Taxable Talk

Earlier today I posted my mixed opinion on regulating tax professionals. Joe Kristan has noted there are plenty of laws already on the books that tax preparers must comply with.

But the Bozos are out there. Take Georgia Gaines of Lake Worth, Florida. A helpful soul, Ms. Gaines' clients were aided by over $1.1 million of invented deductions. All was well until the IRS found out.

Unfortunately, the IRS also looked at Ms. Gaines' own returns. Somehow, $200,000 of income from her 2002-2005 tax preparation work didn't appear on the return.

Ms. Gaines has now pleaded guilty to five counts of preparing false tax returns and five counts of filing her own false tax returns. Ms. Gaines will be sentenced in August and will have to make restitution and is also likely to find herself at ClubFed for just under three years (based on federal sentencing guidelines).

Two corporate tax fraud stories crossed the wires today. In one case the participant will spend over 20 years at ClubFed; the other will almost certainly spend significant time there too.

Frank Amadeo bragged that one day he'll rule the world. Well, he didn't send $181 million to the IRS, so perhaps he could have afforded a small country. That's after he spends the next 22 1/2 years at ClubFed. He was sentenced yesterday and must also make $181 million in restitution. If there's a certainty in tax prosecutions, it's that if you don't remit trust fund taxes you will be prosecuted. Peter Pappas has more on this story.

Meanwhile, two orders of magnitude less still is a large amount of fraud. Fisher Sand & Gravel operates twelve plants and is a big player in the aggregate industry. The IRS began an audit and discovered that one executive, Michael Fisher, had used company funds for an African safari and to renovate a truck stop he owned. Since those were personal expenses (and not "necessary and ordinary" business expenses) that's a problem. Mr. Fisher will be pleading guilty to tax fraud later this week. Two other executives, Amiel Schaff (the former CFO) and Clyde Frank (the former comptroller) previously pleaded guilty. The company itself is under a deferred prosecution agreement and will be making restitution of $1.17 million relating to 2001-2004 corporate taxes. Additionally, the company is cooperating in a probe of 2005-2009 corporate taxes.

I've covered Bozo tax preparers before, but since I'm in Las Vegas (to attend the annual CSEA SuperSeminar for continuing education) I'll look at a resident of Sin City.

Caroline Reyes operated Carol's Tax Service (also called Central Tax Service). She was probably popular with her clients: She charged low rates and she did more than her best to make sure that her clients got refunds. Unfortunately, her methods for the latter included adding phony deductions and inflating other itemized deductions for her clients. Those are illegal, and it's called tax fraud. Ms. Reyes pleaded guilty today to 20 counts of tax fraud.

After the IRS started to investigate her, Ms. Reyes sent the IRS false receipts to try to prove her returns were kosher. Instead, she'll be sentenced later this year and will likely end up visiting ClubFed.

Gene Haas won the coveted Tax Offender of the Year award for 2007. As I've detailed Mr. Haas lost a patent lawsuit and decided to get back at the government by committing tax fraud. He was sentenced to 24 months at ClubFed.

As reported in the Ventura County Star, Mr. Haas will be released after serving 16 months. His sentence was shortened after successfully going through a 500-hour treatment for alcoholism.

I am hopeful that Mr. Haas has realized the errors he made. He's still the owner of Haas Automation, and hopefully he'll be able to help that company in the future.

Maxim Maltsev allegedly had an interesting means of making money. The Russian citizen is accused of setting up a free online tax preparation service in San Diego. He supposedly advertised that it was affiliated with the IRS.

That doesn't sound that bad.

Well, it's what he allegedly did with the refunds that taxpayers got. Instead of them going into the accounts that they provided, they allegedly went into Mr. Maltsev's accounts. He's accused of doing this 65 times, diverting over $100,000 in refunds.

Mr. Maltsev was arrested when he flew into Los Angeles last week.

We've got some lowlights from the tax fraud world. A dentist and a doctor from West Virginia are in trouble. And we'll take a look at what could happen if your 1031 Exchange uses a dishonest Qualified Intermediary.

