Taxable Talk

Having had to deal with a few refugees from Western Tax Service, I've seen the damage that a bozo tax preparer can do. But this story is, well, ridiculous.

From Oronogo, Missouri, comes the story of Carrie Shafer. Ms. Shafer owned her own tax service, TC's Taxes, from her home in Oronogo. She prepared 1,475 tax returns between 2002 and 2004. There was just one major problem here: Almost all of the returns were false or fraudulent.

Like Western Tax Service, Ms. Shafer never saw a deduction she wouldn't take for her customers, even if they didn't have that deduction. Medical, dental, charitable, and business expense deductions were just some of her favorites. And after she was told she was under investigation she continued to prepare returns that had false deductions, and provided false information at audits! That's either chutzpah or stupidity...or both.

Ms. Shafer pleaded guilty to 40 counts of tax fraud earlier this year. She received three years at Club Fed, and she has already been barred from preparing tax returns in the future. Her customers have already likely received "Dear Valued Taxpayer" letters from the IRS; they'll have to pay the true amounts owed with interest. Remember, if it sounds too good to be true, it probably is.

I just finished re-reading Murder by the Book. Written in the 1950's by Rex Stout, the Nero Wolfe novel deals with four deaths and what a certain book ("Put Not Your Trust") has to do with them. If you've never read Stout, do so—he's a wonderful author, and the books written many years ago are still eminently readable.

Coincidentally, two sham trusts crossed my email in-basket this evening. From Kenai, Alaska comes yet another dentist who allegedly decided that a sham trust was a good way to cut his taxes. Here's the alleged scheme according to the Department of Justice.

The accused, Glenn Lockwood, formed a professional corporation. No problem so far. Then he allegedly contracted his services to an Irish company. That company allegedly leased his services to a Nevada company which, in turn, allegedly leased his services back to his own corporation. Of course, the money took a much more convoluted path, with offshore accounts, Nevada real estate development, and sham trusts supposedly thrown into the mix. The DOJ alleges that the loss to the Treasury is $575,000 for tax years 2000-2003. Mr. Lockwood will face four counts of tax evasion, and is looking at ClubFed if found guilty.

Meanwhile, in North Carolina, the DOJ has filed a civil lawsuit accusing two men of creating sham trusts to help customers evade taxes. The accused, Alexander Klosek and Bryan Noel, allegedly targeted wealthy and elderly individuals and attempted to get them to sell their homes and other major assets into sham trusts. It appears to be a pretty big alleged crime; the DOJ estimates the loss to the Treasury at $55 million. The DOJ has asked for an injunction to stop the individuals from selling any more trusts. And you can be fairly certain that a request for their customer list will soon follow so that the IRS can send a heartwarming "Dear Valued Taxpayer" letter to Klosek's and Noel's customers.

In the end, the best kinds of sham trusts are the ones you read about in novels. They cost you $5.95 or so for a paperback. The crimes described above, if proved, could lead to much larger penalties.

In February 2006, I wrote about the "end of the sage" for Western Tax Service. Western Tax Service, for those who don't remember, had inventive but illegal methods for getting refunds for its' clients: phony deductions for employee business expenses, false charitable deductions, fake deductions for tax payments, and other similar shenanigans. Back then, Samuel Joseph DeAngelo pleaded guilty to defrauding the IRS and aiding and assisting in the filing of false tax returns.

Mr. DeAngelo was finally sentenced on Monday. He received 51 months at ClubFed. Also sentenced on Monday was Erin Cordes, another tax preparer for Western; Cordes received one year of probation. Joe Shields will be sentenced in mid-October.

By the way, the total tax revenue lost to the US government in the Western Tax Service scam was $15,458,732. That's a lot of fraud.

I am rarely surprised when I write about tax crime. I remember reading on Fark about a 91 year old bank robber with the headline never too old to steal. Today's subject is a little younger, but still one of our senior citizens.

Well, let's head to North Platte, Nebraska. Thomas Miller is a retired dentist in North Platte. He also has some annuities and pensions (which isn't unusual). But his tax returns painted a somewhat different story.

