The IRS released its annual Dirty Dozen Tax Scams list for 2023, and this year there is a new entry for third parties who target taxpayers who are not eligible for the Employee Retention Credit, but convince them to claim the credit so the third party can charge a fee. The third-party also then collects the taxpayer’s personally identifiable information. The list also cautions against scams offering to help taxpayers set up their IRS Online Account. Taxpayers should do this themselves because of the sensitive information required to set up the account, which would then be in the hands of any “helpful” third-party. (www.irs.gov/newsroom/dirty-dozen)

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

A New Jersey tax pro pleaded guilty to conspiracy to defraud the government after marketing a scheme to sell $1.3 billion in fraudulent tax deductions that allegedly preserved green spaces. He admitted to guaranteeing tax deductions worth at least four times clients’ investments, knowing this was “too good to be true.” (www.justice.gov/opa/pr/cpa-pleads-guilty-conspiring-promote-fraudulent-tax-shelter-scheme) The IRS has issued proposed regulations that identify certain syndicated conservation easement transactions as “listed transactions,” a.k.a., abusive tax transactions that must be reported to the IRS. (IRS Notice 2022-28) The IRS issued the proposed regulations in response to Tax Court and Court of Appeals for the Sixth Circuit rulings that the IRS lacks the authority to identify listed transactions by notices, such as Notice 2017-10. The regulations are intended to be finalized in 2023.

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

Husband and wife duo Wolfgang and Helene Beltracchi spent decades painting forgeries in the styles of deceased European artists and selling them for millions of euros. The Betracchis extensively researched the artists’ lives: travelling to where they had lived, reading letters and diaries, and reading academic discussions of their work. Wolfgang painted the images (numbering around 300) which were claimed to be either known paintings that had been lost or undiscovered ones; he claimed to have mastered the style of about 50 deceased artists. However, one mistake blew the whole operation open when Wolfgang purchased a zinc pigment that also contained titanium, which wasn’t used in pigments until the 1920s. The painting in question was supposedly painted in 1914. The pair spent several years in prison and were ordered to pay €35 million in restitution. (https://www.cnn.com/style/article/wolfgang-helen-beltracchi-forgers/index.html)

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

We’ve all heard of a “Ponzi scheme,” but who was the man behind the scam? Born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Italy in 1882, Chuck did not invent the eponymous scheme that pays earlier investors using the investments from later investors. He was known as a swindler in the 1920s, and he promised clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S. The fraud held up for over a year before it collapsed, taking $20 million in “investments” with it. He was sentenced to five years in prison for mail fraud and when he was released, he was immediately hit with state larceny charges and served another nine years, followed by seven more for a Florida swampland scam, after which he was deported back to Italy. It is reported that while serving his various prison terms, he continued to receive Christmas cards and requests to invest from some of his more dedicated investors. (https://en.wikipedia.org/wiki/Charles_Ponzi)

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

The SEC filed a complaint against Nutra Pharma, Inc., which claimed to make pain relief drugs from cobra snake venom. The SEC took issue with fraudulent press releases the company put out regarding upgrades to their cobra farm, when in fact there was no cobra farm, the company never owned cobras, and therefore had never produced a drop of cobra venom. The SEC complaint noted that Nutra Pharma had never turned a profit. The FDA was also on the attack, issuing a warning letter to Nutra Pharma for claims it posted on its website that its products could be used to treat asthma, arthritis, and pain related to cancer.

(www.sec.gov/litigation/complaints/2018/comp24295.pdf)

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

In Amanda Ramirez v. Kraft Heinz Foods, Ms. Ramirez is suing Kraft over the statement on the packaging of Velveeta Shells & Cheese Original Microwaveable that states “Ready within three-and-a-half minutes.” She alleges that these instructions only describe the cooking time and fail to take into account the time it takes to remove the lid, add the cheese sauce, add water, and stir; had she known it would take longer than the stated time, she claims she never would have purchased the product. Ms. Ramirez is asking that Kraft cease its deceptive advertising and demands $5 million in punitive damages. (Her attorney had also filed a lawsuit against Frito-Lay for its “Hint of Lime” Tostitos, which the plaintiff in that case claimed contain only a “negligible or de minimis” amount of lime.)

(https://wsvn.com/news/local/miami-dade/south-florida-woman-sues-kraft-claims-mac-and-cheese-instructions-are-misleading)

CPAs, get four hours of fraud CPE with our Fraud Essentials for CPAs Webinar. Click here for more information.

A Los Angeles-area cannabis product manufacturer is being investigated for conducting unlicensed operations that put illegally manufactured cannabis products back into the legal market. Affected products include 3.3 million Kushy Punch brand gummies with an estimated value of $64 million. The complaint against the company also alleges they were making a product called “Kushy Punch T.K.O.” that contained more than the legal limit of THC. The company’s manufacturing licenses have been revoked, and a penalty could apply in the amount of up to three times the amount of the $75,000 license fee for each day of unlicensed operation. (https://cannabis.ca.gov/2020/09/24/cannabis-licensing-authorities-file-civil-action-against-vertical-bliss-kushy-punch-for-unlicensed-activity/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

If you’re going to file an appeal, you should stick around for it. A taxpayer was convicted of tax evasion for not filing returns reporting income from his log cabin home building business. The taxpayer filed an appeal, but then failed to report for prison as scheduled. Under the fugitive-disentitlement doctrine, a court is allowed to dismiss a defendant’s appeal if he or she flees while the appeal is still pending. (U.S. v. Birk (January 9, 2020) U.S. Court of Appeals, Tenth Circuit, Case No. 19-1422)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The “pipe dream”: originally a reference to the fantastical hallucinations caused by smoking an opium pipe.

