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Last Minute Tax Tips For Mariners

by James Maguire

We’re all guilty. We don’t enjoy pondering many of the negative aspects of our lives. Having taxes prepared has been compared to going to the dentist more times than I’d care to remember.

Ronald Regan said, “The Taxpayer - that’s someone who works for the federal government but doesn’t have to take the civil service examination”. Most clients I speak to understand the nature of the tax system and are comfortable with paying their fair share. The issues arise over their interpretation of what a fair share is versus the governments’. Here’s my question - when has ignoring an issue made it better?

December for individual tax planning is similar to packing a sea bag for what could be a six month hitch. When I would sail, there were certain things I made sure to take along. They’re all common sense items - foot powder, toothpaste, email contacts, account info, specific clothing, etc… I know it’s a lot easier to get supplies in my hometown vs. Djibouti, Africa. And once she’s underway, you can’t turn around and go to Wal-Mart.

December 31 is the day before your voyage begins for tax purposes. Once we’ve gone into the new year it’s pretty much too late. Luckily, there’s a month left. Let’s look at some common sense tax planning items that could save you thousands before departure.

1. Have you maxed out retirement?

This is such an easy addition to any tax plan. The higher your income, the more beneficial retirement contributions can be. You’re excluding taxable income at your marginal tax rate (MTR). This is the rate that your next dollar will be taxed at. $10,000 contributed to a 401(k) plan by someone in a 25% bracket saves $2,500 in taxes (plus the state, if applicable). The savings can exceed your MTR in some cases.

If you’re getting hit with alternative minimum tax (which can effectively eliminate your employee business deductions), these contributions will reduce alternative minimum taxable income (AMTI). If you’ve lost child tax credits, these contributions may help put them back on your return. It’s all about adjusted gross income (AGI). It’s one of the most important lines on your 1040. If it’s too high, many benefits you may have qualified for will be lost. 401(k) contributions are excluded from gross income and reduce your AGI. Other retirement contributions (IRA’s SEP’s etc…) are deducted in calculating your AGI.

2. Does your employer offer other tax deferred benefits?

Even in the industry, companies are beginning to catch up with the Jones’. Also, if you’re married and your spouse works, perhaps they have benefits you should be taking advantage of. Perhaps you have a FLEX account. Many employers utilize these accounts that give employees the ability to put away tax deferred dollars for various expenses. Take daycare, it’s a necessary expense for some families. Many companies allow contributions from your salary for daycare that are excluded from taxable income. This would reduce your taxable income and that all important AGI as well.

3. Have you maxed out your deductions? [Continue Reading →]

Kappsized Clarification?!

By James MacGuire

In my last article Kappsized or Scuttled?!, I forwarded a client question which was, “Do I HAVE to file these amended returns?” regarding recent amended returns sent to former clients of Martin Kapp. I answered “no” with respect to the question. It has come to my attention that this may have been incorrectly interpreted. Treasury Regulations, specifically §1.451-1(a) state If a taxpayer ascertains that an item should have been included in gross income in a prior taxable year, he should, if within the period of limitation, file an amended return and pay any additional tax due. This is not an obligation (have, must), but a recommendation (should). Please be aware that not filing an amended return could result in the assessment of additional interest and penalties. Filing an amended return does not excuse you from interest and penalties either. Interest and penalties generally keep accruing until you pay the amount due.

Here’s the bottom line. You cannot deduct meals while onboard a vessel if meals are provided for you. If you took these deductions on prior returns, it was in error, either knowingly or unknowingly. The IRS is entitled to the difference between the original and amended tax due.

Making matters worse, I’m fearful of additional acts that could occur in the future. Generally speaking, there is a three year statute of limitations for the audit of income tax returns. Fraud is NOT subject to this statute. Fraud can be audited indefinitely. It has often been stated that for fraud to apply, it needs to be on the part of the taxpayer and not solely the preparer. THIS NO LONGER APPEARS TO BE THE CASE. A recently released tax court memorandum http://www.ustaxcourt.gov/InOpHistoric/vallen.TC.WPD.pdf held a taxpayer liable for fraud committed solely by the preparer with respect to the statute of limitations. The IRS was allowed to audit past the statute when only the preparer committed fraud. This suggests that the IRS could audit Mr. Kapp’s former clients for years past the current three year period. How far? From the point that the fraudulent positions were taken is my guess. This also suggests that the IRS could wait until you are collecting social security to audit those returns.

I hope this doesn’t happen. To my knowledge there haven’t been any public statements of position from the Service on this issue. The only sure thing is that time will tell…..

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This article was written for gCaptain.com by James MacGuire, MaguireTaxes.com

Kappsized or Scuttled?!

By James MacGuire

 

My phones have been ringing constantly regarding the amended returns and letters sent to former clients of Mr. Martin A Kapp.

Here are the top questions –

• Was Kapp required to prepare these amended returns by the court order? NO

• Did Kapp furnish a copy of these amended returns to anyone other than the taxpayer? I do not know. He was not required to, but I have not been able to receive a definite answer.

