Grammy Winner Sentenced in Tax Case

Singer  and Grammy Winner Lauryn Hill found herself in trouble with the Internal Revenue Service, as discussed in a previous blog post. Ms. Hill faced a judge on Monday for her failure to pay taxes on earnings that numbered around $1 million, charges to which she pleaded guilty last year. She was sentenced to three months in prison, and three subsequent months in home confinement.

Ms. Hill, in a statement before the judge on Monday, emphatically stated that she had always planned to pay the taxes she owed, but that this was not possible during the time that she removed herself from the music business. This statement was in the same vein as a statement she posted online last year when her tax troubles came to light.

Without an explanation for her actions, Ms. Hill stated that she needed to be able to earn money to support her family, but that she had been unable to do so.

Her attorney previously stated that Ms. Hill had attempted to make payments to satisfy her tax liabilities in regards to both her state and federal taxes. According to him, she has paid over $970,000. Her attorney sought probation, as Ms. Hill was facing up to a year in prison.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Offshore Voluntary Disclosure Revoked By The IRS

According to reports, the IRS revoked the Voluntary Disclosure Program for many U.S. taxpayers. This includes many U.S. taxpayers who hold accounts in Bank Leumi in Israel.

The IRS was not satisfied with merely investigating Switzerland; it has now expanded its net to include several more countries, including Israel, India, Hong Kong, and Singapore. Many taxpayers will recall that the IRS initiated a large-scale investigation led to the disclosure of UBS bank accounts. Individuals who had not disclosed their foreign accounts suddenly found themselves under the microscope of the Internal Revenue Service.

UBS was extensively fined and provided information regarding many offshore accounts that had been previously undisclosed. Wegelin Bank, the oldest bank in Switzerland, pled guilty to felony conspiracy to commit tax evasion, becoming the first Swiss bank to do so.

For U.S. taxpayers with undisclosed accounts, the IRS initiated a program in 2009 and 2011, the Offshore Voluntary Disclosure Program. This program allowed taxpayers to file amended returns and to pay penalties and interest without the threat of facing civil or criminal penalties. The program found success, with the government collecting over $4.4 billion in delinquent tax payments. Over 30,000 U.S. taxpayers participated in the collection. This particular program has ended, paving the way for a new program in 2012, to be explained in a subsequent blog post.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Beware, US Investors Trying to Evade Taxes

In an article in today’s Wall Street Journal, the Internal Revenue Service is brandishing a “very big stick.” It’s called the Foreign Account Tax Compliancy Act. According to the article, panelists during a Dow Jones webinar agreed that the unfolding law, which will uncover U.S. investors who evade taxes by putting their money in foreign funds and institutions, deserves that forceful designation.

It is the opinion, though, of Laurie Hatten-Boyd, a principal at KPMG, that this new law has information gathering purposes, not a revenue-making machine.

As proposed, the law would require any U.S. entities paying dividends, interest or proceeds from the sale of securities to withhold a 30% punitive tax if the foreign recipients of this payments refuse to agree to disclose information about their U.S. investors or account holders to the U.S. government.

The law is complex, though, and will take as much as five years to implement fully. A comment period on the proposed rules ended on April 30, but lawyers, compliance officers and consultants are still waiting to hear the final word on the changes.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Tony Romo Scores Big with Tax Law

According to a recent article in Forbes by Kelly Phillips Erb, current tax law may make Tony Romo, controversial quarterback of the Dallas Cowboys, the highest paid NFL player.

Romo signed a 6-year $108 million dollar contract extension, much to the chagrin of the Twitter world. Regardless of whether or not the sports world approves, Romo is at least winning the salary game, as his contract extension makes him the highest paid NFL player after taxes.

Based purely on salary, Romo would be the fifth highest paid player in the NFL, but his location gives him an edge when taxes are involved. Texas, the state in which he resides, is “kinder” in regards to its tax rates, which leaves Romo with a higher take home salary than even Baltimore Ravens quarterback Joe Flacco. The Ravens quarterback, despite being the highest-paid player in NFL history, lives in Maryland. The state, with its “millionaire’s tax,” will potentially subject Flacco to a 5.75% tax on his earnings in the state and possibly a 2.75% local tax.

