Archive for the ‘Tax Evasion’ Category

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.

At Least His Name Was Right on the Return

Monday, November 28th, 2016

Steven H. Young of St. Petersburg, Florida didn’t like to pay taxes. Well, most of us don’t like to pay taxes but we do because it’s the law. Mr. Young decided that veracity wasn’t needed when filing tax returns.

Mr. Young was self-employed in real estate, and he prepared his own tax returns. He was married, but filed as “Head of Household.” That was strike one. Mr. Young did not do business with a company in the Dominican Republic; however, he created his invoices that showed a phony lease and phony expenses to that company. That was strike two. Mr. Young was audited, and the audit didn’t go particularly well; the IRS subpoenaed records from Bank of America. Mr. Young came up with the not-so-brilliant idea of writing a phony letter to Bank of America, and telling the bank to send the records to a different address—an address he opened in an IRS’s employees name. That was the third strike, and IRS Criminal Investigation and the Treasury Inspector General for Tax Administration pounced. Mr. Young pleaded guilty earlier this year; he was sentenced today to 21 months at ClubFed.

I could have called this story, “Count the felonies.” Lying to an IRS employee is another felony, so Mr. Young should count his lucky stars he will only enjoy a little under two years at ClubFed. A helpful hint to those at home: Don’t emulate Mr. Young!

Sovereign Stupidity

Sunday, November 20th, 2016

Most electrical engineers are intelligent. Perhaps I’m biased: My father was an electrical engineer and my brother has a degree in electrical engineering. This story focuses on an electrical engineer who showed a lack of intelligence in dealing with taxes.

Harold Stanley worked as a consulting electrical engineer. He was paid $971,604 from 2005 through 2009, and he undoubtedly received Form 1099-MISC’s for those years. I’ll let the Department of Justice press release take it from there:

According to court documents, Stanley is a tax defier who failed to file any tax returns for 2005 and 2006. Stanley has participated in “sovereign citizens” groups that believe the federal income tax system is voluntary and that they do not have to pay their fair share in taxes.

For tax years 2007 through 2009, Stanley filed substantially correct returns but left the tax line entry blank and failed to submit any payment. According to court documents, Stanley has not filed a tax return for tax years 2010 through 2015.

Unfortunately for Mr. Stanley, the IRS investigated why he hadn’t filed proper tax returns (or any tax returns for some years). However, it’s his actions once he was being investigated that drew my attention to this case:

Stanley submitted fake money orders for payment to the Internal Revenue Service, returned documents to the Internal Revenue Service claiming that the tax assessments were satisfied because they were “Accepted for Value,” filled out payment vouchers with his name in all capital letters but didn’t submit payment and submitted a false criminal referral to IRS – Criminal Investigation.

After his arrest, Stanley filed a civil suit against the Commissioner of Internal Revenue, an employee of the IRS, and an Assistant United States Attorney. On July 22, 2016, the District Court dismissed the case with prejudice. The court wrote that “by filing his complaint in this court, Mr. Stanley attempted to throw a wrench into his criminal proceedings in the Western District of Missouri and re-present the same arguments that he had previously and unsuccessfully litigated in other federal courts including the United States Tax Court, the Western District of Missouri, and the Eighth Circuit Court of Appeals.”

Mr. Stanley was found guilty of tax evasion back in June. There are a lot of actions I’d consider before sentencing. Mr. Stanley, though, wanted to be nominated for my coveted “Tax Offender of the Year” award, so he chose something I would not have considered:

On June 9, 2016, after the verdict in this case, a claim for damages was filed on behalf of Stanley, alleging that “Chief Magistrate Judge Sarah W. Hayes, Judge Roseann A. Ketchmark & District Attorney Paul Becker trying to collect an IRS debt in violation of 18 USC section 8 and when the 26 CFR states its voluntary and a civil action not criminal.” The claim for damages alleges personal injury in the amount of $55 million.

This past week Mr. Stanley was sentenced to five years at ClubFed; he received a sentencing enhancement for obstruction of justice. I assume that civil actions to recover the tax, penalties, and interest will be forthcoming.

Mr. Stanley was sentenced by Judge Ketchmark—yes, the same judge he sued. I’m sure that went over well with her. A helpful hint to anyone about to be sentenced: Don’t file a lawsuit against the judge! On the bright side, Mr. Stanley does have a far better chance of winning the Tax Offender of the Year award than winning his personal injury claim.

This Isn’t What I Think of When I Hear “Law School”

Sunday, November 13th, 2016

When I think of a law school, I think of a university teaching students how to be attorneys. My cousin is a professor at the University of Chicago Law School; that’s a law school. That’s not what I’m writing about today.