First, let's head to Charleston, West Virginia. Dr. Alan Vance is a dentist who also happened to own a dry cleaning business called "Pressed For Time." Dr. Vance wanted a pool for his home, so he marked off the cash on the deposit slips prepared by his staff, and didn't declare it on his tax return. He did get his swimming pool, but he also got a charge of tax evasion. He pleaded guilty last week, and he's likely to not be so pressed for time for over one year when he's sentenced.

Let's head to nearby Bluefield, West Virginia. Dr. Randy Brodnick appears to have a successful medical practice. He's also facing a federal indictment. Dr. Brodnick and Anthony Kritt, an attorney from Crofton, Maryland, are accused of using sham contracts, employee leasing, and shell corporations to defraud the IRS out of $2 million. Allegedly, they set up fictitious entities in Ireland and the Channel Islands. They face a total of seven counts and if convicted could spend up to 35 years at ClubFed. Interestingly, one of the funds that Brodnick and Kritt are alleged to have used to hide the funds is the Ruritania-90 fund. (Ruritania is the fictional country from The Prisoner of Zenda.)

Finally, our last story notes a potential problem with a 1031 Exchange. Section 1031 of the tax code allows taxpayers to do an exchange of investment properties without paying capital gains taxes. There are lots of rules for §1031 exchanges. One of them is that you must use a Qualified Intermediary.

It's very, very important to use a reputable, honest Qualified Intermediary. Unfortunately, in every industry there are some who aren't honest. Edward Okun was one of the dishonest ones.

Mr. Okun, of Miami, had a unique way of conducting his business. People would come to him wanting to do a §1031 exchange. He'd obtain the original property, find a replacement property, and take some of the proceeds for himself. It gives a whole new meaning to "boot."

Everything was fine while the real estate market was going up. Unfortunately, we all know that ended. Mr. Okun, who apparently owned several Qualified Intermediary companies, had a personal jet, a yacht, and a Miami mansion. It appears that after the market tanked his scheme was uncovered.

Mr. Okun was convicted on 23 counts. He apparently bilked over 600 individuals and obtained over $125 million. All told he could be sentenced to 400 years at ClubFed, along with restitution and fines.

Suppose you're a tax "professional" and a client comes in who needs to file back tax returns. He presents his record of income for those years. You look at it and realize your client is going to owe a lot of tax. Do you (a) try to find every possible legal deduction for your client; (b) work with your client and the tax agencies to obtain a payment plan (or plans); or (c) tell him that if he shows that much income and he should just lower the amount—after all, he'll never be caught?

Of course, since I headlined this as two from the Bozo preparer front, you know where this is heading. And yes, there are allegedly tax preparers who will do this. From Clarence, New York comes the story of Dara Lis. Ms. Lis' client was an undercover investigator from the New York Department of Tax and Finance. Allegedly, Ms. Lis told the client (on tape), "As long as there's no way for them to trace this income, you know, I would just lower it...real (income) numbers [are] going to kill you."

Helpful tax hint: If your preparer tells you this, make a u-turn and find someone else.

The second story comes from Elm City, North Carolina. Raymond Renfrow used to be a professional tax preparer. He's been barred from preparing future returns by a federal court. He promoted trusts that allegedly hid income without having any economic benefit. He used to be involved with Concept Marketing International. One of the founders of that entity was convicted of tax fraud, and a court order is prominently noted on their website. Mr. Renfrow allegedly started promoting similar trusts on his own.

Helpful tax hint #2: If your tax professional has a court order on his website that bars him from promoting tax fraud schemes, you may want to find someone else.

In any case, not only has Mr. Renfrow been barred, he's also required to send a list of his customers to the Department of Justice. If you happen to be on that list you can expect a "Dear Valued Taxpayer" letter in your mailbox from the IRS very soon.

I remember an old Peanuts where Snoopy asks to get off the IRS' mailing list. It just doesn't happen, and Barry Lusk of Easley, South Carolina may have learned his lesson.

This story begins back in 2000. Mr. Lusk was successful, and he owned two businesses. He proceeded to sell the businesses for $1.5 million. He wrote the IRS and said that the tax laws didn't apply to him.

You're already ahead of me, right?

