September 19, 2012

Turns Out Crime DOES Pay

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Back when you were a little kid, Mom and Dad warned you that crime doesn't pay. (They also told you it was the tooth fairy leaving that money under your pillow.) But it turns out that crime does pay -- at least for one felon-turned-whistleblower.

Bradley Birkenfeld grew up in suburban Boston before moving to Switzerland to pursue a career in banking. In 2001, he started work at Switzerland's biggest bank, UBS. His job was to solicit American depositors, 90% of whom he said were trying to evade taxes. His main duties included schmoozing clients at UBS-sponsored events like yacht races in Newport or the Art Basel festival in Miami Beach. But he also helped clients create shell companies to hide ownership of their accounts, shredded documents recording transactions in their accounts, and once even smuggled a pair of diamonds through U.S. Customs in a tube of toothpaste. (Doesn't everyone carry their diamonds in their toothpaste?)

By 2005, Birkenfeld reports, he suffered a crippling attack of conscience. He approached his superiors at the bank to complain about "unfair and deceptive" business practices. When those complaints went nowhere, he took his story to the U.S. government. He originally sought immunity for his own role in any crimes, but wound up pleading guilty to a single count of conspiracy to defraud the United States. He spent 2½ years in prison before moving to a halfway house, and he's scheduled to be released for good on November 29.

Now Birkenfeld is getting ready to "re-enter society." But he leaves the Big House with parting gifts that most felons don't enjoy. He'll have $104 million dollars waiting for him, courtesy of none other than -- you guessed it -- the IRS! That works out to $4,600 for every hour he spent behind bars. Of course, Birkenfeld doesn't get to keep all those millions. His lawyers get a cut, and the rest is fully taxable. But some of you reading these words might consider taking the same deal for yourself!

Birkenfeld wasn't the first guy to tell the IRS that rich Americans were using Swiss banks to cheat on their taxes. But he was the first to document it so devastatingly, and he was the first to offer evidence that the bank itself encouraged illegal behavior. The IRS said, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS."

How much was Birkenfeld's help worth? Well, UBS itself paid $780 million in fines and ratted out their 4,700 biggest American clients. But that's just the tip of the iceberg. Nearly 35,000 Americans have taken advantage of special IRS amnesty programs and have collectively paid more than $5 billion in back taxes. And Birkenfeld's bars-to-riches story, which included an appearance on 60 Minutes, has spurred a gold rush of whistleblower claims. In some cases, enterprising hedge funds have actually "invested" in those claims, paying whistleblowers up front in exchange for a share of any future awards.

The irony here is that none of the cheaters who sent their money on an alpine vacation had to cheat to pay less tax. They just needed to plan to take advantage of perfectly legal concepts and strategies. We give you the plan you need to pay less tax, legally, so you can spend your time in Switzerland visiting chocolate factories and cuckoo clocks -- not your hidden bank accounts!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

September 12, 2012

The Day The Internet Died

by Kenneth Hoffman in Business Counsel

Monday, September 10, 2012, is the day the Internet died for millions of small businesses around the world.

Internet services company Godaddy, a company who provides domain registration, website hosting, DNS services, e-mail hosting and e-commerce services to millions of individuals and small business, had an outage "due to a technical glitch" according to Wired. However, TechCrunch, in an earlier report, said that Godaddy was a hacking victim.

Apparently, Godaddy was not able to resolve their problems and had to off-load their DNS services to their rival VeriSign.

Twitter was buzzing with tweets from Godaddy customers. Some where clueless about what was happening, while others were threatening to take their business elsewhere. Unfortunately, what happened to Godaddy could happen to any service provider. Moving to another provider will not protect you or your business.

My own company website was off-line too. However, my email was still up. I use Rackspace, a great company to do business with. My website is hosted with SquareSpace, another fantastic company. However, I use Godaddy to host my DNS server. I failed to plan for a possible outage, as did millions of others.

Godaddy is my main DNS service provider, but I have since contacted DYN to provide backup or secondary DNS services.

Secondary DNS provides redundancy for your primary name servers. If something goes wrong with your primary (and only) name server set, you run the risk of requests hitting a dead end with nowhere else to go. You can back up your DNS zones with Secondary DNS (a secondary name server) so your domain name never goes offline.

