Online Casinos Are Foreign Financial Institutions

Posted on January 27, 2009 by Russ

Casinos in the United States fall under the same currency requirements as banks and other financial institutions. Congress and the IRS recognized that money laundering and other currency shenanigans could occur at a casino. I’ve always felt that one day the Treasury Department would consider offshore (foreign) online casino to be a foreign financial institution and subject to reporting. Well, that day is here.

Every year I’ve sent an inquiry to the FBAR group at the Treasury on this subject. This year they responded that these accounts must be reported if the account value requirements were met.

To determine if you need to report your foreign financial accounts (including online casinos), determine the maximum value of each account during 2008. Add up the total. If the sum is $10,000 or more all your accounts must be reported.

You have to report these accounts in two ways. First, you must check a box on the bottom of Schedule B and list the country or countries where the accounts are. Second, you must file Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30th. No extension is available for this reporting requirement. Note that the form must be received by June 30th, not postmarked by that date.

The Treasury Department has revised Form TD F 90-22.1 for 2008. You used to have to just list the name of the financial institution, the account number, and indicate what range of money your account held (e.g. $10,000 – $99,999). This year you must list out the maximum value of each account and the address of the financial institution.

Indicating you have an account at a foreign financial institution doesn’t change your tax but it does increase your risk of audit. Given that the penalty for willfully not reporting a foreign financial account(s) is the greater of $100,000 or half the value in the account, you will need to report them.

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Zumwinkel Pays Fine, Avoids Prison

Posted on January 26, 2009 by Russ

Yesterday I reported on Claus Zumwinkel, the former head of Deutsche Post AG, the German mail and logistics giant. Mr. Zumwinkel admitted last week that he evaded paying taxes on €970,000. Presiding Judge Wolfgang Mittrup said Zumwinkel had “knowingly, meticulously, enduringly and thus criminally evaded taxes.”

He received a two year suspended sentence and must pay a fine of €1 million. Mr. Zumwinkel already paid back €3.9 million in back taxes covering 1997 – 2006. Prosecutors asked for a suspended sentence and the judge agreed.

In Germany (and in the United States) it’s a whole lot easier to just pay your taxes when they’re due than to evade paying them.

Spiegel Online Story
AP News Story

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Touch of Brazil Owner Avoids ClubFed

Posted on January 26, 2009 by Russ

There’s something about escort services and tax evasion. It’s a cash business, of course, and the owners get tempted by the cash. After all, who is going to rat on an escort service?

Well, someone did let the IRS know about Touch of Brazil (aka touchofbrazil.net), a high class Bay Area escort service. Its owner, Cristina Warthen (formerly Cristina Schultz), grossed $133,000 from the service back in 2003. But Mrs. Warthen didn’t file a tax return; instead, she dumped the cash in safety deposit boxes and stores some at her home. The IRS seized $61,171 in 2004. She claims that she formed the escort service to pay off her law school student loans (she has a law degree from Stanford).

Mrs. Warthen settled the prostitution charges that were filed against her but then she was charged with tax evasion. Mrs. Warthen, who married the founder of AskJeeves.com (now ask.com), pleaded guilty today to one count of tax evasion. Under her plea agreement, she’ll pay a $313,133 fine, have home confinement for one year, and two additional years of probation.

With the current economic downturn you may be tempted to form an escort service. If you do, remember to pay your taxes. The IRS is an enemy you don’t want to have.

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Will “I Forgot” Work for Me?

Posted on January 26, 2009 by Russ

Well, there’s a new Treasury Secretary tonight. Tim Geithner was approved by the Senate 60-44. Personally, I’m very unhappy with this. Yes, I do believe that failure to pay his taxes does disqualify Mr. Geithner from being Treasury Secretary (and the titular head of the IRS). However, the Senate has the power to Advise and Consent, and they did.

Ten Republicans voted for Mr. Geithner’s confirmation; three Democrats and one Independent voted against.

The next time I represent a taxpayer in an audit or an appeal, I might try out the “I forgot” defense. Unfortunately, I don’t expect to be as successful as Mr. Geithner.

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Blackmail and Tax Evasion from Europe

Posted on January 25, 2009 by Russ

Liechtensteinische Landesbank AG (LLB) is the oldest bank in the principality of Liechtenstein. It’s also very much involved in the current European tax evasion scandal centered around Germany. Two related stories emerged this past week.

