Bank Notice on IRS Tax Refund Fraud

Posted on December 9, 2013 by Russ

The IRS has been making noises that they are more aggressively pursuing identity theft and tax refund fraud. My bank (Bank of the West) sent me a notice on these issues. (I assume it was sent to all Bank of the West customers who were identified as tax preparation firms.)

The letter notes,

The American Bankers Association (ABA) and Internal Revenue Service (IRS) have issued bulletins regarding a significant increase in the number of fraudulent tax refunds filed using stolen Social Security or Tax Identification Numbers. Tax refund fraud involves identity theft, fraudulent W-2 forms and the online filing of fraudulent tax returns for the purpose of receiving a tax refund deposit into the account of a fraudster or an accomplice acting on behalf of the fraudster. Variations of this fraud scheme also include using an unwitting tax preparation firm.

I have not heard about the “unwitting tax preparation firm” issue prior to this letter. Indeed, I suspect that unwitting tax preparation firms are a drop in the bucket of the problem. The 80-20 rule is almost certainly applicable here: At least 80% of tax fraud is committed by 20% of the fraudsters.

That said, the letter and notice are important in how they’ll likely be used in the upcoming tax season. I suspect that banks will match names with the name that the IRS has on file. In most cases these will match. Trouble could ensue, though, for individuals who have recently changed their names. Consider Jane Doe who recently married and became Jane Smith. She’s changed her name with the bank (and the Social Security Administration). However, the IRS doesn’t have the updated records from Social Security, so she’s still Jane Doe. When her refund is issued, it bounces because of the name issue. Individuals who recently changed their names may want to get paper check refunds from the IRS this year.

While I salute the IRS (and the banks) for doing something, this effort is equivalent to patching one hole in a roof that has over a hundred leaks. Hopefully, other efforts are underway. Unfortunately, until I see otherwise I suspect the IRS remains reactive instead of being proactive on the issue of identity theft.

Posted in IRS | Tagged | 1 Comment

IRS Interest Rates Unchanged for 1st Quarter 2014

Posted on December 9, 2013 by Russ

The IRS announced today that interest rates for the first quarter of 2014 will be unchanged:

– 3% for overpayments (2% for corporations);
– 3% for underpayments;
– 5% for large corporate underpayments; and
– 0.5% for the portion of corporate overpayments exceeding $10,000.

Full details are given in Revenue Ruling 2013-25.

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Vacation

Posted on December 1, 2013 by Russ

It’s time for my fall vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right.

In any case, I’ll be back on Tuesday, December 10th.

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Inherited IRAs and Bankruptcy Heading to the Supreme Court

Posted on December 1, 2013 by Russ

Can creditors go after an inherited IRA in bankruptcy? The Supreme Court will examine that issue next Spring when they hear arguments in Clark v. Rameker. The Supreme Court will resolve a split in the Courts of Appeal (the 7th Circuit ruled that creditors do have access to inherited IRAs while the 5th and 8th Circuits ruled they don’t). The issue is important because as the US population ages many IRAs will end up becoming inherited IRAs.

A decision should be released by the end of June.

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Gilbert Hyatt In New York

Posted on November 27, 2013 by Russ

The decision on the Gilbert Hyatt appeal here in Nevada has still not come out. However, when I did my weekly check I discovered that the Gilbert Hyatt case has now reached New York State.

The entire Gilbert Hyatt case revolves around when Mr. Hyatt moved from California to Nevada. Mr. Hyatt said he became a Nevada resident in September 1991; the Franchise Tax Board said he left California in April 1992. Usually, seven months don’t make much difference. Here, though, that’s not the case. Mr. Hyatt is a successful investor and received a substantial payment in late 1991 (after September).

The Franchise Tax Board (California’s state income tax agency) audited Mr. Hyatt and assessed taxes and penalties. In 1996, Mr. Hyatt protested the audit. The Protest Division did not complete its review until 2007; Mr. Hyatt then appealed the FTB’s decision to the Board of Equalization. (The BOE hears appeals from the FTB).

Meanwhile, Mr. Hyatt filed a lawsuit against the FTB in Nevada (back in 1998). Before the case was tried, the FTB asked the Nevada courts to throw out the case based on sovereign immunity. That went up to the US Supreme Court; the Supreme Court ruled unanimously that Nevada does not have to immunize the FTB for intentional torts. The case was decided in 2009, and the FTB lost. The Appeal of that was heard in May 2012, and the decision has not yet been announced. The judgment to Mr. Hyatt totals $490 million.

So what is the litigation in New York? It stems from the appeal to the BOE by Mr. Hyatt. The FTB served a subpoena duces tecum on attorneys for U.S. Philips Corporation in New York, asking for information on Mr. Hyatt’s patents, income received in 1991 and 1992, his relationship to Philips, licensing of patents, and related items; they also asked for depositions of individuals. Mr. Hyatt asked the New York court to stop the subpoenas and depositions; the FTB contended that Mr. Hyatt did not have standing to challenge the subpoenas.