This will happen again, either by hackers trying to make a statement or by some "technical glitch". Now is the time to plan for that event. Don't be a victim again. If your business is important to you, having a backup plan in place is well worth the expense.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

September 12, 2012

Gentlemen Prefer Tax-Free

by Kenneth Hoffman in Tax Planning

Fifty years after her mysterious death, Marilyn Monroe's image remains as profitable as ever. In 1999, the dress she wore to sing "Happy Birthday, Mr. President" to John F. Kennedy sold at auction for $1.26 million. Forbes magazine lists her as #3 on their "Top-Earning Dead Celebrities" list (topped only by Michael Jackson and Elvis Presley). And In 2009, a Japanese man paid $4.6 million for the crypt directly above hers at Westwood Village Memorial Park Cemetery in Los Angeles. (Some people really do have too much money.)

Now Marilyn is in the news again, this time for the financial consequences of her tax planning. If Hollywood made the story into a movie, nobody would believe it.

When Marilyn died in 1962, she left $40,000 to her secretary, 25% of her estate to her psychiatrist, and the remaining 75% of her estate, including the "residuary," to her friend and acting coach, Lee Strasberg. The estate sat in probate for 41 years before finally settling, with the bulk of the assets eventually passing to an entity called Monroe, LLC, a Delaware limited liability company managed by Strasberg's widow. (It might be worth mentioning here that Alexander the Great took just ten years to conquer the entire civilized world.)

Marilyn died at her home in California. However, she executed her Last Will and Testament in New York -- where she owned an apartment at 444 E. 57th Street -- and named a New York attorney, Aaron Frosch, as her executor. Frosch consistently treated Marilyn as a New York resident in order to avoid California estate taxes. And it worked -- her estate paid just $777.63 in inheritance taxes there.

Fast forward to 2005. That year, the new LLC set up to manage the estate's assets sued the heirs of several photographers who had taken pictures of Marilyn while she was still alive, heirs who were licensing those images for commercial use. Marilyn's estate argued that this violated her "right of publicity," which included their rights to control the commercial use of Marilyn's name, her image, her likeness, and other aspects of her identity. The heirs, in turn, countersued, arguing that Monroe, LLC didn't own the star's right to publicity.

A district court in California declared that at the time of her death, the state didn't recognize any such right of publicity, and ruled in favor of the photographers' heirs. Just one month after that decision, California passed a law creating a posthumous right to publicity that would be transferable to Marilyn's estate. Armed with the new law, the estate's attorneys went back to court to overturn their previous decision. Not so fast, the Court said. Yes, the California law would let Marilyn's estate inherit her right to publicity, if she had been a California resident at her death. But she didn't die a California resident, she died a New York resident -- and New York doesn't recognize a right to publicity.

Last month, the U.S. Circuit Court for the Ninth District issued what should hopefully be the last word, just over 50 years after her death. "We conclude that because Monroe's executors consistently represented during the probate proceedings and elsewhere that she was domiciled in New York at her death to avoid payment of California estate taxes, among other things, appellants are judicially estopped from asserting California's posthumous right of publicity." In other words, go pound sand.

Here's the lesson. Sometimes, avoiding tax shouldn't be our most important goal. Sometimes, focusing on taxes means letting the tail wag the dog. And sometimes, our job is to help you put taxes in the right perspective. In Marilyn Monroe's case, her executor made a smart decision to treat her as a New York resident, and succeeded in avoiding California tax. He certainly couldn't have foreseen the development of any right to publicity, and he can't be said to have done anything wrong. But focusing solely on taxes did cost Marilyn's estate big in the end. So call us when you've got big decisions to make -- we'll help you avoid making similar mistakes!

September 11, 2012

Time To Call Your Tax Advisor

by Kenneth Hoffman in Tax Counsel, Tax Planning

Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse:

Waited until the last possible minute to start preparing your return
Receive a large employee bonus or award
Become unemployed
Change employment
Take an unplanned withdrawal from an IRA or other pension plan
Retire or are contemplating retirement
Exercise an employee stock option
Have significant stock gains or losses
Get married
Separate from or divorce your spouse
Sell or exchange a property or business
Experience the death of a spouse during the year
Turn 70½ during the year
Increase your family size through birth or adoption of a child
Start a business or acquire a rental property
Receive a substantial lawsuit settlement or award
Get lucky at a casino, lotto, or game show and receive a W-2G
Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity
Plan to gift more than $13,000 to any one individual during the year

In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with us.

