Taxable Talk

I haven’t blogged about the arrest, conviction, and sentencing of Ed & Elaine Brown. “Ed and Elaine Brown insist tax laws do not exist and have holed up in their hilltop home in Plainfield, which has a watchtower, concrete walls and the ability to run on wind and solar power. Ed Brown, 64, said he has stockpiled food and supplies…Elaine Brown, 66, said Monday that she doesn’t recognize the government, and that its officials are ‘a fiction in my life.'”

Roth Tax Updates has been covering this story from day one. Eventually, the Browns will surrender, and they’ll find that instead of being self-imprisoned in their New Hampshire home, they’ll be at a ClubFed facility.

Crime doesn’t pay, especially when you get caught. As I mentioned yesterday, I’ve got another full slate for you tonight.

We’ll start with some garden variety fraud in Georgia. Stephen Taylor operated 20/20 Payroll Solutions, and he made sure that your tax deposits went…mostly to his personal expenses. That’s bad. When clients began to get dunning notices from the IRS and state tax agencies, he showed them false confirmation receipts. That’s worse. Then he started using payroll tax monies from one client to pay other client’s taxes—sort of a Ponzi scheme. In the end, it fell apart, and Taylor pleaded guilty last week to one count of fraud after diverting about $4 million in deposits. He’s looking at a lengthy stay at ClubFed.

Trusts have a surgeon in Carthage, Missouri in trouble. He purchased trusts from Aegis Co., of Palos Hills, Illinois, in an attempt to avoid $1.6 million in income tax. The government alleges that the trusts are shams. Not only has the surgeon, Brian Ellefson, been arrested, the founders of Aegis are also awaiting trial. Remember our standard warning: if it sounds too good to be true, it probably is.

David Stewart of Bowling Green, Kentucky, had a rags to riches story. Unfortunately, it will now be featuring a trip to ClubFed after Stewart pleaded guilty to four counts of tax evasion. Stewart admitted to not paying about $169,000 in income tax while not filing returns from 1999 through 2002. Along with some time at ClubFed, he faces a fine of up to $1 million.

Heading now to South Florida, the owner of a tax preparation service is accused of setting up sham corporations in Panama and Nevada to get extra deductions for his clients. Robert Payne of Miramar is charged with conspiracy and preparing false tax returns. If the allegations are true, he’s looking at a stint at ClubFed.

Finally, from Buffalo (and I’ll be nearby Buffalo for a day next week) comes the story of another bozo tax preparer. Corwin Johnson used to manage the EZ Income Tax Service. However, he pleaded guilty to tax fraud and bank fraud. He admitted to falsifying W-2 forms, identity theft, and submitting false tax refund claims. He could spend up to 30 years at ClubFed.

And I only posted a few of the stories from the last week….

Superior Electric Company of Ohio had an interesting way to make a profit: they cooked the books. Back in November, two former executives pleaded guilty to defrauding the IRS. Yesterday, John McShane, the former CFO, was sentenced.

Mr. McShane was sentenced to 15 months and ordered to make restitution of $1.62 million.

What did Mr. McShane and the former CEO and co-owner of Superior, Jerry Gemeinhardt, do? They put some of Mr. Gemeinhardt’s personal expenses as company expenses. Things like his yacht and landscaping expenses are some of what they allegedly did.

Mr. Gemeinhardt hasn’t been sentenced yet. I suspect his yacht will soon have a “for sale” sign on it.

I’m a big fan of Rex Stout, the creator of fictional detective Nero Wolfe. Murder by the Book is prototypical Stout, and is one of my favorites. As a published author, I’ve gotten to see some of the workings of the publishing industry. The plot in Murder by the Book centers on an unpublished novel titled Put Not Your Trust. And that’s where this tax story begins.

Most Americans believe they pay too much in taxes. High income taxpayers think this too. Many find themselves investing in various schemes in an effort to lower their taxes. Sometimes they pay more in fees than they will save in taxes. One of the most popular vehicles—but definitely one that needs to be carefully explored—are offshore trusts.

The idea is to take taxable income and turn it into nontaxable income. Usually these trusts are found in tax havens such as the Cayman Islands or the Isle of Man. Promoters promise the moon, but remember my old adage: if it sounds too good to be true, it probably is.

Americans are taxed on their worldwide income. If you have an offshore trust, it may not file documents with the IRS. But if you look at Schedule B, you will note that there’s a question that asks if you are the grantor of an offshore trust. If you are, you need to report it (in most cases).

Ah, you’ll just ignore that bit of tax law; the IRS will never catch you. Warning: you’ve just committed a felony. Of course, the IRS might not catch you, but you won’t be happy if they do.

The IRS goes after promoters of these sham trusts. Victor Carlysle Sullivan, Jr. of Albany, GA is the latest to find this out. Sullivan charged between $5,950 and $49,500 to invest in these trusts. He’s just been barred from promoting or organizing any more of them. And he has to send the names and social security numbers of his clients to the IRS. If you’re one of his “lucky” customers, expect a friendly neighborhood IRS agent to be knocking on your door in the near future.

So put not your trust in offshore trusts, because if it sounds too good to be true, it probably is. And Mr. Sullivan’s customers will almost certainly wish they never heard of him. Oh, if you’ve never read Rex Stout’s Nero Wolfe books, pick one up. You’re in for a treat.

This weekend’s edition of the fraud post features a bozo tax preparer, a contractor who built his dream house with the money he was supposed to send to the IRS, and a temp agency owner who allegedly did a good job withholding taxes but a poor job in sending them to the government.

Let’s start close to my home. From nearby Buena Park, California (home to Knott’s Berry Farm) comes the story of Yakoob Habib. Mr. Habib pleaded guilty in February to money laundering, tax evasion, and flight while on bail. Mr. Habib was sentenced on Friday to 11 years in state prison.

The news story indicates that Mr. Habib has a history with crime. Back in 2001, he was part of a conspiracy stealing million from California’s MediCal program. He pleaded guilty in 2002 and promised to cooperate with the government. Later he decided to flea the United States. His current offense was not reporting $10 million that went through his personal accounts and $18 million that went through his business. Mr. Habib has probably prepared his last tax return.

We all want our dream houses. Athanasios Reglas thought he had a foolproof way of getting his. He created two fictitious companies that billed his Reglas Painting Company for work that was never done. He built his dream home in Ocean City, Maryland and bought a waterfront lot for $400,000. He also transferred money from his shell companies to his personal accounts, and he committed the crime of “structuring” as he hid $873,000 in withdrawals. When he was arrested, the government found $358,000 in cash (which he has agreed to forfeit). He pleaded guilty to tax evasion and will be sentenced in July. Based on federal sentencing guidelines, Mr. Reglas is looking at 3 to 4 years at ClubFed.

Finally, Michael Monahan of Nashua, New Hampshire is alleged to have not paid the government withholding taxes. Mr. Monahan runs a temp agency in Nashua. On Wednesday, Mr. Monahan was indicted on six counts of tax evasion and three counts of mail fraud. Mr. Monahan allegedly had an interesting method of reporting his firm’s wages to the government. In 2000, for example, he reported $226,000 in wages and paid $69,000 in taxes. The problem is that he allegedly had an additional $1.9 million in wages. Oops. The IRS alleges that this continued through 2003. The government is also looking Mr. Monahan’s partner in the business (who was not named in the indictment). Mr. Monahan faces a long term at ClubFed if he’s found guilty on the charges.

There’s just no such thing as a free lunch….