The IRS scandal is now linked into the White House. The Wall Street Journal is reporting that a “senior White House official” was told around April 22nd of the results of the TIGTA audit (note: Link is for subscribers of the WSJ). Kathryn Ruemmler, White House Chief Counsel, was told by Treasury Department attorneys that there was improper scrutiny of Tea Party and conservative organizations.
President Obama stated that he didn’t learn of the scandal until everyone did. I think the chance of that is about zero: I find it impossible to believe that Ms. Ruemmler didn’t tell the President when she learned of this. The bigger question is whether the scandal originated in the White House. I also find it hard to believe that two (or four) low level bureaucrats in Cincinnati decided on their own to target conservative groups.
Meanwhile, the Washington Post reported that there’s surprise among the IRS employees in Cincinnati over the scandal. “Everything comes from the top. We don’t have any authority to make those decisions without someone signing off on them. There has to be a directive.” The IRS employees interviewed believed it was middle managers who decided to implement this policy. That may well be the case, or it could be that they got directives. Sooner or later the full details will come out on this scandal.
A pair of reports from the South about elected officials (well, in one case former elected officials) in tax trouble. A longtime state representative allegedly took from charities while a former mayor may not have reported interest he received on personal loans.
Georgia State Representative Tyrone Brooks (D-Atlanta) is facing a 30-count indictment on mail, wire, and tax fraud. Representative Brooks is accused of misappropriating about $1 million of charitable donations from a charity he founded in 1990 and the Georgia Association of Black Elected Officials (GABEO). While Mr. Brooks accuses the government of going after him as retaliation in regards to his attempts at getting arrests in a 1946 lynching, the Department of Justice alleges that this has everything to do with Mr. Brooks using charities for his own gain.
Supposedly Mr. Brooks took the monies from the charity and moved them to his own bank account and paid personal expenses or just paid the personal expenses from the charity’s bank account. Additionally, he’s accused of naming individuals to the charity’s Board of Directors without their knowledge; of lying on solicitations for the charity; of telling the IRS that the charity had over $180,000 of various expenses while the year before he told the IRS that the expenses were under $9,000; of making false representations while soliciting for GABEO; and of filing false tax returns.
Meanwhile, the former mayor of Hialeah, Florida and his wife find themselves facing tax evasion charges. Julio and Raiza Robaina are accused of not reporting interest on more than $1 million of personal loans. The Robainas face several tax related charges, including filing a false tax return, conspiring to defraud the IRS, and lying to federal agents.
While the IRS is receiving criticism that’s well justified for the current scandal, IRS criminal investigation and the Department of Justice are slowly increasing their efforts on identity theft. Glenn Powell, Jr. of Alabama found that out.
Mr. Powell opened two bank accounts, and at least 49 false tax refund checks totaling over $95,000 were deposited into his accounts. Mr. Powell withdrew over $46,000 before the IRS put an end to his part in the scheme (overall, the scheme resulted in half a million dollars of false refunds). Mr. Powell pleaded guilty; he’s looking at a maximum of 10 years at ClubFed.
Meanwhile, Raquel Hogan and Yolanda Blount (both from Macon, Georgia) have been indicted for allegedly using nursing home records in a tax fraud scheme that involved identity theft. Ms. Hogan allegedly provided the records to Ms. Blount; she allegedly then prepared the tax refunds. Both are looking at a stay in ClubFed if found guilty.
Some news came out of the first of what will be many Congressional hearings on the IRS scandal.
First, the question that occurred just one week ago and started the controversy–yes, it’s only been one week–was planted. The question came from Attorney Celia Roady. Per a spokesperson from her law firm:
“On May 9, I received a call from Lois Lerner, who told me that she wanted to address an issue after her prepared remarks at the ABA Tax Section’s Exempt Organizations Committee Meeting, and asked if I would pose a question to her after her remarks. I agreed to do so, and she then gave me the question that I asked at the meeting the next day. We had no discussion thereafter on the topic of the question, nor had we spoken about any of this before I received her call. She did not tell me, and I did not know, how she would answer the question.”
Why did it come out last Friday? That’s easy, the TIGTA report was going to be released the following week; maybe an apology on a Friday afternoon would diffuse a crisis. (Nope.)
Acting Commissioner Stephen Miller didn’t like the use of the word “targeting.” Well, that’s exactly what it was. But Commissioner Miller did admit that the IRS provided horrible customer service during this episode.
The New York Times notes that TIGTA let senior officials at the Department of the Treasury know about this. My question: Did this go up to the White House? We don’t know that yet.
Not from the hearing, but related to it: A conservative group sent a Freedom of Information Request to the IRS asking for documents from the tax-exempt division related to the “Tea Party.” The IRS responded that it “found no documents specifically responsive to your request.” Oops. (The request and the IRS response are available at the link.)
