The New 1040 Schedule A

        The IRS is preparing its revised Form 1040 Schedule A for taxpayers to file by next April. In that new form medical expenses will continue to be deductible which exceed 7.5% of adjusted gross income. The deduction for state and local taxes is limited to $10,000 for Schedule A itemizers ($5000 if filing separately). Charitable contributions continue to be deductible. Personal casualty losses have been eliminated except if in a presidential declared federal disaster area. All of the personal miscellaneous itemized deductions which were subject to 2% adjusted gross income have been eliminated. The result of all this is that fewer taxpayers will be itemizing deductions for tax year 2018. The IRS has also made clear that all attempts by the individual states to circumvent the SALT limitation through the use of charitable deductions and other contrivances will not be allowed. The many high tax states have not at this time given up on this issue.

Love Me Love My Dog

        The dog is man’s best friend. Our country is becoming increasingly dog friendly. Dogs are now finding their way onto airplanes, into restaurants and in some cases supermarkets. Many states have laws that prevent pet owners from bringing their furry little friends with them into many places. But then there is the very special service dog. In some cases these dogs exhibit more compassion than many human beings including at least half of the US congress. The Internal Revenue Service treats the service dog who assists a visually impaired person or others with physical disabilities and its required veterinarian care as an allowable medical deduction to the owner. The amounts paid to purchase such an animal plus food and grooming can be deducted on schedule A subject to the 7.5% of adjusted gross income limitation. An owner of a support animal who is not so impaired must show that it is primarily for medical care to relieve a mental disability or illness.

The IRS Can Drive You Crazy

         Let’s face it, the IRS can drive you crazy. I don’t mean just us tax professionals, after all we get paid for the aggravation. You know some of us actually enjoy it. But when a client gets notice from the Internal Revenue Service even the toughest of them begin quaking in their boots. When representing these taxpayers of course the first course of action is to set forth a plan hopefully to negotiate an amicable conclusion. As a tax court judge once told me a good settlement should make both parties unhappy. But sometimes the IRS just won’t do it your way and for those cases referral to a bankruptcy attorney makes the most sense. Bankruptcy stops the IRS in its tracks to enforce collection. It can no longer badger the taxpayer by mail or any other type of communication. In that sense it is the same as any other creditor. What redress exists if the IRS doesn’t play by this rule? In Hunsaker (9th circuit) the taxpayers admittedly owed taxes but were forced to file bankruptcy. Notwithstanding this filing the IRS continued to send nasty demand letters which threatened immediate enforcement action. The taxpayers sued the IRS for emotional distress and a bankruptcy court ruled the IRS would have to pay the taxpayers… $4000. The District Court in late 2016 reversed on the grounds of sovereign immunity. But this Court of Appeals determined the District Court erred in dismissing the couple’s claims and sent the case back for a decision on the merits. Certainly this case is an aberration, but it does represent creative thinking on the part of their attorney.

The New Man at IRS

1      Charles Rettig has become the new Commissioner of Internal Revenue. He may be the first from the other side of the fence. That is the side most of us are on. He spent 35 years representing clients before the Internal Revenue Service, the tax division of the Department of Justice and numerous state taxing authorities in federal and state court litigation and appeals. You name the board and he’s been on it. He’s worked with IRS in an advisory capacity. His credentials include a certified specialist both in taxation law, estate planning, trust and probate law. He is admitted in California, Hawaii and Arizona. He is no stranger to the bar association having given numerous presentations to private practitioners. He has also done his share of work representing taxpayers in foreign and domestic voluntary disclosures and sensitive civil tax examinations where substantial civil penalty issues or possible assertions or fraudulent conduct may arise. You can read more about his accomplishments at the website of his firm: Hochman, Salkin,Rettig,Toscher and Perez. There is no doubt in my mind that Mr. Rettig knows where the bodies are buried. He is one of us… for better or worse.