Don't wait until December 31st to call. By then, it is too late.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace of Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a comment and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 7, 2012

Can A Church Amend A Pastor's Housing Allowance

by Kenneth Hoffman in Church Counsel, Church Issues

While neither the IRS nor the courts have addressed this question, it seems perfectly reasonable to conclude that the church can amend its housing allowance designation during the course of the year if changed circumstances render the allowance inadequate. However any changes to an allowance cannot be applied retroactively.

For example, the church runs on a fiscal calendar year that runs January to December. A proposed adjustment is made in October. The adjustment would apply for the months of October, November, and December; everything prior to October (January to September) would operate under the original housing allowance amount set heading into the fiscal year.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

September 7, 2012

Can You Prove Basis When Selling Property

by Kenneth Hoffman in Tax Planning, Tax Preparation

In Jovita Diaz (T.C. Memo. 2012-241) the taxpayer sold two pieces of real property. The purchase prices were not in dispute. But in the first property she argued she made $60,000 in improvements after purchase. The costs included $40,000 for renovating the garage to be used as a daycare center and $20,000 for improving the driveway and walkway.

She testified that she hired a contractor to perform the improvements, but she did not introduce any records which supported the costs. She did not introduce an invoice from the contractor, a canceled check, a construction permit for the improvements, or before and after pictures.

Also, she did not introduce any records that showed the property was used as a daycare center. The taxpayer contended that she did not have documentation because she kept moving from one place to another. The Court found her testimony was unpersuasive in support of her claim of $60,000 of improvements. The taxpayer claimed $10,000 in improvements (installation of a lawn) with respect to the second property, but again, could show no support. The Court disallowed any increase in basis for the improvements. In addition, the Court allowed the imposition of the accuracy-related penalty for failure to keep records.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

September 5, 2012

Players Behaving Badly

by Kenneth Hoffman in Business Counsel, Tax Planning

Football season is back! College teams have started already, and the pros kick off this weekend. So welcome back to the energy and excitement of game day. Enjoy the pageantry and the tailgating as the days get shorter and the air gets crisp. And don't forget the tax liens!

What?!? Don't forget the tax liens . . . ? That's right, sometimes the surest hands in the game drop the ball on their taxes.

We'll start our tour of NFL tax offenders with Plaxico Burress. The free-agent wide receiver, who once signed a $25 million contract with the New York Giants, owes New York state a cool $59,241 in tax. Of course, Burress is no stranger to the law -- he spent nearly two years scrimmaging behind bars after accidentally shooting himself in the leg at Manhattan's glitzy Latin Quarter nightclub.

Running back Jamal Anderson played eight seasons for the Atlanta Falcons, where he earned the nickname "Dirty Bird" for his touchdown celebration dance. But the IRS will be dancing in the end zone when they collect $478,247.57 in unpaid taxes for 2007 (when he appeared on MTV's "Celebrity Rap Superstar") and $627,015.94 for 2008 (when he appeared as an analyst for ESPN). Like Burress, Anderson has also had brushes with the law -- in 2012, he was arrested for drunk driving, and in 2009, he was arrested after Atlanta police reported him snorting cocaine off a toilet bowl in the Peachtree Tavern's restroom.

Quarterback Ken Stabler led the Oakland Raiders to a 32-14 win over the Minneapolis Vikings in Super Bowl XI. (That was so long ago, people paid more attention to the game than the commercials!) Now it looks like he'll be playing for the IRS. Earlier this summer, a federal judge sacked Stabler for $259,851 in unpaid business and personal taxes. (Oh, and the IRS piled on for another $5,509 in penalties.) Stabler's attorney says the former passer has sold his house to help pay the debt, and will also make monthly payments out of income he earns appearing at NFL events.

At least Burress, Anderson, and Stabler actually filed their returns, even though they didn't pay. Cornerback William James played for the New York Giants, Philadelphia Eagles, Buffalo Bills, Jacksonville Jaguars, Detroit Lions, and San Francisco 49ers. Apparently he lost his W2 in one of those moves. Federal prosecutors say he earned over $9 million during his career -- but failed to file returns for 2005-2009. Now he faces up to a year in prison and $100,000 in fines when he's sentenced later this month. Oops!

