A Baseball Player Gets Hit By A Penalty

I have a question for you: let’s say you are a professional athlete. You have hired a financial advisor and an accountant. You give the financial advisor a durable power of attorney, allowing him/her to pay your bills, manage your money and grow your investments. You ask your accountant to prepare tax returns as necessary keep you out of trouble.

These services are not cheap. They cost you an upfront fee of $150,000 and an ongoing $360,000 annually.

            COMMENT: I am available and open to relocation.

You get robbed for millions of dollars. Tax returns do not get filed.

The IRS now wants big penalties from you.

QUESTION: Do you have “reasonable cause” to have the IRS remove those penalties?

We are talking about Mo Vaughn, who played baseball with the Red Sox, the Anaheim Angels and the New York Mets in the nineties and aughts.  He was the American League MVP in 1995.

In 2004 he hired Ra Shonda Kay Marshall to handle his money matters. She wound up leaving her employer, Omni Elite, and set up her own company, RKM Business Services, Inc. He also hired David Krebs with CPA Advisory Group, Inc. for the preparation of his tax returns.

Something happened, and in 2008 he fired both of them. Vaughn was going through his bank statements when he realized that Marshall had been embezzling. He hired forensic accountants, who determined that from 2004 to 2008 she had embezzled more than $2.7 million.

He then learned that his 2006 taxes were not paid.

Even that was better news than 2007, when his taxes were not even filed, much less paid.

He sued Marshall and RKM Business Services.

He hired new CPAs to get him caught up. The IRS – in that show of neighborliness that we have come to expect – hit him with penalties of $1,037,158 for 2006 and $102,106 for 2007. He had filed and/or paid late, and there were penalties for both.

He owed the tax, of course, but he had to contest the penalties. He went the administrative route – meaning appealing and working within the IRS itself. Striking out, he then took his case to court. He went to district court and then to appeals.

His main argument was simple: he was paying people to keep him out of tax problems. There was a lot of money leaving his account, so he had every reason to believe that a good chunk of it was going to the IRS. He was robbed. The IRS was robbed. Surely robbery is reasonable cause.

The IRS and the court pretty much knew his story at this point, and they knew that he was suing to get his millions back. The court however decided the government was due its money. There was no reasonable cause.

How is this possible?

There is a tax case (Boyle) where the Supreme Court addressed the issue of penalties assessed a taxpayer for his/her agent’s failure to file and pay taxes. The Court stated:

“It requires no special training or effort to ascertain a deadline and make sure that it is met. The failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing under [Section] 6651(a)(1).”

The Court was addressing deadlines, and it set a fairly high standard. The Court distinguished relying on an attorney or accountant for advice from relying on an attorney or accountant to actually file the return itself. Reliance on an agent did not relieve the principal of compliance with statutory deadlines, except in extremely limited circumstances.

Vaughn could not clear this standard. He had delegated too much when he turned over responsibility for both preparing and filing his taxes to Marshall and Krebs.

Vaughn had a backup argument: the malfeasance of his agents rendered him unable to pay. He did not have enough money left to pay taxes by the time Marshall was done with him.

He was referring to a tax case (American Biomaterials Corp) where two corporate officers defrauded their corporation, including failing to file and pay taxes. Those two were the only officers with the responsibility to file returns and make payment. The Court held that the corporation was not vicariously liable for the acts of its officers and therefore was not liable for penalties.

There is a limit on American Biomaterials, though: a corporation is not entitled to relief if – by act or omission – its internal controls are so lax that that there was no reasonable expectation that malfeasance would be detected in the ordinary course of business. In other words, the corporation cannot willfully neglect normal checks and balances and expect to be relieved of penalties.

Vaughn got smacked on his second argument. The Court noted the obvious: in American Biomaterials there was no one left in the company to file and pay the taxes. This was not Vaughn’s situation. While he had delegated responsibility, there was someone left who could and should have stepped in: Mo Vaughn himself. He did not. That was his decision and provided both reason and cause to impose penalties.

And so Vaughn lost both in the district and the appeals courts. He owed the IRS enough penalties to allow either you or me to retire. He lost because he delegated the one thing the tax Code does not allow one to delegate, except in the most extreme cases: the duty to file the return itself.

TomatoCare And The Supreme Court

Let’s play make believe.

Late on a dark and stormy Saturday night, the Congressional Spartans - urged on by Poppa John's and the National Tomato Growers Association – passed a sweeping vegetable care bill by a vote of 220-215.