Commissioner Miller also stated today that the actions taken by the IRS were not illegal. What?! If they weren’t illegal (I’m not an attorney), they were, at minimum, reprehensible.
The IRS asked about content of prayers. I am not making this up. (Apparently the Tea Party group that sent a copy of the Constitution to the IRS should have also sent a copy of the Bill of Rights.)
I was talking with my mother this evening, and she said we’ll find out all of the truth when someone writes a tell-all book: “Targeted.” Given the magnitude of this scandal, I’m hoping we’ll find out the truth far sooner than that.
Some music from the 1980s which contains an apropos reference to the IRS:
In a story that has not yet been picked up nationally, Fox19 News in Cincinnati reported that the four IRS workers at the supposed core of the story, “simply did what their bosses ordered.” Here’s the video from Fox19:
This report states that there are four employees, not two; and the four employees allege they were just following orders. Meanwhile, in other news from the scandal:
- Stephen Miller, Acting IRS Commissioner, sort of resigned. While President Obama said he was fired, Mr. Miller will be leaving the IRS when his term as Acting Commissioner is over. In an email to employees Mr. Miller noted he is leaving not because he was fired, but because his term will end in early June.
- The number of groups targeted is now 500, up from 300, according to Darrell Issa.
So we just have more little drips of revelations yesterday. The most interesting is the allegation of following orders. While I’m certain the IRS and the Obama Administration want this to be “rogue” employees and bad management, the truth might be something else entirely.
The Treasury Inspector General for Tax Administration’s (TIGTA) report on the targeting of Tea Party and other conservative groups was released late today. If you were to step back in time to May 1st, you would have said that everything being alleged to have been occurring were paranoid delusions. Today we find that the cynics were absolutely correct. First, the conclusions of the report:
- The Determinations Unit developed and used inappropriate criteria to identify applications from organizations with the words Tea Party in their names….
- The Determinations Unit developed and began using criteria to identify potential political cases for review that inappropriately identified specific groups applying for tax-exempt status based on their names or policy positions instead of developing criteria based on tax-exempt laws and Treasury Regulations….
- While the team of specialists reviewed applications from a variety of organizations, we determined during our reviews of statistical samples of I.R.C. § 501(c)(4) tax-exempt applications that all cases with Tea Party, Patriots, or 9/12 in their names were forwarded to the team of specialists. [I'll discuss the specialists a little later.]
- Organizations that applied for tax-exempt status and had their applications forwarded to the team of specialists experienced substantial delays. As of December 17, 2012, many organizations had not received an approval or denial letter for more than two years after they submitted their applications….
- [T]he Determinations Unit requested irrelevant (unnecessary) information because of a lack of managerial review, at all levels, of questions before they were sent to organizations seeking tax-exempt status….
So let’s look at all the allegations that had been alleged. First, that Tea Party groups were targeted. They were.
Next, that a “special unit” had been developed to look at them. There was such a special unit (see the reference above to a team of specialists).
Next, that information was requested from Tea Party groups that shouldn’t have been. True again.
There’s more, though. First, this scandal was not caused in Cincinnati. As Joe Kristan noted in his analysis,
Although the processing of some applications with potential significant political campaign intervention was started soon after receipt, no work was completed on the majority of these applications for 13 months. This was due to delays in receiving assistance from the Exempt Organizations function Headquarters office.
That means a big part of the problem was in Washington, not just in Cincinnati, as the spinners would like us to believe. [Emphasis in original.]
So Washington was involved. And like a bad infomercial, there’s more (from the TIGTA report):
After being briefed on the expanded criteria in June 2011, the Director, EO, immediately directed that the criteria be changed. In July 2011, the criteria were changed to focus on the potential “political, lobbying, or [general] advocacy” activities of the organization. These criteria were an improvement over using organization names and policy positions. However, the team of specialists subsequently changed the criteria in January 2012 without executive approval because they believed the July 2011 criteria were too broad. The January 2012 criteria again focused on the policy positions of organizations instead of tax-exempt laws and Treasury Regulations. After three months, the Director, Rulings and Agreements, learned the criteria had been changed by the team of specialists and subsequently revised the criteria again in May 2012.
These directors are in Washington, not Cincinnati. And these are people one to three levels below the IRS Commissioner. The chance of either then-IRS Commissioner Douglas Shulman or current Acting Commissioner Stephen Miller having been truthful in their testimony to Congress–where both individuals denied having any knowledge of the targeting of Tea Party Groups–is about zero in my eyes.
The TIGTA report was commissioned because,
TIGTA initiated this audit based on concerns expressed by members of Congress. The overall objective of this audit was to determine whether allegations were founded that the IRS: 1) targeted specific groups applying for tax‑exempt status, 2) delayed processing of targeted groups’ applications, and 3) requested unnecessary information from targeted groups.