And what about everyone's favorite former All-Pro felon, O.J. Simpson? Would you be shocked to learn that "the Juice" is fumbling his taxes, too? That's right, the IRS announced just last week that they had tackled him with liens for $15,927.89 for 2007, $105,119.71 for 2008, $49,490.27 for 2009, and $8,897.20 for 2010. Of course, taxes are probably the least of O.J.'s worries right now, considering he's got 29 years left to serve on armed robbery and kidnapping charges. And he still owes murder victim Ron Goldman's family $33 million in civil damages!

There's not really a specific tax-planning lesson here -- we just hope you're paying more attention to the game than these guys are! Either way, you can trust us to keep an eye downfield for you, and help you stay out of those IRS tackles!

September 4, 2012

3rd Quarter Estimated Taxes Are Due

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Due Dates

If you haven't done so already, calculate your third estimated tax payment for 2012. September 17th will sneak up on you faster than you expect, so it's best to have this taken care of early.

For most people, tax day comes just once a year - on April 15. But, for most entrepreneurs, Uncle Sam expects a check four times a year.

Who pays?
The rules are complex, but we will make this easy. You need to pay estimated taxes if:

If you are an sole proprietor, partner or S corporation shareholder AND you expect to owe at least $1,000 in federal income taxes when you file your personal income tax return in April; or
If your business is a C corporation AND you expect to owe at least $500 in federal income taxes when you file your annual corporate income tax return.

When payments are due.

For the 2012 tax year, estimated tax payments are due on April 17th, June 15th, September 17th and January 15th, 2013.

How much to pay.
The official answer is you must calculate your expected AGI, taxable income, taxes, deductions, and credits for the year, then use Form 1040-ES to figure your estimated tax.

Simplified: Take the total amount of federal income tax you paid last year and divide it by 4 to calculate your quarterly tax payment amount.

How to pay.

Mail : send a check or money order with a payment voucher from Form 1040-ES. If your business is a corporation, you must use the EFTPS system.

Phone: pay with a credit or debit card by calling 1-888-729-1040 or 1-800-272-9829

Online: pay with a credit or debit card at www.pay1040.com, www.officialpayments.com or www.payusatax.com

Underpayment of Estimated Tax

If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

August 29, 2012

Trillion Dollar Taxpayer

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

When America's biggest corporations make news for their taxes, it's usually for how little they pay. One recent study, for example, argues that 26 big corporations, including AT&T, Boeing, and Citigroup, paid their CEOs more than they paid Uncle Sam in federal income tax. (Comparisons like that might bring to mind an old Babe Ruth quote. In 1930, a reporter pointed out that Ruth's $80,000 salary was more than the President's -- to which the Babe replied "I know, but I had a better year . . .") Now, another corporate giant is making headlines for its taxes. And for once, the surprising news involves how much it paid, not how little.

Exxon and Mobil are iconic corporate names. Both began life as parts of John D. Rockefeller's original Standard Oil Company. Both were spun off in 1911 when the U.S. Supreme Court found Standard Oil guilty of illegally monopolizing the oil refining industry. ("Standard Oil Company of New Jersey" eventually grew into Exxon, while "Standard Oil Company of New York" morphed into Mobil.) When the two giants re-joined to create ExxonMobil in 1999, they instantly became the biggest publicly-traded corporation on earth. And since then, they've only gotten bigger, with a "market capitalization" (total value of outstanding publicly-traded shares) topped only by tech giants Apple and Microsoft, and the largest company on earth by revenue.

You would expect a corporation this size to pay a lot in taxes, right? And for once, you would be right. In fact, a recent study by economist Mark Perry reveals that ExxonMobil has paid over one trillion dollars in taxes since that merger. That's a full three times the profit the company earned for its actual shareholders.

Take 2008, for example. ExxonMobil's profit reached a staggering $46.87 billion, the highest annual profit since the Romans invented the corporation. But they also paid $36.53 billion in income taxes, $34.51 billion in excise taxes, and $41.72 billion in other taxes, including sales taxes. Do the math and you'll see that totals $112.76 billion -- $9.4 billion per month, $2.17 billion per week, $309 million per day, and $214,535 per minute.

