If You Get a Tax Refund That’s Someone Else’s, Don’t Spend the Money

Posted on September 16, 2012 by Russ

Last year I reported on the case of the misplaced tax refund. An Orange County, California women put in the wrong account number on her tax return. She used an account that she had closed years ago. However, Citibank reissued the account to one Stephen Reginald McDow. The woman wasn’t expecting a refund of $110. Rather, she was expecting $110,000. When the refund didn’t show up, she started investigating.

Mr. McDow had spent roughly 60% of the refund, and he told the unlucky woman what happened. When restitution never happened, she reported the theft to the local police. The Orange County District Attorney was going to prosecute the case. However, Mr. McDow pleaded guilty last week.

He got 60 days at the Orange County jail, 18 months of probation, and had to make restitution (which he has done).

As I mentioned when I first reported on this story, you can’t spend a tax refund that’s not yours. This has happened on a couple of occasions to my clients. I had one client receive a $1,500 check and another had over $10,000 incorrectly direct deposited into his account. Both returned the money and there were no other issues. If you instead elect to spend the money, you’re spending someone else’s money, be it the taxpayer who was expecting the refund or the tax agency that incorrectly sent it. That”s theft, and the local jail is likely no more comfortable than ClubFed.

Indeed, had Mr. McDow repaid this money when first contacted by the victim, all he’d be out is the money he should never have received. Instead, he gets 20 months to think this over.

Posted in Orange County | Tagged | 1 Comment

A Penny Saved, Lots of Dollars Lost

Posted on September 11, 2012 by Russ

The old cliche is, “A penny saved, a penny earned.” In real life, though, sometimes when you save some pennies you lose lots and lots of dollars. So was the case for two taxpayers who filed a case in Tax Court.

The Tax Court has very strict deadlines. You typically have 90 days from the date on a Notice of Deficiency to file a Tax Court case. Marcius and Andrea Scaggs wanted to file a Tax Court case. They were apparently procrastinators, so they waited to the last allowed day to file the case. They also didn’t trudge to the Post Office; had they done so and mailed their petition using certified mail, return receipt requested, they would have been fine.

Instead, they went to FedEx. There’s nothing wrong with using FedEx, but you need to use the right service. They used “Express Saver Third Business Day.” That is not an approved delivery method so the petition was considered filed on the date of receipt, not the date it was sent. So their case was thrown out. Had they spent a few more dollars and used FedEx Priority Overnight, FedEx Standard Overnight, or even FedEx Two-Day, they would have been fine.

As an aside, many post offices now have Automated Postal Centers. These will time stamp a letter as of the current date and time, so you can timely file on the last day after the post office has closed! I’ve had a couple of clients use this for filing tax returns at the very last minute, and they were successful.

For the Scaggses, they must now pay the tax and file a lawsuit in either Federal District Court or the Federal Court of Claims. And that’s far more expensive.

Joe Kristan and the TaxProf have more.

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A Modest Proposal on Tax-Related Identity Theft

Posted on September 9, 2012 by Russ

The issue of identity theft is growing. The IRS is faced with twin challenges on this front: The IRS needs to quickly process tax refunds but it also needs to combat this growing issue. The IRS’s current policy is to process the first return it sees with a given social security number and hold up processing on the second return. The major issue with this is that the second return is usually the correct return.

Consider hypothetical taxpayers, George & Jane Jetson. Mr. & Mrs. Jetson filed their tax return last year with, say, a Las Vegas address. Come January 17th, enterprising crooks in Tampa, Florida who have somehow stolen the Jetsons’ identity file a return claiming a refund. (I chose Tampa because it’s a hotbed of tax-related identity theft.) The IRS mails a refund check to the crooks (or direct deposits it). Weeks later, the Jetsons file their real return and the problem is uncovered.

I have a possible solution to this issue. The IRS should check the address of every filed return versus the address on file for the taxpayer. If the Jetsons’ return is filed with the same address as used last year, it’s likely the return is legitimate. If not, then the IRS should put a hold on processing the return, and send a letter to the taxpayers at the address used in the prior year (with forwarding requested). The letter would note that the IRS received a return from the taxpayers, but the address does not match the address on file with the IRS. The letter would further state that processing of the tax return is being held awaiting confirmation of the address change. (The post office does this with all submitted change of address forms; there’s no reason why the IRS can’t do this, too.)