In the article, Erb asks why all athletes don’t move to states like Florida and Texas. She notes that there are a few who have adopted that strategy, Tiger Woods included. Unfortunately for NFL athletes, such flexibility is not part of their job description.

Erb notes that residency is only a portion of the whole tax picture. She goes on to explain that while individuals may have a residence in a tax free or tax light state, they still may be subject to taxes by the states in which they do business.

Taxes, as we have learned time and again, can sometimes influence the most unexpected of cultural choices.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Facebook Founder with $1 Billion Tax Bill

mark zuckerburg facebook founderFacebook Founder with $1 Billion Tax Bill

The stock market debut of Facebook left Mark Zuckerberg, the company’s founder and CEO, with a very large fortune, and a very large tax bill.

According to an article in CNNMoney, the tax bill is the result of a decision Zuckerberg made in May to increase his stake in the company. Zuckerberg, on the day the company went public, decided to exercise a stock option and purchased 60 million shares of Facebook at 6 cents each.

The IRS views the shares as ordinary income, regardless of whether or not the shares are ever sold. The article notes that the rationale for classifying it is income is that options such as those are a form of compensation, not unlike regular wages.

The billion dollar tax bill that Zuckerberg is facing is unusual, according to tax experts that CNNMoney consulted with in the process of writing the article. According to Silicon Valley tax attorney, Toby Johnston, it is usually capital gains, and not ordinary income, that result in a tax bill that large.

Segal, Cohen & Landis
9100 Wilshire Blvd., Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

How to Find the Right FBAR Attorney for You

When dealing with the Internal Revenue Service in regards to foreign accounts, the best thing you can do for yourself is to find the best FBAR attorney possible. The following guidelines can help you find the right person for you.

1. Look for someone with the correct qualifications

Not every attorney is a tax attorney, and not every attorney is an FBAR attorney. While a tax attorney may have a basic knowledge of the tax implications of foreign account, they may lack the experience to strategize to your greatest benefit. Finding a tax attorney with that type of experience is crucial.

2. Find a tax attorney who can communicate with you

Make sure that the attorney you select can translate the jargon of the complex tax code as it relates to your particular case. It is important to find a tax attorney who takes the time to look at your specific case and comes up with a specific strategy of your own. If complications do arise, make sure that your tax attorney is keeping your best interest in mind.

FBAR tax situations are often complex and take a great deal of expertise and dedication. Make sure the tax attorney you select is knowledgeable and reliable. Choosing an FBAR tax attorney with all of those qualifications, one that you can trust with your delicate matter, could make a significant difference in the end.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

How Will New Tax Laws Impact My Divorce Settlement?

In a recent article in Forbes, Personal Finance Contributor Jeff Landers examines the possible impact of the new tax laws on divorcing women. The American Taxpayer Relief Act, passed January 1, 2013 in order to prevent the economy from falling of the dreaded “fiscal cliff,” could possibly affect the negotiations for a divorce settlement. Landers emphasized the need to be informed about how the new laws could impact your particular settlement agreement and negotiation; such knowledge could affect the outcome.

One of those most significant provisions of the American Taxpayer Relief Act has to do with the raising of tax rates on taxpayers with high incomes. According to the Act, if the taxpayer is a single filer with an annual income greater than $400,000, he or she will be required to pay a rate of 36.9%–a 4.6% increase from years past—on the income that exceeds the $400,000 mark.

How Will This Impact My Divorce Settlement?

As Landers notes, divorce will most assuredly change the economic situation of the parties involved. There is a potential for alimony (also known as “spousal support”) that would be paid from the “moneyed” spouse to the “non-moneyed” spouse. The alimony payments would then mostly likely be classified as taxable income.

