Iowa Disbands Forfeiture Team; Settles Lawsuit from Poker Players

December 6th, 2016

Back in 2014 I mentioned (in passing) that two poker players had $100,000 seized while simply driving across Iowa on their way home to California. The Iowa Department of Public Safety (the state highway patrol) had a dedicated team on Interstate 80 assigned to seize money from motorists. What were signs of suspicious activity? They included:

– Driving too fast
– Driving too slow
– Driving the speed limit

A better question would have been, “What wasn’t a sign of suspicious activity?”

I am not a fan of civil forfeiture. It’s too easy for it to turn into a funding source for police agencies. The idea of civil forfeiture is to act as a deterrent, not to fund the government. That wasn’t the case in Iowa.

However, that’s in the past. Twin announcements out of Iowa are very good news on the civil forfeiture front. First, the two poker players who had their funds seized had filed a lawsuit alleging their civil rights were violated. Iowa has agreed to settle the lawsuit brought by William (Bart) Davis and John Newmer­zhycky for $60,000. (Iowa had earlier returned $90,000 of the cash that had been seized from the players.)

The second announcement is, in the long-run, more meaningful: Iowa is disbanding its state forfeiture team. The officers have been reassigned to traffic safety and special events. As the Institute for Justice reported,

“Today’s decision is an important step to protect Iowans’ property and due process rights from forfeiture abuse, but the state must do more,” noted Lee McGrath, legislative counsel at the Institute for Justice.

Unfortunately, Iowa still has civil forfeiture laws on the books. Perhaps this settlement and the change in Iowa policy will cause Iowa legislators to end civil forfeiture in the Hawkeye state.

IRS Appeals Implements Stupid Policy of Not Sending Initial Contact Letters

December 6th, 2016

I have a client who filed a Tax Court petition in late September. She is disputing additional tax from an Automated Underreporting Unit (AUR) notice. She didn’t respond to the initial AUR notice, so the way to resolve this is to file a Tax Court petition and get this in front of IRS Appeals. I have a Power of Attorney for my client; I expected to hear from IRS Appeals in three to five months.

When I got in yesterday morning I had a message from someone identifying themselves as an IRS Appeals officer out of Philadelphia. When I returned the call I discovered he was the assigned Appeals Officer in the case. I also discovered that:

– In the past for a case sent to Tax Court the IRS sent a letter to the petitioner (and her representative) noting that the case was being assigned to an IRS Appeals Officer with the hope of settling the case;
– IRS policy has changed, and these letters are no longer being sent;
– Now the initial contact would be by phone with no letter being sent; and
– Even after my calling the Appeals Officer there’s no way for me to receive correspondence showing that the Appeals Officer has been assigned to the case.

In this particular case I am certain that this Appeals Officer is working on the case (he had details of the case that were not public). However, I do not want to just take the say-so of a voice on the phone. Hasn’t the IRS Appeals Office heard of identity theft? Perhaps they’ve heard of the IRS Phone Scams? This week also is “National Tax Security Awareness Week;” it appears that the IRS Appeals Office should consider how their security appears to tax professionals.

The IRS recently mandated that, “ALL initial taxpayer contacts to commence an examination must be made by mail using approved form letters. [emphasis in original]” Similar rules now apply for payroll tax examinations and FTD Deposit Alerts. The Appeals Office policy of calling first is, to be blunt, stupid.

An initial contact letter (or fax) costs a couple of dollars to send out. It informs the taxpayer and his representative that a specific individual has been assigned to the case, their contact information (address, phone and fax numbers), and gives official notification of the assignment. (It also usually gives the name of the Appeals Officer’s Manager.) The cost for sending out this letter is likely less than five dollars. This is a minimal cost. I don’t know exactly how much the Appeals Officer I spoke to yesterday makes, but I can guarantee he spent more than five dollars worth of his salary proving to me that he was assigned to the case.

