Taxable Talk

Another light week on the tax fraud front. But while it lacks depth, some of the cases are definitely amusing.

Three women in Maryland allegedly had a Bozo idea on how to make some money. Let's get some inmates at the local prisons to give us their social security numbers, and then we'll file phony returns on their behalf. What can go wrong?

Well, I can think of several felonies that the three committed. Unfortunately for our Bozo preparers the Postal Inspection Service, the IRS, and the FBI were not as amused by the scheme as I was. And since the Bozo preparers allegedly filed 101 claims totaling $365,599.41, the three are looking at lengthy terms at ClubFed if convicted on charges of mail fraud, conspiracy to defraud the US, and identity theft charges. You can read the press release on the indictment here.

Unfortunately, the three ladies in Maryland aren't the only Bozos in the tax profession. Trumbauersville, Pennsylvania is a tiny town—less than 1,000 people reside in the borough. The town got some notoriety this week, though.

Eugene DiNatale, a councilman, runs an accounting business in nearby Rockledge. Mr. DinNatale and an associate, Chakawarn Sirirathasuk, found the old fashioned way to allegedly deprive the government of tax revenues. They allegedly collected employment taxes on behalf of their clients and kept the money rather than remitting it to the IRS. This is a scheme that almost never works, and one where the IRS and the Department of Justice go after every time it occurs. And the amount of the alleged money they kept wasn't small: $4.9 million. Just for good measure the pair is also accused of overstating clients' business expense deductions. Mr. DiNatale is looking at a very long term at ClubFed if convicted.

The final story comes from Saginaw, Michigan. Two brothers and a bank manager are accused of structuring transactions and tax evasion. The brothers filed tax returns from 2001 through 2005 showing incomes under $55,000 a year according to this news story but somehow managed to make "extravagant" purchases. And when their homes were raided in January 2006 the IRS found over $1.3 million. The bank manager is accused of aiding and abetting structuring. The brothers face multiple structuring and tax evasion charges. All are looking at relocating to ClubFed if found guilty.

My suggestion to everyone is if you think you've found a foolproof scheme to cheat Uncle Sam think again. Most schemes have been tried before and failed.

Earlier this week I posted an advertisement from the Nevada Development Authority. The Los Angeles Times had an article today noting that Democrats in Sacramento are unhappy with the advertisements that portray California as a tax-happy state. Of course, Democrats in Sacramento are arguing for more taxes.

Somer Hollingsworth, President of the Authority, told the Times, "We can see what is going on in California as far as businesses are concerned...They've got workers' comp issues, a $16.5-billion deficit, employee retirement funds that are out of whack."

State Senator Mark Ridley-Thomas (D-Los Angeles) told the Times, "Businesses are here because they appreciate the powers of this economy...I suspect Nevada wishes it could be ranked as among one of the top economies in the world."

Perhaps the Democrats in the Legislature would like to talk with some of my corporate clients who are again contemplating leaving the Bronze Golden State because of high taxes and too many regulations. Maybe Nevada won't be the destination, but if California tries to close the deficit on the back of businesses other states will benefit. State Senator Ridley-Thomas is naive if he believes that taxes can increase forever without businesses reacting.

Nevada's constitution exempts food for human consumption. The Nevada Department of Taxation believed that Use Tax was owed on meals that were given out free of charge (either to employees or as complimentary meals to patrons); the Nugget Hotel in Sparks, Nevada thought that the plain language of the Nevada Constitution exempted such food from tax. The Nevada Supreme Court gave the answer earlier this week.

Use Tax is the equivalent of sales tax on items purchased from out-of-state where no sales tax is charged. For example, if you purchase a book on Amazon.com and are not charged sales tax and live in California, you are supposed to remit Use Tax to the Board of Equalization. The Nevada Department of Taxation believed that there's no such thing as a free lunch, and that the Nugget owed Use Tax on the free food.

The Nevada Supreme Court disagreed.

"...[T]he Nugget’s initial purchases of unprepared food did not “escape” sales tax liability since Nevada’s constitution exempts such purchases from sales and use taxation. Indeed, Nevada’s constitutionally mandated food exemption applies to all “food for human consumption,” unless that food is “prepared food intended for immediate consumption.” Because the food at issue in this case was not “prepared food intended for immediate consumption” at the time it was purchased by the Nugget, the Nugget’s initial purchase was exempt from sales taxation. Furthermore, the Nugget’s later “use” of that food to prepare complimentary meals was not subject to use taxation since the Nugget’s “use” did not follow an otherwise taxable purchase that had “escaped” sales tax liability."

So many Nevada casinos may be requesting tax refunds from the Nevada Department of Taxation. Nevada, too, has a state budget crisis. This ruling may exacerbate that a bit, but it does prove that sometimes there really is such a thing as a free lunch.

