Prescription: Tax Fraud

Posted on February 5, 2007 by Russ

I’ve been under the weather the last two days, fighting a bout of the flu. That’s better than these individuals, including some doctors who should (one day) have a prescription to fight off the malady.

Dr. Steven Herman was a plastic surgeon, with a practice in Norwalk, Connecticut and Manhattan. I say “was” because he’ll be spending 20 months at ClubFed. Dr. Herman started by committing tax evasion; he took $883,000 from his medical practice and didn’t report the income. Then he asked friends and household employees to buy money orders payable to him at post offices. He would have them buy (typically) four $700 money orders, so that the $3,000 requirement for reporting wouldn’t happen. That’s a second felony, structuring. Finally, he billed a health insurance company for procedures that were cosmetic, but he told the insurance company that they were medically necessary. That’s a trifecta, and it earned Dr. Herman the prison time, $800,000 in a civil settlement to the IRS, $150,000 in restitution to the insurance company, $236,000 in forfeiture because of the structuring, and a fine of $60,000. You can read the story here.

Meanwhile, phony trusts snagged three in Morgantown, West Virginia. Dr. Max Harned and his wife were found guilty last November of hiding money in trusts; they face up to 25 years in prison according to this AP Story. And a forest service employee who hid $1.1 million in trusts faces nine years in prison. I missed the first story of Dr. Harned’s indictment last June. Dr. Harned apparently told IRS agents, “I’d like a piece of you, I’d kick your butt” and “I’m a very good shot.” All three convicted in West Virginia were clients of Las Vegas attorney Robert A. Jones. Mr. Jones told the Pittsburgh Post-Gazette that he’d win both of these cases. Apparently he needs to buy a new crystal ball.

It’s a shame that these medical practitioners haven’t spent some money in finding a cure for the flu. If they had been successful, they wouldn’t have any money problems.

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Tax Myths for the Poker Player

Posted on January 31, 2007 by Russ

That’s the title of the article I’ve written for the 2+2 Online Magazine. If you’re a poker player, the magazine (which is free) is a great resource; I heartily recommend it.

My article covers many tax myths that I’ve seen in online poker forums. You can read the article here. The entire 2+2 magazine is available here.

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Minimum Wage and Taxes

Posted on January 31, 2007 by Russ

Last night the Senate passed an increase in the Federal minimum wage. Attached to the bill are tax breaks for small businesses and tax hikes for big businesses. There are several issues here, so let’s take a look at what this bill might mean.

First, the House passed an increase without any tax changes. Leaders in the House have said that they want a “clean” bill—one without any attachments. Unfortunately for the Democratic leadership, in the Senate it takes 60 votes (out of 100) to cut-off debate. Republicans made it quite clear that without the tax changes, this bill was d.o.a. in the Senate.

As to the minimum wage increase itself, it will have no impact at all in California; the state’s minimum wage is higher than the new federal minimum wage.

However, the tax provisions will have an impact if they become law. The two versions of the bill must go to a conference committee which will have to iron out differences, and then it must pass both the House and Senate again. Also, under the Constitution tax changes must be first started in the House, not the Senate (there are ways of getting around this, though). So if the House leadership is adamant about a “clean” bill, the tax changes won’t happen.

The biggest impact of the new legislation would be a cap on the amount of deferred compensation. Today’s Wall Street Journal has an editorial arguing against this provision. The Journal argues that if deferred compensation isn’t allowed, companies will switch to other forms of compensation. And they’re correct, too. As the cliche goes, where there’s a will, there’s a way. If someone wants to pay $x, he’ll find a way.

So it should be interesting to see what happens with the bill. Since an increase in the minimum wage leads to fewer jobs (this is basic economics), I personally hope that the bill dies. But given that House leadership desperately wants to pass this legislation, I expect to see it emerge in some form later this year.

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A Slam for Traylor? No, It’s the Slammer.

Posted on January 28, 2007 by Russ

Robert “Tractor” Traylor, a former NBA player for Milwaukee, Cleveland, Charlotte, and New Orleans, pleaded guilty on Friday to a charge of preparing a false tax return. Mr. Traylor, 29, attempted to conceal assets of his cousin, Quasand Lewis, according to this AP story. Mr. Lewis, Traylor’s cousin, was recently convicted of drug trafficking and money laundering–he distributed 22,000 pounds of marijuana in the Detroit metropolitan area.

Here’s a wonderful quote from the story: “Robert Traylor is a basketball player, not a businessman,” Traylor’s attorney, Steven Fishman, told The Associated Press on Thursday night. “He got some bad advice and unfortunately he took it. So here we are.”

Unfortunately for Mr. Traylor, the IRS doesn’t appreciate lying on a tax return. Mr. Traylor could be sentenced to as much as fourteen months at ClubFed.

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Will You Really Get that Hybrid Vehicle Tax Credit?

Posted on January 26, 2007 by Russ

There’s a great op-ed piece in today’s San Francisco Chronicle about the hybrid vehicle tax credit. The op-ed, written by Edward McQuarrie, a professor at Santa Clara University, gives the unpleasant details of how many Californians won’t get the full value of the credit: the AMT will eliminate the tax break for many. I’ve been warning clients about this for some time.

But if you’re single, making between $25,000 and $115,000, you will likely get the full credit. Everyone else should read the article and learn why the AMT needs to be reformed (though that is very unlikely to happen in today’s Congress).

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Trumpeter Goes to Jail for Tax Evasion

Posted on January 26, 2007 by Russ

In August 2005 I reported on trumpeter Phil Driscoll. Mr. Driscoll was being accused of tax evasion of over $1 million. He was convicted last year on conspiracy and tax evasion charges stemming from using his ministry to hide income between 1996 and 1999 according to this story. He was sentenced today to a year and a day at ClubFed.

Mr. Driscoll performed at the opening of the Bill Clinton Presidential Library in Little Rock, and the former President sent a letter to the judge sentencing Mr. Driscoll.

Mr. Driscoll plans on appealing the conviction. He will not have to report to prison until March, pending the appeal.

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Bitten by a Spider?

Posted on January 26, 2007 by Russ

A web spider, or web crawler, is a program that scours the Internet for data. Wikipedia has a good description of them. And guess who is starting to use them? The taxman.

The Belastingdienst, the Netherlands version of the IRS, started a program called Xenon in 2004. Four other countries have joined in: Austria, Canada, Denmark, and the United Kingdom. As this story in Wired notes, the goal of the program is to look on the Internet to find individuals and organizations that have not paid their taxes. The spider finds businesses, and using other tools, gets their addresses. The information is then compared to the data in the tax organization’s files to see if that business has filed a tax return. Presumably, businesses that haven’t filed get a knock on the door from the taxman.

Obviously, there are privacy concerns with such a program. But it’s public information that’s being examined, and if you post it on your web site, you had better assume that the IRS (or the foreign equivalent) is reading it.

The IRS is not part of the Xenon project. However, the IRS would not confirm or deny to Wired that they use web crawlers.

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Tax Day Is Pushed Back One Day

Posted on January 24, 2007 by Russ

The IRS announced today that the deadline to file your tax return has been pushed back to Tuesday, April 17th (the deadline was originally Monday, April 16th because the 15th falls on a Sunday). The IRS release is available here.

California will follow along, according to today’s release from the Franchise Tax Board.

Why the change? Because April 16th is Emancipation Day, a legal holiday in the District of Columbia. Under federal statutes enacted years (decades?) ago, when the tax deadline falls on a Saturday, Sunday, or legal holiday in the District of Columbia, the deadline is extended to the next business day. Emancipation Day is a new holiday in the District; thus, the change.

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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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