The IRS let Mr. Lusk know that they didn't appreciate frivolous correspondence. Indeed, Mr. Lusk's own accountant advised him to file his returns. He didn't, so the IRS came up with the amount of tax he owed: $843,000.

In 2003 Mr. Lusk filed his 2000 return; he said he owed nothing. Last week, a jury let him know the truth. His bill, when all is said and done, will be $843,000 in tax (plus penalties and interest), and up to five years at ClubFed and a $250,000 fine.

The tax laws apply to us all, and perhaps Mr. Lusk now realizes that.

Dr. Jørn Ege had a thriving plastic surgery practice in Copenhagen. Apparently it was very successful—successful enough that he took 12.6 million kroner and didn't disclose that on his 2005 income tax returns. Denmark isn't known as a low tax country, and when SKAT (the Danish tax agency) found out they had an arrest warrant issued. After fleeing Denmark, Dr. Ege turned himself in last December.

Dr. Ege was found guilty last week. Although the article only notes his sentence of two years in prison and a fine of 4.6 million kroner (about $780,000), I assume he'll also have to pay the back taxes and penalties.

And how did Dr. Ege get his nickname? Well, you already guessed that he did penile procedures. No, it wasn't how he advertised his business; rather, it was from complaints to Danish authorities.

I usually don't report on state tax fraud, but when I see someone accused of 505 counts, that gets my attention. From Lafayette, Louisiana, comes the story of Eric Cloutier. Mr. Cloutier is a former professional hockey player, and also has the same avocation as myself. He's a poker player, with about $160,000 in career winnings.

Mr. Cloutier owns two bars in Lafayette, and the Louisiana Office of Alcohol and Tobacco Control (LATC) was suspicious of his bars. The LATC alleges that Mr. Cloutier manipulated his cash registers so that the sales reported were substantially less than the actual sales—$1.4 million of under-reporting.

That's not the only thing he's accused of. There's one count of racketeering, two counts of theft and two counts of attempted theft, 67 counts of computer fraud, 92 counts of filing false public records, and a whopping 340 counts of obstruction of justice. Those 340 counts come from allegedly destroying evidence once the investigation had begun.

It doesn't take a math genius to figure out that Mr. Cloutier is looking at spending a lot of years in a Louisiana prison if found guilty.

The inscription on the New York City General Post Office is actually, Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds. Yet one postman serving the Bronx is, I assume, on administrative leave. He's accused of being one of the individuals involved in a $40 million tax refund theft scheme.

As reported by the New York Daily News, the scheme began in the Dominican Republic. Thousands of tax returns were transmitted using social security numbers stolen from residents of Puerto Rico. The refunds, for amounts from $2,000 to $32,000, totaled $32 million. The mailman, Lacy Bethea, allegedly agreed to take $100 per refund that he gave to his cutout (rather than delivering it to the address shown on the refund). Both the mailman and his cutout appear to have cooperated with the FBI. Also involved in the arrests were police in the Dominican Republic.

The ringleaders are looking at very long stays at ClubFed if found guilty. It's unclear what tipped off the IRS to the fraud, but I'm all for stopping such shenanigans.

I try hard to help my clients pay the lowest tax possible—legitimately. These Bozos skip that last word.

Let's start in Valdosta, Georgia. Back in November I reported on the scheme of Pamela and Clinton Hughes to claim fraudulent tax refunds for using diesel fuel off the highways. There's a federal tax on diesel fuel, and if you use it off the highways (they claimed they used the fuel in logging) you can get a tax refund. The only problem was that it was a lie. And not a small lie; this was a $5.2 million scheme. Pamela Hughes got 33 months at ClubFed; her husband got 48 months. Each also has to make restitution of just under $4 million.

We next head to Rockford, Illinois. Angelique Tinder, aka Angelique Howen, used to operate Your Tax Master. She catered to a niche: Bosnian immigrants. The price was right; she only charged $35 to $40 a return. And she got her clients refunds, calling money sent to the families back home in Bosnia as 'charitable contributions.' Unfortunately, that public service has a problem—you can't take a charitable contribution deduction on money not given to charities. And when the total of the attempted fraud adds up to $2.5 million, you're in trouble. She was found guilty of multiple counts of tax evasion, and must make restitution of $1,085 to her clients...and serve 63 months at ClubFed. If the judge had a sense of humor and announced the sentence in that order....

