Archive for the ‘Tax Evasion’ Category

Here’s a Step-by-Step Manual of How to Go to Prison for Taxes

Sunday, July 30th, 2017

Do note that I absolutely, positively, do not recommend you follow the procedures done below. But if you want to go to ClubFed for a tax crime, it’s a superb illustration.

You start a home health care business. (The business could be in anything, but I’ll use the actual example.) Your business grows and you hire employees. You correctly withhold employment taxes from your employees. So far, all is well.

You then keep the employment taxes you withhold rather than remitting them to the IRS. You do this not for one month, nor two, but for years. As I’ve said before and will doubtless say again, this scheme has as close to a zero percent chance of success. The problem is that sooner or later an employee will note the withholding on his tax returns, and the IRS will investigate why they don’t have the money. In any case, that was only the first thing done wrong.

Next, after the IRS starts snooping around you can change the business’s name and have nominees start running the business. That will deter the IRS, right? A helpful hint: This won’t deter the IRS. That was the second error.

Meanwhile, let’s not admit that the business is making money, and not report the income on your personal tax return. That will show the IRS! It will, in one sense: It will help cement an indictment for tax evasion. After all, three strikes and you’re out.

This is what was done by Dinorah Stoll-Weaver of St. Joseph, Missouri. She pleaded guilty to failing to pay over employee payroll taxes to the IRS. Given that the criminal tax loss from this scheme (it ran twelve years) is $1,459,727, a trip to ClubFed is likely in her future.

“I Ain’t Got It, So You Can’t Get It” Doesn’t Generally Apply to the IRS

Saturday, July 15th, 2017

Ain’t never gave nothin to me
But everytime I turn around
Cats got they hands out wantin something from me
I ain’t go it so you can’t get it…

So goes part of the lyrics of “X Gon’ Give It To Ya” by DMX. The IRS and the Department of Justice allege that these lyrics by Earl Simmons (aka DMX) were taken literally by him. Mr. Simmons is accused of engaging in a multi-year scheme to conceal millions of dollars of income from the IRS to not pay $1.7 million in taxes.

Mr. Simmons is accused of not paying his income taxes from 2000 through 2005 of $1.7 Million. That’s his first problem. His second problem was apparently not filing his 2010 through 2015 tax returns. The Department of Justice is accusing him of earning $2.3 million during that period; it would be hard not to have some tax liability with that amount of income.

The third problem was what he supposedly did to avoid taxes. From the DOJ press release:

Instead, [SIMMONS] orchestrated a scheme to evade payment of his outstanding tax liabilities, largely by maintaining a cash lifestyle, avoiding the use of a personal bank account, and using the bank accounts of nominees, including his business managers, to pay personal expenses. For example, SIMMONS received hundreds of thousands of dollars of royalty income from his music recordings. SIMMONS caused that income to be deposited into the bank accounts of his managers, who then disbursed it to him in cash or used it to pay his personal expenses. SIMMONS also participated in the “Celebrity Couples Therapy” television show in 2011 and 2012 and was paid $125,000 for his participation. When taxes were withheld from the check for the first installment of that fee by the producer, SIMMONS refused to tape the remainder of the television show until the check was reissued without withholding taxes.

SIMMONS took other steps to conceal his income from the IRS and others, including by filing a false affidavit in U.S. Bankruptcy Court that listed his income as “unknown” for 2011 and 2012, and as $10,000 for 2013. In fact, SIMMONS received hundreds of thousands of dollars of income in each of those years.

Mr. Simmons faces 14 counts of tax evasion, obstructions, and failing to file tax returns. He faces a maximum of 44 years at ClubFed. He’s been released on bond of $500,000 pending his trial. I’ll point out something I have many times in the past: If you’re a celebrity, it pays to just pay your taxes.

