A Second Bite at the Apple? Yes, When You Don’t Read the Fine Print

Posted on March 13, 2014 by Russ

I previously wrote about betonsports.com, a former Internet sports betting website. One of its executive, David Carruthers, made the mistake of changing planes at DFW. Unbeknownst to him, he had been indicted. His two-hour layover got extended…to 33 months at ClubFed. Sportsbetting on the Internet is generally against US law (though intrastate sportsbetting in Nevada is legal in certain situations).

Today, as I glanced through a Tax Court case on one Gary Kaplan, I saw the dollar amounts and did some math. Mr. Kaplan was assessed tax for two years totaling $24,369,493, and additions to tax totaling $12,358,596. That’s a total bill of $36,720,089, and certainly reason to petition the Tax Court.

Mr. Kaplan is the founder of betonsports.com. He took the company public on the London Stock Exchange in 2004. Mr. Kaplan transferred his shares of the business into trusts, and those trusts then sold shares. Mr. Kaplan never filed (or paid) tax returns, so the IRS created substitute for returns and assessed the tax and penalties noted above. This occurred after Mr. Kaplan was arrested and made a plea bargain on the criminal case.

Plea bargains are binding documents. They’re binding on the government, too. And that’s the major issue of the case: Did the plea bargain stop the IRS from assessing tax and penalties? Two excerpts from the plea agreement are quite on point:

[T]he Office of the United States Attorney for the Eastern District of Missouri agrees that no further federal prosecution will be brought in this District relative to the defendant’s participation in the BETONSPORTS ORGANIZATION, as described in the Third Superseding Indictment, of which the Office of the United States Attorney for the Eastern District of Missouri is aware at this time. In addition, the Office of the United States Attorney for the Eastern [sic] of Missouri and the Office of the United States Attorney for the Southern District of Florida, which has authorized the Eastern District of Missouri to enter into this agreement, agree that no federal prosecution will be brought in either District relative to the defendant’s involvement in a business venture known as Hope Mills Universal, of which said offices are aware at this time. In addition, the Office of the United States Attorney for the Eastern District of Missouri agrees that no federal criminal tax charges will be brought in this District relative to the defendant’s receipt of income from the BETONSPORTS ORGANIZATION, the sale of stock in BetonSports, plc and/or the investment of the proceeds in any such income or sale. [Emphasis added by the Tax Court.]

The second excerpt note that:

…[t]he defendant has discussed with defense counsel and understands that nothing contained in this document is meant to limit the rights and authority of the United States of America to take any civil, civil tax or administrative action against the defendant * * * except that the United States shall not seek civil forfeiture in connection with this case or any asset constituting or derived from the receipt of income from the BetOnSports Organization, the sale of stock in BetOnSports, PLC and/or the investment of the proceeds of any such income or sale. [Emphasis added by the Tax Court.]

The Tax Court noted that during the change of plea hearing the judge in the criminal case made sure that Mr. Kaplan knew that the government could initiate a civil tax proceeding:

[Court:] Do you understand, Mr. Kaplan, that there is a difference between a criminal tax proceeding and a civil tax proceeding?

[Petitioner:] Yes I do, Your Honor.

[Court:] And in this document, the U.S. Attorney’s Office has agreed it will not bring any criminal tax proceeding against you; however, that doesn’t preclude the initiation of any civil tax proceeding or administrative action against you.

[Petitioner:] I understand that. And we’ve agreed to that.

Mr. Kaplan argued that the statute of limitations barred the IRS’s actions. There’s an obvious problem with that: If you don’t file a tax return the statute of limitations never runs. Strike one.

The petitioner then argues that the plea agreement precludes the actions. The excerpts of the District Court’s questioning are particularly on point. The judge noted that this could happen; Mr. Kaplan said he knew it could. Strike two.

Mr. Kaplan’s last argument is that the IRS is precluded by judicial estoppel.

Under the doctrine of judicial estoppel, once “‘a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’”

Unfortunately for Mr. Kaplan,

…because the plea agreement unambiguously reserved the Government’s right to bring a civil tax action against petitioner, petitioner suffered no detriment nor prejudice from any perceived “position” of the Government. For these reasons, petitioner’s judicial estoppel argument is without merit.

