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Comparing Form 8938 and FBAR Requirements

April 2nd, 2012 No comments

Form 8938 is a new form for the 2011 tax year. Taxpayers are required to disclose on the form “specified foreign financial assets” if the total value of the taxpayer’s interests in such assets exceeds certain thresholds.

I’ve written before about the requirements here. The Form 8938 instructions may also be helpful.

The IRS has realized Form 8938 is creating a fair bit of confusion. That’s because the FBAR (TD F 90-22.1) requirements were already in place. And they still are.

Form 8938 has not replaced the FBAR. They are two separate reporting requirements that have some similarities and some differences. To assist taxpayers with figuring it all out, the IRS recently posted a chart comparing them. View it here.

Categories: International, IRS Tags: ,

Class Action Suit Against Citibank over Frequent Flyer Miles

March 1st, 2012 No comments

About a month ago I wrote about Citibank issuing 1099-MISCs to some of its customers who opened a bank account and received frequent flyer miles.

Some customers aren’t happy. Last month, a class action lawsuit was filed against Citibank by lead plaintiffs Bertram Hirsch and Igor Romanov. They claim that Citibank did not tell new customers who received 40,000 frequent flyer miles after opening a new account that they would have to report 2 1/2 cents per mile as income to the IRS. They also claim that 2 1/2 cents per mile is a gross overvaluation.

Like many lawsuits, class actions take time to resolve. Often years. It is of no help to taxpayers and accountants who have to decide whether to report the income this tax season.

As far as I know, the IRS hasn’t said much about the issue since the news broke. This story has generated a lot of press, so maybe the government will step up. We’ll see.

(Hat tip: taxgirl)

Categories: IRS, Travel Tags: ,

Frequent Flyer Miles Now Taxable?

January 29th, 2012 No comments

Recipients of frequent flyer miles from Citibank sometime during 2011 may find a surprise in their mail right around now. The Los Angeles Times reports the bank is mailing 2011 Form 1099-MISCs to certain customers who received thousands of miles as rewards pursuant to its ThankYou rewards program.

via Wikipedia

This news comes as a surprise. It’s the first time I have heard a bank treating frequent flyer miles as income. Citibank is valuing each mile around 2.5 cents. If the total value of the miles received is $600 or greater, then Citibank will issue a Form 1099-MISC.

In IRS Announcement 2002-18, the agency stated it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” The IRS hasn’t said much on the issue since then.

Perhaps Citibank views rewards attributable to use of a credit card for non-business purposes as outside the scope of 2002-18. By treating these rewards as income to the customer, Citibank may be entitled to a corresponding deduction. Here’s what Citibank has to say in the ThankYou Rewards terms and conditions:

Redemption of ThankYou Points related to your participation in ThankYou Rewards may result in your receipt of taxable income from Citibank in the tax year in which the ThankYou Points are redeemed. In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. The valuation of ThankYou Point redemptions for Form 1099-MISC tax reporting purposes will be at Citibank’s sole discretion. You are solely responsible for any personal tax liability arising out of the redemption of ThankYou Points. Please consult with your Tax Advisor if you should have any questions regarding your personal tax situation.

I’ll paraphrase: We [Citi] believe the rewards may be taxable, but we’re not sure, so go ask someone else. And since we’re not sure, we’re treating it as income and likely increasing your federal income tax liability. And by the way, we and only we determine how to value something that you may have to pay tax on.

Gee, thank you for offering me ThankYou Rewards!

The amounts reported on 1099-MISCs by Citibank will be in the IRS system. What will the IRS do if a taxpayer does not report such amount on her tax return? Of course, the IRS can make life simple for the potentially millions impacted by issuing a new announcement. But that’s probably too much to ask for, leaving the situation in a state of flux.

(Hat tip: TaxProf Blog)

Categories: IRS, Travel Tags: ,

Strawberry: Struggling to Find His Way with the IRS

January 17th, 2012 No comments

Playing for the New York Mets in 1986, Darryl Strawberry hit 27 home runs, drove in 93 runners, and stole 28 bases during the regular season. The team captured its second World Series title later that year. Strawberry continued his success on the field for years to come, making eight All-Star team appearances in all.

