Too Much Fraud

Posted on October 19, 2008 by Russ

I counted over thirty interesting tax evasion stories from the last few days. There’s no way I’m going to put them all in a post so here are the highlights.

First, let’s head to Gallatin County, Montana. Ruth Amande knew that having children would give her a tax deduction. So she decided to have twins—Victor and Victoria, “born” on December 28, 1995. She applied for social security numbers for her twins in 1997. There was only one problem…well, two problems: neither child really existed. Unlike the disk jockey in Wyoming who successfully deducted his dog Ms. Amande will be making restitution.

The upcoming trial of attorney James Perdigao is big news in New Orleans. Mr. Perdiago has been accused of stealing $30 million from his old law firm, allegedly sending $20 million of that to Switzerland, and has been facing 59 counts including fraud, tax evasion, and money laundering. Make that 60 counts: Mr. Perdiago has had a charge of computer hacking added. He is alleged to have used his girlfriend’s computer to hack into his old law firm’s computer network.

Meanwhile, in nearby Vicksburg, Mississippi Marshall Sanders will face tax evasion charges in November. Mr. Sanders is accused of not filing tax returns since 1994 while earning $3.4 million in 2001, 2002, and 2003. He faces three tax evasion charges (one for each of those years) for allegedly using a trust account to hide his personal income.

>From the Bozo tax preparation wing we find Raymond Ekpedeme of Laurel, Maryland. Mr. Ekpedeme operated Erikson Tax Service though it could be called Western Tax Service East. He followed the same plan as Western—phony deductions, false credits, and inflated numbers. He had lots of satisfied clients. Unfortunately for Mr. Ekpedeme the undercover IRS investigator wasn’t pleased when he got a $1300 refund he didn’t deserve. Mr. Ekpedeme pleaded guilty to tax evasion charges and will be sentenced next February; his clients can expect “Dear Valued Taxpayer” letters soon.

Louis Xifaras had an interesting method of attracting business to his former company, Innovative Network Solutions. He used kickbacks to workers at Southern New England Telephone/SBC (now AT&T). He deducted those payments on his corporate tax return as “salary.” Unfortunately, kickbacks aren’t deductible under federal tax law. And more unfortunately for Mr. Xifaras was that the federal government began investigating the fraud. He pleaded guilty and will have to make restitution, serve a year and a day at ClubFed, and pay a $50,000 fine. The tax owed is only $222,000, but there’s now an additional $167,000 in penalties and $164,000 in interest.

Finally, the Hawker 4000 looks like a great business jet though it carries a pricetag of $21 million. But I do know where you may be able to get one for less than retail. The very first Hawker 4000 was delivered to Gary Hall in June. He runs Sunflower Supply Company in Galena, Kansas, a tobacco wholesaler. Mr. Hall and seven associates are accused of avoiding $25 million in cigarette taxes to Oklahoma and several Indian tribes. If Mr. Hall is acquitted (he and his associates face 43 charges) he’ll get his plane back.

That’s a lot of fraud for just a few days. Can we lighten up for next week?

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California Budget Problems

Posted on October 19, 2008 by Russ

Surprise, surprise: California’s budget, assembled with smoke, mirrors, and lots of hope is already in trouble. Analysts already see a $1 billion deficit and think that $3 billion is a more likely number…and we’re still in October. The fiscal year has over eight months to go. Given the probable lowering of income tax collections next year things could get ugly in Sacramento again.

Republicans still pledge no new taxes while State Senate President Pro Tem Don Perata wants to tax goods and services that haven’t been taxed in the past. Since tax increases require a 2/3 vote of the legislature (meaning that Republican votes are required) don’t expect any substantial tax increases.

Given the rhetoric you should also not expect any meaningful legislation until the very last minute.

News Stories: New York Times, Forbes (AP), Los Angeles Times

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2009 Inflation Adjustments

Posted on October 19, 2008 by Russ

Now that 2007 tax returns are complete it’s time to begin thinking about 2008 and 2009. The IRS announced this past week inflation adjustments for 2009:

– Personal exemptions will increase from $3350 in 2007 to $3500 in 2008 to $3650 in 2009;

– The standard deduction will increase from $5350/$10,700 (single/married filing jointly) in 2007 to $5450/$10,900 in 2008 to $5700/$11,400 in 2009;

– The maximum foreign earned income exclusion will increase from $85,700 in 2007 to $87,600 in 2008 to $91,400 in 2009; and

– The annual gift tax exclusion will increase in 2009 to $13,000.

