The Toy King vs. The IRS

Toy industry executive Jeffrey P. Chernick has pleaded guilty to charges of filing a false tax return, the third U.S. client of Swiss bank UBS to plead guilty to tax charges.

Chernick, who owns a corporation in New York that represents toy manufacturers in China and Hong Kong, appeared Tuesday before Judge James I. Cohn in Ft. Lauderdale, Fla., and accepted responsibility for concealing more than $8 million in Swiss bank accounts.

According to prosecutors, Chernick’s 1040 return for 2007 failed to report that he had a bank account with UBS, and the income he earned on the account. The UBS account was opened in the name of Simba International Ltd., a nominee Hong Kong corporation.

Beginning in the mid-1970s, Chernick set up a Hong Kong corporation and opened offshore bank accounts in order to conceal from the IRS commissions paid to him for toy sales, according to prosecutors. In total, he was the beneficial owner of approximately $8 million in offshore assets maintained in accounts in the name of nominee entities, including Simba, at UBS and other Swiss banks.

In 2000, UBS entered into an agreement to begin providing the IRS with information on bank accounts in which the beneficial owner was a U.S. citizen. Around the same time, one of Chernick’s Swiss bankers left UBS for a smaller, less prominent Swiss bank. The banker told Chernick he had left UBS in part because the smaller bank would not be subject to Washington’s scrutiny and could not be pressured by the U.S. government to disclose certain information to American authorities. Following the banker’s advice, Chernick agreed to invest some of his assets with the smaller Swiss bank.

Between 2002 and 2008, Chernick discussed his offshore accounts with the former UBS banker and other Swiss financial service providers. The meetings took place at various U.S. locations, including hotels in New York City. During these meetings, Chernick, the Swiss bankers and Swiss financial service providers would discuss Chernick’s investments held in his offshore accounts, as well as the payment of fees for banking services rendered by Hong Kong and Swiss financial service providers. In July 2008, despite Chernick’s concerns about an ongoing investigation into the activities of UBS, a Swiss financial service provider convinced him not to disclose his offshore accounts, nor to file amended returns or pay the IRS any additional taxes he owed.

In order to have access to the millions of dollars he concealed offshore, he allegedly used credit cards linked to his offshore Swiss bank accounts to make large purchases while traveling abroad.

With the assistance of Swiss bankers and other financial service providers, Chernick also set up a sham $700,000 loan between Simba and a second Hong Kong entity in order to repatriate funds into the U.S. to purchase property adjacent to his home in New York.

Judge Cohn scheduled Chernick’s sentencing for Oct. 30, 2009. He faces a maximum sentence of three years in prison.

Chernick is the latest UBS client to plead guilty to tax charges. In June, Boca Raton accountant Steven Michael Rubinstein pleaded guilty to filing a false tax return, as did Robert Moran, a Ft. Lauderdale yacht broker, in April.

In February, UBS signed a deferred prosecution agreement with the U.S. Justice Department, agreeing to pay $780 million and provide the names of 250 U.S. clients who had been accused of tax fraud. However, the IRS has a lawsuit pending in a Miami court to force the bank to reveal the identities and holdings of an additional 52,000 UBS clients by issuing “John Doe” summonses.

The two sides have delayed the trial and are reportedly in negotiations on a settlement.

What Is The Car Allowance Rebate System?

The CAR Allowance Rebate System (CARS) is a $1 billion government program that helps consumers buy or lease a more environmentally-friendly vehicle from a participating dealer when they trade in a less fuel-efficient car or truck. The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation's roadways. Consumers will be able to take advantage of this program and receive a $3,500 or $4,500 discount from the car dealer when they trade in their old vehicle and purchase or lease a newone. Consumers you do not need to register anywhere or at anytime for this program.

Consumer Bill of Rights

Qualified consumers may participate in the CARS Program between July 1, 2009 and November 1, 2009 or when authorized funds are no longer available.

Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program.

Qualified consumers will receive the $3,500 or $4,500 credit at the time the purchasetheir new vehicle.

Dealers must provide consumers with any other advertised rebates or discounts inaddition to the credit they receive through the CARS Program.

Consumers should expect to conduct their deals at their dealership of choice, not on theInternet.

Consumers should expect the dealers to provide their best estimate of the scrap value fortheir eligible trade-in vehicle. Dealers are allowed to deduct $50 from this value for their administrative costs.

Consumers should expect that all information collected through the CARS Program willbe kept confidential. Social Security numbers are not required for a CARS transaction.

IRS WARNING: FIRST-TIME HOMEBUYERS FRAUD

The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.

On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.
First-Time Homebuyer Credit

The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.

Different rules apply for homes bought in 2008.

Full details and instructions are available on the official IRS Web site: http://www.irs.gov

Have you visited IRS.gov lately?

Tax information can be difficult to understand in any language but it can be even more difficult if it is not in your first language. To assist Spanish speaking taxpayers, the IRS provides a wide range of free products and services on its Spanish Language web site IRS.gov/Espanol.

Here are eight features you can find on IRS.gov “en español” this summer:

Get answers 24 hours a day seven days a week Whether you need a form or have tax questions, IRS.gov/Espanol has a wealth of information. IRS.gov/Espanol is accessible all day, every day for individuals and businesses.

Get tax forms and publications You can view and download several tax forms and publications in Spanish directly from IRS.gov/Espanol at any hour of the day or night.

Find out all about electronic filing You can e-file your 2008 federal income tax return through October 15, 2009 from the comfort of your home. E-file is fast, easy and free for some taxpayers, and available in English or Spanish.

