Taxable Talk

Have I got a deal for you! (It is, after all, the Holiday Season where we’re all looking for deals, right?) I can take your assets and hide them from anyone and everyone! Simply form one of my special Nevada Corporations, and, well:

Camouflaging your assets is the first step in implementing any asset protection plan. Remember, if a federal judge can find an asset, he can seize it. Conversely what he can’t find, or doesn’t know about, he can’t touch. Although I enjoy advertising bulletproof asset protection, the prescription for making an asset bulletproof is first to make it invisible.

And I also offer a hidden bank account program! With my new vanishing bank accounts, you have access to your money but nobody else does! No more worries from the government, or anyone else. The whole program retails for just under $10,000, and there are multi-level marketing opportunities, too! Who can refuse?

All of the above is what one Las Vegas man, Richard Neiswonger, offered through his Asset Protection Group, Inc. Back in 2011 he was indicted on various tax fraud charges. He was sentenced last week to 22 months at ClubFed and must make restitution to the IRS of $3,212,078.

This wasn’t Mr. Neiswonger’s first brush with the US government. The FTC had obtained an injunction against Asset Protection Group, but that didn’t stop them. The US Attorney’s office had requested another injunction in 2007. The sentencing press release details Mr. Neiswonger’s activities:

From 1999 to mid-2006, Neiswonger, who was imprisoned, and his business partner, formed Asset Protection Group, Inc. (APG) in Nevada in late 1998. Neiswonger, along with his business partner and a certified public accountant, conspired to promote false and misleading business information. Consumers would purchase the APG “asset protection” program for typically $9,800 and become APG “consultants,” who would sell “asset protection” services to clients who wished to conceal assets from potential litigants and creditors, as well as government agencies. The service allowed clients to place funds in bank accounts in the name of nominee entities that could never be traced back to the clients themselves. In turn, APG “consultants” received a portion of the client’s fees. These nominee entity accounts and other fraudulent conveyances, such as so called “friendly liens,” were used to divert and hide income from the IRS. Over 70 APG clients using the APG system had collective IRS liabilities totaling approximately $14 million.

Mr. Neiswonger not only hid others from the IRS, he hid $1 million through his attorney from the IRS.

A helpful hint to those reading this: It’s far, far simpler and easier to simply pay what you owe to the IRS. The scheme that Asset Protection Group offered was just that: an illegal scheme. Mr. Neiswonger did enjoy the fruits of his labors for a few years, but in the end he has to disgorge what he made and gets an almost two-year trip to ClubFed.

A helpful hint to those reading this: Don’t do this!

A few years ago, Steven Martinez won the coveted (not really) Tax Offender of the Year Award. His scheme was to tell clients that they had an amount due to the IRS and California. He then prepared a second set of tax returns showing a lesser amount due (or a small refund). He had his clients make checks out to his “client trust account.” He filed the second set of tax returns, and pocketed the difference. (He won the Tax Offender of the Year Award for hiring a hit man after his scheme was uncovered.) A New Jersey woman copied Mr. Martinez’s scheme (less the hit man, thankfully) with the expected result.

Doreen Gentile ran an accounting and tax practice in Toms River, New Jersey. As the Department of Justice press release notes,

Gentile admitted that as part of her scheme, she would show her clients a tax return that indicated that they had no tax or refund due, owed a minimal amount of tax, or were due a refund that was far less than the amount to which they were entitled. Gentile then prepared a second set of tax returns, signed without her clients’ permission, that she submitted to the IRS or the State of New Jersey for the full tax refund.

This was not a brilliant scheme by Ms. Gentile. Sooner or later one of her clients would be audited, or the client would obtain a transcript on their own; the return that was filed wouldn’t match their copy of the return. Indeed, inevitably this crime would be discovered and so it was. Ms. Gentile was indicted in 2014 and pleaded guilty to mail fraud and filing a false income tax return last year (she also didn’t include all of her income on her tax return—yes, the funds that were stolen were taxable income to her). She was sentenced earlier today to 37 months at ClubFed; she must also make restitution of $1,863,013.

Sreedhar Potarazu is apparently very intelligent. He’s an ophthalmic surgeon in Potomoc, Maryland. He’s also an entrepreneur and an author. He’s also likely to be spending a few years at ClubFed.

Dr. Potarazu formed VitalSpring Technologies, Inc., in 2000. Based in McLean, Virginia, the company provided software that purportedly helped to lower costs and improved service quality for health care. VitalSpring changed its name to Enziime LLC late in 2015.

