Muffled

Posted on August 13, 2007 by Russ

Later this week I need to bring my car in for service. The auto repair shop I use is on the up-and-up. However, not all of them are. Today, the Tax Court looked at a Colorado muffler shop which apparently decided to use the Cook/Schulz method of tax preparation. The results weren’t pretty.

Colorado Mufflers Unlimited, Inc. is exactly what you’d think: a muffler shop in Colorado. Back in 2000, they decided to start paying their employees in cash. That’s not necessarily a problem. But they didn’t withhold anything from their employees’ wages, didn’t issue W-2s, didn’t file Form 941 (or Form 940), and claimed that their employees weren’t employees. The IRS disagreed, and audited the business, found that they were employees, and that the company owed about $100,000 in back employment taxes. The company took the case to Tax Court.

Adding to the company’s problems was the fact that they requested a refund of employment taxes for early 2000 (they stopped paying them in the middle of the year) and they received an $88,000 refund in early 2001. The IRS filed a court case to get back the refund (there’s nothing in the case that notes how that case went).

The company also lacked good timing; they filed court papers late, and their filings were not allowed. That was their first strike.

Second, the testimony showed that the “employees” were paid by the hour, week, or month—not by the job. In other words, they looked like employees.

Not only that but:

“Petitioner’s behavior during the audit and the pretrial preparation of this case was characterized by a consistent lack of cooperation and by considerable obfuscation designed to prevent respondent from ascertaining the facts regarding petitioner’s business, business payroll, and workers. It appears that petitioner used fictitious names and/or other companies to hide the nature and extent of its business activity from respondent during the years at issue.”

That was strike two.

Then the Court looked to see whether an employer/employee relationship existed by evaluating seven factors. The Court found that all of the factors favored an employment relationship. Needless to say, the Court concluded, “After reviewing the record and weighing the factors, we conclude that petitioner has failed to prove that respondent’s determination treating the workers as petitioner’s employees was in error.” That was strike three, and the case went to the IRS.

And the Court was not amused with the company’s obfuscation and use of “frivolous or groundless” tactics. Even though the IRS did not ask for a penalty under §6673(a)(1), the Court imposed one of $3,000.

Case: Colorado Mufflers Unlimited, Inc. v. Commissioner, T.C. Memo 2007-222

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2007-2008 IRS Priority Guidance Issued; Poker Still on the List

Posted on August 13, 2007 by Russ

Today, the IRS issued its 2007-2008 Priority Guidance Plan. These are the major issues the IRS expects to complete during the year. There are 303 items on the list.

Poker tournaments remain on the IRS’ radar screen. Like the previous two Priority Guidance Plans, one of the 303 projects is issuing a revenue procedure regarding the withholding rules for poker tournaments.

Other items on the list that appear interesting include:
– Guidance on the treatment of wrap fees;
– Guidance under section 263A regarding the treatment of post-production costs, such as sales-based royalties;
– Revenue procedure under section 6213 regarding internet and oral change of address requests;
– Guidance under section 6676 regarding the penalty for erroneous claims for refund; and
– Guidance under section 6694, as amended, regarding the penalty for understatements of taxpayer’s liability by tax return preparers.

There’s plenty more, especially in technical guidance issues. I’ll point out (as I did last year) that many of these 303 items will not be addressed by the IRS during the coming twelve months.

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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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