Taxable Talk

At the end of the four-day Thanksgiving weekend we should ponder who we should give thanks to. Perhaps the following individuals—mainly from overseas—who have less to be thankful for.

We'll start in Lucerne, Switzerland. I haven't been keeping close tabs on the UBS scandal (a Swiss bank which allegedly hid funds for tax scofflaws) but I'm probably going to start. Shock of shocks, UBS has announced that, "...[We] have uncovered a limited number of cases of tax fraud under both U.S. and Swiss law," according to UBS AG Chairman Peter Kurer. While the data hasn't been forwarded to US authorities yet, I'm sure that the US indictment of Rauol Weil, head of UBS' wealth management group, just might have played a part in the pursuit of tax fraud. Mr. Weil is accused of assisting thousands of Americans hiding their identities and accounts from the IRS and aiding in the filing of false income tax returns. I'll keep you informed as more details emerge.

Next, let's head to Israel where the Israel Tax Authority has a problem. "It is impossible to estimate tax evasion in Israel. I believe the lower the tax rates, the lower the amount of tax evasion," said ITA head Yehuda Nasradishi to Haaretz. So what's the solution? The ITA will now pay informers 20% of any fines collected when they inform on tax evaders. In case you're wondering the IRS has a similar program, and American whistleblowers can receive up to 30% of the taxes and penalties collected.

A former New London, Connecticut attorney pleaded guilty to tax evasion last week. Gilbert Shasha understated his income in 1999. He reported $112,000 in gross receipts, but he understated his income by $223,000. Mr. Shasha will receive between 10 and 16 months at ClubFed and a fine of between $3,000 and $30,000. Well, math is hard...

So let's be thankful we're not a tax evader—and for our health, our families, and our friends.

The dysfunctional California legislature was unable to resolve the budget fiasco yesterday. Democrats proposed a plan that would have tripled the car tax and made a few symbolic budget cuts; Republicans refused to vote for it because they want a permanent measure mandating spending limitations.

The new legislature is sworn in next week. Unfortunately, I suspect that the only difference will be the names and Sacramento will be as dysfunctional as ever.

This is having an impact on California's ability to sell bonds. Interestingly, the prices for bonds may imply that the state has a huge risk of bankruptcy. At least that's what a British commentator has said.

And California isn't the only state in such danger. Michigan, Nevada, and New Jersey are on the list, too. Let's look at each in turn.

Michigan is likely on the list for two reasons: the troubles with the automobile industry and the state's miserable business climate. The automobile industry dominates Michigan and there's a real chance that the entire Big Three (GM, Ford, and Chrysler) will declare bankruptcy. There's even a higher risk of huge job losses as these companies are going to have to restructure. Meanwhile, the government in Michigan raises taxes on all businesses—I'm sure that's attracting lots of businesses to Michigan....

Nevada has hit a downturn, too. But there's a big difference between Nevada and California. The legislature in the Silver State and Nevada's Governor have reached an agreement on a short-term solution (though there appears to be some smoke and mirrors with that). And Democrats there appear to have some sense of fiscal reality. Steven Horsford (D-North Las Vegas), Nevada Senate Majority Leader told AP, "All of the options are very difficult choices...They hurt Nevada citizens in different ways, and none of the options are good ones. But we have to balance this budget in the short term."

New Jersey has a huge crisis with its pension plan. "New Jersey’s pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows...The latest losses — nearly $9 billion in October, and another $3 billion so far this month — mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time." New Jersey's pension plan expects an 8.25% return in 2009 and one commentator bluntly said, "That simply is not going to happen."

Indeed, pension problems are likely occurring in many states. New Jersey invested in the market. That's great during upturns but not so good during downturns. How many other pension bombs are out there? I'm sure there are plenty.

It's always better to confront your problems now than to wait until later. At least in Nevada they appear to be doing that. Here in California and in the swamplands of New Jersey the blinders remain on.

The IRS released the 2009 standard mileage rates today:

$0.55/mile for business
$0.24/mile for medical/moving
$0.14/mile for charity

Note that you should keep a written mileage log.

The current business mileage rate is $0.585/mile (it was $0.505/mile through June).

If you are a victim of the recent fires in Southern California, both the IRS and the Franchise Tax Board have given you an extension on tax payments. Both agencies said that impacted taxpayers who were required to make payments, returns, or other time-sensitive acts between November 13, 2008 and February 11, 2009, have until February 11, 2009 to make their payments. There will be no added penalties or interest for impacted taxpayers.

The IRS is also providing an extension for impacted taxpayers for payroll tax deposits due between November 13th and November 28th; those deposits must be made by November 28th.

FTB News Release
IRS Press Release

With Thanksgiving coming this week many look forward to a short work-week. We do need to remember all the things that we should be thankful for—our families, our friends, our health, and our country. Here are some stories about individuals who have a little less to be thankful for.

