Earlier this week, a Spanish court found Argentine soccer player Lionel Messi guilty of three counts of tax fraud. The charges were related to allegations raised in 2013 that Messi’s father used a series of shell companies in tax havens to shield royalties and other licensing income from tax. In the scheme, which dated back to 2005, income from his many endorsement contracts with such companies as Pepsi and Adidas was reportedly funneled offshore to Belize and Uruguay through an elaborate structure of entities and countries to avoid paying income tax in Spain.
The soccer star has been sentenced to 21 months in prison, though he will likely only face probation due to Spain’s stance on light prison sentences involving non-violent crimes and non-habitual offenders.
Messi’s conviction comes at a time where high net worth individuals are facing increased scrutiny by tax authorities related to their off-shore holdings.
Since 2012, 30,000 Americans have avoided stiff tax penalties by entering into the IRS streamlined program, stating they had innocent reasons for failing to disclose offshore holdings. Those living in the U.S. who voluntarily came forward paid penalties of 5 percent of their undisclosed offshore assets, while overseas residents paid none. Under the program they received no assurances they would not be prosecuted in the future.
With the recent settlements between the U.S. Government and 80 Swiss banks that participated in a limited-amnesty program, the Justice Department has begun scrutinizing information the banks turned over on thousands of U.S. taxpayers’ Swiss accounts to compare that information with what the tax payers have reported to the IRS. The data could expose U.S. tax payers who hid money in Swiss accounts or failed to disclose all their offshore assets after coming forward under the IRS streamlined program.
U.S. Taxpayers who entered int the IRS program that made it easier to disclose their hidden offshore bank accounts may have thought they put their legal troubles behind them. Now prosecutors may be trying to put some of them in jail for not sharing all.
Only broadly experienced tax advisory professionals can provide a truly global perspective so you can preserve, enhance and pass on to the next generation the assets and wealth that you’ve worked hard to build. Talley & Company welcomes the opportunity to discuss with you the current opportunities available to you and your family. For more information, contact us here.
Last week, John Oliver, the British comedian and host of Last Week Tonight, set his sights on critiquing the largely unregulated debt-buying industry. To illustrate how easy it was to establish a debt-buying company, Oliver did just that, forming Central Asset Recovery Professionals, or CARP (after the bottom-feeding fish) in Mississippi via the internet.
Soon after, CARP purchased $15 million in out-of-statute medical debt for $60,000, acquiring the debt, names, current addresses and social security numbers of nearly 9,000 debtors. While Oliver was permitted to now pursue the owing parties, instead he chose to forgive the $15 million in debt, freeing 9,000 people from the threat of late-night phone calls from creditors, while simultaneously achieving the largest monetary giveaway in TV history.
…But what about the taxes??
The IRS is in the habit of taxing people (surprising, we know) when they are enriched. And in their eyes, being forgiven of an obligation to pay someone $5,000 that you owe them is no different than someone handing you $5,000: in either situation, you should pay tax. However those paying close attention to Oliver’s explanation of the process, noticed he added that the debt would be forgiven “with no tax consequences” to the debtor, but how?
The answer is found in Section 108(e)(2), a provision that offers a host of exclusions to the general rule that the forgivenenss of debt generates taxable income. The section provides that “no income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction.”
Because individuals are cash-basis taxpayers, they cannot deduct a liability until it is paid. If the taxpayer has never paid the outstanding debt, they understandably have never taken a deduction for the amount. As a result, when the debt is forgiven, they have not been enriched in an accounting sense because the taxpayer’s net worth was not reduced upon the initial accrual of an unpaid liability.
If Oliver’s forgiveness of $15 million in medical debt causes, as he stated, no tax consequences to the borrowers, then that must mean that payment of those liabilities would have given rise to a tax deduction, right? Yes, and that deduction is provided for in Section 213, which allows a tax deduction for “medical expenses not compensated for by insurance.”
It appears, in this case, the IRS is willing to concede that Section 213 provides a tax deduction for medical expenses, and so you are permitted to exclude the forgiveness of the underlying medical liabilities, even if you don’t itemize your deductions or the sum of the deductions don’t exceed your AGI limit.
Take note Oprah, John Oliver wiped the medical debt of 9,000 individuals, and he may have just successfully* accomplished it without costing them any tax dollars.