Hat Tip: TaxProf Blog

Courtesy of the TaxProf Blog and Roth Tax Updates, I discover that NewsGroper.com has created a tongue-in-cheek Wesley Snipes Tax Blog. From that blog:

"n fact, we have a philosophy that separates us from all those other tax advisement companies who will just jerk you around... know full well, I don't owe anybody any money. Ever."

We'll be starting our own series of Bozo tax tips on April 1st, but until then this parody blog should suffice. One note, though: The Wesley Snipes Tax Blog is definitely R-rated.

Congratulations, California. The Tax Foundation released its list of when each state celebrates Tax Freedom Day. On average, it's April 23rd. But not here in the Bronze Golden State. For us, it's April 30th. What that means is from January 1st to April 30th you're not really working for yourself; rather, you've been working for the government. On average, one-third of Californians income goes towards taxes.

Somehow California doesn't rank #1. Yes, there are worse states for taxes:

1. Connecticut (May 8th)
2. New Jersey (May 7th)
3. New York (May 5th)
3A. District of Columbia (May 3rd)
4. California (April 30th)
5. Washington (April 29th)
6. Massachusetts (April 28th)
7. Maryland (April 28th)
8. Minnesota (April 27th)
9. Florida (April 26th)
10. Hawaii (April 26th)

There are a couple of surprises on this list: Florida and Washington, states without an income tax. The Tax Foundation looked at all taxes, including sales tax, property tax, and Washington state's business tax.

There are some states where you're almost working for yourself. Here are the top ten states in tax freedom:

50. Alaska (March 29th)
49. Mississippi (April 7th)
48. Montana (April 8th)
47. West Virginia (April 8th)
46. Alabama (April 9th)
45. Kentucky (April 10th)
44. Tennessee (April 11th)
43. Oklahoma (April 11th)
42. New Mexico (April 12th)
41. South Dakota (April 12th)

The press release for the Tax Foundation study is here. The only good news that I can see in the study is that Tax Freedom Day does come three days earlier in 2008 than in 2007...except in California.

Linda Stiff, Deputy Commissioner of the IRS, speaks to Americans that they may need to file a tax return in order to get the stimulus/rebate payment. Here's the video:

I really am an Enrolled Agent. In fact, hanging on the wall behind me is my Certificate of Enrollment (and my license is in my wallet).

Do you believe that anyone would impersonate a Certified Public Accountant? And would then choose to specialize in serving law enforcement?

Given that I'm writing about it, you should know the answer. From Arvada, Colorado (suburban Denver) comes the story of Denise Smith. Ms. Smith was indicted by a Jefferson County grand jury of 50 counts for allegedly impersonating an accountant. She's also alleged to have incorrectly increased the deductions for her clients, cheating the IRS and Colorado out of tax revenue.

Her scheme unraveled when a client received an audit notice which apparently led to the investigation. Besides the obvious moral of the story (choose a reputable tax preparer) the Bozo moral is that if you're going to impersonate an accountant, choose clients who don't have the power to arrest you.

With California having a $16 billion deficit, and the Democrats in California's Legislature saying that the only solution to the problem is to increase taxes, it was only a matter of time until the Nevada Development Authority struck. Here's their latest print advertisement:



My advice to the Democrats (and Republicans) in the Legislature: Increasing taxes will increase the Nevada Development Authority's business.

There's something about adult entertainment enterprises that somehow attracts tax troubles. Could it be the plentiful cash and the slightly sleazy nature of some of the business operators? If it's good enough for a New York Governor....

In any case, Riccardo Di Giuseppe, of Vaughan, Ontario, Canada operated two such facilities: Bunnies and Fantasia. His operations were quite profitable. Of course, it helps when you keep $3,492,415 (Canadian) instead of forwarding it to the Canada Revenue Agency. Back in 1998 Canadian law enforcement raided his clubs in an operation called "Northern Greed." I don't know if it was greed or profit, but among the other casualties of the operation were 60 strippers who were found guilty of 115 prostitution-related offenses. They also took over 400 boxes of evidence in the raids which led to the prosecution of Mr. Di Giuseppe.

Mr. Di Giuseppe once owned a 60-foot yacht. After being convicted of tax evasion, and having his appeals denied, Mr. Di Giuseppe received his sentence: six years and a $2 million fine. Mr. Di Giuseppe is going to appeal his sentence but his sailing days are over for the foreseeable future.

Coverage: The Star and Exchange Morning Post

The Bozo side of my profession has had a busy week. Yeah, it's tax season, but we have some pretty bad tax preparers highlighted here.

First, we go to Queens, New York. Tommasina (a/k/a Tammy) Paolino operated Titan Enterprises in the Ridgewood area of Queens. She's been accused of first-degree grand larceny, first-degree identity theft, first-degree offering a false instrument for filing, first-degree falsifying business records, second-degree possession of a forged instrument and related tax charges. And that allegedly cost the State of New York $4 million in bogus refunds.

