October 16, 2012

ObamaCare Expanded Medicare Contribution Tax

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

Beginning in 2013, as part of the Patient Protection and Affordable Care Act (PPACA), an additional tax is imposed on income over a certain level in the case of an individual, estate, or trust. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income.

For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Modified adjusted gross income is adjusted gross income increased by any amount excluded from income as foreign earned income (net of the deductions and exclusions disallowed with respect to the foreign earned income).

The tax is subject to the individual estimated tax provisions and is not deductible in computing any income tax. Thus, for example, there is no deduction allowed for this tax when calculating the self-employment tax.

For purposes of the unearned income Medicare contribution tax, net investment income is investment income reduced by the deductions properly allocable to such income. Investment income is the sum of:

(1) gross income from interest, dividends, annuities, royalties, and rents (other than income derived in the ordinary course of any trade or business to which the tax does not apply);

(2) other gross income derived from any trade or business to which the tax applies; and

(3) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the tax does not apply.

Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax.

In the case of a trade or business, the tax applies if the trade or business is a passive activity with respect to the taxpayer, or the trade or business consists of trading financial instruments or commodities. The tax does not apply to other trades or businesses. Income, gain, or loss on working capital is not treated as derived from a trade or business.

Net investment income DOES NOT INCLUDE items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.

This law could affect you if you dispose of a partnership interest or stock in an S corporation. In such cases, gain or loss is taken into account to the extent gain or loss would be taken into account by a partner or shareholder if the entity had sold all its properties for fair market value immediately before the disposition.

In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

The unearned income Medicare contribution tax does not apply to a nonresident alien; a trust, all the unexpired interests in which are devoted to charitable purposes; a trust that is exempt from tax under Code Sec. 501; or a charitable remainder trust exempt from tax.

If you believe you may owe this tax, we will need to prepare estimated taxes in order to avoid a penalty. Please call me at your convenience if you wish to discuss this further or have any other questions regarding health insurance.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. 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 from 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 commit 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. 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.

October 10, 2012

Are You Missing Valuable Year-End Tax Breaks?

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

December 31 is approaching fast. And while you may not associate December 31 with taxes, it’s the deadline to take advantage of some of the most valuable planning opportunities. And proactive tax planning is the key to minimizing your tax.

Here’s a quick quiz to help see if you need year-end planning. This year, did you or will you:

Marry or divorce
Have a baby (or adopt)
Change jobs or retire
Earn income from stock options or employer stock
Buy or sell your home
Make gifts of more than $13,000 to any one person
Start or invest in a new business
Close or sell a business
Hire contractors or employees for your business
Start using your home for business
Start using your car for business (other than driving to or from work)
Increase or decrease your business income
Buy or lease a new car/truck for business
Buy or lease business equipment
Sell business assets
Start receiving IRA or retirement plan distributions
Reach age 70½
Buy or sell stocks, bonds, or mutual funds
Buy, sell, or exchange investment real estate

Did you answer “yes” to any of the questions? If so, you can probably profit from year-end tax planning. Call us at 954.591.8290 for a free analysis. We’ll find the mistakes and missed opportunities that may be costing you thousands, and show you how we can fix them.

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. To start the conversation 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.

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

October 10, 2012

Department of Worst Nightmares

by Kenneth Hoffman in Tax Counsel

Last week, we wrote about a recent report issued by the Treasury Inspector General for Tax Administration ("TIGTA") -- an independent board that works to prevent and detect fraud, waste, and abuse within the IRS and related entities. We were amused to learn that 70 federal agencies owed $14 million in unpaid employment taxes on their employees' wages -- and 18 more agencies hadn't even filed their employment tax returns. But we were appalled to learn that the IRS can't take any effective action to collect those outstanding balances.

While we were busy bringing you the news about Uncle Sam's "Get Out of Jail Free" card, the TIGTA was busy issuing another report that we knew you'd want to hear about. And this one may be worth paying attention to. Would you believe that TIGTA thinks "Firearms Training for IRS Criminal Investigation Division Needs Improvement"?

When we think of IRS "agents," we typically think of deskbound bureaucrats who spend their days shuffling papers that would put the rest of us to sleep. And for the most part, that's true. "Revenue Agents" are the IRS's invaluable front line, auditing and examining financial records to make sure that taxes get paid.