TIGTA was not asked (and has no conclusions on) why this practice began. Did someone at the IRS spontaneously decide that targeting organizations on the right (politically) was a great idea? Did someone at the White House ask the IRS to implement this policy? We don’t know the answer to that question. Since we know that other offices were involved (El Monte and Laguna Niguel), why were they involved? Who directed them to be involved? There are plenty of questions that still need answering.
I suspect the Congressional hearings will be a spectacle.
ABC published a list of some of the questions. Some are ridiculous and obviously impossible to answer (one asked for all stories published about an applicant).
“How dare the administration imply that they’re going to get to the bottom of it,” said Issa in an interview on CBS’s “This Morning.”
“This was the targeting of the president’s political enemies effectively and lies about it during the election year so that it wasn’t discovered until afterwards,” he added. “The fact is this is the kind of investigation that has to be open and transparent to the American people.”
EPA waives fee requests for “green” groups but not conservative groups. While I won’t be covering this in detail, it sure looks like a pattern. And the FCC helps pro-net neutrality groups but not conservative groups on Freedom of Information Act requests. It’s the appearance of impropriety that’s the issue…and there’s more than an appearance here.
It has been an interesting few days to be a tax blogger.
The scandal involving the targeting of conservative groups continues to grow with new revelations. ABC obtained a timeline (purportedly from the soon to be released TIGTA report) which shows that the targeting began in 2010, not as Ms. Lerner of the IRS said in 2011. That’s bad as Ms. Lerner’s apology appears to be wrong.
Unfortunately for the IRS (and the Obama Administration) there’s more–a lot more. Next, we find that the IRS sent confidential applications to a liberal-oriented group according to that group. Amazingly enough, this included nine organizations that hadn’t been approved. Those applications for 501(c)(4) status aren’t supposed to be released but they were. And they were published by ProPublica.
Next, we discover that this wasn’t confined to the Cincinnati Service Center. The Washington Post has an update that hits close to home for me:
IRS officials at the agency’s Washington headquarters sent queries to conservative groups asking about their donors and other aspects of their operations, while officials in the El Monte and Laguna Niguel offices in California sent similar questionnaires to tea-party-affiliated groups, the documents show.
We next discover an allegation that there’s a secret group working on conservative organizations. Normally, I wouldn’t believe this. However, I am forced to remember, “Sometimes the cynics are right.” Attorney Dan Backer alleges that an IRS analyst told him that there’s such a group.
“More than a year ago, one of these guys, really a slip of the tongue, [said] ‘Yeah we have this new working group that’s really looking at all these conservative organizations,’” Backer said. “And that’s when we knew it was gonna be a problem.”
We have the National Organization for Marriage’s lawsuit against the IRS alleging that IRS employees revealed the confidential portion of their Form 990 filing. (Some portions of Form 990 are released; however, some portions do remain confidential. The list of donors to a non-profit is listed on Schedule B of Form 990; that is considered confidential.)
Lost in all this is another black eye for the IRS: The GAO said that the IRS has 60 deficiencies in their internal controls. I guess the news stories of the day might make one believe that’s the case.
At this point in time, the paranoid are believing that there’s an “Enemies List” and that higher-ups are organizing IRS vendettas against conservatives and conservative groups; and that the Enemies List comes from higher-ups in Washington, DC. One week ago, I would not have believed someone who told me, “The IRS deliberately targeted conservative groups and this had gone on for three years and it goes up to the IRS Chief Counsel’s Office.” Yet that absolutely appears to be the case. I’m forced to admit that the paranoid in this case could be correct. I don’t know if we’re heading toward a repeat of what happened with Watergate, but I am certain that there will be a lot of tough questions for a lot of individuals at the IRS.
I vaguely remember a video game with the character Leisure Suit Larry. I’ve never played video games (well, perhaps some online poker) so my knowledge of the games is minimal. From Wikipedia, we find that Larry is,
…though still somewhat lovable, …a balding, dorky, double entendre-speaking, leisure suit-wearing “loser” in his 40s. The games follow him as he spends much of his life trying (usually unsuccessfully) to seduce attractive women.
No, the makers of Leisure Suit Larry didn’t have Larry going through a federal courthouse looking for ladies. Instead, we have the former CFO of Sierra Entertainment (the creator of Leisure Suit Larry) heading to Tax Court on a case involving an airplane, grapes, lending, and lady’s clothing.
First, a word of warning. While I thoroughly enjoyed reading Judge Holmes’s decision, it is long. It runs 76 pages. That said, it is eminently readable by a layman.
Ed Heinbockel is the former CFO. After leaving Sierra Entertainment he ended up running a training simulation company (quite successfully). However, he also had some other businesses that weren’t as successful. He bought an airplane and rented it to others. He decided to add a vineyard near his home. There was a family loan that went bad. And his wife had a successful personal shopping business with plenty of deductions.