That’s strike three, and Mr. Kaplan owes the $36.7 million…plus interest.

If you ever make a plea deal with the government, you absolutely want to read the fine print. And if a judge points our that a civil tax proceeding could occur, you might want to inquire about that…especially if you have millions of dollar sitting around.

Case: Kaplan v. Commissioner, T.C. Memo 2014-43

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The IRS Needs Volunteers for the Taxpayer Advocacy Panel

Posted on March 12, 2014 by Russ

The IRS is looking for a few good men and women. The IRS is looking for volunteers to serve on the Taxpayer Advocacy Panel (TAP), a federal advisory committee that listens to taxpayers, and help identify concerns and make recommendations for changes and improvements to IRS services.

“In trying to comply with an increasingly complex tax system, taxpayers may find they need different services than the IRS is currently providing,” said Nina E. Olson, National Taxpayer Advocate. “The TAP is vital because it provides the IRS with the taxpayers’ perspective as well as recommendations for improvement. This helps the IRS deliver the best possible service to assist taxpayers in meeting their tax obligations.”

There are some requirements: You must be a US citizen, current with your taxes, pass an FBI criminal background check, and be able to commit 200-300 hours each year. New TAP members will begin serving a three-year term this December. The TAP is looking for members in Alaska, Arizona, California, Delaware, Idaho, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New York, Oregon, Pennsylvania, Utah, Vermont, Virginia and International; alternates are needed for the District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, North Dakota, Puerto Rico, Rhode Island, South Carolina and West Virginia.

You can find applications here. Additional information about the TAP and/or the application process is available from 888-912-1227 (select prompt number five) or by email at taxpayeradvocacypanel@irs.gov.

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An Update on the BOE’s Fixer-Upper

Posted on March 12, 2014 by Russ

When I last wrote about the home of California’s Board of Equalization–one of two tax collecting agencies in California–I called it a fixer-upper. That might have been kind.

It does have a good location (right in downtown Sacramento). It is 24-stories tall. Of course, there are a few problems. Like the windows that pop out randomly and take the wings of gravity down to the ground. There’s the mold that’s been found in many areas of the building…toxic mold. If you ever have to go above the ground floor you might want to use the stairs: The elevator doors periodically don’t open.

The most recent issues relate to water pipe issues. It seems that the waste lines tend to leak. Now it’s been determined that the entire drain system wasn’t built to code. Oops….

The California state auditor is now going to conduct a five-month long study about what to do with the BOE headquarters. Hopefully the auditor will be able to find some solutions before any more problems pop up.

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The Moral Climate may have Changed but the Law Hasn’t

Posted on March 11, 2014 by Russ

Another professional gambler went to Tax Court seeking to stop Section 165(d) of the Tax Code–the section that stops a gambler from deducting losses in excess of wins. This ended up being a full decision of the Tax Court, so it’s worth taking a look at it.

Today’s taxpayer is a CPA from California who, in his off time, is also a professional gambler betting on horse racing. He filed his tax returns with two Schedule C’s: one for his tax practice and one for his gambling. He, though, took his gambling losses (in excess of wins) to help lower his accounting income. He also took a deduction for “Takeout” from horse racing. The IRS objected to both, and the dispute made its way to Tax Court.

Let’s deal with the more mundane “Takeout” issue. Horse race betting is a form of “pool” accounting. Individuals make wagers, they form a pool, the race happens with winners being declared, and the track pays out from the pool. The track deducts from the pool taxes and other business expenses. That’s the Takeout–it’s taken out of the pool. (It’s akin to the rake on a hand of poker).

The problem is that this isn’t an expense of the bettor; it’s an expense of the track. Thus, since the wagerer doesn’t pay it, he can’t deduct it. The Court succinctly came to that conclusion.

The more interesting part of the case is whether Section 165(d) is legal. The petitioner noted an excerpt from Tschetschot v. Commissioner (T.C. Memo 2007-38):

The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be.

The basis of petitioner’s argument is:

Petitioner responds to the last two sentences of the quoted excerpt from Tschetschot with the hope that “the judiciary is at some time [presumably, meaning this Court in this case] going to take a bold stance and help to reverse section 165(d) of the Internal Revenue Code.”