But it's easy to forget that the IRS has a long history of law-enforcement success. (Remember who finally put Al Capone in jail?) Today's Criminal Investigation ("CI") Division employs 2,700 "Special Agents" -- an elite force who investigate tax evasion, money laundering, narcotics-related financial crimes, and counterterrorism financing. Their duties include executing search warrants and arresting fugitives. They're even authorized to use deadly force to protect themselves and the public. So, naturally, Special Agents must meet firearms training and qualifications standards every year, including "firing a handgun, entering a building with a firearm, and firing a weapon while wearing a bulletproof vest."

TIGTA looked at 597 Special Agents working out of the New York, Los Angeles, Chicago, and Washington D.C. field offices. They found that CI's firearms training and qualification requirements "generally met or exceeded those of other federal law enforcement agencies." That's certainly reassuring for those of us who think the only thing more terrifying than an IRS agent packing heat is an IRS agent with a gun he doesn't know how to use.

However, TIGTA found, some special agents don't actually meet those training and qualification requirements. Field office managers didn't always take consistent actions when special agents failed to meet the requirements. And there's no national-level review of firearms training to make sure all special agents meet their requirements. TIGTA recommended that CI either enforce the requirement that special agents who don't meet training requirements surrender their firearms, or modify the literal rules to reflect what actually happens in the field when an agent misses training requirements. TIGTA also recommended that CI establish a process to monitor and periodically review special agent firearms training and qualification records.

IRS Special Agents do some of the Service's most valuable work. Their efforts help keep everyone's taxes down, and keep us safe in other ways as well. We're confident none of you reading this will ever wind up on the wrong side of an IRS agent's gun. But if it ever did happen, wouldn't you want that agent to have a little experience?

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

October 3, 2012

Latest Government FAD

by Kenneth Hoffman in Tax Counsel

If you don't take care of your taxes, you risk some pretty expensive fines and penalties. Some of those amounts are fixed, like $195 per partner per month for failing to file your partnership return. Others are based on the actual tax due, like the 10% penalty for failing to file employment taxes. If the IRS has to come after you, they can slap liens on your home or other property. They can impose levies to pluck back taxes from your paycheck, your bank account, or your retirement plan. They can even seize your assets and auction them to collect their pound of flesh.

Having said all that, would it surprise you to learn that there's someone with a "Get Out of Jail Free" card for not paying his taxes? Would it surprise you even more to learn that it's Uncle Sam himself?

The Treasury Inspector General for Tax Administration ("TIGTA") is an independent board that oversees the IRS. Their job is to audit, investigate, and inspect the tax system itself, as well as to prevent and detect fraud, waste, and abuse within the IRS and related entities. Last month, the TIGTA issued a report with a bland and vague title: A Concerted Effort Should Be Taken to Improve Federal Government Agency Tax Compliance. But that deceptively bureaucratic name masks a pretty outrageous conclusion:

"Federal agencies are exempt from paying Federal income taxes; however, they are not exempt from meeting their employment tax deposits and related reporting requirements. As of December 31, 2011, 70 Federal agencies with 126 delinquent tax accounts owed approximately $14 million in unpaid taxes. In addition, 18 Federal agencies had not filed or were delinquent in filing 39 employment tax returns. Federal agencies should be held to the same filing and paying standards as all American taxpayers."

Fourteen million bucks might not seem like a lot compared to our sixteen trillion dollar debt. But believe it or not, the problem is bad enough that the IRS has an entire unit, called the Federal Agency Delinquency ("FAD") Program, just to collect delinquent taxes from other federal agencies! How well do they do? Last month's report took a look at the December 2008 "FAD list" of 132 delinquent accounts to see what had happened through December, 2011. The TIGTA found that just 33% of those agencies had paid their employment taxes. 30% of those accounts were still open and unresolved, three years later. Even worse, 36% of those accounts had actually expired; meaning the IRS won't ever collect those balances.

That "FAD" unit sounds like a real pit bull, right? Well, they might be, if they had any leash. IRS Policy Statement 2-4 says the IRS can't assess interest or penalties against delinquent federal agencies. And even if they could, Comptroller General Opinion B-161457 says that the agencies aren't authorized to pay them!

You might ask yourself why it even matters whether the government pays taxes to itself. We've all heard that people who live in glass houses shouldn't throw stones. That age-old advice seems especially appropriate here. We're in the home stretch of an election centered largely on the role we want entitlements to play in our society. And every time a federal agency short-changes its payroll tax obligation, it cheats the Social Security and Medicare trust funds of much-needed dollars. It hardly seems controversial to ask Uncle Sam to set the best example possible!

