More than a Pinch of Fraud

Posted on August 12, 2007 by Russ

While I’ve been gone for the last two weeks, I collected many stories about tax fraud. Here are just a few of them (if I included all of them, it would fill many pages of this blog).

Two members of a former Florida advertising agency pleaded guilty to conspiracy in a $1.5 million tax fraud. Michael and Michelle Cragan created bogus invoices, with the money mainly going to a third individual, Douglas Haase. Unfortunately for all concerned, the phony invoices were included on the business’ tax return. And with Mr. Haase receiving $1.5 million that wasn’t included on his tax return, we’re not talking peanuts here. Mr. Haase previously pleaded guilty. All are looking at spending time at ClubFed when sentenced (plus restitution).

>From Dickson City, Pennsylvania comes the story of Thomas Winnicki and his company Keystone Employee Benefits, Inc. He was in the employee leasing business. So far, so good. His clients paid him over $1 million for employment taxes that he was supposed to remit to the government. But when the business was going through a downturn, he used the $1 million for personal expenses rather than turning it over to the IRS. He pleaded guilty, and will be spending 18 months at ClubFed, and must make restitution of the over $1 million. The $100 “special assessment” he must also pay is the least of his worries.

A father-daughter team is accused of not paying taxes on $3.1 million of income. From Holmdel, New Jersey comes the tale of Anthony Ambrosia and his daughter, Lisa Derosa. The pair allegedly set up bank accounts in the names of children and other family members, and moved over $3.1 million into these accounts. They’re also accused of “structuring,” deliberately making deposits under the $10,000 federal currency transaction reporting limit. Mr. Ambrosia allegedly made numerous $9,500 deposits. His bank warned him about this, but he allegedly continued doing this. I suspect that the bank issues a Suspicious Activity Report (this isn’t mentioned in the news story but appears to be a reasonable conclusion), and the IRS and DOJ followed-up and discovered the alleged misdoings. If convicted, both Mr. Ambrosia and Ms. Derosa are looking at lengthy terms at ClubFed.

Finally, two tax “gurus” won’t be peddling their wares any time soon. I earlier reported about the convictions of Wade and Laura Cook. Wade Cook received 88 months—that’s 7 years, 4 months—at ClubFed. As Joe Kristan reported,

“Mr. Cook doesn’t seem to expect to appear before Judge Zilly again anytime soon:

Asked afterward to comment on the outcome, Cook remarked, “I’m not going to tell you that this judge is an a**hole. I’m not going to say that.”

Good thing he showed so much restraint.”

Joe also told the story of “We The People.” Robert Schulz had been enjoined from providing a tax scheme that caused employees and employers to not withhold from wages. Additionally, the “We The People” webpage must display the injunction. As of now, it doesn’t. Of course, expecting a member of the tax protester movement to comply with a ruling that would put him out of business (it’s hard to sell a product when the first thing potential clients would see on your webpage is an injunction against selling that product) isn’t a good bet. One last point: If you happened to be a customer of “We The People,” expect a visit from the IRS in your future. “We The People” is required to turn over its customer list to the government.

So it was not a good week to be a fraudster. And it was an especially bad week for tax protesters, as two of their champions discovered that there is an income tax, and you must pay it.

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Not a Good Week for Bozo Tax Preparers

Posted on August 12, 2007 by Russ

There are good tax preparers, bad tax preparers, and bozo tax preparers. There have been two recent stories about the latter group—tax preparers, please don’t copy their methods.

>From San Jose, California, comes the story of Melinda Newens. The former Jackson-Hewitt employee had a neat method of making sure she had a profitable year: she increased the deductions on her clients’ tax returns, adding phony deductions. She did this to increase her fees, as she took fees from the refunds (that’s a violation of ethics rules). In any case, her scheme collapsed when the IRS found out about it. The loss to the Treasury was over $1 million. Ms. Newens received two years at ClubFed, and has been barred from being a tax professional in the future.

Harold Hunter used to be a tax preparer in Stanton, Mississippi. He’ll soon be a ClubFed resident (for ten months). Mr. Hunter was kind to his clients; he, too, invented fraudulent deductions for his clients’ returns. He pleaded guilty last year and was just sentenced. As part of his plea agreement, he will also no longer be a professional tax preparer.