A law can be held unconstitutional if it doesn’t have a rational basis. The Tax Court looked at the Congressional commentary from when Section 23(g) of the Revenue Act of 1934 (which has identical language to the current Section 165(d)) was passed and found there was, indeed, a rational basis. First, here’s the commentary:

Section 23(g). Wagering losses: Existing law does not limit the deduction of losses from gambling transactions where such transactions are legal. Under the interpretation of the courts, illegal gambling losses can only be taken to the extent of the gains on such transactions. A similar limitation on losses from legalized gambling is provided for in the bill. Under the present law many taxpayers take deductions for gambling losses but fail to report gambling gains. This limitation will force taxpayers to report their gambling gains if they desire to deduct their gambling losses.

The Tax Court’s conclusion is that Congress must change the law:

The basis for the enactment of section 23(g), as set forth in the last sentence of the foregoing committee report, still pertains to taxpayer reporting of gambling gains and losses. Therefore, it still constitutes a “rational basis” for the continued application of section 165(d) to the losses. There being no constitutional impediment to the continued application of section 165(d), we reiterate our admonition in Tschetschot that this Court “is not free to rewrite the Internal Revenue Code and regulations * * * [but is] bound by the law as it currently exists”. [footnote omitted]

Thus, until Congress changes the law a professional gambler cannot deduct gambling losses in excess of wins.

Case: Lakhani v. Commissioner, 142 T.C. No. 8

Posted in Gambling, Tax Court | 1 Comment

False Checks, Trusts, and Ignoring Taxes Lead to Real Prison

Posted on March 9, 2014 by Russ

Perhaps Michael Williams subconsciously wanted to go to ClubFed. He sure did just about everything he could to make sure he did. Let’s run down the list of things he did.

First, have a business that makes money and not file tax returns. Check.

Next, set up trusts that don’t file tax returns. Check.

Let’s add some bank fraud. How about creating phony US government checks and trying to deposit those. Not only is that bank fraud, but it’s probably some other felonies. Check.

And then let’s target the state officials and judges who are involved in state investigations. Let’s refer them to the IRS. That will get them. (No, it didn’t.) The IRS won’t care about that. Check.

(Here, I should point out that this likely got a separate agency involved: TIGTA, the Treasury Inspector General for Tax Administration. TIGTA is the internal affairs department of the IRS, and phony criminal referrals would likely get referred to TIGTA rather than IRS criminal investigation.)

Mr. Williams, a resident of Colorado, was indicted in 2012. He was found guilty on November 5, 2013 after a six-day trial. It took the jury just three hours to find him guilty of tax evasion, currency structuring, bank fraud, and interfering with internal revenue laws.

US District Court Judge Linda Arguello called Mr. Williams “a danger to the community…[He] is continuing to show his contempt for the government and he appears to believe he is exempt from the laws of the United States.” He received 71 months at ClubFed to think things over.

Posted in Tax Fraud | 1 Comment

Regulating Tax Preparers Always Prevents Tax Preparer Fraud (Not True, of Course)

Posted on March 9, 2014 by Russ

I’m generally a supporter of the National Association of Enrolled Agents and its policies. However, I disagree with the idea that both the NAEA and the IRS have that regulating tax preparers will magically make preparer fraud go away. It’s just not true.

Yet another case in point comes out of the San Joaquin Valley in California. From the DOJ press release:

The United States filed a civil complaint asking a federal court in Fresno, Calif., to enjoin Ken Mendoza and Alice Mendoza from preparing federal tax returns for others, the Justice Department announced today. The complaint alleges that the Mendozas frequently prepare tax returns for individuals claiming refunds from the federal government that are not deserved. According to the complaint, since 2010, the Mendozas have prepared over 600 tax returns for individuals in the Fresno area.

According to the complaint, the Mendozas improperly understate their customers’ federal tax liabilities by fabricating business expenses, claiming false or inflated credits, particularly educational credits, and deducting customers’ personal expenses that are not legally deductible. In total, the complaint alleges that the loss to the U.S. Treasury from the Mendozas’ activities could be as much as $2.8 million for tax years 2010 through 2011.