Meanwhile, the Social Security Administration announced that the annual wage limitation for social security tax in 2009 will be the first $106,200 in wages (up from $102,000 in 2008). For the self-employed, this means that the self-employment tax will be 15.3% on the first $106,200 in self-employment earnings in 2009 and 2.9% on earnings above that.

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Survivor: Morgantown Renewed for 12 Months

Posted on October 15, 2008 by Russ

Richard Hatch, the Survivor winner who was convicted of tax evasion, won’t be leaving the Morgantown, West Virginia Federal Correctional Institution anytime soon. The US Supreme Court declined to hear his appeal today.

Mr. Hatch had charged that the trial court didn’t allow him to ask certain questions on cross-examination. The Appeals Court had ruled, “Here, the district court’s limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive.”

And that’s it. There are no more immunity challenges left, no more places to appeal. Mr. Hatch will have to serve out the remaining twelve months of his sentence. In the end the 300 million witnesses were correct.

Hat Tip: How Appealing

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Two Days Away

Posted on October 13, 2008 by Russ

The deadline for filing tax returns on extension is this Wednesday, October 15th. That’s also the deadline for funding your SEP IRAs. If you procrastinate beyond this date you will be hit with the failure to file penalty (if you owe any tax) of 5% of the tax due per month.

Your paper-filed returns must be postmarked by the 15th. Electronically filed returns must be transmitted by the 15th.

Joe Kristan put it very well:

If you haven’t gotten your tax information to your preparer yet, it is definitely time to panic. And if your preparer charges then you an arm and a leg for the doing the return because you brought your information in three days before the extended return deadline, well, don’t do that next time.

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A Bit More Evasion

Posted on October 12, 2008 by Russ

The tax evaders were out in force this week. I could have filled several posts with their escapades. Here are the lowlights.

Let’s start with a Bozo tax preparer. First, from Upper Darby, Pennsylvania comes the story of Nyon Geleh-Saylee. Mr. Geleh-Saylee truly wanted to help his tax preparation clients. He did this by inflating the deductions on their returns costing the federal government over $89,000. He was convicted back in June for filing false tax returns. He avoided ClubFed and will spend six months in home confinement.

Todd Newman is a CPA in Yonkers, New York. Mr. Newman was arraigned on Friday on charges of grand larceny and failure to file a state income tax return. Mr. Newman allegedly stole $1.6 million from one of his clients. He was supposed to send the money to New York state for payroll taxes withheld; instead, he allegedly wrote checks to himself. He’s looking at a lengthy term in state prison if convicted.

Here’s a scheme that sounds intriguing. Let’s start a banking system to cater to the tax protester movement. We’ll hide their money, give them access so they can print money orders when the need to, and we’ll ignore those pesky banking and tax laws. Other than violating a few federal statutes (and possibly some state laws) it’s sounds kosher, right? Well, the man who thought up this idea will likely get some time to consider it at ClubFed. Wayne Hicks, Sr. of Berryville, Arkansas pleaded guilty to one count of tax fraud conspiracy this past week. Mr. Hicks also admitted that he’s neglected to file his own tax return for the last sixteen years.

Finally, a follow-up on the story of Kevin Morse of Austin, Minnesota. Mr. Morse was sentenced this past week to 30 months at ClubFed. Mr. Morse was told by his accountant that he owed about $100,000 in back taxes but chose to use a tax protester argument to avoid the taxes. The good news is that the promoters of the scheme that Mr. Morse used are awaiting trial in Oregon.

Remember, if it sounds too good to be true it probably is.

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Escort to Evasion

Posted on October 12, 2008 by Russ

Christina Warthen appeared to have everything. She’s a graduate of Stanford Law School. She’s married to the founder of Ask Jeeves (now Ask.com). She’s also allegedly a tax evader who ran a high priced escort service called TouchofBrazil.net.

Back in 2004 IRS agents raided her apartment and other locations seized over $61,000. That was just some of the funds that she allegedly earned from her business; the IRS alleges she cleared over $133,000 but didn’t file a tax return. Whether her business was an escort service or an older profession isn’t relevant—all income, legal or illegal, is generally taxable.

Mrs. Warthen will be arraigned later this week; she faces one count of tax evasion. So if you have an escort business try to remember to file your tax returns. If you don’t you may find yourself escorted to ClubFed.

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We Get Questions on Gambling Income

Posted on October 12, 2008 by Russ

Over the past few weeks we received a couple of questions. Here they are with answers.

Timing of Online Gambling Income
Question—What if you are gambling on an online site over the course of a year and you win some money, however you don’t make a withdrawal from the account that year? Say you save up what you win for two years then withdrawal some do you have to report it the year you win or when you actually withdraw it ad have in your hand?