Looking back over the legislation of the past 40 years, there have been numerous occasions in which a sales tax on services bill loomed over California taxpayers, for example AB 194, which we covered in the July 1995 issue of the California Taxletter. These efforts have been stepped up recently; since Robert Hertzberg became a state senator in 2014, he has introduced such a bill each year (SB 8, SB 1445, SB 640, SB 993, and most recently, SB 522). These bills all failed, and Spidell and other tax advocacy groups have consistently been vocal in speaking out against a sales tax on services.

There are other states that tax some services, but the few attempts to enact a broadly applied tax on services have all failed. For example, in four states (Florida, Maryland, Massachusetts, and Michigan) such laws were passed, only to be almost immediately repealed before they went into effect.¹

In California, sales tax on services bills are generally met with strong opposition. The basic arguments against taxing services are:

• Increased cost to consumers;
• Increasing the competitive disadvantage faced by California businesses (especially small businesses);
• Compliance and administrative nightmares;
• Creating competitive disadvantages between in-state businesses;
• Tax pyramiding, which occurs when taxes are imposed on various stages of production of an item; and
• In years where California has a budget surplus, the necessity of such a tax is questionable.

Spidell will continue to oppose attempts to implement a sales tax on services. In comparison to the revenue such a tax would bring in, the disadvantages would do more to hurt Californians than benefit them. We think the Legislature can put that in its pipe and smoke it.

¹ California Tax Foundation. “The Challenge of Taxing Services” Available at: https://caltax.org/research/sut_20190109.pdf

For this month’s look-back over the past 40 years, we dug out the 1979 FTB Form 540 and noticed a cryptic note at the very bottom of page 2 under the preparer’s signature line: “If adjusted gross income on Federal return is different from line 31, attach explanation.”

According to Lynn Freer, some taxpayers ([cough] her father) provided the following explanation: “Beats the heck out of me” and never heard anything back from the FTB.

You can see the entire 1979 Form 540 at www.caltax.com/spidellweb/public/editorial/cat/1119-1979ca540.pdf.

In the June 1991 issue of the California Taxletter, we ran an article that highlighted the seemingly arbitrary rules that determined whether a food was taxable. The article stated that (at the time) sales tax applied to certain foods based on random quantity, depending on what the BOE determined was a “suitable” amount for consumption. For example, a pint of ice cream was not considered a suitable amount for consumption so no tax applied, but a one-half pint was suitable and so tax applied. (This anonymous author can eat a whole pint, no problem, and will pay the tax to prove it.)

The issue stemmed from language in 18 Cal. Code Regs. §1603: “… tax applies to sales of cold food products … in a form suitable for consumption on the seller’s premises [emphasis added].”

However, the current version of §1603(c) now includes a clarifying definition:

(A) For purposes of this subdivision (c), the term “suitable for consumption on the seller’s premises” means food products furnished:

1. In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
2. In a size which ordinarily may be immediately consumed by one person such as a large milk shake, a pint of ice cream, a pint of milk, or a slice of pie. Cold food products (excluding milk shakes and similar milk products) furnished in containers larger in size than a pint are considered to be in a form not suitable for immediate consumption.

Note the somewhat subjective terms “large milkshake” and “a slice of pie.”

Sales tax oddities as related to food continue to this day. A favorite is hot food versus cold food:

• The mere heating of a food product constitutes preparation of a hot prepared food product (e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infrared lights, using steam tables, etc.).
• On the other hand, the sale of a toasted sandwich, which is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product.¹

Sales of food products are considered taxable sales of hot food items when a seller’s premises includes microwave ovens accessible only to the seller. If the microwave ovens are accessible to the public, the sales are generally nontaxable because the customers are buying the food cold and heating it themselves.²

¹ 18 Cal. Code Regs. §1603(e)
² CDTFA Annot. 550.1753

With the enactment of the Tax Cuts and Jobs Act (TCJA), nonconformity issues are raised to a whole new level. As we’ve said numerous times before, California does not conform to the vast majority of the changes enacted by the TCJA.

Here are a few of the changes that could have the greatest negative impact on the California return or could easily be missed, causing clients to overpay their California taxes.

1. Property taxes: Itemized deduction for state and local taxes limited to $10,000 for federal purposes but not for California.
2. Mortgage interest: The amount of deductible mortgage interest is limited to $750,000 of acquisition indebtedness on the federal return, but this limitation does not apply to the California return.
3. Moving expenses: This deduction was repealed for federal purposes, but California taxpayers may deduct the moving expense or exclude the reimbursement.
4. §529 plans: Federal law allows tax-free distributions to pay for K-12 expenses at private or religious schools, but for California these distributions are includable and subject to the 2.5% penalty.
5. Charitable contribution limits: Federal law increases the individual charitable contribution limit to 60% of federal AGI, but it remains 50% for California.
6. Miscellaneous itemized deductions subject to 2% floor: Repealed for federal purposes, but still allowed for California purposes.
7. Casualty and theft losses: federal law repeals the individual casualty loss except for those taxpayers in Presidentially declared disaster areas; California still allows a casualty loss deduction.
8. Entertainment expenses: Repealed for federal purposes but still allowed for California purposes for both businesses and as an employee business expense.
9. Technical terminations: Federal law no longer requires a partnership to terminate after a greater than 50% change in ownership, but California still requires two short-period returns.
10. Small business accounting methods: Federal law provides a uniform small business exemption from various accounting method requirements; California nonconformity means separate books and records for state purposes.

Nonconformity issues are clearly laid out in the 2019 edition of The Big Blue Answer Book™ and is now shipping. Click here for more information.