Next, we head to Omaha, Nebraska. Siyad Ali also specialized in preparing tax returns for immigrants; he specialized in Sudanese immigrants. He was a generous individual, and added foster children to his clients' returns. Throw in some phony fuel tax credits, earned income credits, and incorrect filing statuses (Head of Household), and you end up with $67,000 of fraudulent refunds. Mr. Ali was found guilty; his clients have already had to pay back the refunds with interest and penalties. Mr. Ali will be sentenced in June.

Here in Irvine I'm a member of the Exchange Club of Irvine. One of the events we put on is the Teacher of the Year Banquet; this past week the Teachers of the Year were announced. That story headlines some of the good that teachers do.

Unfortunately, sometimes we get stories that aren't so good. Georgia Gaines is a high school math teacher in Lake Worth, Florida. She's been charged with 32 counts of preparing phony tax returns. Additionally, she allegedly didn't include her income from her side job on her own tax returns. Allegedly, Ms. Gaines' returns included $1.1 million of phony deductions. She's looking at a lengthy stay at ClubFed if found guilty.

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

Let's head to Corpus Christi, Texas. Stephen and Bryan Lyons operated B&T Rents. The store was profitable. Of course it helps when you don't send your trust fund taxes to the IRS. As I've said before, if you do that you're guaranteed to face an IRS investigation. They did. The owners had hoped that front companies would hide where the money was from the IRS. That wasn't successful, and the two owners pleaded guilty to tax fraud. Stephen Lyons received a year and a day at ClubFed; Bryan Lyons received 18 months. Both had to pay $10,000 fines. The two have already made full restitution to the IRS.

If your business is having trouble paying trust fund taxes, get legal and/or tax advice now. This is one area where malfeasance will almost always be discovered and where tax fraud will almost always be prosecuted.

Three Bozo tax preparers are in trouble this week. Two are the target of a Department of Justice lawsuit to shut them down; the other finds himself facing tax evasion charges.

Let's start in Clive, Iowa. Jill Schwartz-Musin and her husband Howard Musin own SSC Services. They've been very successful, preparing about 5,000 returns for small businesses over the last three years. And I can see why they've been successful. Unlike most preparers, if you use SSC you can allegedly deduct expenses such as tanning salons, hair and nail care, and gifts to family members as deductions. And even that trip to Cancun was allegedly deductible. Needless to say, such personal expenses aren't deductible. If the allegations are true, Mr. & Mrs. Musin will likely need to find a new profession. Those who've used SSC are likely to receive "Dear Valued Taxpayer" letters from the IRS. Joe Kristan has more.

Let's head next to Sarasota, Florida. Carl Prater operated New Found Freedom (doing business as Tax Escape Service). Mr. Prater basically was in the same situation as Mr. & Mrs. Musin. Back in December 2002 he was the target of a Department of Justice lawsuit, and a temporary injunction was issued against him. Mr. Prater sold packages for up to $26,000 that stated that US income was exempt from US tax (proving again that a sucker is born every minute). Most individuals would figure it's time to move on after being the target of a federal injunction. (It appears from the record that a permanent injunction was issued in 2005.)

Apparently, that wasn't the case for Mr. Prater. The IRS and the Department of Justice allege that he ignored the temporary and permanent injunctions that were issued, and he continued to sell his "tax escape" package that states that income earned in the US is exempt from US income taxes. (Hint: If you take that position there is a way you will escape paying taxes. You could be arrested on tax evasion and find yourself working for pennies a day at ClubFed.) Mr. Prater has been charged with a litany of tax-related offenses: aiding and assisting in filing false tax returns, failure to file tax returns, criminal contempt, structuring transactions, and lying before a grand jury. Mr. Prater is looking at a lengthy term at ClubFed if he's found guilty and a fine of up to $1.95 million.

If someone tells you that you can escape taxes in one of the ways described above, run in the other direction.

I like to poke some humor on tax fraud cases. This case has none of that, and I'm really disgusted about the facts of the case.

