208 Chances to Commit Tax Evasion and Other Stories

Posted on September 30, 2012 by Russ

There are good schemes and bad schemes. Today, I’m focusing on the particularly stupid.

From McClellandtown, Pennsylvania comes the story of Sherman Friend. Mr. Friend just knew that the number “1127” would come up in the lottery. He bought 208 tickets with that number in a Big 4 drawing back in 2009. And Mr. Friend was correct! With each ticket being worth $250 and having cost just $0.50, he was looking at a profit of a cool $519,896. Even after taxes that’s a good deal.

Mr. Friend, though, had other ideas about paying taxes. Instead of cashing all the tickets himself and accumulating a bunch of W-2Gs noting his winnings, he solicited friends to cash the tickets and paid each of them $250 (10% of his win). That reduced Mr. Friend’s profit, but after the net proceeds of around $480,000 ended up in his wallet, he still owed tax on it. Mr. Friend decided to ignore the law.

“He went on to explain that he didn’t feel he owed the taxes on these moneys,” Assistant US Attorney Nelson Cohen told a judge in Pittsburgh. Mr. Friend pleaded guilty, and has agreed to make restitution of the $132,000 he owes the IRS.

Next, lets head to Billings, Montana. Shannon Grimm enjoyed doing genealogy research. She discovered that many old documents had social security numbers. Aha, she thought, why don’t I submit tax returns with those social security numbers. Those individuals are deceased so no one will mind.

She filed over 90 such phony returns.

Last April, she pleaded guilty to tax fraud. She was sentenced last week to 51 months at ClubFed. Additionally, she has to repay the $129,498 she got in refunds from the IRS. (The IRS caught $270,000 of additional refunds she field before sending them out.) One factor that led to her lengthy sentence was that Ms. Grimm was on probation when she committed the federal crime.

Finally, let’s head to Sicklerville, New Jersey. As I’ve said many, many times, if you want to get in trouble with the IRS the quickest and easiest way is to not remit employee trust fund payroll taxes. The IRS investigates every one of these complaints. Vanna Kem apparently didn’t read my blog. Ms. Kem owned Tri State Labor Services (though she used a nominee for registering the corporation). Ms. Kem paid her employees: They made over $1 million from 2006 through 2008. The employees were paid in cash, and apparently Ms. Kem thought that eliminated the responsibility of doing anything about her payroll taxes. She didn’t pay them and didn’t file Form 941s with the IRS.

Sooner or later one of her employees would note something on a tax return, and the IRS would find out. Ms. Kem pleaded guilty to one count of evading employment taxes and will enjoy ClubFed for 18 months. She must also make restitution of nearly $164,000.

Three rather dumb criminals will all get some time off. As usual, it’s far, far easier to pay your tax up front but that thought rarely enters the Bozo tax criminal’s mind.

Posted in Tax Evasion, Tax Fraud | 1 Comment

California Musings

Posted on September 27, 2012 by Russ

Yesterday a client emailed me and asked if I was planning on moving back to California. The answer is easy: no. I could make it stronger, but I’ll let others help with that.

First, Dan Walters writes about what will happen if Governor Brown’s tax increase passes. I could just quote Alan Greenspan: “Whatever you tax, you get less of.” Mr. Walters cites the case of Gilbert Hyatt (a case I’ve written about extensively) as an example of what will likely occur if Proposition 30 passes.

Mr. Walters thinks that the verdict in the Hyatt appeal will influence this. I disagree, though; if Proposition 30 passes, the exodus will increase. It’s even easier today than it was in the 1990s to live anywhere in the U.S. and run a business. My business partner is in Maryland, yet through the magic of computers, Skype, FedEx, and the telephone we’re able to run our business very efficiently. It really doesn’t matter where you reside these days, be it Los Angeles, Las Vegas, Denver, or Phoenix.

There are some catches Californians who plan on moving need to be aware of. If you have a business entity, you probably want to reform it in your new state. That way you can escape California business taxation, too. (Note that there are exceptions to this, and this definitely should be discussed with your tax professional.)

Second, there’s a study out by the Manhattan Institute titled “The Great California Exodus: A Closer Look.” A key bit from the executive summary:

The data also reveal the motives that drive individuals and businesses to leave California. One of these, of course, is work. States with low unemployment rates, such as Texas, are drawing people from California, whose rate is above the national average. Taxation also appears to be a factor, especially as it contributes to the business climate and, in turn, jobs. Most of the destination states favored by Californians have lower taxes. States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are prompting businesses to locate outside California, thus helping to drive the exodus.

The entire report is worth your time.

Finally, there will be a court hearing in November in Sacramento on blocking California’s train to nowhere. The city of Chowchilla along with the Madera and Merced Farm Bureaus and the county of Merced have sued under California’s Environmental Quality Act. The first leg of the train, if built, will run from Bakersfield to Merced.

