Taxable Talk

Another domino fell in the government's fight against Naftali Tzi Weiss, the Grand Rabbi of Spinka. He's charged with tax fraud. Allegedly he concocted a scheme where individuals could donate funds to his organization as charitable donations but would receive up to 95% of them back.

And now one of those who donated has voluntarily come forward. Uri Mandelbaum has agreed to plead guilty to two tax evasion charges, and will make restitution of about $1.5 million. According to the Los Angeles Times,Mr. Mandelbaum donated $900,000 in 2005 and 2006 but got almost all of the money returned back to him.

The Times story notes that the government is looking for 100 other donators to Spinka. Meanwhile, for Rabbie Weiss things are not looking up. The government has at least one witness who can verify exactly how the scheme worked.

Sometimes you read a story and wonder how in the world it can be true. How can people be so gullible and how can someone do such a stupid scheme and expect to get away with it.

Robert Doyle of Oakland had an interesting means of making a living. He would ask random individuals he'd meet on the street if he could prepare their tax returns. He'd then do so, making up a phony return and then pocketing a goodly portion of the refund. (You didn't he'd make up a return with a large balance due, did you?). The "Tax Man" (yes, that was really his nickname) pleaded guilty to one count of filing a false tax return and will be sentenced this Fall to spend some time at ClubFed. Mr. Doyle practiced his trade from 2000 - 2005, so it's likely that the loss to the government was quite substantial.

Meanwhile, Fatai Onevai of Pittsburg, California told his clientele that he could fix any and all IRS problems. And he did by a similar method—in total, he bilked the government out of $1.3 million. He pleaded guilty to one count of filing a false tax return and was sentenced in late June to 18 months at ClubFed.

As usual, if it sounds too good to be true it probably is.

Last year we covered the trial of Wisconsin dentist Frederick Kriemelmeyer. Dr. Kriemelmeyer argued at trial that the indictment was faulty because it was in English; that the American flag should not be in the courtroom; and that as long as some additional punctuation was added to a tax return the tax magically vanished. Unfortunately for Dr. Kriemelmeyer, the jury found that not reporting all of his income was what you and I would think it was—tax fraud&mdashand the judge thought he was greedy and sentenced him to 36 months at ClubFed to take remedial English.

Dr. Kriemelmeyer appealed the verdict, and Joe Kristan reported this morning on the appeal. Joe quotes from the opinion:

[In 2002], his mother began frequently cashing checks made payable to cash at a local bank. Bank employees became suspicious of these deposits and notified the IRS, which investigated and in December 2004 executed a search warrant at his dental office. In March 2007 a grand jury returned an indictment charging that Kriemelmeyer's 2000, 2002, 2003, and 2004 returns reported gross receipts substantially below his income. The IRS determined that he underreported his gross receipts by $392,023 in total for those four years, thus underpaying his taxes by $135,337.

As Joe also notes, the judge during the trial suggested that an attorney might be a good idea instead of someone who doesn't like English; Dr. Kriemelmeyer declined.

There is actually a somewhat serious lesson to be learned from this case. Dr. Kriemelmeyer got caught because of a Suspicious Activity Report (SAR). The IRS regularly investigates these, and even small banks will send them to the IRS. If you have a choice between making several deposits of $3,000 or one larger deposit of (say) $12,000, it's usually better to make the larger deposit and wait the 30 or so minutes while a Currency Transaction Report (CTR) is filed. Some of those are investigated, but not nearly as many CTRs are investigated as SARs.

Of course, it's even better to not commit tax fraud. And if you do end up in a trial, get a competent attorney who understands that English is the language used in the United States—not some weird pseudo-English dialect.

Last year I wrote about Naftali Tzi Weisz. Mr. Weisz is the Grand Rabbi of Spinka. He'll also be standing trial in September charged with tax fraud. He's accused of soliciting charitable donations but promising to refund most of the money—a scheme that's definitely not kosher.

