Tag Archives: IRS

All For Love

Al_Capone_in_Florida

“Valentine’s Day; red roses
It’s said that some have died for love.
In North Clark Street, Chicago
They died for money…”

It was with those words, uttered by Laurence Olivier, on a Paul Hardcastle song about greed, that Al Capone first fascinated me. It started with that tale of the St. Valentine’s Day Massacre – “It’s a good day to die,” the gangster laughed in a scene in the video – and it continued as I learned more about his legacy as a famous gangster. I mean, as perennially single as I have been most of my life, I have been known to don black clothing and disdain on February 14th, but to shoot a bunch of people on that day? That just seemed a little much. You couldn’t wait until the 15th? What kind of person does that? I found out that others were similarly outraged by Capone’s actions and expended a lot of time and energy trying to bring him down.

A few weeks ago, I was reminded of Al Capone when I spoke with Meredith Engel of The New York Daily News. She was reporting on the financial issues faced by those in the marijuana business. Marijuana is legal in some states, such as Colorado and Washington, but is still illegal on a federal level. This dichotomy may lead to confusion on what income is taxable on a state level, where pot is legal, and on a federal level, where it is illegal.

What does this have to do with Al Capone? Well, despite being blamed for the St. Valentine’s Day Massacre, among other murders, and in spite of being investigated for racketeering and his bootlegging business, the authorities struggled to get Capone convicted on his gang-related crimes. However, there was a government agency that he had not seriously considered; the IRS. You see, it does not matter where your income comes from, be it from legal or illegal sources, you have to pay taxes on it.

It doesn’t matter whether you are selling pot or stealing from your boss, if you don’t pay taxes on that money coming into you, you cold find yourself in trouble with the IRS, ranging from interest and fines to imprisonment. Federal agents couldn’t find enough evidence to pin murder on Al Capone, but they were able to use forensic accounting methods to put together enough evidence to indict Capone on tax evasion charges. He was sentenced to 11 years in prison, was fined $50,000, was charged $7,692 in court costs and $215,000 plus interested in back taxes.

Preparing a tax return can get rather complicated. Figuring what deductions, exemptions and credits you are eligible for can be a like navigating a maze. However, the most simple part of the tax return is the income that you start with. If you don’t want to get into trouble with the IRS – REPORT ALL OF IT, regardless of how you came about it.

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That’s Not How It Goes

canine_side-eyeI am a huge sports fan. Huge. It is just about the only time that I tend to watch live television. The drawback, in my opinion, is that I have to watch all the ads on television, even the ones that get on my nerves. It is a sacrifice I am willing to make in order to get my game in real-time but, sometimes, I wonder. We are in the midst of basketball and tax seasons and the two have, apparently, come together to try to give me an aneurism or, at the very least, high blood pressure. You see, there are a variety of tax preparation related ads, declaring that it is time to get the mountains of money due to you and how easy it is to just do it all yourself, while you’re at it. I just hold my head and mutter, “no, no, no, no!”

Ad after ad trumpets that the product advertised will get you the largest tax refund around. So, what happens when you file your taxes and you don’t get a big refund; maybe you don’t get a refund at all? Do you get upset? Do you feel that your tax preparation software or professional has done wrong by you? But a refund is the government paying you back money that you overpaid them in the first place. Getting a large refund doesn’t mean that you lucked out and won the government lottery; it means that, over the year, you sent the government too much money and now the money is sending that money back to you, interest free.

Refund tales aside, there is the matter of how complicated the tax code is, something that even the Internal Revenue Service (IRS) writes about. The 2014 Tax Guide, a publication that the IRS puts out to help guide individuals who are filing their taxes is a daunting 288 pages long and that’s before the references in the guide for further information on the subjects covered. So, I am sure you can begin to understand my frustration when I see ads that imply that preparing a tax return is as simple as baking a cake. It is unclear how long the tax code is currently, but what we do know is that it gets longer and more complicated by the year.

Computer software is incredibly helpful, when it comes to tax preparation. However, it is paramount to keep in mind that the software is a tool and it will not automatically make you an expert, knowledgeable of the ins and outs of the tax code. If your tax return is straightforward, the chances are that you will be okay filing your own return. Say, however, that you have a business; do you know which of your expenses are deductible and which are not? If you are married, and you decide to file separately, instead of jointly with your spouse, do you know what the differences are between the two? What about if you have spent the year speculating, buying and selling assets, or if you gambled a lot and have significant winnings or losses? The software can only work with what you give it and what if the software doesn’t ask you the right questions in order to get as much information needed in order to have as accurate a tax return as possible?