The bill went to the Senate, where its fate was sadly in doubt. The fearless majority leader Harry Leonidas negotiated agreements with several recalcitrant senators, including the slabjacking of New Orleans, an ongoing automatic bid for the Nebraska Cornhuskers to the college Bowl Championship Series and the relocation of Vermont to somewhere between North Carolina and Florida. After passage, the bill was signed by the president while on the back nine at Porcupine Creek in Rancho Mirage, California.

As a consequence of this visionary act, Americans now had access to affordable tomatoes, thanks to market reforms and consumer protections put into place by this law. The law had also begun to curb rising tomato prices across the system by cracking down on waste and fraud and creating powerful incentives for grocery chains to spend their resources more wisely. Americans were now protected from some of the worst industry abuses like out-of-season shortages that could cut off tomato supply when people needed them the most.

California, Vermont and Massachusetts established state exchanges to provide tomato subsidies to individuals whose household income levels were below the threshold triggering the maximum federal individual income tax rate (presently 39.6 percent). The remaining states had refused to establish their own exchanges, prompting the federal government to intervene. The Tax Exempt Organization Division at the IRS, recognized for their expertise in technology integration, data development and retention, was tasked to oversee the installation of federal exchanges in those backwater baronies. IRS Commissioner Koskinen stated that this would require a reallocation of existing budgetary funding and – as a consequence - the IRS would not be collecting taxes from anyone in the Central time zone during the forthcoming year.

The 54 states that did not establish their own exchanges filed a lawsuit (Bling v Ne’er-Do-Well) challenging a key part of the TomatoCare law, which read as follows:

The premium assistance amount determined under this subsection with respect to any vegetable coverage amount is the amount equal to the lesser of the greater…”

These benighted states pointed out that, botanically, a tomato was a fruit. A fruit was defined as a seed-bearing vessel developed from the ovary of a flowering plant. A vegetable, on the other hand, was any other part of the plant. By this standard, seedy growth such as bananas, apples and, yes, tomatoes, were all fruits.

There was great fear upon the land when the Supreme Court decided to hear the case.

Depending upon how the Supreme Court decided, there might be no tomato subsidies because tomatoes were not vegetables, a result clearly, unambiguously and irretrievably-beyond-dispute not the intent of Congress on that dark, hot, stormy, wintery Saturday night as they debated the merits of quitclaiming California to Mexico.

The case began under great susurration. The plaintiffs (the 54 moon landings) read into evidence definitions of the words “fruit” and “vegetables” from Webster’s Dictionary, Worcester’s Dictionary, the Imperial Dictionary and Snoop Dogg’s album “Paid tha Cost to Be da Bo$$.”

The Court acknowledged that the words “fruit” and “vegetable” were indeed words in the English language. As such, the Court was bound to take judicial notice, as it did in regard to all words in its own tongue, especially “oocephalus” and “bumfuzzle.” The Court agreed that a dictionary could be admitted in Court only as an aid to the memory and understanding of the Court and not as evidence of the meaning of words.

The Court went on:

Botanically speaking, tomatoes are the fruit of the vine. But in the common language of the 202 area code, all these are vegetables which are grown in kitchen gardens and, whether eaten cooked, steamed, boiled, roasted or raw, are like potatoes, carrots, turnips and cauliflower, usually served at dinner with, or after, the soup, fish, fowl or beef which constitutes the principal part of the repast.”

The Court decided:

            But it is not served, like fruits generally, as a dessert.”

With that, the Court decided that tomatoes were vegetables and not fruit. The challenge to TomatoCare was courageously halted, and the liberal wing of the Court – in a show of their fierce independence and tenacity of intellect – posed for a selfie and went to Georgetown to get matching tattoos.

Thus ends our make believe.

There was no TomatoCare law, of course, but there WAS an actual Supreme Court decision concerning tomatoes. Oh, you didn’t know?

Back in the 1880s the Port of New York was taxing tomatoes as vegetables. The Nix family, which imported tons of tomatoes, sued. They thought they had the law – and common sense – on their side. After all, science said that tomatoes were fruit. The only party who disagreed was the Collector of the Port of New York, hardly an objective juror.

The tax law in question was The Tariff of 1883, a historical curiosity now long gone, and the case was Nix v Hedden. 

And that is how we came to think of tomatoes as vegetables.

Brilliant legal minds, right?

What ObamaCare Tax Forms Should You Expect For Your 2014 Return?

Are you wondering what, if any, new ObamaCare tax forms you will either be receiving in the mail or including with your tax return come April?

This was a topic at a tax seminar I attended very recently. What may surprise you is that the ObamaCare tax forms are still in draft; yes, “draft,” and I am writing this in the middle of December.

