Archive for the ‘Scams’ Category

Accountant Who Solicited Hit Man Pleads Guilty

Sunday, August 12th, 2012

Back in March I reported on Steven Martinez. Mr. Martinez is a tax preparer who faced charges of stealing $11 million from clients. He decided that the best strategy to fight this charge wasn’t hiring a good attorney, nor was it trying to disprove the charges; rather, he decided to hire a hit man to kill four witnesses. (One reason he didn’t try to disprove the charges is that they were true; Mr. Martinez has admitted he took the $11 million and used it to buy a home in Mexico and other personal expenses.)

The hit man to be told the FBI, and Mr. Martinez was arrested. He pleaded guilty on Friday to soliciting a violent crime, interstate commerce in murder for hire, witness tampering, mail fraud, and eight other felonies. Sentencing is set for November 30th and the 51 year-old Martinez faces 100 years at ClubFed.

Hatch Finds a Job! (But Buyer Beware: Firm Linked to Roni Deutch & Another Accused Attorney)

Thursday, April 26th, 2012

Congratulations to Richard Hatch, winner of the first Survivor and my favorite tax-challenged celebrity. Courtesy of Kelly Erb we find out that Mr. Hatch now has a job.

Yes, it appears to be another penny on the dollars firm. If some of you actually could read the disclaimer on the advertisement, I congratulate you! My eyesight just isn’t that good.

But this firm is different: They are just a referral service, and by doing a search on them I discovered that they have been advertising for people to buy their leads. I also found that they own http://www.taxcab.com with beautiful spokeswoman Tonya.

Unfortunately, MMAC Group may have some issues. When I looked up who owned the domain “taxcab.com” using whosis, I found the reference was to one Gregory Flahive. That name sounded familiar, and when I looked it up in Google I discovered that Mr. Flahive is one of three Sacramento area attorneys accused of taking thousands of dollars upfront from homeowners trying for loan modifications; that would be illegal if proven under California law. He faces 19 felony charges.

Yet another name associated with MMAC is Brandon Funk (see the link to the referral service). Mr. Funk’s name, too, rang a bell; he’s the former Client Intake Director for Roni Deutch’s firm. For those who aren’t aware, Ms. Deutch was accused of taking large up-front payments with promises of reducing individuals’ tax debts but provided little or no help in actually reducing their taxes.

Is this business legal? Probably; they’re not promising anything. Would I use Richard Hatch to help me recommend a good tax professional? Please….

The Dirty Dozen

Thursday, February 16th, 2012

It’s time for the Dirty Dozen. No, not the movie; rather, the IRS’ annual listing of the worst tax scams.

On top of the IRS’ list is identity theft. It is a major problem, and the IRS is trying to stop it. The IRS does have a special unit dealing with identity theft.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

Second on the IRS list is phishing. The IRS never sends unsolicited emails to taxpayers. As the IRS notes,

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

You can find the rest of the list here. Remember, if it sounds too good to be true it probably is.

Well, She Didn’t Get Charged with Impersonating a CPA…

Monday, February 13th, 2012

Every so often a client asks me to send a mortgage company a letter noting that I prepared their tax returns, and verifying their income for those years. I haven’t been asked to send a letter to a mortgage company where I invent numbers and falsely claim that I prepared someone’s return. (If I were to be so asked, I’d quickly say “no thanks.”) Of course, one always needs to be aware of the Bozo contingent.

From Bakersfield comes the story of Patricia Ann King. She ran The Tax Kings, which did tax preparation work in Bakersfield. From the Department of Justice press release:

King prepared and provided to her co-defendants false and misleading verification letters that purported to verify loan applicants’ self-employment history and income, among other information. King received compensation payments from the co-defendants for providing the verification letters. King knew that the verification letters were to be submitted by the co-defendants to lenders in support of applications for loans for the purchase or refinance of properties and that the lenders would rely on the letters to approve the loans. King admitted that her actions caused lenders to incur losses of approximately $530,000.

She pleaded guilty to aiding and assisting in the preparation of a false tax document and three counts of mail fraud. She also admitted to impersonating a CPA.

I have been coming around to Joe Kristan’s view of the IRS regulating tax professionals. Ms. King had a license from CTEC, the California state body that licenses non-CPAs/EAs/Attorneys who prepare tax returns. (I verified her license–though it expired last November–on the CTEC website.) Her taking the required continuing education courses didn’t stop her from committing four felonies. The IRS being the regulatory body won’t stop bozo individuals from committing bozo actions. But I digress….

In any case, Ms. King will be sentenced in April.

The Secret Decoder Ring Strikes Again!

Tuesday, November 15th, 2011

I’ve written about Sharon Kukhahn before. Ms. Kukhahn thought that there was some magical way to decode your IRS file and magically make your taxes disappear! Ms. Kukhahn sold her packages to the public and pocketed $2,000 – $3,000 per sale. As P.T. Barnum said, “There’s one born every minute.”