Helping the Las Vegas Economy Isn’t a Good Excuse for Not Paying Employment Taxes

Sunday, July 9th, 2017

I’m a resident of Las Vegas, so things that help the local economy are generally good. Of course, I have a bias: A good Nevada economy will help keep taxes down. Richard Tatum, Jr. of Houston helped the Las Vegas economy so I suppose I should be thankful for him. The Internal Revenue Service and the US Department of Justice have a different view.

Mr. Tatum owned an industrial staffing business. It was a large business, with about a thousand individuals working for it both internally and at other businesses. Between March 2008 and the end of 2012 the business withheld $12 million in payroll taxes. And there were $6 million of social security and Medicare taxes (the employer’s share) during the same period. However, those funds didn’t make it to the IRS. The good news is that some if helped my local economy: “[Tatum] used the money for his personal benefit, including making payments on his ranch and traveling to Las Vegas, Hawaii and France. Tatum admitted that he caused a tax loss of more than $18 million.”

As I’ve said in the past many times, if you want to go to ClubFed one of the easiest ways is to withhold trust fund (employment) taxes and not remit them. Mr. Tatum will have three years at ClubFed to think things over after pleading guilty to one count of failing to pay over employment taxes; he’ll also have to make restitution of $18,298,604. As usual, it’s a lot easier to simply pay your taxes in the first place….

Truth In Advertising Isn’t Always a Good Idea

Sunday, July 2nd, 2017

There are laws mandating that advertisements be accurate. Sometimes, though, you can get in trouble for being ‘truthful.’ Michael Raymond Martinez of Fullerton, California did himself no favors by his advertisements.

Mr. Martinez was a tax professional in Fullerton (Orange County), and he advertised, “The Largest Refund…Guaranteed!!!” And he did give his clients very large refunds. It’s how Mr. Martinez operated that was the cause of trouble. Mr. Martinez met with his clients, picked up their documents, received his payment, and then prepared their returns. Nothing out of the ordinary with that.

However, he didn’t have his clients review the returns. So how could clients sign the returns if they hadn’t reviewed them? That was definitely an issue. Of course, given that Mr. Martinez invented false deductions and expenses for his clients (all of which lowered their tax liability), he likely did get his clients “The Largest Refund[s].” Illegal, of course.

Unfortunately, the IRS caught on to the scheme. Indeed, that was inevitable from the start. Sooner or later a client would look at the transcript of his return and see moving expenses when they hadn’t moved, education deductions when they weren’t in college, or phony itemized deductions and wonder what was going on. Given the tax loss to the IRS was $1,155,006, this was going to get some attention. There was one other matter: Mr. Martinez didn’t bother to report his income from preparing those returns for 2011 and 2012; oops.

Mr. Martinez was sentenced last week to 21 months at ClubFed. He’ll also have to make restitution of $205,465 to the IRS.

If You Want to Get In Tax Trouble as a Business…

Sunday, June 25th, 2017

…simply do not deposit your payroll taxes. As best as I can tell, the IRS investigates 100% of such violations. One Missouri business owner pleaded guilty last week to failing to pay the IRS more than $1.4 million in payroll taxes.

Payroll taxes are “trust fund” taxes. If you own a business you are personally liable for making sure those tax deposits end up where they belong. If you use a payroll service subscribe to EFTPS and you can make sure those federal payroll tax deposits are being made.

Consider what happens if you don’t make the deposits. Your employees are issued W-2s and will report the payroll taxes that were withheld. Sooner or later the IRS will wonder why that money isn’t in the system. It is basically certain this crime will be discovered. But I digress….

The Missouri business owner decided that he would throw his business ‘under the bus,’ so to speak. His first business entity accrued a $300,000 employment tax liability; he discontinued that business and started a new one with a new name (doing the same thing). The new business accrued $1 million in employment tax liability, so it was time for business number three. What did the money go for? He used some of it for new buses (the companies all provided school bus services), and he also withdrew over $286,000 for personal use.

The scheme ended (as it was almost guaranteed to be) when IRS Criminal Investigation started investigating. The business owner is looking at up to five years at ClubFed plus must make restitution. A helpful hint to anyone with cash flow problems: Pay your payroll taxes first. Any other choice is fraught with extreme danger.