Next, we head to Kingsport, Tennessee. Donna Rees (aka Donna K. Blessing and Donna Blessing Bortz) operates B&B Tax Service. She apparently has had a good year, and the IRS thinks they know the reason. According to her indictment, Ms. Rees, "directed and encouraged persons for whom she had prepared tax returns to create false, fictitious and fraudulent documents and records to be used in civil audits." When the IRS showed up at her office to ask her questions about 22 allegedly phony returns, she's alleged to have cooked up phony documents on the spot. She's alleged to have used fake business deductions and phony farming losses to get her clients bigger refunds. And that's not Ms. Rees' only troubles with the law; she's already facing a federal bank fraud indictment.

So if your tax preparer volunteers to create phony deductions, just remember it's an offer you can refuse. And if you know your tax preparer as "Tom" but he signs his name as "Dick" or "Harry," you may want to inquire a bit....

We get mail. Now, I don't answer all of it, but this weekend I got quite a bit of interesting email. A reader asks,

"I caught your appearance on the Ante Up podcast last week, so I thought I'd take a look at your blog and subscribe to your feed. Both the blog and your appearance on the show was very helpful.

"I had a question. I remember when Jamie Gold won the WSOP main event in 2006 he waited to collect his funds for several weeks. Now, I don't care to discuss the whole legal battle he had. I recall the reasoning for him waiting to collect his money had something to do with positioning himself for taxes and potentially creating some sort of corporation around this.

"We all dream of winning the big one. If one was to win the big one, what type of options around taxes and collection of your winnings would be smart to look into? I am curious if you could claim professional at that time or if you could have your corporation collect the funds."

Good questions. First, the timing of income for most taxpayers is guided by the doctrine of constructive receipt. When you can access the money it's income. In the case of 2006 World Series of Poker winner Jamie Gold, it didn't matter if he waited to pick up his winnings until 2007—he could have picked it up in 2006. Thus, he clearly had 2006 income.

He of course had legal issues which as you noted delayed his receipt of the money. And he may well have wanted to get some advice from an accountant regarding the tax implications. Had I been advising him I would have told to make sure to put at least 40% of the money aside to pay California and federal taxes.

The question of whether an individual gambler is a professional or an amateur is one governed by the facts and circumstances of each case. For example, today Joe Hachem (the 2005 winner of the World Series of Poker) is a professional player. However, he wanted to be considered an amateur when he won because of Australian tax issues. Mr. Hachem won his case. Returning to your question, there is no one right answer.

You also ask whether you could assign your winnings to your corporation. This is an issue I'm often asked: Can an individual incorporate and be a professional gambling corporation and are there any tax advantages to doing that? I have significant doubts whether the IRS would accept a professional gambler without ancillary sources of income as a corporation. Gambling is a personal service, and this poses another problem. The Tax Code has a special type of corporation for personal service corporations; they are taxed at a flat 35%. And a 35% tax rate defeats the purpose. Most corporations are formed for liability reasons; that's a non-issue for professional gamblers.

You could elect to be an S-Corporation. But an owner of an S-Corporation must pay himself a "reasonable" salary, so the savings is limited to the self-employment tax differential between a reasonable salary and $102,000. That's if the IRS accepts it.

And there's one last hurdle. Last year Harrah's (the owner of the World Series of Poker) refused to honor correctly submitted Form 5754s and told anyone who submitted a Form 5754, "You have to deal with the tax problems," and issued W-2Gs solely to the winner. That policy violated IRS regulations, but until the IRS stops Harrah's I'm sure their illegal policy will continue.

An intriguing question, and one that I hope you have to ponder this summer.

Section 1031 Exchanges are a tool to defer taxes. Properly done, using a reputable qualified intermediary, they're a very useful tool in tax planning. Of course, some intermediaries aren't as reputable as others.

Edward Okun owned 1031 Tax Group LLP, a qualified intermediary. His firm entered bankruptcy some time ago, and in February a bankruptcy court judge denied Mr. Okun's motion to cancel an agreement he made to sell some of his possessions. Soon he may not have any possessions after being indicted this week.

Mr. Okun is accused of telling clients that their money would be use for §1031 exchanges and then misappropriating $132 million, "to support his lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds."

He also faces charges of violating the currency transaction reporting requirements by telling employees to put $15,000 on his yacht so he could allegedly deposit it in the Bahamas and of committing perjury. The indictment is asking for all of his remaining assets to be forfeited. He's also looking at 30 years at ClubFed and substantial fines if he's found guilty on all counts.

His attorney states, "Ed is confident he will be proven innocent in a court of law." Mr. Okun has waived extradition and will soon be in Richmond, Virginia where he will await trial.

If you're interested in pursuing a 1031 exchange, make sure you use a reputable qualified intermediary. Get references, and check them.

