Expense Documentation

We've often mentioned the importance of adequate documentation to substantiate a business deduction. Ideally you should have a canceled check and an invoice marked paid with the serial number of the item purchased. While that may be viable for certain big-ticket assets, realistically, that's not often the case for most expenses. And the IRS knows that. There are many other ways to document expenses that are acceptable. However, you should be able to show that payment was made (e.g., a canceled check) and the nature of the item purchased (e.g., an invoice with a description of the item).

 Travel and entertainment, auto expenses and charitable contributions. There are separate rules for these items, and they're very strict. I won't deal with them here. They'll be detailed in an upcoming blog post.

Canceled check. The check should have the payee and should show the cancellation on the back. Why the cancellation? In the case of large or unusual purchases, the IRS may check that the payee actually cashed the check.

Checks not returned. Many businesses (and individuals) no longer have their checks returned. The IRS will accept images of the check. In order to be accepted as proof of payment, the statement must exhibit a high degree of legibility and readability. If your bank doesn't send you hard copies of the images, you should be able to download PDF copies of the checks. Don't rely on the bank to save statements and check images. After a certain period of time you may not be able to retrieve them without cost. Download statements and images each month. (That's good advice for other statements where you may no longer receive hard copies such as telephone bills, etc.) You may also be able to show proof of payment by providing:

• an invoice marked "paid",
• a check register or carbon copy of the check, and
• an account statement that shows the check number, date, and amount.

An account statement prepared by a financial institution showing check clearance will be accepted as proof of payment if the statement shows:

• the check number,
• the amount of the check,
• the date the check amount was posted to the account by the financial institution, and
• the name of the payee.

Credit/debit cards. If payment is made using a credit card, the IRS requires that you have an account statement that shows the amount of the charge, the date of the charge (i.e., transaction date), and the name of the payee. If payment is made using a credit card, the IRS requires that you have an account statement that shows the amount of the charge, the date of the charge (i.e., transaction date), and the name of the payee. Most likely your credit card company is already mailing you these statements monthly. Cards specifically designed for business like American Express business credit cards will also provide year-end summaries. Note, this will only provide proof of payment.

Electronic funds transfer. If you transfer funds electronically, the IRS will accept an account statement prepared by a financial institution showing an electronic funds transfer as proof of payment if the statement shows:

• the amount of the transfer,
• the date the transfer was posted to the account by the financial institution, and
• the name of the payee.

Invoice. You must have an invoice or other documentation showing what you purchased. A canceled check without an invoice or some other document showing the item purchase could be a problem. Statements from a supplier may be substituted, but only if they show the item. Fortunately, since most businesses are computerized, a supplier could generate a duplicate invoice if an agent insisted on seeing one. But it's best not to rely on that. When paying invoices, write the check number and amount paid on the invoice and the invoice number on the check so that you can cross reference them later if necessary.

Save all invoices. Don't assume the IRS will accept a check written to the telephone company without an invoice. The check could have been for payment of your personal line.

What about independent contractors? Even for small jobs, ask for an invoice. In addition, make sure you give the party a Form 1099, if applicable. No 1099? You could lose the deduction or be subject to penalties. What about those cash payments to some contractors? No invoice and no record of payment probably could mean no deduction.

Cash register tapes. You go to the local hardware store to purchase some fasteners for the business and get only a cash register tape with no details of the items purchased. Will it fly? If the total is relatively small and it's not a common occurrence, and agent should accept it. Write a description of the items on the slip--1 gallon paint for repainting wall; bolts for shelving. Fortunately, most stores now print the detail on the tape.

Caution on tapes. Many businesses, including major big box retailers, use heat sensitive tape to print receipts. The life can vary widely from less than 1 month under poor conditions (the glove box of your truck) to several years under good conditions. Don't take a chance. Make photocopies of the tapes.

Reasons for purchase. The business purpose of most of your purchases may be obvious. An agent is unlikely to question a laser printer cartridge, a computer, a book on how to use a computer program, etc. But be prepared for questions if the invoice or tape shows the purchase of items that normally wouldn't be business related or could be personal as well as business. For example, the purchase of a book with no clear business relationship, power tools by a computer consulting business, etc. Don't take a chance on remembering the reason several years later when you're audited. Write the business reason on the receipt or attach a description to the receipt.

