Taxable Talk

It's time for my annual vacation. I'll be back on August 4th. If you need to learn the latest on the California budget mess, I recommend the Flash Report. If you need a tax fix, check out one of the tax bloggers listed in the blogroll on the right.

It was a busy week for bozo taxpayers. There's one less bozo tax preparer to harm my profession, while two under-the-table business owners found out that cash income is just as taxable as checks.

First, we'll head to Dartmouth, Massachusetts. Daniel McElroy owned Daily A. King, a temporary agency that had lots of advantages. Their rates were better than their competitors...but for all the wrong reasons. It seems that Mr. McElroy used two shell companies so that he didn't have to pay the full amount of payroll taxes to the government. He also underreported his payroll to his workers compensation carrier. All told, that's a lot of fraud, and Mr. McElroy was sentenced to nine years at ClubFed.

Let's now head to Camden, New Jersey where Neyembo Mikanda had a thriving tax preparation business, and with good reason. He falsified the tax returns for his clients, and for his own businesses. He was found guilty last week on all 26 counts, and will be sentenced later this year.

Finally, we head to beautiful La Jolla where Marjan Poustan ran a cosmetic surgery business with her husband. She pleaded guilty to attempted tax evasion. Her not so brilliant idea was to, in 2005, go from post office to post office and purchase money orders for just under $3,000 from cash receipts and use those to pay the bills for her business. Since legitimate business expenses are deductions, her scheme really appears to be one of the most bozo we've encountered. More likely, the brief story left out one detail—Ms. Poustan pocketed some of the money orders and was going to not report that income. In any case, she'll be sentenced in October.

Another domino fell in the government's fight against Naftali Tzi Weiss, the Grand Rabbi of Spinka. He's charged with tax fraud. Allegedly he concocted a scheme where individuals could donate funds to his organization as charitable donations but would receive up to 95% of them back.

And now one of those who donated has voluntarily come forward. Uri Mandelbaum has agreed to plead guilty to two tax evasion charges, and will make restitution of about $1.5 million. According to the Los Angeles Times,Mr. Mandelbaum donated $900,000 in 2005 and 2006 but got almost all of the money returned back to him.

The Times story notes that the government is looking for 100 other donators to Spinka. Meanwhile, for Rabbie Weiss things are not looking up. The government has at least one witness who can verify exactly how the scheme worked.

For Californians, there's no sign of a budget compromise. The Democrats are proposing massive tax increases; the Republicans won't consider a penny in new taxes; and Governor Schwarzenegger wants a solution but isn't putting any pressure on anyone.

The latest:

1. The Wall Street Journal ran an op-ed piece that proclaimed California is #1. But it's not number one in a good way; rather, it's leading the country in the tax rate. The Journal noted:

California faces a $15 billion budget deficit and Democrats who rule the state Legislature have proposed closing the gap with a $9.7 billion tax hike on business and "the rich." There's a movie that describes this idea: Clueless...

This latest tax gambit was unveiled, ironically enough, within days of two very large California employers announcing they are saying, in the famous words of Governor Arnold Schwarzenegger, "hasta la vista, baby" to the state. First, the AAA auto club declared it will close its call centers in California, meaning that 900 jobs will move to other states. "It costs more to do business in California," said a AAA press release, in the understatement of the year.

2. The Contra Costa Times published an op-ed piece from the "Proposition 13 Reform Tax Force" that advocates a split-roll property tax scheme. The op-ed doesn't mention that a split-roll has been defeated by the voters of California before. And that relatively low property taxes is about the only favorable tax factor in California.

3. Governor Schwarzenegger on Thursday broached the idea of a sales tax increase to balance the budget.

4. The Los Angeles Times published an article noting that economists are unsure of whether the Democrats' proposed income tax increase would actually bring in the revenue that the Democrats forecast. Patrick Fleenor, chief economist for the Tax Foundation, is quoted as stating, "But what is often missed is the firm that would have popped up in L.A. but is instead popping up outside Las Vegas. People on the cusp of moving to California or leaving California would certainly be affected by this [proposed tax increase]."

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Meanwhile, Democrats in the legislature are stating that there are no cuts to be made in programs and that only revenue increases will be considered. Republicans state the only thing they'll look at are cuts in programs. I'm leaving on vacation tomorrow. I'm very confident that California won't have a budget when I return on August 4th.