Bringing up children is tough. A Bozo tax preparer allegedly had a way to make it slightly easier. She supposedly created phony children to use as tax deductions. Hey, at least they didn't yell about getting their rooms clean!

Paulina Mohn worked at an H&R Block outlet inside a Wal-Mart in Brooklyn Park, Minnesota from January 2006 through March 2007. She likely had quite a few satisfied clients. Her methods, though, were allegedly from the Bozo school of tax preparers. She was indicted on 22 counts of aggravated identity theft and making false claims on tax forms.

What did she do? She's alleged to have used fake W-2 forms that had false information, along with allegedly inventing children (and giving them social security numbers out of thin air). Now, the IRS' computer system isn't perfect, but they do a good job of matching W-2 income and checking social security numbers.

And we're not talking a small amount of fraud. Ms. Mohn is alleged to have caused $749,000 of false federal and state tax refund claims. If she's found guilty on all charges, she's looking at a lengthy stay at ClubFed.

Last July I reported on the case of Timothy Heffner of Pittsburgh, Pennsylvania. Mr. Heffner had pleaded guilty to fraud, conspiracy, and tax evasion in a scheme where he "purchased" rare chemicals from Sigma-Aldrich for next to nothing and then resold the same chemicals back to Sigma-Aldrich for their normally high prices. That was very profitable as Mr. Heffner and his co-conspirator made $2.1 million in illegal income. He also committed tax evasion, changing personal expenses into business expenses.

Mr. Heffner enjoyed the fruits of his "success" with fancy cars, an estate in a nice suburb of Pittsburgh, and a yacht. Ultimately, though, neither foray into alchemy was successful as the scheme unraveled with his indictment last year.

To Mr. Heffner's credit he cooperated fully with the IRS and the Postal Inspection Service following his indictment. "I've learned a lot from this experience. It's been costly and it's been painful and it never will be repeated," Mr. Heffner said. "I meant no harm to the government of the United States of America."

Under federal sentencing guidelines Mr. Heffner was looking at 41 to 51 months at ClubFed. His cooperation paid off; Assistant US Attorney Paul Hull asked the judge to reduce Mr. Heffner's sentence because of his cooperation. Mr. Heffner has also already paid back most of the money to Sigma-Aldrich (he needs to pay only $139,000 more to the company). Mr. Heffner also has been very active in local charities. Judge Gustave Diamond noted these activities, and sentenced Mr. Heffner to 18 months at ClubFed, completion of restitution to Sigma-Aldrich, a $7,500 fine, and restitution to the IRS...once the IRS figures out how much he owes in back taxes, penalties and interest.

News Story: Pittsburgh Post-Gazette

Most individuals put their lease agreements in writing. But not everyone does that. An individual in Maryland leases a bar to a friend with a verbal agreement. He doesn't tell his accountant about the lease; the accountant believes (wrongly) that the individual is operating the bar. And the individual's name is on the legal documents as the owner of the bar because his friend had a felony conviction years ago and doesn't believe he'll qualify for a Maryland liquor license. The IRS audits the individual. The accountant realizes that there's an error, and attempts to correct it...but the IRS refuses to accept the corrections. The mess ends up in the Tax Court.

It's an excellent case to read. “Taxation * * * is eternally lively; it concerns nine-tenths of us more directly than either smallpox or golf, and has just as much drama in it; moreover, it has been mellowed andmade gay by as many gaudy, preposterous theories.” [The quote, from the decision, is actually from H.L. Mencken, “The Dismal Science,” Smart Set, June 1922, at 42.]

Verbal leases are binding. The evidence in the case shows that there truly was a lease between the landlord and the tenant. Their agreement was based on a "swinging door concept"—everything inside was the responsibility of the tenant and everything outside was the responsibility of the landlord and the evidence backed them up.

As to who owned the bar, "Even more telling, however, is that Monk’s [the landlord's] financial interest--which consisted primarily of his monthly rent payment--wasn’t tied to the profits or losses of Chuck’s Place." The IRS' view that the landlord ran the bar ran into some literal evidence, "Maney [the tenant] also testified that he (and not Monk) has the bar’s logo tattooed on his chest. Though the Court did not undertake a visual inspection, we found him credible on this point."

The Tax Court noted the reality: "In situations like this, where there is written documentation which contradicts the reality of a situation, we disregard the documents to properly tax the person actually earning the income." So today the petitioner really was the winner. He was just a landlord of a business, not the owner.

Case: Monk v. Commissioner, T.C. Memo 2008-64

The IRS today released the schedule of when the stimulus payments will be received:

By Direct Deposit:

Last Two SSN Digits	Payment Will be Transmitted By:
00 through 20	May 2
21 through 75	May 9
76 through 99	May 16

By Paper Check:

Last Two SSN Digits	Payments will be mailed by:
00 through 09	May 16
10 through 18	May 23
19 through 25	May 30
26 through 38	June 6
39 through 51	June 13
52 through 63	June 20
64 through 75	June 27
76 through 87	July 4
88 through 99	July 11

More here from the IRS.

