A Pinch of Fraud, and a Pound of Evasion

Posted on January 23, 2007 by Russ

I haven’t done a megapost with a bunch of tax schemers in some time. So before I head off to dinner, here’s some fraud and evasion to munch on.

Lots of people have been filing false tax returns lately. The IRS doesn’t appreciate it. These individuals worked for a shoe retailer, and allegedly came up with a nice way to make extra money: submit 107 false tax returns totaling about $250,000 in refunds. They apparently needed the money quickly, as they used Refund Anticipation Loans to instantly get their money. They’re looking at spending a few years at ClubFed.

Meanwhile, the Department of Justice has asked that a court issue an injunction barring a Georgia tax preparer from preparing tax returns and from selling “tax schemes.” As this press release notes, Victor Carlysle Sullivan, Jr., of Albany, Georgia is accused of bilking the US out of around $5 million.

Last year I reported on nursing home operator Jack Easterday. He was convicted on 47 counts of tax evasion. What I didn’t know was that his conviction was tossed out due to a faulty jury instruction. He’s going to be retried in March. The IRS has added 62 new charges to his trial; he’s now accused of not paying over $10 million in payroll taxes he collected from his employees. He’s looking at a substantial stay at ClubFed if found guilty.

A Newberg, Oregon man made lots of money selling mail-order divorces. He “forgot” to claim them on his tax return. The IRS didn’t forget to catch up to him. William Cleveland Thompson pleaded guilty to evading taxes from 1993 to 1995 (he last filed a tax return in 1992). As this story notes, he’ll be visiting ClubFed.

I again ask, what is it about strip clubs that attract tax cheats to them? Maybe it’s that the businesses have lots of cash, and the owners wonder what will happen if they just don’t report it. Well, that’s allegedly what the owners of Dangerous Curves in the Tacony section of Philadelphia did. Their accountant prepared false tax returns enabling them to get loans. Then, an investigation of a councilman (now imprisoned) put the focus on their club. To top it off, some of the employees said that they were paid in cash (a total of about $1.4 million) that wasn’t reported to the IRS. All involved are looking at three years at ClubFed plus restitution if convicted. You can read more here.

Remember Charles Lanza, of Wolcoot, CT? He had a new take on “Bowling for Dollars,”—”Skimming for Dollars” as I earlier reported. He lucked out though, and was sentenced to just six months in prison (sentencing guidelines indicated he should receive about three years) due to poor health.

Finally, remember the Florida evangelist who had the dinosaur theme park? Kent Hovind, aka “Dr. Dino,” will enjoy ten years at ClubFed. As this story notes, Hovind believes that dinosaurs and humans walked the earth together but didn’t believe you had to send employment taxes to the government. As the judge sentencing Hovind noted, “[he refused] to accept what the law is.” He’ll have plenty of time to pray about it. His wife will be sentenced in March.

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What Kind of Business Entity is Right For You (Part 1)

Posted on January 19, 2007 by Russ

You’ve decided to go into business for yourself! Congratulations. If you’re like most new entrepreneurs, you start your business first, and ask questions later. If you do that, I can guarantee that unless you’re incredibly lucky, you’ll have a bunch of headaches down the road.

In this series I’m going to look at the various types of business entities: sole proprietorships, partnerships, C Corporations, S Corporations, LLCs, and other business entities. Many tax preparers and attorneys believe that “one size [entity] fits all.” That’s just not the case. What may be right for you might not be right for me.

It’s important that before you start your business, you meet with an attorney and a tax professional. There are three different individuals who need to come together to determine which business entity is right for you: the attorney, a tax professional, and you. It’s like an Isosceles triangle, and somewhere in the middle is the right entity.

Your goals are extremely important. What do you want from the business? Some entrepreneurs want to be the next Microsoft; others just want a nice, steady income. Do you want health insurance payments to be made from your business? How many (if any) employees do you want/need? Is your business local, regional, or national? Do you want to franchise it? What kind of income do you need from it to live off of? These are just a sampling of the questions that I ask new business owners.

The attorney is needed because liability questions can mandate different types of entities. Does your business have significant product liability risks, such as food, small toys (they can be swallowed by small children), pharmaceuticals, etc.? Do you have backers (investors) who want a specific agreement/entity? Does your business location present legal risks? Do you have partners/investors, such that a buy/sell agreement needs to be drafted? There are many other legal issues when you form a business. A business attorney familiar with your business idea(s), and the community you will be operating in, is a must.

A tax professional is also a must. Depending on your goals, and the legal issues involved with your business, the tax professional can recommend a business entity. The attorney will also likely recommend a type of entity. Usually, these recommendations sync.

There can be major issues when you rush into your business. I have a new client in San Diego. She formed her business in 2005 as a sole proprietorship. There are just a few problems, though: she has a silent partner, entitled to 50% of the income that’s not on the books; this partner is in Hong Kong, so there are foreign withholding requirements; the company has significant liability exposure (it’s in the food industry); she formed an LLC and an S Corporation, but she’s operating her business in the name of the sole proprietorship; and she first saw an attorney (at my urging) in late 2006. In other words, it’s a mess, and will take time (and money) to straighten out. It’s much, much easier to spend a little bit of money up front then have to spend a lot on the back end.

