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 firstname.lastname@example.org 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.