Remember Aegis Trusts? They were the Palos Hills, Illinois purveyor of sham foreign trusts to shield income from the IRS. The trusts weren't worth the paper they were printed on, and eventually the IRS caught on. Six individuals, including Michael Dowd of Glenview, Illinois, were convicted of various tax and fraud charges. Mr. Dowd was sentenced this past week to ten years at ClubFed.

Stanley Tollman used to be an executive at Tollman-Hundley Hotels. That entity managed Days Inns in the United States. Mr. Tollman allegedly had an interesting way to save for his retirement: He funneled income into foreign entities, but didn't pay tax on that. He managed to avoid trial—he was indicted in 2002 but had just left the United States. On Friday he pleaded guilty on a videoconference link (he was in London, England) to a court in Manhattan. He'll serve a single day of probation. However, Mr. Tollman will be paying $25 million immediately and will make annual payments of $16,018,728 plus interest for each of the next five years for the tax, penalties, and interest he owes. The government has dropped the indictment of Mrs. Tollman who had also been accused of tax fraud.

Seven individuals were sentenced in Valdosta, Georgia for a fuel tax credit fraud scheme. These individuals were involved in claiming that they used diesel fuel off of the highways (in a logging company)...but they didn't. The logging businesses apparently never existed. The seven pleaded guilty, and with $3.2 million involved in the fraud some were lucky to escape ClubFed. Sentences ranged from home confinement to three years at ClubFed. The two alleged ringleaders, Clinton Basil Hughes and Pamela Hughes, have also pleaded guilty to $5.2 million of fraud. They have yet to be sentenced.

A scheme that's been tried many times works just fine as long as the government doesn't find out. Take a little bit of the revenue (preferably cash) and keep it off the company books and just somehow get it into your personal account. Unfortunately, once the government finds out that you've committed tax evasion problems do occur. Peter Lebsock, the former manager of Dos Gringos Trailer Park—a suburban Phoenix chan of Mexican restaurant—pleaded guilty to one count of tax evasion. He didn't report $600,000 of income on his corporate tax returns from 2002 through 2005, and he left off $47,000 in tax on his personal returns for three years. He'll be sentenced next February and could be spending some time at ClubFed.

Finally, American Boiler, Inc. of Stratford, Connecticut does what you think it would do. They service boilers. Industrial Property Management does what you'd expect, too. James McCarthy is a principal in both. Stavros Ganias is the owner of Taxes International in Wallingford, Connecticut. He prepared the books for Industrial Property Management. Allegedly they decided to divert $1,612,841.20 in money that American Boiler had received in work done for Industrial Property Management and used it for themselves and their families. And that income allegedly didn't make it on their tax returns (it was supposedly reported as "loans paid"). That's tax fraud, if proved, and that's what the government is accusing Mr. McCarthy and Mr. Ganias of (along with two counts each of tax evasion). Given the amount of fraud allegedly involved, Mr. McCarthy and Mr. Ganias are looking at lengthy terms at ClubFed if they are convicted.

Do remember that if you think you've discovered a brand new way of evading taxes it's likely that it's anything but new, and the government has seen it before. It's usually a whole lot easier to just pay your taxes now then to get in deep trouble later.

Lots of fraud this weekend. Let's start with the Bozo side of tax fraud, with yet another Bozo preparer.

DaJuan Jackson was one of two preparers at a branch office of American Tax Associates in District Heights, Maryland. His methods helped his clients immensely—they added false information on clients' returns to increase their refunds. That's a crime, and Mr. Jackson was found guilty of eight counts of preparing false income tax returns. There is a bright side for Mr. Jackson: He was found not guilty on eight additional counts of preparing false tax returns. The jury couldn't reach a verdict on eight other counts. Mr. Jackson will be sentenced next year and will likely be visiting ClubFed.

Terry Reed found an interesting method of increasing his income. Mr. Reed wasn't making much; inmates make about $1 an hour. So Mr. Reed filed 23 false tax returns with the IRS and received $140,000 in refunds. He was caught, and he could get another ten years. It's likely he'll have to make restitution to the government. He could even be fined...and at $1 an hour it may take a long time to pay that fine.

I found another Californian with a tax blog. Bill Murray (no, not that Bill Murray) is a CPA in Sacramento. I found his blog which has a great name—April15.com—by accident; he linked to a story I ran earlier this month. But now on to the Bozo story. Mr. Murray is a former IRS Revenue Agent and he knows that every Revenue Agent's tax return is examined (audited) every year. He's not a Bozo. But Jim Liu appears to be. Mr. Liu, of nearby Diamond Bar, is accused of claiming a loss on a sale of an apartment complex when he actually made money. He allegedly provided false documents during an audit, and filed a false return. He faces charges of obstruction and tax fraud. As Mr. Murray said, "Since Agent Liu knew his returns were going to be audited, I just can't see how he could be so stupid to claim a loss he didn't have and then submit false documentation."

