Taxable Talk

A fundamental principal of US taxation is that all income is taxable unless Congress exempts it. If you’re a referee in a basketball game, you have to pay tax on that money.

Now, I wouldn’t have though that refereeing adult basketball leagues would be something that leads to alleged tax fraud. But I was wrong.

From Chelsea Piers, the sports complex in Manhattan, comes the story of some basketball referees. At $40 a game, this doesn’t sound like big money. That said, it can add up; one of the accused allegedly earned more than $10,000 in 2004. Chelsea Piers (like all businesses) had to issue Form 1099-MISCs to any referee who made more than $600 in a year. Whether or not you receive a 1099, the income is still taxable; however, the defendants likely felt that if the IRS didn’t receive a 1099, they’d earn the money tax-free. So what’s a good way of avoiding getting a 1099?

How about identity theft. Instead of all the payments going to each individual, they paid the stolen names. They allegedly obtained these names from a variety of sources: a youth baseball team, cases at the New York State Workers’ Compensation Board, a chamber of commerce, and friends and family.

Two of the four involved in the scheme pleaded guilty, while the other two were arrested. The two remaining defendants face identity theft and tax evasion charges (one of the defendants also allegedly decided not to file any tax returns for four years).

One method of increasing profit that’s been practiced since the first books and records have been kept is to keep two sets of books. One set shows the true profit and loss while the other presents a bleaker picture that’s used for tax returns. As long as you’re not caught it works great.

One problem is, of course, what you do when you sell your business? Prospective purchasers like to know what the business really makes. A business with a lower profit will sell for less, so the real books usually get shown. The IRS knows this, and so they do send undercover agents (with hidden tape recorders) to businesses that are for sale.

Take the owner of Club 7 in Fruitland, Idaho, Thomas Dale Overstreet. Mr. Overstreet decided to sell his business. In April, a prospective purchaser spoke with Mr. Overstreet and was allegedly told that the true profit was quite a bit higher than what was on the books. Yes, once again that was an IRS agent. But that wasn’t the only problem for Mr. Overstreet.

I’m sure the IRS then went to look at Mr. Overstreet’s tax records to see what was on his returns. The problem was that there were no returns filed for 2003 – 2010. Oops. Given that Club 7 supposedly made $1 million during this period, that’s a problem. It also appears that much of the profits came from hosting gambling at his club. Casinos aren’t legal in Idaho, so that’s yet another problem.

The IRS undoubtedly continued to investigate. They certainly looked at his bank records, but they apparently didn’t show much. It appears that the reason why is that Mr. Overstreet sent the profits from his business to Mexico, allegedly via money laundering and bulk cash smuggling.

All-in-all Mr. Overstreet has been accused of everything from tax evasion to money laundering, and he’s looking at spending decades at ClubFed if convicted of all the charges. If Mr. Overstreet had kept just one set of books and paid his taxes, its likely he’d still be making money from his illegal activities.