At the lower court (the New York Supreme Court), the Court ruled that Mr. Hyatt did have standing, that the FTB couldn’t asks for information on a patent infringement case, but that it could ask for information related to his residency and income in 1991 and 1992 (and related items). The Supreme Court modified the subpoena duces tecum to just that information. Both Mr. Hyatt and the FTB appealed; the appellate court upheld in all respects the original order. This decision came out in March.

The New York case relates to the BOE appeal. Presumably, the subpoenas have been served and the depositions have been taken (or soon will be taken). Sometime in 2014 the actual BOE appeal would occur…only 18 years after the protest was made!

That’s the key takeaway from this post. If you fight the FTB, the FTB will delay, delay, and delay some more in the hope that you can’t afford the litigation. Mr. Hyatt has deep pockets and can afford to litigate; many (most) individual and entities fighting the FTB don’t have the deep pockets to do so.

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Don’t Try This at Home

Posted on November 24, 2013 by Russ

Thomas Thorndike was a tax preparer in Waterbury, Connecticut. I use “was” because earlier this year he was sentenced to six years at ClubFed for cheating on his own taxes and for helping clients obtain refunds using false deductions. Here’s an excerpt from the DOJ press release:

If clients were audited by the IRS, THORNDIKE would provide them with blank Goodwill receipts as well as instructions as to how they should create a list of charitable donations that would correspond with the donation value THORNDIKE had entered on their returns. He also would direct his clients to create mileage logs that would support deductions he had entered for employment-related travel.

There’s plenty more in the press release to show that Thorndike was able to obtain over $1 million in refunds that clients weren’t entitled to. The Hartford Courant noted in its news story that Thorndike earned $12,000 a day by preparing a tax return every 15 minutes. But that’s not what this post is about; rather, it’s about ancillary damage that occurred.

Robert Liquindoli was one of Mr. Thorndike’s clients. I’ll let the DOJ press release take it from here:

In connection with [the investigation of Mr. Thorndike], the IRS requested to interview LIQUINDOLI, whose 2007 and 2008 tax returns had been prepared by Thorndike. After being contacted by the IRS, LIQUINDOLI sought to obstruct the IRS’s investigation by obtaining false documents that he intended to present to the IRS in support of deductions he claimed on his tax returns in 2007 and 2008. Between December 2011 and February 2012, LIQUINDOLI engaged in an effort to obtain false documents in support of false items on these tax returns, and lied to the IRS concerning the extent to which he possessed original and legitimate documents to support the deductions on his tax returns. LIQUINDOLI also falsely denied that he had attempted to obtain false documents to support those deductions.

A few years ago I represented a client of a Bozo tax preparer. My client (probably like Mr. Liquindoli) had phony deductions on his tax return. I explained to my client that you actually do have to spend the money in order to get deductions–my client had no idea of the law involved. My client didn’t lie to the IRS, didn’t obstruct the IRS, but did have to pay the IRS. Because my client cooperated and it was quite clear he did not know at the time his return was filed that he had done anything wrong, the penalties were waived.

Mr. Liquindoli was in a slightly different position. The one thing I haven’t mentioned (until now) is that Mr. Liquindoli is a former police detective. Presumably, he’s aware that it’s illegal to do what he did. Oops….

While Mr. Liquindoli faces up to three years at ClubFed, he’s likely to receive a much lesser term.

Posted in IRS, Tax Preparation | 1 Comment

Nifty Scheme Lands Five at ClubFed

Posted on November 24, 2013 by Russ

Last year I reported on the inventive scheme used by the owners of Nifty Fifty’s, a Philadelphia area restaurant chain. Back in 1986, the restaurant was founded. The chain is themed on the 1950s; the owners apparently longed for the 1850s when there wasn’t an income tax.

What did the five owners do? From the DOJ press release:

The restaurant owners paid employees a portion of their wages with unreported cash in order to evade payroll taxes; paid suppliers with unreported cash; and had false tax returns prepared that under-reported income and falsely inflated expenses and deductions. Just between the years 2006 and 2010, the defendants deliberately failed to properly account for $15.6 million in gross receipts, thereby evading $2.2 million in federal employment and personal taxes. In the course of their conspiracy, Mattei, McGlynn, Donnelly, and Welsh committed bank fraud by submitting to the bank bogus income tax returns in order to secure several business loans.

The five owners of Nifty Fifty’s pleaded guilty to the various charges and agreed to full restitution. The IRS has received over $4.5 million in restitution to date. The five owners all received time at ClubFed, ranging from 12 months and a day to 36 months.