In August we wrote about Bozo accountant Henry Omozee. Mr. Omozee underreported his own income on his tax returns. Patrick Brown of the IRS emailed me to let me know that Mr. Omozee was sentenced to 27 months at ClubFed, followed by a year of supervised release. He must also make restitution of $82,430 and pay a $300 fine. I don't know if Judge Brinkeman (who sentenced Mr. Omozee) said the usual morale, but I'll remind everyone that it's a whole lot easier to pay your tax in the first place.

California's continuing budget crisis may be buried towards the back of newspapers but if you're a Californian you should start paying attention. It looks pretty clear to me that some taxes are going to go up eventually.

Negotiators are debating tripling the car tax (which Republicans vehemently oppose), the sales tax (which Republicans oppose), and the income tax (which would likely need a popular vote and isn't likely to be approved). In order for a tax increase to be allowed Republicans are demanding hard budget caps (which are both vehemently opposed by Democrats and that would have to be voted on by the public and would likely fail) and immediate deep budget cuts (which Democrats oppose).

Doesn't this sound familiar? It should—it's a repeat of the budget crunch from this summer. The difference is that the economy was neutral then and it's now falling. Indeed, I think it's going to be a while before California recovers and what the legislature does will have a big impact on when the recovery begins.

Consider how dreadful California's business climate is. Additional taxes will only exacerbate the problems of the Bronze Golden State.

There are going to have to be deep budget cuts. What's unknown right now is whether there will be additional tax increases or not, and if there are what shape they'll take. Once again the operative phrase for Californians is to watch your wallets.

News Stories: Los Angeles Times, Sacramento Bee

Charles Rangel (D-NY) is the chairman of the powerful House Ways & Means Committee. All tax legislation is supposed to start in that committee. Congressman Rangel has been battling tax troubles over the past year.

His troubles have apparently worsened. Congressman Rangel owns a home in the District of Columbia. That's not a surprise; many Congressmen and Senators buy homes in or near the District as they spend a lot of time in Washington. Congressman Rangel has taken the Homestead exemption on his DC property tax bill. This break cuts his DC property tax bill.

Congressman Rangel also owns a home in New York. That, too, isn't a surprise; after all he represents the Empire State in Congress. His New York home is in Harlem (the area he represents) and he has taken the Homestead exemption on that property, too.

There's a problem here: You can only take the Homestead exemption on your principle residence. You cannot, by definition, have two principle residences. Presumably his New York home is his principle residence and he shouldn't have been taking the exemption on his DC property. Congressman Rangel likely owes back property taxes, interest, and penalties.

The New York Post writes about this today. As I mentioned it's only the latest in a string of tax-related problems for the number one tax writer in Congress. Somehow this seems apropros....

The Franchise Tax Board announced today that disaster relief is available to impacted taxpayers. Taxpayers who are amending their returns should write "Southern California Wildfires 2008" in red ink on the top of their return so that it is expedited. Impacted taxpayers can also get free copies of returns that were lost by filing Form 3516. Again, such taxpayers should write "Southern California Wildfires 2008" in red ink on the top of the form so that their request is correctly processed.

The Southern California fires involved are the Tea Fire in Santa Barbara County, the Sayre Fire in northern Los Angeles County, and the Freeway/Triangle Complex fire in Orange and Riverside Counties.

Every so often I get a phone call from someone who tells me, "Now Russ, I know that paying the income tax is completely voluntary and I don't really have to file." Or it might go like this: "Russ, I'm a citizen of California and not of the United States so I don't have to pay income tax." I've been referring individuals to the IRS page on frivolous arguments and Dan Evans' Tax Protester FAQ.

I now have yet another resource to refer them to. Jon Siegel, Professor of Law at George Washington University, has his own webpage titled, Income Tax: Voluntary or Mandatory? I thank Professor Siegel for his addition to the cause of educating those who continue to believe the malarkey that tax protesters dish out. Professor Siegel even has a blog where he occasionally covers tax cases.

Hat Tip: The Volokh Conspiracy

Two stories tonight, one from Tulsa and one from England; they both illustrate Bozo behavior (or should I spell that behaviour) and one adds some British understatement.

First, let's go to Tulsa, Oklahoma. Cynthia Michelle Odom was in state prison for "financial crimes." She decided that a good way to earn some money was to file tax returns for eleven individuals that she befriended while in prison. Well, if she was being helpful that wouldn't be that big of a deal. But the truth was quite different: She invented income numbers and somehow all those returns got refunds. Did I mention that she hadn't asked any of her "friends" for permission to file those returns? Presumably the IRS discovered the fraud and identity theft when one of her victims filed their own return. She used refund anticipation loans from various banks (defrauding them) and, of course, the actual refunds defrauded the IRS. She was sentenced to 8 1/2 years at ClubFed, must make restitution of about $128,000, and pay a $2,000 fine. On the bright side she'll have plenty of time to make some new "friends...."