On Friday two alleged co-conspirators pleaded guilty. Joseph Roth, a Tel Aviv-based banker with United Mizrahi Bank pleaded guilty to conspiracy. And Rabbi Moshe Zigelman will plead guilty on Tuesday. Mr. Roth admitted that he established secret bank accounts overseas and helped repatriate the money to the United States. Rabbi Zigelman's attorney told the Los Angeles Times "his client was 'atoning for his own wrongdoing' and would not testify against the other defendants.

Given the alleged size of the tax fraud—millions of dollars—Grand Rabbi Weisz is looking at a very lengthy term at ClubFed if convicted this Fall.

Two more Bozo tax preparers won't be harming consumers any more. Let's just say up front that the methods used weren't wise.

First, we'll head to Union City, Georgia. Majalai Wisdom prepared plenty of tax returns from 2000-2004.Me And her clients got lots of refunds (and gave her back $500 - $1500 in cash from each refund they received). Of course, the fact that Ms. Wisdom made up her own W-2s for clients using nonexistent employers, added phony exemptions and credits, including children who had nothing to do with the taxpayer. Now, perhaps if she used just one of those methods she wouldn't have gotten caught. However, sooner or later the IRS computers would wonder why Joe Taxpayer showed income from Acme but Acme never filed its W-3 with the government. Ms. Wisdom was sentenced to 30 months at ClubFed.

Meanwhile, the proprietor of Melba's Tax Service in Batesville, Arkansas will soon be at ClubFed. Melba Nelia Lopez pleaded guilty to two counts of preparing false tax returns. Ms. Lopez appears to have also added phony items to clients' returns causing the government a loss of about $95,000. She'll be sentenced later this year.

And what will likely happen to users of Ms. Wisdom or Ms. Lopez? Their clients will soon be receiving "Dear Soon to be Audited Taxpayer" letters (if they haven't already received them). Remember, if it sounds too good to be true it probably is.

Suckers are born every day, and so are the people out to fleece them. I've reported in the past on Aegis Corporation, a now defunct Chicago-based vendor of offshore trusts. The former owner of Aegis is spending 30 months at ClubFed.

But that's not to say that Aegis wasn't successful marketing their trusts. They were, though many of the purchasers wish that weren't the case. Four men from South Dakota purchased an Aegis trust, and then used the trust to shelter income away from the prying eyes of the IRS...for a while.

Eventually, though, the IRS found the trust and saw that it was as phony as a $3 bill. One of the men is a pastor, Jon Bowers of Junction City, South Dakota; the other three are his brothers, Kurt, James, and Kent. All four have been sentenced to terms at ClubFed ranging from ten to 36 months. Jon and James have repaid the IRS the $1.2 million in tax, penalties, and interest that they owe; Kent has repaid $297,000 but still owes $450,000; and Kurt has repaid $317,000 but owes $1.6 million additional in tax, penalties, and interest. Kent, James, and Jon also were fined between $10,000 and $50,000.

As a reminder, if it sounds too good to be true it probably is. If someone tells you that there's a legal way to hide money from the IRS in an offshore trust, do yourself a favor and run, don't walk, anywhere else.

Last year I reported on Circle Industries, the Alpharetta, Georgia based international construction company. The father and son owners conspired with their bookkeeper to deduct personal expenses on their business return, including things like visits to Atlanta's Gold Club, an adult entertainment facility.

Well, this past week the owners found out their fate. Gerald Marchelletta Sr. received 27 months at ClubFed, his son Gerald Marchelletta Jr. received 36 months, and their bookkeeper, Theresa Kottwitz, got 24 months. Additionally, the firm, which has already made "substantial restitution" according to this news report must fully pay back the IRS. Finally, each of the Marchallettas must pay a $50,000 fine.

As a published author I know that finding the right title for a book can be a difficult task. My writing partner and I struggled with the title for our first book while for our second book we chose the title and then wrote the book.