A Lincoln Town Car is the top of the line for Lincoln.



It would be hard to confuse a Town Car with a Singer Sewing Machine:



Who could possibly confuse the two?

Well, Charles Edkins of Greenville, Michigan owned Baby Bliss, Inc. They made clothing for the popular American Girls dolls. Mr. Edkins pleaded guilty to four counts of tax evasion. He allegedly filed false tax returns in 1995 - 1997 and followed that up by not filing any federal tax returns from 1998 to 2003. Additionally, he didn't file corporate tax returns from 1995 - 2003. The indictment also alleged that he didn't file state tax returns from 1999 - 2003 after filing false state returns from 1996 - 1998.

And yes, Mr. Edkins allegedly wrote off personal expenses on his tax return. His Lincoln Town Car became five used Singer Sewing Machines (one for each tire, including the spare). The IRS wasn't as amused as I was.

On the positive side, Mr. Edkins did plead guilty and does plan on making restitution. He'll be sentenced later this year (he could receive up to five years and a $250,000 fine on each count).

You're on trial for tax evasion. Do you (a) hire a good defense attorney; (b) attempt to get evidence that exonerates you; or (c) file fake warrants and fraudulent liens, attempt to disrupt the court proceedings and attempt to "arrest" the judge?

Yes, Robert Beale, already awaiting to find out how long he'll be spending at ClubFed on tax evasion charges, did exactly that. As Joe Kristan reported, his insane scheme "missed it by that much."

Joe Kristan reports that tax evading psychic David Guardino has passed on. We wrote about him three times, most recently last February when he was sentenced. As Joe said, it's a sad way to go out.

Dr. Garland D. Miller was a successful physician in Zwolle, Louisiana. He even served as Sabine Parish's elected coroner. He went through an IRS audit in 1995 and then decided to take action.

Now, we don't have the results of the audit so we can only speculate as to what actually occurred. Suffice to say, it's unlikely it went well for Dr. Miller. So assume you went through a bad audit. Would you (a) Discuss with your accountant tax saving strategies, (b) Embezzle money from your employer, or (c) Purchase a publication from a foundation that argues that the income tax doesn't apply and then implement their strategies?

After the audit he purchased a publication from Save a Patriot Foundation that argued that you don't have to pay income tax. Interestingly enough, in 2006 a court ordered that a notice be put on their home page that states, "The District Court orders...That Defendants...are hereby permanently enjoined from directly or indirectly: ...Advising anyone that they are not required to file federal tax returns or pay federal taxes...." But I digress.

Dr. Miller then ceased filing tax returns. In 2000 he sold his office building to De Soto Regional Health System and became an employee. He was supposed to remit substantially all of his medical income to De Soto but didn't. There's a word for that—embezzlement.

After the local District Attorney investigated, the IRS joined in. Dr. Miller was convicted of tax evasion (it took the jury just two hours to reach a verdict). He'll be sentenced in October and will likely get to spend some time at ClubFed.

If someone ever hands you a publication that says you don't have to pay an income tax just laugh and note that it's good fiction. For if you take it as non-fiction you probably won't like the consequences.

I don't watch soap operas on television. I should add the caveat that I don't watch much television, period. But all Californians are going to get to watch the annual installment of As the Budget Churns.

California has a statutory deadline of June 30th for enactment of a budget. As usual, that deadline has come and gone. California's constitution requires a 2/3 vote in order for passage of a budget. That means that Democrats must get Republican support for a budget or it can't pass.

Democrats proposed last week to increase taxes (shock, shock). Two new brackets would be added: a 10% bracket and an 11% bracket. They also proposed a hike in California's corporation tax (from 8.8% to 9.3%). They also defeated Governor Schwarzenegger's proposed budget cuts. Republicans vowed that the Democrats' proposals are doa.

The North County Times (of San Diego County) has an excellent editorial on the subject.

[Assembly Speaker Karen] Bass spoke after the Democrats presented their plan to fix the deficit: $8.2 billion in new money, primarily through tax increases. Bass said, in essence, "no more cuts" and fell back onto the controlling Democrats' long-standing line that California does not have a spending problem; "it has a revenue problem." (Republicans are holding firm to a no-tax-increase stance.)