Avoid personal purchases through the business. It's convenient to use a company check or credit card to purchase personal items. Resist the urge. Your accountant may spend time making the entries to adjust your expenses. If he doesn't or misses some that an agent catches, the agent might increase his scrutiny of all your expenses. You could be liable not only for additional taxes and interest but also an accuracy-related penalty. In flagrant cases the IRS may claim fraud, particularly if other indications are present.

Checks made to cash. While you should try to avoid them at all cost, that's nearly impossible. The larger the amount, the more careful you should be. Be sure to indicate on the check what the purchase was for. This is one time when an invoice can be critical. An invoice marked paid in full would certainly help your position.

Cash expenses. Some expenses will be so small that an invoice or even a cash register tape is impractical. You may also be paying in cash rather than by using a check or credit card. Keep a diary showing the date, place, amount, and description of the item purchased or service obtained. For example, "11/20/12, Madison Hardware, $6.25, nuts and bolts for shelving".

Business standards for documentation. Any invoice, contract, etc. should be up to industry standards. For example, a receipt from a local deli for sandwich platters for the office party may be scribbled on an invoice without a number (it should, of course, be dated). But an invoice for a collision repair on the company truck should contain detailed parts and labor, since the shop normally does that for insurance purposes.

Other documentation. You should also retain other documentation that might be used in addition to or in place of an invoice. For example, a contract for services, lease on equipment or office space, warranties on equipment, service contracts, etc.

Petty cash. If you keep a petty cash fund, slips showing expense reimbursements should be sufficient to document the expenses. That's assuming the expenses are small, as one would expect. Make sure that the nature of the expense is clear from the slip. Employees should check that and, if not, write on the slip the type of expenses and the vendor.

Expense reports. We're not talking travel and entertainment here. It's not unusual for an employee to purchase office supplies, small equipment, shop supplies, maybe even items to be used on the manufacturing floor that may be critical. Officers and especially officer/shareholders often pay company expenses out of their own pocket. While it's best to avoid such situations, that's not always possible. The correct procedure is to have the employee file an expense report and attach the documentation. The company should then cut the employee a check for the amount documented. For example, you need a color printer for a rush job. An employee buys an inkjet printer with his own credit card. He should file an expense report and attach the credit card slip and any other documentation from the store.

This can be especially critical when it comes to an employee/owner/shareholder. Without the expense report the company can't take the deduction because it didn't pay for the item; the employee/owner can't take the deduction because it's not a valid deduction. Special rules apply to partnerships and there's an exception if the business has a policy of not reimbursing. Talk to your tax advisor.

Cohan rule. The last resort. It's called the Cohan (Cohen vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930)) rule because it evolved from a court case where the taxpayer was George M. Cohan. Cohan claimed travel and entertainment expenses for which he had no receipts. The court allowed him a deduction based upon the fact he was able to convince the court he incurred expenses but did not have proof of payment or the actual amount. Ironically, this rule cannot be applied to travel and entertainment expenses any longer. Now if required, no receipt, no deduction, no exception for those expenses.

How does the Cohan rule work today? If you can show you definitely incurred the expenses and are entitled to a deduction but don't have the receipts or proof of payment, the court may allow a deduction based on an estimate. But there has to be some basis on which the court can make the estimate. For example, you have no receipts to prove your fuel oil expense for 2012 because you inadvertently destroyed the bills. In addition, the company went out of business. Clearly you incurred some charges to heat your building. The court may estimate the expense based on an average of fuel bills for several years.

This is a last resort for a number of reasons. First, you may have to go to court to get the deduction. Second, the court is almost assuredly going to try and underestimate the amount of your deduction. Third, the rule will probably not be applied if you have access to the documentation but don't produce it (e.g., you could ask a vendor to produce the necessary statements, even if it cost you). Fourth, you'll still have to convince the court you incurred the expenses. It may believe your testimony; it may not. You'll be on safer ground if you have some corroborating evidence.