Check the status of your tax refund Whether you chose direct deposit or asked the IRS to mail you a check, you can check the status of your refund through the online tool “¿Dónde está mi reembolso?” on our secure Web site.

Find out if you qualify for the Earned Income Tax Credit EITC is a refundable tax credit for people who work but don’t earn much income. Find out if you are eligible by answering some questions and providing basic income information using the “Asistente EITC.”

Protect yourself from identity theft Learn how identity theft affects your taxes and how you can protect yourself from common scams.

Find answers to the “What Ifs” of an economic downturn The Internal Revenue Service recognizes that many people may be having difficult times financially. There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. Find answers to these questions and more by typing the keyword “Qué pasa si” into the search box.

Get up-to-date at the “Multimedia Center” Video tax tips and audio podcasts on various IRS topics can be found in English and in Spanish with keyword “Centro Multimediático.”

IRS.gov/Espanol

Seven Tips for Students with a Summer Job

Many students get a summer job during their time off from school. Here are the top seven things the IRS wants everyone to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the

Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

You are in the business of delivering newspapers.

All your pay for these services directly relates to sales rather than to the number of hours worked.

You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

IRS Withholding Calculator
Form 1040 Schedule SE

Make Home Improvements This Summer

Summer is a great time to handle all those home improvements you have been wanting to do. Now is the time with the 2009 energy efficiency tax credits. Under the American Recovery and Reinvestment Act (ARRA) of 2009, the energy tax credit was increased. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

Note: A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as "energy efficient" for purposes of this tax credit.

The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards.

Homeowners may continue to rely on manufacturers' certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

Further, the Residential Energy Efficient Property Credit is a nonrefundable energy tax credit that helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.

Top Seven Tips for Taxpayers Starting a New Business

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.

First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

The type of business you operate determines what taxes you must pay and how you pay them.

The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.
Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

Starting A Business
Operating A Business
Closing A Business
Publication 4591, Small Business Federal Tax Responsibilities (PDF 470.1K)
Publication 334, Tax Guide for Small Business (PDF 286.2K)
Order Publication 1066C, A Virtual Small Business Tax Workshop DVD

Tax Tips for Recently Married Taxpayers

If you have recently gotten married or plan to get married in the near future, the IRS has some tips to help you avoid stress at tax time.

Notify the Social Security Administration Report any name change to the Social Security Administration, so your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices.

Notify the IRS If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from the IRS website IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).

Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.

Notify Your Employer Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year.

Check Your Withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will even provide you with a new Form W-4, Employee's Withholding Allowance Certificate you can print out and give it to your employer so they can withhold the correct amount from your pay.

IRS Withholding Calculator
Form 8822, Change of Address

Summertime Child Care Expenses

Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

The cost of day camp can count as an expense towards the child and dependent care credit.
Expenses for overnight camps do not qualify.

If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.

The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.

You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information, including rules for claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, check out IRS Publication 503, Child and Dependent Care Expenses. This publication is available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

IRS Publication 503, Child and Dependent Care Expenses (PDF)

What NOL Will Not Reduce

Net Operating Losses (commonly known as NOL) is not one of those terms that are not familar to most taxpayers and it would take an enormous amount of time to explain in detail.

Most NOLs are a result of your deductions (capital losses, investment losses and as a result of negative K-1 passive income) exceeding your income, i.e. net operating loss.

Here's an example:

You have a self-employed (1099-MISC) individual who also has losses from a K-1 he receives as a partner of a corporation (1120S or 1065). The individual had $10,000 income reported on his Schedule C which also results in tax due on his earnings plus self-employment tax (social security tax). Individual receives a K-1 with a $125,000 loss.

First of all, the tax due as a result of the Schedule C income will be eliminated by the K-1 loss but will not eliminate the self-employment tax.

NOL will not reduce or eliminate or having to pay self-employment tax.

Since the net loss from the K-1 was $125,000 then deduct the amount of tax due on the self-employment income (not the self-employment tax) and whatever is left can be carried over indefinitely and can be used in future years to offset taxable income.

You also have to remember that Social Security tax is not paid to the IRS but rather is paid to the Social Security Administration and is deposited into your personal social security account for your retirement.

W-2 wage earners pay Social Security tax through their paychecks but self-employed taxpayers have to pay the tax themselves on their returns.

Look at it this way, yes, you have to pay the self-employment tax as it is mandatory, but who are you really paying......yourself!

Unemployment vs. Workers Compensation - Which is taxable?

Have you ever received Unemployment payments or Worker's Compensation for a job related injury?

Did you know that one of these payments is taxable and must be reported on your tax return?

Do you know which one that is?

Well the answer is Unemployment compensation is taxable income.

Please note that under Obama's recovery plan, for the tax year of 2009, the first $2400 of unemployment will be exempt from taxation.

The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of the unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.

In general, the Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law. Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who meet the requirements of state law.

And since you, as the employee, do not pay the unemployment taxes, then this becomes basically free money to you and therefore becomes taxable on your return.

For additional information, visit the Department of Labor’s Web site under the listing of Unemployment Insurance Tax Topics.

Worker's Compensation is never taxable since is a payment for loss of wages due to personal on the job injury or illness.

The Department of Labor's Office of Workers' Compensation Programs (OWCP) administers four major disability compensation programs that provide wage replacement benefits, medical treatment, vocational rehabilitation and other benefits to federal workers or their dependents who are injured at work or who acquire an occupational disease.

Individuals injured on the job while employed by private companies or state and local government agencies should contact their state workers' compensation board. The Department of Labor has several programs designed to prevent work-related injuries and illnesses. You may obtain information about these programs by visiting Find It! By Topic Workplace Safety & Health page.