Archive for the ‘Scams’ Category

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.


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.

Phony Liens, Real Jail

Thursday, June 9th, 2011

Here’s a strategy that’s guaranteed to endear yourself to the IRS and other officials at the federal government. First, get yourself in trouble with the SEC. Thanh Viet Jeremy Cao of nearby Rancho Santa Margarita did just that: He was a defendant in a civil fraud case brought by the agency. Now, most of us who would be in such trouble would get an attorney, or perhaps discuss settling the charges (with the help of the attorney, of course).

Not Mr. Cao.

As the Department of Justice reported,

Cao filed 22 false liens in the public records of the state of Nevada and Clark County, Nev., against SEC attorneys, U.S. District Court Judges, U.S. District Court Magistrate Judges, the U.S. Attorney for the Southern District of California, Assistant U.S. Attorneys, U.S. Secret Service special agents and special agents of the IRS. Each lien alleged that the lien victims were “debtors” of Cao for hundreds of millions of dollars. According to the plea agreement, Cao admitted that all 22 liens were false and agreed that the liens should be expunged from the public record.

Mr. Cao is also accused of filing for $20 million in false tax refunds. Mr. Cao is a tax preparer, but hopefully not for long. Sentencing is scheduled for September; Mr. Cao is likely looking at a stint at ClubFed.

Peter Pappas has more.

Time Was On His Side

Wednesday, March 2nd, 2011

Sometimes I have to be careful about jumping to conclusions. When I first looked at Charlton v. Commissioner I expected the taxpayer to lose. It wasn’t hard to jump to that conclusion when I read,

Throughout his career, Jeffrey pursued a myriad of income producing opportunities. His desire to earn large amounts of income with minimal effort led him to become involved with Amway, Herbalife, and numerous other multilevel marketing businesses (MLM). These endeavors were unsuccessful.

Next, I read that the petitioner learned about Trusts that magically made income tax disappear. In a footnote, Judge Foley notes,

Representatives of ProTec routinely told potential clients that the Internal Revenue Service had verified that the ProTec plan complied with tax laws. In 2004, certain representatives of ProTec pleaded guilty to a charge of conspiracy to defraud the United States in connection with their activities related to the promotion and marketing of fraudulent trust schemes.

But the petitioner missed out on that entity (whew) as it went out of business before he could invest. Unfortunately, he discovered Aegis. I’ve reported on Aegis in the past; suffice to say many of the principals ended up at ClubFed. With their CPA they attended an Aegis presentation and, “…[they] left the Aegis seminar convinced that the Aegis system was a legitimate tax minimization and asset protection plan.”

From 2002 – 2003 the IRS attempted to obtain records, but the petitioner fought the IRS, even suing employees. Eventually, a District Court ordered the petitioner to comply with an IRS summons (which he did). Finally, in 2007, the IRS issued deficiency notices for tax years 1999 and 2000. The IRS alleged that the petitioner, his partnerships, and his trusts engaged in fraud, so the normal 3-year statute of limitations wouldn’t apply. (In cases of fraud, the tax can be assessed at any time.)

Unlike in most Tax Court cases, the burden of proof is on the IRS in a fraud case. “Respondent must establish by clear and convincing evidence that Jeffrey and Mary filed false or fraudulent returns with the intent to evade tax.”

Simply put, respondent has failed to meet his burden…To the contrary, Jeffrey did not intend to evade tax but wrongfully believed that the ProTec plan and the Aegis system were legitimate tax avoidance techniques. Indeed, Jeffrey, Timothy, and Mr. Moore [the CPA] all believed that the Aegis system was legitimate and that the returns were accurate.

Mr. Moore, respondent’s primary witness, provided convincing testimony regarding the perceived legitimacy of the techniques and accuracy of the returns. His testimony relating to his advice to Jeffrey and Timothy, however, was inconsistent, incoherent, and at times incomprehensible. Nevertheless, Jeffrey, through his credible testimony, established that Mr. Moore did not express any doubt regarding the legitimacy of the tax planning arrangements. In fact, Mr. Moore was so comfortable with the tax planning arrangements that, after preparing the domestic trusts’ returns relating to the years in issue, he became a trustee of Jeffrey’s domestic trust.

Luckily for the petitioner, there are cases where “reliance upon an accountant to prepare accurate returns may negate fraudulent intent if the accountant was supplied with all the information necessary to prepare the returns.” Mr. Moore may have been “imprudent,” but the petitioner supplied him with all of his records. They may have “believed in and acquiesced to an elaborate scheme designed by con artists,” but the petitioner didn’t intend to commit fraud. Thus, the IRS is time-barred from redress.

Still, this case is a reminder that if it sounds too good to be true, it probably is. There is no magical trust that makes the income tax disappear.

Case: Charlton v. Commissioner, T.C. Memo 2011-51

Ciavarella Guilty of 12 of 39 Counts

Tuesday, February 22nd, 2011

Back in 2009, I reported on what I called, “One of the worst cases I’ve read about.” I like putting humor in posts, but that post was just matter of fact. I had not read before of such horrendous corruption by a judge.

At the time, Judge Mark A. Ciavarella had pleaded guilty. However, sometime between then and now he changed his plea. He was tried on 39 counts (including filing a materially false tax return); last week he was found guilty of 12 of those 39 counts.

Interestingly, the US Attorney’s office focused on the financial crimes rather than the stories of juveniles who were, in some cases, wrongly put away. Yes, if you rob a bank you do need to report that income; Mr. Ciavarella appears to have forgotten about Al Capone.

In any event, a man who it appears deserves to head to federal prison will likely soon be doing so.