Fraud, With a Capital F

Posted on February 21, 2007 by Russ

It’s time for yet another round-up of tax fraud. We have some of the usual suspects, but there is one that rises to the top.

I wrote about Wade Cook in December 2005
 when he was indicted for tax fraud. On Tuesday Cook was found guilty of seven charges of failing to pay taxes on $8.9 million of income between 1998 and 2000. The jury did deadlock on one charge against Cook. His wife, Laura, had a much better outcome: the jury deadlocked on all the charges against her. The government proved to the jurors satisfaction that Cook took royalties from his books and moved them into a trust. Cook then used the trust to support a luxurious lifestyle. Cook’s attorney noted that he plans to appeal. You can read more about the Cook case here.

Meanwhile, some tax preparers are in trouble. In Orange City, Florida, Keith Warner had a good way of making a living as a tax preparer (until he was caught); he kept over half of the refunds that should have gone to his clients. And he also neglected to report his embezzled income on his tax return. He’s looking at a visit to ClubFed, and a fine of $500,000 (coincidentally, that’s about how much he pocketed), and restitution. Meanwhile, a preparer in nearby Polk County, Florida is accused of making up deductions for her clients. She’s accused of inventing $2.7 million of deductions for her clients. She could face 81 years in ClubFed if found guilty on all counts.

Newman, California is one of the small towns in the Central Valley. Bonnie Arnell, of Newman, also made up questionable deductions for her clients, and she has pleaded guilty to 39 counts of filing false income tax returns and 3 counts of making false statements to the IRS. She also had another problem—when she was supposed to show up for an audit, she never did (inventing excuse after excuse). She’ll be spending significant time at ClubFed.

In Columbus, Georgia, yet another preparer is in trouble with the law. In early February, Valerie Renfroe was arrested on charges of overcharging clients and putting false information on tax returns. She’s now being sought on additional charges of theft by deception.

Finally, in New Jersey an accountant and his children have been indicted on charges of conspiring to steal more than $500,000 from the state by inventing 745 applications for homestead rebate checks. The Philippine News states that Ronnie Lapuz used the accused accountant’s firm and that Achilles Amante had ‘doctored’ various documents to allow him to get a larger refund. “I was shocked when his children were arrested because I thought what he was doing was legal,” Lapuz told the News. The case resulted from a tip to the Jersey City Police Department that many refund checks were directed to a business owned by the accused.

Not a good week for some of the lesser members of the tax preparation community. Doctoring documents, inventing deductions, and stealing refunds. Oh, I forgot to mention that Achilles Amante apparently charged $65 to do a tax return, according to the Philippine News. His clients may have gotten what they paid for….I should mention that tax preparer fraud is on this year’s list of the “Dirty Dozen” tax scams. As the IRS says, if it sounds too good to be true, it probably is.

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IRS Street Addresses

Posted on February 21, 2007 by Russ

Most taxpayers use the Postal Service to send their returns to the IRS. However, you can use Federal Express, UPS, or DHL. The problem is the IRS doesn’t list the street addresses of their service centers anywhere on their web site if you need those to use a private delivery service. As a public service, here are the street addresses of the Service Centers.

Andover Service Center
310 Lowell St
Andover, MA 01810-4500
[978-474-9701]

Atlanta Service Center
4800 Buford Hwy
Chamblee, GA 30341
[770-936-4500]

Austin Service Center
3651 S IH 35
Austin, TX 78741-7855
[512-460-0176]

Brookhaven Service Center
1040 Waverly Ave
Holtsville, NY 11742-1129
[631-654-6583]

Cincinnati Service Center
201 W. Rivercenter Blvd
Covington, KY 41011-1424
[859-292-5185]

Fresno Service Center
5485 E Butler Ave
Fresno, CA 93727
[559-454-6334]

Kansas City Service Center
333 W Pershing Rd
Kansas City, MO 64108
[816-823-2076]

