Well, It Was Only Three Zeroes Off

Posted on February 18, 2011 by Russ

I didn’t know that shoe inserts were a good business, but they are. Randall Pennington, of Houston (and formerly of Branson West, Missouri) was the proprietor of an orthotics business in Missouri. One look at the tax returns of his business and you’d believe that business was poor.

Of course, given that Mr. Pennington only told his tax preparer about two of his seven bank accounts, that might have had something to do with it. Did I mention that he sent some of the money that his business made into another individual’s account? Perhaps I should add in the fact that he adjusted the social security number on some gambling winnings to lower his tax.

However, all was for naught in the end. The IRS got wind of the scheme, and Mr. Pennington was investigated. He pleaded guilty yesterday to one count of filing a false tax return. Given that he paid $1000 in tax in 2002 when he should have paid $318,000 for the five years ending in 2004, I suspect Mr. Pennington will get near the maximum sentence of three years at ClubFed.

As always, it’s a whole lot easier to just pay the tax in the first place but that just never appeals to the bozo tax scofflaws out there.

Posted in Tax Evasion | Comments Off on Well, It Was Only Three Zeroes Off

If Statesboro, Georgia Sent Me a Property Tax Lien

Posted on February 17, 2011 by Russ

Let’s suppose there was a company in Statesboro, Georgia called “Clayton Financial and Tax.” Let’s further suppose that they didn’t pay their property tax bill, and that the business folded. Statesboro tries to find someone to pay the bill, so they put a lien on my business, in spite of my never having been in Statesboro, or having a business address outside of California.

Now, no government entity could be that dumb, right?

Well, Statesboro hasn’t gone after me, but San Joaquin County, California has gone after a Statesboro business. GMP Services, Inc. publishes Statesboro Business and Lifestyle Magazine. Apparently there was another company in Tracy called GMP Services and they didn’t pay their property tax bill. So San Joaquin County has put a tax lien on the Georgia GMP Services, a company that has never been in California. The owner of GMP is not as amused as I was, and is sending a bill to San Joaquin County for the time that he has lost and his costs.

Most likely, this has all been done by computer. The county may be contracting with a collections company; they found a match, and no human looked at the underlying records to see that there were two different GMP Services.

As for the owner of GMP Services, Allen Harkleroad, getting any money, his chances are slim and none (with none the clear favorite). No government agency in California is going to voluntarily pay. Mr. Harkleroad would have to file a lawsuit, and this case would be a tough one.

I do sympathize with Mr. Harkleroad. Tax agencies do far too many computer driven programs, where no human looks at anything until a complaint is received. The problem is that these programs bring in far too much money to go away.

As for San Joaquin County, perhaps they should only look for California entities rather than businesses throughout the country. I certainly hope they’re not going after any Smiths, Joneses, or Foxes.

Posted in California, Property Taxes | Comments Off on If Statesboro, Georgia Sent Me a Property Tax Lien

Making $35,000 While Gambling with $800,000 Doesn’t Compute

Posted on February 15, 2011 by Russ

Even if you lose as a gambler, you’re supposed to report the income. Today, the Tax Court took up the case of a gambler who lost in more ways than one.

Our unlucky gambler spent quite a bit of time at Foxwoods, the big Indian casino in Connecticut. Our gambler didn’t report any gambling income, but somehow he had managed to have Currency Transaction Reports issued to him for over $800,000 in purchases of casino chips during 2004 and 2005.

Now, what do you with casino chips? You might sell one or two, but you gamble with them, of course. His return was selected for examination when he showed gross income of $16,450 and $18,230 in the two years selected for audit. The IRS was naturally curious how someone could buy $800,000 in casino chips while make $35,000.

The petitioner did not cooperate during the audit with the IRS. The IRS sent “several information document requests” to the petitioner because he claimed that other had used his rewards card and obtained casino chips. “Petitioner never provided any of the requested documentation.”

The IRS reconstructed the petitioner’s income, figuring that for every dollar expended in net casino chip purchases there was a dollar of income. He also assumed every dollar of income earned was used for purchasing casino chips. All told, that led to the IRS assuming that there was $372,759 of unreported income in 2004 and $264,375 in 2005.

When the petitioner got that news, his passport suddenly became available; the petitioner was out of the country during some of the purchases so the final number for unreported income was $159,599 for 2004 and $250,975 for 2005.

In his pretrial memorandum petitioner claimed that his casino chip purchases were financed by a loan he obtained from the “Fukkianese community” and that he would testify to this effect. However, petitioner failed to show up for trial.