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No Progress on the Budget

Posted on August 12, 2007 by Russ

I’ve been gone for two weeks (one week on vacation, one week in Florida on business), and California’s budget situation is unchanged. The GOP wants a balanced budget, an agreement that Attorney General Jerry Brown won’t sue developers over global warming issues. Democrats aren’t budging, hoping that they can convince two GOP State Senators to change their positions. Otherwise, the budget is anything but balanced.

Meanwhile, the Los Angeles Times proclaims in an editorial, “You’ve Already Won, GOP.” The Times states that the budget approved by the Assembly is a win for the GOP. It is, when compared with the original Democratic proposal.

But overall, wouldn’t it be in California’s best interest to have an actual balanced budget, and an Attorney General who helped California’s economy grow rather than to use resources on wasteful lawsuits? California, in my opinion, needs a budget that’s good for all of the state’s residents, including our children (and grandchildren); they are the ones who will be paying back the debt we have been racking up over the past decade. It’s time for California to bite the bullet and balance the budget.

For those of you who wish to hear more on this, the Exchange Club of Irvine will be hosting State Senator Tom Harmon (R-Huntington Beach) this Tuesday. Join us at noon at the Irvine Marriott (19000 Von Karman, just south of the 405 Freeway); I’m sure the budget impasse will be front and center in Senator Harmon’s talk. If you are coming, please send me an email so that we can have enough seats for our visitors.

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Probate in CA: Notify the FTB

Posted on August 11, 2007 by Russ

The passage of AB361 in California has modified California’s Probate Code (§902). Beginning July 1, 2008, estate representatives must notify the Franchise Tax Board when an estate is opened for probate. Current law requires notification within 90 days by an estate’s representative only if a claim from the FTB is deemed “likely.”

The change in the law does not change the FTB’s ability to file claims against an estate.

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A Strip of Evasion

Posted on August 7, 2007 by Russ

I’m heading to Florida tomorrow, so posting will be light to non-existent until the weekend. Until then, here’s yet another story of someone who got into tax trouble from a strip club. And, yes, the name of the individual did grab my attention.

Matthew Fox (no relation) was a bouncer at an Atlantic City, New Jersey strip club beginning in 1998. Later he was the manager of the club. Last week a jury convicted him of five counts of tax evasion for not reporting the approximately $400,000 he earned from the club (and evading about $110,000 in taxes according to this story). Mr. Fox and his wife were acquitted on a count of criminal conspiracy.

The indictment alleged that Mr. Fox was paid in cash for his work, but didn’t report the cash as income on his tax returns. Whether you are paid in cash, checks, or casino chips is irrelevant—in general, all wage income is taxable.

So if you do end up working at a strip club, do yourself a favor and report your income. It’s a lot easier and cheaper to pay the taxes now then it is to find yourself in court on trial for tax evasion.

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Vacation

Posted on July 27, 2007 by Russ

Yes, it’s time for my annual vacation. I’ll be back on August 6th; however, I’m heading out of town on August 7th for the remainder of that week on a business trip so posting will likely be light until August 13th.

If you need a fix on the California budget mess, I urge you to go to the Flash Report. They’ll keep you up to date on the budget.

If you need a tax fix, try any of the tax bloggers listed on the blogroll on the right.

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Will There be a Budget When I Get Back From my Vacation?

Posted on July 27, 2007 by Russ

I’m leaving tomorrow for a ten-day vacation. Will California’s legislature have a budget by the time I return?

Republicans in the State Senate want a balanced budget. State Senator Tom Harman (R-Huntington Beach) told the Flash Report, “Senate Republicans have placed on the table for consideration by the Democrats a plan that reduces the operating deficit to zero.” That’s what the Republicans want.

The GOP budget proposal has cuts—cuts in welfare spending, cuts in unfilled positions in state government, and cuts that do not impact education, public safety, and environmental programs.

However, the Democrats don’t like these cuts. They hit Democratic constituencies, so they oppose them. However, for any budget to pass the legislature, it must have a 2/3 vote in each house. Though the Democrats have a majority in each house, they must get Republican votes to pass a budget.

The GOP is united, and part of this stems from a silly stunt that State Senate President Pro Tem, Don Perata, did. He locked the entire State Senate in the chamber for 30 hours, figuring that by doing so he would force two Republicans (the number needed to defect to pass the budget) to join with the Democrats.

It backfired.

Meanwhile, in coming days we will see more impacts in California. I don’t know if we will see a state government shutdown (such as occurred earlier this year for a few days in Pennsylvania or last year in New Jersey). This will hurt government workers.