The year your income is earned is the year that it is taxable. If an individual has online gambling income earned in 2008 but doesn’t make a withdrawal in 2008 he still has 2008 income that must be reported on his 2008 tax returns.

Ohio and Gambling Losses
Question—I’m a resident of Ohio. I think it’s ridiculous that even though I’ve been a net loser in gambling this year I must pay state income tax on my “wins.” How can this be constitutional?

In several states, mostly in the Midwest, the state income tax is based on gross income (Federal Adjusted Gross Income with a few changes); no itemized deductions are allowed. Under the US Tax Code gambling income is considered Other Income included in Federal AGI; gambling losses are an itemized deduction allowed up to the amount of wins on Schedule A.

The situation you describe—being taxed on phantom gambling income—is quite possible. There is a Wisconsin case (Wisconsin also doesn’t allow gambling loss deductions) which explains the philosophy. As I quoted in March 2007:

“Effective January 1, 2000, gambling losses were no longer offset against gambling winnings under the Wisconsin tax code because, effective on that date, Wisconsin no longer permitted as a deduction from Wisconsin taxable income “[m]iscellaneous itemized deductions under the Internal Revenue Code,” see Wis. Stat. § 71.07(5)(a)7 (2003–04), one of which, the Department contends and Dettwiler does not dispute, was the deduction for “wagering losses,” under section 165(d) of the Internal Revenue Code…His contention that he should nevertheless be permitted to subtract from his Wisconsin taxable income the offset permitted by section 165(d) of the Internal Revenue Code is not only circular and without merit, but is wholly contrary to the legislature’s decision to eliminate such offsets effective January 1, 2000.

“The Tax Appeals Commission decision is perfectly logical, appropriate, and correct. Accordingly, we affirm.”

It’s actually worse in Ohio. This will not only impact your Ohio income tax but your city income tax. Ohio is truly not a good location to be an amateur gambler. I suggest you contact your state legislators and request that the law be changed.

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A Gotcha in Minnesota

Posted on October 9, 2008 by Russ

One form of business entity that is coming into increasing use is the Limited Liability Company (LLC). But that may change in Minnesota based on a ruling from an administrative law judge in that state.

Generally an LLC is a disregarded entity for federal tax purposes. Most states follow the federal guidelines though a couple of state require reporting. An LLC in California must file Form 568 and pay a minimum tax and possibly a gross receipts tax.

Minnesota, though, is about to take this one step further. The Gopher State will soon charge sales tax on transactions between single member LLC owners and the LLC. Joe Kristan calls this “an awful idea.” He’s right—Minnesota is effectively imposing sales tax for LLC owners when they move an object from their left hand to their right hand.

Hopefully the Minnesota Department of Revenue or the Minnesota legislature will reconsider this. Otherwise single member LLCs may become dinosaurs in the Land of 10,000 Lakes.

Hat Tip: Roth Tax Updates

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We’re #3!

Posted on October 6, 2008 by Russ

And that’s not good news for Sacramento.

The Tax Foundation came out today with their annual report of state tax climates. No surprise, California is the third worst climate, surpassed only by New Jersey and New York. First, here are the ten best state climates for business taxation:

1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Montana
7. Texas
8. New Hampshire
9. Oregon
10. Delaware

And now the ten worst state tax climates:

41. Minnesota
42. Nebraska
43. Vermont
44. Iowa
45. Maryland
46. Rhode Island
47. Ohio
48. California
49. New York
50. New Jersey

There is some good news for California. The Tax Foundation no longer believes that the Bronze Golden State has the worst individual income tax in the country. It’s not that California has improved; rather, Maryland now has a worse system.

Maryland managed a remarkable drop—from 24th in last year’s index to 45th in this year’s—by raising its individual income tax, corporate income tax, sales tax and cigarette tax all in the same year. Maryland added four new brackets to the individual income tax, increasing the top rate by 1.5%, adding new complexity, and introducing a big marriage penalty. In fact, we now rate Maryland’s as by far the worst individual income tax in America, displacing California for that dubious distinction.

California ranks poorly in almost every category: 45th for corporate tax, 49th for individual income tax, and 43rd for sales tax. The lone bright spots are being ranked 16th for unemployment insurance and 15th for property tax.

There’s bad news on the horizon for California. The recently enacted budget restricted using net operating loss carryforwards. That will lower California’s score in future years. But our legislators appear to have one goal—making sure California goes to the top. Nevada, Oregon, and other nearby states aren’t complaining in the least.

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