Memphis Service Center
5333 Getwell Rd
Memphis, TN 38118-7733
[901-546-4115]

Ogden Service Center
1160 W 1200 S
Ogden, UT 84404-5402
[801-620-4249]

Philadelphia Service Center
11601 Roosevelt Blvd
Philadelphia, PA 19154-2100
[215-516-5994]

Franchise Tax Board
9645 Butterfield Way
Sacramento, CA 95827

It’s very important to note that these addresses should be used only for private delivery services. Mail sent to these street addresses may be rejected as sent to a non-deliverable address and returned to the sender! Mail sent to a service center should be sent to the “normal” address of the service center; for example, here is where taxpayers filing their own Form 1040 returns should mail the returns to.

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Are Poker Tournaments Gambling?

Posted on February 20, 2007 by Russ

A very interesting case today from the Tax Court. A husband and wife play poker. The wife is a professional, playing in poker tournaments; the husband is not a professional. The wife wins some money playing in poker tournaments; however, her expenses exceed her income. Can she deduct the additional expenses and have her net income from playing poker professionally be a net loss?

In 2000, the wife earned $11,708, but she claimed a net loss of $29,933 on her Schedule C. Section 165(d) of the Internal Revenue Code limits deductions for gamblers to the amount of their wins. However, the petitioner claimed that tournament poker is not a form of gambling; instead, it should be looked at like a professional sporting event such as tennis or golf. Alternatively, they claim an equal protection argument.

The Court first examined tournament poker (and provided one of the best descriptions for the layman that I’ve ever read), and come to these conclusions about whether tournament poker is a form of gambling:

“Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting.

Petitioners agree that the first poker tournaments held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the basic nature of the game as a wagering activity.”

It’s hard for me to argue with this conclusion; while poker tournaments have become sporting events, poker is definitely a form of gambling.

The equal protection argument also fails.

“Petitioners argue that the benefits of being able to offset “exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions.

Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner, T.C. Memo. 1994-483, the Court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection.”

As I’ve written in the past, I believe the equal protection argument could succeed in the right venue. However, that venue is likely a District Court, a Court of Appeals, or the Supreme Court. That’s an expensive road to take to fight the IRS and the precedents that exist on this issue.

The Tax Court’s conclusion hints that they think the law should be changed:

“The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many year ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d).”

The petitioner in this case loses out on being able to deduct additional expenses; poker tournaments are just another form of gambling. For all gamblers it’s just another reminder that the Tax Code isn’t fair, but you have to live with it or get Congress to change it.

Case: Tschestschot v. Commissioner (T.C. Memo 2007-38)

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Stop Tax Haven Abuse Act

Posted on February 19, 2007 by Russ

Three Senators have introduced the “Stop Tax Haven Abuse Act.” Senators Carl Levin (D-MI), Norm Coleman (R-MN), and Barack Obama (D-IL) are targeting the 30+ offshore tax havens. Senators Levin and Coleman have led an investigation into these tax havens, and believe they shelter $100 billion in annual tax losses to the U.S. Treasury.

“It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars in assets from taxation,” said Coleman. “These tax schemes cause a massive revenue shortfall and, sadly, it is the honest American taxpayer who must bear a disproportionate burden of investing in areas like education and healthcare. We are introducing this bill to close these loopholes, shut down offshore tax schemes, and ensure that every American pays their fair share of taxes.”

I expect this bill has a good chance of passage this year. It may end up being tied to this year’s AMT relief act (whenever that’s introduced). The press release (from Senator Levin) lists the goals of the bill (available below).

Though this legislation targets the securities industry and the offshore trust industry, at least one other industry will be impacted by this bill (should it pass Congress): the offshore gambling industry. The Isle of Man and Gibraltar are two of those offshore tax havens, and they happen to be two of the main domiciles of offshore gambling firms. Depending on the actual text of the legislation (the bill is not yet available on the Thomas system) and any regulations promulgated by its passage, Americans might have even more difficulties in getting funds from the U.S. to the offshore gambling firms.