But it hasn’t been all smiles for Strawberry, creating his fair share of bad noise off the field. As reported by Forbes, his most recent troubles involve back taxes owed to the IRS.

via Wikipedia

In 2009, Strawberry published an autobiography entitled Straw: Finding My Way. According to the book description, Darryl reflects upon various challenges he faced over the years, including tax evasion, drug use, solicitation, and allegations of domestic assault. Apparently, his life took a favorably dramatic turnaround in 2006 after marrying his third wife and rediscovering God.

Of course, we hope Strawberry continues on his redirected course. The IRS, however, continues to pursue him, and now his current wife is in the mix. The IRS recently issued a third-party levy to HarperCollins Publishers, his book’s publisher, and received around $50,000 in order to collect on Strawberry’s back taxes. Last week, Strawberry’s wife Terry filed a suit claiming the IRS wrongly obtained the funds.

HarperCollins is paying Straw Marketing, LLC pursuant to a contract for Strawberry’s book. Mrs. Strawberry is the President of Straw Marketing. Her argument is that Darryl had no claim to the funds paid to Straw Marketing, so the third-party levy to collect on his back taxes was invalid. Unsurprisingly, the IRS disagrees, asserting that Terry and Straw Marketing are merely nominees receiving the funds on Darryl’s behalf.

Whatever the suit’s outcome, Darryl will eventually have to settle up with the IRS. Janet Novak explains how his tax troubles began:

Strawberry, 49, has been plagued by tax troubles for decades. In 1994 he was indicted for failing to report hundreds of thousands of income from autograph and baseball memorabilia shows and other personal appearances in 1986 through 1990. The next year he pleaded guilty to a single tax charge and was sentenced to six months home confinement and three years probation. A Notice of Levy the IRS sent to Harper Collins last August indicates that as of June 30th, 2010, Strawberry still owed $405,522 in back taxes, penalties and interest for 1989 and 1990. A separate notice of federal tax lien filed in a Florida court case involving the Mets,  shows that as of July 2011, he also owed $53,817 in unpaid taxes from 2003 and 2004.

There are various collection alternatives to address one’s outstanding IRS liabilities. From my experience, a cooperating taxpayer is far more likely to land a manageable payment agreement. As for Strawberry, it appears he can’t lay off the curveballs.

Miccosukee Tribe versus IRS and Former Counsel

January 15th, 2012 No comments

Last August, I wrote about the IRS seeking records from financial institutions relating to all internal financial operations of the Miccosukee Tribe and payments of gambling profits from the tribe’s casino to its members.

Subsequently, the Miccosukee Tribe sued its former attorney Dexter Lehtinen for malpractice, claiming that he provided erroneous legal advice with respect to its tax matter. The Miami Herald is reporting that on Friday Mr. Lehtinen filed a motion to dismiss the malpractice suit, revealing previously confidential information in the process.

There’s a reason why we put legal advice in writing: Because if sometime in the future the client sues for malpractice, we can prove what legal advice was actually given. In this case, Lehtinen disclosed internal memos between he and his client, indicating he advised the tribe it could be facing a massive tax problem.

Although the tribe as a sovereign nation is not required to pay federal income tax, individual members are not exempt. Allegedly, many members received distributions from the tribe that were subject to reporting and withholding, but the tribe failed to report the income on informational returns or withhold any tax. If true, the tribe’s approximately 600 members could be facing tens of millions of dollars in personal income taxes covering the past decade.

Categories: Gambling, IRS Tags:

NBA Player Settles with IRS over Deductions for Fitness Fees and Fines

January 3rd, 2012 No comments

Last year, NBA player Lamar Odom challenged an $87,000 IRS bill. At issue was whether Odom could deduct on his 2007 income tax return $190,000 in personal fitness fees and NBA-imposed fines.

via Wikipedia (before his trade to the Dallas Mavericks)

Forbes is reporting that Odom settled the matter with the IRS last month. Odom’s attorney Robert Leonard claims Odom ended up paying $7,827 plus interest. Not a bad result considering the IRS was seeking $87,000.