October 3, 2012

Proper RecordKeeping is a Must

by Kenneth Hoffman in Business Counsel, Tax Counsel

In Marilyn Eileen Noz et vir (T.C. Memo. 2012-272) the Tax Court sided with the IRS in disallowing a number of the taxpayers' business deductions including those for flights from New York to Stockholm. The Court noted that on the basis of the frequency of travel, the personal relationship between the taxpayers, and the their failure to offer any evidence, beyond broad generalities, of how the trips advanced any stated business purpose, the Court found that the New York-Stockholm trips were motivated primarily by personal concerns and held they were not entitled to deduct the costs of their flights.

The Court also disallowed deductions for home internet use because the taxpayers provided no evidence regarding the percentage of internet use that was devoted to business purposes vs. the amount devoted to personal purposes. The Court declined to allow the accuracy-related penalty, finding that they at least partially complied with the record-keeping requirements and made a good-faith effort to act in accordance with the law.

September 28, 2012

Withholding Tax Compliance

by Kenneth Hoffman in Business Counsel, Tax Counsel

Introduction

There are many reasons employers don't withhold or pay employment taxes. For some, it may be an attempt to use the government as a bank to 'borrow the money for a short while' with good intentions to pay it back later. For others, it may be a situation where an employer collects the taxes and elects to keep it during a period of financial difficulty rather than pay it to the IRS. Regardless of the reason, federal law requires employment tax withholding and payment by employers.

Employment taxes consist of federal income tax withholding along with social security and Medicare taxes and unemployment taxes. Also, many states have withholding requirements for various employment related taxes, such as income taxes. In addition, any business that has employees is liable for unemployment insurance contributions on at least a portion of the wages. Improper reporting or payment of employment taxes affects the ease with which employees can claim future benefits from these programs.

The IRS takes a variety of steps to combat employment tax non-compliance. The agency has a number of civil actions it can take like audits and filing tax liens against property the taxpayer owns. In addition to civil actions, IRS Criminal Investigation investigates and refers for prosecution individuals and businesses that have willfully attempted to avoid filing and paying employment taxes. These efforts have led to significant criminal convictions resulting in incarceration and fines.

Prison time is not unusual, for both federal and state violations. In many cases the taxpayer is still required to make restitution.

Eight Most Common Types of Employment Tax Non-compliance

Pyramiding. "Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. The cause is often a lack of profit or capital for operating costs, so the business owner uses the trust funds to pay other liabilities. The quarterly employment tax liabilities accumulate (or "pyramid") until the employer has little hope of catching up. Businesses involved in pyramiding frequently shut down or file for bankruptcy and then start a new business under a different name starting the cycle over.

Unreliable Third Party Payers. There are two primary categories of third party payers--Payroll Service Providers and Professional Employer Organizations. Payroll Service Providers typically perform services for employers such as filing employment tax returns and making employment tax payments. Professional Employer Organizations offer employee leasing meaning that they handle administrative, personnel, and payroll accounting functions for employees who have been leased to other companies that use their services. Many of these companies provide outstanding services to employers. Unfortunately, in some instances, companies of both types of services have failed to pay over to the IRS the collected employment taxes. When these employment service companies dissolve, millions in employment taxes can be left unpaid. Employers are urged to exercise due diligence in selecting and monitoring a third party payer. For example, when choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS). This allows the business owner to verify payments made on their behalf. Also, an employer should never allow their address of record with the IRS be changed to that of the third party payer.

Frivolous Arguments. Unscrupulous individuals and promoters have used a variety of false or misleading arguments for not paying employment taxes. These schemes are based on an incorrect interpretation of "Section 861" and other parts of the tax law and have been refuted in court. One variation of this scheme involves the improper use of Form 941c, Supporting Statement to Correct Information on Form 941, to attempt to get a refund of previously paid employment taxes. Employer participants could also be held responsible for back payments of employment taxes, plus penalties and interest.

