It Was Only a 13.33% Kickback

February 7th, 2016

Last year I reported on the case of Ronald Boyd. Mr. Boyd was Chief of Police of the Port of Los Angeles. The ports of Los Angeles and Long Beach are two of the busiest ports in the world, and Mr. Boyd had a nice job. But he saw an opportunity.

In 2011, Mr. Boyd and two other individuals entered into an agreement where Mr. Boyd would receive 13.33% of revenues related to a smartphone app called “Portwatch.” Mr. Boyd guaranteed that the port would adopt the app, and in return for that he got the promise of future revenues. There’s only one problem with that: Mr. Boyd didn’t disclose that. Oops.

Adding to his woes were the future plans of the business: The goal was to take Portwatch and get more money by developing and marketing a similar app called Metrowatch to sell to other government agencies. (The idea of Portwatch is that it would allow ordinary citizens to report crime at the port. In that sense, the app is quite good.) Unfortunately, Mr. Boyd decided that lying to federal investigators was a good idea (it’s not, of course).

Unfortunately, as the investigation into Mr. Boyd continued the government discovered something else:

Boyd also pleaded guilty to tax evasion in relation to his personal income tax return for 2011. In his plea agreement, Boyd admitted receiving income from a security business he operated, At Close Range. The income came from the owner of a company doing business with the Port, American Guard Services, and Boyd admitted that he failed to report that income on his personal income tax returns for years 2007 through 2011.

Mr. Boyd pleaded guilty to making false statements to FBI agents, tax evasion, and a misdemeanor charge of failing to file a tax return (he neglected to file a 2011 tax return for At Close Range). He’ll be sentenced in July.

“I Bestow on You the Title of Taxpayer in Good Standing…”

February 7th, 2016

A bit of humor to start the day. Courtesy of Spidell’s Tax Season Tribune, I discover that a video game has decided to emulate the Internal Revenue Service. Now, it’s been years since I played video games. Apparently the game Witcher 3 is quite successful. And in this game is the Deputy Tax Enumerator for Revenue and Customs for Occupied Temeria, Dorian Branch. Here’s a YouTube excerpt:

Maryland Suspends Processing Tax Returns from 23 Liberty Tax Service Locations

February 4th, 2016

Maryland Comptroller Peter Franchot announced on Tuesday that he has suspended processing from 16 more Liberty Tax Service locations (bringing the total suspended to 23). The decision was made based on suspicious characteristics found on the returns:

  • Business income reported when taxpayers did not own a business.
  • Refund amounts requested much higher than previous year tax returns.
  • Inflated and/or undocumented business expenses.
  • Dependents claimed when taxpayers did not provide required 50 percent support or care.
  • Inflated wages and withholding information.

These reasons sound like tax fraud 101–what’s been done by unscrupulous preparers year after year. This year, though, at least one state is making an effort to nip these problems before they grow too large.

It should be noted that these stores were owned by franchisees. Jim Wheaton, General Counsel, Chief Compliance Officer, and Vice President of Legal and Government Affairs at Liberty, told Accounting Today that they have a “…robust compliance program, and we expect our franchisees to make sure that their offices comply with all federal and state tax requirements.”

For consumers, the advice that Maryland noted in their press release is accurate: “Taxpayers should carefully review their returns for these issues and should be suspicious if a preparer: deducts fees from the taxpayer’s refund to be deposited into the tax preparer’s account; does not sign the tax return; or fails to include the Preparer Taxpayer Identification number “PTIN” on the return.” I’ll add, if you don’t own a business and see business income on your return, there’s a problem. If you’re not attending college (or have a dependent attending college) and see education tax credits, there’s a problem. If it looks too good to be true, it probably is.

IRS Computers Crash

February 4th, 2016

2015 was a year the IRS would like to forget. Unfortunately, 2016 may be heading the same way. Yesterday, the IRS had a computer failure impacting multiple systems.

Those systems are still down this morning (as of 6:30am PST). The IRS currently cannot accept returns, and IRS e-services (the tool tax professionals use to pull transcripts) is also down. However, “Where’s My Refund” and IRS Direct Pay are working. More importantly, tax professionals can still submit returns to their software vendors; these returns are being held by the software companies until the IRS computers come back online.

The IRS’s statement on the failure notes,

Taxpayers can continue to prepare and file their tax returns as they normally would. Taxpayers can continue to send their tax returns to their e-file provider; these companies will hold the tax returns until the IRS resumes accepting electronic tax returns. Taxpayers who have already filed their tax returns do not need to take any additional action.

