Laura Schultz was expecting to hear from the IRS. After all, the Denver-area house cleaner owed the IRS about $80. But when she opened up a letter from the IRS, it wasn’t quite was she was expecting: a refund check for $122,783.51.
Schultz felt that it was a mistake – and it was. She called the IRS and they told her to destroy the check, which she did.
Of course, I know what you’re thinking: why didn’t she just keep the check? Because she knew better. I’ve gotten this call more than once from a client. The IRS always figures it out eventually (it’s pretty hard to misplace more than $100,000 for long) and you’re then stuck with repaying the principal plus interest.
And trust me, that’s not a letter that you want to get…Larry Kopsa CPA
Thursday, September 17, 2009
INMATES RUNNING THE ASYLUM
It's bad enough that the person in charge of the IRS, Treasury Secretary Timothy Geithner, is an acknowledged tax cheat who claims not to understand how to use Turbo Tax. Now, Charlie Rangel, the Chairman of the House Ways & Means committee, which writes all of the tax laws, has been discovered to be hiding even more income and assets than were previously disclosed.
Here are just a few of the current news stories, courtesy of Drudge:
Wednesday, September 16, 2009
OPINION: 'The Real Culture War Is Over Capitalism'
(Wall Street Journal) -- In a recent op-ed appearing at WSJ.com, American Enterprise Institute president Arthur Brooks writes: "There is a major cultural schism developing in America. But it's not over abortion, same-sex marriage or home schooling ... The new divide centers on free enterprise -- the principle at the core of American culture." Mr. Brooks notes that "the Congressional Budget Office predicts $9.3 trillion in new debt over the coming decade" and predicts "government spending will grow continuously in the coming years as a percentage of the economy -- as will tax collections." He also notes that a recent "Rasmussen poll conducted to choose the better system between capitalism and socialism, 13% of respondents over 40 chose socialism. For those under 30, this percentage rose to 33%." He reasons that "advocates of free enterprise must learn from the growing grass-roots protests, and make the moral case for freedom and entrepreneurship. They have to declare that it is a moral issue to confiscate more income from the minority simply because the government can. It's also a moral issue to lower the rewards for entrepreneurial success, and to spend what we don't have without regard for our children's future." See the op-ed at <http://online.wsj.com/article/SB124104689179070747.html>
Tuesday, September 15, 2009
ACORN TAX ADVICE TO HOOKER
Late last week, news broke that officials with the group ACORN were secretly videotaped allegedly offering advice to folks posing as a pimp and prostitute. While accusations have flown about what was or was not said/meant/intended/edited, it’s clear that at least one of the officials was offering improper tax advice.
Here’s the set up for the video. James O’Keefe, a 25-year-old independent filmmaker, and a young woman paid a visit to an ACORN office in Baltimore. O’Keefe posed as an over the top pimp and the young woman pretended to be a prostitute. They told the officials at ACORN that they were hoping to find housing where the young woman could continue to operate as a prostitute. Both acknowledge and are advised that prostitution is illegal. And that’s where the fun begins.
The young woman is first advised that she should file taxes even if she’s working as a prostitute. This is absolutely true. Gains from illegal activities are still reportable and taxable.
Next, the staffer advises the young woman that she needs a “code” for her occupation for purposes of her tax return. She’s referring to the “Principal Business or Professional Activity Codes” that the IRS requires for Schedule C. The instructions state:
Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.
After the young woman has advised that she’s a prostitute, the ACORN staffer advises her to refer to herself as a freelance performing artist. Hmm… I think I would have suggested “812990 – All other personal services.”
The young woman tells an ACORN tax advisor that she earns about $8,000 per month. The ACORN employee, it has been reported, then advised the young woman that she would report $9,600 per year on her tax return (as opposed to $96,000). It sounded very deliberate when I first read the reports but watching the video made me change my mind. Tax evasion or bad math? I vote bad math on this one.
The staffer goes on to advise (properly) that self-employment income reported on a Schedule C would be subject to self-employment tax unless it could be offset by expenses. The staffer goes on to improperly advise that clothing and grooming would be deductible as expenses (who honestly believes that what a prostitute wears would pass muster with IRS as a uniform?). She also suggests that gifts to clients might be deductible – they are, to a point. But those would be subject to limits. The “pimp” then suggests that condoms could be considered a client gift. I actually think condoms would be considered a legitimate business expense (certainly ordinary and necessary in the trade of prostitution), not a gift.
The “pimp” and the young woman then tell the staffers that they plan to bring in young, illegal immigrants to work as prostitutes. The “pimp” wants to keep them off of the books but the staffer advises that they should issue 1099s, a good idea except for the teensy-weensy detail that they’re illegal. When the “pimp” points this out again, the staffer backtracks and says, “well then, you don’t have to worry about them.” She’s right in that, without a proper tax ID number, you can’t issue a 1099. But that doesn’t mean that you don’t report those workers, it means that you don’t hire them in the first place. That should have been the answer.
The most disturbing part of the video is when the staffer suggests that the girls who are being trafficked for the purpose of prostitution could be claimed as dependents. The IRS defines a dependent as a qualifying child, or a qualifying relative. There’s no way that these girls could be described as a “qualifying child.” They almost fit the definition of “qualifying relative” since the intent is to live with the taxpayer “all year as a member of your household” – however, there is a caveat that the relationship must not violate local law. Clearly, in this situation, it does violate local law on a whole bunch of levels.
