Taxable Talk

Here’s a good way to make some money (for a while). You create a phony vendor, and send invoices to your company for that vendor for work that was, of course, never preformed. The money from the phony vendor isn’t reported on your tax return–it’s always good when your after-tax income is the same as your before-tax income.

Now, there are some potential drawbacks to this scheme. You would be embezzling from your company. Depending on how you do that, it will be some sort of felony. Not reporting the illegal income on your tax return is tax evasion, another felony. And if you do this scheme over multiple years, that’s multiple felonies.

If your business were audited, it’s possible that the IRS might discover this (or a state tax agency). That would be problematic.

Now, you might think that no one would do this–especially that no one would do this and steal money from his own company. You would be wrong.

Michael Stover of Plymouth, Michigan did this exact scheme. Mr. Stover was president of Omni Facility Service and did this scheme with his invented subcontractor from 2004 through 2010. And we’re talking big dollars here: Per the Department of Justice press release, “Stover embezzled approximately $2,178,423 from Omni.” He also didn’t report this income on his tax returns.

Mr. Stover is looking at spending some time at ClubFed, a possible fine, and restitution. He’ll be sentenced in January.

Earlier this year I reported on the case of Mathew and Sandra Zuckerman. The Zuckermans stopped filing and correctly paying taxes back in 1986. When you’re doing something illegal it’s best to keep a low profile. The Zuckermans eschewed that philosophy. Mr. Zuckerman became very successful in leading companies through reverse IPOs. They owned two expensive homes: one in Colorado and one in California. That’s not keeping a low profile.

But what drew my attention to the case was a strategy that probably will never be tried again. No, it wasn’t the interlocking web of corporate entities Mr. Zuckerman created to hide his transgressions; that’s been done countless times before and will be done countless times in the future. Rather, Mr. Zuckerman put his dog and cat on the board of one of his companies. Unfortunately, members of a board of directors must be human: Fido and Lulu don’t qualify.

The Zuckermans pled guilty earlier this year. Yesterday, the day of reckoning arrived. Mr. Zuckerman received 24 months at ClubFed and must make restitution of $693,706; he also will serve three years of supervised release once he’s released from ClubFed. Mrs. Zuckerman received 36 months of probation. Of Mr. Zuckerman’s restitution, Mrs. Zuckerman was held to be jointly liable for $112,511. Fido and Lulu escaped prosecution.

As a poker player, I know there’s a time to lie. As a tax professional, I know that time is not while preparing your tax return or advising others on taxes. These individuals learned that the hard way.

First, we head to my old stomping grounds. From Orange County, California, comes the case of Kenneth Elliott. Mr. Elliot sold welfare benefit plans (also known as 419(e) plans). When these are legitimate, they provide benefits to employees for things such as health, disability, and long-term care. Legitimate plans allow contributions to be deductible business expenses.

Mr. Elliott’s plans were different. His plans allowed you to both get the tax deduction and, “then later access the full cash value of their plan contributions by taking out loans against the life insurance policies purchased with plan contributions.” That’s not allowed. Mr. Elliott has been barred by a federal court from ever selling and/or operating any purported welfare benefit plans; he must also send a copy of the injunction to his customers.

Next, Randall Due and Donna Kozak were already in trouble. The two had been convicted of tax evasion. (They believe they’re “sovereign citizens” so not subject to income tax. That didn’t work.) Well, there are various things you might do after being convicted. You might find grounds for an appeal; that’s a good idea. You might file liens against the judge, the US Attorney for the District of Nebraska, the Assistant US Attorneys, and an IRS Special Agent (in Criminal Investigations); that will get them! This is a really, really bad idea.

But that didnt’ stop Mr. Due and Ms. Kozak. Both were convicted of filing false liens. They’re looking at lots more time at ClubFed. The best summary of this is simple: Don’t do it!

Finally, from Philadelphia comes the case of Yaser Masso. Mr. Masso did a great job of billing the customers that used his security guards. He didn’t do so well in providing the records of those bills to his accountants. He only understated his income by $2.1 million for 2006 to 2009. Oops.

This was an especially bad problem when the IRS discovered the error. Given that the understatement resulted in a need for $429,000 of restitution, this was a big deal. Mr. Masso was sentenced to 21 months at ClubFed and must make that restitution.

All-in-all, these are three examples to avoid.

My dentist loves me…well, he loves my teeth. Years of orthodontia and ice hockey combined with some interesting genetics has helped my dentists make money off me. One local dentist decided to make money in a different way.

Dr. Leslie Kotler is a cosmetic dentist in nearby Henderson. He found some tax advisors who believed that a phony trust is a good way of avoiding tax. (It is, until you get caught.) Dr. Kotler had a large tax debt to the IRS; he used a sham to hide his assets along with a bankruptcy petition to delay the IRS. Dr. Kotler pleaded guilty to one felony count of tax evasion related to the $437,456 he owes the IRS.

Dr. Kotler does have one thing going for him when he is sentenced in November: He has agreed to cooperate with the US government as they attempt to stop individuals involved with creating the phony trusts. The Las Vegas Review Journal noted that three individuals have been named in a civil complaint; those individuals may have a lot more to worry about in the future.

The answer to this is, perhaps it’s against the law. And it is. Let me start at the beginning.

Back in 2008, Francis Chandler filed his 2007 tax return. He claimed he had quite a bit of interest income and even more withholding…$6,222,850 of withholding. He claimed a refund of $3,969,012. He got it, too. There was a problem, though: He should not have gotten the refund; the claim was false. Two years later, Mr. Chandler was indicted and charged with making a false claim against the United States.

Now, you and I would seek legal advice about the case, but Mr. Chandler had a “better” idea. I’ll file a lien against two federal judges, the US Attorney, and an Assistant US Attorney. That wasn’t a bright idea; that’s a false retaliatory lien, and that’s a crime, too. Eventually, Mr. Chandler pleaded guilty to the false claim and filing the lien.

Mr. Chandler was sentenced on Tuesday to 37 months at ClubFed; he must also make restitution of just over $3 million. A helpful hint to anyone who is thinking of emulating Mr. Chandler: Don’t!