As a reminder to anyone who works with a computer (which is probably everyone who reads this), back up your computer! Your computer will crash at the least opportune moment (my corollary to Murphy’s Law). Do not keep your backups on your computer! And, most importantly, periodically test your ability to restore from your backups.

A Tale of Three States

February 3rd, 2016

Hawaii, Indiana, and Mississippi are three states where daily fantasy sports (DFS) is being debated. The three states are representative of what is likely to occur in every state.

Last week, Hawaii Attorney General Doug Chin issued an advisory opinion that DFS was gambling under Hawaii law.

Gambling generally occurs under Hawaii law when a person stakes or risks something of value upon a game of chance or upon any future contingent event not under the person’s control…The technology may have changed, but the vice has not.

On Tuesday, Honolulu (Oahu County) Prosecutor Keith Kaneshiro sent letters to DFS companies FanDuel and DraftKings ordering them to cease and desist offering DFS to Honolulu residents:

Gambling is illegal in Hawaii, and on January 27, 2016, the state Attorney General issued a formal advisory opinion confirming what I have long believed: That daily fantasy sports contests are a form of gambling and violate Hawaii statutes.

It appears DraftKings will leave Hawaii.

Meanwhile, the Mississippi Attorney General also issued an opinion that DFS is illegal in the state. The opinion notes that DFS would be illegal both in a casino (there are casinos in Mississippi) and outside of a casino. Neither DraftKings nor FanDuel has left the Magnolia State.

Today, the Indiana State Senate sent legislation to the Indiana House that would explicitly legalize and regulate DFS. It is unclear whether or not the bill will eventually make it into law.


The wild cards that could both negatively or positively impact DFS are:

  • Will the current federal investigations of DFS in Florida lead to prosecutions?
  • Will New Jersey win the en banc appeal of New Jersey’s legalization of sports betting (the lower court and the Court of Appeals ruled that New Jersey was barred by the Professional and Amateur Sports Protection Act (PASPA))?  A loss by New Jersey could make DFS illegal nationally; one interpretation of PASPA is that it makes all sports betting, including indirect betting such as DFS, illegal (except for the states specifically exempted within the law).  A win by New Jersey might overturn PASPA.
  • Will the lawsuits and appeals filed by DFS companies in New York and Illinois succeed in anything but delaying DFS exits from these states?
  • Will the payment processors leave DFS making the industry financially unable to continue?
  • Will the IRS rule that DFS is or isn’t gambling?
  • Will Congress act on gambling in any manner?
  • Will an anti-gambling candidate become the next President of the United States?

A lot will happen over the next two to three months. Because it’s Tax Season, I won’t be following this as closely as I have been over the last couple of months. A great resource on DFS is the Legal Sports Report.

An observer might ask, what does this all mean? I believe that we will see a dichotomy within the states on how they treat DFS. I believe that about 20 states will explicitly ban DFS, another 20 states will legalize and regulate DFS, while a few states will ignore DFS and let it continue in its current unregulated state. But the wild cards noted above could drive the DFS industry under or make it wildly successful.

The Liberty to Commit Tax Fraud

January 31st, 2016

There are thousands of tax professionals. These range from the huge firms such as H&R Block to mom and pop outfits. The professionals range from Enrolled Agents, CPAs, and tax attorneys to those who have just put up a sign saying that they’re “professionals.”

Liberty Tax Service is one of the huge chains. They have employees dressed up like the Statue of Liberty outside of their locations. According to the IRS and Department of Justice, a Liberty Tax franchisee in metro Detroit took quite a few liberties with tax law.

Craig Comer operates five Liberty Tax Service locations near Detroit. If the complaint lodged by the US Department of Justice is correct, the five franchise locations did the usual illegal things to increase refunds:

According to the complaint, the defendants prepare income tax returns for customers that fraudulently overstate refunds and claim refundable credits by, among other things, claiming false or inflated Schedule C income and expenses, bogus dependents, false filing statuses, improper education credits and false itemized deductions. Based on audit adjustments the IRS has made to tax returns prepared and filed by the defendants for 2008 to 2013, the defendants’ conduct has cost the U.S. Treasury approximately $4.5 million for those years alone, according to the suit.

There are also allegations of forging customer signatures, changing returns that customers have already signed, committed fraud with the Earned Income Credit, and violated IRS PTIN (Practitioner Tax Identification Number) requirements. All tax professionals who prepare tax returns for money are required to put their PTIN on every tax return they file. The government is alleging that this wasn’t done by this franchisee.