According to this article, in 1998 he allegedly reported a tax loss of $1.6 million...but it should have been zero. In 1999, he reported a loss of $22,730 but he should have reported over $369,000 in pension and annuity income. He was indicted for this, and for reporting tax losses in 2001 and 2002 when the government believes that none should have been reported.

But it gets worse. Mr. Miller also faces charges of mail fraud, wire fraud, money laundering and swindling for allegedly taking $1.3 million in investor's money, putting it in accounts in Grenada, and then allegedly sending the money elsewhere overseas for his own use.

Mr. Miller pleaded guilty to two counts of tax fraud on September 4th. He still appears to be facing the other charges with a court date in October.

At least three times I've written about Renaissance, the Tax People. The company, now out of business, was a multi-level marketing firm that promoted deducting personal expenses as business expenses. The latter is why they're out of business, with the principals finding their way to ClubFed.

Thell G. Prueitt of Kingsland, Texas used to be at Renaissance. After that company dissolved, he set up shop at several other companies. The US Government alleges that Mr. Prueitt is promoting the same schemes as used at Renaissance, and the government is suing to bar him from preparing tax returns. The DOJ alleges that Mr. Prueitt's materials, "...have falsely claimed that customers could convert non-deductible personal expenses into deductible business expenses and be 'audit proof.'"

My old advice stands about any tax scheme that you come across: If it sounds too good to be true, it probably is.

The Houston Chronicle has an interesting article about US Attorneys using the tax laws to go after adult business owners.

Pornography, excuse me, adult businesses, are not liked by the government. Back in 2005, then US Attorney General Alberto Gonzales set up a task force targeting the industry. As the article notes, the tax laws are being used where anti-pornography laws can't.

Businesses in industries that have lots of cash have always been targets of the IRS. This is definitely the case for the adult entertainment industry. I've written in the past about cases against strip club owners. Based on the Chronicle article, I'll have plenty more to write about in the future.

Bohdan Senyszyn worked for the IRS in Paterson, New Jersey. He audited mid to large-sized businesses. Mr. Senyszyn also holds a CPA license.

Then things went wrong. In 1992, Mr. Senyszyn agreed to help a New Jersey real estate developer hide income. Not content with one crime, Mr. Senyszyn then embezzled money from the real estate developer, evaded taxes on his own return (by failing to report the embezzled income), and committed bank fraud by obtaining a loan under false pretenses. He got the loan because his business had "income" of $175,000 based on "revenues" of $350,000. The real numbers were $0 and $0.

Mr. Senyszyn pleaded guilty this past week to tax evasion and bank fraud charges, and given the $762,000 loss to the treasury, he's looking at an extended stay at ClubFed.

I'm a native of Chicago. It's a great city, and has every kind of attraction you can think of. It's also the home to the best baseball team in the world (unfortunately, they usually don't have a good record).

But Chicago may become a much more taxing place to visit or shop. Currently, the sales tax in Cook County (Chicago and nearby suburbs) is 9.00%. That doesn't appear to be large enough to Cook County Commissioners.

Cook County Commissioner Joan Murphy told Leah Hope of WLS-TV, "We just need to do something other than cut jobs if we want to maintain services to our residents." What's the something she proposes? A sales tax increase from 9% to between 11% and 11.75%. That's somewhere between a 22.2% increase and a 30.6% increase.

Apparently, Ms. Murphy thinks the tax increase is a done deal. She told Ms. Hope, "The sales tax is going up 2 ¾ percent. That's not a back-breaking increase."

Well, a 30.6% increase may not be back-breaking, but that's a huge increase. I'm sure local businesses—especially those where individuals have options to shop elsewhere—will feel the difference. Wheaton, in nearby DuPage County, has a sales tax rate of 7.75%. A 4% difference will likely cause some shoppers to patronize other stores. Likewise, Joliet in Will County has a 7.75% rate.

The proposal must go through public hearings, and votes by the commissioners before being implemented. Needless to say, if you live in Cook County, this is something you may want to raise your voice about...or you will likely find things 30% more expensive.

