U.S. v. Kapp – What Happened?
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.
Related Articles:
- Mariner Tax Expert James MacGuire
- Future gCaptain says "My Daddy's gettting audited" | Tear
- Mariner Tax Deduction "Kapp-sized" By IRS
Related Post
Enjoy this story? Subscribe
9 responses so far ↓
1 DDave // Sep 25, 2007 at 8:28 am
Good stuff!
2 Joe // Sep 25, 2007 at 9:04 am
I left Kapp 5 years ago for turbotax and I bought the “audit defense” insurance for the years I did the taxes on my own.
Well 2 days ago they sent me a brochure to say I could purchase protection for the years I was with Kapp for $49 per year.
I understand this insurance doesn’t limit my liability but it is suppose to handle all my audit related expenses and provide me with a tax attorney. Is this offer too good to be true knowing what I know now about the judgment?
This is the service: http://www.taxaudit.com
3 John // Sep 26, 2007 at 8:37 am
Joe, I’ll email James with your question or feel free to call him directly. His cntact information is on his website, here:
http://www.maguiretaxes.com/marine.htm
4 Fred Fry International: Maritime Monday 78 // Oct 1, 2007 at 6:08 am
[…] Freak wind gust? Tapped by the crane?)gCaptain has an update to the seafarer tax return fiasco in “U.S. v. Martin Kapp – 10 Mariner Tax Questions Answered” which includes an explanation of the problem and gives some tips as to how you can check to see if […]
5 Colleen Emery // Dec 10, 2007 at 2:43 am
Recent questions and answers by a real maritime tax professional!
I have received three years of amended returns from Martin Kapp, do I need to file these?
Yes, you do. I know his cover letter gives you three options. Recognize option B is NOT an option. If you go to our website; http://www.transport1040.com you will see a copy of the summary judgment; it clearly states on page 9 that Martin Kapp is not allowed in tax court. As mentioned in his letter addressed “Dear Clients and Friends” disadvantages with choosing this option states “Electing this option and IF the Tax Court later rules against my clients will also cause some additional accumulating interest and penalties.”
Option C that states do nothing, is also NOT an option. Again referencing his letter addressed “Dear Clients and Friends” Mr. Kapp state “The claiming of incurred meal expenses, just like any other deductions on your returns, may subject yourself to an audit”. Recognize the August 20, 2007 Judgment and Permanent injunction ordered Martin Kapp to provide the Department of Justice (DOJ) a list of names, social security numbers, and addresses of all clients from 2000 forward. Do you want to put yourself in an audit situation where they will disallow all of your deductions? It is then up to you, the taxpayer, to prove time, place and business purpose of ALL of your deductions. Not to mention that the IRS can then scrutinize your whole return, not just your mariner deductions.
I read the ruling against Martin Kapp, and no where in the ruling does it state that he has to amend our previous years returns, why did he?
You will also notice that Mr. Kapp faced very little personal repercussion as a result of preparing frivolous returns. Let’s look at some previous cases involving preparers of invalid mariner deductions. Again, please reference our website and you will see the ruling against four Louisiana preparers. In that case the DOJ issued permanent injunctions against the preparers. Per the final ruling “The preparers agreed to be enjoined from preparing false or fraudulent income tax returns” and were permanently closed them down. I know Mr. Kapp referred to himself as a “friend of the maritime industry,” however the IRS stands to collect millions of dollars in tax deficiencies as a result of the amended returns prepared by his office, and Mr. Kapp was allowed to stay in business.
Mr. Kapp told me he won both the Johnson and Westling case, I thought the meal deductions were valid?
Again, please reference the summary judgment available on our website. Pages 2, 5, 8, 9, 10, 11, 16, 18, 20, and 24 clearly show that Mr. Kapp did not win either case. Those cases validated only the INCIDENTIAL deductions that we have only taken on behalf of our clients and spells out very clearly that meal deductions that were provided to the mariner at not cost was NOT valid.
I read a letter from Mr. Kapp stating that the IRS had never contacted him and additionally when he did speak with them he showed them that the meal deductions were valid?
Per the above mentioned Summary Judgment Page 15 states “Kapp also falsely states in this letter that “These government attorneys did not realize the IRS published position for the last 17 years (1990 thru 2006) is to allow mariners to claim meals. Surprised. So were these government attorneys when they finally let me direct them to look at the government website.” When asked to identify these alleged “surprised” government attorneys, Kapp could not provide any names, agreed that this “could be a false statement,” and asked for a “quick break” to speak with his attorney.
Again, the above comes directly from the DOJ’s summary Judgment; I would use caution when trying to ascertain valid statements.
I’ve read statements from other maritime tax preparers blogs at gCaptain saying that I do not have to amend my taxes, is this valid?
Ironically, the initial statement said “You fulfilled your obligation in filing a timely income tax return. However, interest and penalties are assessed from the time the additional tax was due” . The second posting states “Do I HAVE to file these amended returns? NO
My initial question would be if interest and penalties are assessed from the time the additional tax was due, would the preparer be willing to assume those costs for you should you elect not to file your amended return? But, more importantly, let’s go back and reference the first question. Do you really want to go back and provide substantiation for all your other VALID deductions? Going through an audit is time consuming, I would prefer you utilize your vacation time doing things you enjoy. Not to mention I always appreciated one of my grandfather’s favorite lines, there is only two things in life you are required to do, die and pay taxes. No wonder he pushed us into either being mortuaries or tax preparers!