The purported basis for the deductions is section 162(a) of the Internal Revenue Code, which permits a taxpayer to deduct “ordinary and necessary” expenses paid or incurred in carrying on any trade or business.

One should note that this settlement does not set any legal precedent. In other words, one cannot solely rely on news of this settlement to justify these deductions on a tax return. After all, deductions for league-imposed fines have generally been disallowed. Perhaps the IRS is shifting its stance on the issue, perhaps not.

Of course, a good accountant should tell his impacted clients about it, so then they could make an informed decision together. The informed decision should rest on whether the expenses in question are both “ordinary” and “necessary” to the taxpayer’s trade. Odom’s attorney argued that his client’s expenses were, because the player contract required Odom to “be in sufficient physical condition that allows him to perform as a professional basketball player throughout the basketball season.”

We don’t know whether Odom’s personal fitness activities in question were the kind to render him in NBA shape. If those activities resembled anything similar to those Odom now endures as a member of the Dallas Mavericks, his argument was probably compelling.

Hal Steinbrenner Sued for Tax Refund

December 28th, 2011 No comments

Bloomberg is reporting New York Yankees co-owner Hal Steinbrenner has been sued by the U.S. government for $670,494. According to the article, Steinbrenner received the sum as a refund after filing an amended 2001 tax return in late 2009. The U.S. government is taking the position he lost his claim for refund by filing the return after March 1, 2009.

In general, a taxpayer has three years from the due date of the return to claim a refund, up to the amount paid. If, however, additional taxes are paid sometime after the due date of the return, then the taxpayer has two years from the date of the additional payment to claim a refund for those paid taxes. The three year rule trumps the two year rule if the additional taxes are paid no later than one year after the due date of the return. Got that?

The complaint against Steinbrenner was filed yesterday in the Middle District of Florida. Unfortunately, I have not located a copy of the complaint, so I cannot assess the accuracy of the analysis.

(Hat tip: TaxProf Blog)

Clickjacking the IRS

November 9th, 2011 No comments

If you enter the search term “IRS” on yahoo.com, the first result, unsurprisingly, is the homepage of the Internal Revenue Service. And, you would click on that first result to be brought to the homepage.

I didn’t write the immediately preceding sentence to insult your intelligence. I wrote it because some users, in fact, have not been brought to the IRS homepage, but to somewhere else.

Wired is reporting that seven men have been charged in New York with operating a “clickjacking” scheme in a sixty-two page indictment unsealed today. The indictment states the men infected computers in over 100 countries with malware known as DNSChanger. DNSChanger altered DNS settings on a user’s system, redirecting the system’s browser to a DNS server controlled by the defendants. Then, that DNS server directed the browsers to another web site.

Why infect systems to redirect? For money, of course. Allegedly, the men set up advertising businesses which would receive a commission each time a user visited certain web sites. For example, users of infected systems that clicked on the link to the Internal Revenue Service web site were actually brought to a site for H&R Block. Each time a user visited the H&R Block site, the men were paid. The indictment alleges the men generated $14 million through the scheme.

Trend Micro’s Malware Blog claims we’re witnessing the “biggest cybercriminal takedown in history.” Apparently, over 500,000 machines in the United States were infected, at least 100 of which belong to the National Aeronautics and Space Administration (NASA).

The men face 27 charges, including wire fraud and other computer-related crimes. Six of the seven men have been taken into custody.

In a similar vein, taxgirl tells us about an apparently new IRS e-mail phishing scam. Remember, the IRS *never* asks for taxpayer identification information via e-mail. If you receive such an e-mail, forward it to phishing@irs.gov and then immediately delete it.

Receive Less Up Front, Pay More Later

November 1st, 2011 No comments

In 2005, Gerald and Monica Ware had luck on their side playing the slot machines at the Imperial Palace Casino in Biloxi, Mississippi. Six years later, the luck is on the side of the Internal Revenue Service.