News Story Here

Back in 2005 I wrote about Derivium Capital. They were under investigation by the IRS & FTB for making loans that converted capital gains to nothing! for tax purposes. A great scheme, if you can get away with it.

Well, the Department of Justice filed suit to stop the scheme. The defendants are Derivium Capital, LLC, Derivium Capital (USA) Inc., and Veridia Solutions LLC. Four individuals were named in the suit. The DOJ is asking for a permanent injunction to stop the loans; the lawsuit claims that the scheme has cost the US Treasury over $230 million.

Though Derivium is in bankruptcy, the lawsuit alleges that the individuals involved are still trying to peddle the loans. My advice from back in September 2005 was if it sounds too good to be true, it probably is. In this case, not only are the defendants in trouble, but if you happen to have "bought" a Derivium loan, or are considering buying one today, you will have problems with the IRS.

Wesley Snipes lost his latest battle in federal court this past week. He had asked that his trial be moved from Ocala, Florida, to New York City. Snipes is accused of attempting to obtain a fraudulent $12 million tax refund.

The judge, though, was unmoved. Judge William Terrell Hodges wrote, "While the Ocala courthouse is not located in the immediate vicinity of a major airport, it is within one hour and a half driving distance from two international airports, (Tampa and Orlando), and is within a 45-minute driving distance from Gainesville Regional Airport, which has regular direct flights to and from Atlanta and Miami...As the government points out, these driving times are only slightly longer and, on some occasions may even be less, than the congested commute from New York airports to downtown Manhattan."

Snipes also asked for the move because he has a home in New York. But the judge pointed out that he has a home in Orlando, which is just to the south of Ocala. The judge also noted that Snipes "...is an affluent individual..." who can afford the travel costs.

And while the probable jury pool in central Florida wasn't listed as an argument in both sides' briefs, you can bet that Snipes felt that he would likely have a better chance in Manhattan than in Ocala, Florida. So the media circus will descend on bucolic Ocala in October when Wesley Snipes will face the government.

News Story: St. Petersburg Times

A reader asks,

"I'm currently studying in undergraduate university in the U.S., where I hold my only citizenship. I was thinking about studying abroad, probably in Australia. I was thinking about going from around Jan.1-December 31st of 2009, or from Sept.1 08-Sept.09. I receive financial aid grants from the university/government(?), but the school financial office says those are never taxed the way they do it, so presumably it's a non-issue for Australian as well as U.S. tax. I think if I study abroad everything is billed to my U.S. university account which is where the grants are credited to. So while in Australia I might want to focus on poker, both live and online. I was wondering what kind of liability I'd be looking at, I'm guessing I could get the U.S. exemption if I am there for the whole year as long as my income is less than ~82k? And after reading my understanding is that it's unclear but unlikely that people have liability for poker in Australia. If you can help elucidate the rough idea for the situation I'd be in I would greatly appreciate it."

There are several things you need to consider. First, Australia only taxes professional gamblers. So if you're not a professional gambler, your gambling income will not be taxed by Australia. However, if you are a professional gambler, and if you were required to pay Australian income tax, you would have to pay income tax on the gambling. (I don't know anything about whether your scholarships would be taxable in Australia; your university can probably answer that question. I also do not know if full-time students are exempt from Australian income tax.)

As a US citizen, you must file tax returns each year, whether you reside in the US or Australia. When you write about the "U.S. exemption," I assume you mean the foreign earned income exclusion. That will pose a problem for you, as gambling income is not considered earned income, and only earned income is eligible for the exclusion. (There are other requirements in order to take the foreign earned income exclusion.)

Now, a professional gambler living abroad (one who files a Schedule C) can take the foreign earned income exclusion ($85,700 in 2007). However, a professional gambler must pay self-employment tax on his net gambling income.

So without knowing more about your entire situation, it appears on the surface that you are not a professional gambler (as you are a full-time student). Thus, your gambling winnings will remain taxable whether you are studying here or in Australia.

Tax fraud comes in many shapes and forms. This weekend has given me a plethora of examples.