Companies that grow need money, and that was the case for VitalSpring/Enziime. Dr. Portarazu started to skip paying employment taxes to the IRS. As we’ve said before and we’ll say again, if you want to be investigated by the IRS stop making payroll tax deposits; as best as we can tell, the IRS investigates 100% of such failures. Dr. Porarazu started to not fully pay his employment taxes in 2007. From the DOJ Press Release:

In all but one quarter between the first quarter of 2007 and the last quarter of 2011, as well as the second and third quarters of 2015, Potarazu failed to file VitalSpring’s Employer’s Quarterly Federal Tax Return (Forms 941) with the IRS. Potarazu also failed to pay over any of the employment tax withheld from VitalSpring’s employees’ wages in all but one quarter between the second quarter of 2007 and the third quarter of 2011, as well as the third and fourth quarters of 2015.

Not filing employment tax forms (Form 941) won’t stop the IRS from investigating. Once an employee files his income tax return and shows the withholding of federal income tax and the IRS can’t find that withholding, an investigation is guaranteed. The IRS interviewed Dr. Potarazu in 2011 and let him know of the liability (which he apparently already knew about). The employment tax liability totaled $7.5 million.

So the company needed money. There are several good strategies in such a situation: Making a payment plan with the IRS and slowing down growth so the need for money lessens are two that immediately come to mind. Dr. Potarazu raised $32 million from 2009 through 2016. Since the company wasn’t turning a profit, investors needed reassurances about the business. It’s how he raised the money that caused the problems:

Potarazu induced investments from shareholders by making false representations, concealing material facts, and telling deceptive half-truths about VitalSpring’s financial condition, tax compliance, and alleged imminent sale. Potarazu also caused someone to pose as a representative of a prospective buyer on shareholder conference calls to add legitimacy to his claims regarding VitalSpring’s imminent sale.

VitalSpring had not generated a profit since 2009. Nonetheless, Potarazu falsely represented to shareholders that VitalSpring’s financial position and profitability was improving from 2009 to 2015, and that VitalSpring had millions of dollars in cash reserves. To support his scheme, Potarazu presented fake bank statements to some shareholders that showed inflated balances.

Potarazu also concealed from shareholders that VitalSpring owed substantial employment tax to the IRS. Potarazu provided or caused to be provided false corporate income tax returns to some shareholders that overstated VitalSpring’s income and omitted the accruing employment tax liability.

Committing fraud to investors is not a good strategy. And doubling down on it will make things worse:

In November 2014, Potarazu created a Special Review Committee (SRC) in response to a lawsuit filed in Delaware by shareholders that claimed Potarazu misled the victim investors about VitalSpring’s finances, the status of the impending sale, and Potarazu’s compensation. Potarazu provided the SRC with false financial records, fake tax returns, and fake bank statements to induce the SRC to believe that VitalSpring was financially healthy and to cause the SRC to make materially false representations to the Delaware court and victim investors. He also falsely represented that the alleged imminent sale would yield substantial returns to the shareholders, and used this to induce additional investments. Members of the SRC traveled interstate to the Eastern District of Virginia to attend meetings in which Potarazu presented false information for their review.

There was no sale pending. Dr. Potarazu even made up emails from a purported bank employee and provided a buyer with a link to a phony website. And he used some of the money from investors for his personal use.

Dr. Potarazu pleaded guilty to inducing interstate travel to commit a fraud and failing to account for and pay over employment taxes. He’ll be sentenced next year and will likely have plenty of time at ClubFed to write a second book.

The Tax King—at least, the St. Louis version thereof—is heading to ClubFed. Eyob Tilahun owned the Tax King tax preparation firm in the St. Louis area. He wasn’t charging low prices; his typical fee was $400 to $650. And he asked for tips of $100 to $1000. Sounds like a good business model to me.

Of course, I didn’t mention the other things he did. Let’s head back to the DOJ press release from May:

In the pleading guilty today, Tilahun admitted that Tax King’s return preparers were trained and instructed to increase their customers’ refunds by falsifying certain information on their tax returns. The false information that was placed on the returns included: (1) false Business Income and Schedules Cs which caused the clients to qualify for larger Earned Income Credits (“EICs”); (2) false wages, which again caused the clients to qualify for larger EICs; (3) false education expenses which enabled the clients to qualify for American opportunity education credits; and (4) false information regarding fuel taxes which qualified the clients for federal fuel tax credits.

I think I’ve talked about how all these credits can be used for fraud in the past. Congress might want to consider not having so many tax credits…but I’m likely talking to the converted.

Well, sentencing came up last Friday. Mr. Tilahun will have 38 months at ClubFed to think things over. He’ll also have to make restitution of something over $2 million. Maybe that’s why I haven’t embraced this business model.

For individuals shopping tax professionals, remember that if it sounds too good to be true it probably is. If you make a lot of money, you’re likely going to pay a lot in tax. There is no tax fairy to make your taxes go away.