In part two (coming next week) I’ll take a look at the advantages and disadvantages of a sole proprietorship. Sole proprietorships are the easiest businesses to start. But ease comes with a price.

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Out of State California S Corp Shareholders in for a Surprise

Posted on January 19, 2007 by Russ

California has always mandated that for all distributions to out-of-state S Corporation shareholders, 7% be withheld for state income tax to the Franchise Tax Board. However, there was no enforcement of this mandate. That’s changed for 2007.

The Franchise Tax Board will now enforce this. So if you’re an out-of-state shareholder in a California S Corporation, you’ll be getting 93% of what you thought you’d get. Exemptions are available if you’ve been filing (and paying) California state income tax, or you can demonstrate to the FTB that the withholding rate is higher than your actual tax rate.

Hat Tip: Jeff Quin, North Lake Tahoe Bonanza

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Frozen Taxes?

Posted on January 16, 2007 by Russ

California has been in the grips of a freeze. It’s estimated that the cold weather will cost California growers billions of dollars. You and I will feel the pain when we go to buy citrus in coming weeks — expect prices to skyrocket.

But there’s another impact, one that the media hasn’t picked up on (yet). Taxes.

Businesses pay taxes based on their net income. The freeze of 2007 will drastically impact the agriculture industry in California, and will cause profits to melt away. No profits, no tax due.

Estimated tax receipts will fall through the year as the impact becomes known. Individuals will be laid off (no crops to pick). California’s Central Valley will be devastated, and government support programs will be necessary. So expenses will rise, while receipts fall.

Meanwhile, the Governator proposes a new health program. Who is going to pay for this? With what money?

In 2007 and 2008, money won’t grow on trees, and neither will tax revenues.

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Postmarks Matter

Posted on January 16, 2007 by Russ

Today is the deadline to make your fourth quarter estimated tax payment. That payment must be postmarked today. It doesn’t have to be received by the IRS today, but you do need it to be postmarked today. The easiest, best, and safest way to ensure compliance is to mail your payment using certified mail. When you do that, your receipt is stamped by the post office with the date it was mailed.

Why do I bring this up? Because yet again a case was decided by the Tax Court dealing with something sent a day late. Today’s petitioner had a deadline of Monday, May 8, 2006, to file a petition with the Tax Court. The petition was received by the Court on May 10th, and showed a handwritten date sent (the petition was sent by FedEx) of May 8th. But the FedEx computer generated receipt showed it was sent on May 9th. Additionally, the tracking documentation showed it entered the FedEx system on the 9th.

The Court does an excellent job of summarizing the issues:

A timely mailed petition may be treated as though it were timely filed. Sec. 7502(a). Thus, if a petition is received by the Court after the expiration of the 90-day period, it is nevertheless deemed to be timely filed if the date of the U.S. Postal Service postmark stamped on the envelope in which the petition was mailed is within the time prescribed for filing. Sec. 7502(a); sec. 301.7502-1, Proced. & Admin. Regs.

The Tax Court takes two pages to note that the rules also apply to private delivery services. Handing the envelope to a hotel worker on the evening of the 8th was not equivalent to handing it to an employee of FedEx on the 8th. Suffice to say, the petitioner was a day late and a dollar (or more) short.

Case: Austin v. Commissioner, T.C. Memo 2007-11

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I Won the Money, But They Took It Away– Do I Pay Tax?

Posted on January 10, 2007 by Russ

Last year, two Internet poker players were found by two different Internet poker sites to have cheated. (The players involved had multiple accounts, which was in violation of the sites’ rules.) Both Internet sites confiscated the money that the cheaters won. Do they owe income tax on their alleged ill-gotten gains?

In the first case, cheater #1 won $140,000 in an Internet poker tournament. He bragged to a friend that he had used two different accounts. The information made its way onto the Internet, the site (we’ll call it site A) where he won the money investigated, pronounced him guilty, and seized the $140,000 plus an additional $40,000 that was in his two accounts. The second site (site B) also confiscated an unknown amount of money from his accounts. Site A redistributed the tournament winnings to the players who finished below him.

In the second case, cheater #2 won about $150,000 in an Internet poker tournament on site B. He also told people about his using multiple accounts. The information again made its way onto the Internet. Site A investigated, found he had multiple accounts, and confiscated his money. Site B also investigated, found multiple accounts, and confiscated some of his money; they let him keep the tournament winnings because it was “clean,” in their view.

So who owes tax? And on what?

Cheater #1 never had constructive receipt of his income for his tournament winnings. Because those funds were never really in his possession (and were subsequently redistributed), the $140,000 in winnings weren’t really his and he doesn’t owe tax on the winnings. However, he did have constructive receipt of the other $40,000 (for a while, at least). Technically, the IRS can argue that he had the money, and it was stolen from him. He has a cause of action (tort) against the Internet site (good luck on pressing a case against an offshore entity), and may have a casualty loss. It’s an unusual situation, because he could have taken that money up to the moment it was seized. The same situation holds for the money taken from him by site B.