We'll start in Dayton, Ohio. Martin Dorf found an interesting way to short the IRS: Report ten cents on the dollar. From 2001 through 2004 Mr. Dorf earned about $574,000 but he reported only $57,000. The IRS caught on to the scheme, and Mr. Dorf has pleaded guilty to one count of attempted tax evasion. Mr. Dorf has already made restitution, so he may avoid any time at ClubFed (he could get up to five years).

Billy Wayne Minor was a tax preparer in Brownsville, Tennessee. In 2006, he was charged with 15 counts of preparing false tax returns; he ended up pleading guilty to one count of aiding and assisting in the preparation of a false tax return. He got 18 months at ClubFed, a fine of $7,500, and he was permanently enjoined from preparing tax returns for others.

That wasn't the only bozo tax preparer brought to justice recently. Thomas Mercer of Romulus, Michigan pleaded guilty to 30 counts in federal court. Mr. Mercer prepared 23 tax returns full of bogus deductions for things like business losses, charitable donations, and tuition and fees. His clients agreed to share their refunds—refunds that ranged between $900 and $19,000 for a total of $330,000—with him. Mr. Mercer also coached his clients on what to say during meetings with the IRS and provided them with phony documents backing up the phony deductions. Mr. Mercer is looking at a significant stay at ClubFed.

Heading now to Florida, we find the end of the political career of Warren Newell. Mr. Newell pleaded guilty to federal tax evasion and corruption charges. He attempted to pocket $500,000 through three schemes, and then use money laundering, false income tax returns, and false financial disclosure forms to cover them up. Mr. Newell used to be a County Commissioner in Palm Beach County. He'll likely soon be visiting ClubFed.

Finally, we head down under to Sydney, Australia. Andrew McCall pleaded guilty to 32 counts of tax evasion, in a fraud scheme that cost Australia 530,257 Australian Dollars ($447,166 USD). Mr. McCall was sentenced to seven years imprisonment, and he must repay over 500,000 Australian Dollars. Mr.McCall used phony identities, false passports, and other false documents to deceive Australian authorities before he was caught.

As usual, for all of these individuals it would have been a lot easier to just pay the taxes and skip the fraud in the first place. But if they did that, I'd have a lot less to write about each week.

Wouldn't it be nice if we could buy a $39.95 package that would terminate our taxes? Tax protester Robert Schulz offered just such a package...until the US government got an injunction against him.

But the IRS had this idea. Wouldn't it be nice to know who bought these packages, and we might want to check and see if they actually filed (and paid) their taxes? So they issued a subpoena to PayPal for the records. And they won at the District Court.

Mr. Schulz appealed to the 8th District Court of Appeals. As Joe Kristan reported today, the Appeals Court upheld the subpoena. Read his entire post; it's excellent. I'll just note one sentence from the Appeals Court ruling: "[W]e conclude that Schulz’s constitutional arguments challenging the IRS’s authority to enforce the tax laws are without merit."

A CPA likes to gamble, and shows his gambling activity as a second business (his other business activity is his accounting practice). The IRS challenges this, claiming that he's really an amateur gambler. The Tax Court has to decide who is right.

Ali Mohammadpour is a CPA who also likes to gamble. On his 2003 tax return, he shows his accounting practice on Schedule C. He also shows his gambling on another Schedule C. He won $84,730 while gambling. However, the petitioner lost at least as much as that, and reported a net gambling income of $0.

There's nothing wrong with an individual having multiple businesses. Indeed, many accountants have two (or more) businesses so that during their off season they can also earn an income.

Unfortunately for the petitioner in this case, there were several questions as to whether he really was a professional. To be a professional gambler, one must, "[engage] in the gambling activity with continuity and regularity and with the primary purpose of making a profit." This means gambling full-time, for your livelihood.

In contrast, the petitioner in this case "...dedicated approximately 900 hours to his gambling activity in 2003 (or approximately 17 hours per week on average), which appear to have been distributed over 136 days." That's definitely not full-time. The Court also noted that the petitioner did not show positive net gambling income in the two years prior to 2003 or in the year after (or, for that matter, the year in question).

