The Fiction Strikes Back

Posted on April 25, 2007 by Russ

I haven’t blogged about the arrest, conviction, and sentencing of Ed & Elaine Brown. “Ed and Elaine Brown insist tax laws do not exist and have holed up in their hilltop home in Plainfield, which has a watchtower, concrete walls and the ability to run on wind and solar power. Ed Brown, 64, said he has stockpiled food and supplies…Elaine Brown, 66, said Monday that she doesn’t recognize the government, and that its officials are ‘a fiction in my life.'”

Roth Tax Updates has been covering this story from day one. Eventually, the Browns will surrender, and they’ll find that instead of being self-imprisoned in their New Hampshire home, they’ll be at a ClubFed facility.

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Ex Parte Means Ex Parte

Posted on April 24, 2007 by Russ

Yesterday, the Tax Court decided Industrial Investors v. Commissioner. Industrial Investors, a corporation in Santa Monica, California, had fought the IRS in Tax Court. The case was then appealed to the 9th Circuit Court of Appeals. After the case was settled in court, the IRS attempted collection of the tax owed; Industrial owed tax for 1990 – 1992. Industrial requested a collection due process (CDP) hearing.

When Industrial made the request, the IRS revenue officer working the case sent a letter to the IRS appeals office…in Oklahoma City. (An interesting point is why the appeal went to Oklahoma from California when the IRS has several offices that I’m all too familiar with in Southern California…but I digress.) An appeals officer is supposed to independently judge the facts; thus, ex parte communications are not allowed. Here are a few of the lines from the letter of the IRS revenue officer:

“Therefore, no CDP hearing on the recorded Notices of Federal Tax Liens should be considered. As for the Notice of Intent to Levy, this should proceed accordingly….

Since Mr. William G. Wells has had numerous opportunities to sell, refinance or secure a second mortgage on all real property owned by Industrial Investors Inc and has not done so to this date, it is time that the government secure any and all interest for all assets owned by the Corporation to pay the outstanding tax debts.

That’s just part of this letter. I’m not an attorney, but I do know that this is an ex parte communication.

Among the other gems of the IRS’ behavior is how quickly they forced Industrial to respond. On June 21, the IRS demands information by July 8; on July 8, the IRS schedules a telephonic CDP hearing on July 19, without checking that the representative from Industrial could make that time. He couldn’t, as was under subpoena for that date and time. He wrote back, asking for a change of time/date, but the IRS didn’t receive the request until after July 19.

The IRS’ behavior was atrocious in this case. And the Tax Court rightly takes the IRS to task. The Court notes regarding the ex parte communications,

“The Commissioner then made the guarantee of impartiality part of the IRS’s standard operating procedure by issuing Revenue Procedure 2000-43, 2000-2 C.B. 404. This procedure prohibits ex parte communications by IRS employees that would appear to compromise the independence of an Appeals officer…There can’t be any suspense in our holding on this point–the cover letter sent to Talbott that accompanied the administrative file was precisely the sort of prohibited ex parte contact that the Commissioner and Congress wanted to ban.”

The IRS also lost on other issues. Industrial impliedly requested a face-to-face CDP hearing. That request is required to be granted, and the hearing is required to be at a local IRS office, not one 1500 miles away. And the IRS should have allowed more time for a corporation to prepare for a hearing, “We merely note that eighteen business days from the date of initial contact hardly seems an adequate amount of time for a corporation to provide all relevant documentation, and putting Industrial into default when Wells left word that he was under subpoena to appear in court is inexplicable.”

So Industrial Investors will get a CDP here in Southern California. This is a case the IRS deserved to lose, and hopefully the patterns of behavior that were shown in this case by the IRS will go into the trash heap…but I’m not holding my breath.

Case: Industrial Investors v. Commissioner, T.C. Memo 2007-93

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Some More Fraud

Posted on April 23, 2007 by Russ

Crime doesn’t pay, especially when you get caught. As I mentioned yesterday, I’ve got another full slate for you tonight.

We’ll start with some garden variety fraud in Georgia. Stephen Taylor operated 20/20 Payroll Solutions, and he made sure that your tax deposits went…mostly to his personal expenses. That’s bad. When clients began to get dunning notices from the IRS and state tax agencies, he showed them false confirmation receipts. That’s worse. Then he started using payroll tax monies from one client to pay other client’s taxes—sort of a Ponzi scheme. In the end, it fell apart, and Taylor pleaded guilty last week to one count of fraud after diverting about $4 million in deposits. He’s looking at a lengthy stay at ClubFed.