Last November I detailed the indictment handed down to Bernard Bagdis and ten other individuals. Mr. Bagdis had allegedly boasted to IRS criminal investigators that he was going to write a new book called Federal Tax Fraud: The Users Guide. Mr. Bagdis may have a lot of time to work on his book—he faces 35 felony charges.

On Wednesday another individual was arrested allegedly because of this scheme. Wayne Bozeman, a West Chester, Pennsylvania attorney was charged with conspiracy to defraud the IRS and other related charges. The government alleges that Mr. Bozeman took money from a company he ran, deposited it into the account of another company he controlled, and then used the funds for personal expenses. The government alleges that Mr. Bozeman evaded $157,000 in tax on $830,000 of income.

Meanwhile, Mr. Bagdis and his alleged co-conspirators were also indicted on new charges yesterday. Mr. Bagdis is now alleged to have also prepared a false tax return for Mr. Bozeman.

Seven of the original ten co-conspirators have pleaded guilty and are cooperating with the government according to this story in the Philadelphia Daily News. Peter Scuderi, Mr. Bagdis' attorney, told the Daily News "My client's position is he's done nothing wrong. There's a defense to everything." Only time will tell what kind of an ending is written to Mr. Bagdis' book.

If you're in prison and need some extra money, what should you do? How about defrauding the IRS—after all, you're in prison, and all the government can do is keep you there.

Of course, such a scheme needs help from outsiders. It's tough when you're in prison to have access to your bank accounts. One such outsider will soon get to spend time at ClubFed from such a scheme.

Daniel Goodheart was a prison counselor at the Okeechobee Correctional Institute in Florida. Mr. Goodheart allegedly used a Florida Department of Corrections database to get names and social security numbers which he, and several others, used to obtain $902,000 in refunds.

But the IRS caught on to the scheme, and Mr. Goodheart was prosecuted on charges of mail fraud and wire fraud. He was found guilty in February, and was sentenced last week to five years at ClubFed. He will appeal the conviction.

Unfortunately, Mr. Goodheart isn't the only individual who has been engaging in this kind of tax fraud. Of all fraudulent returns caught by the IRS, 15% were prison-related. And that's just the fraudulent returns that were caught.

I've read about all sorts of Bozo tax preparers, but Sunita Buddhu is by far one of the worst I've read about. Luckily for you and I, her days of preparing tax returns have ended.

Ms. Buddhu and her father, Deowraj Buddhu, began preparing tax returns in 2003 as Paradise Consulting Services. The name was later changed to Lotus Consulting. No matter what the name, they used methods that are guaranteed to cause problems: They invented business losses for taxpayers who weren't self-employed. When the IRS looked at returns from 2003 - 2005 they found that most contained such phony losses.

So the IRS began examining lots of returns, and Ms. Buddhu decided on a new strategy. She had her clients' returns amended, and changed the business losses to employee business expenses. And then there's the following, courtesy of the Hartford Courant:

[Judge] Droney said Sunita Buddhu told her clients they had nothing to fear from the IRS because the federal government does not have authorization or jurisdiction to conduct examinations of Connecticut residents' tax returns. Sunita Buddhu also prepared letters for her clients to submit to the IRS making that claim.

Needless to say, the last time I checked Connecticut was part of the United States....And the Buddhus made the same argument in court last week; the judge responded that the argument wasn't worth a response.

So the judge has barred Sunita Buddhu from preparing tax returns, and from promoting tax fraud schemes. Unfortunately, over the last few years they prepared thousands of returns. If you happened to use the Buddhus to prepare your return you will likely find yourself a recipient of a "Dear Valued Taxpayer" letter. At least it does appear that the clients weren't complicit in the fraud.

What happens if you use a payroll service and they don't forward the deposits to the IRS and your state tax department? The payroll company will be in trouble, but the employer is still liable for the deposits. That's why you should only use reputable companies.