What happens when you start paying personal expenses out of your business and call them corporate expenses rather than salary? Very bad things, and a family in Jackson, West Virginia is accused of that.

Five family members are accused of cheating Uncle Sam out of $9 million. The accused are Eddie Burl Smith, his son Edward Michael Smith, his brother, Donald Paul Smith, Donald's wife, Judith E. Smith, and their daughter, Jaclyn E. Smith.

They are alleged to have diverted proceeds from three family businesses—Carl E. Smith Inc. (CESI), Carl E. Smith Petroleum Inc. and Carl E. Smith Real Estate Inc—and used the proceeds for personal use.

According to the indictment (which runs 33 pages), Donald Smith used $800,000 to purchase horses. Edward Michael Smith is accused of spending over $300,000 on vehicles.

The defendants are accused of filing false tax returns. Further, they allegedly embezzled pension funds and health care premiums. But we're only getting started.

Edward Michael Smith is accused in the indictment of burning documents after they were subpoenaed. CESI went into bankruptcy in 2003 but the defendants are accused of diverting funds after the bankruptcy filing into another family business (so there are bankruptcy fraud charges, too). There are charges of money laundering, too. Needless to say, the defendants are looking at very lengthy stays at ClubFed if found guilty on all charges.

As the news report notes, "n 2003, Fayette Circuit Judge John W. Hatcher ruled that Eddie, Edward and Donald Smith illegally depleted $21 million of assets of Carl E. Smith Real Estate Inc., in a case brought by Larry D. Smith, former company treasurer and brother of Eddie and Donald, and other minority owners."

There are far better ways for a family to stick together than to evade taxes together.

Who is Heinrich Kieber? Mr. Kieber is the man who took €4 million from the Bundeskriminalamt, the German Federal Criminal Police, and gave Germany the list of Germans who had bank accounts in the tiny principality of Liechtenstein. The Landespolizei, Liechtenstein's police, has issued an international arrest warrant for Mr. Kieber.

The statement issued by the Landespolizei states, "The Liechtenstein law enforcement agencies demand his immediate extradition...According to media reports, Kieber received a new identity and travel documents from the German secret services."

Somehow I think Mr. Kieber will either remain in Germany (where he presumably has protection from extradition to Liechtenstein) or will carefully check his new country's extradition treaties.

One of my favorite television shows is Get Smart. In the episode called "The Decoy," Maxwell Smart is brainwashed back to his childhood, is doing multiplication tables, and can't figure out that 7 x 2 = 14. It's one thing for a character not being able to complete that equation; it's another thing for an accountant to not be able to add or subtract correctly...on Form 1040-EZ.

Yet the IRS announced that there were 1,161 errors made on Form 1040-EZ, including "Amounts in the payments section was added incorrectly: 30." Of course, these were returns done on paper. It's hard for me to imagine a paid preparer messing up the easiest tax form around. Unfortunately, it's true.

Joe Kristan has more.

Political theater occurred last night in Sacramento. The Assembly held a rare evening session, and the Democrats' oil tax fell to defeat 45-30 (it needed a 2/3 vote to pass). The vote was party line, except for one. Assemblywoman Nicole Parra (D-Bakersfield) voted no.

The Democrats framed the issue as "Save our children, tax the rich low-taxed oil companies." Republicans called it political theater. Democrats want to increase taxes; there's no room in the budget to cut spending. Republicans want to cut spending; there's no room in taxpayers' pockectbooks to pay for additional taxes.

I think it's well worth remembering these two themes as we vote this year. Over the last four years spending increased 44% while revenues increased 40%. I think that's food for thought.

As expected, Assembly Democrats introduced AB9. It would add a 6% tax on oil drilling and a 2% tax on oil profits that exceed $10 million. Because it's a tax the measure requires a 2/3 vote for approval—and it won't get that.

Assemblyman Chuck DeVore (R-Irvine) told the San Jose Mercury, "It's just bad political theater. If this bill ever made it into law, it would increase the cost of gas at the pump and . . . increase our reliance on foreign oil from places like Venezuela and Iran."

Fortunately, Democrats don't have the votes to pass this measure. You can follow the progress (or lack thereof) of this measure here. State Senator Tom Harman (R-Huntington Beach) has an excellent commentary on what truly ails California. I doubt the Democrats are listening.

The joy of being a Californian. The gas stations at Culver and Walnut in Irvine are having a price war—they're seeing which station can reach $3.60 for a gallon of regular first. And if the Democrats in California's Assembly have their way we'll be paying even more.