Trusts have a surgeon in Carthage, Missouri in trouble. He purchased trusts from Aegis Co., of Palos Hills, Illinois, in an attempt to avoid $1.6 million in income tax. The government alleges that the trusts are shams. Not only has the surgeon, Brian Ellefson, been arrested, the founders of Aegis are also awaiting trial. Remember our standard warning: if it sounds too good to be true, it probably is.

David Stewart of Bowling Green, Kentucky, had a rags to riches story. Unfortunately, it will now be featuring a trip to ClubFed after Stewart pleaded guilty to four counts of tax evasion. Stewart admitted to not paying about $169,000 in income tax while not filing returns from 1999 through 2002. Along with some time at ClubFed, he faces a fine of up to $1 million.

Heading now to South Florida, the owner of a tax preparation service is accused of setting up sham corporations in Panama and Nevada to get extra deductions for his clients. Robert Payne of Miramar is charged with conspiracy and preparing false tax returns. If the allegations are true, he’s looking at a stint at ClubFed.

Finally, from Buffalo (and I’ll be nearby Buffalo for a day next week) comes the story of another bozo tax preparer. Corwin Johnson used to manage the EZ Income Tax Service. However, he pleaded guilty to tax fraud and bank fraud. He admitted to falsifying W-2 forms, identity theft, and submitting false tax refund claims. He could spend up to 30 years at ClubFed.

And I only posted a few of the stories from the last week….

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A List You Don’t Want to Be On

Posted on April 23, 2007 by Russ

There are many ways to catch tax scofflaws. California is trying something new—publicizing the worst offenders. Will shame cause payments?

The Board of Equalization collects sales and use tax in California. Under a law passed last year, both the BOE & the Franchise Tax Board must post lists of the worst offenders. The BOE has come out with their list of 227 who owe $219 million to California. A company can get off the list by paying the amount in full or by agreeing to a payment plan. Debts being appealed or in bankruptcy will not be listed.

The list will eventually grow to 250 names. For now, you need to owe $201,000 to make the list. Topping the list is Southland Federal Enterprises at $17,152,957.96 (we wouldn’t want to forget those 96 cents); their debt dates back to 2000. Next on the list are Khaled Mohammed Tabbah of Walnut and Ammar Assad Tabbaa of Orange; each owes $16,887,211.88. In fourth place is the former owner of the Los Angeles Kings, Bruce McNall (also a former resident of ClubFed); he owes a measly $7,138,011.08 dating back from 1994.

Later this year the FTB will issue its list. As noted in the press release announcing the list, the BOE has received one payment of $300,000 and two payment plans totaling $1.5 million. So it appears that shame works.

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A Tax That’s Typical California

Posted on April 22, 2007 by Russ

California’s legislature has plenty of warped ideas. Now there’s a piece of legislation that would tax big vehicles to subsidize small vehicles. Under the “Clean Car Discount” bill, big vehicles that emit lots of Carbon Dioxide would pay a tax of up to $2500. This tax (after appropriate amounts are siphoned off by the state bureaucracy) would subsidize small cars through a rebate program.

Forgetting that global warming is a theory—a theory that is looking more dubious (to me) day by day—I doubt this will have any impact on global warming. In fact, the only thing this will do for certain is raise agriculture prices as farmers are big users of big vehicles (they need them), and they’ll pass on their costs, of course.

Just another typical day in Sacramento….

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Back at Work…To See Some Fraud

Posted on April 22, 2007 by Russ

I’ve recovered from Tax Day, and am back at work. While I’ve been gone, there’s been a lot of fraud. That’s typical for this time of year, as the government loves letting people know that tax fraud is bad. Indeed, I probably have enough material for two uber-posts.

Let’s start off with the mob. Yes, that mob. It seems the government found that an alleged soldier in the Gambino family, Salvatore Scala, had attempted to extort money from the VIP Club in New York City. The VIP Club is an “adult entertainment” facility, but that doesn’t change that extortion is illegal. So is tax evasion, and Scala was found guilty of two counts of extortion and four of evasion. He was sentenced to six years at ClubFed. His co-defendant, Thomas Sassano, was convicted on two extortion charges.

Heading south to North Carolina, we find a tax preparer who appeared to almost guarantee a refund. Indeed, 99% of his clients got one! Lloyd Batsfield accomplished this feat by having most of his 10,000 returns from 2002-2005 have education credits claimed. The trouble was, most of the clients didn’t deserve the credits. Oops, and that became a big oops when the government knocked on his door. He pleaded guilty to filing $6 million in false claims for tax refunds. He also owes over $100,000 in back taxes to the IRS. He’s looking at an extended stay at ClubFed.

A yoga instructor in New York found out that whether or not you receive a W-2 or 1099 doesn’t change whether income is taxable. He pleaded guilty to evading $90,000 in taxes. That’s a lot of yoga instruction.