2016 Tax Offender of the Year Gets 34 Months at ClubFed

Sunday, June 25th, 2017

Last April, a husband and wife from Minnesota were indicted on tax evasion charges. There wasn’t anything unusual about what they allegedly did; besides lying to their tax professional and the IRS they deducted personal expenses as business expenses. The reason Diane Kroupa won the award was her profession: She was a judge on the United States Tax Court. She knew better.

Last week Ms. Kroupa received 34 months at ClubFed; her husband received 24 months. Acting United States Attorney Gregory Brooker said,

Over a nearly ten-year period, the defendants engaged in a deliberate and brazen tax fraud scheme…Considering Ms. Kroupa’s position of public trust as a US Tax Court Judge, her crime is particularly egregious. Ms. Kroupa used her knowledge of the tax laws to further their fraud scheme, conceal their criminal conduct and maintain their acquisitive lifestyle. The sentences handed down today show that no one is above the law.

There’s not much to add to that statement.

Even Minor Celebrities Should Pay their Taxes

Sunday, March 12th, 2017

I never saw Discovery’s “American Guns” reality show. The former owner of a store called “Gunsmoke” ran into trouble with both gun selling laws and filing tax returns. He’s likely heading to ClubFed.

Richard Wyatt is the former owner of a gun store called Gunsmoke in Wheat Ridge, Colorado. Getting your store on television is a good way to increase sales; he appeared on 26 episodes of American Guns. Of course, you might want to make sure you follow the law. As the Department of Justice press release notes, “On Feb. 17, 2012, Wyatt conspired with others to deal in firearms without a license. In April 2012, the defendant surrendered his Federal Firearms License (FFL) due to his violations of federal laws and regulations.”

That might have been a good time to change careers. According to the DOJ (and later a jury), Mr. Wyatt simply ignored his lack of a federal license and sold guns using someone else’s license (a decidedly illegal thing to do). While gun laws violations don’t really interest me, tax violations do. They also really interest the DOJ.

In addition to the alleged firearms violations, Wyatt failed to pay personal income tax in years 2009, when he made approximately $290,000, in 2010, when he made approximately $123,000, and in 2012, when he made approximately $689,000. Further, in 2010, 2011 and 2012, Wyatt failed to pay corporate taxes. In 2012, Wyatt willfully filed a tax return he knew to be false, stating that he lost money, when in fact he made at least $350,000 that he failed to disclose.

Let’s see, go on television promoting a business that shouldn’t exist. Don’t pay taxes on income at the same time. Those are two real good ways to head to ClubFed.

Two too Many Sets of Books Leads to 41 Months at ClubFed

Monday, March 6th, 2017

I maintain one set of books for my business. It tells me my income, expenses, and balance sheet for the year. Owners of a Las Vegas liquor store decided that one set of books wasn’t enough and had three sets of books. That was a decidedly bad idea, but it does lead to good blog content.

As I first reported on last year, Jeffrey Nowak and Ramzi Suliman owned liquor stores here in Las Vegas. That’s a good business here; this is a decidedly partying type of town. There are many good strategies to reduce income but Mr. Nowak and Mr. Suliman came from the Bozo taxpaying community. They created a second set of books to give to their accountant. Shockingly (well, not really), not all of their income went on that set of books.

But what gets them a nomination for Tax Offender of the Year is how they kept track of the difference between the correct books and the falsified books: They used a third set of books that showed the difference between the two sets of books. I’m sure it was helpful for IRS Criminal Investigation. And, yes, the IRS did indeed discover the bookkeeping shenanigans.

Earlier, Mr. Suliman pleaded guilty and received 12 months at ClubFed. Mr. Nowak was convicted of conspiring to defraud the United States and tax evasion; he was sentenced today to 41 months at ClubFed and restitution to the IRS.

Do yourself a favor if you’re in business: Keep one good set of books. Your tax professional will appreciate it.