More damaging to the petitioner's case was his lack of recordkeeping. The IRS expects a professional to keep records, no matter what the profession. Gamblers, whether professionals or amateurs, must keep a gambling log.

"Also in contrast to the taxpayer in Commissioner v. Groetzinger, supra, petitioners did not keep reliable records of Mr. Mohammadpour’s gambling activity. This was due in part to error, and also to the fact that Mr. Mohammadpour intentionally ignored, for record-keeping purposes, bets on which he won less than $600 and which therefore were not reported to the IRS by means of Form W-2G. These winning bets of less than $600 made up approximately 10 percent of all Mr. Mohammadpour’s bets. In other words, petitioners adopted record-keeping practices which would merely approximate Mr. Mohammadpour’s gambling performance. Such is inconsistent with a conclusion that Mr. Mohammadpour engaged in his gambling activity with the primary purpose of making a profit." [footnote omitted]

Mr. Mohammadpour was determined by the Tax Court to be an amateur. If you want to be considered a professional, you need to treat your business as a profession. Not only must you try to earn an income (a livelihood), but you need to keep complete and accurate records. In this case the petitioner was a CPA and should have known this.

Case: Mohammadpour v. Commissioner, T.C. Summary 2007-163

When you sell your home (assuming it's your principle residence), you get to exclude the first $250,000 of income ($500,000 if you're married and filing a joint return). That's a nice tax break. But if you sell investment property, you must pay taxes on the gain. And if that adds up to $6.5 million in real estate sales, someone might notice if you don't file a tax return.

Indeed, that's just what Jorge A. Valdes is alleged to have done. Mr. Valdes, a resident of the Miami area, is accused of selling $6,485,597.88 between 2001 and 2004. However, the Department of Justice alleges that Mr. Valdes has failed to file a tax return since 1992. The government alleges that Mr. Valdes owes tax of about $1.5 million.

Mr. Valdes is facing four counts of tax evasion for his failure to file. If found guilty, Mr. Valdes will be looking at a significant stay at ClubFed.

Press Release Here

The California Legislature is currently looking at AB1546. The initial goal of this legislation was to make the LLC "fee" (tax) legal. This fee is based on gross receipts.

As I wrote last year, courts ruled twice last year that the LLC fee is unconstitutional. The legislature, desperate for money, decided to change the way that the LLC fee, er, tax, is calculated so that it is only based on California income. That's reasonable.

However, a recent amendment in the State Senate will drastically impact California taxpayer rights. AB1546 was amended so that no interest will be paid on any tax or fee that you pay that's ruled unconstitutional.

So let's assume that California enacts a tax on Enrolled Agents income. I sue, claiming it's discriminatory and unconstitutional. I win. All I'll get back is the tax—California will have the free use of my money for years. AB1546 is an invitation for California to enact dubious taxes as the state would keep the interest earned.

Needless to say, I hope this legislation—at least, the amendment that impacts all taxpayer's rights—doesn't pass the legislature. More likely, it will pass and we'll have to hope that the Governor takes out his veto pen.

Hat Tip: FlashReport Blog

The Tax Court decided an interesting case today. An individual receives gambling income, but has given the payee a Form 5754, stating that the income belongs to another individual. However, the other individual doesn't claim the income. The IRS goes after the individual who picked up the money. Who owes the tax?

Willie Albert worked at the Los Angeles Turf Club, an off-track betting parlor. During 2003, Mr. Albert presented winning tickets worth $12,258. When he presented those tickets, he also presented Form 5754. Form 5754 is used to assign gambling winnings to others. For example, poker players use this when they are backed to show that instead of the player being responsible for 100% of the winnings, she is responsible for (say) 60%. In this case, Mr. Albert's forms (which are signed under penalty of perjury) show that one Romeo Umali was responsible for 100% of the winnings.

That would be all and good if Mr. Umali claimed those winnings on his tax return. He didn't. So the IRS went after Mr. Albert. The dispute ended up in Tax Court.

The key points of the case are summed up by the Tax Court:

In general, section 61(a) defines the term “gross income” to include “all income from whatever source derived” unless it is specifically excepted.