This story does show two things. First, requiring every tax professional to obtain a license won’t stop tax fraud. The alleged fraud here was started by an individual with a PTIN, someone who assuredly could obtain the former RTRP designation or the current AFSP “seal of approval.” Second, the Department of Justice news release notes, “In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers.” This is absolutely true, and the DOJ should be commended for their work. It also shows that licensing every tax professional isn’t needed to get rid of unscrupulous ones.

FTB’s New MyFTB Impresses; Will the IRS Take Heed?

January 25th, 2016

Submitting a Power of Attorney form to the IRS means I must fax the form to the IRS’s Centralized Authorization File (CAF) unit and hope that the POA is entered in timely. A few years ago authorized e-services providers (which I am) could enter the POAs directly in the IRS system but no more.

Meanwhile, California’s Franchise Tax Board (FTB), the state’s income tax agency, has never allowed California POAs to be entered by practitioners. The procedure was to fax or mail them and wait weeks for them to be entered. No more.

The FTB debuted the new MyFTB on January 4th, and it’s a winner. I signed up, and waited for my PIN to be mailed to me (that took the expected 7-10 days). I then input the PIN, and have access. I can see the accounts I’m authorized for, and the new system allows me to enter a POA.

However, the POA does not immediately go into effect. The FTB requires that a pdf of the POA be attached so that the FTB can review it. The FTB states that within two weeks (well, 15 days) the POA will be in their system.

The FTB’s procedure appears to me to allay the issues that the IRS had with rogue professionals entering POAs without authorization. And consider the time savings here. I’ve entered all the information into the FTB’s computer system. An FTB employee can match the pdf I uploaded to the POA I entered. If it matches, the employee can make my POA go live. He or she doesn’t have to retype the information I entered, saving the FTB time (and money). The POA gets into the FTB’s systems faster, making me happy (and my client). It’s a win-win.

There’s a lot more that’s doable with the FTB’s new MyFTB. I can look at account balances, estimated payments amounts (clients get these wrong all the time), 1099 information on the state level (IRS wage and income transcripts don’t have this information), calculate a balance due for a future date, protest an assessment, view images of notices and correspondence, and more.

If you’re a tax professional who deals with California clients or a California taxpayer, I urge you to enroll in MyFTB. I’m very impressed. I may rag on the FTB (especially in the enforcement area) but from my point of view MyFTB is a model to be emulated by the rest of the country.

Such a system, if implemented by the IRS, would also be a win-win. Unfortunately, my expectations on that end aren’t particularly high. Indeed, I’ll be surprised if we see such a system for the IRS in the next five years.

An Entity a Day Will Keep the IRS Away, Right?

January 24th, 2016

Here’s a scheme that’s sure to work to avoid remitting payroll taxes to the IRS. Every day (or week or month), I’ll form a new business entity that’s collecting the tax. Once the amount due to the IRS gets large, I’ll just use a new entity. The IRS will never catch on, right?

As I’ve said before and will say again, if you want a sure-fire way to get in tax trouble, withhold payroll taxes and don’t remit them to the IRS. I guarantee it will be investigated and you will get in trouble. Agim Zendeli apparently didn’t read my prior posts on this subject.

Mr. Zendeli operated the Ziggies chain of restaurants in Missouri. Mr. Zendeli, liked the good life; for eleven years (from 2004 to 2014), he used the restaurants as a piggy bank for his personal life.

During this period, Zendeli lived a lavish lifestyle, and spent substantial sums on vacations, gambling trips, entertainment and luxury vehicles, including three BMWs, two Cadillac Escalades, two Infiniti QX56s, a 2009 Mercedes, a 2008 Acura and a 2004 Land Rover.

That was done by not remitting the payroll taxes. His scheme was what I noted in my first paragraph.

In order to avoid IRS collection of past due employment taxes, Zendeli repeatedly formed new entities to continue restaurant operations. Once each company accumulated a large tax debt to the IRS, Zendeli ceased operating under that company’s name and opened a new entity, often in the name of a family member, partner, or employee. Zendeli, however, maintained custody and control of the businesses.

Mr. Zendeli also tried to deceive the bankruptcy court; that didn’t work:

In addition, Zendeli attempted to avoid payment of approximately $654,260 in past due federal and state employment taxes by filing bankruptcy on March 26, 2010. Prior to the bankruptcy, Zendeli divorced his wife and transferred the trademarked name “Ziggies®” to his father, for a token payment. (Funds from the 2011 sale of trade name “Ziggies®” were remitted through Zendeli’s bankruptcy proceedings, after the trustee determined a fraudulent transfer of assets had occurred.)