The California Farm Bureau Federation is upset with the high-speed rail because it would urbanize prime farmland. I’m upset with the plan because it’s a colossal waste of money. The goal of the high-speed rail project is to connect the Los Angeles and San Francisco areas by trains that would take 2:40 to run between the metropolitan areas. The high speed rail’s website lauds that its sustainable trains would help the environment.

Today, you can fly between Los Angeles and San Francisco in just over an hour. Does anyone really think that people are going to spend an extra hour and thirty minutes to take the train? As far as electricity being cleaner than a jet, that’s true…until you realize that you have to generate the electricity. That means a fossil fuel (coal, oil, natural gas), hydroelectric power, or nuclear power. The difference between “clean” electricity and a jet is that with the electricity you’re one step down from where the “green” nature goes away.

In any case, the big problem is economics. High speed rail may make sense to connect two densely packed metropolitan areas (such as from Boston to Washington, D.C.). But without massive subsidies this program–estimated to cost upwards of $67 billion–is just more money down the drain in California.

Posted in California | Tagged , | 1 Comment

Las Vegas Attorney Accused of Tax Evasion and Structuring

Posted on September 23, 2012 by Russ

On Wednesday, I attended an all-day continuing education seminar put on by the Nevada Society of Enrolled Agents. This happened to be the annual IRS liaison meeting, and a hot topic was the indictment of Randolph Goldberg. This was especially true given we were treated to a presentation from local IRS Criminal Investigation (CI) agents. (They did not state anything about this case, of course.)

Mr. Goldberg is accused of keeping two bank accounts. There’s nothing wrong with that. However, he’s being accused of only including the deposits from one of the two accounts on his tax returns. Adding to his troubles is that he’s being accused of “structuring” bank deposits. Structuring is adjusting your bank deposits of cash deliberately so as to avoid currency transaction reports (CTR). If you make a deposit of $10,000 or more of cash, the bank will file a CTR. Mr. Goldberg is being accused of structuring bank deposits 147 times.

Mr. Goldberg is accused of four counts of tax evasion and five counts of structuring. He pleaded not guilty to the charges on Thursday. He was released on his own recognizance; his next hearing is in late November.

It takes effort to get in trouble with CTRs — so many of them a year are issued. Interestingly enough, one of the tidbits that CI gave us is that in August of this year there were 808 Suspicious Activity Reports (SARs) received in Las Vegas. (I believe, but am not 100% certain, that is the number issued by banks and casinos here in Las Vegas.) IRS CI told us that they have investigated or are investigating every one of the SARs.

SARs are issued when a bank or casino thinks their may be suspicious activity going on. For example, a SAR is likely to be issued if you make an $8,000 cash deposit in the morning and another $3,000 cash deposit in the afternoon. People don’t like dealing with CTRs because their issuance usually takes an extra 30 minutes at the bank. Assuming that one or more SARs lead to the investigation of Mr. Goldberg (which is very likely), he could spend far longer than 30 minutes at ClubFed.

Posted in Nevada, Tax Evasion | Tagged | 2 Comments

A Golden Ending

Posted on September 23, 2012 by Russ

Walter Samaszko, Jr. passed away in May of this year. He had been a recluse, and when odors started emanating from his Carson City, Nevada home, neighbors called the authorities. They discovered his body. No one knew his relatives were, so the house was cleaned out by the Clerk-Recorder’s office before the modest home (listed for just over $100,000) could be placed on the market.

They found quite a surprise: Austrian ducats, South African Kruggerrands, English Sovereigns, and US $20 gold pieces. All told, the gold is valued at about $7 million. The estate will be subject to the federal estate tax–the exclusion amount this year is $5.12 million–so the IRS will get about around $750,000. A first cousin in the San Francisco Bay Area will get the rest (after probate fees are paid), likely around $6 million. It doesn’t hurt that the current price of gold is just under $1,800 an ounce.

Posted in Estate Tax, Nevada | Comments Off on A Golden Ending

Home Is Where the Family Is

Posted on September 23, 2012 by Russ

Last week there was an interesting case out of Iowa regarding domicile. A man was working in South Dakota but his family home was in Iowa. He decided to file as a South Dakota resident. Could it be that South Dakota’s 0% state income tax rate was more appealing than Iowa’s 8.9% rate? Perhaps I’m too cynical (not).

In any case, the taxpayer lost because he did many of the things that are necessary wrong. For those wondering about domicile cases, Joe Kristan’s report on the case is must reading.

Posted in Iowa | Tagged | 1 Comment

Does the New Unearned Income Medicare Contribution Tax Impact Amateur Gamblers?

Posted on September 23, 2012 by Russ

Over two years ago the Patient Protection Act–aka Obamacare–passed Congress. At the time, no one knew what was in the law. Famously, then Speaker of the House Nancy Pelosi (D-CA) said that, “We have to pass the law to know what’s in the law.” Really?