Finally, the court is under no obligation to assist you. Even if your records are destroyed through no fault of your own (e.g., a fire), the court can require you to reconstruct. You'll fare better if you can show the lack of records either isn't your fault or, if it is, there are extenuating circumstances. For example, you normally have excellent documentation but telephone and utility bills for one year were inadvertently discarded.

Corroborating witnesses. Sometimes you can convince the IRS or the court you incurred the expenses by producing witnesses. That may work, but if the witnesses aren't convincing or the court believes the testimony may be biased (they're employees or relatives), it doesn't have to accept their testimony. And that happens in a high percentage of cases. Again, not an approach to rely on.

Too much paper? In many cases you don't have to save paper copies. Electronic versions of statements received from vendors or others will normally suffice, but they must be readable. You can also scan documents and save them as electronic copies. If the documents are signed (e.g. a lease), you might want to retain an original copy. And consider retaining hard copies of important asset purchases. Contact us if you have questions or if you want to implement a paperless office.

Retention time. You may have heard hold canceled checks and other documents for 3 years, but it's more complicated than that. Technically it's three years from the date you filed the return. But if the IRS suspects you underreported your income, it can go back 6 years. If it believes fraud is present, there is no limit. For assets such as autos, equipment, etc. you should retain all documentation for at least 3 years after the asset is disposed of. And longer retention periods can apply to employment records. If you need a single rule of thumb, use a 7-year holding period for most records. But the best approach is to check with your tax adviser.

Documentation vital. Based on an informal analysis, it appears that more taxpayers lose in Tax Court because they can't substantiate their expenditures than for any other reason. While the IRS sometimes does show some flexibility, it's generally a stickler for records and can disallow the smallest expenditure for lack of them.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

2012 Tax Campaign Preview

Here's some more news from the campaign trail that may affect your taxes. On April 9, former Pennsylvania senator Rick Santorum suspended his campaign for the 2012 presidential race. This move effectively clears the way for former Massachusetts governor Mitt Romney to assume the Republican nomination.

Romney has made taxes a centerpiece of his campaign, and we expect to see even more attention focused on the issue as November draws near:

• Romney would make the Bush tax cuts permanent.

• He would cut top rates to 25% for both individuals and corporations.

• He would eliminate tax on interest, dividends, and capital gains for taxpayers making under $200,000.

• He would eliminate the estate tax entirely.

• He would eliminate the Alternative Minimum Tax (AMT) as well as new taxes imposed by the 2010 healthcare reform legislation.

Most tax professionals see their clients just once a year. But we realize that this year's Presidential race will have a major effect on your taxes. So we're committed to tracking both candidates' tax proposals, letting you know how they affect your wallet, and offering proactive suggestions to plan for tax law changes. We're not here to take sides. We just want you to know we've got your back.

We'll be following the race carefully through November and beyond. So, if you have questions, don't hesitate to call us at 954-591-8290.

A Dubious Privilege

The "Occupy Wall Street" movement argues that we live in a divided nation. First there's a gilded "1%" enjoying lives of ease and privilege. Then there's a downtrodden "99%" struggling just to stay in place. But here's a take on "the 1%" that you won't hear at your local tent city . . .

The IRS is struggling just like the rest of us to carry out its mission with limited resources. Back in 2003, they audited just one out of every 203 returns. By 2010, that number was up to one out of 90. To stretch that audit budget even further, they're auditing more and more taxpayers by mail. But one study shows that 10% of IRS mail never gets where it's supposed to go, and 27% of those who do get their mail don't even realize they're actually being audited! Naturally, that leads to more and more of the paperwork screwups that every taxpayer fears.

Enter Nina Olson. She's the IRS's first and only Taxpayer Advocate, a position created by the 1998 "Taxpayer Bill of Rights" act. She supervises the Taxpayer Advocate Service, a nationwide group of 2,000 caseworkers who specialize in cutting through red tape and greasing the wheels of the great gummy IRS machine. If the IRS sends your mail to the wrong address, slaps you with a lien after you've already paid your bill, or just makes a mistake they can't seem to fix, Olson's office is the one we'll call.