Back in 2008, the Department of Justice obtained an injunction against her from selling her worthless decoding scheme. (There is no secret IRS file to decode that will make your taxes disappear.) One would think that Ms. Kukhahn would fade into the sunset.

Nope.

In April 2010 Ms. Kukhahn was arrested, charged with conspiracy and tax evasion. Not only did Ms. Kukhahn allegedly promote phony tax schemes, she also supposedly orchestrated a letter writing campaign to stop the IRS from collecting taxes.

Ms. Kukhahn was found guilty back in May. Ms. Kukhahn supposedly used the proceeds from her scheme to buy a yacht and other worldly goods; meanwhile, many of her clients are suffering under tax debts they’ll never be able to repay.

Sentencing is set for Wednesday.

Now, if you really want a decoder ring, here’s an offer from nearly 60 years ago that (at the time) would get you one. It wouldn’t have removed your taxes, but it was a decoder ring:

A Chestnut Is in the Rough

Monday, October 24th, 2011

Another week, two more individuals have been sued by the Department of Justice for allegedly promoting phony tax schemes. Rodney Chestnut and Nafeesah Hines are alleged to have found a unique way for you and I to obtain tax refunds: redemption. You see, there are supposedly secret tax accounts that you can get money out of just by filing phony Form 1099-A’s and 1099-OID’s.

I can’t tell you much more about this method, because it doesn’t exist. There are no secret tax accounts. This method (redemption) is as phony as a three-dollar bill.

Mr. Chestnut and Mr. Hines will have the joy of trying to find those secret accounts when they get their day in court. Good luck–they’re going to need it.

Full Tilt Poker: $238 Million (54%) May Have Gone to Pay Taxes

Wednesday, September 28th, 2011

As I noted last week, Full Tilt Poker allegedly paid their owners $440 million, much of that money supposedly coming from player deposits. One question I’ve been asked is, where did that money go?

Well, I don’t know where all of it went, but I do know where a large percentage of it went: The IRS and California’s Franchise Tax Board.

Full Tilt Poker has a complicated structure (to say the least) but it appears that the main vehicle for ownership was Tiltware LLC. That’s a California LLC, still active, with one Raymond Bitar listed as the agent for service. (You can look it up here.) There’s also a Tiltware Merchandise Services, LLC (another California LLC) whose agent for service is one Chris Ferguson. Mr. Bitar is under indictment in the original Black Friday (April 15th) accusations against Full Tilt; Mr. Bitar and Mr. Ferguson are among the accused in last week’s expansion of the civil claims against Full Tilt.

In any case, there were approximately 19 owners of Full Tilt. Assuming that the payments went through Tiltware, California income tax would be owed on the entire amounts of the payments. A California LLC must withhold state income tax on foreign (non-California) members (owners) of the LLC. The withholding rate is 7%. (Some of the members are Californians, and would likely owe up to 10.55% on their income. But I’ll be conservative and use 7%.) That’s a little more than $31 million into the California treasury.

Next is federal income tax. Unless the members had incredibly bozo tax professionals, they’ve paid federal income tax on all of the income they’ve received from Full Tilt. Interestingly, there were no tax charges filed with the original Black Friday indictments. Given that it is routine in allegations of financial crimes for the US Attorney’s Office to check with IRS Criminal Investigations, it’s fairly certain that Ray Bitar paid his taxes.

Using an average federal tax rate of 33%, that’s over $146 million collected in US income tax.

I assume Full Tilt is being taxed as a partnership. An LLC can elect to be taxed as either a C-Corporation or an S-Corporation. Given that Full Tilt has foreign owners, it cannot elect S-Corporation status. While it could be taxed as a C-Corp, it’s more likely that it’s being taxed as the default option, as a partnership.

That leaves self-employment tax. General partners in a partnership (those involved in the business) pay self-employment tax on their income from the partnership. Self-employment tax is at 15.3% on the first $106,800 and 2.9% thereafter. Now, not all of the Full Tilt owners would pay this, but it’s likely that the majority who received distributions did pay this. I’ll use 2% rather than 2.9% as an overall estimated rate for the effect of the limited partners. Still, that’s nearly $9 million more to the Treasury.

The total is $186 million, but that’s an understatement. And that’s probably a significant understatement. Still, even this figure represents 42% of the money distributed.

The problem with this analysis is that for federal tax purposes, tax is owed on the full amount earned, no matter what the distributions were! Suppose you have an LLC that earns $1 million, but you don’t take any withdrawals. You still owe tax on the $1 million!

At this point it’s impossible to know what this excess income was. This would be money plowed back into Full Tilt for development, etc. The estimates I’ve seen state that Full Tilt made on average $150 million a year during this time frame; that would equate to $600 million during the four-year period of 2007 – 2010. That might mean another $52 million in federal income tax and $3 million in self-employment tax have been paid. (There would also be some additional California income tax paid, by the California resident members of Full Tilt. I’ll ignore that for this analysis, but this could mean that I’m still understating the total.)