Two judges in Wilkes-Barre, Pennsylvania had a nice racket going. Judges Mark Ciavarella and Michael Conahan accepted $2.6 million in kickbacks. They took the money so that two private juvenile detention centers could be built, and Judge Conahan shut down the county's existing juvenile detention center. Judge Ciavarella then sentenced children to the new facilities.

There are allegations that the two judges sent children to the facilities rather than sending them home (as recommended by juvenile probation authorities). Judge Ciaverella denies that charge.

The two judges pleaded guilty to tax evasion and to fraud. The plea agreement specifies they will serve 87 months at ClubFed. They must also make restitution.

Suppose you're a tax preparer, and your new client owes quite a bit. Being the ever helpful kind of person that you are, you suggest to him that he add some additional business losses, charitable contributions and child care expenses, and maybe a dependent or two. Sounds familiar, no?

Well, if that client happens to be an undercover criminal investigator from the IRS, you will soon be a former tax preparer and you may soon be residing at ClubFed. Dewayne Preacely of Flossmoor, Illinois owned and operated Personal Tax. The business was successful, with three locations in Chicago Heights, Harvey, and Waukegan. The emphasis definitely needs to be on "was" because Mr. Preacely pleaded guilty last week in Chicago to tax fraud.

It's not just Mr. Preacely who will be paying for this. There are 67 taxpayers who have been sent "Dear Valued Taxpayer" letters from the IRS and who will soon have to pay the additional tax, interest, and possible penalties.

But Mr. Preacely isn't the only Bozo preparer from Illinois this week. Keith Edwards of Cahokia (near St. Louis) is boarding at ClubFed until his April trial. Mr. Edwards prepared tax returns and allegedly had the money wired into his own account. That in itself is bad, and the charge that he also used someone else's social security number to file the returns makes matters worse. Plus he was apparently caught with ammunition. He was convicted of a felony count in 2002 so he's also been charged with being a convicted felon in possession of ammunition. It's triple trouble for Mr. Edwards.

From the East Coast comes two tales of Bozo tax preparers. They're joined by one from the heartland. Together, it's a trifecta of what not to do.

First, Henderson Joseph of Clarksburg, Maryland used to own Triad Business Services. Mr. Joseph followed the Western Tax Service methods of getting refunds for clients: lying. It works great until you get caught, and with $500,000 of fraudulent tax returns Mr. Joseph did get caught. He pleaded guilty to conspiracy, and he's looking at about three years at ClubFed.

Meanwhile, Diana Aliffi of Suffolk County, Long Island, New York took Mr. Joseph's methods one step further. She attempted to defraud New York of $19 million in phony refunds. The New York State Department of Taxation and Finance caught her, and she pleaded guilty in state court to a 76-count indictment with tax fraud front and center. Perhaps it was the fact that she told her clients to have the refunds come to her office instead of to the taxpayers (that in itself is illegal) that got her caught. In any case, Ms. Aliffi is looking at one to three years at a New York penitentiary and must make restitution of $57,000.

Finally, Gene Franklin was convicted in March 2008 on two counts of preparing false tax returns. His business, Franklin & Company, aligned itself with Renaissance, The Tax People. Renaissance was a multi-level marketing firm (no problem yet) that sold tax kits (still doing OK) that advocated tax fraud (that's a problem). Mr. Franklin will spend 30 months at ClubFed.

Remember, if it sound too good to be true it probably is.

We may have a new President, but it's the same old tax fraud. Please, don't try any of these yourself.

From Snohomish, Washington comes a crime that's guaranteed to get yourself sent to ClubFed. Simply take the trust fund (FICA and Medicare) taxes that are being withheld from your employees' paychecks and rather than sending them to the IRS, keeping them for yourself. Using them on trips to Hawaii and Disneyland will only make things worse. That's what Lynda Mead did, and she'll have just under three years at ClubFed to think it over. She also must make restitution of $537,000 (including penalties and interest).

Joseph J. Smith and Cynthia McDonough owned two auto body shops in Philadelphia. They were profitable, to the tune of over $1 million from 2001 to 2004. Their income after taxes was the same as their income before taxes—they didn't report that income to the IRS. Nor did they report income from the sale of two homes. The IRS discovered this and wasn't pleased. The couple was indicted on tax fraud charges. Last week they were convicted on those charges. Each is looking at a lengthy term at ClubFed, fines, and probable restitution.