Last month, Olson delivered a presentation to the Federal Bar Association on how "the 99%" experience the tax system. And the picture she painted makes a tent in lower Manhattan Park look like a room at the Ritz. One in three taxpayers who call the Service don't get an answer. Only half of those who write hear back within six weeks. The IRS is relying on computers instead of people to audit all but the highest-income taxpayers. And perhaps most curious of all, she says, "we're getting to a situation where the only people who get face-to-face audits are the 1%"!

Now, correct us if we're wrong, but do you really consider face time with an IRS auditor a "privilege"? We all know that at least some level of government is necessary. But there are just some parts you don't want to see up close and in person. Like the "Level 4" Biolab at the Atlanta Centers for Disease Control, for example, where we store the Ebola virus, Crimean-Congo hemorrhagic fever, and other superbugs we can't risk having out on the loose. Or the "Supermax" penitentiary in Florence, Colorado, where we "store" the most dangerous felons we can't risk having out on the loose. Or the inside of any IRS Service Center!

Does Olson's "1%" comment conjure up images of plush IRS offices, with thick oriental carpets and rich leather upholstery, staffed by discreet, white-gloved concierges sitting at granite-topped desks? We can assure you that when it comes to getting audited, even the 1% have to settle for the same government-issue linoleum floors, metal chairs, and battleship gray desks as everyone else. (And really, in the unlikely event you are audited, we probably won't let you go with us anyway! Trust us -- it's for your own protection.)

We talk in these emails about how proactive planning cuts your tax bill. But paying less tax isn't the only perk of a good tax plan. Did you know that smart tax planning can also cut your audit risk? In fact, some strategies -- like choosing certain business entities -- can cut that risk by as much as 90%. So call us if you think face time with an auditor is a "privilege" you can do without!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Where You Report a Deduction is Important

Does it make a difference where you report expenses? Sometimes yes, sometimes no.

You can't deduct charitable contributions on your Schedule C. Instead, they should be deducted on Schedule A as itemized deductions. What's the difference? If deducted on Schedule C the contributions would reduce the taxpayer's self-employment tax liability.

You might be able to deduct them on Schedule C if the amounts aren't really contributions but advertising expense. For example, if you buy a 1-page ad in the local high school's yearbook. Whether or not it would be advertising could depend on a number of factors.

A similar rule applies to S corporations and partnerships. Charitable contributions are passed through to the shareholders and deducted on their individual returns, not from S corporation or partnership income.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Mastering Tax Breaks

This weekend's Masters golf tournament featured the usual perfect weather, gorgeous scenery, and competitive play that fans have loved for so long. Tiger Woods came into the tournament as the betting favorite based on his win at last month's Arnold Palmer Invitational -- his first tour victory in nearly three years. But Tiger's performance disappointed his fans yet again -- in fact, he even hit a spectator on Saturday. And in the end, Bubba Watson became only the third leftie in history to don the coveted green jacket.

It turns out Tiger isn't the only one having trouble on the course. Our good friends at the IRS have also "sliced into the rough" over the question of deducting conservation easements for golf courses. A "conservation easement" is a gift of a partial interest in real estate you make to a publicly-supported charity or government. If you own a historic townhouse, for example, you might donate the right to make changes to the facade, to ensure it keeps its historic character. If you own a farm at the edge of the city, you might donate development rights, to ensure it remains green space. You'll need an appraisal to support the value of your gift, as the IRS is cracking down on inflated conservation easement deductions. If your gift exceeds 50% of that year's adjusted gross income, you can carry forward the excess for up to 15 years (rather than the usual five year limit for all other charitable gifts).

The easement in question involves Kiva Dunes -- a Jerry Pate-designed golf course nestled on Alabama's Fort Morgan Peninsula, which is tucked neatly between Mobile Bay and the Gulf of Mexico. The course is surrounded by 163 upscale homes, including 30 right on the beach. It's no Augusta National, of course, although Golf Digest has ranked it the best course in Alabama. Back in 2002, the partnership that owns Kiva Dunes placed a conservation easement on the course, limiting its use to a golf course, park, or farm. They appraised the easement at $30.6 million, donated it to the North American Land Trust, and happily deducted that amount on their partnership return. (Not bad, considering the owners paid just $1.05 million for the property encompassing both the course and the homesites back in 1992!)