Assemblyman Anthony Adams (R-Claremont) reports on the Flash Blog that Assembly Speaker Fabian Nunez (D-Los Angeles) wants to add a 6% tax on all oil from California and a 2% surcharge on oil companies that earn more than $10 million.

I wonder if Speaker Nunez has interests in office building in Nevada, Arizona, and Oregon. Why am I asking this? Because if I were running an oil company and I was faced with a gross profits tax I'd relocate as much as my business as possible out of California and into neighboring states.

And does Mr. Nunez understand basic economics? What does a tax do? It increases the price of a good or service. When a business is taxed it always passes the cost of the tax onto its customers. If this tax increase passes Californians will see a 2% to 10% increase on the prices of products from oil companies. That's economic reality.

While the goal of Mr. Nunez's proposal is laudable (the money would be used for education), I agree with Assemblyman Adams. "I guess the $60 Billion plus a year we spend on education isn't getting the job done. Here's a thought: Give the school districts back the money we already take instead of tying it up in countless layers of State bureaucracy and ridiculous 'one-size-fits-all' testing standards that force every teacher to teach to the test."

California needs fundamental reforms in the bureaucracy. It may be painful, but the time has come to seriously confront the bloated workforce of government workers in this state. It's time for limited government, and it appears that at least some in California's legislature understand that. Unfortunately, Assembly Speaker Nunez doesn't.

A good friend of mine called me late this afternoon and asked me for a referral. I asked him what he needed, and he told me, "Your side business." I'm a writer (and I'm certain he knew that), so this made no sense. After I expressed my bewilderment he said, "Can't you provide me with the same kind of service you did for Eliot Spitzer?"

Ah yes, the Governor of New York. Mr. Spitzer, a Democrat who decided to partake of the world's oldest profession, chose a rather expensive prostitution ring. He apparently paid somewhere between $1000 to $4300 an hour, and may have spent $80,000 of his own money.

So why did my friend call me? He had heard that the ringleader of the prostitution ring (called the Emperors Club VIP) was an Enrolled Agent. Of course, ABC gets some details of what an Enrolled Agent is wrong:

"He is also a licensed "enrolled agent" of the IRS, spokesman Rob Marvin confirmed. That means Brener was allowed to prepare and submit other people's taxes, represent others in tax court and in negotiations with the IRS, and receive information directly from the IRS on behalf of others."

For the record, an Enrolled Agent represents taxpayers before the IRS; we are not employees of the IRS. We do prepare tax returns and represent individuals and businesses in negotiations with the IRS and other tax agencies.

I had to disappoint my friend; I didn't have a Kristen to send his way. My side business doesn't earn me $4000 an hour in illegal income. Unless your name is Tom Clancy or John Grisham writers just don't make that kind of money.

On the positive side, at least Enrolled Agents are making the news....

It wasn't that big of a week on the tax fraud front, with the exception of the German-Liechtenstein scandal that's still around. But there's a smidgen here and there to report on.

In nearby Camarillo there's a business owner who is finding out that concealing smidgens of revenues can be a big deal. Giancarlo Pertile was the owner of Art Marble Design until 2002 allegedly decided that if he didn't tell his bookkeeper and accountant about some revenues he wouldn't have to pay taxes on them. The government alleges that his corporate tax returns from 1998 through 2002 understated revenue, and his personal tax returns during the same period were also off. Mr. Pertile is looking at up to 25 years at ClubFed if found guilty on all charges.

Farmers have it tough. I worked in agriculture for many years and still have many friends who have to deal with freezes, water issues, and other thorny problems. But one way of helping your business is to undercount revenues. Of course, that's illegal but they've got to catch you. That's what a farmer in Austin, Minnesota did. Kevin J. Morse filed his taxes between 1996 and 2000 and showed that he owed less than $1,000 a year in taxes. That's a neat trick when your gross income is about $1,000,000 and your net income is just under $700,000 each year. And when you've already been convicted once for tax evasion (for 1991-1994), it's a safe bet that the IRS will be watching you carefully. And when an accountant tells you that you owe $100,000 in back taxes but you choose not to file the return (shades of Richard Hatch) you can bet that only bad things will happen. Mr. Morse is looking at some time at ClubFed and restitution.

It may just be a smidgen of stories but it does show that bad things happen if you choose to avoid taxes and get caught.

That's the opinion of the Reason Foundation, a nonprofit 501(c)(3) organization dedicated to "advanc[ing] a free society by developing, applying, and promoting libertarian principles, including individual liberty, free markets, and the rule of law." In an article titled "California Won't Fix Budget Until It Cuts Spending" Reason notes:

"Despite what some lawmakers would like us to believe, this is a budget crisis borne of an addiction to spending, not a revenue problem. In the past four years, the state's general fund revenues have increased approximately 32 percent. In fact, total revenue has grown steadily since the early 1990s, shortly after major tax increases were imposed under Gov. Pete Wilson's administration...