State Sales Tax and the Internet

               It is almost forty years ago that I rented an apartment in a two family house near the office. The landlady was an elderly woman who lived downstairs. She had managed to purchase a clothes washer in her basement, but couldn’t afford a dryer. So I bought it for her. It wasn’t soon after that that she began raising my rent…. often. In one year in particular it was increased four times. When I asked her why she was raising the rent so often she had a very simple explanation: “You got it and I need it.” Eventually I was into home ownership but I never forgot her simple explanation. It explains a lot of what goes on in tax administration. You got it and the government needs it. In this case it’s the states. Now in this great country of ours 45 states impose a sales tax. You can argue that such a tax is unfair in that it is applied without exemption to the rich and the poor. But that argument will get you nowhere. Up to now states have had no problem assessing the tax for sales that occur when the seller has a presence within a state. In some circumstances that presence could be mailing a catalog to a state’s residents and certainly if the business office is maintained or a manufacturing or a warehouse facility exists. New Jersey of course has its sales tax…and its use tax. The story goes that at one time the Director of the Division of Taxation asked to see the Use Tax form as he had purchased a sailboat out of state and was ready to cough up the Use tax since the state of acquisition did not have a sales tax. He was told the form was simply unavailable. After that time a resurgence in the collecting of the use tax was made by the state. You’ll notice when you file your New Jersey income tax return a use tax form is included. Years ago lawyers received letters in the mail asking them to consider what their use tax liability was for equipment purchased sales tax free. But can business be conducted without any physical contact to a state? Certainly the authors of the sales tax in the various states never dreamed that it would be possible to conduct business from out of nowhere. Enter the Internet. I don’t have to tell you that more things are being purchased and sold on the Internet then they are at your local mall. And the situation is only likely to get worse. In 2001, I wrote a book about Ocean Grove*, New Jersey called: “The Other Side of Ocean Grove.” It has been recently republished and is now available on the Internet and can be purchased by anybody anywhere on the planet at Amazon.com. I have noticed that Amazon apparently does collect sales tax. But the states feel billions of dollars of taxable transactions are going by the wayside. Enter the new Supreme Court case of South Dakota vs Wayfair No. 17 – 494. Since a ruling in 1992 by the Supreme Court, sales on the Internet have been almost sales tax free. Brick and mortar stores as well as the states themselves have complained vociferously. Now the Supreme Court has agreed to again review the issue and by June perhaps a decision may be rendered. In South Dakota, the state itself passed its own Internet sales tax law for sellers that have no physical presence in South Dakota and make over $100,000 in yearly sales or 200 transactions in the state. Sellers are required to collect sales tax from South Dakota buyers. Forty-one states have filed briefs with the court supporting South Dakota. It is estimated that the states could see $10 billion in additional revenue by increasing the sales tax base. Alaska, Delaware, Montana, New Hampshire and Oregon are the five states without sales tax. The Trump administration has also filed a brief supporting South Dakota and Congress itself may get into the act to create a uniform sales tax structure. In theory at least it should make no difference to purchasers as those who have not been subject to sales tax I’m sure are paying the use tax to their respective states….”and the dish ran away with the spoon.”


*Those who would like to discover Ocean Grove, New Jersey's most interesting seaside town need only go to Amazon.com and look for "The Other Side of Ocean Grove"----a classic of sorts.

The Bitcoin "Treasure"