Thanks to the TaxProf Blog for the heads-up.

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Middle Class Tax Relief? From the Democrats?

Posted on February 18, 2007 by Russ

The Wall Street Journal on Friday headlines a possible attempt by the Democrats to enact middle class tax relief ($ubscriber pay link). With the Democrats now in control of Congress, they have enacted rules that require all tax legislation to be “revenue neutral.”

The big issue facing Congress is the extension of AMT relief. For the past several years, Congress has done one-year extensions of this relief. The Alternative Minimum Tax was designed to get 65 or so millionaires, back in the 1960s. If nothing is done, 25% of households will soon be paying AMT. If you’re unlucky enough to live in a high-tax state, and you have a large family (lots of dependents), you could be hit with the AMT even with an income of less than $100,000.

The Journal article suggests that the Democrats might enact long-term relief, but with corresponding tax increases to the wealthy. And the Journal hints that President Bush might go along with that idea.

I’ll keep you informed as the Congressional term continues.

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How Not To Commit Tax Evasion

Posted on February 14, 2007 by Russ

You’re a successful business owner, but you’re running a little short of cash. Do you cut back a bit on your expenditures? Of course not. Do you set up a trust, and write checks to cash, and pocket the money? Well, this is an entry on tax evasion, so I’m sure you know how this turned out.

Here’s the scheme, as the IRS figured it out: The business owner creates a trust. Nothing illegal so far. He stops paying himself wages, and writes checks to cash. He purchases cashier’s checks payable to the trust with the cash. Still nothing illegal, as long as the trust reports the deposits.

But the cashier’s checks are not deposited into the trust. They’re swapped for other cashier’s checks deposited into his bank account or used to pay his expenses. Well, we have a problem, especially if he doesn’t declare these checks as income. He didn’t. Even worse, the checks were listed as “subcontractor fees” and “loans to stockholders” on the corporate tax return. That’s falsifying a corporate tax return, another offense.

The business owner, Brian Troy Aberle, accepted a plea agreement and pleaded guilty to one count of tax evasion and one count of filing a false tax return. He faces up to eight years at ClubFed, though he’ll likely receive two years or so.

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Psychic Doesn’t See Upcoming Sentence

Posted on February 14, 2007 by Russ

Pity “psychic” David Guardino. We’ve written about Mr. Guardino of Cary, North Carolina twice before: when he threw some punches at his wife and when he was one of our nominees for the 2005 tax offender of the year. He was sentenced yesterday after being convicted of evading taxes on $1 million that he earned from his readings.

If he was psychic, shouldn’t he have known he would be convicted? But I digress….

As Joe Kristan noted in his lengthier report, Mr. Guardino attempted to influence the judge by showing the judge his legs. The legs of a 364 pound man. It didn’t work; he was sentenced to 21 months. But shouldn’t he have known that the legs wouldn’t work?

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Money Doesn’t Grow on Trees

Posted on February 13, 2007 by Russ

You know that. I know that. Does our leadership here in the Bronze Golden State know that?

Last week I got the chance to read. I was forced to—I was in bed with the flu. A very small blurb in the Register caught my eye: “State $1 Billion Behind in Collections in January.” California, for unknown reasons, collected $1 billion less in tax revenues than projected in January. Bureaucrats said not to worry; we think it’s a glitch and we’ll catch up soon.

I have my doubts.

Back in January I wrote about two stories. The first story is based on a Dan Walters column in the Sacramento Bee and examines the possibility that a single taxpayer led to a large increase in tax revenue collections in 2006. The second story examines the likely impact of the recent freeze.

I don’t think it takes a brain surgeon to see where we’re going. The talk out of Sacramento is all about new spending programs, new health insurance programs, etc. What they really should be talking about is cutting the current programs, because there isn’t going to be money to pay for everything on the Legislature’s wish list. Come May or June, when the impact of the collections from the 2006 tax season rolls in, this may become clear. This will be very clear in the fall, when estimated payments are collected at levels that will be much lower than the state anticipates.