Fukkianese are Chinese from the Fukien province. And nothing was presented at the trial showing there was any loans from the Fukkianese community or anyone else.

In an audit, it’s important to cooperate fully with the IRS. First, you may be able to get the burden of proof shifted to the IRS (if your audit finds its way to Tax Court). Second, if you cooperate with the IRS your audit will go far smoother; the auditor will be far more willing to compromise on some issues.

Of course, when a case gets to Tax Court its helpful to have proof of what you claim.

Petitioner did not introduce any evidence at trial to demonstrate that the cash purchases at Foxwoods were made with cash from nontaxable sources. Rather, he argues that because respondent has conceded that 11 CTRs were erroneously attributed to him, the remaining CTRs are unreliable and cannot be used as the basis for reconstructing his income. We disagree.

If you are a gambler and have CTRs issued to you, make sure you (1) report your gambling income and losses, (2) have income to justify the purchase of the CTRs, and (3) keep good records proving this. In today’s case, the gambler did none of this. Indeed, the IRS received a log from Foxwoods noting that the petitioner gambled even more extensively; the IRS could have sought an increased deficiency based on this information. (And it’s clear from the decision that the Court would have upheld this.)

As for the petitioner, he was hit with back taxes, penalties (including the accuracy related penalty), and interest. The taxes alone are near $200,000, and that’s just tough to do on an income of $35,000.

Case: Pan v. Commissioner, T.C. Memo 2011-40

Posted in Gambling, Tax Court | 2 Comments

Changes (Welcome, Aaron Lion)

Posted on February 15, 2011 by Russ

This year will be one of change for my business. When I started my business in 1999 I had just some thoughts and dreams. Nearly twelve years later I have a mature and still growing tax practice and I must deal with the reality of change.

The first of these changes is growth in my practice. I’ve known Aaron Lion for a number of years. Last year, we met and discussed the idea of him joining my practice. Aaron took that thought and ran with it; in early January he passed the Special Enrollment Examination (the exam to become an Enrolled Agent). He’s sent in his Form 23 to the IRS and sometime in the near future he’ll be a duly licensed Enrolled Agent. Whether that will be in time to help during the heart of tax season is up to the bureaucracy at the IRS.

Here’s some background on Aaron: He earned his bachelor’s degree in Mathematics of Computation with a minor in Computer Science. He worked as a software engineer for twenty years. Aaron left his last engineering job six years ago as a result of having one impossible task after another and one unhappy customer after another (a result of other people’s decisions).

Aaron then became a professional poker player. After finally getting to the point where he felt he could make a living from poker, he stopped because while being able to do it was important actually doing it was not.

Aaron resides in suburban Washington, DC where he is happy to take care of his top two customers: his wife and daughter. He is looking forward to taking care of more hopefully happy clients in our tax practice.

You’ll see Aaron first here on the blog. He’ll be writing many of the posts, and will also add an East Coast view to tax issues.

Welcome aboard, Aaron.

Posted in Taxable Talk | Comments Off on Changes (Welcome, Aaron Lion)

$28 Million in Tax Fraud Gets Preprarer 6 Years at ClubFed

Posted on February 14, 2011 by Russ

Lester Morrison had a great business going. His “Tax Prep” (also called “24 Hour Income Tax Refund Service”) was doing a bang-up business in the Bronx and across the river in New Jersey. Their clients were quite pleased with their refunds. Sure, much of the refunds went to the preparers but what’s not to like when you get money you don’t expect.

Mr. Morrison’s clients had children. Sometimes these were children who weren’t clients’ children and who had already died. Yes, Mr. Morrison and his co-conspirators took deceased children of others and put them on tax returns. And that was one of the more mundane things he did.

Some of the other practices detailed in the announcement of his guilty plea (last August) include phony business losses from fictitious businesses, non-existent charitable donations, false education credits, and phony child care tax credits.

We’re not talking peanuts here, either. The scheme netted $28 million from over 7,500 refunds…until it was caught. At his plea last August Mr. Morrison agreed to make restitution. Last week he was sentenced to six years at ClubFed; the restitution totals $17.3 million.

If your tax preparer puts a child you don’t know of on your return, that’s a big hint that something is wrong.

