Taxable Talk

The bailout bill passed Congress today and was signed into law by President Bush this afternoon. I'm of mixed opinion on the bailout portion of the bill. But I'm thrilled about one part of the bill—this year's AMT (Alternative Minimum Tax) patch was included in the bailout legislation.

Every year Congress goes through the effort to raise the AMT exemption so that millions more individuals don't get impacted by AMT. Last year Congress waited until December to pass an AMT patch and it impacted the filing season.

Also included in the bill were "extenders." The extenders extended popular deductions that would have been eliminated.

Here is a list of some of the major tax items in the bill:

- AMT exemption increased to $46,200 for single and $69,950 for married filing jointly;
- Sales tax deduction extended through 2009;
- The Tuition and Fees deduction extended through 2009;
- Educator expense deduction of up to $250 extended through 2009;
- The real estate taxes deduction (for those taking the standard deduction) of $500 single/$1000 married filing jointly was extended through 2009; and
- Major tax benefits for those who live and/or work in major disaster areas.

There's probably a lot more in the legislation (it runs 300 pages) but let me add a caveat: California will not be in compliance with any of these changes for 2008.

Apparently this blog has a wider circulation than I thought. Today I received an email from Tom Teale, the Assistant Director, Criminal Investigations of the Minnesota Department of Revenue (the state tax agency in Minnesota). While I generally focus (when I report on tax evaders) on IRS/Department of Justice prosecutions and California I'm happy to highlight the lowlights from other states.

And I do wish to point out that many states are suffering revenue shortfalls. If you file your federal tax return and skip your state tax return your state will find out. Every state but Nevada has an information sharing agreement with the IRS. Given that state income tax payments are generally deductible on your federal tax returns and are usually for far smaller amounts than your federal income tax doesn't it make sense to ensure your compliance with state law?

In any case, Mr. Teale highlighted four cases in Minnesota. I've already covered Robert Beale, the tax evader who attempted to arrest the judge. He received eleven years of nonconsensual incarceration.

There were two cases I wasn't aware of. In one, an attorney, John Hatling of Fergus, Falls, claimed that he could deduct his own wages using the "claim of right" deduction. If you've never heard of the deduction you're not alone. It's yet another tax protester argument and it doesn't hold water. Mr. Hatling will plead guilty to one felony count and will be sentenced in state court next Friday.

In the other case, a judge didn't file his Minnesota income tax returns. Donald Venne of Anoka County faces four gross misdemeanor charges. While the total unpaid tax is relatively small (about $3,200) a judge, of all people, should understand about compliance with the law. His attorney said that the problem was caused by a "traumatic family event that occurred over a period of years."

Again, remember that you do need to pay your state income taxes. And my thanks to Mr. Teale for bringing these cases to my attention.

There are some things that just must be seen in person at least once. I think that one of those is the Indianapolis 500. It's called the greatest spectacle in auto racing for good measure. If you get the chance head to Indy over Memorial Day and catch the race.

If you went in 2001 or 2002 you would have watched Brazilian-born Helio Castroneves win back to back races. Mr. Castroneves is a Brazilian but has been residing in the United States since 1997. That means he must pay US income taxes. Mr. Castroneves apparently didn't like that idea.

While most of us don't like it but pay he allegedly decided on a different course of action. Mr. Castroneves received $6 million in pay. Of that, $5 million allegedly moved through a Panamanian shell company to evade US taxes. At least, that's what the government alleges in a seven-count indictment against Mr. Castroneves, his sister Katiucia, and his attorney, Alan Miller. There's one count of conspiracy and six counts of tax evasion.

Among the other items contained in the indictment are allegations that Mr. Castroneves lied to his tax attorney and accountant, that Mr. Miller and Mr. Castroneves lied to another law firm, and that the trio allegedly prepared false tax returns. If found guilty they'll be watching a few Indy 500s at ClubFed and he'll miss participating on Dancing with the Stars (which he won last year).

This week's tax evasion stories share a common theme: the alleged evaders (and those convicted) should have known better.

Let's start in Sin City, where a personal injury attorney liked cash as a way to conduct his business. There's nothing wrong with that, but when you don't declare the cash income and you purchase assets and hide them in others' names, problems can arise. When the total amount involved is $2 million over six years and there's a sham child support agreement, it's trouble with a capital t. Edmund C. Botha was found guilty last week of one count of tax evasion. Based on federal sentencing guidelines, Mr. Botha is looking at about three years at ClubFed plus probable restitution when he's sentenced in early 2009.

Moving east, Danny Gladden is the former tax collector of Crawford County, Missouri. He was elected in 1991 and soon after discovered a lucrative side job: He embezzled from the county. A state audit discovered the missing funds in 2005, and he was later convicted of theft and sentenced to seven years in state prison. This past week he was convicted of tax evasion. Mr. Gladden forgot that tax must be paid even when the source of your income is stealing. Given that he owed about $82,000 in tax he's looking at about two years at ClubFed based on sentencing guidelines.

Next, let's look at two stories that both feature payroll taxes. First, the US Department of Justice calls this "the largest cash wage scheme in Massachusetts history." Now, there's nothing wrong with paying employees in cash—it's completely legal. But you still must withhold payroll taxes, and you still must report them accurately to the government, and you do have to remit them to the appropriate agencies. What happens when you don't do any of those things? Well, if you get caught, tried, and convicted, and the amount involved is over $43 million, you'll likely find yourself at ClubFed for a long time.

And that's exactly what happened to husband and wife Daniel and Aimee King McElroy. About $43 million in payroll was paid under-the-table, with the loss to the IRS being around $10 million and the loss to workers compensation companies was $7 million. In total the husband and wife were each found guilty of 19 counts. The husband was previously sentenced to 108 months at ClubFed; last week the wife received 78 months. They were also ordered to make restitution of $9.1 million.

Our final story comes from Worcester, Massachusetts. Attorney Christopher Uhl allegedly withheld money from his employees' wages for payroll taxes. That's good. He also allegedly didn't remit that money to the federal government. That's not good. He's been indicted on six counts of tax evasion and six counts of willful failure to pay taxes.

If you have employees make sure you're in compliance with payroll taxes. This is not an area to skimp on. Those taxes are called "trust fund taxes," and the federal government and state governments almost always vigorously go after individuals who withhold but don't remit. Committing this sort of tax evasion is a losing proposition.