Landers often encourages his clients to consider an upfront lump sum payment instead of alimony payments, as the lump sum would not be categorized as taxable income for the spouse who receives it, nor would it be deductible to the spouse who is paying it.

Landers notes that looking at the long term financial effects while engaged in a divorce settlement is important, as oftentimes the non-moneyed spouse has given up valuable education opportunities or professional progress in order to support the moneyed spouse. Landers explains that the purpose of alimony is to ensure that the non-moneyed spouse maintains a similar standard of living.

The point that Landers emphasizes when dealing with divorce settlements is to be well-informed about the tax implications of the agreements. If you have any questions, contact your knowledgeable tax attorney.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

The Taxman and Bebop: How A Tax Gave Rise to a Musical Movement

Dancehalls faced the wrath of the taxman in a post-World War II period. Interestingly enough, the Internal Revenue Service seems to have had a hand in a new, burgeoning a musical movement as a result.

In a recent article in the Wall Street Journal, Eric Felton discusses the following question: Do taxes change behavior or not? He pays particular attention to the “cabaret tax,” a wartime tax that went into effect that had lasting implications those who proposed and passed the tax would never have imagined.

After the end of the World War II, the potential for popular big bands to find an audience in the young men returning home from overseas was great. The bands, having been wildly popular since the early 1930s, were poised for another bid decade. This was not to be, as many of the most popular bands of the day were no longer together. Benny Goodman, Harry James, and Tommy Dorsey—whose bands had dominated the previous decade’s music scene—had all disbanded less than three years after the war had ended. While some bands were able to adapt to the changing times, many were unable to keep up.

The cabaret tax of 30%, an excise tax on all receipts at any venue that served food or drink and allowed dancing, was imposed in 1944. While many thought that the elegant venues of the period would be the only businesses affected, the Bureau of Internal Revenue (a precursor to the present-day Internal Revenue Service) offered clarification and expanding the reach of the tax to include more of the businesses of the day in the following excerpt of the code: “A roof garden or cabaret shall include any room in any hotel, restaurant, hall, or other public place where music or dancing privileges or any other entertainment, except instrumental or mechanical music alone, is afforded the patrons in connection with the serving or selling of food, refreshments or merchandise.”

The far reaches of the tax were soon apparent, as dancing was among the most popular activities of the day. Many club owners had anticipated that the tax would not affect attendance at their dance halls to substantially, as they were convinced that the need of the young men to find a good time would outweigh the monetary consideration, but they soon found that prediction to be incorrect. Soon after the tax was imposed, club owners saw steep declines in patronage and profit.

In an attempt to work around the tax, some owners began a policy of starting the shows after dinner, hoping that this would circumvent the tax. Unfortunately for them, the Bureau was once again quick to clarify, stating that patrons would have to leave the establishment after dinner and prior to the start of any shows or dancing. If patrons failed to leave before the entertainment began, anything purchased prior to the show would be subject to the cabaret tax.

The tax soon gave way to a new form of non-danceable jazz—bebop—as clubs that provided music that was strictly instrumental and not able to be danced to not subject to the tax. The Wall Street Journal Article asks, “…how differently might the aesthetic impulse behind bebop have been expressed if it had been allowed to develop organically instead of in an atmosphere where dancing was discouraged by the taxman?” Felten predicts that the artsy niche that jazz became may not have come about.

The cabaret tax remained in effect until 1965, after it was lowered several times from the ruinous levels of the mid-1940s. The swing era was long gone by then in a disappearance aided by the non-dancing taxman.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Getting Over Your Fear of the IRS

In a recent article in Fox Business, tax attorney Bonnie Lee discusses an issue that thousands are facing in regards to the IRS: How do I overcome my fear of the IRS and become tax compliant once again? When it comes to issues with back taxes or unfiled returns, understanding how to resolve the issue is essential.

According to Lee, thousands of Americans have not filed tax returns in years, with fear being a main component in their reluctance to file. Many are afraid to come forward because they believe that calling attention to their failure to file returns in a timely manner will land them in jail.