Well, back in March 2010 I thought that the law would impact amateur gamblers. I based this on the title of the provision and how Congress wrote and the IRS interpreted the Kiddie Tax. The Kiddie Tax is also a tax on unearned income. The exact title of the law is the Unearned Income Medicare Contribution Tax. Since the Kiddie Tax is theoretically a tax on investment income but it applies to amateur gamblers, I felt that the IRS would interpret this law similarly.

However, that does not appear to be the case. Section 1402 of the law notes that it is on 3.8% of the lesser of:

‘‘(A) net investment income for such taxable year, or
‘‘(B) the excess (if any) of—
‘‘(i) the modified adjusted gross income for such taxable year, over
‘‘(ii) the threshold amount.

So what is Net Investment Income? Section 1411(c) has the definition:

‘‘(c) NET INVESTMENT INCOME.—For purposes of this chapter—
‘‘(1) IN GENERAL.—The term ‘net investment income’ means the excess (if any) of—
‘‘(A) the sum of—
‘‘(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade
or business not described in paragraph (2)….

Based on how the law is written it will not apply to “Other Income” such as gambling income, sweepstakes, and contests.

Thus, my initial fear back in 2010 of how the law would be interpreted should be wrong.

I should note that the IRS has yet to issue most of the regulations on Obamacare, so they could interpret this provision differently. However, I think that would be very unlikely. Additionally, it is very possible that some tax software will make errors in this calculation. The Kiddie Tax, a tax on unearned income, uses a different basis than this tax. A lazy software writer might not notice the difference so this is definitely something I’ll be checking when we get to 2013 returns. (This new tax goes into effect with 2013 tax returns filed in 2014.)

Posted in Gambling, IRS | Tagged | 1 Comment

Is the IRS Time-Barred From Imposing a Penalty on a Frivolous Amended Return?

Posted on September 17, 2012 by Russ

The IRS is allowed to impose a penalty on the filing of a frivolous tax return (Internal Revenue Code Section 6702(a)). Today, the Tax Court looked at a taxpayer who filed a normal tax return, but then filed an amended return where she claimed she wasn’t a “person.”

Well, we’re all people (I hope), and the petitioner, one Marla Crites, also said that wages aren’t taxable (helpful hint: they are taxable). When the IRS imposed a $5,000 penalty on the frivolous amended return, she asked for a Collection Due Process Hearing. Ms. Crites filed four amended returns (not one), and they all appear to have said that she wasn’t liable for tax. At the CDP, the Appeals officer upheld the IRS. She then went to Tax Court.

I’m not going to go over the arguments that wages aren’t taxable, or that she’s not a person; neither argument is worth any time. Nor is her argument that an amended return isn’t a return under IRC Section 6702; the Tax Court (and other courts) have held that it is.

The interesting issue is whether the statute of limitations time bars the IRS from imposing a frivolous return penalty on an amended return that the IRS does not process. The Tax Court notes,

As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not just frivolous “returns”–and even here Congress was careful to penalize not just returns but “what purports to be a return”–but frivolous “submissions”. It would be odd if penalties keyed to “submissions” had somehow to be tied to the limitations period for tax that is supposed to be shown on a “return”…

But let us assume–and here we are expressly assuming without deciding–that Crites is right that the filing date of her “return” is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it.

The IRS then asked the Court to impose a penalty for filing a frivolous case at the Tax Court. I hope Ms. Crites looks carefully at the last line of the decision:

…[T]his is Crites’s first trip to Tax Court, and by submitting the case under Rule 122, she did save us the burden of trial. And one of her arguments, the statute-of-limitations issue as applied to frivolous amended returns, was one we had not yet addressed and was not itself obviously frivolous. We will therefore exercise our discretion not to sanction her under section 6673.

This time.

Case: Crites v. Commissioner, T.C. Memo 2012-267

Posted in Tax Court | Tagged | 1 Comment

Well, He Probably Wouldn’t Have Won Reelection

Posted on September 16, 2012 by Russ

John McCauley, Jr. is the Deputy Speaker of the Rhode Island House. He’s not running for reelection. Given that he will be pleading guilty to one count of tax fraud and one count of conspiracy, that’s likely a good decision.

Mr. McCauley and his partner in an insurance adjustor business, William L’Europa, were accused of underreporting $1.8 million in their business. That equates to a tax loss of over $500,000 to the IRS. Mr. L’Europa will also be pleading guilty to the same charges.

Mr. McCauley is the sixth Rhode Island legislator to face criminal charges during 2012. It hasn’t been a good year in Providence.

Posted in Rhode Island, Tax Evasion | Comments Off on Well, He Probably Wouldn’t Have Won Reelection

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.

Posted in IRS, Tax Court | Tagged , | Comments Off on A Penny Saved, Lots of Dollars Lost