All posts by John Mark Wendler

About John Mark Wendler

Certified Public Accountant Lavine Lofgren Morris & Engelberg, LLP

To Pay, Or Not To Pay Disputed Taxes: Cristiano Ronaldo Says No, Why You Should Say Yes

Cristiano Ronaldo, the world’s highest paid athlete, stands accused of tax evasion in Spain. His team, Real Madrid, rushed to his defense. Some sources even suggested that his team would pay the $16.5 million in taxes for him. But the athlete is unhappy, even suggesting that he might leave the team and Spain. It now appears that Real Madrid may not pay his tax bill after all, which stands at more than $16.5 million.

Reports have swirled that Ronaldo would pay the disputed taxes to reduce the severity of the charges, and to keep the size of the tax bill and penalties from growing. Then, reports bounced back that no, he would not pay after all. Big tax evasion cases involving celebrities are big news, and Spain and big soccer have had a nice run of them.

Portugal’s forward Cristiano Ronaldo poses before the 2017 Confederations Cup group A football match between Portugal and Mexico at the Kazan Arena in Kazan on June 18, 2017. / AFP PHOTO / Yuri CORTEZ (Photo credit should read YURI CORTEZ/AFP/Getty Images)

But despite the outsized dollars at stake, there are lessons for most taxpayers even at this stage of the case. One question is in a tax dispute, do you pay, or do you refuse? Opinions vary, but the optics and dynamics of a criminal case are especially sensitive. Given that this is a criminal case, Ronaldo’s advisers are probably telling him to pay.

After all, it can help with the public, and more important, it can help ease the tension of the criminal proceedings. If the case ever ends in a plea bargain or a conviction, it can certainly help at sentencing. So in a criminal case, nearly all indicators point toward making the payment if you can afford it. Clearly, Ronaldo can afford it.

Moreover, there would be no admission of guilt associated with the payment. It would normally also be possible to make the payment conditional. That way it could be recouped if Ronaldo defeats the charges and the additional taxes. All of this suggests payment is wise, even though paying the bill would not eliminate the pending criminal charges.

In a criminal tax case, paying is usually wise, no matter how much you think the government is wrong. Here, prosecutors contend that Ronaldo used an off-shore company, Tollin, to hide his income from tax authorities. They allege that Ronaldo filed tax returns that understated his income and his taxes due. They claim he defrauded the Spanish government out of 14.7 million euros (about $16.5 million) between 2011 and 2014. Ronaldo’s agency, Gestifute, released a statement saying that using off-shore structures is common among soccer players, and that Ronaldo’s intent has always been to comply with Spanish tax laws.

In a regular civil tax case, whether to pay is a tougher call. When disputing a tax bill, are you better off refusing to pay until you get it resolved, or paying to stop interest from running while you disagree? Interest is one point of debate. When the IRS proposes adjustments to your account, interest on the liability runs from the date the tax return was due to the date the IRS receives your payment of the entire amount including taxes, penalties and interest.

Of course, if you convince the IRS they are wrong and no tax is due, there is no interest due. But if you turn out to be wrong in whole or in part and owe taxes, interest mounts quickly. Interest on tax deficiencies is not tax deductible (except for corporations), so that makes interest payments even more painful. The interest compounds daily and runs at the short-term federal rate plus 3%. See IRS Topic 653 IRS Notices and Bills, Penalties and Interest. The IRS adjusts the federal short-term rate quarterly based on market rates.

Some taxpayers want to stop the bleeding and pay up but still fight the underlying tax. Who is holding the money is not supposed to impact your dispute, but some worry the IRS will be more motivated to resolve your case favorably if they don’t have possession of your money. Get professional advice about your particular dispute if you’re in doubt.

To completely stop interest from running, you must pay it all, including all interest that has accrued up to that point, as well as penalties. Otherwise interest will continue to build on any excess tax, penalties and interest that may be assessed. If you win your tax dispute you’ll get it back.

