No Evading for Them

Posted on June 24, 2007 by Russ

Besides Mr. Yagman, several other individuals found their tax evading days ended. We also have a story detailing potential tax problems for a Los Angeles politician’s wife.

We have two from the high tech world. From suburban Pittsburgh comes Pradeep Kumar Walia. Mr. Walia is the former CEO of Atlas Software. Back in 1999, he reported $231,000 of income and paid $65,500 in tax. The problem? His actual tax was about $10,000 more. Oops. Mr. Walia pleaded guilty and will receive probation plus will have to make restitution.

Last year I reported on the saga of the CEO of VaporTech. John Frances Griffin pleaded guilty to two counts of tax evasion last week, and has agreed to forfeit $75,000 worth of personal items. He’s facing a term at ClubFed for his evading tax on $1.1 million of income, plus a likely fine.

>From Providence, Rhode Island, comes the story of an entrepreneur who outdid Mr. Griffin. Neil Stierhoff ran a mail-order electronics business. It was apparently doing quite well, especially as his net after taxes was close to his net before taxes. Of course, that was due to Mr. Stierhoff not paying taxes on $1.2 million of income through allegedly using aliases and cash. He was found guilty last week, and based on federal sentencing guidelines, is looking at about four years at ClubFed.

Moving to Enid, Oklahoma, we get the story of a bookkeeper who created her own W-2 form. That might be all right, if it was accurate, but she missed just a bit of her income. Actually, it might be more appropriate to say that her W-2 recorded just a bit of her income. She, too, pleaded guilty, and Margaret Renee Schram is looking at five years at ClubFed plus restitution of $270,000 to her ex-employer and restitution to the IRS.

Finally, this last story highlights the perils of public office. Rocky Delgadillo is the Los Angeles City Attorney. Recently, his wife has been accused of driving Mr. Delgadillo’s city-provided SUV. Adding an insult to the alleged injury, the Los Angeles Times reported yesterday that Mrs. Delgadillo failed to file California income tax returns for her business and didn’t obtain a Los
Angeles city business license. She has also been accused of having city employees baby-sit her sons during normal business hours. As a hint to any aspiring politicians, I strongly suggest you pay all of your taxes and ensure that all of your businesses have all appropriate licenses. You can be sure that your opponents will check public records in these days of public records being on the Internet.

So a little evasion resulted in probation, but some substantial evasion got time at ClubFed. It’s a lot easier not to evade in the first place, but that temptation is just hard to resist for some.

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Yagman Guilty

Posted on June 24, 2007 by Russ

Civil rights attorney Stephen Yagman was found guilty on 19 counts of tax evasion, money laundering, and bankruptcy fraud on Friday in Los Angeles. Yagman will be sentenced on September 24th.

Yagman was a considered combative civil rights attorney, and fought many battles with the Los Angeles Police Department and other agencies. Yagman claimed during his trial that he was “targeted” because of his history of fighting US law enforcement agencies. However, it may have been his non-payment of taxes that caused him to be targeted. Yagman, after filing for bankruptcy, had a lavish dinner and bought expensive shoes. That didn’t sit well with the jury.

Yagman is looking at spending a few years at ClubFed.

News Story: Los Angeles Times

Prior coverage: Here and Here

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The AMT May be Unfair, But You Must Pay It

Posted on June 21, 2007 by Russ

The Tax Court looked at two cases involving the Alternative Minimum Tax (AMT) today. In both cases, the taxpayers impacted by the AMT protested that they shouldn’t have been impacted by the AMT because they either didn’t have preference items or that they’re the kind of people who shouldn’t have to pay AMT.

The Tax Court’s response? Tough.

In the first case, the petitioner had just $121,000 of adjusted gross income (AMI), and he ignored the AMT when he completed his tax return. However, the IRS computers found that he owed an additional $4,176 because of AMT. He had no preference items.

However, if you’re “lucky” enough to have a high enough level of AGI (typically over $100,000), and enough itemized deductions (and our lucky taxpayer had over $35,000), you can get hit by the AMT. Petitioners arguments were restricted to the fact that he worked two jobs to support his family and shouldn’t have to pay AMT because Congress didn’t intend for the AMT to impact the nonwealthy working class.

“The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected…Congress enacted the AMT and we have no authority to disregard them.”

In the second case, our taxpayers did have a preference item—a $342,000 capital gain. But the AMT was never intended to cover taxpayers in their situation, or so they said.