Let’s go over the principal tax forms you may see and how they fit into the overall puzzle. The 2015 filing season will be the initial launch, and some rules have been relaxed or deferred until the 2016 filing season. This means you may or may not see or receive certain forms, depending upon the size of your employer and what type of insurance is offered. Let’s agree to speak in general terms and not include every technicality, otherwise we will both be pulling out our hair before this is over.

The key form (I suspect) you will receive is Form 1095-B.

Form 1095-B

You will be receiving the “B” from the employer’s insurance company. Its purpose is to show that you had health insurance (“minimum essential coverage” or “MEC,” in the lingo), as failure to have health insurance will trigger a penalty. The form has four parts, as follows:

(1) The name and address of the principal insured person (probably you)

(2) The name and address of the employer

(3) The name and address of the insurance company

(4) The name and social security number of every person covered under the policy for the principal insured person. There are boxes for all 12 months, as the ObamaCare penalty is a month-by-month calculation.

What if your employer did not provide health insurance and you purchased coverage on the exchange? Now we are talking Form 1095-A, and the exchange will send it to you. It has three parts:

(1) The name of the principal insured person, as well as information about the marketplace itself and some policy information.

(2) The names and social security numbers of those covered under the policy.

(3) Monthly information, such as the premium amount and the amount of any subsidy (“advance payment”) received.

Form 1095-A

You will have received this form because you or a family member obtained health insurance through the exchange. You already know that the principal insured person (likely you) has to settle up with the IRS at year-end, comparing his/her household income, any subsidy received and any subsidy actually entitled to. The information on the “A” will – in turn – be reported on that form, which we will discuss in a minute.

We still have one more “1095” to talk about: the 1095-C. Frankly, I find this one to be the most confusing of the three.

Form 1095-C

The employer issues the “C.” Not all employers, mind you, only the “large employers,” as defined and subject to the $2,000/$3,000 penalty for not offering health insurance or offering health insurance that is not affordable.

You will not receive a “C” in 2015. Rather, you will receive one in 2016 if you were a full-time employee anytime during 2015. It can be included with your 2015 W-2, should your employer choose.

It has three parts:

(1) Employee and employer information, including identification numbers and addresses

(2) Recap of insurance coverage offered the employee, detailed for each month of the year. There are a series of codes to fill-in, depending upon a matrix of minimum essential coverage, minimum value, affordability and availability of family coverage.

(3) The third part applies only if the employer is self-insured.

BTW, you may have read that there is 2015 transition relief for employers having between 50 and 99 employees. That applies to the penalty, not to filing this paperwork. An employer with between 50 and 99 employees still has to file the “C.” You will receive this form in 2016 - if your employer has at least 50 employees.

NOTE: The IRS has said that employers can file this form “voluntarily” in 2015 for the 2014 tax year. Uh, sure.

Let’s recap. You would have received the “A”or “B” from a third party and (unlikely) a “C” from your employer. You now have to prepare your individual tax return. What new forms will you see there?

If you acquired insurance on an exchange, you will receive Form 1095-A. You will in turn use information from the “A” to complete Form 8962. Since you are on an exchange, you have to run the numbers to see if you are entitled to a subsidy. Combine this with the possibility that you received an advance subsidy, and you get the following combinations:

(1) You received a subsidy and it is exactly the subsidy to which you are entitled. I expect to see zero of these in my practice.

(2) You received a subsidy and it is less than you are entitled to. Congratulations, you have won a prize. Your tax preparer will include the difference and your tax refund will be larger than it would otherwise be.

(3) You received a subsidy and it is more than you are entitled to. Sorry, you now have to pay it back. Your refund will be less than it would otherwise be.

(4) You received no subsidy and you are entitled to no subsidy. I expect this to be the default in my tax practice. I suspect that we will not even have to file the form in this case, but I am waiting for clarification.

What if you did not have insurance and you did not go on the exchange? There are two more forms:

(1) If you have an exemption from buying insurance, you will file Form 8965. You have to provide a reason (that is, an “exemption”) for not buying health insurance.

(2) All right, technically the next one is not a form but rather a “worksheet” to Form 8965. The difference is that a worksheet may, but does not have to be, included with your tax return. A “form” must be included.

Form 8965

Form 8965 Instructions and Worksheet 

You are here if you did not go on the exchange and you do not have an exemption. You will owe the ObamaCare penalty, and this is where you calculate it. The penalty will go from here to your Form 1040 as additional taxes you owe.

And there you have it.

By the way, expect your tax preparation fees to go up.