• Do I HAVE to file these amended returns? NO

• Has the IRS made any public statements as to whether they will not assess interest and penalties even if I voluntarily file the amended return and pay the amount due? NO they have not

• When can I be audited until? Tax year 2004 April 15^th or the applicable extension deadline (if you filed an extension)of 2008,Tax Year 2005 April 15^th or the applicable extension deadline of 2009, Tax Year 2006 April 15^th or the applicable extension deadline of 2010

Have things been made better by recent events? Was your profession considered a contender for the IRS’ dirty dozen tax schemes 15 years ago? Was your accountant sending out amended returns for you to consider filing because of his issues with the Internal Revenue Service, a United States attorney, and a United States District Court Judge? Do you still believe that there is a better good to be served? That the United States of America has formed a huge conspiracy to prevent mariners from taking deductions that were won by several tax court cases? Even though it seems only one accountant interprets the cases this way? That there is only one accountant out there who is looking out for mariners’ best interests? His own former attorney wrote, “even if we are able to convince the IRS that ‘meals’ were not provided, the mariners did not incur their own meal expenses and thus a deduction at per diem rate would not be appropriate”. I goggled “maritime tax” five minutes ago and the first result was an indictment notice by the Department of Justice. Now we’re looking at thousands of mariners who are affected by this. This suggests that thousands of mariners cheated on their taxes. What statement does this make? How do you think this sits with the IRS?
Reading between the lines –

Citing an unsigned form letter [Continue Reading →]

U.S. v. Kapp – What Happened?

By James MacGuire

As many are aware at this point, Mr. Kapp was the defendant in an action brought forth by the United States Department of Justice. This action sought a court order for Mr. Kapp to cease in preparing, or assisting in the preparation of U.S. Income Tax returns which assert that mariners are entitled to tax deductions for meals that are provided without cost.This action also sought to require Mr. Kapp to furnish (essentially) a copy of the portion of his client list that contains mariners who took these illegal deductions to the U.S. Attorney.

In these types of clear cut cases, the Department of Justice (DOJ) can request a summary judgment from the Court. Essentially, this is telling the judge that the evidence is so overwhelming that a trial is not necessary. Judge Schiavelli granted summary judgment in this case and found in favor of the government.

I have heard through the pipe that Mr. Kapp is planning on appealing this decision. Neither myself nor my colleages have noted any appeals of this matter on file with the Court.

Who is affected by this decision?

Mr. Kapp and his agent, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this order. We are in the process of determining whether this order extends to firms that were deemed “approved” by Mr. Kapp.

Speaking from personal experience, I was contacted by Mr. Kapp’s attorneys in 2004, and subsequently 2005 regarding a type of computer program “patent” that was issued to Mr. Kapp in relation to the preparation of mariners’ income tax returns. It was demanded that I furnish the intellectual property that I use to prepare income tax returns to his attorneys so that they could evaluate it. As an alternative, Mr. Kapp’s attorneys (and subsequently Mr. Kapp himself) offered to sell me licensing rights to his patent and advertise my firm as an “approved” preparer. I was unwilling and uninterested. I use congress and the Internal Revenue Code as my primary source for the preparation of all income tax returns.

It could stand to reason under the order that the people who did pay to be licensed and approved by Mr. Kapp could be notified of the order, and subsequently be held to the ruling. Mr. Kapp however is the only individual required to furnish client information as previously mentioned.

Am I affected by this decision?

This is a tricky question. What the DOJ does with the list of clients remains to be seen. Simply as a mariner, you are not directly bound to this court order. Could the DOJ forward this list to the IRS? Yes.

What will the IRS do with this list if they get it?

I am unable to comment on what they will do, but I can on what they could. The service can send a notice of deficiency for tax years that took illegal deductions. The service could assess an additional tax due, plus interest, plus penalties. It remains to be seen what the Service will do. The Service is in the business of assessing and collecting taxes. If you had a list of names of people who took illegal tax deductions in which you could recover millions, what would you do?

I was Mr. Kapp’s client for 10 years, can the IRS assess for all of those years?

In most circumstances, no. In most cases, the IRS can audit the prior three years returns (ex. Until April 15, 2008, the Service can assess tax years 2004, 2005, 2006. If you filed an extension in 2004, it would be the extension due date rather than April 15).

Do I have to amend my taxes?

You fulfilled your legal obligation in filing a timely income tax return. However, interest and penalties are assessed from the time the additional tax was due.

How many of Mr. Kapp’s clients does this apply to?

I do not know. Mr. Kapp has been ordered to furnish this information to the DOJ. I have only examined returns of my clients who were former clients of Mr. Kapp. Of those returns I examined, all of them took the illegal meal deductions outlined in this order.

How do I tell if I took these deductions?

Look at your return, specifically “Schedule A Line 20 – Supplemental Sailor Travel Schedule” which is usually attached after your state return “if applicable”. You need to crosscheck the rates listed on various ports of call with the published rates https://secureapp2.hqda.pentagon.mil/perdiem/perdiemrates.html . This website is pretty user friendly. If the rates indicated include the meal rate, you may have taken the deduction illegally.

My return is taking the meal deductions, now what?