Offshore Employee Leasing. This scheme, which was designated as a Listed Transaction by the IRS, misuses the otherwise legal business practice of employee leasing. Under the typical promotion, an individual taxpayer supposedly resigns from his or her current employer or professional corporation and signs an employment contract with an offshore employee leasing company. The offshore company indirectly leases the individual's services back to the original employer using a domestic leasing company as an intermediary. The individual performs the same services before and after entering into the leasing arrangement. While the total amount paid for the individual's services stays the same or increases, most of the funds are sent offshore as "deferred" compensation. The "deferred" compensation is then paid to the individual as a "loan" or ends up in an account under the individual's control. Promoters of these arrangements improperly claim that neither employment taxes nor income taxes are owed on the "deferred" compensation. Because it is a Listed Transaction those who use the scheme are required to disclose their participation on current tax returns, and will be liable for the unpaid tax and subject to penalties and interest. Civil and criminal actions are being taken against promoters and participants in offshore leasing schemes--one promoter was convicted of defrauding the U.S. and sentenced to 70 months imprisonment, two other promoters have been ordered by the courts to stop marketing the scheme and a San Diego doctor plead guilty to tax evasion and is awaiting sentencing.

Misclassifying Worker Status. Sometimes employers incorrectly treat employees as independent contractors to avoid paying employment taxes. Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who misclassify employees as independent contractors (and are not eligible for relief under Section 530 of the Revenue Act of 1978) will be liable for the employment taxes on wages paid to the misclassified worker and subject to penalties.

Paying Employees in Cash. Paying employees wholly or partially in cash is a common method of evading income and employment taxes. There is nothing wrong with compensating an employee in cash, but employment taxes are owed regardless of how the employees are paid. And the IRS will build its case using all available information even if there are no payroll records or checks.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns. Preparing false payroll tax returns intentionally understating the amount of wages on which taxes are owed or failing to file employment tax returns are methods commonly used to evade employment taxes.

S Corporation Officers Compensation Treated as Corporate Distributions. In an effort to avoid employment taxes, some S Corporations are improperly treating officer compensation as a corporate distribution instead of wages or salary. By law, officers are employees of the corporation for employment tax purposes and compensation they receive for their services is subject to employment taxes.

The IRS encourages employees to report any concerns that an employer is failing to properly withhold and pay federal income and employment taxes. Employers must report employment taxes withheld from their employees on Form 941. Employers are also responsible for filing Form 940, Employer's Annual Federal Unemployment Tax Return.

Second, you can be held personally liable for the unpaid amounts. And, should you end up paying the amount personally, you will not get a deduction for the payment. Moreover, any outstanding liabilities are not discharged in bankruptcy.

Except in cases where an employer is basically ignoring his or her responsibilities or just using the withheld amounts for personal spending, holding onto the withholdings generally indicates a serious cash flow problem that and the business probably need outside assistance.

If you're already behind one or more quarters, contact us immediatly. You may have options. But the longer you wait, the worse it will get.

September 26, 2012

Don Draper on Taxes

by Kenneth Hoffman in Tax Planning, Tax Counsel

Earlier this week, the Academy of Television Arts and Sciences handed out their 64th Primetime Emmy Awards. Showtime's political drama "Homeland" was the big winner -- stars Damian Lewis and Clare Danes won Best Actor and Best Actress, and the series itself won Best Drama. AMC's period drama "Mad Men" was the big loser, failing to win the Best Drama award after four previous victories. And Mad Men's brooding star Jon Hamm lost again for Best Actor, for the fifth year in a row.

Hamm's character, Don Draper, is an advertising genius who creates campaigns for clients as diverse as Lucky Strike cigarettes, Mohawk Airlines, Menkens Department Store, and Utz potato chips. Don uses all sorts of psychological triggers to promote his clients' products. But one trigger he he hasn't used -- at least, not yet -- is everyone's dislike of paying taxes. So, as Hamm leaves the Emmys empty-handed again, we had to ask: which real-world advertisers have used taxes to promote their products?

"You must pay taxes. But there's no law that says you've gotta leave a tip."
Morgan Stanley
"You'd be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (tax-free bond funds)
"Cheerios can lower cholesterol 4% in 6 weeks. To appreciate that number, give the IRS an extra 4%."
General Mills
"There is an inherent hypocrisy in increasing taxes on consumers to discourage smoking, while simultaneously relying on that revenue to fund the increasing cost of children's healthcare."
Lorillard Tobacco
"The Higher the Tax Bracket, the Better the View."
Florida Real Estate Developer
"Nowhere on any tax form does it say you can't be crafty."
Nuveen Investments

It's certainly no surprise seeing financial firms like Morgan Stanley and Nuveen Investments in this list. But cigarette makers and luxury homebuilders are a bit of a surprise. And if the makers of Cheerios can advertise "against" taxes, well, anyone can!