The 2016 Tax Offender of the Year

Tuesday, December 27th, 2016

Every year I hope that I won’t find any deserving individuals of the Tax Offender of the Year Award. To win this award, you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

Coming in third this year is the Internal Revenue Service. What did the IRS do to deserve this award? Well, we have the IRS Scandal; it’s still unresolved. If we were to believe the IRS nothing untoward happened! I’m sure that’s why Commissioner Koskinen faced an impeachment resolution. And remember the data breaches? It wasn’t 104,000 people who were victimized back in 2015 (the “Get Transcript Hack) nor was it 334,000 taxpayers. There were over 700,000 people impacted (and over 500,000 unsuccessful attempts)! As Joe Kristan says, “The IRS: Protecting your identity since 1913.” Or not.

Coming in second place this year is the Miccosukee tribe of Indians in Florida. They’ve been fighting in both US District Court and US Tax Court that income to members of the tribe from a casino isn’t taxable. To date, they’ve lost every single case. Most recently, in August US District Judge Ceclilia Altonaga ruled that a tribal member must pay nearly $279,000 in taxes, penalties, and interest stemming from not filing a 2001 tax return. The Tax Court cases have been inching along; most recently, the Tax Court ruled that a trial will be held and that the tribe cannot subpoena witnesses from the Department of the Interior to interpret statutes (the judges will do that). In March, the tribe lost an appeal that they were immune from US taxes. (The lawsuit alleged that the US had waived sovereign immunity for the tribe. The lawsuit was dismissed in US District Court; the tribe appealed and lost that appeal.)


A husband and wife from Minnesota were indicted in April on tax evasion charges. The charges, detailed in the indictment, are very typical tax charges. The couple were alleged to have fraudulently claimed personal expenses as business expenses, including rent, utilities, garbage removal, household cleaning, remodeling windows, interior design fees, a dishwasher, furniture to stage a house for sale, Pilates classes, jewelry, wine club fees, and grooming expenses. (There are more, but that’s a good range of the expenses they claimed on their returns.)

They were also alleged to have not reported income from a sale of land in South Dakota, and to have not reported canceled debt income. Adding to their troubles, they were alleged to have lied to an IRS Office Examiner during an audit of their 2004 and 2005 tax returns in 2006. It’s a very bad idea to lie to an IRS employee; that’s a felony. They then allegedly lied again during an audit of their 2009 and 2010 returns (in 2012). One would think they had learned but….

Of course, they allegedly lied to their tax professional regarding all of the returns, grossly understating their income. They ended up owing an additional $500,000 in taxes, penalties, and interest.

Unfortunately, this kind of tax crime (taking personal expenses as business expenses) is fairly common. Most individuals believe that they just won’t get caught. As the Tax Court has noted,

Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term “ordinary and necessary business expenses” means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. The term does not include personal, living, or family expenses. Simply because an expense would not have been incurred but for the taxpayer’s engaging in a trade or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible.

There are many expenses that are helpful, even essential, to one’s business, but which are not deductible in our tax system. Expenses of driving to and from work, for example, are not deductible. Expenses for clothing worn in a taxpayer’s trade or business, and the costs of laundering the clothing, are not deductible if the clothing is adaptable for nonbusiness wear.

The judge who wrote that decision is Diane Kroupa. Ms. Kroupa was a US Tax Court judge from June 2003 until her resignation in June 2014. She’s also one of the two defendants in this case. Yes, a former Tax Court judge committed tax evasion. And that is why she is the 2016 Tax Offender of the Year.

When Judge Kroupa and her husband were indicted, my reaction was the same as Law Professor Dennis Ventry, Jr. of the UC Davis Law School:

Smart people do dumb things all the time but this is a head-scratcher. If you’re a high-level government employee, you side on saying ‘no’ to a deduction; you take the conservative approach.