If you pay to stop the interest, you must specifically call it a deposit and follow IRS procedures or the IRS may think you’re agreeing. Make your check payable to “United States Treasury” and send a written statement designating it as a “DEPOSIT.” Also include the tax year, type of tax, and why you disagree. The nature and grounds of your disagreement should be specific.

The fact that you call it a DEPOSIT is important. For one, it allows you to withdraw it upon request if you later determine you want or need the money back. But note that if you do withdraw your deposit and it later turns out you owe the tax, the IRS will charge you interest from the original due date of the tax return as if you never made a deposit. See IRS Revenue Procedure 2005-18. No matter what, weigh your options and consider the dollars, the impact on your tactics, and even the optics.

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Even Lawyers Face Independent Contractor – Employee Disputes

There is considerable talk about tech workers and worker status. There are also big lawsuits over who is truly an independent contractor and who is actually an employee, whatever you may call them. The stakes are big for governments, for workers, and for companies whose practices are scrutinized. Independent contractor v. employee distinctions can apply just about anywhere. With workers in almost any setting, there are tax, employment law, pension, and fringe benefit reasons that the government, third parties, and workers often argue about worker status. Even lawyers can be independent contractors or employees.

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If you hire a lawyer for a few hours of consulting, a flat fee assignment, or contingent fee case, you may not think twice. In those situations, your lawyer is presumably an independent contractor, just like a doctor who treats you. But in other cases, it may not be so clear. A traditional grey area in law firms involves of counsel lawyers, where lines can blur. Independent contractor treatment offers the benefits of:

  • No income tax withholding;
  • No employment taxes;
  • No agency liability for the acts of your employees (whether driving a car on company business or legal malpractice liability);
  • No federal and state discrimination laws covering only employees; and
  • No fringe benefit, pension, retirement, or other plans.

Considering the disadvantages, you may wonder why anyone is hired as an employee. Yet much is not a matter of choice. Our system generally presumes workers are employees unless you can prove otherwise. There can be some special considerations for lawyers. The IRS, a state labor commissioner, insurance company, employment development department or unemployment insurance authority, will generally assume workers are employees unless you can prove otherwise.

Formulations vary for determining who is an employee, but most tests center on the degree of control over the worker. The IRS has enhanced its enforcement and is actively cooperating with other federal agencies and the states. Lawyers can be prime targets, and in some cases, they get caught. Take Donald G. Cave A Professional Law Corp. v. Commissioner, where the U.S. Tax Court held an incorporated law firm’s sole shareholder, his associate attorneys and law clerk were all employees. If you read the case you may wonder how the lawyer ever thought he could treat himself and his associates as independent contractors. The lawyers were really employees of the law firm, and the main question was whether the firm could rely on Section 530 relief. It is a kind of get-out-of-jail-free card for employment tax liabilities available if you:

  1. Consistently treat the worker and similar workers as independent contractors;
  2. File all Forms 1099 for these workers treating them as independent contractors; and
  3. Have a reasonable basis for not treating them as employees.  The reasonable basis is usually judicial precedent or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry.

Donald Cave’s law firm collected all fees but split a portion (generally one-half or one-third) with the attorney who handled the case. The firm treated everyone as independent contractors, claiming it didn’t control how they did their jobs. When the IRS said this was wrong, Cave said he relied on Section 530 relief. Cave himself was an employee, all his associates were, as was his law clerk. Plus, Cave and his law firm failed to issue the requisite Forms 1099 and didn’t have a reasonable basis for the contractor treatment. Although worker status determinations can be difficult for of counsel lawyers, one thing is clear: drafting a good independent contractor agreements is essential.

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Beware IRS Form 1099 Mistakes That Trigger Big Taxes On Phantom Income

Some tax mistakes make it look like you collected big, when you really didn’t. They can cause tax problems, and it can be hard convincing the IRS that you are right. Take the recent case of a woman who was giddy over winning a $43 million casino jackpot. Her excitement was short-lived, as the casino claimed the slot machine malfunctioned. Oops, you didn’t win after all, they said. The slot machine said it was “printing cash ticket $42,949,672.76,” but it was a mistake. The casino offered her a steak dinner instead, but Katrina Bookman is suing the Resorts World Casino over the $43 million jackpot, demanding her payout. She alleges negligence, breach of contract, and negligent misrepresentation, according to Courthouse News Service.

