No Vacation from Fraud

Posted on June 4, 2007 by Russ

I’m traveling quite a bit this month. Currently, I’m enjoying the heat of Las Vegas. The individuals mentioned below are suffering a different kind of heat.

I’ve written about Talal Chahine and the La Shish resturant before. His wife was just sentence for her part in a tax evasion scheme. Chahine, who has already been charged with four counts of tax evasion, was charged with a fifth count of tax evasion this past week. Chahine has apparently fled to Lebanon. If he returns and is convicted he could spend many years at ClubFed.

Yet another individual has found out that a sham trust leads to tax evasion. Karl Olsen of Easton, Connecticut, was sentenced to two years probation, a fine of $10,000 and must make restitution to the IRS. Olsen admitted when he pleaded guilty that he evaded over $51,000 in tax through a sham trust and making false deductions. Olsen, though, avoids ClubFed.

I use aloe vera, a skin moisturizer. Inltalo Fiore owned Aloe Vera of California, an S Corporation. Aloe Vera sold aloe vera powder. However, his corporation underreported its income. If you’re not caught, it’s a great way to save on taxes. Unfortunately for Fiore, he did get caught. And given that he has already made restitution of $2.9 million to the IRS, we’re not talking about just a little bit of aloe vera here. Fiore faces up to 12 years in prison and a fine of up to $1 million when sentenced after he pleaded guilty to the fraud.

I’ll be getting out of the head midweek when I return to Irvine from Las Vegas. These individuals could be dealing with the heat for some time.

Posted in Tax Evasion | Comments Off on No Vacation from Fraud

The IRS Makes a Mistake; Who Pays?

Posted on May 30, 2007 by Russ

Suppose you discover an error in your 2001 tax return. You’ve forgotten to include a $55,065 deduction that will lower your taxes by $13,769. You timely amend your return to get the deduction (you have three years from the due date of the return or the filing date, whichever is later, to amend a return), and make a claim for the refund. The IRS questions your refund claim and eventually denies it. You appeal internally (administratively) within the IRS, and, after spending $7,253 on accountants and attorneys, prevail, and get your check for $14,921 (inclusive of about $1,200 of interest). You file a Tax Court claim for the $7,253 you spent on fighting (rightly) the IRS, because Section 7430 of the Internal Revenue Code allows you to recover funds when you are the prevailing party in an administrative or court proceeding. Do you get your $7,253?

The Tax Court looked at that issue today. A taxpayer filed his 2001 tax return and had a Roth IRA (converted from a regular IRA under §408A(d)(3), and timely filed and paid his tax. In October 2001, he reconverted his IRA back to a regular IRA under §408A(d)(6), and asked for a refund of $13,769. The IRS disputed the refund, and denied it as the reconversion wasn’t timely.

The taxpayer went to the IRS’ National Office of Chief Counsel a ruling as to whether or not the reconversion was timely. The Office of Chief Counsel ruled it was. The taxpayer resubmitted his amended tax return, attaching a copy of the letter from the Office of Chief Counsel. Eventually the taxpayer got his refund along with additional interest. Still, the taxpayer was out the costs of fighting the IRS of $7,253.

After filing a claim with the IRS Appeals Office (which was denied), the case went to the Tax Court. Unfortunately, to win a claim under §7430, the petitioner must be the “prevailing party.” The IRS must have adopted a “position” on the matter. And that only happens, according to the Tax Court, if there’s a notice of deficiency or an IRS appeals office ruling—neither of which occurred in this case.

The Tax Court sympathizes with the petitioner, and notes,

“…[T]axpayers (such as petitioners herein) who do a good job at the administrative level of resolving issues and getting respondent to realize the error of his ways are precluded from recovering administrative costs incurred in achieving those favorable results. To the contrary, taxpayers who do not do as good a job at the administrative level and who receive adverse Appeals Office notices of decision or notices of deficiency, but who later convince respondent to concede issues or who substantially prevail in litigation on the issues, are able to seek a recovery of administrative costs. In effect, taxpayers who do a better job at the administrative level of resolving issues raised by respondent on audit are prejudiced in their ability to recover administrative costs under section 7430.”

But “Courts do not have the power to repeal or amend the enactments of the legislature even though they may disagree with the result.” (Metzger Trust v. Commissioner, 76 T.C. 42, 59 (1981), affd. 693 F.2d 459 (5th Cir. 1982) So our unlucky taxpayer is out the money, because he was good at going through the administrative system. There’s a moral here, but I don’t like it at all.