California does need to look at the budget and view it honestly. A balanced budget is required under the state constitution. It would be nice if our legislators in Sacramento actually obeyed the law.

As to the chance there’s a budget on August 6th (when I return), I think the odds are still even money.

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Like Father, Like Son

Posted on July 25, 2007 by Russ

Following in your father’s footsteps can be a very good thing. However, when you’re following your father into (potentially) prison for tax evasion, that’s not a good thing at all.

Let’s first talk about the father, David Pflum. The elder Mr. Pflum thought he found two very useful books, “The Great Income Tax Hoax” and “How Anyone Can Stop Paying Income Taxes.” Then the IRS got involved. They issued summonses and subpoenas, seeking records showing that Mr. Pflum earned an income and owed income tax. Mr. Pflum was indicted for not filing a federal income tax return (three counts) and not paying federal employment taxes (eight counts). He admitted in court that he didn’t file the taxes. He was found guilty on all 11 counts. He appealed, and lost. Oh, Did I mention that Mr. Pflum followed the advice of Irwin Schiff, who (like Mr. Pflum) is now residing at ClubFed? And, yes, the tax evasion involved the usual suspects—trusts set up specifically to avoid taxes. (Hint: They don’t work.)

We now turn to the son, Gregory Pflum. Mr. Pflum the younger was indicted last year. He was warned by the IRS that not paying taxes doesn’t work. Unfortunately for him, from 1998 through 2003, he didn’t pay taxes. He had the opportunity to file those returns (albeit late, with penalties and interest). Instead, when he was contacted by the IRS he gave the agents tax protester materials.

Mr. Gregory Pflum pleaded guilty to one count of attempting to evade taxes by not filing a return. Though he faces up to five years at ClubFed, he will probably receive a shorter term.

Sometimes, you shouldn’t follow your father’s advice.

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So You Catch Barry Bonds’ 756th Homer…Did You Just Lose $100,000?

Posted on July 25, 2007 by Russ

An interesting article this morning in the Wall Street Journal: What are the tax implications of catching Barry Bonds’ 756th home run? Sometime in the next few weeks some lucky fan will likely catch the ball. (There’s always the chance, albeit slight, that the ball will ricochet back onto the field, say, off a foul pole, and this issue will be moot.)

Tom Herman in today’s Tax Report in the Journal (Note: Pay Link) ponders that question, and gets different answers from different experts. The IRS prefers not to answer the question. Alice Abreu, a professor at Temple University Law School, believes its taxable income the moment its caught. Other unnamed law professors disagree. And Don Korb, Chief Counsel of the IRS (and a baseball fan), told the journal, “Please, whatever you do, don’t ask me that question.”

My view is that a fan, having purchased a ticket, has the right to take with him from the game anything thrown or hit from the field of play (such as a baseball). If he is lucky enough to catch the ball, he’s paid for it by the ticket.

However, if (or should that be “when”) he sells the baseball—and estimates of the worth of Bonds’ 756th home run baseball start at $400,000—that lucky fan will owe tax on the proceeds.

Of course, we’re dealing with the IRS and it wouldn’t shock me for them to interpret this completely differently.

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Why Trust Fund Tax Fraud is Bad

Posted on July 24, 2007 by Russ

We received an email regarding the post we did on Ace Tire & Parts. The owners of Ace are accused of violating federal employment laws and have each pleaded guilty to one count of tax fraud.

In any case, we were asked the following:

“just read your article. where did you get your information for bozo scheme failed? what makes you think these guys are going to club fed? what do you know about pa tax laws with regard to this case? isn’t this a rather common practice among small businessmen across the country? give me your thoughts.”

Well, as to where I got the information, it was published in multiple places, including the Pittsburgh Post-Gazette. I think they’re going to prison because of the nature of their crime. These individuals robbed what are called “Trust Fund” accounts. When I wrote, “And the DOJ and IRS really, really don’t like violators of employment tax laws.” And that’s what they did, to the tune of somewhere between $400,000 and $1,000,000.

As to whether this is a common practice, definitely not. Anyone who thinks that most small business owners steal from employment tax trust fund accounts needs to think that through. Do you really believe that most small business owners are tax cheats? Thankfully, most Americans do pay their taxes, and most business owners correctly forward the employment taxes they collect to the government.

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