If the filed return is valid–the taxpayers moved but did not inform the IRS–the taxpayers would be given a number to call where they could input some information from the prior return and the processing of the return would resume. If the filed return is not valid, the taxpayers would have a different number to call and the IRS would be able to quickly move after the probable crooks.

There is a second part to this program that would be necessary. The IRS would need to send confirming notices to individuals who send in Change of Address forms to the IRS. The reason for this is if this program is implemented, identity thieves would just submit Form 8822 and change the address. The confirming notice would ask the taxpayer to dial a specific phone number, input a code that’s on the letter, and then the change of address would be processed. The confirming notice would be sent to the address on file, of course.

I can see a few kinks with this proposal. For example, people who have been out of the system for some time would have issues. A second issue will be where an identity thief uses the correct address but has chosen direct deposit. Still, my proposal should stop a large percentage of tax-related identity theft. It would have the side benefit of forcing individuals and businesses to send change of address forms into the IRS. There would be some delays to taxpayers who have moved and have not informed the IRS, but that’s the only major drawback that I see in this system.

Overall, my proposal seems to me to be a solution that should be relatively easy to program into the IRS’s computers. And unless I’m missing something, it should stop a lot of tax-related identity theft.

Posted in IRS | Tagged | 5 Comments

Another Week, More Tax-Related Identity Theft

Posted on September 9, 2012 by Russ

Seven citizens from Zimbabwe opened Express Refund Center in Cincinnati in 2007. The business thrived, but not for those unfortunate souls who used the service. It seems that the operators allegedly decided that stealing their customers’ identities was a lot more lucrative than preparing tax returns. The seven are charged with various tax fraud and conspiracy charges.

Of the seven individuals charged in the case, one is in custody and one is expected to surrender to federal authorities next week. The five other individuals charged appear to have fled the country to Zimbabwe. The US does have an extradition treaty with Zimbabwe, so its possible the five will end up facing charges. The money that was lost in the case is likely lost for good, though.

As quoted in this story, Assistant US Attorney Tim Managan noted, “In later years, they didn’t operate a tax preparation service. They simply operated in wholesale theft.” There’s the issue of how do we stop identity theft. On that, I have a modest proposal (which will be in my next post).

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Partouche Poker Tour Will Honor Guarantee

Posted on September 7, 2012 by Russ

After my last post on the Partouche Poker Tour electing to ignore a published guarantee, the people in charge either decided that the horrible publicity was bad or their attorneys let them know that French law on false advertising might lead to a term at ClubFrance. No matter, I’m happy to pass on the news that the 5 million Euro guarantee will be honored.

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Flying 5,400 Miles and Finding an $882,000 Shortfall in a Prizepool Isn’t a Good Thing

Posted on September 5, 2012 by Russ

There’s a major poker tournament going on in France: The Partouche Poker Tournament Main Event. It had a €5 million guaranteed prize pool. Based on the actual number of entrants, the prize pool ended up being around €4.3 million. Normally when a prize pool is guaranteed, the host must cover any shortfall in the guarantee. Reports out of France are that’s not happening. The €700,000 shortfall is equivalent to $881,961 at today’s exchange rate.

In the United States, host casinos almost always make good on their word. Casinos are heavily regulated, and gaming commissions look askance when a casino starts lying. For example, the Commerce Casino in Los Angeles is running a tournament series right now. The second event of that series had a $250,000 guarantee. When the number of entrants caused the prize pool to not meet the guarantee, Commerce Casino added the $46,000 so that the guarantee was met.

Sometimes guarantees have to be removed. A couple of weeks ago a tournament series in Biloxi, Mississippi was running when Hurricane Isaac came calling. Clearly, people who were planning on traveling to Biloxi had to make other plans so the guarantees were dropped. An event like that is usually covered under a force majeure clause (basically, an act of God). Most casinos cover themselves by inserting a phrase in their advertising, “Management reserves the right to alter or cancel the tournament at any time.” (In the end, the Biloxi tournaments were cancelled because of Isaac.)