Not surprisingly, the IRS ruled the deduction out of bounds -- valuing the easement at just $10.0 million -- and the case wound up in Tax Court. The Court started by noting that the partnership's appraiser lives and works in the immediate vicinity of the course and has decades of experience evaluating local properties, while the IRS's appraiser lives 250 miles away in Birmingham and has only visited the vicinity of the course twice. Then they estimated how much the owners could realize if they subdivided the property for the same sort of instant mansions already surrounding the course ($31.9 million). Next, they calculated the current value of the golf course (just shy of $3.0 million). Finally, they subtracted the current value from the potential value to settle on a $28.7 million value for the easement -- really, just a chip shot away from the partnership's original appraisal.

The law allowing deductions for conservation easements expired at the end of 2011. That's not necessarily the end of the story, though -- lots of popular tax breaks expire, then come back from the dead. But this one may be more dead than usual. That's because President Obama's 2013 budget proposes to eliminate deductions for golf course conservation easements entirely, arguing that they do more to benefit the people living in the McMansions surrounding the courses than the general public. Thus, Kiva Dunes's owners may be the last to benefit from this hole-in-one of a deduction.

Minimizing your taxes may look hard, but it's a lot easier than driving straight down the fairway. Proactive planning is the key to staying out of the sand and water. Remember, we're here for you -- and the rest of your foursome, too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Using Business Checkbook for Personal Purposes Raises Suspicions

Using your business checkbook for personal purposes can always raise suspicions. In Dwight D. Vanover (T.C. Memo. 2012-79) the taxpayer had already undergone a criminal investigation by the IRS in connection with the underreporting of income from his business.

During the years at issue the taxpayer used the business account to buy a $159,000 boat and two collectible cars, one for $60,000 in cash; the other for $32,500 in cash and some 11 additional vehicles from various sellers for a total of $277,000.

The taxpayer's tax preparer testified that he relied on the taxpayer's summary statements of income and expenses and the taxpayer did not provide any supporting documents. He also testified that he was unaware the business bank account was used to pay the taxpayer's personal expenses.

The Court looked at the other "badges of fraud" and concluded that the IRS had proven by clear and convincing evidence that the taxpayer underpaid his tax liabilities for the years at issue and that some part of the underpayment was due to fraud.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Bonus Depreciation

Don't automatically take the 100% bonus depreciation, the Section 179 writeoff or even the 50% bonus depreciation. Work through the numbers.

Taking a big deduction this year could leave you with no future deductions and that will cost you if you're in a higher bracket in the future. The self-employment tax (for sole proprietorships and partners) can also be a factor. Deductions will save the self-employment tax, but the deduction is wasted once your self-employment income drops below zero.

Additionally, those depreciation deductions will have to be recaptured if you sell the asset or your business in an asset sale. While the only way to get a good answer is to work through the numbers, a red flag should go up if the depreciation or Sec. 179 deduction forces your business income to go negative.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Failed To File A Tax Return?

In Mario E. Cayabyab (T.C. Memo. 2012-89) the taxpayer was going through a divorce in 2006 and was struggling with the care of his children. The taxpayer's ex-wife was in possession of documents relating to their investment income. He did not attempt to retrieve these documents because his priority was to settle his divorce and take care of his children, and he believed he could settle his taxes for 2006 "later on".

The taxpayer was in good health throughout 2006 and was not hospitalized for any illness between 2006 and 2010. He was aware of his obligation to file his Form 1040 for 2006 but he did not file a timely return. The IRS sent the taxpayer a letter on November 30, 2009, requesting that petitioner file his Form 1040 for 2006. He filed the return with the IRS on October 14, 2010. The Court noted Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed unless the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. To prove reasonable cause for a failure to timely file, the taxpayer must show that he exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. The determination of whether reasonable cause exists is based on all the facts and circumstances.

The taxpayer argued that certain documents required for filing his return were unavailable to him because of his divorce. He further argued that he was too preoccupied with the difficulties of his divorce and the care of his children to attempt to retrieve those documents.