Staying in New York, pop star Marc Anthony was in the news for the wrong reasons. Three of his companies forgot to pay New York state income tax, and they pleaded guilty to the charge. The total tax owed was $3 million. Anthony escaped prosecution under a plea bargain but he’s going to have to pay $2.5 million in back taxes, penalties, and interest.

Remember the Ozbays? I’ve reported on this clan who didn’t believe in taxes before, most recently when Birol Ozbay was sentenced to 10 years and must forfeit $6.8 million. Yalcin Ozbay got an identical sentence of 10 years and $6.8 million. The story notes that just about every federal and New York law enforcement agency was involved. Given that they tried to violate every tax law they could, I’m surprised that this story didn’t get more play right before tax day.

Finally (for this uber-post), a story that’s closer to home. A Riverside (California) owner of a halfway house allegedly really liked the telephone tax refund. He’s been charged with claiming $600,000 in telephone tax refunds. Peaches Mercer Turner, according to this story, has been charged with tax fraud, identity theft, wire fraud, and obstructing an IRS investigation. Apparently Turner allegedly used some of his halfway house patrons to file the telephone tax refund claims. One such individual, Alejandro Berdin, requested a $33,000 refund. Given that he was unemployed and in a halfway house, it seems improbable that he made $1 million worth of long-distance phone calls. If convicted, Berdin (who was also charged) and Turner may make the short-distance trip to ClubFed’s Victorville facility….

Well, I’ve just scratched the surface of the deceit, fraud, and other items that have come across my desk in the last couple of weeks. I’ll have another uber-post tomorrow, as there’s plenty more tax crime.

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Two Extra Days in the Northeast

Posted on April 17, 2007 by Russ

Because of the storm in the Northeast U.S., the IRS has, according to an email I just received, extended the due date for returns for impacted taxpayers only until April 19th.

Taxpayers who are impacted and take advantage of the extra two days will be charged interest but will not be charged a late filing penalty.

Update: The IRS has released its’ FAQ on this issue. Some highlights:

Returns covered:
* Calendar-year 2006 federal individual income tax returns, whether filed electronically or on paper (Forms 1040, 1040A or 1040EZ).

* Requests for an automatic six-month tax-filing extension on an individual return for calendar-year 2006, whether submitted electronically or on Form 4868.

* Tax-year 2006 income tax balance-due payments, whether made electronically (direct debit or credit card) or by check.

* Corporation income tax returns, including S corporations (Forms 1120, 1120-A and 1120S) for a fiscal year ending on Jan. 31, 2007, and any balance due.

* Calendar-year estate and trust income tax returns (Form 1041) and any balance due.

* Calendar-year 2006 partnership returns (Form 1065).

* Annual information returns (Form 990) and unrelated business income tax returns (Form 990-T) for tax-exempt organizations with a fiscal year ending on Nov. 30, 2006.

* Calendar-year 2006 Form 990-T for certain employee trusts, retirement plans and education savings plans.

* Extension requests for any return.

Estimated Tax Payments are not covered.

More information is on the IRS website.

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Bozo Tax Tip #1: Only Foreign Income is Taxable

Posted on April 16, 2007 by Russ

This sounds ludicrous (and it is, of course), but some tax protesters came up with this argument. And a very famous actor apparently bought it.

Wesley Snipes, star of Blade and Passenger 57, went to an accountant who believes this. Mr. Snipes allegedly amended his tax return and claimed that he should get a $12 million refund. The government says that the IRS sent letters to Snipes advising him of the error of his ways…but he continued to claim the refund. Snipes now stands charged with filing false tax returns and claiming false refunds. He’s out on $1 million in bond.

The Internal Revenue Code (which is a law, Title 26 U.S.C.) says that all income is taxable. If the charges against Snipes are true, Snipes better hope that the judge he draws has a very good sense of humor.

The U.S. Tax Code is a mess. I’ve basically completed my returns for the year, and I’m amazed at how ugly our tax system has become.

I hope you’ve enjoyed this series. One thing I do hope you realize is that almost all income is taxable. If you follow down the path of Snipes (allegedly, of course) and Hatch, you’re asking for trouble. If you’re famous, you’ll get it, because the IRS likes to make examples of bozo celebrities.

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Bozo Tax Tip #2: 300 Million Witnesses Can’t be Right

Posted on April 15, 2007 by Russ

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

Tomorrow, you will see our number one bozo tax tip of the year. It’s a real “winner,” and one that I can guarantee will cause you nothing but problems (if you follow it).

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Things Could be Worse…

Posted on April 15, 2007 by Russ

It’s a parody (of course), but it reminds us what confiscatory tax rates are like….

Hat Tip: AllahPundit (via HotAir)

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