Talley & Company

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*Note: “Last Week Tonight” transferred the debt it bought to an organization known as RIP Medical Debt, which has applied for but not yet been recognized as a non-profit under section 501(c)(3) of the U.S. Internal Revenue Code as of 6/10/16.. Should the Internal Revenue Service (IRS) deny RIP Medical Debt’s non-profit status, then the people that Oliver helped could still face a hefty tax bill.

Source: Forbes.com 6/10/16

While it’s nice to get a few extra days to file your taxes this year, the annual chore of handing over money to the government can get people a little grouchy. Businesses have a long-standing tradition of using tax day as a marketing opportunity in hopes of trying to capture some of the refund money tax payers receive each year, with this year being no different. If you’re looking for a distraction from filing your taxes at the last minute, here’s a fun roundup of the best deals and freebies celebrating the end of the tax season on Monday, April 18.
Food and drink
  • Boston Market: On Tax Day, guests can get a half-chicken individual meal with two sides, cornbread, a regular fountain drink, and a cookie1 for $10.40, in honor of the awesome form.
  • Outback Steakhouse: Diners can get 15 percent off their check on April 18 if they go to the web site’s Offers section and sign up for emails to receive a coupon.
  • Hard Rock Cafe: Sing your favorite song on stage on April 18 and your reward is a free Legendary Burger.
  • Bruegger’s Bagels: From April 15 to 18, a bundle including 13 bagels and two tubs of cream cheese costs $10.40, a savings of about $3.50 off the normal price.
  • Sonic Drive-In: Cheeseburgers are half-price on Tax Day.
Services
  • Office Depot & Office Max: At Office Depot and Office Max, download a coupon from their website and get five pounds of bulk bin shredding now through April 23. Staples is offering the same deal, but on April 18 only.
  • Planet Fitness: Guests 18 or older qualify for a free HydroMassage from April 18 to 22 at more than 1,000 of the fitness chain’s locations. Coupons can be downloaded from the Planet Fitness web site starting April 18.

 

Founded in 1989, Talley & Company is the premier consulting and financial services firm dedicated to advising high net worth individuals and their closely held entities with the strategic business solutions that deliver meaningful results.

 