Case: Kwestel v. Commissioner, T.C. Memo 2007-135

Posted in Tax Court | Comments Off on The IRS Makes a Mistake; Who Pays?

The Massive Tax Increase You Haven’t Seen or Read About

Posted on May 28, 2007 by Russ

If I told you that you were going to get hit by a massive tax increase, you would rightly ask, “Why haven’t I heard about it on television? Why haven’t I read about it in the media?” But it really is coming…just in two years.

Congress passed, by a party-line vote, the Democrat’s version of the budget. This budget lays the groundwork for the elimination of the Bush tax cuts. What happens when you eliminate a tax cut? In the Democrats’ world, nothing. For you and me, it’s a $200 billion tax increase.

I try hard in this blog not to single out one political party. Frankly, they’re both quite capable of underhanded ways of budgeting. The Republicans had twelve years of running Congress, and are only now managing to understand the wisdom of being fiscally conservative. Unfortunately, it appears that the Democrats have no idea what that means.

President Bush is threatening to veto any appropriation bill that exceeds the amounts in his budget. I expect he’ll be using that veto pen frequently.

As Congressman Paul Ryan (R-WI) stated, “But I’d hardly consider a $200 billion tax hike a ‘win’ for American workers.” It’s not. Democrats have claimed that the Bush tax cuts led to the budget deficits. That’s not the case; federal government revenues increased by 46% since they were enacted. Unfortunately, spending increased by even more.

We have bloated government, bloated bureaucracies, and a Congress that wants more of the same. I suggest that anyone who cares about this issue—and it’s a major one in my opinion—read the Porkbusters website. Join with me in trying to take the pork out of government.

Posted in Legislation | Comments Off on The Massive Tax Increase You Haven’t Seen or Read About

Health Care Bills Gain Steam, But There’s a Problem…

Posted on May 27, 2007 by Russ

It appears that legislation for a mandatory health care system with employer mandates may pass the California legislature. Apparently the Governator and our legislators haven’t figured out that high taxes drive out small business from California.

Luckily for you and I there’s a problem looming for the plan: ERISA. Passed in 1974, the Employee Retirement Income Security Act prohibits states from mandating health insurance. The Supreme Court has upheld the prohibition, and an appeals court recently upheld the law (again) when Maryland tried to mandate health care benefits on Wal-Mart. As this story in the San Diego Union-Tribune makes plain, the Democrats and the Governator don’t think much of the federal law. It’s a pity that they don’t think much of small business either.

Posted in California | Comments Off on Health Care Bills Gain Steam, But There’s a Problem…

Some Fraud for Your Holiday

Posted on May 27, 2007 by Russ

With tomorrow being Memorial Day, our troops overseas should be in your thoughts and prayers. I’ll be writing about some individuals who are praying to avoid ClubFed.

Let’s start in Georgia, where a Bozo tax preparer allegedly decided to take advantage of the telephone tax credit. Onessimus Govereh prepared 20 tax returns that had the telephone tax credit…only, according to the indictment, the amounts were drastically inflated to the tune of $568,675. That’s a lot of phone calls. He’s facing 20 counts of preparing false tax returns, and a lengthy stay at ClubFed if found guilty.

Last June we reported on the indictment of civil rights attorney Stephen Yagman. His trial began this past week in Los Angeles. If you believe the prosecution, Yagman deliberately hid his assets; if you believe the defense, Yagman moved his assets for personal reasons and to keep his domicile secret. Yagman stands accused of money laundering and bankruptcy fraud. We’ll update you as the trial proceeds.

>From San Antonio comes the case of the Kickapoo Seven. The seven (now six, as the government withdrew the charges against one of the defendants), three of the defendants switched their pleas from guilty to not guilty; one other defendant switched his plea last week. The four are part of a group that allegedly stole funds from an Indian casino in Eagle Pass, Texas and committed tax evasion and conspiracy. The four claim that they were either coerced into pleading guilty or victims of a conspiracy. Under their now disavowed plea bargain, they were looking at two or so years at ClubFed. If found guilty, they’ll be facing ten.

So if you can, don’t be coerced into evading taxes…or you may be following in the footsteps of these individuals and having an unhappy holiday.