At our firm, we've known all along what these advertisers have discovered, too: you don't want to pay any more tax than you have to. That's why we focus on planning to pay less tax, legally. That's the kind of "can't miss" campaign that ought to finally win Don Draper an Emmy!

September 21, 2012

Election Day and Taxmageddon

by Kenneth Hoffman in Tax Counsel, Tax Planning

Election Day is almost here, and taxes are taking center stage in this campaign. We're not here to tell you how to vote. But we want you to know that we're following the race with an eagle eye. Our goal is to help you make the most of whatever changes eventually come with the next administration.

Several important tax changes are scheduled to take effect on January 1, and we're paying close attention to all of them:

The Bush tax cuts are scheduled to expire. This will mean higher tax rates for everyone, along with a higher top rate of 39.6% for the highest-earning taxpayers.
Top rates for long-term capital gains and qualified corporate dividends climb back from 15% to 20%.
The employee portion of Social Security and self-employment tax goes back up from 4.2% to 6.2%.
The Medicare tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
Finally, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income of those earning more than $200,000 ($250,000 for joint filers).

Below is our 2012 Campaign Tax Comparison to help you compare the current law with the Obama and Romney proposals. We'll be following the campaign carefully in order to help make the most of your opportunities, no matter who wins. And of course, if you have any questions, don't hesitate to call us at 954-591-8290.

2012 Election Tax Outlook

	Current Law	Obama Plan	Romney Plan
Top Marginal Rate – Ordinary Income	35%	39.6%	28%¹
Top Marginal Rate – Capital Gains	15%	20% (plus 3.8%²)	15%³
Top Marginal Rate – Qualified Dividends	15%	39.6% (plus 3.8%²)	15%³
Top Marginal Rate – Corporations	35%	28%	25%
Payroll Tax	13.3%⁴	Increase top rate from 2.9% to 3.8%	No Change
Alternative Minimum Tax	26-28%	30%⁵ (incomes >$1 million)	None
Estate Tax Unified Credit	$5 million⁶	$3.5 million	None
Estate Tax Rate	45%⁶	45%	None
¹Romney’s plan would extend current rates for 2013. Ultimately, he would lower rates by 20% across the board, and replace lost revenue by eliminating unspecified “loopholes and exclusions” ²Beginning on January 1, 2013, the Patient Protection and Affordable Care Act imposes a new “Unearned Income Medicare Contribution” applies on investment income for taxpayers with incomes over $200,000 ($250,000 for joint filers) ³Romney has proposed to eliminate all tax on capital gains, dividends, and interest for taxpayers earning under $200,000 ⁴Currently, FICA and self-employment taxes total 13.3% on incomes up to the Social Security wage base, plus 2.9% Medicare tax on earned income above that figure. ⁵Obama has proposed to replace the current AMT with a “Buffet tax” of 30% on incomes above $1 million ⁶Estate taxes are scheduled to revert to a $1 million unified credit and 55% rate on January 1, 2013

September 20, 2012

File Joint Tax Return Each of You Are Responsible

by Kenneth Hoffman in Tax Counsel, Tax Preparation

If you file a joint tax return, you're generally liable for taxes on the return if your spouse doesn't pay. Sec. 6015 provides relief from that rule for an innocent spouse. But you must meet certain requirements.

In Sharon K. Hudgins (T.C. Memo. 2012-260) the taxpayer sought relief from the liabilities she incurred with her deceased husband. In considering the taxpayer's request for relief the IRS determined that (1) of the outstanding 2007 tax liability, $3,639 was attributable to the taxpayer and $17,058 was attributable to her spouse; (2) the taxpayer did not have a reasonable belief that her spouse would pay the tax because she did not review the return in the first instance and because the tax liabilities shown on the spouse's individual returns from 2001 and 2002 were also not timely paid and (3) the taxpayer was not making a good-faith effort to comply with the tax laws because she did not file her 2008 return, which had an extended due date of October 15, 2009, until October 20, 2009.

The Court reviewed the factors and concluded that the taxpayer failed to satisfy the safe harbor requirements and the equitable factors in Rev. Proc. 2003-61 and that she was not entitled to relief.

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 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.