Erin Andrews recently was awarded a $55 million verdict in her peephole lawsuit, but unsurprisingly, the IRS may be the real winner in the case. The perpetrator, Michael Barrett is on the hook for $28 million whereas the Marriot franchisee and operator, West End Hotel Partners LLC and Windsor Capital Group Inc., face the remaining balance of $27 million.  Though the verdict will likely face an appeal by the hotel franchisee and operator and the perpetrator will unlikely have the funds to pay up, taxes may be the biggest thing standing between her and a big pay day.
The IRS treats damages for physical injuries (e.g. broken bones from an auto accident) as tax-free. So are damages for physical sickness. But since 1996, your injury must be “physical” to be tax-free. The IRS says your injuries must be visible, so Ms. Andrews may have trouble treating the damages awarded to her as tax-free. She was understandably humiliated and clearly suffered emotional distress. But without being able to argue something considerably more ‘physical,’ it is all subject to tax.
Ms. Andrews may have more tax-mitigating options available by choosing to settle out of court. In a settlement both parties can attempt to iron out the tax issues and tax reporting, with varying amounts of success. 
Attorney fees can be a tax trap, too. If you are the plaintiff and use a contingent fee lawyer, you’ll usually be treated (for tax purposes) as receiving 100% of the money recovered by you and your attorney, even if the defendant pays your lawyer directly.
Ms. Andrews did the right thing and showed an enormous amount of courage by standing up for herself in court. From a financial viewpoint, her case presents an excellent example of the significant tax implications revolving around settlements/judgments that not everyone is aware of.
Last week the IRS warned that email and texting scams aiming to trick U.S. taxpayers into providing personal data have surged 400% in 2016 so far. The schemes involve phishing (“fishing” for information and “hooking” victims) messages designed to trick taxpayers into believing the emails and texts represent official communications from the IRS, tax software companies or others in the tax industry. Here’s what you need to know.
What to Look For in These Scams
You may receive an official-looking email or text message from what appears to be an official source, whether the IRS or someone in the tax industry. The messages typically ask for data related to tax refunds, filing status, or seek confirmation of personal information, including ordering IRS transcripts or verification of IRS Personal Identification Numbers.
When you click on the links (which you shouldn’t be doing), you are sent to what appear to be government websites that ask for Social Security numbers and other personal information that identity thieves can profit from filing false tax returns. The sites may also contain malware that infect taxpayers’ computers and enable cyber-thieves to gain access to files or track consumers’ keystrokes to get personal data.
It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
Also Note That the IRS Will Never:
  • text/email you demanding immediate payment, nor will the agency call about taxes owed without first having mailed you a bill;
  • demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe;
  • require you to use a specific payment method for your taxes, such as a prepaid debit card;
  • ask for credit or debit card numbers over email/text/phone; or
  • threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
Accounting Today recently released a summary of the IRS’ “Dirty Dozen” list of the top tax scams for 2016. You can view it here.

 

Talley & Company

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Last year, U.S. District Judge Carl Barbier found British Petroleum (BP) guilty of gross negligence in the worst offshore oil spill in U.S. history. The terms of a proposed $20.8 billion out-of-court settlement between the U.S. Department of Justice and BP was announced Monday. According to the U.S. Public Interest Research Group, the settlement would allow the oil company to write off three-quarters of its $20.8 billion settlement, a whopping $15.3 billion, as an ordinary cost-of-doing-business tax deduction. That would allow BP to save roughly $5.35 billion.
As it turns out, the majority of the settlement comprises normal tax-deductible restoration and natural resource damage payments, as well as government reimbursement. Only $5.5 billion would be non-tax deductible under the Clean Water Act.
Presently, the tax code allows businesses to deduct damages, including punitive damages. Restitution and other remedial payments are also fully deductible. Only certain fines or penalties are nondeductible. Even then, the rules are not clear, and companies routinely attempt to deduct payments unless it is explicitly stated that they cannot.
Regardless of what side you take on whether BP’s oil spill settlement should qualify as an “ordinary and necessary business cost”, BP’s current situation should provide a reminder to all business owners to regularly ensure they are making all the right (legal) moves to mitigate their tax burden.
Whether you’re looking to improve your tax position, build your brand through a business transaction, or wish to guarantee a legacy for your family, Talley & Company is uniquely equipped to provide the technical and managerial expertise to help you plan, negotiate, structure and execute upon your goals. Call us today to find out more how we can help you and your company succeed.
In his prime, infamous Medellín cartel boss Pablo Escobar pulled in an estimated $20 million a day in revenue, easily making him one of the wealthiest drug lords in history. In 1989, Forbes named Escobar the seventh richest man in the word with a net worth of roughly $25 billion. When you have more money than you know what to do with and the feds slowly closing in, losing money to rodents is probably the least of your worries.  For the rest of us who run honest businesses, Pablo Escobar’s story provides remarkable advice. Here are some of the highlights.
According to Pablo Escobar’s brother and chief accountant Roberto Escobar, Pablo’s wealth grew at such a rate he was forced to stash mountains of cash in Colombian farming fields, warehouses, and in the walls of his cartel member’s homes. “Pablo was earning so much that each year he would write off 10% of the money because the rats would eat it in storage or it would be damaged by water or lost”.  Doing the math, Escobar lost nearly $2.1 billion a year – and it didn’t even matter.
You’re bound to run into unforeseen challenges when scaling your business. Escobar made so much money that he allegedly spent $2,500 on rubber bands a month just to keep his cash organized.   (What an inconvenient expense, right?) Growing businesses face a range of challenges. As a business grows, different problems and opportunities demand different solutions – what worked a year ago might now be not the best approach. All too often, avoidable mistakes turn what could have been a great business into one that falls to the wayside.
Surround yourself with a team that complements your strengths. Escobar began his illustrious criminal career by allegedly stealing gravestones and reselling them to smugglers. At the height of his powers, Escobar was responsible for 80 percent of the cocaine smuggled into the United States. As the Medellín Cartel grew, Escobar would enlist the help from other notable “colleagues” (we use that term loosely here) in the business of drug trafficking. This allowed him to concentrate more on growing his business and less on the day-to-day operations of his empire.
While we don’t advise anyone attempt to create a drug empire following Escobar’s example, Talley & Company understands the challenges facing entrepreneurs with generating and protecting income. Whether you’re looking to improve your tax position, build your brand through a business transaction, or wish to guarantee a legacy for your family, Talley & Company is uniquely equipped to provide the technical and managerial expertise to help you plan, negotiate, structure and execute upon your goals.