As for the situation in France, as of last report none of that is happening. The advertising clearly states a €5 million guarantee and there is no disclaimer. The prize pool has been announced at €4.3 million. Now the question becomes legal: Do the players who appear to be the victims of fraud have any recourse?

Well, the tournament is in France and presumably subject to French law. I’m not an attorney, and know just enough about US gambling law to be dangerous (and know less on French law). So can a lawsuit be filed? Maybe, but it likely has to go through the administrative side of the French regulatory agency, Française des Jeux first. (Unfortunately, French is not one of my languages so someone else will have to tell me about the regulatory rules on casinos in France. My understanding is that under French law a casino might be limited to adding €250,000 to the prize pool. Well, if that’s the maximum allowed, Partouche should do that and let the players know why they can’t do any more. It’s always the cover-up that gets you. But I digress….)

There is one other course of action player can take, and that’s already happening. Name players are rightfully annoyed with a company advertising a guarantee and then reneging on it for no reason. There are tweets and a thread on the poker website 2+2 complaining about this. While Partouche may think that all publicity is good publicity, trust me when I say that the bad words circulating in the poker community on Partouche will definitely have a future impact unless they restore the €700,000 to the prize pool.

UPDATE: This morning the head of the Partouche Poker Tour, Patrick Partouche, announced that this will be the last tournament ever in the series. Additionally, Mr. Partouche apparently denied that the tournament was ever guaranteed. (Here’s a helpful hint for Mr. Partouche–actually two helpful hints: First, if you deny something, make sure no one can prove you wrong within one minute. Second, it’s always the cover-up that gets you.) I don’t know what the laws on fraud are in France, but I suspect that Mr. Partouche and his legal staff may want to quickly investigate them.

For poker players, this does bring up some issues. Be careful regarding operators who are not well known or are in jurisdictions that aren’t well regulated. A tournament in the United States will rarely have any problems; American casinos are highly regulated. If someone duplicated the events of the Partouche debacle in the US, they’d likely be facing fraud charges. If you are playing online poker, make sure the company you play with is reputable.

Does the mean that all poker tournaments in France should be avoided? It certainly puts a black light on French poker, but the answer is no. For all of the issues that I have with Caesar’s, there is no way they would ever do anything like this with the WSOP-Europe (which will be in Cannes in October). Reputable operators–thankfully, most poker tournaments are run by reputable operators–would never do this.

UPDATE-2: The Partouche Poker Tour announced on Friday that the guarantee will be honored.

Posted in Gambling, International | 2 Comments

I’m Envious

Posted on September 3, 2012 by Russ

Two stories related to one of my favorite topics appeared over the weekend. The first comes out of Michigan, where the state legislature passed a law to ban “tax zappers.” The only zappers I ever heard of were these:

Bug Zappers, Courtesy of Wikipedia

That’s definitely not what Michigan banned. No, these zappers are used to skim cash from registers in cash-basis businesses so that sales could be under-reported. Who were the customers in Michigan? According to this story, Detroit area strip clubs. It appears that sales of the “Journal Sales Remover” may have been better than thought of. I wrote about this product in 2010; it wasn’t a bright idea then and it’s not one today.

Of course, the new Michigan law is overkill. Anyone violating the new law is also violating various sales tax laws, committing tax fraud against both the IRS and Michigan, and likely violating local ordinances, too.

So from Michigan lets head west to Minneapolis. Last Friday night Envy was raided. That’s Envy, the nightclub. Minnesota State Department of Revenue officers raided the club; the DOR alleges that the owners of the club, James and Susan Beamon, may be skimming cash, grossly underreporting withholding taxes, and not paying all their sales tax. This news story notes that per the search warrant the owners of the club reported negligible income for 2009 and haven’t filed 2010 or 2011 returns. And conspicuous consumption may have gotten the owners in trouble:

“Normally, persons with the income levels reported by the Beamons could not afford a high-priced Cadillac,” the search warrant said.

As a reminder, income is taxable whether you make it in cash, checks, or credit cards. That said, the idea that businesses that deal in large amount of cash would be tempted to skim is normal. That’s why cash businesses such as strip clubs and nightclubs are far more likely to be audited than, say, a jewelry store.