Posted in Tax Fraud | Tagged | Comments Off on Some Fraud for Your Holiday

The IRS Overreaches

Posted on May 24, 2007 by Russ

What happens when you receive a Form 1099-MISC, but you never received the income shown on the information return? You don’t include it on your tax return—after all, you didn’t receive the income, so you don’t owe tax on it. But then the IRS sends you a notice saying you do owe tax on the money.

That’s the situation that the Tax Court faced today. A Colorado insurance agent accepted a new client, and assigned the commissions to the client. (Why he would do that is not known, but the evidence in the case showed that the checks from the insurance company were deposited into the clients’ accounts.) The IRS sent a notice to the insurance agent, and the case ended up in Tax Court.

Normally, the petitioner in Tax Court has the burden of proof. However, when the underlying issue is a dispute over an information return (such as a 1099-MISC), and the petitioner cooperates with the IRS (as was the case here), then the burden of proof shifts to the IRS.

That’s very important here, because there was no evidence of any money ending up with the insurance agent. After the IRS admitted that the commissions ended up with the client (it was hard not to admit that, given that the checks were deposited into their bank accounts), they still contended that the insurance agent must have received some income. “Respondent nevertheless determined that petitioner had unreported income, around $2,000 to $3,000, which respondent asserts was the amount petitioner received from Investments for the use of his license in selling the insurance policies that generated the commissions reported by NACOLAH.” (“Investments” is the client and “NACOLAH” is the insurance company.)

There was only one thing missing for the respondent (IRS) to prove their case: any evidence. Without any evidence, the Court ruled for the petitioner. “Accordingly, the Court finds that petitioner is not liable for the 2003 deficiency and section 6662(a) accuracy-related penalty because respondent has failed to satisfy his burden of production with respect to the deficiency and the Form 1099-MISC under section 6201(d).”

Case: Cirbo v. Commissioner, T.C. Summary Opinion 2007-85

Posted in IRS, Tax Court | Comments Off on The IRS Overreaches

He Gambled and He Lost (In More Ways than One)

Posted on May 23, 2007 by Russ

I’ve repeatedly said that gamblers aren’t treated well under the Tax Code. One Michigan resident allegedly had a way around this problem: just ignore the gambling. This may turn out to be a much bigger problem, as he now faces a 22-count indictment.

Christopher Aaron, of Ortonville, Michigan, faces up to five years at ClubFed plus fines for allegedly filing false tax returns, and giving false social security numbers so currency transaction reports on his wins of over $10,000 wouldn’t be traced to him. Unfortunately for Mr. Aaron, the government got wind of his scheme. And when the unreported gambling income totals $3 million, the government pays attention.

His attorney notes that Mr. Aaron was an overall loser, so he doesn’t really owe any tax. Well, as someone who has prepared more than a few tax returns for gamblers, I can almost guarantee that his tax return would change if it had the gambling accurately stated. This is especially true if Mr. Aaron is an amateur (unable to net his wins and losses) because Michigan does not allow gambling losses on its state income tax. So while Mr. Aaron’s federal tax return numbers might not change, his state income tax return would likely change. You can read more about this case here.

There is a moral to this story (besides the bad treatment of gamblers under the Tax Code). It’s much better (and cheaper, considering the attorney fees that Mr. Aaron will likely incur) to prepare your tax returns correctly than to attempt to cheat the system.

Posted in Gambling, Tax Evasion | Comments Off on He Gambled and He Lost (In More Ways than One)

A Big Case for the Supreme Court Later this Year

Posted on May 21, 2007 by Russ

The Supreme Court doesn’t decide many tax cases. They’re usually not that interesting, and it’s rare to see a split among the different circuits in a tax issue. However, a very important tax case will be decided in the next Supreme Court term (beginning in October): Department of Revenue v. Davis.

In 2006 the Kentucky Court of Appeals (the Kentucky Supreme Court declined to hear the case) held that, “…[W]e find that Kentucky’s tax on the income derived from bonds issued outside Kentucky violates the Commerce Clause of the United States Constitution, we vacate and remand.”

Why is this important? If you live in a state with a state income tax, and you own municipal bonds issued by your state, you do not pay income tax on those bonds. However, if you own bonds issued by another state you almost certainly do pay income tax on those bonds. The Kentucky ruling says that’s illegal—it violates the dormant commerce clause of the U.S. Constitution.

To no one’s surprise, the National Association of State Treasurers doesn’t like this ruling; they will be filing an amicus brief on the case. The Kentucky Department of Revenue doesn’t like the ruling; it will cost the state money. Indeed, high tax states (and Kentucky is not one of those) like this ruling even less. If the Court of Appeals ruling is upheld, bonds issued by high tax states (such as California) will need to pay a higher interest rate, costing the states money.