The National Football League recently gave up its tax-exempt status, a designation that saves the organization about $10 million each year, according to the Citizens for Tax Justice. Measured against the billions the league makes annually, this is a drop in the bucket for the sports superpower. Still, $10 million is, well, $10 million. So why would an organization voluntarily expose itself to the obligation of making tax payments?

The answer is, we believe, PR and privacy. To be clear, the tax-exempt status the NFL enjoyed only applied to the league office itself, not the 32 teams, who have always filed taxes. For years, the league has been heavily scrutinized by the media for its 501(c)(6) designation status. The idea that a mega-revenue-generator could be allowed to sidestep taxes, legitimately or not, is easy fodder for the news media.

With this designation under the IRS code, the organization is required to disclose top salaries paid. That means NFL Commissioner Roger Goodell’s salary of over $35 million in 2013, $13 million higher than the top paid player, is public knowledge. This information has only exacerbated intense criticism of the league at a time when its image is still on the defense as a result of the Ray Rice scandal, among others.

At a news conference at the NFL annual meeting, Robert McNair, chairman of the league’s finance committee, told the press, “The owners have decided to eliminate the distraction associated with the misunderstanding of the league office’s status, so the league office will in the future file returns as a taxable entity.” Major League Baseball made the move to give up its 501(c)(6) status and eliminate this “distraction” back in 2007, and the National Hockey League may someday decide to follow suit.

The lesson in all of this, to those of us who don’t run a national sports league, is that potential tax savings alone should never be the most important factor to making a major life or business decision. Chasing after the biggest refund to save a few dollars and cents now could have bigger, more significant consequences down the line.

In the end, it looks like the NFL decided saving a few dollars wasn’t worth the cost to the league’s reputation and brand. And, well, it will probably be able to find plenty of other ways to minimize its tax bill, now that it can write off a long list of business expenses as a taxable entity.

The end game is that the decision was probably made after looking at the cost/benefit scenario from multiple angles. High-net-worth individuals are advised to take the same approach with their own assets, considering tax-saving maneuvers from a 10,000-foot-level to understand potential liabilities and benefits.