So it’s a mixed bag on the advice. Occasionally on the right track. But mostly bad/wrong/illegal.A lot has been said on both sides about the tape, including noting the holes in the editing. I’m glad that I watched it, though, rather than relying on reports from either side of the debate. Is it scream worthy? You can watch the tape here and judge for yourself what you think:
http://biggovernment.com/2009/09/10/chaos-for-glory/#more-274
Reportedly, both staffers have since been fired.
Here’s the set up for the video. James O’Keefe, a 25-year-old independent filmmaker, and a young woman paid a visit to an ACORN office in Baltimore. O’Keefe posed as an over the top pimp and the young woman pretended to be a prostitute. They told the officials at ACORN that they were hoping to find housing where the young woman could continue to operate as a prostitute. Both acknowledge and are advised that prostitution is illegal. And that’s where the fun begins.
The young woman is first advised that she should file taxes even if she’s working as a prostitute. This is absolutely true. Gains from illegal activities are still reportable and taxable.
Next, the staffer advises the young woman that she needs a “code” for her occupation for purposes of her tax return. She’s referring to the “Principal Business or Professional Activity Codes” that the IRS requires for Schedule C. The instructions state:
Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.
After the young woman has advised that she’s a prostitute, the ACORN staffer advises her to refer to herself as a freelance performing artist. Hmm… I think I would have suggested “812990 – All other personal services.”
The young woman tells an ACORN tax advisor that she earns about $8,000 per month. The ACORN employee, it has been reported, then advised the young woman that she would report $9,600 per year on her tax return (as opposed to $96,000). It sounded very deliberate when I first read the reports but watching the video made me change my mind. Tax evasion or bad math? I vote bad math on this one.
The staffer goes on to advise (properly) that self-employment income reported on a Schedule C would be subject to self-employment tax unless it could be offset by expenses. The staffer goes on to improperly advise that clothing and grooming would be deductible as expenses (who honestly believes that what a prostitute wears would pass muster with IRS as a uniform?). She also suggests that gifts to clients might be deductible – they are, to a point. But those would be subject to limits. The “pimp” then suggests that condoms could be considered a client gift. I actually think condoms would be considered a legitimate business expense (certainly ordinary and necessary in the trade of prostitution), not a gift.
The “pimp” and the young woman then tell the staffers that they plan to bring in young, illegal immigrants to work as prostitutes. The “pimp” wants to keep them off of the books but the staffer advises that they should issue 1099s, a good idea except for the teensy-weensy detail that they’re illegal. When the “pimp” points this out again, the staffer backtracks and says, “well then, you don’t have to worry about them.” She’s right in that, without a proper tax ID number, you can’t issue a 1099. But that doesn’t mean that you don’t report those workers, it means that you don’t hire them in the first place. That should have been the answer.
The most disturbing part of the video is when the staffer suggests that the girls who are being trafficked for the purpose of prostitution could be claimed as dependents. The IRS defines a dependent as a qualifying child, or a qualifying relative. There’s no way that these girls could be described as a “qualifying child.” They almost fit the definition of “qualifying relative” since the intent is to live with the taxpayer “all year as a member of your household” – however, there is a caveat that the relationship must not violate local law. Clearly, in this situation, it does violate local law on a whole bunch of levels.
So it’s a mixed bag on the advice. Occasionally on the right track. But mostly bad/wrong/illegal.A lot has been said on both sides about the tape, including noting the holes in the editing. I’m glad that I watched it, though, rather than relying on reports from either side of the debate. Is it scream worthy? You can watch the tape here and judge for yourself what you think:
http://biggovernment.com/2009/09/10/chaos-for-glory/#more-274
Reportedly, both staffers have since been fired.
Friday, September 11, 2009
HOBBY OR BUSINESS?
Larry, I have been raising horses for fun and have sold a few here and there. One of my buddies that I horse around with (no pun intended) suggested that I could maybe deduct my expenses as business expenses. What do you think?
Roger
Roger, this question is way too complicated to answer without discussing with you personally. If you are a client of our firm, call me and I will disucss with you to see if there is a possibility that your horse business is actually a trade of business or just a hobby. If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
To give you an idea of what we would be looking at to determine if you have a trade or business or a hobby, here are the questions that we would be reviewing:
Roger
Roger, this question is way too complicated to answer without discussing with you personally. If you are a client of our firm, call me and I will disucss with you to see if there is a possibility that your horse business is actually a trade of business or just a hobby. If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
To give you an idea of what we would be looking at to determine if you have a trade or business or a hobby, here are the questions that we would be reviewing:
- Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
- Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
- Do you depend on income from the activity? If so, your activity is likely considered a business.
- Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
- Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
- Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
- Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
- Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
Note that if your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
It is a pleasure serving you.
Larry Kopsa CPA
QUOTE OF THE WEEK
My favorite poem is the one that starts
'Thirty days hath September'
because it actually tells you something."
--Groucho Marx
'Thirty days hath September'
because it actually tells you something."
--Groucho Marx
Thursday, September 10, 2009
SOME JOB-SEARCH SPENDING CAN BE DEDUCTED FROM YOUR TAXES
Expenses incurred while looking for employment are often tax deductible, but you have to follow the rules laid down by the Internal Revenue Service. The first thing to consider is whether your search is targeted to a position similar to the one you last held. Career changers are out of luck when it comes to deducting job-search expenses. Under the "same occupation rule" you can claim expenses that you've incurred only in trying to find a job like the one you had before. The Wall Street Journal
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