Premier Data Solutions doesn't sound like a payroll company, but that's one of the services they offered. The company, located in Kankakee, Illinois, served a variety of employers, including the Kankakee Valley Park District, a local high school, and a pizza parlor. When the IRS notified these companies that their payroll deposits haven't been made, they contacted the Kankakee Police. Currently both local and federal investigators are looking into Premier.

Complicating the matter is that Premier was sold earlier this year and, remarkably, the payroll deposit problems apparently weren't noticed.

Joe Kristan recommended last week that employers should check with the IRS to make sure that their payroll deposits are being received. That's excellent advice. In any case I suspect lots of people are looking into whatever happened with the money Premier received but didn't remit to the government.

News Story: The Daily Journal

One of the surest methods I know to get the IRS upset with you is to withhold payroll taxes and not remit them. Payroll taxes are called trust fund taxes; I've yet to know of a time when the IRS hasn't gone after a business that failed to remit those taxes. I'm also unaware of any case where the IRS hasn't pursued a payroll service who failed to remit trust fund taxed on behalf of employers it serviced.

James McLamb, of Raleigh, North Carolina, was CFO of the Castleton Group. Castleton serviced about 100 employers in the Research Triangle area of North Carolina. Serviced, though, may be the wrong word to use for Castleton; scammed appears to be more apropos.

McLamb had a unique method of handling trust fund taxes. He'd calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He'd use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It's unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn't end up in the U.S. Treasury and likely lined McLamb's pockets.

The fallout from this mess is what you'd expect. McLamb has pleaded guilty to defrauding the United States; he'll likely be sentenced to a lengthy term at ClubFed later this year. Castleton is bankrupt; it's owner blames McLamb for the company's problems. The employers who trusted Castleton still have to remit the taxes to the IRS & North Carolina.

I strongly advise my corporate clients to use a reputable payroll service. This is not an area to skimp on—the penalties are high for mistakes and owners can and are held personally liable when mistakes occur. Finally, if you think that an idea like McLamb's will work over the long term you're badly mistaken. Trust fund taxes are heavily scrutinized and the government will come after you.

Richard Hatch has appealed his guilty verdict to the US Supreme Court. Hatch's attorney told the Associated Press, "He's extremely optimistic about his appeal...He still believes the system should work." Hatch is appealing alleging that the judge improperly limited his testimony and that the judge unfairly limited his cross-examination of the accountant who prepared his tax returns.

The Court of Appeals rejected Hatch's appeal earlier this year. Indeed, the Court of Appeals summarily rejected each argument that Hatch is now making, noting, "Here, the district court's limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive" and

The court thus opened the door for defense counsel to ask Hatch whether Burnett or someone else at SEG had promised to pay the taxes on the money he won. Hatch's counsel, however, did not follow up with questions of this sort.

Like Mr. Hatch and his attorney, I believe that the system should work. Unlike Mr. Hatch and his attorney, I think it has.

From just the last few days there have been two stories of Bozo tax preparers and one of a Bozo tax examiner. Here they go:

First, from Navarre, Florida comes the story of Deborah Adams. Ms. Adams was a helpful soul when she ran Archer Tax and Accounting. She added deductions to her clients' returns. That increased the clients' refunds, but it's illegal. Added to her problems was her side business of identity theft, which is just as illegal. She pleaded guilty to 44 counts and will be sentenced at the end of July.

Stephan Doimas prepared taxes in Chandler, Arizona (a suburb of Phoenix). He allegedly had another way of helping relieve clients: he is accused of stealing money from his clients. Mr. Doimas was arrested by Chandler police on charges of theft, fraud, forgery, and threats. So far the loss to clients is tabbed at $15,000, but that number is preliminary as the investigation continues.

Finally, from Hiroshima, Japan comes the story of an unnamed individual who used to work at the Hiroshima Regional Tax Bureau. This individual decided he'd like a promotion, and so he invented fraud at five companies and sent them notices demanding payment of ¥330,000. Unfortunately for him the National Tax Agency's internal auditor apparently discovered the fraud. "I thought I would receive a good evaluation and get a promotion if I revealed cases of tax evasion," is what the Bozo examiner told the Tax Agency. The good news out of this is that the Bozo examiner paid the 330,000 yen out of his own pocket.