And, in hyperbole at its lowest extreme, Bass asserted there was nothing left to cut except the pay of elementary school teachers, high school principals or firefighters.

Hogwash.

Any private business knows that one does not simply raise prices when facing a new year with projections of less income than anticipated. Instead, a business finds ways to maintain the core of its operations by cutting costs, doing without some things and, if need be, shrinking the work force, either by attrition, buyouts or layoffs.

Is that too much to ask our highly paid, full-time Legislature (now in another weeklong recess) to do, and on time?

Meanwhile, the economic development authorities in Las Vegas, Phoenix, and Denver may have yet another opportunity to snag ex-California businesses in the near future.

The Tax Foundation reported that Massachusetts voters will get the chance to vote themselves out of having an income tax this November. Question 1 on the Massachusetts Ballot will be condemned by almost every politician, newspaper, and liberal group in the Bay State.

Indeed, Governor Patrick called the proposal "irresponsible." But the mere fact that it's on the ballot—and Massachusetts is not an easy state to get an initiative on the ballot—shows that lots of voters are unhappy with taxes in Taxachusetts.

It will be an interesting November in Massachusetts.

Sometimes you read a story and wonder how in the world it can be true. How can people be so gullible and how can someone do such a stupid scheme and expect to get away with it.

Robert Doyle of Oakland had an interesting means of making a living. He would ask random individuals he'd meet on the street if he could prepare their tax returns. He'd then do so, making up a phony return and then pocketing a goodly portion of the refund. (You didn't he'd make up a return with a large balance due, did you?). The "Tax Man" (yes, that was really his nickname) pleaded guilty to one count of filing a false tax return and will be sentenced this Fall to spend some time at ClubFed. Mr. Doyle practiced his trade from 2000 - 2005, so it's likely that the loss to the government was quite substantial.

Meanwhile, Fatai Onevai of Pittsburg, California told his clientele that he could fix any and all IRS problems. And he did by a similar method—in total, he bilked the government out of $1.3 million. He pleaded guilty to one count of filing a false tax return and was sentenced in late June to 18 months at ClubFed.

As usual, if it sounds too good to be true it probably is.

Last year we covered the trial of Wisconsin dentist Frederick Kriemelmeyer. Dr. Kriemelmeyer argued at trial that the indictment was faulty because it was in English; that the American flag should not be in the courtroom; and that as long as some additional punctuation was added to a tax return the tax magically vanished. Unfortunately for Dr. Kriemelmeyer, the jury found that not reporting all of his income was what you and I would think it was—tax fraud&mdashand the judge thought he was greedy and sentenced him to 36 months at ClubFed to take remedial English.

Dr. Kriemelmeyer appealed the verdict, and Joe Kristan reported this morning on the appeal. Joe quotes from the opinion:

[In 2002], his mother began frequently cashing checks made payable to cash at a local bank. Bank employees became suspicious of these deposits and notified the IRS, which investigated and in December 2004 executed a search warrant at his dental office. In March 2007 a grand jury returned an indictment charging that Kriemelmeyer's 2000, 2002, 2003, and 2004 returns reported gross receipts substantially below his income. The IRS determined that he underreported his gross receipts by $392,023 in total for those four years, thus underpaying his taxes by $135,337.

As Joe also notes, the judge during the trial suggested that an attorney might be a good idea instead of someone who doesn't like English; Dr. Kriemelmeyer declined.

There is actually a somewhat serious lesson to be learned from this case. Dr. Kriemelmeyer got caught because of a Suspicious Activity Report (SAR). The IRS regularly investigates these, and even small banks will send them to the IRS. If you have a choice between making several deposits of $3,000 or one larger deposit of (say) $12,000, it's usually better to make the larger deposit and wait the 30 or so minutes while a Currency Transaction Report (CTR) is filed. Some of those are investigated, but not nearly as many CTRs are investigated as SARs.

Of course, it's even better to not commit tax fraud. And if you do end up in a trial, get a competent attorney who understands that English is the language used in the United States—not some weird pseudo-English dialect.

Rhode Island has joined 17 other states including California to mandate that state tax returns prepared by professionals be electronically filed. The mandate goes into effect in January.