Wrong.

“We also remind petitioners that this Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax.”

So yet again the Court saw two cases where the AMT was shown to be unfair. The final score? AMT 2, Honest Taxpayers 0.

I wonder if Congress is aware of the storm that will be unleashed next year if they don’t stop the AMT monster….

Cases: Kamara v. Commissioner, T.C. Summary 2007-103 and Moore v. Commissioner, T.C. Summary 2007-104

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Be Careful What You Ask For

Posted on June 20, 2007 by Russ

I haven’t blogged about a tax protester case at the Tax Court in some time. But one was decided today that had several humorous elements—more than enough to make it ripe for reporting.

Chester Davis didn’t file a 2001 tax return. In 2005, he received a notice of a lien from the IRS (based on having income in 2001 but not paying tax). He filed an abuse of discretion petition with the Tax Court. Both sides asked for summary judgment.

Mr. Davis hired a representative, Jeffrey Hubacek, who had been permanently barred from dealing with the IRS. So the IRS wouldn’t talk with Mr. Hubacek. “…[I]t was not an abuse of discretion to exclude Mr. Hubacek from representing petitioner….” Strike one.

So what about his arguments? Well, “[T]he record indicates that the only issues petitioner raised throughout the section 6320 administrative process and in his petition to this Court were frivolous and/or tax protester type arguments. We do not address petitioner’s frivolous arguments with somber reasoning and copious citations of precedent, as to do so might suggest that these arguments possess some degree of colorable merit.” Strike two.

What about the tax liability underlying the case? Well, Mr. Davis never filed a return; he wasn’t entitled to contest the liability, and “…he presented nothing more than an income tax return with a zero in each pertinent box.” That’s three strikes, and Mr. Davis was out. But he did get one of his wishes granted: summary judgment. Except it was summary judgment for the IRS and against Mr. Davis.

But the Court wasn’t done. “Respondent has requested that the Court impose a penalty under section 6673 on the ground that the arguments advanced by petitioner to respondent and the Court are frivolous.” Yes, if you file a frivolous case in Tax Court, you can be penalized. The Court found Mr. Davis’ case thoroughly frivolous, and so he found himself owing an additional $2,000 for the frivolity. And that might not be the last time we see Mr. Davis’ name mentioned as there are two other cases working there way through Tax Court brought by Mr. Davis; he was warned (in a footnote) to not be frivolous. Under section 6673 the Court could have penalized Mr. Davis up to $25,000. I expect that if there’s a recurrence he’ll see a five-digit fine.

So be careful what you ask for as you might just get your wish.

Case: Davis v. Commissioner, T.C. Memo 2007-160

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FBAR, SARs, and CTRs

Posted on June 20, 2007 by Russ

This morning I sat in on an IRS teleconference about Foreign Bank Account Reporting (FBAR), and the Treasury Department’s Form TD F 90-22.1. Last week, during my annual CSEA SuperSeminar continuing education program, this was also discussed.

As I’ve mentioned previously, if you have $10,000 or more at any one time in a foreign bank account(s), you must do two things. First, you must check a box on Schedule B of Form 1040 to note that you have a foreign bank account, and list the country or countries where the account(s) are. You must also fill out Form TD F 90-22.1 by June 30th (July 2nd this year, as June 30th falls on a Saturday) and mail it to the Department of the Treasury (not the IRS). Examples of reportable foreign bank accounts include bank accounts, securities accounts, and accounts such as Neteller and Firepay.

What are the penalties for not reporting a foreign bank account? If you’re found to be willfully not reporting the account, it’s the greater of $100,000 or 50% of the value of the account, plus possible criminal penalties. If it’s not willful, the maximum fine is $10,000.

So if you had a foreign bank account in 2006, make sure you fill out the form. As the IRS told us during the teleconference today, the FBAR is being used to support the US’ anti-money-laundering laws.

Another component of those laws are Currency Transaction Reports (CTRs). If you accept a payment of more than $10,000 in cash, you’re required to complete a CTR. A CTR is used by a bank or other financial institution. There’s a special form for a casino (Casino Currency Transaction Report). If you’re in a trade or business, and you accept more than $10,000 in cash as a payment (say you’re an automobile dealer, and you receive a $15,000 cash payment for a car), you must fill out Form 8300.