California requires all tax professionals who are not EAs, CPAs, or attorneys to register with CTEC. If the IRS is right that regulating tax professionals stops tax preparer fraud, Mr. Mendoza wouldn’t be registered. The IRS’s view is just another fairy tale.

Mr. Mendoza is registered with CTEC (I checked). That means he went to some continuing education and regurgitated some basic information on taxes. Taking continuing education courses does not turn a good person into a bad person (or vice versa).

I’m hoping that cases such as these–and mind you, I do want the Bozo side of my profession to be gone–will put a stop to the idea that regulating tax professionals will magically make all tax professionals angels. Let me be blunt: Wherever there is money around, there will be bad people around. There will always be people going after the dishonest buck and nothing anyone says or does will ever change that.

I do want to point out the other point of this post for taxpayers who read this: You are responsible for your tax return. Read it. Ask questions if you don’t understand something. The Tax Code is complex, and there are things that seem obvious that aren’t on a tax return. If you have a good tax professional, he or she will want to answer your questions.

Posted in Tax Preparation | Tagged , | 4 Comments

Your Check Might Not be in the Mail

Posted on March 6, 2014 by Russ

I used to live in Orange County, California. Earlier this week a US Postal Service caught fire as it was heading toward an airport after leaving the Santa Ana mail sorting center. So if you mailed something on Monday, March 3rd from ZIP Codes starting with 926, 927, 928, 906, 917 and 918, it might have been burnt to a crisp. All the mail the truck was carrying was destroyed (an estimated 120,000 pieces). (No one was hurt in the accident.)

If you happen to have mailed a tax payment or tax form hopefully you used certified mail. When your payment doesn’t show up–and you should check to see if the check cleared–tax agencies will normally consider the certified mail receipt as proof of filing. The USPS is offering documentation of the fire (if the news stories aren’t enough).

This is the third incident like this in recent years that I can remember. Back in 2005 a truck carrying payments leaving the San Francisco Post Office Box where IRS payments go made a right turn on the Hayward Bridge (across the San Francisco Bay). There’s a reason why there’s a bridge and you don’t make right turns while on a bridge. Those payments went to the fishes. In 2012, a truck carrying mail to New Jersey government offices went up in flames.

Most likely, this incident will have minimal impact on taxes as it is early in Tax Season. Still, this is a good reminder why if you do mail a tax form or tax payment that you use certified mail, return receipt requested. That way should there be a problem it’s an inconvenience rather than one leading to costly penalties.

Posted in California, IRS | Tagged | 1 Comment

The Las Vegas Culinary Union Should Look at a Calendar Before Calling EAs in March

Posted on March 6, 2014 by Russ

The Las Vegas Culinary Union (formally, Local 226 of the Culinary Union) doesn’t like non-union casinos here in Las Vegas. One such casino is the Cosmopolitan Hotel. It’s one of the newest of Las Vegas’s mega-resorts, and it’s a beautiful facility. Last year I attended the National Association of Enrolled Agent’s national conference in August at the Cosmo (I was taking the third and final year of the National Tax Practice Institute). The Culinary Union would like all convention business at the Cosmo to vanish. This year’s conference is also scheduled for the Cosmo. The Culinary Union decided on the strategy of calling EA’s…in the middle of tax season.

Today, someone from the Culinary Union called me. I was on the phone, so the call went to voice mail. After listening to the first 20 seconds of the message I hit delete. I don’t have time for much besides work, sleep, and the gym during the height of tax season–and it is just that right now: the height of tax season.

I’m not taking sides for or against the Culinary Union. They may be right in their fight against the Cosmo or they may be wrong. However, they’re dead wrong in calling tax professionals at the height of tax season. If anything, the Culinary Union’s current action is counterproductive. While today’s call will not impact whether or not I attend the conference, if I did make a decision based on the call I’d be attending.

A hint to the Culinary Union: Tax professionals are far less busy after April 15th. We have time to listen then…but not now.

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Deadlines for Us, but Not for Them

Posted on March 4, 2014 by Russ

I was on the phone today with the IRS about a client. Back in October he received an IRS notice regarding his 2012 return. We believed the IRS notice was incorrect. With this particular notice the only option was to write the IRS. I did so (I had a Power of Attorney for the client), sent it via certified mail, return receipt requested, and noted that it was received three days later.