Posted in Tax Fraud | Tagged | Comments Off on $28 Million in Tax Fraud Gets Preprarer 6 Years at ClubFed

No Valentine’s Love from the IRS

Posted on February 14, 2011 by Russ

When the IRS announced that they will begin accepting all tax returns for processing on February 14th, I called it a bit of Valentine’s love. No more, though. I received a notification from my software vendor that the IRS will be limiting the number of returns that can be processed each day from each vendor so that there system can handle the load. My vendor noted that returns processed with them on Monday might not reach the IRS until Friday. The notice said that they expect this to last just one week, so tax processing will be truly lovely on President’s Day rather than Valentine’s Day.

Posted in IRS | Comments Off on No Valentine’s Love from the IRS

Gilbert Hyatt and the FTB (An Update)

Posted on February 11, 2011 by Russ

When last I reported on the Gilbert Hyatt case, Mr. Hyatt had won nearly $400,000,000 (yes, that’s $400 million) in a lawsuit from the Franchise Tax Board. This case began when Mr. Hyatt moved from California to Nevada in 1992, but the Franchise Tax Board didn’t think so. So agents of the FTB rummaged through Mr. Hyatt’s garbage in Nevada, and in the view of a Las Vegas court, committed torts against Mr. Hyatt. Including legal fees and continued interest, the tab is now around $500 million.

This case went to the US Supreme Court before it was tried; the FTB attempted to hold that California couldn’t be sued. The Supreme Court ruled against the FTB, and the case was tried in 2008…ten years after it was filed.

Not surprisingly, the FTB has appealed the decision. I’ve been trying for a while to discover the status of the case, and this evening finally found a blurb noting that the case is awaiting a date for oral arguments at the Nevada Supreme Court. [Go to page 12 of the link to see the status.] (Nevada does not have intermediate courts of appeal.) So sometime in the next year or so we’ll likely get a final verdict on how much the Golden State will be out in this case. Of course, the FTB could appeal this case to the US Supreme Court if they lose at the Nevada Supreme Court.

Meanwhile, the underlying alleged liability that triggered the whole fiasco–whether Mr. Hyatt was a California resident when he earned money off a semiconductor patent–is trickling through the California administrative hearing process.

Posted in Canada, Nevada | Tagged | 3 Comments

Unlearning the Income Tax: Another Journey to Frivolity

Posted on February 8, 2011 by Russ

About once a year I decide to post about the newest Bozo scheme to get out of the income tax. It’s that time again: Today, we learn about the Institute for Unlearning.

Yes, that’s a real website and its proprietor, one Patrick Mooney, espouses that, “[A] private sector worker’s earnings are not legally subject to the federal tax on income. They never have been, and as long as we still have a Constitution, they never will be.” Mr. Mooney was highly confident in his beliefs, so he filed a 2005 tax return with all zeroes, and claimed a refund of $2,647.48, the amount he had withheld in federal tax during the year.

The IRS didn’t appreciate Mr. Mooney; after he submitted his tax return they denied his refund and wrote him a letter warning him that he was submitting a frivolous tax return. Even the IRS sending him documents warning about why you have to file tax returns didn’t dissuade the intrepid Mr. Mooney. He continued, and sent a letter protesting the IRS’ decision to deny his claim. The IRS assessed a $500 penalty for filing a frivolous return, and eventually sent him a Notice of Deficiency.

The dispute ended up in Tax Court. This was not the first time Mr. Mooney ended up in Tax Court; he similarly petitioned the Court regarding his 2004 tax return. As you might guess, he lost and also had to pay a $1,000 Tax Court Penalty for filing a frivolous case. You probably know where today’s case is heading….

Do yourself a favor if you’re ever even thinking of petitioning the Tax Court and telling a Tax Court judge that there’s no income tax because [the reason is irrelevant; none will work]. Just don’t do it.

Petitioner’s assertion that the payments he received in 2005 were not taxable income within the meaning of the law are frivolous. We do not address petitioner’s frivolous and groundless arguments with “somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.”

Things got worse for the petitioner. The IRS won, of course, on the tax due, the failure to file penalty, and the failure to pay penalty. But the IRS decided to also assert the fraud penalty.

The instant case involves many badges of fraud. Petitioner is intelligent and well educated and properly filed and paid taxes for a number of years before he recently began to claim, on the basis of various tax-protester arguments, that his income is not subject to Federal income taxation. Petitioner wrote on his Web site about his efforts to avoid paying income taxes, characterizing his plan as a “‘get out of income taxes free’ Monopoly card”. Pursuant to the strategy described on his Web site, he failed to report any income on his 2005 Form 1040; yet he acknowledged at trial that he did receive income during 2005. Petitioner received and has read Internal Revenue Service publications discussing tax-protester arguments like the ones he has employed and explaining why such arguments fail. Despite petitioner’s being fully informed by respondent about the frivolous nature of his arguments, petitioner’s correspondence with respondent has been filled with tax-protester arguments and has not addressed the factual accuracy of respondent’s determination. Petitioner has also previously attempted to use similar arguments to dispute his tax liability before this Court, and he is aware that we consider such arguments frivolous and groundless.

