Archive for June, 2014|Monthly archive page

We Buy Gold…FIFA World Cup Trophies

Originally published in the Cedar Street Times

June 27, 2014

As a young lad, I played a lot of soccer.  The first team I was on was called the “Half-Pints.”  I think I was four or five years old, but I can still remember our green and white uniforms and the coach wearing jacked-up tube socks with colored stripes along the top.  When I was six and seven I played on the “Chiefs” – I am not sure that team name and logo with the Native American headdress would be allowed today.  Around that time, I also played on the “Jedis” – probably because the original Star Wars trilogy was in its heyday.

By the time I was in middle school, my brother and I were both on traveling soccer teams often playing at opposites ends of the state on any given Saturday.  We played a fall outdoor season, a winter indoor season, a spring outdoor season, and then attended soccer camps during the summer.  In high school I played on regular club teams as well as the high school team.  One very vivid memory was winning the state championship my junior year in high school.  The opposing team had two players that went on to play in the MLS, one of which even played on two U.S. World Cup teams.  I went to college and played a few more years there until other priorities began to emerge.

Throughout my time playing soccer, there was one thing that eluded me – a real gold trophy!   Cheap plastic trophies at the end of a season, or after winning a tournament remained pretty consistent.  They seemed like treasures when I was young and most survived through the years with only minor dents and scratches.  A few unlucky ones had lost an appendage or their fake gold hair paint had rubbed off leaving the embarrassing white plastic beneath.  Eventually, they all got round-filed save one early trophy as a momento.

If I had only managed to keep playing, gain citizenship in a powerhouse soccer country, join the national team, and then win the World Cup, my dream could have been realized! With the World Cup currently in full swing, some country is only two-and-a-half weeks away from holding the world’s most valuable trophy. Not only in symbolic worth to the world, but also in perceived collectible value and sheer melt value, the FIFA World Cup Trophy is the world’s most valuable trophy.

The trophy is not gold-plated as most other major sports trophies are, but its 13.6 pounds is made almost entirely of 18k gold.  If you took the championship trophies from the NHL, NFL, NBA, and MLB and melted them all down, their combined value would be worth only about 28 percent of the melt value of the World Cup Trophy, which currently has about $200,000 of gold in it with an estimated collectible value of $10 – $20 million.

What does this have to do with taxes? – Not a whole lot, but it was a good excuse to talk about soccer. I will say this: buying and selling gold has been quite popular since the markets bottomed out in 2009.    It seems that everybody has a sign that says, “We buy gold.”  I think I even saw that written on the back of an “Anything will help” sign from a panhandler.

There are a lot of special tax and regulatory rules surrounding gold sales, so you need to make sure you get the right advice before you buy a bunch of gold or gold coins thinking you are making a solid investment to protect you from inflation.  For instance, if you owned the FIFA World Cup Trophy, you would be subject to special collectibles tax rates of 28 percent if you tried to sell it, as opposed to lower long-term gain rates even if held over a year.   People wanting to hold gold directly in their IRAs also have special rules to follow regarding the purity of the gold they purchase, in order to maintain the tax deferral.

So, scout it out before you buy gold!  Besides, it’s better to just win the gold.  Go USA!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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What Are Your Chances of Being Audited? Part III – Red Flags

Originally published in the Cedar Street Times

June 13, 2014

Four weeks ago I discussed some of the statistics regarding your chances of being audited by the IRS, and two weeks ago I discussed audit selection methodology.  A few of the high points from the articles were: 1) on the average, audit rates for individuals are generally less than one percent each year, and increase as you make more money, 2) about 75 percent of audits are actually mail correspondence audits focused on a narrow request of information for specific items on your return rather than a full-blown in-person, field audit, 3) the IRS does not release its exact methods of selecting audits, and many people have incorrect notions about this process, 4) the IRS does tell us audit selection is aided by a computer scoring system to help find returns that will likely yield a change; it uses computer matching to ensure information reported on 1099s by third parties matches what you report; it uses publicly available information; and it uses statistical random sampling.  The rest of this article will be devoted to “red flags.”

So what are these “red flags” everyone talks about?  One fairly obvious assumption we can make from the audit statistics released by the IRS is that they follow the money!  You are three times more likely to be audited if you make over $200,000 a year and over eleven times more likely to be audited if you make over $1,000,000 a year.  C-corporations face a similar dynamic of increasing audit rates on larger corporations – for instance, one out of every three corporations with assets over $250 million are audited.

Not reporting all your income even when it is reported to the IRS should not be a surprising red flag, but it happens frequently.  I see this most commonly with stock sales reported on a 1099-B when people prepare their own returns – they either forget, or do not understand the form.  I also see this with contract work where a 1099-Misc is issued and the individual forgets to report it.

There are a number of issues related to small businesses that raise eyebrows.  Keep this in mind – anytime there is an easy path for someone to pass-off personal expenses as business expenses, you are going to have a higher level of scrutiny.  For instance – relatively high amounts of: business automobile mileage (or claiming 100% business use on your vehicle – very rare in reality), home office deductions, meals and entertainment, or travel expenses.  All of these can be easily abused, so they are highly scrutinized.  If you are beyond the norms, you are a clearer target.

Here is another golden nugget – if your job is one that millions of people do for fun as a hobby (although perhaps not nearly as well!), then you have a higher level of audit risk, particularly if you are losing money.  Think of the arts – photography, video, music, drawing, painting, performing, etc.  Also, think of horse racing and breeding for the wealthier set.

That brings us to another “red flag,” businesses that lose money every year.  The IRS is trying to determine which of these three describes your nonprofitable business situation: 1) Are you really trying to make this successful and genuinely feel it will be profitable overall?  2)  Are you trying to deduct your personal expenses, your hobby, or keep up appearances? or 3) Are you just plain nuts?  By allowing people to continue businesses circumscribed in two and three, the rest of the country is having to foot the bill for the lost tax revenues.  This is because the “losses” generated are offsetting the person’s other income that would otherwise be taxable.  With no realistic future expectation to recuperate the losses, the IRS is ready to pounce.

Claiming rental losses in California is fairly common due to the high cost of our real estate, but claiming a real estate professional designation in combination with these losses is an area of greater concern.  If your main occupation is in the real estate related field, and you work at least 750 hours in this trade, you are allowed to deduct all of your rental losses in the year they are incurred.  Everyone else get to deduct $25,000 at most, and are rapidly phased out to no deductions for the losses based on income levels.  The losses get suspended until the property is disposed of or until there is passive gain to offset.  There are a lot of challenges when it appears the person has substantial earned income from a trade or business unrelated to real estate or if there is very little income from real estate related trades.

Refundable tax credits such as the Earned Income Tax Credit, Child Tax Credit, American Opportunity Credit (for education), and Health Care Tax Credit can also be a point of concern, particularly when the total refund on your return is higher than the tax paid in to the system!  The IRS receives thousand of fraudulent returns each year that use refundable credits to steal money from the government.

Although harder to catch, unreported foreign income is an area worth mentioning due to the extremely high penalties by the Treasury Department for failure to report foreign accounts, and it has been a hot-button issue that has raised billions in revenues.

The above is not an exhaustive list, but it does describe many commonly seen areas of concern.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.