The Court noted it has previously held that a taxpayer does not have reasonable cause for failure to file where he knew of his obligation to file but chose to make his divorce and custody battle a greater priority. Further, the unavailability of information or records does not necessarily establish reasonable cause for failure to file a timely return. The Court found the taxpayer did not demonstrate that he exercised the ordinary business care and prudence that would qualify him for relief from the Section 6651(a)(1) addition to tax. Consequently, he has not met his burden of persuasion, and the IRS's determination was sustained.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Mad at Taxes

Mad at Taxes

Fans of AMC's Mad Men rejoiced last week when Don Draper and his colleagues at Sterling Cooper Draper Pryce returned after a 17-month absence. The year is 1966, and change is in the air. Protestors oppose the war in Vietnam, and riots break out in Los Angeles, Cleveland, and Atlanta. The "kids" are listening to Dusty Springfield and the Rolling Stones. And the "grownups" are struggling to make sense of it all.

Mad Men creator Matthew Weiner is famed for his obsessive attention to period detail. (One episode featured junior executive Pete Campbell displaying a spectacularly ugly "chip and dip" platter he received as a wedding present -- the very same chip and dip that Weiner's own parents received for their wedding back in 1959.) So, fashion mavens predictably ooh'ed and ahh'ed over the period costumes, which have inspired today's Banana Republic to introduce an entire Mad Men collection. Interior design aficionados ooh'ed and ahh'ed over Don and his new bride Megan's stylish Upper East Side penthouse, with its white carpeting, sunken living room, and broad terrace. But tax professionals cheered loudest of all when partner Roger Sterling bribed media buyer Harry Crane $1,100 to give up his office for rising star Campbell. "That's more than you make in a month," Sterling wheedled, "after tax!"

And really, who cares about Don's suits, Megan's dresses, or Roger's cocktails, when we can spy on their money and their taxes?

Prices from 1966 seem comically quaint today. A gallon of gas cost just 32 cents. A dozen eggs cost 60 cents. Postage stamps cost a nickel. But there was nothing comical or quaint about taxes. Rates in 1966 started at 14% on income over $1,000 (roughly $7,000 in today's economy), and rose to 70% on income over $200,000. 70% is a lot compared to today's 35% maximum -- but 70% was actually a big step down from the 91% top rate that Don and his colleagues faced just three years earlier in 1963. One small consolation -- Don's Form 1040 was quite a bit simpler. However, the "Expense Account Information" section at the bottom of page two includes an intimidating box to check -- and separate instructions to follow -- "if you had an expense account or charged expenses to your employer."

And what about those three-martini lunches that play such a central role in lubricating Mad Men's ensemble? Well, for starters, they sure cost less back then. In one scene from Season One, Don flips a waitress at a beatnik bar $5 to cover three martinis, plus tip. Today, those same martinis cost $14 each at The Roosevelt Hotel, where Don stays after separating from first wife Betty. As for tax breaks, under today's rules, meals and entertainment are 50% deductible. That means, if you're in the top 35% bracket, a dollar's worth of martini saves 17.5 cents in tax. But back in 1966 -- when doctors appeared in cigarette commercials and seatbelts were still optional in most cars -- meals and entertainment were 100% deductible. That means that same dollar's worth of martini saved up to 70 cents in tax. No wonder the partners spent more time getting soused than they did talking business!

If we had been practicing back in 1966, we would have looked just as good wearing the silhouettes of 1960s style. But Don Draper would have appreciated us more for the way we cut his taxes. There's no need to get mad at the IRS if you have a proactive plan. And there's no pesky two-drink minimum, either!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Business, Russian Style

Tax Business, Russian Style

Working in the tax business is usually a pretty safe gig. You really just need an office, a computer with an internet connection, and a fast laser printer for all those piles of paper. There's not much heavy lifting -- and even less intrigue or danger. But sometimes the tax business is a different story. Just ask Pavel Petrovich Ivlev, who works (now) in suburban New Jersey.

Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.

Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.

In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB -- working counterintelligence, no less -- and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.

Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick -- or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):

"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer -- you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'Yes.'
'But nothing like that ever happened.'
That's when he threatened to arrest me."

Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client -- Khodorkovsky has spent the last seven years in a series of former Soviet prisons.

Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.