[Image from Wikipedia]

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Joseph Pleads Guilty

Posted on September 3, 2012 by Russ

Back in May I wrote about William Joseph, the former NFL player caught in an identity theft ring that was broken through an FBI sting. Mr. Joseph pleaded guilty last week to tax fraud. Mr. Joseph’s attorney, Roderick Vereen, told the Miami Herald, “He recognizes the mistake he made, and he is going to take responsibility for his actions and do what he can to repair his good name.” Hopefully, Mr. Joseph will make good on that statement.

Posted in Tax Fraud | Tagged | 1 Comment

Illinois Debt Downgraded

Posted on August 30, 2012 by Russ

S&P cut the rating of Illinois debt by one level yesterday. From the news story:

“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Robin Prunty, an S&P analyst, in a report today.

Illinois has at least an $83 billion unfunded pension problem. The state is months late in paying its bills. It raised its income tax by 67% last year…and the state continues to spend money like its going out of style.

Governor Quinn says he’d welcome the state legislature to work together on solutions. The problem is that the real solutions involve cutting spending and pension benefits, and that’s anathema for Democrats. The problem is that the other “solution,” raising taxes, was tried and the results were more of the same.

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Court Rules that California Can’t Discriminate on Small Business Stock Tax Deferrals

Posted on August 30, 2012 by Russ

If you sell stock in a small business (one with $50 million of assets or less), and then take the proceeds and reinvest them within 60 days in another small business, you can defer the gain. California law has a similar provision, but it has the proviso that both companies must have at least 80% of their assets and payrolls within California.

Frank Cutler invested in a start-up company, and sold his shares in 1998 and reinvested those shares within the allotted 60 days. The start-up shares he sold didn’t meet the California provision (the companies he reinvested in did). Mr. Cutler took the deferral on both his federal and California returns. California’s Franchise Tax Board–the income tax agency in California–denied his deduction. Mr. Cutler went through the administrative appeals and lost. He then paid his tax and filed a claim for refund which was denied. He then took his case to court and lost at the state superior court level. The result of his appeal was handed down yesterday.

The problem with the law according to Mr. Cutler was the commerce clause — specifically, the dormant commerce clause. As the Court noted,

Fulton tells us that in this negative aspect—also referred to as the dormant commerce clause—the clause “ „prohibits economic protectionism—that is, “regulatory measures designed to benefit instate economic interests by burdening out-of-state competitors.” ‟ ” [The Fulton is the US Supreme Court case Fulton Corp. v. Faulkner (1996) 516 U.S. 325, 330]”

And on this issue the Court could not see how the California law was not discriminatory:

The deferral of taxation occurs in connection with a sale (and subsequent purchase) of qualified small business stock, rather than in connection with dividends on the stock, and the deferral of gain is provided only for individual taxpayers, not for corporations. But we are unable to see how these distinctions could in any way sustain a departure from the analysis—and the conclusion—dictated by Fulton and the body of commerce clause jurisprudence that preceded and followed Fulton. The fact remains that the purpose and effect of the statute is, as Fulton forbids, to “favor investment in corporations doing business within the State” (Fulton, supra, 516 U.S. at p. 343), and the statute operates as a “disincentive . . . to buying stock in corporations doing business out of state.” (Id. at p. 341.) As in Fulton, the statute “favors domestic corporations over their foreign competitors in raising capital among [California] residents and tends, at least, to discourage domestic corporations from plying their trades in interstate commerce.” (Id. at p. 333.)

The Board insists the California property and payroll requirement does not discriminate against interstate commerce. But it offers no cogent analysis to support its assertion.

Mr. Cutler hasn’t won a refund yet–the case was remanded back to superior court for a ruling on the correct remedy. Other individuals who took similar positions on their tax returns (and whose deferrals were denied by the FTB) may wish to consider making protective claims for refund depending on the ultimate resolution of the Cutler case. It is possible that the case could be appealed to the California Supreme Court, too.

One final note: The court decision is quite readable even for the layperson. A news story on the case is also available.

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