There’s no suggestion that the IRS actually believes she got the money in that case. But what if she had received a Form 1099? What if the IRS read about the jackpot and came calling? That can happen with lawsuit recoveries, and it got me thinking: can fake income you actually do not receive turn into real taxes? Plainly, the answer is yes, and it happens more times than you might think. At tax time, you probably receive many IRS Forms 1099, and incorrect Forms 1099 are not uncommon.

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Most companies interpret the IRS Form 1099 regulations broadly, erring on the side of reporting. When in doubt, issue a Form 1099, many companies say. A few observers may even think of issuing IRS Forms 1099 in a kind of punitive way, to turn the tax tables on someone. Every year, check to see if you received any Forms 1099 that you think are wrong. If someone actually paid you $1,000, but reported that they paid you $10,000, you’ll have to explain that to the IRS on your return.

Boxer Floyd Mayweather Jr. once sent an IRS Form 1099 to a strip club to report that he dropped $20,000. Mayweather Promotions LLC sent the form to the Hustler Club for $20,000, mostly cash tips for dancers. The club claimed it didn’t see the money paid to the ‘independent contractors.’ Still, the club must report it. Forms 1099 are critical to tax returns, and you are almost guaranteed an audit or tax notice if you fail to report one. Each Form 1099 is matched to your Social Security number, so the IRS can easily spew out a tax bill if you fail to report one. It matters a lot, especially now that the IRS has six years to audit, not three.

That’s just one example of how a report saying that you were paid can make it awfully tough to prove that you never received the payment. Another circumstance involves the write off of a debt. How can writing off a debt become a tax problem? You can have income despite an absence of cash if you have a discharge of debt. It is also called cancellation of debt or “COD” income.

Loans are not taxed as income. So if a relative or the bank loans you money, you get the cash but do not have income. After all, you have to pay back the debt. But if you are relieved of the obligation to repay, so your debt is cancelled? That’s usually COD income and it is taxed. Here again, the reports can hurt. There used to be spotty reporting of COD income, with no rigorous reporting system. But today, lenders are required to issue a Form 1099-C reporting this COD income to ensure that you don’t omit it from your tax return. There are a few exceptions from the harsh COD income rules. Debts forgiven while you’re in bankruptcy–or if not in bankruptcy when you are technically insolvent with more debt than assets–don’t count as income.

Phantom income from entities can be a big problem too. Partnerships, limited liability companies (LLCs) and S corporations are pass-through entities. They are generally not taxed themselves; their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss), even if that income is retained by the business and not distributed to the owners. You are obligated to report it, regardless of whether you received any payout. The IRS matches Forms K-1 against individual tax returns. So whatever your phantom income situation may be, plan ahead and be prepared to explain it!

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IRS Warns Don’t Rely On IRS.Gov — It Isn’t Authority

Can you rely on the IRS? In an audit, can’t you cite the IRS to the IRS? You would think so, but the big tax collection agency isn’t exactly a warm and fuzzy place. Plainly, the IRS has a tough job to do. Our tax law is famously complex, and administering its twists and turns in a fair way isn’t easy. Still, taxpayers and practitioners alike have complained for years that you cannot rely on things the IRS tells you over the phone. In the past, there even used to be surveys showing the track record of IRS employees answering tax questions. These surveys showed just how reliable (or unreliable), those employees were. Of course, now it’s plenty difficult to just talk to a real person at all, so perhaps the reliability function is not as big a worry as it used to be.

These days, many taxpayers are likely to do their own research online, and that’s where IRS.gov should come in. The IRS website is actually quite good, with a wealth of material on it. And surely, taxpayers can rely on that official IRS information, correct? Not so fast. Not long ago, the IRS’s Small Business/Self Employed Division (SB/SE) issued a memorandum to IRS Field Examination Area Directors telling them that frequently asked questions (FAQs) and other items posted on www.IRS.gov that have not been published in the Internal Revenue Bulletin (IRB), are not legal authority.