At the end of the day, the IRS holds you responsible for errors in your tax return and the amount of taxes you pay (and what you claim as a refund). The last thing you want is to be hit with a notice telling you that you owe the IRS a bunch of money because, when they do that, they tend to also charge you interest and penalties. Some tax preparers will tell you that they will cover only penalties and interest due to errors on a tax return, but what about the erroneous tax refund that you have already spent? Yup, only you have to deal with that. It seems like the punishment is a lot worse than just messing up a cake recipe, right? So, I’m thinking that getting a qualified professional, such as a CPA, to prepare your taxes might be worth your investment. Don’t go with someone who promises you the largest refund; go with someone who has studied the law and takes continuing education to stay up to date on the intricacies of the tax code and not only how you will be affected federally but also on a state and local level. Yeah, state and local – I didn’t even go into all that. Find someone who knows what they are doing and who can tell you what is going on and why. Or, you could try to tackle the bigger than the bible tax code and do it all yourself. You’ve got time, right?

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So Fresh And So… Not Clean

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Last week, online currency exchange, Liberty Reserve, was shut down, several individuals were arrested and an indictment was filed by the United States Justice Department in New York. filed and indictment accusing six individuals of, among several other things, money laundering. Media outlets all over keep throwing out that term but how exactly does money laundering happen?

In the United States, money that is earned, whether by legal or illegal means, is subject to taxation. Al Capone went to jail, not for the many (as I gather from watching Boardwalk Empire) people he killed and his unlawful business ventures but for tax evasion. When the government sees you spending money and you do not give them a reasonable reason for your having that money, they will work hard to find out just where your money is coming from. However, if they find out that this money comes from illegal sources, they can arrest and prosecute you for your unlawful activities. This is where money laundering comes in. People who make money via illegal methods, find ways to make their money look clean, as though it came from lawful sources. How does this happen?

  1. The first step in money laundering is referred to as placement. At this stage, money is put into the financial system. This can be risky as US banks are required to report large cash deposits, and wires and checks contain the payer’s information and are, therefore, quite traceable. This is where Liberty Reserve was very handy. First of all, the only honest information Liberty Reserve required from an account holder was an email address. Although they requested a name and birth date, none of that information was verified. This gave the account holders anonymity. Also, Liberty Reserve did not accept money directly from users. Instead, users took their money to approved exchangers who then issued LR currency, Liberty Reserve’s currency. These exchangers were located in countries with little or no oversight over their financial systems, such as Malaysia and Vietnam, so questions were not asked about where the money came from. This LR currency was then deposited into the users’ Liberty Reserve accounts with no clear path to where the money originally came from.
  2. The second step in money laundering is layering. During this phase, money is moved around, through many different sources, in an attempt to make the money difficult to trace. Under ordinary circumstances this involves moving funds from one bank account to another, generally in different countries and in varying amounts, buying expensive items and then selling them and changing money from one currency to another. The goal is to make the money’s path as complicated and difficult to trace as possible. Liberty Reserve made this relatively simple. Money going into a Liberty Reserve account holder’s account was already pretty anonymous and difficult to trace. Funds could then be moved, as LR currency, between various anonymous Liberty Reserve accounts. The sources of the funds became near, if not totally, impossible to trace, without having to go through the complications of multiple bank transfers through different countries and bank accounts.
  3. The final step in money laundering is integration. Here, the money re-enters the economy, disguised as coming from a legitimate source. The funds are transferred into a business that is probably a front for the illegal business but now that its origin has been disguised, it appears to be coming from a legal source. In the case of Liberty Reserve, the LR currency was transferred to money exchangers who converted the LR currency back to US dollars and then moved that money to wherever it was the Liberty Reserve account holder requested.

It is pretty clear just how handy Liberty Reserve was to those involved in illegal business and wanting to launder money so that it looked clean. By removing identification and making money transactions anonymous, placement and layering of dirty money a far less complicated endeavor than it tends to be. It is not surprising that Liberty Reserve had over a million users, 200,000 of which were in the United States, and that over $6 billion went through its system.

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