the underlying facts are in the court case that started this blog post off. It raised some interesting issues that I don’t understand how the preparer got around. Of course, I’m not going to turn my client in, but I wouldn’t feel bad if someone else did.

One other thing.

I know a person who was very high profile in American politics that was convicted of tax fraud 15 years ago, and he is still in prison. He is likely to die there.

Don’t go there.

A better approach that I suspect is used from time to time, is to simply not pay your taxes. Wait a few years and settle for pennies on the dollar. I don’t ever advise that, but I know it happens.