Under the claim of right doctrine, if a taxpayer receives money under a claim of right and without restriction as to its disposition, then he has received income that he is required to report even though it may still be claimed that he is not entitled to retain the money and may be ordered to restore its equivalent. N. Am. Oil Consol. v. Burnet, 286 U.S. 417 (1932). But under the conduit theory, if a person receives funds merely to enable him to act as a conduit of the funds to another, then he does not have a claim of right to the funds, and the funds received are not income to him to the extent that he passes them on to the person for whom the funds were intended. Goodwin v. Commissioner, 73 T.C. 215, 232 (1979).

The main problem for Mr. Albert was that his testimony was unconvincing. He was inconsistent on the stand, and the Court felt his testimony was self-serving. He also presented no corroboration of his testimony. He had no witnesses, his bank statements didn't prove whether or not he received the income, and Mr. Umali's tax return did not show the income. So the Court found that the gambling income came under the Right of Claim, and Mr. Albert owed the tax.


Case: Albert v. Commissioner, T.C. Summary 2007-162

In the United States, almost all income is taxable—including illegal income. Yes, if your a thief, you are supposed to report your ill-gotten gains on your tax returns. If you don't, your guilty of tax evasion.

Yes, it's entirely possible to get convicted of embezzlement (usually by your state) and then get convicted for tax evasion (usually by the Department of Justice). And a Kansan is looking at just that scenario.

Michael Slayton, of Tecumseh, Kansas, is accused of embezzling $238,000 from the home health care company he co-founded. Mr. Slayton allegedly pocketed the funds by writing 138 checks to himself, but using a different payee on the company's books. The US Department of Justice alleges that Mr. Slayton also reported incorrect amounts on employment tax forms to help cover up the embezzlement.

All told, Mr. Slayton is looking at three counts of tax evasion, three counts of filing false federal tax returns, and three counts of failure to account and pay withholding and FICA taxes. If convicted, Mr. Slayton is looking at an extended stay at ClubFed.

So if you decide on a life of crime, it's a good idea to not have the IRS on your back. Yes, you should report your illegal income as "Other Income" on line 21 of your Form 1040.

News Story: Topeka Capital-Journal

The Michigan Wolverines football team hasn't done very well this year, losing their first two games to Appalachian State and Oregon, both at home. There are probably a lot of angry Wolverines fans. While the University of Michigan struggles, the budget in Michigan is struggling, too. Indeed, it appears that the state legislature and the governor are leading Michigan to a government shutdown come October 1st.

Michigan faces a $1.8 billion deficit. Like most states, each year the budget must be balanced. The governor and the lower house are controlled by Democrats while the upper house is controlled by Republicans. Governor Jennifer Granholm wants to increase taxes by $1.5 billion and cut $300 million in services, while State Senate Majority Leader Mike Bishop wants to increase taxes by $600 million, and cut services by about $1 billion. The two sides haven't made much headway, and time is running out.

Needless to say, if you live in Michigan, you can expect your taxes will go up. I believe quite strongly that anyone thinking of starting a business in Michigan today might want to consider a neighboring state with a better business climate, lower taxes, and a better football team.

News Story: Detroit Free Press

Lawmakers in Tennessee had an interesting idea a couple of years ago. Why not tax illegal drugs? So legislators in the Volunteer State required sellers of illegal drugs to get a tax stamp on their merchandise. If sellers were caught selling illegal drugs without the tax stamps, they would face tax charges (and probably charges relating to selling illegal drugs, too).

Of course, if you want to have such a tax, you must make sure that there's a wall between revenue agents and the drug police (or the tax would likely be unconstitutional under the 5th Amendment). A lower court found that Tennessee's tax violated that.

However, the Tennessee Court of Appeals ruled that the tax also violates the Tennessee Constitution, in that "...the statute is arbitrary, capricious, and unreasonable and, therefore, invalid under the Tennessee Constitution, in that it seeks to tax as a privilege, activity that prior legislation has designated as criminal activity...."

Tennessee will appeal to the Tennessee Supreme Court.