It gets a little tricky. As stated, you aren’t required to amend. Additionally, these deductions quite often don’t produce a tax benefit. Consider the Alternative Minimum Tax (Alt Min). As income increases, taxpayers quite often don’t fully benefit from these employee business deductions. A $1,000 business deduction may produce a $250 reduction in tax. However Alt Min applies a tax that negates the $250 benefit. You may well want to have someone experienced look your return over if you want to know the tax effect. If you are in such an Alt Min situation, the Service would not be able to recover additional taxes, interest, and penalties upon audit.

Let’s say I receive a notice, and I owe money to the IRS. Who’s going to pay?

You are responsible for your income taxes. Penalties can sometimes be lifted because you relied upon the advice of a professional. Interest is pretty non-negotiable.

You would owe the IRS personally. However, you may have a legal action against the preparer (even if you aren’t audited).

Can you look over my returns, I’m just curious where I stand with respect to the ruling?

I’ve thought this one over. Current clients have or can have prior returns examined at no charge. I’ve already received many phone calls from non-clients asking to have the returns examined. The flood of returns I could possibly receive could halt business for several weeks. I don’t want you to have to pay to have them looked over. It’s enough that you have spent thousands in preparation fees. So, here’s my compromise. Current clients, if they want an opinion on their returns can have this done free of charge. All others, I will provide an opinion on your returns free of charge if you prepay for 2007 preparation. I think this is a fair trade off. Basically, by becoming a client, the examination is free of charge. My rates are competitive (pricing usually ranges from $225-$450) and the clients’ best interests come first.

Please feel free to e-mail me with any questions jkm@maguiretaxes.com and visit my website. I intend to provide additional tax planning guidelines in the near future. It’s my hope to work with fellow mariners to implement proper, legal, tax planning and credit sheltering.

We have been hard at work finding information for those who have been “Kappsized” by the IRS’ decision against certain aspects of mariner tax deductions promoted by Martin A. Kapp’s Sailor Tax service. Today we bring you Mariner Tax Expert James MacGuire.

James holds a masters in taxation from Northeastern University. His practice focuses on individual (particularly mariners’) taxation, general tax planning, financial tax and trust planning, estate tax planning, audit resolution and forensic accounting services. James operates side by side with noted estate and business planner Attorney Hugh J. Crossland of Crossland and Crossland P.C.; also of counsel to Graber, Davis, and Cantwell P.C.

James’ goal is to provide tax and tax planning services to mariners, paying particular attention to the planning aspects so often ignored. “The US Supreme Court has stated many times that a taxpaying citizen should only be liable for their fair share. We are allowed under the law to utilize every deduction legally available.” James enjoys big picture planning with clients – taking into account current and future goals to create a tax plan that follows the clients intended interests.

To those who have sent me questions or panic about being Kapp-sized I don’t have any answers… yet.

Stay tuned HERE and rest well knowing you have Future gCaptain Jack’s sympathy.

I was recently reading Robert Greene’s; The 48 Laws of Power and took a few tips from it but more often than not I break them. Today’s infraction is listed under Law 24 “Never Be the Bearer of Bad News”

The Ruling

U.S. District Court Ruling; United States V Martin A Kapp:

Judgment is entered against Defendant Martin Kapp

The United States may recover its costs

Defendant and his agent… are enjoined from preparing tax returns…(2 page list)

Within 21 days of this Order Defendant shall provide a list of all persons or entities for whom he prepared returns (any portion of a return, amended returns, or refund claims)… This list is to cover materials that were prepared at any time from January 1, 2000 to present… Defendant must state name, contact information, social security number or employer id number and tax period for which the returns … relate.

This is a difficult pill to swallow and a source of much debate within the maritime community. I have yet to sign aboard a ship, attend a training class or participate in any gathering of U.S. mariners where this topic was not discussed… or debated.

While my wife and I personally used Kapp’s services only once, our first full year after the academy, we missed the January 1st judgment date by a matter of months. We thus have a vested interest in this decision so expect full coverage including answers, interviews and insight here on gCaptain in the coming months.

The Good News

We are not tax experts but it seems that the Judge upheld all parts of the “Mariner’s Deduction” except for meal expenses taken while aboard ship, so penalties should be somewhat limited. Apparently the DOJ had the same question that sparks the most debate among mariners; “How can you deduct the food you eat that the company pays for?”

The Reason

According to the complaint, Kapp has taught college-level tax and accounting classes…

The IRS recently listed return-prepared fraud as part of its 2006 list of the “Dirty Dozen” tax scams which is posted HERE . Since 2001, the Justice Department has sought and obtained injunctions against more than 160 tax-return preparers and tax-fraud promoters. ref

Here is the basic info:

• Kapp’s website with injunction notice
• To view the judgement and permanent injunction, click HERE.
• To view minutes from the August 20th, 2007 judgement, click HERE.
• To view the Department of Justice Notice, click HERE.
• To view the full complaint, click HERE.
• Competitor, Transport 1040, Kappsized FAQ page
• MM&P Newsletter Post

Have you been Kappsized? Enter a comment below or contact us [details in sidebar | contact form] with the questions you’d like answered. All future Kappsized articles will be filed HERE so check back often.