Of course, one option is a tax increase. However, it takes a 2/3 vote of the Legislature for that to happen, and the Republicans have enough votes to block that.

California still has a structural deficit. I’m betting it’s going to be a lot worse at the end of 2007 than it is today.

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Neteller, the DOJ, and the IRS

Posted on February 8, 2007 by Russ

One of my practice areas is professional gambling. Many gamblers maintained an account with the e-wallet firm Neteller. Neteller served as a financial intermediary between US customers and online gambling firms. In January, the Department of Justice arrested the two founders of Neteller and charged them with multiple offenses, including money laundering. Neteller then pulled out of the US market. Neteller announced today that they are cooperating with the DOJ, and that $55 million in funds had been seized by US law enforcement.

Neteller, in one swell swoop, lost over half of its business. Ignoring whether or not such business was legal, assume you were running Neteller. The Department of Justice has arrested your two founders, has decided to fight you, and you no longer have any means to make financial transactions to the United States. What would you do? Fight the US DOJ, or make the best deal you can? It’s clear from the Neteller press release that they are in negotiations with the DOJ, and that transaction records are being sent from Neteller to the DOJ.

Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.

What does the DOJ want with thousands of pieces of data? Well, Neteller required the customer’s name, address, and for many accounts, their social security number. The details of those transactions will undoubtedly be sent to a government agency that’s in the revenue collection business: the IRS.

So what does that mean for the customer who used Neteller?

If you complied with the law—you reported all of your gambling income and your foreign bank accounts—you have nothing to worry about. But probably fewer than 5% of taxpayers report their gambling transactions as income.

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don’t declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn’t declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn’t declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It’s almost always better to come forward to the IRS than to have the IRS knock on your door.

The IRS’s first targets will be those with large (in dollars) transactions. But given the ability of the IRS to conduct computer matching, if you received funds from Neteller and didn’t declare any gambling winnings, you might receive a “letter audit” from the IRS. (“Dear taxpayer, we’ve added $xxx [the amount of money you received from Neteller] to your income. If you agree, pay the tax, interest, and penalties….’)

I believe that a few individuals will likely face criminal prosecution over this. If the IRS can find an online gambler who earned over $100,000 and didn’t declare his gambling income (and I think the IRS will have several to choose from, and might even find someone who earned over $1 million) that individual could find himself facing jail time for tax evasion.

But what if you used Neteller for non-gambling activities? Interestingly enough, I know of one firm that paid individuals through Neteller. If you declared the income on your tax return (and can show that), there’s nothing to worry about. You may have to spend some time responding to an IRS notice, but if you’ve paid your taxes, you’re fine.

However, I believe that many (if not most) online gamblers have thought that since Neteller was based on the Isle of Man (a known tax haven), the IRS would never be able to see their records. You’ve just lost that gamble. It will take some time, probably several months at a minimum, for the IRS to conduct their matching of records. If you’re one of those who just lost the first gamble, do you want to double-down and bet that the IRS won’t find you or do you want to amend your return(s) and pay the tax that you knew you owed…and the interest and penalties?

As I’ve said many times, gambling income is taxable. The Tax Code isn’t fair to gamblers, but the alternatives if you don’t pay your taxes are worse than paying the tax that you owe.

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Holes in the Tax Code

Posted on February 7, 2007 by Russ

With the 2008 Budget being sent to Congress, the Tax Foundation’s Tax Policy Blog shows the cost of ten famous deductions, credits and exemptions. Read the article for the full story.

Meanwhile, Roth Tax Updates has the full details of the proposed budget (as far as taxes goes). Joe Kristan correctly points out that the tax gap closures, which total about $30 billion, are what’s most likely to pass Congress, along with another year of AMT relief.

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