   The Nuestra Senora de Atocha was a Spanish treasure ship that sank in a hurricane in 1622 off the Florida Keys. The ship was filled with copper, silver, gold and gems from the Spanish ports at Cartagena and Porto Bello in New Granada and Havana. The owner of the ship was of course King Philip IV of Spain. Most all of the 110 crew and passengers were lost. It is said that the gold and silver was so grand that it took two months to load aboard ship. The gold and silver alone weighed 40 tons. The Spanish king sent salvage ships to recover its treasure. Soon a second hurricane scattered the loot even further. The Spanish were able to recover about half of the ship’s contents. That left about half a billion dollars’ worth in today’s value on the ocean floor ready to be scooped up by anyone with the good fortune to find it. Now what does any of this have to do with bitcoin? Read on. Treasure hunters from all over the world used Spanish records in Madrid to try to locate the ships contents. One such treasure hunter was Mel Fisher. Fisher set out with other investors to comb the sea floor. It took them 16 ½ years and at least two bankruptcies before finding the mother lode in July, 1985.The value for his find was estimated at $403 million at the time. For lawyers who may be somewhat bored with the practice let it be known that the entire stash was not and has still not been found. Fisher’s discovery in the Florida Keys was in just 55 feet of clear ocean water. Recreational divers, like myself, are licensed to dive with ordinary equipment to 100 feet. Fisher’s find was disputed by the state of Florida and it took litigation through the Supreme Court before his rights in the treasure were settled. The question for Fisher was where to store the loot. And that’s where I got to meet him. Mel Fisher’s Treasure Museum in the early 1990s was and still is in Key West, Florida. In the early days silver and gold bars were stacked along the walls of what looked like a one-time warehouse. Trinkets and souvenirs from the Atocha were sold in a makeshift gift shop in the building. I’ll admit to having a fascination at the time with both diving and treasure hunting. And my interest brought me to the museum. While in line to purchase a trinket, I struck up a conversation with the cashier. By that time I had been an IRS agent and an IRS lawyer in my career. The cashier was complaining about the taxability of the gold, silver and emeralds she had received as she had been part of the partnership aboard the ship. Fisher ran his operation much like 16th century Pirates. No one was paid until the loot was found and then by a set proportion of the booty based upon their duties aboard the ship. The cashier had received a 1099 from the partnership indicating a huge taxable income based on the things she had received. She asked a simple question “where do I get the money to pay these taxes?” In short order I gave her a discussion of code section 61 that taxes income from “whatever source derived” including from the bottom of the ocean as treasure. This did not make her happy. She realized she would be forced to convert her precious metals to cash to pay the taxes. I offhandedly remarked how much I admired Mel Fisher’s determination and that I would love to have met him. To my surprise she said “you can go around back to his office I think he is in there today”. I took her up on the offer and got to meet the big man himself. In the course of conversation Mel with a gold doubloon hanging from his chest with what looked like a golden length of rope said we could have used an ex-IRS agent who could dive on board. Naturally, I immediately volunteered to be that person. No, I never did get to go diving with Mel Fisher. I went back to Hackensack and had a career in tax law instead. But Mel and I talked about the problem with paying taxes with things that are not currency. After all the gold and silver and gems were property. Now enter the problem with bitcoin. In 2014, the Internal Revenue Service announced that crypto currency was actually “property” and therefore subject to all the rules with regard to property transactions. Now when you take a $20 bill out of your pocket and buy a latte or two with it, you don’t receive a 1099 because of the currency transaction. But if you use a share of stock instead to purchase that coffee the difference between your cost and the sales price becomes a taxable transaction. By ruling that bitcoin was in fact property and not currency many traders who made a fortune in 2017 based on the boom and their trades of bitcoin in that year are now waking up finding huge tax bills for their transactions. To make matters worse the value of the bitcoin has steadily decreased in 2018. So the traders lack the funds to pay the taxes. A recent New York Times article talked about a conference where just the tax issues of bitcoin transactions were discussed. Apparently a number of the traders will try their luck and hope that the IRS simply does not detect their taxable trades. I recently attended a tax seminar where IRS special agents mentioned the fact that the IRS criminal division will be looking at just this type of problem. So bitcoin traders should be aware that IRS is on to them and that they have already used summons to acquire the names and other information on thousands of people who have been involved in the bitcoin boom and bust. Those who become disgusted with the situation may want to take scuba lessons and head to the Florida Keys. Diving is a lot less stressful than sitting in front of a computer watching flickering numbers on the screen waiting for that IRS agent at your door. Any of my legal colleagues who dive and who may be so inclined to look for another source of income should give me a call or leave a comment here as my interest in treasure hunting remains.

How to Be a Tax Whislteblower

                 Looking for an interesting part time job? Consider becoming a federal tax whistleblower. The feds have had a statute for years that provides for payment to people who kindly supply information that results in collected taxes. Before 2006 there was a real question whether any payment was being made to a whistleblower as such payments were discretionary by the Internal Revenue Service. However in that year section 7623(b) was amended to make payment mandatory when certain standards are met. Information supplied is given under penalties of perjury and must meet a tax floor before IRS will be interested. However, if qualified, a whistleblower can go home with 15 to 30% of the amount of taxes collected. IRS has created a separate whistleblower office which is unfortunately only staffed by thirty or so employees. Recently 28,000 claims were filed so this may be a part-time job where payment will not be made for a number of years. This is not only due to the short handedness at the whistleblower office but the statute itself which requires that the time period for all appeals have passed for the taxpayer with regard to the collected taxes. So the wait for the big pay back for the whistleblower could be 6 to 7 years or longer. Well, if you’re interested in getting started see Form 211. If the whistleblower has shared or participated in any scheme like the one he’s divulging his chances of success are nil. Should IRS deny the claim the whistleblower can go to the United States Tax Court for review. Lawyers who are contacted by whistleblowers should realize that simply insinuating that wrongdoing has occurred will not be enough. Doing as much investigation as is possible and verifying statements to be supplied to the IRS will be necessary. Submitting the form 211 without backup is almost a guarantee that it will not be accepted. By the way, the state of New Jersey also maintains a whistleblower statute but it does not provide for payment to anyone. New York on the other hand has a statute similar to the federal where payment of 15 to 20% can be made. But motivation for the whistleblower can sometimes be revenge rather than money. It is said that New Jersey examines all whistleblower allegations.