International Game Technology (IGT) was responsible for paying slot machine winnings to casino patrons of the Imperial Palace. In 2005, IGT issued to Mr. and Mrs. Ware a Form W-2G reflecting gambling winnings of $604,093. Mr. and Mrs. Ware, however, believed they had won $993,728, and that the $389,635 difference constituted federal and state income tax withholding. Accordingly, their 2005 Form 1040 reflected $993,728 gambling winnings and $370,022 federal income tax withheld. Because their reported total tax liability for the year was $239,896, the taxpayers received a refund for the difference, or $130,126.

The W-2G filed by IGT with the IRS reflected no income tax withheld. Unsurprisingly, the IRS system picked up the discrepancy and sent a notice, dated March 22, 2010, to Mr. and Mrs. Ware. The notice stated that the IRS had assessed the $370,022 amount claimed as withheld because in fact no tax was paid on the winnings. The IRS also charged interest and penalties. Less than two months later, the taxpayers filed a petition with the U.S. Tax Court, challenging the assessment.

Unfortunately for the taxpayers, the U.S. Tax Court could not entertain the taxpayer’s petition. The court’s jurisdiction to redetermine a deficiency requires the issuance of a valid notice of deficiency. The notice must advise the taxpayer that the IRS intends to assess the taxpayer of a deficiency.

In this case, the March 22 notice was not a notice of deficiency. Instead, the March 22 notice reflected an assessment correcting overstated federal income tax withholding. In other words, because the taxpayers admitted on their 2005 Form 1040 a tax liability arising from the gambling winnings, the IRS did not have to issue a notice to assert new deficiency.

Since the taxpayers were not able to take the IRS to court to be heard, what can they do? The taxpayers can file a Request for a Collection Due Process or Equivalent Hearing (CDP hearing) after the IRS issues a levy or lien notice with respect to the liability. According to the court’s opinion, the taxpayers had a CDP hearing in IRS Appeals, but no determination has been made yet. If IRS Appeals sustains the assessment, then the taxpayer can appeal that decision by filing a petition with the U.S. Tax Court.

Ultimately, it seems clear the taxpayers owe tax on the $604,093 of winnings, plus interest and penalties. Apparently, the taxpayers agreed to receive a lump-sum payment from the casino of $604,093, in lieu of receiving the $993,728 in installments. As a result, the W-2G issued by IGT accurately reported $604,093 in gambling winnings and no tax withheld.

After scoring on the slot machines several years ago, the taxpayers are now required to pay to the IRS more than just tax on the winnings.

Case: Ware v. Commissioner, T.C. Memo 2011-254 (Oct. 31, 2011).

Tucker Faces $11 Million IRS Bill

October 15th, 2011 No comments

TMZ is reporting that actor Chris Tucker owes the IRS over $11 million, for taxes owed from his 2001, 2002, 2004, 2005, and 2006 tax years:

Andrew H. Walker/Getty

According to the L.A. County Recorder’s Office, the lien issued against Tucker back in July 2010 is still active … which means, he still owes money … which means the government can legally seize his assets.

This statement isn’t entirely accurate. A federal tax lien puts the world on notice of the taxpayer’s debt and establishes IRS priority. In the event some of Tucker’s property subject to the lien is disposed, then the IRS may have a claim for the proceeds. Whether or not the IRS receives any of the proceeds depends on whether there are higher priority creditors. For example, the bank will almost certainly have priority over the IRS with respect to the proceeds from the imminent foreclosure of Tucker’s Florida mansion.

While a lien establishes priority, a Notice of Final Intent to Levy is what provides the IRS the right to seize a taxpayer’s assets. The notice provides appeal rights, which, if exercised within 30 days of the date of the letter, will establish a hold on collection while the matter is under consideration with IRS Appeals. At IRS Appeals, a taxpayer can negotiate a payment plan (e.g. Installment Agreement) or a settlement offer (e.g. Offer in Compromise) to address the outstanding balance. If appeal rights are not exercised, the IRS can and will proceed to levy on a taxpayer’s assets, such as funds in a bank account.

Although the Rush Hour star is laughing about his IRS problems now, I’m not so sure he would be if he disregards a Notice of Final Intent to Levy.

Categories: Entertainment, IRS Tags:
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