We heard nothing until last week.

The client has now received the first of a series of collection notices (a CP501). This is the first of four steps in IRS nastygrams about balance dues (CP501, CP502, CP503, and CP504). I called the IRS noting that we had sent in a letter disputing the original notice. The helpful IRS person noted that they had received the letter but it has yet to be assigned to someone. It has been over four months since I sent in the response. The woman I spoke to thought that the nine-week delay they put on sending out additional notices should be enough time for someone to read my letter.

If it takes all nine weeks, that would mean it took over six and a half months from the time I submitted the response until my client got a response. Many times the IRS will ask for additional information, and that might mean if it takes another six months that this will have gone over one year. Actually, that’s not as bad as something else that happened today.

I had a second client I was inquiring about. I had sent a letter disputing another IRS notice; this letter was sent in mid-December and received five days later (and yes, I have the certified mail tracking to prove it). The IRS has no record of receiving it, and the unhelpful individual I spoke to refused to put a stop on notices. I resent my previous response today (again, certified mail; this is another notice where I cannot fax a response). I will call the IRS three weeks after it was received to make sure that they have it noted in the system.

There are some takeaways for both practitioners and taxpayers. For practitioners, the current state of the IRS is such that you can expect a lot of delays in responding to notices. Think months instead of weeks. Expect to have to call the IRS to verify that your response was received, and make sure clients are aware that the IRS is moving like molasses rolling uphill. Make sure anything you send is documented: certified mail with proof of receipt if by mail; if faxing, make sure you have the proof of receipt. Given the lengthy delays our clients are going to be in fear for far longer.

The current customer service delays will lead to more clients being sent to ACS. A client rightly isn’t going to pay a notice he doesn’t owe. While the IRS can stop the sending of notices, sooner or later an account gets moved into ACS. I have one of these right now, and I have to call ACS every 30 days until the underlying matter gets resolved.

This will also lead to more Collection Due Process Appeals. If things get delayed long enough, ACS will refuse to stop collection activities. The next tool a practitioner can use is a Collection Due Process Appeal. If you’ve never been able to dispute the underlying notice, this should be fair game. And a CDP appeal does put a stop to collection activities. (This could also have the indirect effect of slowing other appeals.)

For taxpayers, you need to be aware that expediency is not part of today’s IRS. You have to be expedient in responding to notices but don’t expect the IRS to be expedient in getting back to you. Do not worry if it takes a long, long time to resolve something with the IRS. That’s just par for the course today.

Nina Olson, the National Taxpayer Advocate, noted that IRS budget cuts have hurt customer service. Unfortunately, the apparent political activities by some within the IRS have forced these cuts. Until then, everyone suffers.

Posted in IRS | 3 Comments

“Just Pay the Five Dollars….”

Posted on March 2, 2014 by Russ

That’s one of my favorite lines from one of my favorite movies, North by Northwest. In that classic movie, Cary Grant’s character gets drunk and, well, I’ll be giving away some of the movie if I went on. In any case, his mother (in the movie) says the line, in perfect comedic tempo, “Just pay the five dollars.” Since the Oscars are being televised as I write this a movie reference seems apropos.

Similarly, most tax evaders (and tax deniers) would find their lives far, far easier if they just paid the tax in the first place. One Massachusetts dentist is accused of a long-running scheme that allegedly used many of the normal tricks to avoid paying taxes.

George Fenzell is the accused dentist. He allegedly began, in 1999, to not pay taxes; he allegedly used nominees to conceal receipts. He supposedly comingled funds with others and made some nominees own his business (which, according to the indictment, Mr. Fenzell does own).

Back in 2007 the Massachusetts Department of Revenue was investigating; the indictment alleges that this caused Mr. Fenzell to file his 2000 through 2005 tax returns. Those returns showed tax due of $129,000 which had grown to over $300,000 when you factor in interest and penalties. Meanwhile, the IRS couldn’t collect; the indictment alleges he continued to use cash and nominees to evade the IRS.

Mr. Fenzell is looking at a lengthy stay at ClubFed if found guilty.

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