Remember our usual advice: If it sounds too good to be true it probably is.

I spent the last couple of days relaxing (along with printing tax returns). Unsurprisingly there's some fraud to report on in just those last few days.

First, I have to look at a Bozo tax preparer. From nearby Rialto, California comes the story of Matthew Carl Berry. Mr. Berry was a partner in a tax preparation business. He definitely wanted his clients to get lots of deductions. In fact, if you used his services you didn't need to own a house to get the mortgage interest deduction. There's only one problem with that, and it's called tax fraud. The IRS audited about 4,500 returns and found an average tax loss of $3,150 per return. That's $14,175,000.

But that wasn't all. Mr. Berry and other members of his firm created false documents for audits and he didn't pay taxes on the income they received out of this scheme. Other members of his family have already been barred from preparing tax returns, too. He and his family are also facing a civil lawsuit from the IRS. Mr. Berry will almost certainly be spending some time at ClubFed.

Suppose you are audited by the IRS, and you lose, and are ordered to pay an additional $238,800 in taxes. Would you (a) pay the bill, (b) file an appeal and, if necessary, take the case to Tax Court, or (c) ignore the notices sent by the IRS to pay the bill and stop filing tax returns? Since I'm writing this it's clear which course Edward Barrier of Wildwood, Missouri took.

Back in 1995 Mr. Barrier was audited for 1987 through 1994. He lost, and the bills started coming. He got his revenge by ignoring those and not filing any more tax returns. He also decided to begin "structuring" his financial transactions. He apparently structured around $700,000 of transactions.

Unfortunately for Mr. Barrier eventually the IRS caught up to him. He had done business in cash, lived with his mother, and not owned assets in his own name. He did have a good job from 2002 - 2005—He was a project manager in high-end real estate in the St. Louis area. He had income of $2.4 million, but didn't pay the nearly $800,000 in taxes he owed.

Last week he pleaded guilty to one count of felony tax evasion in St. Louis. Mr. Barrier will be sentenced July 3rd and is looking at a maximum of five years at ClubFed, a fine of $250,000 and restitution. His bill is at $1.03 million...and that's before interest.

As I usually state, it's a lot easier in the long-run to pay the taxes you owe than to commit Bozo acts.

The IRS loves Bozo tax celebrities. They get a chance to show you and I that Bozo celebrities must pay their taxes. And if they go to court and win, it's guaranteed that there will be plenty of publicity. So without further ado, here's Bozo Tax Tip #2, a repeat from last year.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don't remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here's what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I'll create one day). Let's look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn't declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won't file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He's offered a plea bargain: pay your taxes, and we'll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren't withheld but should have been. (Answer: you pay the taxes.)

4. Hatch's attorney can't find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he'll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch's appeal was denied. As you might expect, 300 million witnesses can't be wrong.

Tomorrow, I'll be posting my number one Bozo Tax Tip for 2008. I guarantee that if you follow that tip you will be certifiably Bozo.

I can't believe this. As I reported in December, local billionaire Igor Olenicoff pleaded guilty to $52 million of tax fraud last December. In his plea agreement it appeared he would get a few months at ClubFed.

As Joe Kristan comments, "Yeah, that $3,500 fine and probation will really teach the guy worth $1,600,000,000 a lesson he won't soon forget." That's what Mr. Olenicoff has gotten according to this Forbes report.

I read that and have nothing to add.

Mr. Olenicoff be sentenced on April 14th in nearby Santa Ana.

Links: TaxProf Blog, Roth Tax Updates

Another light week on the tax fraud front. But while it lacks depth, some of the cases are definitely amusing.