Hopefully the powers that be at the IRS will realize that this is a very penny-wise, pound-foolish policy. In these days of identity theft and phony IRS phone calls how am I to know that Appeals Officer Smith really is an Appeals Officer rather than a scammer?

IRS, please reconsider.

Nominations Due for 2016 Tax Offender of the Year

December 5th, 2016

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

Won’t Be Getting Off for a Dime

December 4th, 2016

Sreedhar Potarazu is apparently very intelligent. He’s an ophthalmic surgeon in Potomoc, Maryland. He’s also an entrepreneur and an author. He’s also likely to be spending a few years at ClubFed.

Dr. Potarazu formed VitalSpring Technologies, Inc., in 2000. Based in McLean, Virginia, the company provided software that purportedly helped to lower costs and improved service quality for health care. VitalSpring changed its name to Enziime LLC late in 2015.

Companies that grow need money, and that was the case for VitalSpring/Enziime. Dr. Portarazu started to skip paying employment taxes to the IRS. As we’ve said before and we’ll say again, if you want to be investigated by the IRS stop making payroll tax deposits; as best as we can tell, the IRS investigates 100% of such failures. Dr. Porarazu started to not fully pay his employment taxes in 2007. From the DOJ Press Release:

In all but one quarter between the first quarter of 2007 and the last quarter of 2011, as well as the second and third quarters of 2015, Potarazu failed to file VitalSpring’s Employer’s Quarterly Federal Tax Return (Forms 941) with the IRS. Potarazu also failed to pay over any of the employment tax withheld from VitalSpring’s employees’ wages in all but one quarter between the second quarter of 2007 and the third quarter of 2011, as well as the third and fourth quarters of 2015.

Not filing employment tax forms (Form 941) won’t stop the IRS from investigating. Once an employee files his income tax return and shows the withholding of federal income tax and the IRS can’t find that withholding, an investigation is guaranteed. The IRS interviewed Dr. Potarazu in 2011 and let him know of the liability (which he apparently already knew about). The employment tax liability totaled $7.5 million.

So the company needed money. There are several good strategies in such a situation: Making a payment plan with the IRS and slowing down growth so the need for money lessens are two that immediately come to mind. Dr. Potarazu raised $32 million from 2009 through 2016. Since the company wasn’t turning a profit, investors needed reassurances about the business. It’s how he raised the money that caused the problems:

Potarazu induced investments from shareholders by making false representations, concealing material facts, and telling deceptive half-truths about VitalSpring’s financial condition, tax compliance, and alleged imminent sale. Potarazu also caused someone to pose as a representative of a prospective buyer on shareholder conference calls to add legitimacy to his claims regarding VitalSpring’s imminent sale.

VitalSpring had not generated a profit since 2009. Nonetheless, Potarazu falsely represented to shareholders that VitalSpring’s financial position and profitability was improving from 2009 to 2015, and that VitalSpring had millions of dollars in cash reserves. To support his scheme, Potarazu presented fake bank statements to some shareholders that showed inflated balances.

Potarazu also concealed from shareholders that VitalSpring owed substantial employment tax to the IRS. Potarazu provided or caused to be provided false corporate income tax returns to some shareholders that overstated VitalSpring’s income and omitted the accruing employment tax liability.

Committing fraud to investors is not a good strategy. And doubling down on it will make things worse:

In November 2014, Potarazu created a Special Review Committee (SRC) in response to a lawsuit filed in Delaware by shareholders that claimed Potarazu misled the victim investors about VitalSpring’s finances, the status of the impending sale, and Potarazu’s compensation. Potarazu provided the SRC with false financial records, fake tax returns, and fake bank statements to induce the SRC to believe that VitalSpring was financially healthy and to cause the SRC to make materially false representations to the Delaware court and victim investors. He also falsely represented that the alleged imminent sale would yield substantial returns to the shareholders, and used this to induce additional investments. Members of the SRC traveled interstate to the Eastern District of Virginia to attend meetings in which Potarazu presented false information for their review.