No one likes scrutiny from IRS

No one likes scrutiny from IRS

Now, if you are a taxpayer looking for guidance about IRS tax rules, you might well assume that items the IRS publishes for taxpayers on its own website would be, well, fair game. Yet, the IRS memorandum states that it is the policy of IRS to publish all substantive rulings necessary to promote a uniform application of the tax laws in the Internal Revenue Bulletin. It’s the official place for guidance, more official than the IRS website. As a result, IRS employees are being directed to follow (just those) items published in the Internal Revenue Bulletin.

Taxpayers need to pay attention to that as well. It is true that the IRS makes frequent postings to its website, IRS.gov. In many cases, these postings are in useful and user-friendly formats such as Frequently Asked Questions (FAQs). These things may or may not end up in more formal IRS publications, such as the Internal Revenue Bulletin (where Revenue Rulings and other items are permanently ensconced). But if an FAQ is just on the website, and nowhere else more official, you are supposed to not take it too seriously, it appears. FAQs that appear on IRS.gov but that have not been published in the Internal Revenue Bulletin are not legal authority.

Tax law is complex, and the IRS does have to juggle priorities. But to most taxpayers, this seems like a form of inside baseball that is hard to justify. Not many taxpayers are likely to try to figure out if the FAQ they are reading to answer their tax questions is or is not in the Internal Revenue Bulletin. If they see it on the IRS website, shouldn’t that be good enough? In an audit, IRS examiners are being told that they should draw a distinction between these ‘good’ FAQs, and the bad ones that are only on the IRS website.

You can read the IRS memo here: SBSE-04-0517-0030. Yes, I think this one probably qualifies as authority.

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Real Madrid Can Pay Cristiano Ronaldo Taxes, But That Triggers More Taxes

Cristiano Ronaldo, the world’s highest paid athlete, has been accused of tax evasion. His team, Real Madrid, has rushed to his defense. But the athlete has suggested that he might actually leave the team and leave Spain. In an effort to keep him, now, Real Madrid may pay his tax bill. If his employer pays more than $16.5 million in taxes for the star, is that even legal? Yes, though paying the bill would not eliminate the pending criminal charges. Besides, it would create another tax problem.

To begin with, prosecutors claim that Ronaldo used an off-shore company to hide income from tax authorities. They claim that Ronaldo filed tax returns understating his income, defrauding the Spanish government out of 14.7 million euros (about $16.5 million). If Real Madrid pays all taxes and penalties, the criminal charges will still be up to Ronaldo to defend. But paying the taxes, interest and penalties would be a good start. Yet Ronaldo might be surprised to find that when someone else pays your taxes, that is income to you too, triggering more taxes.

Portugal’s forward Cristiano Ronaldo poses before the 2017 Confederations Cup group A football match between Portugal and Mexico at the Kazan Arena in Kazan on June 18, 2017. / AFP PHOTO / Yuri CORTEZ (Photo credit should read YURI CORTEZ/AFP/Getty Images)

Suppose that you get hit with a tax bill from the IRS or another taxing authority. Either by contract or in any other circumstance, let’s say that another party pays the taxes directly, or reimburses you for them. How is this payment treated for tax purposes? Can the other guy just write you a check for the gross amount and make it all better? In most circumstances, if another party pays your taxes, that too is taxable. If your employer pays, for example, it is treated as additional compensation, and taxable as such.

As a result, where contracts call for an employer or other party to pay any and all taxes that may be due, it is common to ask for a tax gross-up. In essence, this says that any taxes on the tax payment require a second payment. If that sounds circular, it is, and you need a formula to calculate it to the penny. If Real Madrid does make the payment, Ronaldo might want to also ask not only for the tax payment, but also on having this tax payment “grossed-up” to account for taxes on the tax.

Most tax gross-ups occur under contracts with corporate executives, and in corporate transactions in which there is some question whether a particular tax will be payable. And there are occasionally circumstances where one can argue that the payment of the tax should not trigger more taxes. But those circumstances are rare. The IRS has been consistent in saying that the receipt of a tax payment by someone else, or a tax indemnity payment, is taxable income.