For those Americans who are fearful of jail time as a result of their noncompliance, Lee remarks the IRS is not actively seeking to put people in jail. From personal interactions with an IRS revenue agent, she learned that the goal of the IRS for American taxpayers was “for everyone to work, make money, and pay taxes.” She also states that in the thirty years she has been in the tax field, she has never seen a taxpayer end up in jail.

In one case, Lee assisted a taxpayer in re-entering the system after failing to file tax returns for the past 18 years. The taxpayer had not filed a return since 1985, but he was now prepared to file the outstanding returns in an effort to become compliant. Despite fears of what he may owe, he and Lee worked together to sort through the data he had saved in storage. Interestingly enough, after all returns were organized, it came to light that had the taxpayer filed in a timely manner, he would have received over $65,000 in refunds over the past two decades.

Unfortunately, the opportunity had passed for claiming the refunds, as they had expired by the time he had decided to become compliant. It is only possible to receive refunds for returns filed up to three years late.

In some cases, taxpayers are reluctant to file their tax returns because they do not have the correct documentation, such as W-2s or K-1s. Lee notes that this should not be an issue, as the IRS has a record of any documentation that you may receive from third parties. If you need the information, you can simply request a free transcript from the IRS.

If you do not file your returns, the IRS will often use this to file the returns for you. The return filed by the IRS, called a “substitute filed return” (SFR), is filed in a way that is least beneficial to you as a taxpayer—no deductions with only the information derived from the documents. In place of refund, you will receive a large tax bill that is an expensive and inaccurate assessment. The aim of the IRS could be to force you to pay attention and to file a return.

Taxpayers who are self-employed must file additional documentation regarding their business income and expenses in the form of a Schedule C. If information cannot be derived from bank records, it is acceptable to make estimates for the IRS using industry standards as a guide.

Many taxpayers elect to hire a tax attorney to help them with any back taxes or unfiled returns that they may have. Having the guidance of an experienced tax attorney can make all the difference when dealing with the IRS.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

What Attracts an IRS Audit?

While many taxpayers fear the dreaded IRS tax levy or wage garnishment, perhaps the most feared tool of the IRS is the audit. A recent article in CBS MoneyWatch discussed certain key factors that could trigger an IRS audit. According to the article, the IRS examined a very small percentage of all individual tax returns in 2010 and 2011. The number reported was a little over 1%, which means that your chances of being audited are somewhat slim. It is important to keep in mind though that your chances increase dramatically depending on several factors: your income, types of income, the amount you deduct, and changes that you have made since filing your last tax return.

IRS computer systems check each return for small errors—mathematical errors or clerical issues— and then notify taxpayers if an error is found and if additional tax is due. The IRS also uses information that you report from your bank or forms like your W-2 to compare the amounts you report on your return. In all likelihood, if any mistake is made in reporting, the IRS will detect it and, once again, recalculate the tax due. Any penalties and interests that are applicable will also be added to your tax bill.

In addition to the checks provided by the computer systems of small in calculation or reporting, the IRS has several new items to which it has begun to pay attention, including payments made to business by credit or debit cards and investments that are sold by their investors. Credit or debit card transactions are reported by banks or other entities each month, which means that accurate reporting of transactions by the business receiving payments is essential.

Each return is assigned a particular numeric weight through a system that gives points to certain characteristics of the return. A return then receives a composite score from the addition of the weights. The score of your return is compared to the national average score dictated by the Internal Revenue Service. If your score is higher than the average, your return will be flagged for a possible audit. The IRS will not officially discuss what items it focuses on and what numeric weight certain characteristics receive, but the article offers several points that are believed to be scrutinized:

1. Large amounts of income not subject to withholding

2. Indicating a change of address when your home-related expenses stay the same and there has been no reported sale of your residence.

3. Large charitable contributions and expenses for home office, travel or entertainment

The article admonishes taxpayers not to fear audits. If you find yourself being notified of an audit, contact an IRS tax attorney immediately.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999