Tuesday, April 15, 2008

Free tax advice (From the archives)

[Bumped up for the season.]


By William L. Nothstine and Claudia J. Volk
Originally published in the [Portland] Oregonian, April 2001

(William L. Nothstine is a technical editor in Portland, OR, and Claudia J. Volk is a former tax accountant and principal of CJVolk Associates, an Arlington, VA, treasury and cash management consulting firm. Both authors swear they would never, ever try any of these things themselves. Honest.)

Free tax advice is everywhere. Internal Revenue Service figures for 1999 indicate that 11% of all free tax advice came from well-meaning friends and co-workers, 17% came from IRS publications, hotlines, and web site materials, and a full 61% came from professionals such as dentists, cab drivers, and golf pros. The rest came from articles such as this one.

Most of these sources, to be honest, probably won’t tell you much you didn’t already know. What you really need is free tax advice for real people: advice about tax problems that involve eccentric relatives, major lapses in judgment, foolish business decisions, and strokes of bad luck that could keep you awake until the wee hours of the morning.

To fill this gap in the free tax advice market, we cheerfully offer these handy tips for preparing your taxes this spring. They’re drawn from Daily Tax Report, Standard Federal Tax Reports, and Tax Court Reports, summaries of the actual court decisions used by tax professionals to keep up with how the IRS interprets the law.

Hey, don’t thank us; after all, it’s free.

Free Tax Tip #1: Whether bribing or embezzling, be sure to save receipts.

This handy hint could have saved Watergate conspirator and radio talk-show host G. Gordon Liddy a tidy sum. The former Nixon White House staffer was given almost $400,000 in 1972 to pay for the surveillance of President Nixon’s Democratic rivals during his presidential re-election campaign. Liddy claimed that the money was for bugging the Democratic headquarters, not for his own personal gain. Unfortunately, after the Watergate break-in became public knowledge, Liddy shredded the receipts that would have proven this. As a result he had to pay income tax on over $45,000 of the dirty-tricks money. A decade later, during the Iran-Contra scandal, Reagan front-man (and future radio talk-show host) Ollie North was shrewd by comparison, saving his receipts for even minor office incidentals, such as pantyhose for secretary Fawn Hall.

Another example of the wisdom of this advice comes from the case of securities trader Robert Elmore, who claimed that most of the half-million dollars he embezzled from his firm went into his boss’ pocket, while the rest was used for bribing public officials. As auditors closed in, the boss promised to protect Elmore in exchange for the latter’s promise to take the fall on the embezzlement charges. By producing paperwork showing that the reward he got from his boss didn’t come from the embezzled funds, Elmore convinced the court that he didn’t have to pay taxes on any income from the embezzlement. Further, Elmore was never prosecuted.

Free Tax Tip #2: The more fun your religious practice is, the less likely it is to be deductible.

The most obvious proof of this rule is the dreadful tax position in which Heritage USA, televangelists Jim and Tammy Bakker’s theme park and vacation resort for the PTL Ministries faithful, eventually found itself.

But the same problem also befell Seattle peep-show and massage parlor entrepreneur Ronald Peterson, when he attempted to deduct almost $20,000 in gifts to his newly founded Temple of Venus and Venusian Church. Peterson claimed that the Temple (which featured live sex shows), the Church, and its clothing-optional retreat were religious institutions designed to help followers discover the "god-self" within them. Unfortunately, the court concluded that the profits the Church brought Peterson were far in excess of what would ordinarily be called a rewarding religious experience.

Free Tax Tip #3: Capital losses are subject to credibility limitations.

Ignorance can often have tax advantages, but stupidity is subject to penalties and interest to the full extent of the law. The distinction is fairly easy to follow: For example, the taxpayer who paid $5,000 for a signed portrait by a 19th century American artist, only to see its value drop to $300 when the signature was shown to be forged, was merely ignorant and was able to write off the $4,700 difference as theft lost.

On the other hand, James Lincoln exceeded permitted gullibility limits when he agreed to purchase $1 million in stolen cash for $140,000 in a money-laundering scheme. When his contacts staged a phony arrest and tricked Lincoln into fleeing without his money, Lincoln tried to write off the $140,000—either as a theft or a business loss. The court ruled against him, although it is unclear which the court found more foolish: getting suckered by such an obvious swindle, or hoping the authorities would cover his losses on something toward which they take such a notoriously dim view.

Free Tax Tip #4: The two essentials for a successful marriage are communication and sharing.

Specifically, if you are involved in financial hanky-panky, be sure to keep proof that you communicated this to your spouse so that he or she will share in the penalties if you are discovered.

Consider the fellow whose wife, perhaps understandably, hadn’t listed a hefty amount of embezzled funds on her taxes. The husband signed the blank 1040 forms and never looked at them again. When the IRS closed in, the husband's insistence that he’d never given any thought to his wife’s suddenly-extravagant lifestyle or to the coincidental fact that she was charged with grand theft shortly before the returns were filed fell on deaf ears at the IRS.

Much the same thing happened to the woman who claimed that she’d believed her husband (a convicted cocaine dealer) when he said his income was in the neighborhood of $20,000. She soon had to explain to the feds her utter lack of curiosity about the farm, the condo, and the other real estate he had purchased during the previous year, supposedly out of that same twenty grand. In both cases, the "innocent spouse" was held by the judge to be something less than innocent.

See? You just won’t find out about truly important wrinkles in the tax code, like these, from the free sources most people rely upon. For example, did you know that there are provisions for reporting the "ordinary and necessary expenses of smuggling?" Or that there are well-established procedures for determining your tax liability, as well as handling late-filing penalties, if you are held hostage by terrorists? You didn’t if you get your free tax advice from your brother-in-law.

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