There was no sale pending. Dr. Potarazu even made up emails from a purported bank employee and provided a buyer with a link to a phony website. And he used some of the money from investors for his personal use.

Dr. Potarazu pleaded guilty to inducing interstate travel to commit a fraud and failing to account for and pay over employment taxes. He’ll be sentenced next year and will likely have plenty of time at ClubFed to write a second book.

Your Tax Professional, A Cop

December 1st, 2016

Las Vegas Police Department Logo

When I flew to visit my mother for Thanksgiving, I had to show my driver’s license to get through TSA security at the Las Vegas Airport. That’s not a surprise. When I prepare my mother’s tax return for 2016, I am required to note my mother’s drivers license number, the date it was issued, the date it expires, and the state it was issued by. No, I am not making this up.

I have become a cop. And I’m not happy about it.

The IRS (with the tacit support of tax software companies) has pushed this requirement on to tax professionals. Sure, it only takes two minutes to enter this information (four minutes if married filing jointly), so for a return it’s not that big of a deal. Multiply that by 500 returns, and you have 1,000 minutes. That’s nearly seventeen hours of work (likely more, as most of my clients are married).

Yes, this will aid in preventing some identity theft. Yes, some states have already required this information. (I know that Alabama did for 2015 tax returns.) Yes, I won’t need to reenter this for 2017 tax returns (unless the driver’s license information changes). But this is another 17 hours I don’t have during tax season.

Unfortunately, there’s more. When Congress passed the PATH Act, Congress increased due diligence requirements on tax professionals when preparing returns where taxpayers claim the Earned Income Credit, the Child Tax Credit, the Additional Child Tax Credit, and/or the American Opportunity Tax Credit. The instructions note that tax professionals must,

Meet the knowledge requirement by interviewing the taxpayer, asking adequate questions, contemporaneously documenting the questions and the taxpayer’s responses in your notes, reviewing adequate information to determine if the taxpayer is eligible to claim the credit(s) and in what amount(s)….[emphasis added]

We don’t have many clients that take the Earned Income Credit. However, we have plenty of clients that take the Child Tax Credit (and/or the Additional Child Tax Credit) and the American Opportunity Credit. Tax professionals must now conduct an interview. Once again, there goes ten to fifteen minutes of time (that’s our estimate of the interview length). If we have 100 clients who take these credits, that’s another 21 hours of work.

Together, that’s nearly a 40-hour week. Yes, 2016 tax returns will cost more to prepare.

But that’s not all. Consider John and Jane Doe. They have a very simple return: W-2 income, a few deductions, and the usual 2.2 children. They drop off their paperwork in late March, and are surprised to discover they will go on extension. “Why?” they ask. That’s because their tax professional doesn’t have any interview spots available until after the April tax deadline.

The actions of the IRS and Congress have laudable goals. Reduction of identity theft and eliminating people incorrectly claiming tax credits are good ideas. However, because of the additional work, most taxpayers are going to discover that tax professional’s deadlines are very strict for 2016 returns. I know ours will be.

If you are a tax professional it’s probably worth revising your Engagement Letters to note these new requirements. And if you happen to have a spare cloning machine, please call me.

At Least His Name Was Right on the Return

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

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.

Gambling With an Edge Podcast

November 20th, 2016

I am the guest on this week’s Gambling With an Edge Podcast. We discuss year-end tax planning, Caesars’ bankruptcy, tax deadline changes for 2016 returns, and how the final table players of the main event of the World Series of Poker made out with taxes. This was my third appearance on Gambling With an Edge; my other appearances are available on their website or iTunes.

A Housekeeping Message

November 20th, 2016

We will soon be changing hosting companies. If you subscribe to this blog you may need to resubscribe once this occurs. The changeover should happen in the next couple of weeks.

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

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.