The case will be heard late this year; a decision isn’t likely to be announced until early 2008. If you own municipal bonds from a state other than your own, pay attention to the decision. If you paid enough tax from these bonds and the ruling is upheld by the Supreme Court, you may be able to amend your state tax return seeking a refund of tax.

The TaxProfBlog has more on this case, and you can find news stories at Bloomberg and elsewhere.

Hat Tip: TaxProfBlog

Posted in Supreme Court | Comments Off on A Big Case for the Supreme Court Later this Year

A Dose of Fraud to End the Week

Posted on May 17, 2007 by Russ

The fraudsters have been active in the tax realm this week. We’ve got stories from across the country.

We’ll start in Youngstown, Ohio, where Ronald Wells had an idea of how to increase his $1/hour pay as a prisoner at the Trumbell County (Ohio) prison—he’d have friends file 35 phony tax returns with the IRS. This cost us taxpayers over $236,000 in refunds that the IRS paid out. Wells, no matter how long he’s sentenced for, won’t be going anywhere soon; he’s now serving a sentence for aggravated murder in the Grafton (Ohio) Correctional Institution.

Heading just east, from Pittsburgh comes the story of the family that’s accused of committing fraud together. James Lloyd is serving time at the Fayette County (Pennsylvania) Prison, his wife Elizabeth, and their daughter Naomi Malone are all accused of filing a false tax return, and getting $14,700. These first two stories are not the first time we’ve seen inmates accused of committing tax fraud.

Yet another Gentleman’s Club owner has found himself in trouble. Ronald Heidel, of Sanibel, Florida, will find himself at ClubFed for 18 months after underreporting income at his Gentleman’s Gold Club by $1.3 million. He also must make restitution of $130,000 and pay a $30,000 fine. I almost forgot to mention that Heidel is a former IRS agent.

The owners of a casino boat-to-nowhere will no longer be heading to sea but, instead, will be heading up the river to ClubFed. Samuel Gray and his wife Marilyn were each convicted on 18 counts of tax fraud and 4 counts of mail fraud. Samuel Gray was also found guilty of six counts of money laundering and receiving embezzled funds. We first wrote about this story in 2005 when the owner of a bank who was embezzling money managed to invest with another individual committing fraud. Samuel Gray faces a decade at ClubFed; his wife is looking at about 4 years.

Heading further south to Miami, we find a businessman who had an almost-perfect method to having his personal expenses paid by his business. David Traina set up a consulting firm. No problem with that. He was the only employee. That’s fine. He paid personal expenses out of his business and took deductions for them. That’s not good, and it’s worse when the IRS finds out. And when you avoid $70,000 in taxes, that’s a lot of veterinary bills. Mr. Traina has agreed to make restitution but may also find himself at ClubFed for a short stay.

We’ve written about the La Shish restaurants on two occasions. Elfat El Aouar received 18 months at ClubFed in her part of the tax fraud that cost the government $6.9 million in taxes. Her husband, Talal Chahine, is still a fugitive from justice and is believed to be in Lebanon. The IRS may end up owning the La Shish restaurants—liens have been filed to protect the government’s claims.

Heading to the Northwest, Laura Cook, the wife of convicted “tax guru” Wade Cook, pleaded guilty to obstruction of justice. Ms. Cook admitted that she created phony documents to evade $9.4 million in taxes. Under the plea agreement, the government will recommend 15 months at ClubFed.

That’s a lot of fraud, but somehow I figure to be able to bring up another list of cases next week.

Posted in Tax Fraud | Comments Off on A Dose of Fraud to End the Week

What If a Casino Decides to Ignore the Rules?

Posted on May 17, 2007 by Russ

Suppose you’re a poker player, and you are backed (sponsored) by a friend. You’ve agreed with your friend that for the money that he has given you, you will give him 50% of your winnings. You complete the IRS Form that has been created for this exact situation (Form 5754), enter a poker tournament, play well and win a prize. As you are ready to receive your prize, the casino asks for your social security number so that they can issue you a Form W-2G). You give them the Form 5754 and the casino tells you, “Sorry, we only issue the W-2Gs to the recipient. You are responsible for the tax situation for your win.”

