Taxable Talk

Rain–which we had here in Las Vegas this past weekend–didn’t stop the postman from delivering bills I have to pay. Sleet and snow don’t stop the US mail, either. However, theft of the mail will stop it. One postal carrier will likely be heading to ClubFed because he stole mail used in an identity theft ring.

Earl Champagne delivered mail in Pennsaucken, New Jersey. From the Department of Justice press release:

Champagne admitted that from March 2014 to July 2014 he stole U.S. Treasury Checks from the mail and gave them to others. He said he was approached by two individuals who asked him to retrieve checks from the mail with the promise that he would be paid. The individuals told Champagne that the checks were IRS checks and that they would mostly be addressed to individuals with “Spanish” names. The individuals expected to either pick up the checks from Champagne or for him to notify them that the checks were in the mailbox so that they could retrieve the checks themselves. For this service, Champagne was paid $50 per check for every check stolen from the mail. Champagne admitted that he stole 72 U.S. checks totaling $442,776.

Theft of mail is a felony–and can be subject to a lengthy term at ClubFed (up to 15 years and a $250,000 fine per offense). This wasn’t a brilliant idea as sooner or later someone would notice the lack of the refund check, and then the IRS would be notified and it would be fairly easy to figure out the issue. For Mr. Champagne, the Bozo aspect of his crime didn’t occur to him…but it likely does now (a bit too late for him).

I have a degree in chemical engineering. As an undergraduate, I did research into the catalyzed production of methane (CH₄) from graphite (Carbon, C) and Hydrogen (H₂) using potassium hydroxide (KOH) as a catalyst. That was real chemistry.

Alchemy is a bit different. An alchemist tries to turn lead into gold. With the exception of radioactive elements, chemical elements don’t change. If you have lead, it stays lead and doesn’t change into gold.

Joseph Furando of Montvale, New Jersey thought he had the perfect way of performing alchemy. He took biodiesel fuel that wasn’t eligible for two tax credits and magically turned it into biodiesel fuel that was eligible for the tax credits:

From 2007 through 2012, Indiana-based E biofuels owned a biodiesel manufacturing plant in Middletown, Indiana. Biodiesel is a fuel that can be used in diesel engines and that is made from renewable resources, including soybean oil and waste grease from restaurants. Under the Energy Independence and Security Act, properly manufactured biodiesel was eligible for a dollar per gallon tax credit as well as another valuable credit, called a Renewable Identification Number (RIN) that petroleum refiners and importers could use to demonstrate compliance with federal renewable fuel obligations. These incentives can be claimed once and only once for any given volume of biodiesel.

Furando admitted that sometime in late 2009, he and his companies, New Jersey-based defendants Caravan Trading Company and CIMA Green, began supplying E biofuels with biodiesel that was actually made by other companies and had already been used to claim tax credits and RINs. Because these incentives had already been claimed, Furando could purchase the biodiesel at much lower prices, sometimes for more than two dollars per gallon less than biodiesel that was still eligible for the credits. The conspiracy functioned as follows: Furando supplied the product to E biofuels and his co-conspirators would claim that E-biofuels made the fuel and then they would illegally re-certify the fuel and sell it at the much higher market price for incentivized biodiesel, known as B100 with RINs. Within the circle of those he trusted, Furando referred to this fraud scheme as “Alchemy.”

In two years, that was a profit—albeit an illegal profit—of $145.5 million. It appears that $56 million of this represented fraud, as that is how much restitution Mr. Furando must make. He was also sentenced to 20 years at ClubFed, and must forfeit his Ferrari and other cars, his “million-dollar home,” and other possessions.

I’ll point out (again) that tax credits attract fraudsters like moths to flames. One day, perhaps, Congress will decide that these programs should go in the dustbin of history. Well, there’s always hoping.

In California, everyone who prepares a tax return for money must have a license. Individuals must either be an Enrolled Agent, a CPA, an attorney, or obtain a license from the California Tax Education Council. Of course, that means that no California tax professional would commit tax fraud, right?

Of course not. Where there’s money involved there will always be people trying to obtain that money fraudulently. That’s the case whether you need no license, one license, or 100 licenses to prepare a tax return. Take the case of Melissa Ann Vega (aka Lisa Vega).

Ms. Vega owned L&T Works, a tax preparation firm in San Diego. Last year, stories in San Diego media describe deductions that were $3,000 that became $31,000. The IRS raided the facility in April 2014.

Come January 2015, Ms. Vega was arrested and released on bond. What she then did has gotten her a coveted nomination for Tax Offender of the Year:

Vega was released on bond in this case on January 28, 2015. Although the court informed her not to commit another federal crime, Vega once again began filing false tax returns with the IRS within days of her release. Without the clients’ knowledge, Vega fraudulently inflated or created credits and deductions to maximize her clients’ false returns. The IRS uncovered her fraud, and Vega was arrested on February 25, 2015. In furtherance of her conspiracy, Vega agreed with Deanna Dave (charged in Criminal Case No. 15CR2715-JM) to misrepresent to the grand jury that Dave was the owner and paid-return preparer for the tax returns filed in February 2015. In truth, Vega continued as the owner of her tax preparation business and prepared the false tax returns which she filed for her clients. On November 17, 2015, Dave pleaded guilty to making a false declaration before the grand jury, and her sentencing is scheduled for February 5, 2016 before Judge Miller.