News Story: The Tennessean

Hat Tip: Tax Foundation

Joe Kristan of Roth Tax Updates has an update on the Wesley Snipes case. For those of you who don't remember, Wesley Snipes is accused of asking for a fraudulent refund of $12 million. Snipes used tax the argument that only foreign income is taxable (hint to anyone who wants to try that: don't). The IRS wasn't amused, and Snipes is now a Florida courtroom.

When we last reported on Snipes, he had accused the prosecutors of being "racially motivated." The judge denied that motion, and stated:

"From a prosecutor's point of view, especially in tax cases, the primary objective in deciding whom to prosecute is to achieve general deterrence. Here, Defendant Snipes is admittedly a well known movie star, and a person of apparent wealth, whose prosecution has already attracted considerable publicity. By contrast, the Defendant Eddie Ray Kahn does not appear to share Defendant Snipes' notoriety. "Since the government lacks the means to investigate and prosecute every suspected violation of the tax laws, it makes good sense to prosecute those who will receive, or are likely to receive, the attention of the media." United States v. Catlett, 584 F. 2d 864, 868 (8th Cir. 1978) (internal citations omitted); see also United States v. Hastings, 126 F.3d 310, 314 (4th Cir 1997) (no selective prosecution in case against prominent businessman and Republican party leader charged with failure to file income tax returns)."

Wesley Snipes was wrong. If you're famous, and the IRS thinks that you've evaded taxes, you are much more likely to be prosecuted. It also helps (if you want to be prosecuted) when you persist with tax protester arguments after the IRS warns you to stop (which Wesley Snipes did).

So Mr. Snipes will soon go on trial. And if he (and his attorney) continue down this path, he will likely find himself at ClubFed.

Hat Tip: Roth Tax Updates

Last year, a law was passed by the California Legislature requiring past due taxpayers' names to be posted on the Internet. Earlier this year, the Board of Equalization listed their biggest debtors. Next month, 250 lucky taxpayers may find their names on the Franchise Tax Board's list.

According to this news report, the FTB is finally about to release their list. If you owe at least $185,000, your name may soon be in lights! The FTB is sending out one final request for payment to those lucky individuals giving them a chance to pay within the next 30 days. The largest amount owed to the FTB is $26 million.

When the list is published, I'll let you know.

It happens every year. No, I'm not talking about school starting (here in Irvine, today is the first day of school), or the leaves changing colors. I'm talking about the corruption arrests in New Jersey.

Various elected officials in New Jersey are now finding themselves under arrest after the FBI set up a sham company in a corruption sting. Eleven individuals were arrested; these include the Mayor of Passaic, Samuel Rivera; Assemblyman Mims Hackett, Jr (who is also Mayor of Orange, NJ); and Assemblyman Alfred Steele, who doubles as the Passaic County Undersheriff. From published reports, it appears that all 11 who were arrested are Democrats.

The defendants are accused of asking for bribes of between $1500 and $17,500. The probe stemmed from last year's corruption scandal in the Pleasantville, NJ school district.

Business as usual continues in New Jersey...

News Stories: New York Times, NorthJersey.com

I was joking with a client today about how the computer age has really cut back on the amount of paper we deal with. Yeah, right. I buy paper by the case at Costco. There's a dermatologist in West Virginia who wishes that good records weren't kept.

David Tolliver has a dermatology practice in Bluefield, West Virginia. On his tax return, he showed income of about $35,000. And that's how he paid his taxes.

But that's what he told the government. He told the truth when he applied for some loans; he noted that his income was between $150,000 and $500,000. Court documents show his income was about $385,000 a year. So what happened to the other $350,000?

The money apparently made its way to some trusts. The trusts, though, were controlled by Dr. Tolliver, and he used the money to buy expensive cars and remodel his home. Somewhere along the way, the IRS and the Department of Justice picked up the scent of a scam.

With a loss to the Treasury in taxes of around $130,000, and a case that was paper-made, Dr. Tolliver pleaded guilty to filing a false tax return. He'll likely have to make restitution, and he's looking at 18 to 24 months at ClubFed. The trust looked so good on the surface as a tax shelter...but it's what's underneath that counts.