The tax filing deadline for 2014 was last week, but today is the day Americans celebrate Tax Freedom Day for 2015. That means that as of now, the nation has collectively earned enough money to pay the nation’s total tax bill, which stands at $4.85 trillion for 2015. This figure represents 31 percent of income and takes into account federal, state and local taxes. It took 114 days to pay off this year’s bill.
Of course, our personal tax freedom days vary depending on where we live, as well as our income, investments, and other holdings. For example, Californians will celebrate tax freedom day a couple weeks later, on May 3. And based on individual factors, the day may come even later (or earlier) in the year for each individual.
Most people are interested in reducing the number of days it takes to reach their own personal tax freedom day. For individuals with straightforward tax profiles, this might be accomplished in the weeks leading up to April 15 by looking for ways to maximize deductions and help score the biggest refund check. For high-income earners, business or property owners, estate beneficiaries or holders, and anyone with multiple tax positions that are intricately connected, this short-term, narrowly targeted approach can actually do more harm than good.
In these cases, a person’s wealth, business portfolio, and long-term investments are all complicated moving parts to take into consideration months and years before tax day. Otherwise, they may be minimizing their taxes for one year, but by doing so expose themselves to greater taxes over the long term.
There can also be a conflict of interest between personal, business, or estate tax positions. Lowering your personal tax burden could have an adverse effect on your business’ position, for example. This is why a holistic assessment helps you save over the long term. It makes it possible to uncover how an action in one area might trigger either detrimental or beneficial consequences in another. 
A tax preparation office or software might be able to help you identify write-offs, plug in the numbers, and calculate your bill/refund for any given year that may save you a few dollars now, but it’s not likely that either will give you much insight into long-term tax strategy.
Only broadly experienced tax advisory professionals such as those among the Talley & Company team can provide a truly global perspective so you can preserve, enhance and pass on to the next generation the assets and wealth that you’ve worked hard to build. We welcome the opportunity to discuss with you the current opportunities available to you and your family. For more information, contact us here.

Nebulous grey areas have always made adhering to IRS’ delineations between employees and contractors a tricky task with a high cost of error. Now that companies with 50 or more full-time employees are required to offer health insurance that meets distinct affordability criteria, it’s more important than ever for small businesses to get classifications right by the IRS. Those that don’t will be slapped with additional penalties tied to the healthcare mandate.

If the IRS finds that enough workers at a company are improperly classified as contractors and not employees, pushing a small business over the 49-employee threshold, big penalties go into effect based on its entire payroll, not just the ones it got wrong. Knowing businesses may want to sidestep the healthcare benefit obligation and associated compliance paperwork by keeping their numbers under the threshold, the IRS could be scrutinizing company classifications even more closely than it already has been.

In other words, just because a business would like to identify 40 of its workers as employees and 10 others as contractors doesn’t mean it can, and the IRS will be helping to make sure of it. There are other benefits to properly classifying every employee, such as avoiding the surprise of a contractor filing an unemployment claim and, consequentially, raising your business’ unemployment tax rate.

The IRS offers businesses guidance on making the proper classification for all workers via form SS-8, but that doesn’t make it easy by any means. The case for categorizing workers in one pool over the other is weighted based on a number of factors considered in holistic combination. Typically, contractors have more control over when, how and which clients they work for, and they use their own equipment and space to perform their jobs. They have more than one client and assume certain business-related risks.

If a company has both contractors and employees, it helps to have very different treatment of the two categories to clarify the distinction. So if employees have consistent workloads, are provided office space and laptops to perform their jobs, must report to work at certain hours and perform the work given to them, it’s best if contractors aren’t treated in the same way.

What makes accurate classification doubly complex is that the distinction can vary from state to state. California, Oregon, Washington, New Jersey and New York, for instance, are more likely to classify workers as employees and have stricter criteria than the IRS. Even if a worker prefers classification as a contractor, they may still be deemed an employee, and the party usually hit with the penalty in the event of an error is the firm, not the worker. If your business is located in one state but hires a contractor from another, you’re obligated to follow the regulations in the worker’s state.

This is the time to be sure every single person working for your business is properly categorized, and that your classifications can withstand the close scrutiny of the IRS. If you have any questions in this regard, ask now so you don’t pay later.


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