Let's cross over the Atlantic and head to Sheffield, England. John Barrett and Edward Kirby-Dorsey ran the Omega Sauna. Now what I consider a sauna is something like this:



Well, this sauna was a bit different. Quite a bit different. The police raided the Sauna and thirteen people were arrested for, "...suspicion of conspiracy to live off immoral earnings." I like the British way of describing prostitution.

The police then raided the home of Mr. Barrett and found safes containing £270,000. Inland Revenue (the British tax agency) investigated and they found that the true revenues of the business weren't being reported. The owners were using American methods of avoiding taxation: false books, offshore trusts, and lying on their tax returns. These methods worked just as well as they do in the US when the participants are caught—the two participants pleaded guilty. Mr. Barrett must pay tax of £258,000, a non-payment of tax surcharge of £45,500, prosecution costs of £1,500, defense costs of £10,000, and serve one year in prison. Mr. Kirby-Dorsey's sentencing was postponed because of his health.

When we last looked at Walter Anderson he was being sentenced to nine years at ClubFed. We wrote, at that time, "But Mr. Anderson did get lucky in one respect. Because the plea agreement was poorly written, the judge did not order Mr. Anderson to make restitution." And since the amount of restitution would be $200 million, Mr. Anderson appeared to catch a lucky break.

The IRS appealed that portion of the sentencing, and Mr. Anderson appealed the nine years he received at ClubFed. The appeals court ruled on Friday, and it was a double dose of bad news for Mr. Anderson. First, his nine year sentence was upheld. And second, the Court found that citing the wrong statute in the plea agreement didn't preclude restitution. "...[T]he parties nonetheless agreed that restitution could be ordered on the federal counts."

Link to Appellate Court Ruling

Earlier this week I posted on the tax bite that the top nine finishers at this year's main event of the World Series of Poker faced. This year's winner, Peter Eastgate, hails from Denmark. Assuming he is subject to Danish taxation he faces an effective tax bite of 72.27%.

I've been told that he has since moved to England, and as a citizen of the European Union (E.U.) he is now subject to British tax law. Others have told me that Britain doesn't tax professional gamblers, and that Mr. Eastgate will only have to pay tax on the first $900,670 of his winnings.

There are several flaws in this argument, though. Mr. Eastgate was a Danish citizen (and resident) when the tournament began. Couldn't SKAT, the tax agency of Denmark, argue that he moved simply to avoid the tax, and that he still owes the tax? Another argument that could be made is that it's the date he entered the tournament that matters, not the date of completion.

My suspicion is that Mr. Eastgate will get a bill from SKAT, and it's going to be big. The likely outcome is that this will end up in court. There's precedent for tax litigation involving the winner of the World Series of Poker; Joseph Hachem won the event in 2005 and had to fight the Australian Tax Office to avoid Australian tax on his winnings (he won).

Finally, if he doesn't owe tax in Denmark he likely will owe tax in Britain. The United Kingdom does tax professional gamblers on their winnings. I've received a couple of emails stating that Inland Revenue hasn't been enforcing tax on professional gamblers' winnings. Given the high profile nature of Mr. Eastgate's victory it's hard for me to believe that Inland Revenue won't notice if Mr. Eastgate ignores the British taxman. Still, the tax rate in Britain (about 40%) is far less than the 72.27% Mr. Eastgate would owe in Denmark. This may be a case where the taxman rings the bell twice.

California's Legislative Analyst is projecting that the budget deficit, currently pegged at about $11 billion, might grow to $28 billion. What does the Legislative Analyst, Mac Taylor, want to do to cure the problem? A 5% income tax increase.

I don't expect Republicans in the legislature to support the Legislative Analyst's proposal. Increasing California's income tax rate to 14.3% (15.3% on income above $1 million) will be welcome news to the development authorities in Nevada, Arizona, Oregon, and Colorado. If this tax increase were enacted—again, I doubt this will happen—and President-Elect Obama's probable tax increase were enacted, self-employed Californians would face marginal tax rates of above 72%. With such confiscatory taxation Californians will react by creating strategies to avoid taxation. Clearly one step would be to move. There's no doubt in my mind that actions like that would occur, and that California will be stuck in a cycle of ever-increasing tax rates.

The only way to cure this is to drastically cut spending. Spending needs to match revenues. Ideally, California should cut tax rates rather than increase tax rates. Cutting taxes would help encourage business to relocate here rather than elsewhere. Unfortunately, the odds of tax cuts in California are less than zero.

I have no idea where the Legislature will head on this issue. Smoke and mirrors won't work anymore. The Democrats won't cut spending. The Republicans won't vote for new taxes. Both sides need votes from the other side.

I'll keep you informed.

This year's World Series of Poker concluded early this morning at the Rio Hotel and Casino in Las Vegas. The winner of the main event won $9,152,416 but would he actually end up with all that money?