Sometimes, a plaintiff in a lawsuit seeks not only damages from a defendant, but also reimbursement for taxes on those damages. Usually, the argument is that the taxes would not have been payable, or would have been less, had the defendant not mistreated the plaintiff in the first place. It is hard to do, but sometimes you can get additional damages for adverse tax consequences. Yet even in that context, such tax payments can mean even more taxable income.

Not everyone agrees with this harsh tax treatment. Some people claim otherwise on their tax returns. Some people even litigate this tax issue with the government, but the IRS usually wins. Taxpayers have generally cited some very old authority for the proposition that a tax payment by someone else should not be income. See Clark v. Commissioner, 40 B.T.A. 33 (1939), nonacq. sub nom., 1939-2 C.B. 45; acq. 1957-2 C.B. 4. But the authority is old. Besides, the IRS has made no secret of the fact that despite it, the IRS considers such tax payments to be fully taxable. See Old Colony Trust and Treas. Reg. § 1.61-14(a).

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Tax Lessons From Soccer’s Messi & Ronaldo Tax Evasion Cases

Cristiano Ronaldo is now the world’s highest paid athlete. He has also been accused of tax evasion. His team, Real Madrid, has rushed to his defense, saying that it has confidence that the star did nothing wrong and will be vindicated. But much has yet to unfold. Like fellow soccer star Lionel Messi–who was already convicted of tax fraud–Ronaldo’s tax case is mostly about image rights and allegedly using shell companies to divert income away from tax authorities. In the case of both stellar athletes, these might sound like unique, multi-million dollar issues having nothing to teach regular-old taxpayers. Actually, though, there are surprisingly universal lessons in these cases.

One is about transparency and good documentation. Hiding things nearly always looks bad. Spanish prosecutors wisely focused on the Messis’ secrecy. The names of the beneficial owners of companies were hidden. The Messis had companies registered in the UK, Switzerland, Uruguay and Belize. Some of the primary charges against Messi and his father involved their use of these shell companies. They were designed to avoid taxes on 4.16 million euros of Messi’s income from image rights. It did not help that Messi’s name came up in the Panama Papers. Similarly, prosecutors allege that Ronaldo refused to provide Spanish tax authorities with complete accountings of earnings associated with his image rights.

Lionel Messi of FC Barcelona conducts the ball next to Cristiano Ronaldo of Real Madrid CF during the La Liga match between FC Barcelona and Real Madrid CF at Camp Nou stadium on December 3, 2016 in Barcelona, Spain. (Photo by Alex Caparros/Getty Images)

Prosecutors contend that Ronaldo used an off-shore company, Tollin, to hide his income from tax authorities. They allege that Ronaldo filed tax returns that understated his income and his taxes due. They claim he defrauded the Spanish government out of 14.7 million euros (about $16.5 million) between 2011 and 2014. Ronaldo’s agency, Gestifute, released a statement saying that using off-shore structures is common among soccer players, and that Ronaldo’s intent has always been to comply with Spanish tax laws.

Some athletes, entertainers, and high income individuals have faced similar claims. For Americans in particular, transparency is becoming a necessity. The IRS requires worldwide reporting and disclosure, and the consequences of noncompliance can be quite severe. FATCA, the Foreign Account Tax Compliance Act, requires foreign banks to reveal American accounts holding over $50,000. With a treasure trove of data, the IRS now has the ability to check. The resources of the U.S. government are vast, and using entities that look secret can make innocent activity willful.

A key element in Messi’s case was the clandestine nature of the tiered entity arrangement. The Spanish prosecutor made it clear that the opaqueness of the deal was key. Advisers and accountability matter too. Messi’s father Jorge may have had a much larger role than his son in setting up the chain of shell companies at the root of the criminal charges. The athlete’s prison term was upheld at 21 months, but, his father’s was reduced to 15 months for his cooperation. ‘Be accountable, and be transparent,’ are surprisingly universal lessons, and certainly apply to America’s tax system. One of the biggest themes is bottom line accountability. Signing a tax return requires some accountability. 