I didn’t report on this case when the indictment was issued in early April (it was during the annual down-time for my blog). I had noticed the story, of course, but basically couldn’t believe it. However, both Robert Fackler (Judge Kroupa’s husband) and Judge Kroupa pleaded guilty.

In the plea examination, Judge Kroupa admitted her crime:

Q. And neither you nor Mr. Fackler told the tax preparer the amounts reflected in the information, spreadsheets, or tax organizers that you gave him included personal expenses that were disguised as business expenses?
A. No.
Q. That fact is true?
A. That fact is true, we did not provide that information.
Q. And by doing that, you thereby significantly and fraudulently increased Grassroots Consulting’s business expenses, which then reduced the amount of taxes that you jointly owed to the IRS?
A. Correct.
Q. And on page 4 and page 5 of this plea agreement there is a list of descriptions of specific expenses that were included supposedly as business expenses which were, in fact, personal expenses, correct?
A. Correct.
Q. You’ve looked at this list and either you know that these are ones that were included or else you have seen evidence to that effect?
A. Correct.
Q. So in total from 2004 through 2010 did you and Mr. Fackler fraudulently deduct at least 500,000 of personal expenses as purported Schedule C business expenses?
A. Yes.

Judge Kroupa certainly knew the law; her resume is quite impressive:

Judge. b. South Dakota. B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section). Volunteer of the Year Award, Junior League of Minneapolis (1993) and Community Volunteer of the Year, Minnesota State Bar Association (1998). Appointed by President George W. Bush as Judge, United States Tax Court, on June 13, 2003, for a term ending June 12, 2018.

Unfortunately, we must add, “Pleaded guilty to tax charges (2016)” to that list.

Judge Kroupa’s actions—a former Tax Court judge committing tax evasion—make her a worthy recipient of the 2016 Tax Offender of the Year Award.


That’s a wrap on 2016! While I am hopeful 2017 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

Former French Budget Minister Heading to Prison for Tax Evasion

Sunday, December 11th, 2016

We have yet another late nominee for Tax Offender of the Year. From Paris, France comes the story of Jérôme Cahuzac, former Budget Minister under President François Hollande and soon to be resident of the Bastille French Prison System.

The story begins in the 1990s. Then Dr. Cahuzac (a cosmetic surgeon) had a successful practice specializing in hair transplants. He was elected to Parliament in 1997. Around the same time, the Cahuzacs decided to move some money offshore. It’s apparent that French law here mimics US law: There’s nothing wrong with having foreign financial accounts; however, you better report them and the income you receive. That apparently didn’t happen. Meanwhile, Mr. Cahuzac was appointed to lead a finance commission for Parliament in 2010. In 2013 Mr. Cahuzac served as Budget Minister.

Unfortunately for Mr. Cahuzac, news of his foreign accounts came out. It was discovered later in 2013 he had a secret Swiss bank account for ten years (from 2000-2010). That led to his resignation in 2013. Mr. Cahuzac lied to the French Parliament, lied to the French government (not revealing another secret bank account—this one on the Isle of Man–that was used in moving €2.7 Million ($2.85 Million) to the Swiss bank account), and admitted his lies on his own blog. Oops! He was tried and convicted this past September for tax fraud.

Mr. Cahuzac received three years in prison; his wife received two years. Reyl Bank of Geneva, the bank that the Cahuzacs used, was fined €1.875 Million ($1.98 Million). Mrs. Cahuzac received a €100,000 ($106,000) fine; Mr. Cahuzac and two intermediaries he used must also pay a €100,000 fine.

Mr. Cahuzac’s attorney is arguing that the sentence is too long and that they will appeal asking for a lesser sentence. Apparently in the French justice system an appeal opens up both a lesser sentence (what Mr. Cahuzac’s attorney wants) and a longer sentence. In any case, it will like be several months before the appeal is heard.

This is yet another case of the fox guarding the henhouse. Mr. Cahuzac was also barred from seeking public office for five years. The French Socialist Party also kicked him out, and I suspect the chances of his successfully running for office is today zero.