This year's winner was Peter Eastgate from Denmark. The United States and Denmark have a tax treaty. Because of the treaty Mr. Eastgate doesn't owe a penny to the IRS. That just leaves the Danish tax authorities.

Denmark's tax agency is called SKAT. Denmark, like the United States, does tax gambling winnings. For casino gambling (which is where I believe this will be classified) the tax rate is 45% on the first 4 million Danish Kroners; it's 75% on income above that. Today $1 is worth 5.88907 DKK; Mr. Eastgate won 53,899,250.70 DKK before taxes. Mr. Eastgate will owe about 39,224,438 DKK in tax ($6,660,545). Put another way Mr. Eastgate will keep 14,674,813 DKK ($2,491,871) of his winnings—just 27.23% of his prize. Yes, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow, Russia finished second and won $5,809,595. The United States and Russia also have a tax treaty and Mr. Demidov won't have any of his winnings withheld by the IRS. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia.

Third place went to an American, Dennis Phillips of Cottage Hills, Illinois. Mr. Phillips won $4,517,773 for his efforts. He's an amateur gambler so he won't owe self employment tax on his winnings. Still, he can expect to pay $1,568,950 to the IRS and $135,533 to the Illinois Department of Revenue.

Ylon Schwartz of Brooklyn, New York, finished in fourth place for $3,774,974. He is a professional gambler so he'll owe self-employment tax on his winnings. He'll also owe state and New York City income tax. His likely tax bite is $1,396,304 to the IRS and $387,966 to the New York Department of Tax & Finance.

Two Canadians finished in fifth and sixth place. Scott Montgomery of Perth, Ontario finished in fifth place for $3,096,768. The US-Canada tax treaty specifies that 30% of his win will be withheld to the IRS. Thus, $929,030 was withheld. Mr. Montgomery is a professional gambler so he will owe tax on his win to Revenue Canada. However, he will be able to take a credit on his Canadian tax return for the money withheld to the IRS. As Canada's tax rate is 29% he likely won't have to pay any additional funds to Revenue Canada. However, when provincial taxes are included the tax rate becomes 46.41%. Thus, Mr. Montgomery will owe tax in Canada: about $491,728 after the credit for the tax withheld to the IRS. [My thanks to the commenter who pointed out the impact of provincial taxes.]

The sixth place finisher was Darus Suharto of Toronto. Mr. Suharto is an accountant, so he won't owe tax to Revenue Canada on his won. However, of the $2,418,562 he won, $725,569 was withheld per the US-Canada tax treaty. He may be able to claim a credit on his Canadian tax return for years to come based on this withheld money and eventually get it back.

The Franchise Tax Board (FTB) was rooting for David Rheem or Kelly Kim to finish in first place. These two Californians finished in seventh and eighth place, earning $1,772,650 and $1,288,217 respectively. Mr. Rheem will owe about $651,262 to the IRS and $170,302 to the FTB; Mr. Kim will owe about $470,995 to the IRS and $121,074 to the FTB.

Craig Marquis of Arlington, Texas finished in ninth place. He is also a professional gambler, and of the $900,670 he won he'll have to fork over about $328,911 to the IRS.

Here's a table summarizing the tax bite:

Amount won at Final Table	$32,731,625
Tax to SKAT (Denmark)	$6,660,545
US Tax Withheld to IRS	$1,654,599
Add'l Tax Owed to IRS	$4,416,422
Total Tax to IRS	$6,071,021
Tax to State Taxation Service (Russia)	$755,247
Tax to Revenue Canada	$491,728
Tax to NY Dept of Tax and NYC	$387,966
Tax to California FTB	$291,376
Tax to Illinois Dept of Revenue	$135,533
Total Taxes	$14,793,416

That's a total tax bite of 45.20%.

So congratulations to the winners. Just remember that a winner—perhaps the biggest winner of all—is the taxman. As we all know the house always wins.

Two tales of Bozo tax preparers came out at week's end, and both come from Denver.

First, Kennedy Oduro liked to make sure his customers got refunds. He invented false deductions and credits, and saved his clients $283,000 in 2003 and $342,000 in 2004. There's just one problem with that—inventing false items on a tax return is quite illegal. Mr. Oduro left the country before he could be arrested. When he returned last December he was arrested at O'Hare Airport in Chicago. He pleaded guilty in August to one count of willfully aiding and assisting the preparation of false federal income tax return. He was sentenced last week to a year and a day at ClubFed and must make restitution of $21,000.

What Mr. Oduro did as one tax preparer is what the government alleges an Aurora, Colorado company did en masse. Eight individuals who worked at Olympia Financial and Tax Services are accused in two indictments of 66 counts of violating various tax and fraud statutes. “They created false deductions to generate fraudulent refunds and we are determined to stop these tax refund schemes,” said Christopher M. Sigerson, Special Agent in Charge of the IRS-Criminal Investigation, Denver Field Office. The scheme involved $2 million in allegedly phony tax refund claims against the IRS and the Colorado Department of Revenue. The eight are looking at lengthy stays at ClubFed if found guilty of all counts.