First, a German court has convicted three men of attempting to blackmail LLB. The ringleader, identified only as Michael F., obtained 2,325 LLB statements of German clients. Given the high German tax rates many citizens used banks in Liechtenstein as a tax haven for their money. Michael F. decided to engage in a little blackmail; he demanded €13 million in exchange for returning the data. Given the principality’s rules on informing other countries of bank account holders (i.e., don’t ask and don’t tell), this might have been a wise strategy…until he got caught.

Blackmail is just as illegal in Germany as in the United States. Presiding Judge Dirk Fischer in Rostock, Germany delivered the verdict: “Michael F. claimed that he was only proposing a deal to the bank and didn’t coerce anybody. Well, we see that quite differently.” Michael will spend 63 months in a German prison; his two accomplices received suspended sentences. Attorneys for the convicted men promise appeals. Prosecutors will also appeal the sentences as they felt they weren’t harsh enough.

Meanwhile, Klaus Zumwinkel, the former CEO of Deutche Post AG, confessed in Bouchum, Germany to tax evasion. He sequestered €970,000 through another Liechtenstein bank (LGT Group). I doubt the Federal Central Tax Office (BZSt, the German equivalent of the IRS) is pleased and I suspect Mr. Zumwinkel will have to make restitution, pay a fine, and might end up in prison.

We’ve reported on the scandal before. A few Americans may have used Liechtenstein banks, too. If you reported your income, fine. Having a foreign bank account isn’t illegal (though you must report it). If you haven’t, it’s time to seek legal advice. Whether in Germany or in the United States, tax evasion isn’t a good idea.

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Don’t Try These at Home

Posted on January 25, 2009 by Russ

We may have a new President, but it’s the same old tax fraud. Please, don’t try any of these yourself.

>From Snohomish, Washington comes a crime that’s guaranteed to get yourself sent to ClubFed. Simply take the trust fund (FICA and Medicare) taxes that are being withheld from your employees’ paychecks and rather than sending them to the IRS, keeping them for yourself. Using them on trips to Hawaii and Disneyland will only make things worse. That’s what Lynda Mead did, and she’ll have just under three years at ClubFed to think it over. She also must make restitution of $537,000 (including penalties and interest).

Joseph J. Smith and Cynthia McDonough owned two auto body shops in Philadelphia. They were profitable, to the tune of over $1 million from 2001 to 2004. Their income after taxes was the same as their income before taxes—they didn’t report that income to the IRS. Nor did they report income from the sale of two homes. The IRS discovered this and wasn’t pleased. The couple was indicted on tax fraud charges. Last week they were convicted on those charges. Each is looking at a lengthy term at ClubFed, fines, and probable restitution.

Moving closer to home, Giancarlo Pertile owned Art Marble Design Inc. in Moorpark, California. Mr. Pertile followed the same pattern as Mr. Smith and Ms. McDonough: Just don’t report the income. He moved it to bank accounts that his bookkeeper, accountant, and the IRS didn’t know about…for awhile. But then the IRS found out about the tax fraud (which occurred between 1998 and 2002). Mr. Pertile was convicted last week of five tax evasion charges. He’ll be sentenced in May and is looking at a stay at ClubFed, fines, and probable restitution.

Finally, Rick Jones was a developer in Wood River, Illinois. Mr. Jones went through a divorce a couple of years ago, and his financial records came to light. While he reported $1.74 million of income in 2003 the divorce records showed a much higher figure. The IRS got interested and Mr. Jones pleaded guilty to tax evasion this past week. It turns out his real 2003 income was about $5.25 million. Mr. Jones paid $538,000 in tax but he should have paid $1.77 million. He’s looking at a stay at ClubFed, a fine, and restitution.

I’ve said many times that if you don’t remit trust fund taxes bad things will happen to you. I’ve also said that if you’re a tax evader, don’t get a divorce. This week shows again that the more things change, the more they stay the same.

Posted in Tax Evasion, Tax Fraud | 1 Comment

No News Is No News

Posted on January 25, 2009 by Russ

There’s been no real change in California’s budget crunch this week. Democrats still don’t want to cut programs and Republicans still don’t want to increase taxes; all Governor Schwarzenegger wants is a way to resolve the crisis. I don’t see anything changing in the near future, so we’ll see what happens this week.