An issue that I’ve stressed over and over to my clients is to document, document, and document. If you have good records of your business expenses, an audit will usually go well. The Heinbockel’s didn’t (generally), and their audits for 2005 – 2007 didn’t go well. The case ended up in Tax Court.
Airplanes are expensive. One way of making them less expensive is to rent them out when you’re not using them. However, a key is to keep records of expenses. Additionally, it helps in a court case if the loan when you’re buying the plane doesn’t have the reason for the purchase stamped as “personal.”
Unfortunately for the petitioner, he didn’t keep good records. He didn’t run the operation in a business-like manner. In fact, when the Court looked at the factors (to see if the activity was run for profit), all of them weighed against the activity being for profit.
Next was a lending activity. However, it really wasn’t according to the Court.
They provided no books or records, showed no separate accounts, and proved no active solicitation of business…We find instead an ordinary family deal: They loaned Lydia’s brother money when he said he needed some.
However, the Heinbockels do get to deduct the proven amount of legal fees they incurred in recovering the bad debt as a miscellaneous itemized deduction (so on this issue it wasn’t a total loss).
The Heinbockels looked at starting a vineyard. Unfortunately, the NIMBY crowd didn’t like the idea of a vineyard so the grapes were never planted. The problem for the petitioners was that since they never incurred income from the grapes, the expenses can’t be currently deducted. Instead, they’re start-up expenses that are deductible when the first dollar of income is taken in.
There’s an obvious issue here: What happens when there is never income?
Thus, all of the expenses the Commissioner has disallowed (including those for 2007 on which he had the burden of proof) should have been deferred under section 195 until an active trade or business began. And, since the Heinbockels sold the property in 2007 without ever beginning business, those costs should have been capitalized and added to the basis of the property for computing their gain or loss upon sale.
So the expenses will decrease their gain when they sold the land that they wanted to become a vineyard.
Finally, there was the personal shopping business. The first issue was that this was claimed on the tax returns as Mr. Heinbockel’s business rather than Mrs. Heinbockel’s. The Court rejected that:
With a business named Lydia’s World, it wouldn’t seem to be a stretch to conclude that this was, in fact, Lydia’s business. It certainly wasn’t Ed’s. Throughout trial, Lydia testified that this was her business. When asked to describe Lydia’s World, she described it as “my business;” and her testimony was threaded throughout with the first-person singular….
Then the case meandered into documenting expenses. Unfortunately, there was no written mileage log. The purported business trips had lots of elements of personal pleasure (e.g. a trip to Sea World).
The absence of contemporaneous logs combined with Lydia’s often inconsistent testimony, and the numerous occasions where these alleged business trips appeared to be draped with personal pleasure, cause us to find that none of the travel and meals and entertainment expenses met the business purpose requirement of section 274.
There’s also the records–or lack thereof. “The records for Lydia’s World rivaled Fibber McGee’s closet for their organization.” Luckily for the Heinbockel’s, the Court is allowed to use the Cohan rules for some items (such as Cost of Goods Sold); the court allowed 50% of gross sales. Elsewhere, they weren’t so lucky:
Even when they provided an invoice, the Heinbockels kept such incomplete and disorganized records as to ensure that we can’t tell whether those amounts were already allowed as deductions elsewhere. We therefore find that the Heinbockels have not met their burden to substantiate any deductions that the Commissioner didn’t already allow for 2005. And to the extent that the Heinbockels conceded amounts lower than those reported on Lydia’s World’s 2005 Schedule C, we accept those concessions.
The Heinbockels did win some other deductions for Lydia’s World where there were receipts and records.
The moral of the story is simple: Keep good records! If you have organized records, documenting your expenses, and you run your businesses in a business-like manner, not only will an audit likely go far better, but your Tax Court case (if you head to Tax Court) will go far better than Leisure Suit Larry’s day at Tax Court.
The Nevada Democratic Party proposed a tax increase on entertainment venues. (It’s doomed, as both Republican Governor Brian Sandoval and Republicans in the state legislature are opposed to it.) To balance it out, Democrats in Carson City are now proposing tax breaks for films in the Silver State. Jon Ralston was told by a state Democratic official, “This is a jobs issue. Democrats want to create jobs here and Republicans want to ship jobs overseas.”
I suggest Democrats in Carson City look at the gory details of film credits in Iowa. Or Michigan. Or the United Kingdom. Again, though, this is a plan that won’t be going anywhere (thankfully) as the votes aren’t there.
Every so often a client asks me, “Can I fund/purchase/own my business through an IRA.” My general answer is don’t do this! You may be able to do it legally, but there are so many gotchas that it’s rarely worth the aggravation.
A taxpayer tried to own his closely-held C-Corporation through his IRA. The results weren’t pretty. Joe Kristan has the details on what went wrong and the troubles the taxpayer now faces.