If someone tells you something that sound too good to be true remember that it most likely is.

It hasn't been a good year for the San Diego Chargers. Their best defensive player, Shawne Merriman, is out for the year. They've struggled on offense. Yet their only one game out of first place.

For one former Charger it's also been a very bad year. Benjamin Lee Coleman, an offensive lineman, played for the Chargers in 2000; his pro football career ran from 1993 to 2001.

Between 2005 and 2007 Mr. Coleman decided to borrow some money. There's nothing wrong with that, but there's a lot wrong when you obtain those loans using false information and other individuals' social security numbers. It's called fraud. And when you don't pay taxes on the money you borrow (and then used for personal expenses) it's called tax evasion.

Mr. Coleman pleaded guilty in December 2007. Last week he was sentenced to three years at ClubFed and must make restitution of $240,502.

Governor Arnold Schwarzenegger proposed increasing California's base sales tax from 7.25% to 8.75% to help close an $11 billion budget shortfall. If the measure passes the state legislature, Orange County's sales tax would be 9.25%. The measure is billed as a "temporary" increase in the sales tax, but you and I know that temporary measures tend toward permanency.

The Governator also proposes other measures, including mandatory furlough without pay for state workers, adding an oil tax (on oil pumped from the ground), and adding the sales tax to additional items, such as veterinary services and tickets to sporting events. All told, the increases in taxes is supposed to bring in $4.7 billion in new revenue. The other $6 billion or so would come from budget cuts.

Republicans in the state legislature vow to block any new tax increases. Meanwhile, Democrats likely will attempt to block any cuts in services. Welcome to a repeat of the fiasco that occurred while the legislature debated the budget back in June through September and ultimately passed a "smoke and mirrors" budget.

Will California's political leaders actually look at what is truly needed to permanently resolve this crisis? Looking at everything the state does, eliminating duplicative programs, and drastically changing how the state gets revenue? Well, do pigs fly?

While the most hotly debated proposition on the California ballot was Proposition 8 (banning of gay marriage—it passed 52% to 48%) that was not the proposition with the biggest fiscal impact. There were billions of dollars of bond measures on the ballot. Unfortunately for your wallets, all but one passed.

Proposition 1A passed with 52% of the vote. $10 billion in bonds will be sold for high-speed rail. Ignoring the costs to run the system (and I think this will be a boondoggle) the bonds will cost $667 million a year to be paid back.

Proposition 2 passed with 63% of the vote. This measure will devastate egg ranches and livestock operations in California. Apparently the voters don't understand that if this industry leaves, jobs leave and prices will go up.

Proposition 3 passed with 55% of the vote. $1 billion in bonds for children's hospitals will be sold. It sounds so nice but just remember that as you pay higher taxes to pay back the interest.

Proposition 5 would have expanded treatment for drug offenders. This measure failed, garnering just 40% of the vote.

Proposition 6 would have increased law enforcement funding, and would have cost over $1 billion. Taxpayers in California do realize that such a non-bond measure impacts them. It received just 33% of the vote.

Proposition 7 would have mandated renewable energy use. This measure, opposed by almost everyone, received just 35% of the vote.

Proposition 10 would have issued billions in bonds for renewable energy. This is the only bond measure to have failed. Perhaps voters kept hearing the advertisements against Proposition 7 and figured that this should be voted down, too. It garnered just 40% of the vote.

Proposition 11 implements new redistricting for the state legislature. It appears to have passed, receiving 50.6% of the vote. This is one measure that I agree with as California's legislature is completely dysfunctional.

Proposition 12 will cause the issuance of $900 million in bonds. It passed with 63% of the vote.

Measure J passed easily. This Orange County measure will require votes of the people if pension plans change. It received over 75% yes votes.

Measures R and S in Irvine passed. Each received over 60% yes votes.

Unfortunately, it's likely to be well past midnight before we know the results of the statewide propositions and the local ballot measures. I value my sleep, so I'll be reporting on these on Wednesday.

It now appears certain that Barack Obama will become the next President of the United States. Congratulations to him. It's an historic occasion when race really doesn't matter in electing a president. That said, it's now time to ponder what this will mean for you and I vis-a-vis taxes.

First, I wrote a piece on what taxes would be like if Barack Obama were elected president. You may also want to read my overview on the two candidates, and the likely impact of Congress on your taxes.

Obama has said he would bring people together. However, his actions are very, very liberal. We will have a Congress where both the House and Senate are controlled by the Democrats (though it appears that Republicans will have enough votes to filibuster in the Senate). In the past, when this has occurred taxes have gone up.

The only saving grace is a bad economy. In the past, Democrats usually try to spend their way out of bad economies. When I was in school we were taught that Franklin Roosevelt's policies—the New Deal—helped end the Great Depression. Economists now believe that they actually extended the Great Depression by seven years.