Well, that exact situation will be facing entrants into this year’s World Series of Poker held at the Rio Hotel & Casino in Las Vegas and run by Harrah’s. I was told yesterday by the Assistant Tournament Director that while the casino will have copies of Form 5754 at the Cashier’s Cage, they will issue the W-2Gs and prize winnings only to the actual winner of a prize.

For the professional gambler who is backed, this is only an inconvenience. His accountant can, at year-end, create W-2Gs to correctly appropriate the winnings. However, for the amateur player this could be a lot more than an inconvenience.

The amateur gambler is now on the hook for the taxes on winnings that aren’t his. It’s even possible that the gambler will have to pay taxes on “phantom” winnings. Say that the gambler won $5000, but $2500 of it belongs to someone else. During the remainder of 2007, the gambler has losses of $3000. If the gambler completes his tax return without making any adjustments, he’ll show $5000 of winnings on line 21 (Other Income) and $3000 of an itemized deduction on Schedule A—he’ll pay tax on $2000 of income that he didn’t earn! And if our “lucky” gambler happens to reside in a state that doesn’t allow gambling losses, he’ll pay state tax on the full $5000!

I received an inquiry today asking,

“We have a small group of players who put up equal shares of money to create a pool sufficient to pay for a main event entry. We give the winner of a private tourney 50% of the equity in any win (and the right to play with the group’s money) and the remainder is divided evenly between the rest of us. In the past, we have provided them with a Form 5754 that spelled out the various equity holders and received individual W-2Gs from Harrahs.

What is the correct way for us to handle this in the future? Should the winner issue 1099-MISC or W-2Gs to the stakeholders? What if the winner was a net loser in gambling for the year prior to the win at the WSOP? Can he still write off the payments to his backers or can he only do that to extent of his winnings, like a gambling loss.

Besides lobbying Harrah’s to change the rules (and perhaps complaining to Nevada gaming regulators, there’s little you will be able to do to change this policy. But I think there are ways for the amateur gambler to still appropriate his winnings, should he be lucky enough to cash at the World Series of Poker.

First, make sure your syndicate/backing agreement is in writing. It should be signed and dated by all participants before the event(s) that the gambler will play in. You may even want to get the document notarized to prove that it was signed and dated before the event.

I would still before the actual event complete Form 5754, and bring it with you to the casino. Harrah’s is supposed to obey the rules (and that includes paying people based on what’s on Form 5754). When you cash, bring the Form 5754 to the Cashier. Harrah’s will likely tell you that they won’t look at it and that it’s your responsibility to do the taxes. You have two choices at that time. You should have a witness at the cage who can swear that Harrah’s refused to honor the Form 5754.

You could at that time call the Enforcement Division of the Nevada Gaming Commission/State Control Board (their Las Vegas phone number is (702) 486-2020). Based on information I have from various gamblers, it’s very doubtful that the NGC will do anything about this problem. And since Harrah’s has the right to refuse entrance into any other tournament should you criticize the World Series of Poker, you risk not being able to play in anything else ever again at the WSOP if you choose this path. But it is available; one of the responsibilities of the Enforcement Division is to “arbitrate disputes between patrons and licensees.”

Alternatively, the winner accepts the W-2G. When he returns home, he gives his accountant the correct payout information (the Form 5754). The accountant then splits his winnings: his share remains as gambling winnings (line 21); the portion belonging to others is moved to a Schedule C as receipts (income) (and the accountant or the winner mails checks to the other participants). The accountant issues W-2Gs (or Form 1099-MISC’s) to the other participants; the total of these are listed as expenses. The net income from this “business” is zero (so there’s no self-employment tax owed).

NOTE (Added in 2013): Based on how the IRS handles W-2Gs from individuals, individuals should issue Form 1099-MISC’s, not Form W-2G’s.

The accountant should attach an explanation to the return explaining exactly what was done and why; I would file a paper return and not file electronically.

This should pass muster with the IRS because the income is being moved to the individuals who really received the income. This is what the law requires—individuals are supposed to pay tax on their income, not the income of others.

For the record, I believe that Harrah’s is required to issue W-2Gs as per a correctly submitted Form 5754. Nevertheless, I’m not surprised at all by Harrah’s new rule. In 2006, Harrah’s would only follow Form 5754 if the other recipients were physically present (this is not a requirement of Form 5754); I had to send out W-2Gs for clients impacted by that rule. Unfortunately, it will take Nevada regulators and/or the IRS complaining to Harrah’s for this bad policy to change.

Posted in Gambling | Tagged | 6 Comments