Let me relate a horror story that a tax attorney told us at last week’s SuperSeminar. A businessman runs a chain of laundries, and receives a lot of cash. He ends up depositing $18,000 each night. So he takes the money to his local bank, deposits the money, and waits the extra 30 – 45 minutes for the bank to fill out the CTR. The “helpful” teller tells the businessman, “If you deposited $9,000 twice a day, I wouldn’t have to complete the CTRs and you would be out of here much faster.” So the businessman now makes deposits twice daily. Problem solved, right?

Well, one problem was solved, but another blossomed. By making multiple deposits of cash daily, it appeared that the businessman was structuring his deposits. Structuring is a crime if you deliberately change your banking to avoid federal reporting requirements. The bank generated a Suspicious Activity Report (SAR) on the businessman’s cash deposits. The bank is not allowed to tell the customer that a SAR has been generated. The businessman didn’t know anything was wrong until two armed federal officers knocked on his door, and started telling him, “You have the right to remain silent,….”

Eventually, after hiring a tax attorney, and spending quite a bit of money, the businessman got the charges (felonies) dropped.

The IRS investigates many SARs that are filed; they don’t look at nearly as many CTRs. And it’s easy to see why that’s the case. Over 15.3 million CTRs were filed by financial institutions in 2004 (an additional 737,000 CTRs were filed by casinos, and 162,000 Form 8300s were filed). But only 536,000 SARs were filed by financial institutions in 2004.

So what’s the moral of this tale? File your information reports (TD F 90-22.1) and don’t structure your transactions. Indeed, if you deposit $9,000 in cash twice daily, you may want to change your deposits so that one of your deposits is over $10,000 each day.

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Flying Carpet Falls to Earth

Posted on June 17, 2007 by Russ

I’m often asked by clients about what they can put down on a tax return. I tell them that the US works on a voluntary-based income tax system. You can put down anything on a tax return. Of course, you swear under penalty of perjury (which the government takes seriously) that everything on the return is accurate, to the best of your knowledge. I strongly believe in having my clients pay the least amount of tax legally for their returns. Of course, some don’t share my scruples.

Take the case of Beaulieu Group, of Dalton, Georgia. The third largest carpet manufacturer in the United States, Beaulieu boasts sales of $1.1 billion. That’s a lot of carpet.

But like all companies Beaulieu must look out for its bottom line. So back in the 1990s the company bought millions of dollars of machines from Europe. That’s not a problem. They apparently put those machines on their books at a value millions over what they bought them for, so that they could take extra depreciation. As long as they weren’t caught, there’s no problem…but of course, you know since you’re reading this here, they were caught.

And catching something like this isn’t easy. Indeed, the government spent over $800,000 proving the case (which Beaulieu has agreed to repay to the government). The tax savings that Beaulieu received from the over-depreciation was $7 million. They’ll be paying back taxes (including interest) of $22.7 million, $7.7 million in penalties, and a criminal fine of $2.2 million. And as part of the plea bargain, the two owners of the company will no longer be involved in the day-to-day business of the firm.

So over nine years Beaulieu saved something over $7 million in taxes. Now, seven years after their last savings Beaulieu must pay out $33.4 million. No wonder Beaulieu’s Vice President and General Counsel, Peter Farley, said, “…[T]he Company has taken steps to strengthen its tax practices and compliance programs.”

News Story Here

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Selling Steroids = Tax Evasion

Posted on June 17, 2007 by Russ

Anabolic steroids are a controlled substance (generally illegal) in the United States. If you sell/distribute/traffic steroids, you can be arrested. One Houston, Texas dealer of steroids got lucky—or so he thought. He didn’t get arrested for distributing steroids. Instead, he got charged with tax evasion.

Remember Al Capone? The Chicago mobster committed lots of murders. But in the end the government couldn’t prove he committed any of them. However, it could and did prove he didn’t pay income tax on his ill-gotten gains, and Al Capone spent the last few years of his life at Alcatraz and similar ClubFed vacation spots.

Vernon Albert Richardson III admitted importing and selling steroids from 2000 – 2003 in his plea agreement. Mr. Richardson forgot one thing that would have been useful: pay the income tax on your illegal income. Yes, illegal income is just as taxable as legal income.

When Mr. Richardson is sentence later this year, he’ll probably receive a little under two years at ClubFed (based on Federal Sentencing Guidelines)

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They Were on the Phone for 25 Hours Each Day

Posted on June 17, 2007 by Russ

And that’s not a typo in the title.