Three women in Maryland allegedly had a Bozo idea on how to make some money. Let's get some inmates at the local prisons to give us their social security numbers, and then we'll file phony returns on their behalf. What can go wrong?

Well, I can think of several felonies that the three committed. Unfortunately for our Bozo preparers the Postal Inspection Service, the IRS, and the FBI were not as amused by the scheme as I was. And since the Bozo preparers allegedly filed 101 claims totaling $365,599.41, the three are looking at lengthy terms at ClubFed if convicted on charges of mail fraud, conspiracy to defraud the US, and identity theft charges. You can read the press release on the indictment here.

Unfortunately, the three ladies in Maryland aren't the only Bozos in the tax profession. Trumbauersville, Pennsylvania is a tiny town—less than 1,000 people reside in the borough. The town got some notoriety this week, though.

Eugene DiNatale, a councilman, runs an accounting business in nearby Rockledge. Mr. DinNatale and an associate, Chakawarn Sirirathasuk, found the old fashioned way to allegedly deprive the government of tax revenues. They allegedly collected employment taxes on behalf of their clients and kept the money rather than remitting it to the IRS. This is a scheme that almost never works, and one where the IRS and the Department of Justice go after every time it occurs. And the amount of the alleged money they kept wasn't small: $4.9 million. Just for good measure the pair is also accused of overstating clients' business expense deductions. Mr. DiNatale is looking at a very long term at ClubFed if convicted.

The final story comes from Saginaw, Michigan. Two brothers and a bank manager are accused of structuring transactions and tax evasion. The brothers filed tax returns from 2001 through 2005 showing incomes under $55,000 a year according to this news story but somehow managed to make "extravagant" purchases. And when their homes were raided in January 2006 the IRS found over $1.3 million. The bank manager is accused of aiding and abetting structuring. The brothers face multiple structuring and tax evasion charges. All are looking at relocating to ClubFed if found guilty.

My suggestion to everyone is if you think you've found a foolproof scheme to cheat Uncle Sam think again. Most schemes have been tried before and failed.

I really am an Enrolled Agent. In fact, hanging on the wall behind me is my Certificate of Enrollment (and my license is in my wallet).

Do you believe that anyone would impersonate a Certified Public Accountant? And would then choose to specialize in serving law enforcement?

Given that I'm writing about it, you should know the answer. From Arvada, Colorado (suburban Denver) comes the story of Denise Smith. Ms. Smith was indicted by a Jefferson County grand jury of 50 counts for allegedly impersonating an accountant. She's also alleged to have incorrectly increased the deductions for her clients, cheating the IRS and Colorado out of tax revenue.

Her scheme unraveled when a client received an audit notice which apparently led to the investigation. Besides the obvious moral of the story (choose a reputable tax preparer) the Bozo moral is that if you're going to impersonate an accountant, choose clients who don't have the power to arrest you.

There's something about adult entertainment enterprises that somehow attracts tax troubles. Could it be the plentiful cash and the slightly sleazy nature of some of the business operators? If it's good enough for a New York Governor....

In any case, Riccardo Di Giuseppe, of Vaughan, Ontario, Canada operated two such facilities: Bunnies and Fantasia. His operations were quite profitable. Of course, it helps when you keep $3,492,415 (Canadian) instead of forwarding it to the Canada Revenue Agency. Back in 1998 Canadian law enforcement raided his clubs in an operation called "Northern Greed." I don't know if it was greed or profit, but among the other casualties of the operation were 60 strippers who were found guilty of 115 prostitution-related offenses. They also took over 400 boxes of evidence in the raids which led to the prosecution of Mr. Di Giuseppe.

Mr. Di Giuseppe once owned a 60-foot yacht. After being convicted of tax evasion, and having his appeals denied, Mr. Di Giuseppe received his sentence: six years and a $2 million fine. Mr. Di Giuseppe is going to appeal his sentence but his sailing days are over for the foreseeable future.

Coverage: The Star and Exchange Morning Post