That gives a high estimate of $238 million in taxes paid, or 54% of the total of money distributed. That would leave just over $200 million for the Full Tilt owners to have actually received after taxes.

I was asked why didn’t the Full Tilt owners just loan the company money back so that they could pay the American players after Black Friday? (The Department of Justice estimates that the amount owed to US players is $150 million.) It’s simple: They don’t have the money. Much of the money has been spent or invested; it’s likely that only a small portion of the $200 million was actually sitting in cash or like funds.

What does this mean for the future? For Full Tilt, lots of legal problems and difficulties in selling the business. Yet there is a rumor that a French firm is looking at acquiring Full Tilt and contributing enough capital to pay all current customers (an estimated $300 million); Americans can only hope that this is true. It’s far more likely that Full Tilt will end up in receivership with the pieces being doled out to high bidders, and all customers receiving pennies on the dollar for whatever they had on deposit at Full Tilt.

Full Tilt Poker Alleged to be “Massive Ponzi Scheme”

Tuesday, September 20th, 2011

The United States Attorney for the Southern District of New York this morning alleged that Full Tilt Poker is a “massive Ponzi scheme.” Back in April, the Department of Justice seized the domain names of the three largest US-facing online poker sites (PokerStars, Full Tilt Poker, and Absolute Poker/Ultimate Bet). Since then, PokerStars has refunded all money on deposit to US players, while Absolute Poker/Ultimate Bet has said basically nothing.

Full Tilt Poker continued to operate for just over two months, until the Aldernay Gambling Control Commission shut them down on June 29th. Full Tilt and the AGCC are having closed door hearings in London today regarding a re-start of Full Tilt Poker. It now appears likely that Full Tilt Poker will never restart.

In a statement, US Attorney Preet Bharara said,

Full Tilt was not a legitimate poker company, but a global Ponzi scheme. Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited.

The owners of Full Tilt Poker are accused of pocketing $440 million since 2007.

Where does this leave players? Assuming the charges are true, its clear that players will not have any of the $150 million (the amount owed to US players; an estimated $300 million is owed to players worldwide) refunded to them voluntarily. The most likely case is that a receiver will wind down Full Tilt Poker’s business, and players will eventually receive pennies on the dollar (after filing claims).

From a tax perspective, this will likely become a casualty loss for players. There are special rules regarding Ponzi schemes and casualty losses (developed after the Madoff case in 2009) that may apply. The problem is that while these losses are definitely related to a Ponzi scheme, are they investment losses?

However, given the US Attorney’s description of the losses, it is possible that Revenue Procedure 2009-20 will apply. There are other possible methods of dealing with this (theft of money on deposit); impacted individuals should consult with their own tax professional as to the best method of treating this loss.

There is time to determine the best tax treatment, though. The losses clearly are 2011 events to be reported (probably) on 2011 tax returns filed in 2012.

One obvious remark: Buyer beware. When you are dealing with an offshore entity, you are going on faith and trust. Sometimes that trust is misplaced.

Nonexistent Inspectors Lead to a Real Cell at ClubFed

Tuesday, September 6th, 2011

Jay Vincent was a standout player at Michigan State. He was part of the squad that featured Ervin “Magic” Johnson that won the NCAA Championship over Indiana State in 1979. Mr. Vincent played in the NBA with stops in Dallas, Washington, San Antonio, Denver, Philadelphia, and Los Angeles.

Unfortunately, Mr. Vincent’s occupation after the NBA appears to be on the dark side, so to speak. Mr. Vicnent operated a business that did home inspections on foreclosed properties. That would seem like a good business in this economy. Unfortunately, he forgot a necessary step: hiring home inspectors. But Mr. Vincent did take his customers’ payments, but they didn’t get anything in return. That’s fraud. Mr. Vincent also didn’t pay tax on the income from the fraud. He pleaded guilty earlier this year and was sentenced last week to 68 months at ClubFed on the fraud charge and 3 years on the tax fraud charge (to be served concurrently).

Mr. Vincent is also facing possible indictment on another alleged scam. In Indiana, Mr. Vincent advertised tryouts for an exhibition basketball team. The team apparently didn’t exist. His advertisements were allegedly paid for with bad checks. This doesn’t look good for Mr. Vincent

There’s Good and Bad Creativity

Monday, August 22nd, 2011

There’s being aggressive, and there’s being stupid. A. Blair Stover was the latter. As the 8th Circuit Court of Appeals noted,

[The IRS]…found that even the most conservative estimate of the tax loss to the government caused by Stover’s schemes was $100 million, and potentially as high as $800 million. Agent Janice Mallon testified that a “reasonable estimation” of the government’s tax loss was $300 million. Apart from those costs, most of Stover’s clients had to pay other professionals to “undo” the structures Stover promoted, organized, and sold. Many had to pay penalties to the government.

Joe Kristan has more.

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