As for her initial crimes, these are detailed in the DOJ press release:

Vega told her co-conspirators and employees that they should maximize clients’ refunds by filing for a $4,000 education credit, even though the client did not attend school for that tax year. To conceal her role in the fraud, Vega intentionally omitted her name and tax return preparer identification number on the false tax returns she prepared for her clients. In total, Vega’s fraud caused the IRS to pay more than $7 million in artificially-inflated tax refunds based solely on the false education credits. Moreover, Vega admitted that she and her co-conspirators stole the identities of other persons, including minors, and used them on the false tax returns in order to further inflate the amount of the tax refund paid by the IRS.

Vega did not shy away from personally profiting from her fraudulent scheme. In addition to charging her clients between $150 and $200 per return, Vega also admitted that she stole more than $300,000 in false tax refunds from her clients by directing their refunds into bank accounts that she controlled. Vega spent this money for her own personal benefit. Vega also admitted that she evaded her own income taxes and filed false personal tax returns in which she fraudulently claimed withholding credits, education credits, and tax credits for minor dependents that she did not support and were not related to her. According to court documents, Vega evaded more than $156,000 in taxes due to the IRS for tax years 2009 through 2013.

As noted above, Ms. Vega was in California; she needed a license to prepare tax returns. That included annual continuing education in ethics. She apparently missed that, along with the commandment, “Thou shalt not steal.” Given she prepared more than 4,000 false tax returns with the IRS (and presumably an equal number of false returns with California’s Franchise Tax Board) in attempting to obtain more than $7 million in phony refunds, she’s likely heading to ClubFed.

There are good tax preparers, bad tax preparers, and then there’s Lawrence Seigel. Mr. Siegel, who resigned from the California bar in 1994 and lost his CPA license in 1997 after being convicted of tax evasion (among other crimes) also faces a 20-count criminal complaint “…charging him with Medi-Cal fraud, grand theft, forgery, identity theft, financial dependent adult abuse and tax evasion.” The US Department of Justice filed a civil action against him, and he was a no-show for the court date last Monday.

As for what Mr. Siegel is alleged to have done, he supposedly has impersonated California attorneys, used multiple aliases, and proposed tax fraud schemes. From the DOJ press release:

Siegel falsely advised his customers, typically high earners who own profitable businesses, that they can establish companies in another state, usually Nevada, then treat their California home as an out-of-state corporate office. Siegel claimed that doing so would transform a vast array of non-deductible personal expenses into tax deductible business expenses, according to the complaint. The complaint details how Siegel boasted about this tax fraud scheme in e-mails, including one where Siegel falsely claimed that his customers are entitled to free housing as tax-free compensation from their out-of-state companies and that “[t]he housing can [b]e luxurious and cost thousands a month” because “[t]here is an assumption that corporations don’t waste money.”

Well, housing can be expensive in California. That said, personal expenses aren’t deductible.

For example, the complaint states that Siegel deducted on one couple’s tax returns purchases at Tiffany & Company, Royal Caribbean Cruise Lines, Louis Vuitton and Princess Cruise Lines. Siegel allegedly attempted to conceal these fraudulent deductions from the Internal Revenue Service (IRS) by lumping them together and reporting them as large expenses for “supplies” or “medical records and supplies.”

It’s great if you can get away with it. Mr. Siegel appears to be lucky to have escaped a federal indictment, given that he is also accused of providing false documents to the IRS and lying to IRS officials. In any case, Mr. Siegel, if found, faces trial in California on that criminal complaint.

As a reminder, if it sounds too good to be true it probably is. No, you can’t deduct personal expenses if you run them through a corporation. And while I wish I could take a deduction for the cruise to New Zealand and Australia that I took last year, I also know the law–and you just can’t do that.

Chaka Fattah Jr., son of Democratic Congressman Chaka Fattah Sr. (D-PA), was found guilty on Friday of 22 of 23 tax and fraud charges. As the Department of Justice press release notes,

Between 2005 and 2012, Fattah Jr.: made false statements to banks to obtain loans; made false statements to banks and the Small Business Administration (SBA) to settle loans for less than what was owed; filed false federal income tax returns; failed to pay federal taxes; and stole from the Philadelphia School District, which had received federal funds for its operations.

His father, Chaka Fattah Sr., is under indictment on separate racketeering charges filed earlier this year.

Chaka Fattah Jr. is scheduled to be sentenced in February. He’s looking at a “substantial term” at ClubFed.