Taxable Talk

1. Inflate other businesses’ deductions by classifying wages and income as loan repayments.
2. Not filing your own tax return.

And if you do both, and get caught, you’re likely going to be joining Brian Cox at ClubFed. Mr. Cox is a former Detroit-area accountant who did both of the above. He was found guilty earlier this year of 42 counts of filing false claims and 11 counts of preparing false tax documents. He’ll be spending 33 months at ClubFed and will have to make restitution of $104,000.

News Stories: Detroit News, Detroit Free Press

Samuel Currin, the former chairman of the North Carolina Republican party, has agreed to plead guilty to conspiracy charges related to tax fraud, according to a published report.

Mr. Currin will, according to the report, admit to taking $1.45 million and laundering it through client trust accounts and an offshore debit account. In violation of federal law, Mr. Currin didn’t report the offshore account. Another published report states that Mr. Currin used an offshore trust scheme to avoid taxes on $10 million used for Internet gambling rights.

Mr. Currin faces up to 43 years in prison.

A little over a month ago we wrote about a Tax Court case where the petitioners had admitted fraud, but wanted to get out of paying the §6663 penalty for fraud. At that time we said, “For once you say you committed fraud, you have to live with the result.”

Today the Tax Court took up another case that Yogi Berra might say was deja vu all over again. Petitioner Henry Uscinski is an attorney who pleaded guilty to evading his 1996 income taxes by filing a fraudulent 1996 tax return. Mr. Uscinski repaid $1,590,000 in restitution. He further admitted that he had failed to report some funds from a client. So in March 2003 the District Court accepted the plea bargain, sentenced Mr. Uscinski to 42 months at Club Fed for tax evasion, and also imposed a $250,000 fine.

And now it’s the IRS’ turn. In 2005 the IRS sent a deficiency notice to Mr. Uscinski for his 1996 taxes. Mr. Uscinski, in his petition to the Tax Court, stated,

“Relief requested is to eliminate and cancel all claimed tax due and penalties imposed. The funds upon which said tax and penalties are imposed were received under a claim of right and were subsequently restored to the U.S. Government in full. Accordingly, no tax should be imposed as the funds were restored.”

Basically, Mr. Uscinski is asking for “collateral estoppel;” that is, because he was prosecuted criminally, he can’t be gone after by the IRS.

The Court stated,

“It is well established that a subsequent guilty plea may be used to establish issue preclusion in a subsequent civil suit where an element of the crime to which the defendant pled guilty is at issue in the second suit….Because the elements of criminal tax evasion and civil tax fraud are identical, petitioner’s prior conviction under section 7201 conclusively establishes the elements necessary for finding fraud under section 6663.” [citations omitted]

Mr. Uscinski also contended that by repaying the government, he stopped the underpayment, and is entitled to relief under §1341. The Tax Court noted, “The relief provided under section 1341, however, applies to the year in which the repayment is made and does not affect the taxpayer’s obligation to report as income, in the year of receipt, items received under a claim of right…Because petitioner’s repayments occurred from 1999 through 2001, section 1341 is inapplicable in determining petitioner’s deficiency for 1996, which is the only year at issue in this proceeding.”

So the Court holds that the petitioner, Mr. Uscinski, is estopped from denying the unreported income on his 1996 tax return and that some of the underpayment is due to fraud (as defined in §6663. But the Court wouldn’t allow full summary judgment to the IRS, stating that Mr. Uscinski can challenge the precise amount of the deficiency. “Consequently, although the current record might leave us in doubt as to petitioner’s prospects for ultimately succeeding in showing error in the notice of deficiency, we shall not deny petitioner an opportunity to present relevant evidence.”

So Mr. Uscinski can get another day in court. But it’s clear he’s facing an uphill battle.

The Tax Court today looked at a case where the government went after a couple who had been convicted of insurance fraud. The problems began in 1998, when the fraud was committed. There was $272,963 in unreported income. As you may remember, illegal income is just as taxable in the U.S. as legal income. However, the Chens, the couple in question, argue that the statute of limitations expired; the spouse argues for innocent spouse relief; and they question the amount of income.

There’s a major difficulty when you argue that the statute of limitations prevents prosecution. Under section 6663(a), there must be proof of the fraud, and that the underpayment of tax is due to fraud. Given that the Chens pleaded guilty to fraud, the first hurdle is easily overcome. And the second hurdle is mostly overcome by the plea agreement, where the couple admits “act[ing] with a specific intent to commit fraud.” The court also notes the numerous other indications of fraud from the criminal case, including a false insurance claim, concealing information from their tax preparer, and contradictory claims during their testimony. And there’s no statute of limitations when a tax underpayment is caused by fraud.

Mrs. Chen doesn’t succeed in her innocent spouse claim. She had, in her plea bargain, admitted that she “acted with a specific intent to commit fraud.”

So the Chens will need to find another $272,963. For once you say you committed fraud, you have to live with the result.

Tax Court Case: Chen v. Commissioner, T.C. Memo 2006-160

I promised that I wouldn’t write about soccer anymore. Well, I’m going to try not to, but I can’t help myself. Dutch soccer coach Guus Hiddink will be prosecuted for tax fraud according to this story. And many Americans will sympathize with his problem: residency.

According to the newspaper Het Financieele Dagblad the dispute centers on whether Hiddink lived in Belgium when he claimed residency there, or whether he was still in the Netherlands. The prosecutor, Valentine Hoen, said that Hiddink’s accountant also faces charges. For the record, the Dutch team made the round of 16 in the World Cup.

Meanwhile, actor Crocodile Dundee is also looking at tax evasion charges in Australia. The Sydney Morning Herald reported that Dundee and his business partner have been accused of hiding millions in offshore trusts. Both Dundee and his partner are accused of participating in shelters run by Swiss accountant Philip Egglishaw according to this story.

Tax fraud isn’t just an American crime, after all.

Don’t try this at home.

Suppose you set up some offshore companies. You take investors’ money and buy gold coins (making the money harder to trace). Add a few shell companies, here and abroad, ignore those pesky IRS (and Treasury) regulations requiring you to disclose foreign bank accounts, mix it up, and you end up with a wonderful scheme to hide assets from the IRS.

Almost. The IRS found out. The perpetrators are finding their way to federal institutions. The Portland Oregonian reported today that the scam cost the IRS over $22 million in unpaid taxes. Terry Neal, of Gresham, OR, will have five years to consider his crimes (in prison) and was also fined $50,000. His co-conspirators received lesser sentences (but did get jail time). And the IRS ended up seizing most of the gold, and did collect over $176,000 from selling it.

The moral is the usual one: If it sounds too good to be true…

News Story: Portland Oregonian