Skeptics might reply that ExxonMobil doesn't actually "pay" all those taxes out of its own pocket. They argue that the corporation just passes the cost of excise taxes on to customers and merely collects sales taxes imposed by state and local governments on buyers. But there's no arguing that the economic activity generated by this particular actor ultimately led to that trillion dollars in worldwide tax revenue.

We're not here to champion "Big Oil" in general, or ExxonMobil in particular. We realize ExxonMobil has been criticized for inadequately responding to various oil spills, funding research disputing "global warming" claims, and even violating workers' human rights in Indonesia. We're here to champion the value of surprising information -- especially when we can use that information to your benefit.

You'd probably be surprised, for example, to learn that some business owners deduct their family's medical bills as a business expense. But that's exactly what a medical expense reimbursement plan allows. You'd probably be surprised to learn that you can deduct the cost of crashing your car if it happens while you're driving for work. But that's what the law allows.

We constantly go to the well for smart tax strategies, so you don't have to. Call us if you want to put this sort of information to work for you! And remember, we're here for your friends, family, and colleagues, too.

August 22, 2012

Linsanity!

by Kenneth Hoffman in Tax Counsel, Tax Planning

The clock is ticking down on "summer." July 4th barbecues are a distant memory, and Labor Day is looming near. Forget about baseball's pennant races starting to heat up. Forget about the upcoming NFL season. It's time to talk basketball!

Taiwanese-American point guard Jeremy Lin played college ball at Harvard, where he notched an Ivy League-record 1,483 points, 487 rebounds, 406 assists, and 225 steals. That might have been enough to get drafted if "Ivy League" earned any respect with NBA scouts. Instead, he walked on to the Dallas Mavericks and warmed various benches for the Golden State Warriors, Houston Rockets, and (Chinese Basketball Association) Dongguan Leopards before catching fire with the New York Knicks. He averaged 18.5 points and 7.6 assists over 26 games before leaving because of a torn meniscus. But those 26 games were enough to ignite "Linsanity," with New York bars and restaurants introducing "Lintinis," asian-spiced chicken "Lings," and asian-inspired "lin-burgers" for beleaguered Knicks fans who finally had a reason to cheer.

At the end of the season, Lin became a restricted free agent. This meant he could sign an offer with another team -- but the Knicks could match it and keep him. Last month, the Houston Rockets re-signed him to a three-year, $25.1 million deal, which New York declined to match, and now, Linsanity moves south to Houston. So naturally, we want to know what it means for Lin's tax bill!

Let's start with Lin's rooting section at the IRS. Regardless of where he plays, he'll pay federal income tax at the top marginal rate of 35%. He'll also pay Medicare tax of 2.9%. If the Bush tax cuts expire at the end of the year, as they're already scheduled to do, that top rate will rise to 39.6%. And the Medicare tax jumps to 3.8% on January 1 as tax hikes included in the Affordable Care Act take effect.

Now let's look at his old tax bill for the Knicks. In "New York, New York", Frank Sinatra sings "If I can make it there, I'll make it anywhere." What ol' Blue Eyes probably meant is that if he could afford the taxes there, he can afford them anywhere. So, Lin starts out owing Uncle Sam anywhere from 37.9 to 43.4%. New York State shakes him down for 8.82%. Then New York City runs up the score for another 3.876% more. If Lin counted baskets like he paid taxes, he would have scored 481 points for the Knicks -- but kept just 239 after taxes!

Now let's look at his new tax bill for the Rockets. Lin will be glad that basketball is an indoor sport when he gets a taste of Houston humidity. But he'll find the tax climate a lot cooler. He'll pay the same amount to Uncle Sam, of course. But neither Texas nor Houston impose any tax on his income at all. None! So this difference could mean as much as a million dollars more per year in Lin's oversized pockets. Smart planning for a guy who graduated with an economics degree and a 3.1 GPA!

Of course, as is usually the case with taxes, things aren't quite so simple. Professional athletes pay state and local taxes wherever they play. That means that when Lin travels back to Gotham to play the Knicks, he'll renew his friendship with New York tax collectors -- but when he plays the Orlando Magic or Miami Heat, he'll enjoy the same zero percent tax rate in Florida that he gets in Texas. And of course he can deduct state and local taxes he pays from his federal taxable income.

Are you expecting an outstanding season in 2012? Maybe wondering where it makes the most sense to play ball? We're here to prevent the IRS from "calling a technical" on your finances. And remember, we're here for your teammates, too!