The Court also wasn’t in the mood for his frivolity.

Apparently, the $1,000 penalty did not deter petitioner from making frivolous and groundless arguments before this Court. Accordingly, we shall impose a $2,000 penalty on petitioner pursuant to section 6673. If petitioner persists in raising frivolous arguments before this Court, wasting time and resources that should be devoted to taxpayers with genuine controversies, and continues to refuse to shoulder his fair share of the tax burden, we will not hesitate in the future to impose a significantly higher penalty.

As expected, arguing that there is no income tax is just not going to work. It doesn’t matter if you’re arguing with the IRS, the Tax Court, or your state tax agency. Just don’t do it! If someone approaches you with a tax protester argument, look at this list of reasons why they are all wrong. Or you can be like the petitioner today, who wants us all to unlearn a basic reality: Yes, Virginia, there is an income tax and you do have to pay it.

Case: Mooney v. Commissioner, T.C. Memo 2011-35

Posted in IRS, Tax Court | Tagged | Comments Off on Unlearning the Income Tax: Another Journey to Frivolity

Two Casino Chip Theft Cases, Two Arrests (Illegal Income Primer)

Posted on February 8, 2011 by Russ

When I learned math, I learned that 1 times any number is that other number, and that 0 times any number is 0. So if I steal 400,000,000,000 play money poker chips (each can be converted to absolutely nothing), I’ve stolen, well, nothing.

I guess I should say nothing of value as a British hacker broke into Zynga.com and stole 400 billion play money poker chips. Unfortunately for Ashley Mitchell he still may have violated British hacking laws. And some individuals actually exchanged money for those play money chips: Apparently Mr. Mitchell earned £53,000 (about $86,000) before finding himself arrested. Now, I won’t ask why anyone would buy play money poker chips….

Meanwhile, you may have heard about the brazen bandit who robbed the Bellagio in December. He scooped up a whole bunch of cranberry casino chips (each worth $25,000) which the Bellagio immediately canceled. So what do you do with such chips?

You try to sell them to anyone for pennies on the dollar. The bandit also allegedly grabbed some lower denomination chips which he quickly spent. He lost money playing poker at the Bellagio (yes, in what has to be a Bozo decision the bandit decided to play poker in the casino he allegedly robbed)…and stayed at the Bellagio. He communicated with posters on the 2+2 Poker forums, and sent pictures signing his name as “Bellagio Bandit” and writing a postscript that noted that, “Cranberries are good for the liver.” He’s now sitting in a Las Vegas jail awaiting his preliminary hearing.

So what has this to do with taxes? Well, just remember that illegal income is just as taxable as legal income. The two alleged thieves need to note on their tax returns the illegal income they made or they can be tried for the federal crime (in the case of Mr. Mitchell, the British crime) of tax evasion. If you have illegal income remember to put it down on line 21 of Form 1040 as “Other Income.”

A better bet is to just not commit dumb crimes. But if that were the case I wouldn’t be able to laugh when I read stories like these.

Posted in Gambling, IRS | Tagged | Comments Off on Two Casino Chip Theft Cases, Two Arrests (Illegal Income Primer)

Wellek Gets 1 Year at ClubFed

Posted on February 7, 2011 by Russ

There’s something about strip clubs that make them go hand-in-hand with tax evasion. Michael Wellek owned three such clubs in the Chicagoland area. Back in 2003, the IRS seized $12 million from a warehouse owned by Mr. Wellek. And that’s where the story stayed, more-or-less, in 2005 when I first reported on it.

Sometimes, though, there’s a reason that the story goes on ice. In this case, Mr. Wellek began cooperating with the IRS. Five years later, it was announced that he would soon plead guilty; one month later, he did.

Last week, Mr. Wellek found out his sentence. He received one year at ClubFed, and must pay $363,000 in restitution above the $5.5 million he’s already paid. If he hadn’t cooperated its almost certain he would have received years at ClubFed rather than a year.

If you become the owner of a business–especially an owner of a strip club–remember that cash income is just as taxable as checks and credit cards. If you decide to stash the cash you’re likely to find yourself stashed at ClubFed.

Posted in Illinois, Tax Evasion | Tagged | Comments Off on Wellek Gets 1 Year at ClubFed