"It is time for Californians and their elected representatives to undertake a serious re-evaluation of the proper role of government. Government has simply gotten too big and too intrusive. The casualty is individual liberty. Only when we rediscover the truth of the maxim - 'That government is best which governs least' - will we be able to restore any fiscal sanity to our state government."

Any bets on our legislators listening? I for one am not hopeful.

The tax rebates (aka the stimulus payments) that will be issued beginning in May won't be taxed by California. The Franchise Tax Board announced this last week. The FTB notes (as has the IRS) that in order to claim the rebate you must file a federal tax return. You do not have to file a California tax return in order to claim the rebate.

A few states will be taxing the federal tax rebate. Generally, those states give a deduction for federal tax paid. Alabama and Louisiana are two states that I believe will be taxing the federal tax rebates.

Section 1031 exchanges are complex. The IRS has just released a fact sheet on these exchanges. These exchanges are used to defer gains on real estate.

Hat tip: Roth Tax Updates

An interesting question is whether California government employees are overpaid. We can now find out. Thanks to the Sacramento Bee we can now find out. The Bee has a searchable database of California government employees so we can now find out exactly what our government employees actually make.

I've been asked by some of my gambling clients about ePassporte, an e-wallet that's now in widespread use. The question that has arisen is whether ePassporte is a foreign bank account like Neteller was.

It's hard to figure this out from ePassporte's web site. Their official name is "ePassporte, N.V." which certainly doesn't sound like an American entity. The whois for their domain returns an address in Curacao. ePassporte offers banking services, so if they're a foreign company they would meet the requirements of a foreign bank under Treasury Department regulations.

So where is ePassporte headquarted? They're headquartered in St. Kitts, part of the Federation of Saint Kitts and Nevis, the smallest independent nation in the Caribbean. So if you have an account at ePassporte it is a foreign bank account. If you're a US citizen and your high balances in any foreign bank accounts when added together add up to $10,000 or more, you must file Form TD F 90-22.1 and check the box on Schedule B. If you willfully don't file Form TD F 90-22.1 the minimum fine is $100,000.

So if you have foreign bank accounts and meet the threshold of reporting make sure you comply. You have until June 30th for your report to make its way to the Department of the Treasury (this form is file with the Treasury, not the IRS).

If you're a California resident (and taxpayer), you may want to buy a padlock. A big padlock. That's because Democratic legislative leaders have resolved that the only solution to the budget crisis is to increase taxes.

Senate President Pro Tem, Don Perata (D-Oakland) told a news conference in Sacramento when asked how the budget deficit will be made up, "Raise taxes. That clear enough? Raise taxes." I applaud his honesty though I disagree with the message.

Meanwhile, Jim Batten (R-Palm Desert) told the Flash Report, "If last year's Democrat rage at the Senate Republicans refusing to vote for a budget until spending was reduced by just $750 million is any indicator of what we're in store for this year, I'm going to start wearing body armor to work."

We may need to start a pool on when the state budget will be finalized. I think the only certainty this year is that it won't be done by July 1st (the constitutional deadline).

What's the difference between a tax hike and the elimination of a deduction? In politics, everything. For the taxpaying public, the impact is the same. We're talking words or nomenclature.

It appears that some legislators in Sacramento are considering eliminating the mortgage interest deduction for state tax returns. While I don't expect that to pass, I do believe we'll see a few tax hikes when a budget finally passes in Sacramento this year. Please don't ask me what they'll be—it's way too early for that—but do realize that Democrats don't want to cut any programs. This editorial in the Los Angeles Daily News sums up the problems with eliminating tax deductions.

Thanks to Kerry Kerstetter for pointing out the editorial.

If I told you that $1 equals $300, you'd rightly tell me that I need to take remedial math. However, there is an instance where that's the case.

The IRS issued Revenue Procedure 2008-21 yesterday. This Revenue Procedure allows an individual to add $1 as Adjusted Gross Income when that individual would normally have $0.

Why would you do that? So that you can electronically file and get the tax rebate (stimulus) payment this Spring of $300. Joe Kristan has more.

Remember Gilbert Hyatt? Mr. Hyatt is the inventor who fled the Bronze Golden State seeking lower taxes. He filed a lawsuit against the Franchise Tax Board alleging that the FTB "...directed “numerous and continuous contacts … at Nevada” and committed several torts during the course of the audit, including invasion of privacy, outrageous conduct, abuse of process, fraud, and negligent misrepresentation." This case was filed in 1998 and will finally go to trial in April.

Why did it take so long? Because the FTB claimed that it was immune from the lawsuit. That issue was litigated up to the US Supreme Court which ruled that the lawsuit could go forward.

We got some more news about the case in a roundabout way. The Las Vegas Review-Journal reported last week that the Clark County District Court is modernizing its computer system so that only sealed information is withheld from online computer records. Previously, if any information was sealed in a case all of the records were sealed. The first case chosen to see the public light was the Gilbert Hyatt case.