Meanwhile, Moody’s warned that California bonds will soon be downgraded. That’s because California doesn’t have enough revenue coming in (or too much money going out in expenses).

There’s a hearing scheduled this week for the Governator’s proposal for mandatory furloughs for state employees. California Controller John Chiang, a Democrat, has submitted a brief which supports the employees. The employees may win their lawsuit which will give them a short-term victory. However, the long-term is very clear: California must drastically cut the number of government workers. That’s going to happen and if you work for the state it’s time to realize that. There simply isn’t the money for current staffing at current salaries.

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Indians 5, New York 4

Posted on January 25, 2009 by Russ

New York suffered a setback this week in its fight against the Cayuga Indian Nation. The Cayugas have been selling cigarettes without New York sales and cigarette taxes; district attorneys had previously executed search warrants and seized records from their cigarette stores. A state appellate court issued a preliminary injunction stopping the district attorneys from pursing the matter until the appeal is heard.

The stores, operated by the Cayugas, have been closed since mid-December. It’s likely they’ll soon be reopened. The last time I reported on this the score was New York 4, Indians 3. It looks like a two-run homer for the Indians from this vantage point.

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Snipes Parties, Loses Passport

Posted on January 22, 2009 by Russ

Poor Wesley Snipes. Mr. Snipes has appealed his convictions and sentence for tax evasion. While waiting for the appeal, he was given permission to travel to London and Bangkok for acting roles.

He did, and that was fine. But he also decided to visit Dubai. The new Atlantis, The Palm resort was opening up, and Mr. Snipes was attracted by the $20 million party being thrown. He had his picture taken on the red carpet.

Mr. Snipes should have sent his regrets, because now his passport has been pulled. The US Pretrial Services Office (they supervise convicted individuals that are not incarcerated) requested that Mr. Snipes’ passport be pulled. Dubai is about 3,000 miles from either London or Bangkok; Mr. Snipes violated the Court’s orders. Mr. Snipes will have to be content with domestic roles for now.

I hope it was a good party.

Hat Tip: Don’t Mess With Taxes

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The Family That Defrauds Together…

Posted on January 21, 2009 by Russ

My writing partner and I have been trying to figure out the subject of our next book. We’re thinking about a mystery, and it appears we’ve just had a plot handed to us.

We’re going to open a home study program, catering to low income families. We’ll tell our clients that as a bonus for using our services we’ll prepare their tax returns. All we ask in return is that they assign their Minnesota Education Tax Credits to us. (That credit can’t be assigned, and could only be applied for after the money has been spent.) What could possibly go wrong? Oh, we’re violating a few laws but who will catch us? Anyway, it might make a good plot for a mystery.

I didn’t make this up, though, as the Department of Justice alleges that’s exactly what a Minnesota mother and son did. Carolyn Louper-Morris and William J. Morris, Jr., both of Minneapolis face a 22-count indictment. They’re charged with mail fraud, wire fraud, money laundering, and wire fraud conspiracy. The DOJ alleges that 1,800 took advantage of CyberSutdy 101’s program, and the couple supposedly received $2.4 million from the Minnesota Department of Revenue.

What did the couple do with the money? Well, they did provide over 2000 computers to low-income students…but they apparently forgot to pay K-Mart for the computers. The indictment alleges that the money was partially used for “…$300,000 payment on a home, $74,000 for a new Mercedes SUV and $8,600 for a mink coat, a cashmere and rabbit scarf, and a chinchilla-trimmed hat.” The Minnesota DOR canceled the tax credit for CyberStudy 101 in 2002.

The couple also is alleged to have lied to the Minnesota DOR; the Minnesota DOR asked where the $2.4 million came from and was supposedly told that it was “loan proceeds.”

There is one surprise for me: That this is a case in federal court rather than state court. I would think that if the allegations are true that fraud charges could certainly be filed in state court. But the defendants, like all defendants, are innocent until proven guilty.

By the way, CyberStudy’s website is still open. If you’re interested in their programs you’d better hurry; I suspect they won’t be available soon.

News Story: Pioneer Press, KARE

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