From Point Richmond, California comes the story of Richard Thomas Grant. Mr. Grant was a partner in an engineering firm in Richmond (in the San Francisco Bay Area). Back in 2001, he stopped filing personal tax returns. In 2003, he stopped filing partnership tax returns for his partnership (although he still paid a tax professional to prepare those returns). Mr. Grant joined “Freedom Law School.”

I had never heard of this law school, but perhaps I should have. Back in 2015, Joe Krsitan had this to say about it:

Through its conferences, materials, and service packages, the Freedom Law School promoted various techniques for evading the payment of federal income taxes. The techniques included:

-Minimize financial records.

-Do not give information to the IRS.

-Do not file tax returns.

And it also offered multi-level marketing opportunities!

Freedom Law School notes its victories and, their web site still states,

There is no statute that makes any American Citizen who works and lives in the United States of America liable or responsible to pay an income tax. Individuals only become liable to pay the income tax when they “VOLUNTARILY” file a tax return and the IRS follows their assessment procedures as outlined in the Internal Revenue Code.

Hint: This is still snake oil advice. If you follow it and you make substantial income, ClubFed will be in your future. Mr. Grant likely wishes he had never heard of Freedom Law School. I’ll let the DOJ press release continue with the case:

While the Internal Revenue Service (IRS) attempted to collect unpaid taxes owed by Grant for 2001 and 2002, and attempted to examine Grant’s taxes for subsequent years, Grant, with the assistance of Freedom Law School and its founder, Peymon Mottahedeh, attempted to frustrate the IRS’s actions by, among other things, filing multiple and ultimately unsuccessful law suits in various jurisdictions.

For the charged years 2005 through 2009, Grant’s partnership income was $509,339, $566,741, $486,062, $598,977 and $604,706, respectively.

So what did Mr. Grant do? He hid his funds in a warehouse bank. That only worked for a few years; he then converted his funds to cash and cashier’s checks.

After the federal government shut down MyICIS, Grant used another bank to convert his partnership distributions to cashier’s checks and cash in order to avoid depositing the funds into a bank account and used the cashier’s checks to pay his mortgage and other high-dollar personal expenses. He also used cash to purchase dozens of U.S. Postal money orders to pay other bills and expenses, including utilities, taxes and expenses related to his classic aircraft.

I’m sure his mortgage company issued a Form 1098 to report his mortgage interest paid. Although not noted in the press release, I’m certain IRS Criminal Investigation contacted the mortgage company; they were able to produce the cashier’s checks that were used. And then it was a simple procedure to find out how Mr. Grant paid for those cashier’s checks.

Earlier this year Mr. Grant was found guilty of three counts of tax evasion. Last week he was sentenced to 33 months at ClubFed plus he must make restitution of $402,457.39. He’ll also have to serve three years of supervised release.

Mr. Grant paid “thousands of dollars” in yearly membership fees to avoid timely paying his taxes. That got him…very little unless you want to spend 33 months behind bars.

If You’re a Celebrity…

Sunday, October 2nd, 2016

…It pays to file and pay your taxes. This goes even for those behind the scenes.

Mario Winans is a record producer, a singer, and a songwriter. He’s won a Grammy Award for Best Gospel Performance. He may be best known for “I Don’t Wanna Know,” a single that reached #2 in tghe United States. Mr. Winans has been successful, earning $2.8 million (gross income) from 2008 through 2012. We know how much he paid in taxes, and that’s the problem: He didn’t pay anything. Did he have some tax shelter, or perhaps a Net Operating Loss he took advantage of?

No, he simply didn’t file returns. That’s not a good idea, and it became an especially bad idea when the IRS figured this out. Mr. Winans pleaded guilty on Thursday; he faces up to two years at ClubFed, restitution of $434,968, and a possible $200,000 fine.

As usual, it’s always a lot easier to simply pay your taxes…especially if you’re a celebrity. Here’s Mr. Winan’s in “I Don’t Wanna Know;” I guess he now knows that filing and paying his taxes would have been a better idea.

Paying Employment Taxes Is Optional…Until You Get Caught

Sunday, August 21st, 2016

Two stories regarding employment taxes from the past week should serve as a reminder that paying employment taxes is only optional until you get caught.

First, an update on the individual who thought he could just create a new business entity every time the IRS asked about his paying employment taxes. Agim Zendeli owned the Ziggies chain of restaurants in Missouri; he pleaded guilty in January to not remitting $1.3 million in payroll taxes. He was sentenced to 37 months at ClubFed and must make restitution of $1.3 million (which he had previously agreed to do).