One of Messi’s primary defenses in the trial was that he did not understand. He said he signed many documents without reading them. Such a defense may not work in the U.S. either. According to the IRS, willfulness is a voluntary, intentional violation of a known legal duty. It is shown by your knowledge of reporting requirements and your conscious choice not to comply. Even willful blindness, a conscious effort to avoid learning about reporting requirements, is enough. Prosecutors suggested that fit Messi. As the steps that led Messi to be convicted and Ronaldo to be accused are picked over by commentators, accountability and transparency are likely to be universal lessons.

If there is a good reason to hide ownership from the public, make sure the ownership is not hidden from the government. Finally, be careful about deals that look tax motivated. For Ronaldo, prosecutors point to a large payment for image rights days before a Spanish tax law named for David Beckham Law was repealed in December 2014. The deal was so slick–with money for Ronaldo’s image rights from 2015 to 2020, that it may be hard for Ronaldo to say that he is ignorant of tax laws.

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Third Canadian Convicted In IRS Tax Refund Scam Could Face Five Years Prison

Many Canadians who live or work in the U.S. have to deal with the IRS. And a common bone of contention is that the U.S. and Canadian tax rules are not always parallel. Add to that the vastly more complex U.S. tax system, and its web of foreign account reporting rules, and you can have a recipe for disaster. Many Canadians filing U.S. tax returns find it downright bizarre that they must report all their (to the IRS, “foreign”) accounts, being all of their accounts at home in Canada! In general anyone with non-U.S. bank accounts having an aggregate value over $10,000 at any time during the year must report all of the accounts. One must report even if one has a signature interest only, without beneficial ownership. And the penalties are quite high.

The U.S. complexity may even cause some anger at the IRS. But complex tax rules certainly can’t explain this one: a Canadian man has pleaded guilty to conspiring to defraud the United States and commit theft of government funds. According to documents filed with the court, Timothy Johnston, 36, of Calgary, Alberta, Canada, along with other Canadian citizens, participated in a scheme to file fraudulent claims for refund with the IRS. In March 2009, Johnston filed a fraudulent nonresident alien income tax return seeking a refund of $642,947.26. On this return, Johnston falsely claimed that the requested refund represented the amount of income taxes that had been withheld and paid to the IRS on his behalf. After the IRS issued the refund to Johnston, he entered the United States and opened a bank account in Rochester, New York to deposit the fraudulently obtained check. Between August 2009 and December 2011, Johnston caused funds to be transferred from this account to a bank account in Canada and accounts in the United States in the names of his co-conspirators.

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Although Mr. Johnston has pleaded guilty, he has not yet been sentenced. In fact, he is scheduled to be sentenced on September 12, 2017. Johnston faces a statutory maximum sentence of five years in prison, a period of supervised release, and monetary penalties. As part of his plea agreement, Johnston agreed to pay restitution to the IRS in the amount of $642,947.26.

Johnston is the third Canadian citizen to be convicted for his role in this scheme. In January 2016, Kevin Cyster of Burlington, Ontario, was sentenced to 135 months in prison after a jury convicted him of conspiring to defraud the United States and commit theft of government funds, making a false claim against the United States and transferring stolen money in foreign commerce. In June 2014, Renee Jarvis, also of Ontario, pleaded guilty to conspiring to defraud the United States and commit theft of government funds.  She is awaiting sentencing.

FBARs weren’t involved in this case, but where they apply, the potential FBAR penalties can be big. Civil penalties for a non-willful violation can range up to $10,000 per account per year. With a six year statute of limitations, even non-willful violations can be expensive, especially with multiple accounts. Three accounts times six years could mean $180,000 in penalties, and that is for non-willful violations. If the IRS says that your violation was willful, it is much worse. Civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account. With up to a six year statute of limitations, that could total 300% of the account value. Fortunately, the IRS says that administratively it generally will only take 100%! And then there are potential criminal penalties too. Criminal FBAR violations can draw very serious penalties, including a $500,000 fine, 10 years imprisonment, or both.

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