News Story: Bluefield Daily Telegraph

Ken Jenne has been a public servant in Florida for many years. After obtaining his law degree, he served in the Florida State Senate from 1978 - 1996, and then was appointed as Sheriff of Broward County in 1998. He was a rising star in the Democratic party.

But then things went wrong. Local10.com reports that he received payments for various items that didn't make their way to his tax return. A surveillance company that serviced the Sheriff's Office made $5500 in payments. His old law firm helped him with loan payments on his car—to the tune of $41,000 from 2002 through 2004. He received two payments from developers totaling nearly $20,000. And then in 2003, Jenne had trouble paying his income tax. His secretary got a $20,000 loan, which was then loaned to Jenne.

That loan became a big issue. When the Florida Department of Law Enforcement questioned the then-Sheriff about the loan, his answer was basically, "What loan?" And then he paid his secretary $21,000 to pay to the developer who gave the loan in the first place to cover the scheme up.

And then the US Department of Justice began investigating. The toothpicks holding up the scheme began to fall down, and Jenne resigned his post yesterday, and agreed on a plea deal today. He has pleaded guilty to three counts of tax evasion and one count of mail fraud. The plea deal will send the former sheriff to ClubFed for nearly two years.

It sure would have been easier to just pay those taxes in the first place...and if he had done so, Ken Jenne might still be sheriff.

As I mentioned previously, the Supreme Court will hear Department of Revenue v. Davis this Fall. If the Supreme Court rules for the Kentucky Department of Revenue (overturning the Kentucky Court of Appeals), then nothing will change, and states will be able to continue discriminate in favor of their own municipal bond interest for tax deductions. However, if the Court upholds the decision, then states will have to choose between taxing no municipal bond interest and taxing all municipal bond interest.

California allows taxpayers to file protective claims on issues that have not been decided. This is one such issue. I hadn't advised clients to file such claims yet because the Franchise Tax Board wasn't ready. Indeed, the FTB denied such claims. If you filed such a claim, and it was denied and the status is final, you must appeal to the State Board of Equalization or you will lose your claim.

The FTB is no longer denying such claims, and is now accepting protective claims. If you are impacted by this issue, and wish to file such a protective claim, you can do so by mailing such claims to:

FRANCHISE TAX BOARD
PO BOX 942867
SACRAMENTO CA 94267-2222

Make sure you note that you are filing a protective claim on the "Department of Revenue v. Davis" decision. Any client who feels that they are impacted by this should contact our office so we can advise them on this issue.

I hope you're enjoying the Labor Day weekend. These individuals didn't have a pleasant holiday.

From Shreveport, Louisiana comes the story of bozo tax preparer Betty Jean Thomas. Thomas had a not-so-good way of helping her clients: she invented phony business expenses. Even worse, those clients didn't have a business. The total cost to the government was $67,000. Ms. Thomas received a year and a day at ClubFed and must pay a $3,000 fine.

We previously told you the story of Athanasios Reglas. Mr. Reglas invented some phony companies to create phony deductions. He pleaded guilty last week, and was sentenced to three years at ClubFed followed by three years of supervised release. He previously forfeited $358,000 in cash that was found when he was arrested.

I also previously wrote about Reverend John Henry Walker. The Charlotte pastor was sentenced last week to five years and three months for tax evasion and stealing from his congregation. The pastor had pleaded guilty to charges of tax evasion, bank fraud, and lying to federal agents. He also must make restitution of $277,000. He used his purloined funds for erectile dysfunction medication, two cars (a Lexus and a Mercedes), and a new home. He evaded taxes on $750,000.

Finally, Joe Roth reported on the case of Lakeland, Florida dentist Nancy Montgomery-Ware. She decided to research the tax laws, and "determined" that, "The income tax is not allowable under the Constitution." That's what she said during closing arguments during her trial for tax evasion. According to the Lakeland Ledger, it only took one afternoon to find her guilty. She's looking at several years at ClubFed. Interestingly enough, her husband told her that she was crazy. It would have been much less costly for her to listen to her husband. But she didn't, and she'll have to pay the consequences.