Under Rhode Island's new law individual taxpayers can opt-out of e-filing. Additionally, the mandate only applies to preparers who submitted 100 or more returns to Rhode Island. And returns that aren't eligible for electronic filing (generally, certain complex returns) aren't covered by the new law.

Perhaps it was the holiday weekend, or perhaps it's the start of summer, but the tax evaders weren't that busy last week. Still, there are some amusing tales of evasion gone wrong.

First, we head to White Plains, New York. Yahezkel Elia and David Elyaho were accused of tax evasion. The IRS alleged that their business were far more profitable than they showed on their tax returns. And when the government found a logbook showing the 12,000 money orders that the two men used to conceal their true income the jury had no problem finding them guilty of tax evasion. Given that the evasion apparently involved millions of dollars the two men will likely soon be boarding at ClubFed.

Next, we journey to Mesa, Arizona. Last week John Stacey was indicted on tax evasion charges. The government alleges that he hid income and assets from his paving businesses by putting money into his mother's bank account, using phony social security numbers and employer identification numbers, and filing false bankruptcy financial disclosure statements. That's a trifecta of problems that could send Mr. Stacey to ClubFed if he's found guilty.

Finally, Michael Kyereme won't be scamming the City of Newark, New Jersey or Cisco Systems anymore. Mr. Kyereme pleaded guilty to mail fraud and tax evasion. Mr. Kyereme was a systems administrator for the City of Newark. When a Cisco part went bad he was supposed to use Cisco's online "SMARTNet" system to order a replacement part, and then have the bad part shipped back to Cisco. He may have done that a couple of times. More often, though, he just ordered "replacement" parts so that he could sell them to another individual and pocketed the money. He would ship other less expensive parts back to Cisco.

The indictment shows that the loss to Cisco is estimated at $4,179,667. That alone is enough to get Mr. Kyereme a stay at ClubFed. But there was an additional problem: tax evasion. Mr. Kyereme profited from his nefarious dealings but didn't report them on his tax returns. In 2006 his gains from this scheme totaled $1,242,483, or an additional $429,846 in tax.

Interestingly enough when Mr. Kyereme was taken into custody $3 million worth of Cisco equipment was found in his home and automobile. Mr. Kyereme remains out on bail until his sentencing later this Fall.

If you get a bright idea make sure it's a legal one, and make sure you pay your taxes. It's always a lot easier to pay them now then to find yourself paying them later...and possibly having to make a journey to ClubFed.

I'm not particularly familiar with the Australian Taxation Office and how they compare to the IRS. Yet I suspect that telling them, "Come and get me, you miserable bastards," is not the way to their hearts. But that's exactly what Australian actor Paul "Crocodile Dundee" Hogan said. The TaxProf Blog, AP, and Don't Mess with Taxes have more.

One of the more vexing problem tax professionals have is preparing returns for individuals who have a partnership interest where the partnership extends the deadline for filing their K-1s. The extension currently is six months, so a partnership can legally mail out the K-1 on October 15th. How are you going to prepare a return on October 15th when the K-1 is in the mail? (The answer is you estimate the income, and then amend the return when the actual K-1 arrives. But this is, obviously, not the ideal solution.)

The IRS is making a change. Effective next year, the extension for partnerships and trusts will only be to September 15th, not October 15th. Joe Kristan has more.

Today is July 1st and Chicago has earned a dubious distinction. The Windy City now has the highest sales tax rate in the country, 10.25%. The old "winner," Memphis, has a 9.25% rate.

The sales tax will likely help suburban retailers of high-end items such as automobiles. Individuals contemplating a $30,000 purchase can save $900, a not insignificant amount, by shopping in DuPage County (7.25% sales tax rate) or $975 by going to Will or Lake County (7.00% sales tax rate).

People who can will vote with their spending dollars. Given the economic climate I'd hope voters in Cook County will remember who approved this increase and take out their anger at the polls. Of course, we're talking about Chicago here....

That's the question that Joe Francis, founder of Girls Gone Wild, must answer. Francis already faces tax charges; he's accused of hiding income through the use of foreign accounts and over $20 million of improper deductions on his corporate tax returns.

So what's another lawsuit? The Wynn Las Vegas Casino accuses Mr. Francis of not repaying $2 million of a $2.8 million loan. Mr. Francis is arguing that he has agreements so that he didn't have to repay the loan.

No trial date has been set.