In the end, Mr. Zendeli pled guilty to failing to remit $1.3 million in federal payroll tax. He’s agreed to make restitution; he’s also facing up to five years at ClubFed.

As a helpful hint to any business owners who think this scheme will work: It won’t. But I’ve been reporting on these schemes for nearly 11 years, and I suspect if I keep this blog going another 11 years I’ll still be able to note these. It’s so much easier to simply pay your taxes and live a less lavish lifestyle…but that doesn’t occur to the Bozo contingent.

Storm Tax Relief for Missouri

January 24th, 2016

Possibly lost in the blanket of snow that fell back east was the IRS announcement on Friday granting tax relief for individuals and businesses impacted by the December storms in Missouri. Here is the IRS announcement in full:

IRS Provides Tax Relief to Missouri Storm Victims; Tax Deadline Extended to May 16

WASHINGTON ––Missouri storm victims will have until May 16, 2016 to file their returns and pay any taxes due, the Internal Revenue Service announced today. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.

Following this week’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency (FEMA), the IRS said that affected taxpayers in Barry, Barton, Camden, Cape Girardeau, Cole, Crawford, Franklin, Gasconade, Greene, Hickory, Jasper, Jefferson, Laclede, Lawrence, Lincoln, Maries, McDonald, Morgan, Newton, Osage, Phelps, Polk, Pulaski, Scott, St. Charles, St. Francois, St. Louis, Ste. Genevieve, Stone, Taney, Texas, Webster and Wright counties will receive this and other special tax relief. Other locations in Missouri and other states may be added in coming days, based on damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Dec. 23, 2015. As a result, affected individuals and businesses will have until May 16, 2016 to file their returns and pay any taxes due. This includes 2015 income tax returns normally due on April 18. It also includes the Jan. 15 and April 18 deadlines for making quarterly estimated tax payments. A variety of business tax deadlines are also affected including the Feb. 1 and May 2 deadlines for quarterly payroll and excise tax returns and the special March 1 deadline for farmers and fishermen who choose to forgo making estimated tax payments.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Dec. 23 and before Jan. 7 if the deposits are made by Jan. 7, 2016. Details on available relief can be found on the disaster relief page on IRS.gov.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred, or the return for the prior year. See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

As of today, the Missouri Department of Revenue has not changed their deadline for state taxes. However, I would expect Missouri to conform to this.

Fail, Caesar! An Update

January 21st, 2016

It’s been just over a year since Caesars Entertainment Operating Company (CEOC) declared bankruptcy. If Caesars Management was hoping that the court-appointed examiner would be giving them good news, and that the company would be coming out of bankruptcy unscathed, well, the news of the day is anything but.

Yesterday’s Wall Street Journal noted that a reorganization is not a given. Judge Benjamin Goldgar noted,

It doesn’t have to end with a confirmed plan…A trustee could be appointed, the case could be dismissed or, my favorite, the case could be converted to chapter 7 [liquidation], which would just be a hoot, wouldn’t it?

It’s likely the temperature in Caesars’ boardroom dropped ten degrees when they heard about that. As to why the judge made the remark, it turns out that Caesars doesn’t want the examiner’s report made public. Now why is that, as examiner’s reports (in a bankruptcy) are normally made public? Could it be that there’s damaging information in the report?

If we are to believe a report in the New York Post that’s exactly why. “Court-appointed probe will slam Caesars for fraud,” screams the headline. The first two paragraphs tell the story:

Caesars Entertainment’s court-appointed examiner has told company officials and creditors’ lawyers he believes the company acted improperly when it transferred assets away from the hobbled casino prior to putting it into Chapter 11, The Post has learned.

A report by the examiner, expected to be released next month, is likely to conclude there was a degree of civil fraud connected to the transfer, three sources with direct knowledge of the talks said.

Ouch.

As to what this means, quite a bit, and none of it is good for Caesars’ plan to get out of bankruptcy:

  • The transfers made just before the bankruptcy (allegedly moving Caesars’ best assets out of CEOC prior to the bankruptcy) could be undone, dragging more of Caesars into bankruptcy;
  • There could be personal liability for members of the Board of Directors of Caesars; and
  • Asset sales and a very different exit for Caesars from bankruptcy would become far more likely.

For my poker-playing readers, it’s still unlikely that this will have a direct impact on this year’s World Series of Poker. It’s in everyone’s interest that the WSOP operate as planned because it’s profitable. That said, I would not be surprised to find assets such as the WSOP owned by someone besides Caesars by the end of the year.