The telephone excise tax refund got a few bozo tax preparers thinking (an oxymoron, of course), “If the government is going to hand out this money [usually $30 – $60] with little documentation, why don’t I prepare a return asking for just a bit more? They’ll never catch me!”

And it’s likely that many, many preparers did just that. But you can definitely take things a bit too far, and that’s exactly what Herbert Jana, Aurora Perez, and Nancy Munoz are accused of doing.

Eric Martinez, Special Agent in charge of the Dallas field office of IRS Criminal Investigation, stated, “The allegations in this indictment are that this scheme in the Dallas/Fort Worth metroplex claimed more than $1.6 million in fraudulent telephone excise tax refunds, making it one of the most egregious telephone excise tax refund fraud schemes during this filing season.”

As for our alleged phone tax crooks being bozos, well, they were also a bit unlucky. As we’ve mentioned, Jackson Hewitt, the #2 tax preparation firm in the United States, is under a major investigation. So what did our alleged bozos name their firm? Jackson Hubbert.

If convicted, the defendants are looking at lengthy stays at ClubFed due to the size of the alleged fraud.

Hat Tip: Roth Tax Updates

News Story Here

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The Other Shoe Drops

Posted on June 16, 2007 by Russ

I’ll have quite a few posts over the next few days, but something came across the wire tonight that deserves reporting (even in my tired state). The ultimate shoe collector, Imelda Marcos, was acquitted of tax evasion.

Ms. Marcos, the wife of the late Philippine leader Ferdinand Marcos, was charged with evading taxes in 1986, and on two later dates. There was just one problem with that—the Marcoses left the Philippines in 1986 after Ferdinand Marcos ‘ rule ended (they went into exile in Hawaii).

Ms. Marcos’ attorneys also noted that when Mr. Marcos died there were newspaper stories globally and the Philippine’s Internal Revenue Bureau would have to have been deaf, dumb, and blind to have missed the news (these relate to the later two tax charges).

In any case, the judge in Quezon City noted that the prosecution had failed to show criminal intent. Indeed, Ms. Marcos was husbanding her shoe collection in Hawaii at the time.

So in this case, Ms. Marcos gets to wear shoes from her collection rather than prison loafers.

News Story: Manila Standard Today

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How Not to Cheat the System

Posted on June 9, 2007 by Russ

As I head for another week on the road (with limited posting–I’ll be at the CSEA SuperSeminar Monday through Wednesday and in Chicago next weekend), there’s more than enough fraud for an uber-post.

We’ll start in Washington where it was announced that the probe of Jackson-Hewitt, the second largest national tax preparation firm, has grown. I previously reported on the chain’s problems. In a regulatory filing, Jackson Hewitt disclosed that more of its stores, including company-owned stores, are being investigated. The initial probe centered on one franchisee; the IRS is seeking to close the 125 stores owned by that franchisee. You can read about this here and here.

Let’s head across the country to Renton, Washington. I’ve said before that multi-level marketing programs are legal. But you do need to pay taxes based on your income from those programs, and not divert the income into a sham trust. It’s even worse if the IRS finds out about it, as Frederick and Denise Vance have discovered. They pleaded guilty to evading about $320,000 in taxes. It appears they’ve made restitution. But they’ll be sentenced in September and are looking at possible short stays at ClubFed.

Yet another bozo tax preparer is in trouble. Al Morton, Jr. was convicted in Birmingham, Alabama of 14 counts of filing false tax returns, 13 counts of bank fraud, and one count of conspiracy. Five others pleaded guilty earlier to similar charges in the scheme which involved filing 121 false refund anticipation loan claims totaling over $700,000. Mr. Morton is looking at a lengthy stay in ClubFed when he’s sentenced later this year.

Heading further south to West Palm Beach, James Exline was sentenced to ten months at ClubFed. Exline, a former City Commissioner in West Palm Beach, had earlier pleaded guilty to filing a false tax return as part of a land development investigation. He’ll also have to pay a $3000 fine and serve a year of supervised release.

The Abramoff scandal claimed a tax evasion victim. Italia Federici pleaded guilty to tax evasion and obstruction of Congress on Friday. Federici admitted lying to a Senate Indian Affairs Committee and not paying taxes from 2001 to 2003. Given that she owes “tens of thousands of dollars” in back taxes, she’s looking at a visit to ClubFed.

I chose five stories out of about 30 that came across the wires over the last couple of days. There are a lot of people trying for that dishonest buck…and they usually find that crime doesn’t pay.

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