Author: Leon Clinton

Have you heard about the enormous tax savings you can reap by investing in a Maltese individual retirement arrangement or utilizing Puerto Rican captive insurance for your business? Before you invest your hard-earned money in these or other highly promoted tax schemes, you should check the IRS Dirty Dozen list.

For over 20 years, the IRS has issued an annual Dirty Dozen list identifying tax scams and avoidance schemes. This year’s list includes everything from employee retention credit claims to the use of fake charities.

Some items on the Dirty Dozen list involve fraud, such as identity theft through “spearphishing.” Other items involve tax credits or deductions, such as conservation easements, that can be legitimate but have been prone to abuse by taxpayers in the IRS’s view.

The Dirty Dozen gives you red flags that trigger IRS scrutiny and can result in aggressive enforcement action against taxpayers who claim such deductions or credits and those who promote them.

When you see a new item on the Dirty Dozen list, especially if it’s at the top, you know it’s something the IRS is particularly interested in. A case in point is the employee retention credit (ERC). It didn’t make it to the list until 2023, and then the IRS placed it at the top.

The top position tells you that combating fraudulent ERC claims is a high priority for the IRS. This doesn’t mean you shouldn’t claim the ERC if you’re entitled to it. Just make sure you have all the necessary records in case of an audit.

As part of its Dirty Dozen awareness effort, the IRS encourages members of the public to report individuals who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. The IRS also created an Office of Promoter Investigations in 2021 to identify and stop promoters and enablers of abusive tax avoidance transactions.

Employing a strategy or scheme on the Dirty Dozen list makes an audit more likely. It can also result in substantial tax penalties if an audit occurs and the IRS concludes that taxes were underpaid due to the use of the strategy. The strategy being on the Dirty Dozen list can make it difficult to avoid the penalties the IRS can impose on

• taxpayers,
• tax preparers, and
• promoters.

Taxpayers can avoid the accuracy-related penalty if they establish that they had reasonable cause for the underpayment and acted in good faith. But it is challenging, if not impossible, for taxpayers to demonstrate that they acted in good faith when they adopt a strategy or scheme listed in the IRS’s Dirty Dozen.

If you have any questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 13, 2024

When it comes to taxes, the tax code treats professional gamblers better than recreational gamblers.

Unlike recreational gamblers, professionals get to deduct all their gambling expenses (including travel, lodging, and meal expenses) up to their annual winnings, without itemizing. This is a big advantage.

If you gamble a lot, you could benefit by qualifying as a professional and filing IRS Schedule C to report your winnings, losses, and other expenses. But it’s not so easy to qualify as a professional gambler. You must

1. gamble regularly and continuously, and
2. gamble with the primary purpose of earning a profit.

Most professional gamblers gamble full-time. But qualifying as a professional and having another job is possible if you gamble regularly and continuously throughout the year. For example, Linda Myers spent 25 to 35 hours per week running her trucking business and about 40 hours playing slot machines. She qualified as a professional gambler. But gambling sporadically won’t cut it, even if you spend a lot of time gambling.

The IRS uses a nine-factor test to determine whether you gamble primarily for profit or for other reasons, such as having fun. The profit factors include whether you carry out the activity in a businesslike way, your history of winnings or losses, your financial status, your expertise at gambling, and the time and effort you spend gambling.

Court cases show that the single most important factor is keeping good gambling records. Don’t rely on casino win/loss statements. A Las Vegas couple won over $19,000 at video poker but learned the hard way, when they tried to file as professional gamblers, that good records are essential. The fact that they never kept their own gambling records weighed heavily in the Tax Court’s refusal to classify them as professional gamblers.

Do this. Create your own contemporaneous gambling log or diary showing your wins and losses by gambling session.

Also do this. Use a separate bank account for your gambling activity.

Other things you can do to help establish your professional gambler bona fides include creating a business plan, educating yourself about gambling, and changing games if you consistently lose. Remember, as a professional, you’re gambling to make money, not to have fun.

If you want to discuss professional gambling status, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 6, 2024

Do you sell goods or services and receive payment through a third-party settlement organization (TPSO)? If so, you must know the IRS’s new Form 1099-K reporting rules.

TPSOs include

• payment apps such as PayPal, CashApp, and Venmo;
• online auction or marketplace services such as eBay and Amazon;
• gig economy platforms such as Uber and Airbnb;
• some cryptocurrency processors such as BitPay;
• craft or maker marketplaces like Etsy ;
• ticket exchange or resale sites like Ticketmaster; and
• some crowdfunding platforms.

For over a decade, TPSOs filed IRS Form 1099-K, Payment Card and Third Party Network Transactions, reporting certain payments the TPSOs process for goods and services.

But a TPSO had to file Form 1099-K only if the recipient had

• gross annual earnings over $20,000, and
• more than 200 transactions in the calendar year. 

With these thresholds, only frequent users of TPSOs exceeded both thresholds and had their payment information reported to the IRS. If you’ve never received a 1099-K from a TPSO that processed payments on your behalf, this is why.

That is changing. Congress drastically reduced the 1099-K filing thresholds when it enacted the American Rescue Plan Act of 2021 to require TPSOs to file Form 1099-K for any recipient who is paid more than $600 during the year with no minimum transaction requirement.

The new 1099-K filing rules were supposed to go into effect for the 2022 tax year.

But the IRS delayed them until 2023. Now, the IRS has delayed them yet again, announcing that the old rules ($20,000/200 transactions) remain in place for 2023.

For the 2024 tax year, the IRS is replacing the $20,000/200 transaction threshold with a $5,000 threshold and no minimum transaction requirement.

For the 2025 tax year and later, the IRS applies the $600 threshold, again with no minimum transaction requirement.

Why all the delays? Because the IRS fears that TPSOs will mistakenly file many of the expected 44 million 1099-Ks. For example, TPSOs might mistakenly file 1099-Ks for personal payments from family and friends.

If you want to discuss TPSO reporting, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 30, 2024