Meanwhile, out of Germantown, Tennessee (suburban Memphis) comes the story of Larry Thornton. Mr. Thornton was the majority owner of one Memphis business and the sole owner of another. I’ll let the DOJ press release tell the story:

Beginning in the second quarter of 2007, Thornton caused SEI to stop paying over the taxes required to be withheld from SEI’s employees’ paychecks and caused SEI to stop timely filing Employer’s Quarterly Federal Tax Returns, Forms 941, with the IRS. Beginning in the first quarter of 2010, Thornton caused First Touch to stop paying over the taxes required to be withheld from First Touch’s employees’ paychecks and caused First Touch to fail to timely file Forms 941 with the IRS. Between 2007 and 2011, Thornton collected more than $6.8 million in employment taxes from SEI and First Touch employees’ paychecks, but failed to pay those collected taxes over to the IRS. Thornton also failed to pay his companies’ matching share of FICA taxes during those years. During that time period, two of Thornton’s full-time accountants – both of whom were certified public accountants (CPAs) – warned Thornton about his failure to pay over employment taxes. Both CPAs resigned their positions due to Thornton’s unwillingness to comply with his employment tax obligations.

During the same years in which Thornton failed to comply with his employment tax obligations, Thornton spent more than $6.2 million from the business bank accounts on personal expenses, including house and condominium payments; vehicle, yacht and motorcycle loan payments; personal travel; and start-up funding for his wife’s beauty boutique. According to court documents, Thornton also failed to file personal and corporate income tax returns. As part of the guilty plea, Thornton admitted that his illegal conduct caused a tax loss of more than $8.9 million to the IRS.

Of course the IRS will understand spending $6.2 million on personal expenses rather than remitting your payroll taxes. I mean what’s more important: buying a yacht or paying the government? Mr. Thornton was sentenced to full restitution and to spend one year at ClubFed.

As a reminder, all employment tax remission issues are investigated by the IRS. If you want to visit ClubFed, having employees and not remitting payroll taxes is a quick and easy way to do so.

Three Sets of Books Isn’t Better than One

Sunday, August 21st, 2016

From time to time I’ve seen stories of individuals using two sets of books: One with the actual numbers and one with the (lesser) numbers used to prepare the tax returns. It’s a great idea…until you get caught. A former owner of a Las Vegas liquor store took the double set of books idea a bit further.

Jeffrey Nowak and Ramzi Suliman owned a chain of liquor stores here in Las Vegas. The stores were successful, but the income reported on the tax returns was inaccurate. Mr. Nowak gave his tax professional the second set of books that left out about $4 million in cash receipts. The Las Vegas Review-Journal reports that there was also a third set of books; that set compared the true and skimmed versions of books. The Department of Justice press release notes, “For tax years 2006 to 2009, Nowak reported a total income tax owed of only $313, when in fact Nowak owed more than $400,000. The total tax loss from the conspiracy is nearly $1 million.”

Mr. Nowak was indicted and tried this past week. He was found guilty of conspiracy to defraud the United States, assiting in filing false corporate tax returns, and tax evasion. He’s looking at a lengthy term at ClubFed when he’s sentenced in November. Mr. Suliman pleaded guilty in 2014; he is awaiting sentencing.

For those wondering: Three sets of books isn’t better than two, and two sets of books isn’t better than one.

If You Want to Go to ClubFed…

Sunday, June 5th, 2016

…The simplest, fastest, and easiest method (via the tax world) is to withhold employment taxes and not remit them to the IRS. This is always investigated. But at least once a month I see yet another example.

Take the case of Bernard Haag of Piedmont, South Dakota. Mr. Haag was the president and sole stockholder of a corporation, and the sole member of a limited liability company. Through these entities he owned a day care facility. So far, so good. He withheld taxes from his employees’ wages. And as the Department of Justice press release notes, “…[He] willfully failed to pay over those taxes to the United States for all of 2005 through 2011, and three quarters of 2012. Haag also willfully failed to pay the employer’s portion of taxes on wages paid to employees of Big Dog and Concept Development for all of 2005 to 2012. Rather than paying over the taxes, Haag used a portion of the withholdings for his own personal use.”

Adding to his misery he filed for bankruptcy, and also was convicted of concealment of bankruptcy assets. In total, he got 18 months at ClubFed and must make restitution of over $300,000. A helpful hint that I’ve repeated for over ten years: Don’t do this! You will get caught.

Lionel Messi On Trial For Tax Evasion

Monday, May 30th, 2016

Football–well, soccer for us colonials–is a big business. Lionel Messi is one of the world’s best players. The Spanish tax agency, Agencia Tributaria, accuses Mr. Messi (and his father) of evading €4.16 million of tax on his image rights. Mr. Messi says he just did what his father, Jorge Messi, said to do.

The trial of the two begins tomorrow in Barcelona; Lionel Messi is on trial even though prosecutors asked that the case against him be dismissed (the judge refused). The court will have to decide whether the Messis used a web of interlocking phony companies in Belize and Uruguay to avoid paying tax in Spain. Lionel Messi has made a protective payment of the tax.

The trial is expected to conclude this week. Both defendants face up to 22 1/2 months in prison and fines of up to €4.16 million.