Perhaps President-Elect Obama will live up to what he said during the third presidential debate:

...what I've done throughout this campaign is to propose a net spending cut.... What I want to emphasize ... is that I have been a strong proponent of pay-as- you-go. Every dollar that I've proposed, I've proposed an additional cut so that it matches. (Hat Tip: Volokh Conspiracy)

I'm not hopeful of this happening. He may want to, but I expect that the Democratic Congressional leaders want to spend, spend, spend. I hope I'm wrong. If I am I'll happily post that.

Democrats may state that they have received "a mandate." When I last checked the vote is 51% to 48% which is hardly a mandate. Indeed, the country remains nearly divided in half. I'm not going to point out the random factors that could have changed this race (I'll leave that to political pundits). But when you hear the mandate meme, throw it away.

I suggest you start paying attention to the legislation very carefully. You can read the actual bills on the Library of Congress' Thomas Site. Follow the legislation. It's time to become the squeaky wheel.

So what should concerned taxpayers do? Let's say that some particularly (in your view) onerous piece of legislation is introduced. The best way to combat bad legislation is to let your voice be heard. Call, write, or email your Congressman. If it's an industry issue, have others in your industry do the same. Contact your trade association. Trust me, if a Congressman gets 2,000 phone calls or pieces of mail on what he thinks is routine legislation he will notice.

Forbes just ran an article stating that no matter who is elected president taxes will be going up. I think that's definitely true. What I think may be worse is the additional regulatory burden placed on businesses.

This is yet another area where business owners need to become proactive. You may want to subscribe to the Federal Register's daily email table of contents (the link is to the Federal Register; you can click on "sign up" to head to that page). Americans tend not to act until things become bad. Well, it's far better to act before that occurs. Again, you and others impacted by proposed regulations need to be that squeaky wheel. If (or perhaps I should say when) you see a particularly onerous regulation being promulgated comment on the regulations. Let your Congressmen and Senators know of the problem.

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Some of my friends have asked me what this will do for my business. Perversely, it will be a very good thing. Most professional preparers I know want a simple Tax Code. We're not likely to see anything like that in the next four years. I'll earn lots of fees utilizing methods that will save my clients taxes. That's good for me (and other professional preparers) but bad overall for the economy. Basic economics teaches that a business will want to make a normal profit. If that business must spend more money on my services it will have less money for other things such as expansion, hiring additional employees, increasing salaries, etc. The next four years figure to be good for professional preparers.

Unfortunately, you will have to watch your wallets. Taxes are going up. The only question is how much.

Today is Election Day, and that means you should exercise your privilege and vote. In California, you can go to the Secretary of State's website to find your polling place.

There's lots of fraud to report this week. Here are some more of the lowlights.

First, the Treasury Inspector General for Tax Administration (TIGTA) issued a report noting that over $1.6 billion in false refunds were estimated to have been issued in the 2006 and 2007 filing seasons. The IRS did intercept about $1.5 billion in fraudulent refunds during 2007. It's a big problem, and the IRS acknowledges this. This report is also making news, and this will likely lead to Congressional pressure to intercept even more of the phony claims.

I've reported twice on Dr. Garland Miller. The former parish coroner for Sabine Parish, Louisiana kept two sets of books, embezzled from a local hospital, and then didn't file tax returns. Earlier this year he was found guilty of tax evasion. This past week he was sentenced to four years at ClubFed and must make restitution of $55,471 to the hospital and $89,130 to the IRS (plus interest). Dr. Miller had purchased a publication from the discredited Save a Patriot Foundation that said that you didn't have to pay income tax. He'll have four years to find some better reading material.

Glenn Lockwood is a dentist in Kenai, Alaska. He was found guilty last week of four counts of tax evasion. He allegedly used those old favorites—sham trusts and phony tax shelters—to avoid income taxes. Add to that deductions for such things as $1,504 spent at Mabel's House of Prostitution in Nevada, and clothing bought as uniforms at Dress Barn and a big and tall shop. (Yes, dental labcoats are deductible because they can't be worn in normal wear but general clothing isn't.) Dr. Lockwood will likely get to spend some time at ClubFed instead of Mabel's.

And now let's look at a Bozo tax preparer. Antonio Adams and Marla Wells thought up an interesting scheme. They recruited people to file false tax returns in Atlanta. They provided their helpers with a phony W-2 and then had them file returns using refund anticipation loans so they could quickly grab their share of the loot. Apparently Mr. Adams went to the bank with his clients, brandished a gun, and made sure that he got their share of the loot. Mr. Adams and Ms. Wells didn't think this scheme through; sooner or later the IRS was going to attempt to match the W-2s and when they couldn't an investigation would be opened. About $222,000 of fraudulent refunds made it through but the IRS did stop $60,000 once they realized what was occurring. Mr. Adams fled Georgia when charges were filed but was later apprehended by the US Marshal's Service. He pleaded guilty, and will have 51 months at ClubFed to think things through. He must also make restitution of over $117,000.