Is it still worth me tracking my expenses? There are still many legitimate deductions! Union dues, uniforms, safety equipment, job search expense, many companies are now including your travel reimbursement to meet the ship in your W-2 wages, plus other out-of-pocket expenditures, again reference our website at http://www.transport1040.com. Do not forgo these legitimate deductions just because a few preparers included so called invalid “mariner tax deductions” covering meals that were provided to you at no costs. Also, recognize, in order for your per diem deductions to be included in your return it does require you to file a paper return; your return can NOT be e-filed on your behalf.
We have stressed in our newsletters, seminars, website, and correspondence over the past eight years that the aforementioned ‘mariner tax deductions’ were NOT valid. Sadly, that has largely fallen on deaf ears and is now coming back to haunt some of you. Recognize since we were first contacted by the U.S. Attorney’s Office on April 10, 2006 we posted the DOJ’s initial complaint against Martin A. Kapp on our website. Since then we have been in constant contact with attorneys involved with the case and other pending cases. Please don’t continue to be misled. We will be more then happy to assist you in setting up a payment plan with the IRS, and/or review your amended returns, at no cost. We appreciate your interest in Transport Workers Tax Service, as you can imagine we have been inundated with similar inquires. In order to provide our new clients with the same exceptional service levels we are requesting that you remit a non-binding count-me-in personal information page. This will allow us to adequately staff for the 2007 tax year. We will be accepting new registers up until January 15, 2008, after then it will be on a first come first serve basis and may result in us being unable to assist you. So we emphasize the importance of doing so in a timely fashion.
Please feel free to contact us at twts@transport1040.com or CountMeIn@transport1040.com should you have any questions that were not addressed in the above.
6 gary mathews // Jan 16, 2008 at 7:14 am
Can Kapp be sued in civil court or ant other venue to held liabel?Have heard talk about a class action suit any comments? thanks Gary
7 James Maguire // Jan 17, 2008 at 8:39 am
I have spoken to several attorneys regarding possible litigation against Mr. Kapp. I’m told there are several issues with pursuing this. First, what are the damages? The fact of the matter is that the returns were fraudulently prepared. The additional amounts mariners have been required to pay SHOULD HAVE been paid with the original return. If the IRS decides to assess interest and penalties after the amended returns are filed, you’ve incurred additional expenses above and beyond the original amount due.
HOWEVER – any attorney who took this case on a contingency basis would want to make sure they would get paid if they received a judgment. I’ve had many clients tell me that they cannot get in contact with Mr. Kapp, nor will anyone from his office return voicemails. A friend of mine who is an attorney in California has been checking weekly to see if an appeal has been filed on Kapp’s case. No appeal has been made. I’d also be interested to know the basis they would appeal the case on. Long story short – the well might be dried up (or relocated to the Cayman’s) by the time any action is taken.
I do have a growing list of mariners interested in pursuing legal action. I will keep looking for an industry friendly attorney (perhaps an oxymoron) who would be interested in pursuing this. I have spoken to many of Kapp’s clients attorneys and am happy to help them in any way I can. One angry captain told me he had no interest in a monetary settlement, rather he wanted a judge to order Kapp to stand a 0000-0400 stern watch on his vessel mid ocean.
Just remember –
1. If only one person knows the right way to take a tax position there’s a good chance the IRS is going to disagree.
2. Any preparer who asserts that their returns are “IRS Approved” or that they have assurances that their returns won’t be audited is suspect. Ask the preparer for the name and identifying number of the agent in charge who will verify this. NO RETURN IS BEYOND AUDIT. The most powerful accounting firms in the world are subject to audit. The Vice President of the United States was audited several years ago. Any statement to the contrary is false advertising.
3. Keep your own logs. I know there are firms who will make up sailing schedules after the fact. I don’t agree with this practice. Several cases were found in favor of the service because of this practice. Read ALL of the Johnson case! He had to provide an affidavit stating that he did in fact INCURR his incidental expenses every day he was onboard the vessel. To make a schedule after the fact which you would have to swear to being true and accurate is thin in my book. The IRS has NOT published any accepted procedures for reporting your incidentals. Current agents retire, get promoted, and move on to other jobs. Unless they publicly state an accepted procedure, you can’t count on it.
I apologize if I sound preachy. I know many friends and alumni who were affected by the decision. My heart goes out. You shouldn’t have to sail for a month to pay an additional tax bill. I did not agree with Kapp’s practices when I saw his first tax return. There is NO reason to attach publications and court decisions to that type of return. I do not produce “mariner tax returns”. I prepare returns and perform tax planning services for mariners. Yes, there are somewhat unique deductions for people in this field. HOWEVER, if all you concentrate on are those additional business expenses, you’re missing the big picture. I usually associate return preparation with damage control and tax planning with preventative maintenance. An extra $300 in refund money doesn’t stand well next to failing to properly plan transactions – failing to do so can literally cause ten’s of thousands in additional liability.
8 Amy // Feb 4, 2008 at 1:31 pm
We have moved several times since leaving Kapp (2004 was the last year we were with him). I have not recieved an “amended return” to turn in. Do you know if All of his cllients had to send in these amended returns? We would be sending in one for 2004. However, I’m afraid that Kapp won’t be able to find us to send us one (especially because I doubt he’s trying very hard to do so).
What a fiasco! Thanks, Amy
9 Colleen Emery // Mar 6, 2008 at 6:38 pm
Amy,
Feel free to contact me at twts@transport1040.com I may be able to tell you if your information was shared with either the IRS or the DOJ. I should be able to tell you if you are one of the many clients affected by this.
I am sorry that you may be in a position to pay back taxes, however we at Transport Workers Tax Service have NEVER put any of our clients at RISK.
We’ve always had the mariners back! Colleen
Leave a Comment