Posted in Tax Evasion | Tagged | 2 Comments

It’s All Greek to Me

Posted on November 21, 2013 by Russ

In reading through the poker world today, news from Greece pushed to the forefront: The Greek government has implemented an up to 20% “Player Withholding Tax” on online gambling. It doesn’t sound like much, but like everything the devil is in the details.

Suppose you play online poker in Greece, and you win €1,000. The first €100 is not taxed. The next €400 are taxed at 15% and the remaining €500 at 20%. So you really win €840. Let’s further suppose you lose €1,000 the very next day. There is no tax, but you’re two break-even days net you a loss of the withheld tax, €140.

That’s doesn’t sound that bad. It’s withheld tax; I can recover it when I file my income tax return. No, you can’t. Although it’s called withholding it’s not the same as withholding in the US–this tax is lost (to the government) for good. Effectively, it’s like you’re playing in any of the bad states for US gamblers: You can’t deduct your losses.

Professional gamblers in Greece do have the availability of the moving truck. While the climate in the United Kingdom is anything but similar to Greece, the tax climate in the UK for professional gamblers is (at least for now) sunny with mild temperatures. Gambling, even for professionals, isn’t taxed in the UK.

The end result for this new tax in Greece is that it will bring in less money than projected. The big gamblers who would otherwise fill the Greek coffers will make economic decisions that benefit themselves but not the Greek government.

Posted in Gambling, International | Tagged | 1 Comment

Pass the Popcorn, Please, II

Posted on November 20, 2013 by Russ

As ObamaCare and its troubles dominate the news, lurking in the background is the IRS scandal. The Chief Counsel of the American Center for Law and Justice (ACLJ) wrote an op-ed on FoxNews that noted the lawsuit filed by the ACLJ isn’t going to be dropped. Jay Sekulow, the Chief Counsel, noted five reasons why the IRS scandal won’t go away. I’m going to focus just on his fifth point:

Fifth, the IRS targeting scandal is directly relevant to the mother of all policy disasters, ObamaCare. With the IRS set to function as ObamaCare’s enforcement arm, every story of corruption, incompetence, and malice casts doubt on the IRS’s ability faithfully and lawfully discharge its responsibilities within our health care system. [emphasis in original]

Eliana Johnson of the National Review had two tweets last night that highlight this issue. Here’s the first:

IRS source tells me that “last thing in the world anybody wants right now is IRS connected to that pile of crap at healthcare.gov”

Here’s the second:

IRS source says agency still working to link IRS sys to HHS and CMS. “Our guys can’t move until HHS and CMS get their crap together.”

President Obama promised that the website would be functioning by month-end. It’s apparent to almost everyone that is not going to happen. Meanwhile, individuals need to enroll by December 15th in order to have coverage by January 1st; the back-end payment system has apparently not yet been built! (The key point in the testimony begins at about 3:20):

If health care weren’t such a major issue this would be laughable. Unfortunately, it is a major issue. I have not talked with many individuals at the IRS regarding health care and the IRS’s role in ObamaCare. I notice that in today’s IRSAC report that IRSAC identified as its very first issue the IRS’s funding level. IRSAC rightly noted that, “Reducing the IRS’s budget constrains IRS effectiveness and efficiency, which results in taxpayers’ loss of respect for the agency and our voluntary tax system.”

I identified this issue earlier this month. I’ll repeat what I said then:

For the IRS to function effectively, it needs both a reasonable budget and to be apolitical. It’s vital that the Department of Justice go after individuals who turn the IRS into a political organization from an apolitical one. Yet the current Administration apparently doesn’t see the urgency in this issue. That’s a huge mistake, and one that will definitely come back to haunt them and all Americans. We need a well functioning IRS…and given what the Administration is doing (and not doing), it’s very likely the budget for the IRS will continue to shrink.

The Obama Administration needs to give more than lip service to the investigations of the IRS scandal. Does anyone really believe that the Department of Justice is doing anything in regards to this? The budget of the IRS will not be increased until the scandal is resolved. As Mr. Sekulow noted, the IRS scandal and the troubles of ObamaCare are directly linked.

The individuals I have dealt with at the IRS are normal hard-working people doing jobs. The IRS deserves better than what it’s getting from the Obama Administration. IRSAC’s recommendation is laudable, but Congress’s cutting the IRS’s budget is also reasonable until the scandal is resolved. The onus here lies on the current Administration. I suspect IRSAC will be repeating their recommendation in next year’s report.

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Pass the Popcorn, Please

Posted on November 20, 2013 by Russ

When I last wrote about Instant Tax Service it appeared that the end of that firm was upon us. After all, a judge ordered ITS to close shop because of a myriad of sins. ITS is appealing and is now also attempting to sell the business. (That does bring up the obvious question: Who would want to purchase a business that is, to say the least, facing a death penalty? But I digress….)

Kelly Erb has more on ITS’s current shenanigans.

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