Everyone seems to be happy about the additional information becoming available. I am pleased because the Hyatt case is one where the FTB is alleged to have overreached and it will be interesting to see what happens when the case is tried.

Lots and lots of fraudsters have been at work recently. Here are some of the lowlights:

Charles Jones, the accused former Louisiana State Senator, pleaded not guilty to three federal tax charges. I wrote about his case earlier this year when the news first broke. His trial is not expected to begin until late summer at the earliest.

Butler County (Ohio) Auditor Kay Rogers pleaded guilty to one count of filing a false tax return and one count of conspiracy to commit mail and bank fraud. Rogers' charges stem from two unrelated issues. First, she prepared tax returns from 2001 to 2006 and didn't report the $56,000 of income on her own tax return. And she's been ensnared in a scandal involving fiber-optic cable contracts in Butler County. She's looking at about five years at ClubFed.

If you want a sure-fire way to get federal authorities upset with you, here it is. Just collect federal payroll taxes and keep them rather than remitting them to the IRS. You can get bonus points if you use phony payroll companies with foreign addresses. That's what Gary Trebert, an attorney who ran nursing homes in the Midwest, did. He pleaded guilty to conspiracy to defraud the IRS and the Department of Health and Human Services. The total skimmed was $34 million, so we're not talking peanuts here. AP is reporting that the government will recommend Mr. Trebert serve eight years at ClubFed.

Earlier this year I reported on the case of Sabi Atteyih. Mr. Atteyih had reported zero income to the IRS but had told the truth while obtaining a loan. He'll do a year and a day at ClubFed and have to make restitution of $47,000 to the IRS.

We've had lots of fraud cases of individuals diverting business funds to pay personal expenses. From Baltimore comes yet another. Stilianos Mavroulis and his son, Kyriakos Mavroulis, are accused of diverting $1.9 million from their mortgage business to pay personal expenses. The government alleges that they coded these personal expenses as "other expenses" on their business tax returns. That's over $500,000 in taxes, and that's felony charges of tax fraud. Their accountant, Joseph Poole, also faces charges. They're looking at several years at ClubFed if convicted.

Lloyd Batsfield belonged to the Bozo wing of tax preparers. Just about every one of his clients got a refund. And almost every one of his clients took education credits. A coincidence? Not hardly. It was tax fraud big time, with the loss to the government of $6 million. To compound matters, Mr. Batsfield also stiffed the IRS for $171,000 on his own taxes. He pleaded guilty last year. He was sentenced last week to six years at ClubFed.

Finally, yet another story about Renaissance, the Tax People. Michael Craig Cooper, the founder, was convicted on 72 counts including mail fraud, wire fraud, money laundering, money laundering conspiracy, and engaging in illegal monetary transactions. While Mr. Cooper can say he was acquitted on 74 counts he has plenty to worry him. He's looking at a very long sentence at ClubFed. To compound matters, he also faces a forfeiture hearing on $75 million of assets that a co-conspirator, Todd Strand, admitted were proceeds from the scam. Remember our advice: if it sounds too good to be true, it probably is.

I wrote earlier about the tax scandal in Germany. Well, that scandal that began in Germany over hidden funds in Liechtenstein has spread. Countries now investigating Liechtenstein-related accounts include France, England, Australia, Italy, Canada, Sweden, New Zealand, Greece and Spain. And one more: the United States.

Yes, the Internal Revenue Service is investigating about 100 individuals who had accounts in Liechtenstein.

Meanwhile, Liechtenstein authorities are threatening to prosecute the Germans who bought the list for $7.3 million. I'm guessing there's a German (or two) who won't have the principality on their vacation plans for the near future.

There is one truism that comes out of this. Linda Stiff, the acting IRS Commissioner, told UPI, "It should be clear from recent events that there is no safe hiding place for the proceeds of tax avoidance and evasion."

Congratulations, Chicago! You now have the highest sales tax rate in the country at 10.25%. Chicago earned that distinction when Cook County doubled its county sales tax to 1.75%.

Who will benefit from this tax increase? Cook County passed the tax increase to balance its budget. Of course, the idea of cutting bureaucracy didn't get considered....

The actual beneficiaries will be stores and malls located just outside of Chicago and/or Cook County. Lake County, Indiana (just over the state line and Chicago city limits) has a sales tax of 6%. The sales tax in Joliet (county seat of Will County, to the southwest of Chicago) is 7.75%. Wheaton, just to the west of Chicago, has a sales tax rate of 7.25%.

Who are the losers? Those who aren't mobile and are stuck paying the higher tax rates. Chicago businesses. Cook County businesses (the tax increase impacts the entire county). And the residents of a great American city stuck with politicians who know tax and spend all too well.

Hat Tip: Tax Prof Blog