Next, let's head to North Tonawanda, New York. Gregory Fisher decided to just lie on his tax returns. From 2004 through 2006 he reported that he had lots of money withheld but didn't owe that much in tax. The only trouble with that was he had nothing withheld. Sooner or later the IRS was bound to have a problem matching $1.3 million with $0. Mr. Fisher received $503,000 in false refunds. He also cheated a local car dealer out of $1.2 million, and the local police let the FBI & IRS know about the situation. Mr. Fisher pleaded guilty and will make restitution of about $2.1 million. He'll be spending some time at ClubFed, too.

That's a lot of fraud for one week. Do yourself a favor and remember if it sounds too good to be true it probably is.

There was so much tax fraud reported this week that I'm writing two posts on it. Here I'm going to take a look at two frauds from restaurants and one from farming.

Let's start in Freeport, Long Island, New York. Lynn Robinson was the owner of several McDonald's in Nassau County. She thought that she deserved a break today so she decided not to remit sales taxes to New York. Back in June she was found guilty of various fraud and tax charges related to the scheme. She was sentenced to six months in prison followed by five years probation. She must also make restitution of $278,678 in taxes, penalties, and interest.

From Everett, Washington comes the story of William Robertson. Mr. Robertson owned the Hot Rod Cafe. In the mid-1990s he withheld over $491,000 in payroll taxes but didn't remit them to the IRS. Failing to remit trust fund taxes is a sure way to get in trouble. He pleaded guilty on Friday to tax evasion. Judge Richard Jones summed it up well stating, "You started a restaurant business and got into a tight squeeze and rather than dealing with it, tried to cover it up." Because of Mr. Robertson's poor health he was sentenced to eight months of home confinement. He must also make restitution of about $491,000.

Finally, leads head to Hillsborough County, Florida. Goodson Farms grows peppers. Its owners purchase federal crop insurance. Supposedly, they lost a lot of their crop and filed claims on their insurance. In due course, they received about $1 million. Sounds fair; after all, that's what crop insurance is for. It would have been if their crop had been lost; however, they allegedly had harvested their crop and sold it. That's insurance fraud if proved. Meanwhile, the owner of Goodson Farms, Janet Goodson, has pleaded guilty to filing a false tax return for 2005. The Tampa Tribune reports that Ms. Goodson has agreed to plead guilty later this month. She also faces a suit; the government is asking for a $500,000 fine, $1 million in restitution, and $1 million in criminal forfeiture. The owners of a second farm, D&K Farms, allegedly did the same scheme with their strawberry crop. They, too, reportedly will plead guilty in a couple of weeks. The owner of D&K, Darryl Williams and William Williams, also face a suit where the federal government is asking for a $500,000 fine, $402,471 in restitution, and $402,471 in criminal forfeiture.

In the end it's a whole lot easier to just pay your taxes but some always like to have their cake and eat it too.

Renato Medina used to own Lucky Chances, a Colma, California cardroom (poker club). Colma, which may have more tombstones than people, was the target of a federal corruption investigation. Mr. Medina was found to have been taking personal deductions on his corporate tax return. Last year he pleaded guilty to three counts of tax evasion. On Thursday he was ordered to serve fifteen months at ClubFed (per his plea agreement). He has already made restitution of $973,841. Mr. Medina no longer owns Lucky Chances (his sons own the cardroom).

What Mr. Medina did—taking personal deductions on his corporate return—is one of the more popular ways of cheating on taxes. The government knows this, and this is also one of their more popular areas in audits. Be aware of this if you're tempted by following in Mr. Medina's footsteps.

Measure S is titled the City of Irvine Personal Information Privacy Act. The City Attorney's analysis states that measure S will comply with state and federal privacy regulations. Proponents believe this measure will aid in privacy for Irvine residents. Opponents argue that the measure is a secrecy ordinance that is unconstitutional under the California constitution.

Remember to Vote on Tuesday.

There are lots of advertisements on local television for Measure R...but they're for Los Angeles County Measure R. In Irvine there is also a Measure R that's far different than the Los Angeles County R.

Irvine Measure R would adopt the City Council's recommendations for the Great Park. According to the city attorney's analysis, the measure should keep separate funds for the Great Park.

Proponents of the measure state that the measure will protect Irvine taxpayers. Opponents argue that the proponents have already spent $115 million of the $200 million allocated for the project and if the measure is approved other taxpayer funds could be tapped.

[Note: Because the Orange County Sample Ballot is interactive, I cannot link to it. If you are an Orange County voter, go to this site to read it.]

Measure J on the Orange County Ballot would require voter approval of county pension changes. Proponents of the measure believe it would help protect taxpayers and would prevent possible future pension meltdowns. There is no organized opposition to the measure.

Remember to vote on Tuesday.