There’s no question that cheater #2 had constructive receipt on his tournament winnings; indeed, site B allowed him to cash out those winnings. Clearly, he owes income tax on that money. The other seized funds fall into the same grey area as for cheater #1.

There’s no question that the alleged cheaters were stupid in bragging about their actions on the Internet. This also raises serious questions regarding the integrity of offshore Internet gambling sites. Caveat Emptor.

But the moral of the story is simple: If you’re going to cheat, take the money and run.

Links: Very Long Thread from Poker Site on Cheater #1
Very Long Thread from Poker Site on Cheater #2

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Tax Carnival and More

Posted on January 10, 2007 by Russ

Don’t Mess with Taxes has the 9th Tax Carnival up. You can read it here. There’s nothing from me, probably because I didn’t submit anything….

Also, I will be attending a convention over the next several days. Posts will be very limited.

Finally, a reminder that the 4th quarter estimated tax payments must be postmarked (or submitted through the EFTPS system) next Tuesday, January 16th.

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Health Care for All…But at What Cost?

Posted on January 9, 2007 by Russ

The Governator announced his health care vision yesterday. You can find a good summary of it here. The plan would mandate that all Californians have health insurance, and the state would mandate what would and wouldn’t be covered. The plan would be funded by a 4% payroll tax, a 4% tax on hospital revenues, and a 2% tax on physician’s income.

Excuse me, they’re user fees, not taxes. Of course, that’s to get around the California constitution, which mandates that new taxes pass by a 2/3 vote of the legislature. So if when this passes the legislature (and it will pass) by a simple majority, someone will file a lawsuit, and this will be in court for a couple of years.

Last week I wrote,

“The Governator has been hinting that he’d like to see some sort of mandated health coverage for Californians. I’d like to see it, too, but in a way that is not government run, government mandated, and government funded. I think that Californians—the same Californians that voted down a mandatory health care initiative—need to let their Assemblymen and State Senators (and the Governator) know how they feel.”

What did the Governator propose? A government mandated, government funded system. It’s not run by the government; however, it might as well be. The government will decide what will and won’t be covered.

This proposal is a recipe for economic disaster in California. The payroll tax falls on employers who have ten or more employees. That’s a lot of small businesses. If I were the Nevada Development Authority, I’d be getting my advertisements ready.

A second problem is what will happen with this proposal after it emerges from the legislature. California’s legislature leans to the left…well, that’s an understatement. It’s very liberal. I expect this legislation to be added to like a Christmas tree, with all sorts of pet mandates being added to it.

Other major problems with this proposal include mandated coverage for illegal aliens, a new state bureaucracy to enforce the legislation (part of the Christmas tree), and, as Ed Morrissey notes, the strong likelihood that prospective doctors will either choose other professions or other states to practice in.

There is at least one good point about this proposal: I won’t have to worry about health insurance any more….

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Bah, Humbug

Posted on January 7, 2007 by Russ

You own a Christmas tree lot, and it’s December 26th. What do you do with your leftover trees?

Well, it’s time to throw them away…but not for one lot owner near Fresno. No, they’re not hazardous waste. Rather, the Board of Equalization wants to make sure that the lucky owner has paid all of his taxes.

What taxes? Well, the owner bought the trees for resale, and didn’t pay any sales tax on the trees. His customers paid sales tax when they bought the trees. However, the leftover trees (which are being destroyed) have never been taxed. Before they’re destroyed, the lot owner must pay sales tax on the soon to be composted trees.

As this brief story notes, the Board of Equalization wants to make sure that sales tax is paid on every single tree.

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Prosecutors to Court: Reject Hatch’s Appeal

Posted on January 6, 2007 by Russ

The U.S. Attorney’s Office replied to Richard Hatch’s appeal on Friday. Hatch, the former Survivor winner who didn’t pay his taxes on his $1 million prize, recently filed an appeal of his conviction. Hatch, in his appeal, alleged that he caught the producers cheating, and that’s why they reneged on paying his taxes; further, he never got a chance to testify about that at his trial. Hatch is currently serving his prison sentence in Morgantown, West Virginia.

The U.S. Attorney’s Office, though, has a different view. According to the Associated Press, Hatch had plenty of opportunity to bring the issue up during his trial. Hatch and his attorney were told that they could present evidence that CBS and the Survivor producers agreed to pay his taxes. CBS, by the way, denies Hatch’s claims.

The AP quotes the prosecution brief, “What the court was unwilling to tolerate was a sideshow concerning whether the producers helped other contestants cheat, divorced from the key defense predicate: that this had all led to the alleged promise…Counsel’s failure [to present evidence] cannot be transformed into an abuse of discretion by the court….”

For bloggers like me, I do hope that the Hatch case lasts as long as his sentence. It sure is amusing, but there is a salient point that can be gleemed from this case. No matter what others may promise to do, you are responsible for the paying of your taxes.

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