Moving closer to home, Giancarlo Pertile owned Art Marble Design Inc. in Moorpark, California. Mr. Pertile followed the same pattern as Mr. Smith and Ms. McDonough: Just don't report the income. He moved it to bank accounts that his bookkeeper, accountant, and the IRS didn't know about...for awhile. But then the IRS found out about the tax fraud (which occurred between 1998 and 2002). Mr. Pertile was convicted last week of five tax evasion charges. He'll be sentenced in May and is looking at a stay at ClubFed, fines, and probable restitution.

Finally, Rick Jones was a developer in Wood River, Illinois. Mr. Jones went through a divorce a couple of years ago, and his financial records came to light. While he reported $1.74 million of income in 2003 the divorce records showed a much higher figure. The IRS got interested and Mr. Jones pleaded guilty to tax evasion this past week. It turns out his real 2003 income was about $5.25 million. Mr. Jones paid $538,000 in tax but he should have paid $1.77 million. He's looking at a stay at ClubFed, a fine, and restitution.

I've said many times that if you don't remit trust fund taxes bad things will happen to you. I've also said that if you're a tax evader, don't get a divorce. This week shows again that the more things change, the more they stay the same.

My writing partner and I have been trying to figure out the subject of our next book. We're thinking about a mystery, and it appears we've just had a plot handed to us.

We're going to open a home study program, catering to low income families. We'll tell our clients that as a bonus for using our services we'll prepare their tax returns. All we ask in return is that they assign their Minnesota Education Tax Credits to us. (That credit can't be assigned, and could only be applied for after the money has been spent.) What could possibly go wrong? Oh, we're violating a few laws but who will catch us? Anyway, it might make a good plot for a mystery.

I didn't make this up, though, as the Department of Justice alleges that's exactly what a Minnesota mother and son did. Carolyn Louper-Morris and William J. Morris, Jr., both of Minneapolis face a 22-count indictment. They're charged with mail fraud, wire fraud, money laundering, and wire fraud conspiracy. The DOJ alleges that 1,800 took advantage of CyberSutdy 101's program, and the couple supposedly received $2.4 million from the Minnesota Department of Revenue.

What did the couple do with the money? Well, they did provide over 2000 computers to low-income students...but they apparently forgot to pay K-Mart for the computers. The indictment alleges that the money was partially used for "...$300,000 payment on a home, $74,000 for a new Mercedes SUV and $8,600 for a mink coat, a cashmere and rabbit scarf, and a chinchilla-trimmed hat." The Minnesota DOR canceled the tax credit for CyberStudy 101 in 2002.

The couple also is alleged to have lied to the Minnesota DOR; the Minnesota DOR asked where the $2.4 million came from and was supposedly told that it was "loan proceeds."

There is one surprise for me: That this is a case in federal court rather than state court. I would think that if the allegations are true that fraud charges could certainly be filed in state court. But the defendants, like all defendants, are innocent until proven guilty.

By the way, CyberStudy's website is still open. If you're interested in their programs you'd better hurry; I suspect they won't be available soon.

News Story: Pioneer Press, KARE

If you're a tax preparer and you want to help your clients save money, one way would be to invent a dependent or two for them. Sure, you're violating a law (or two), but your clients will save money. Not only will they get the extra exemption, they may get some education deductions or credits.

Yes, there's a problem with this scheme (actually, several, but I'll focus on the biggest). The Social Security Number of dependents is reported on tax returns. The IRS isn't perfect, but they do a good job of matching information such as SSNs. Sooner or later—probably sooner—this scheme would be doomed.

So did someone actually do this? Well, since I'm writing about it here you already know the answer. Four women in Rocky Mount, North Carolina did just that. They also inflated wages of their clients to help them qualify for the Earned Income Credit.

All of this occurred in early 2004. Last March the women were indicted. They pleaded guilty in September and they were sentenced last week. The women received terms ranging from 180 days of house arrest to 15 months at ClubFed. All must make restitution of between $1,883 and $40,041 to the government.

This was truly yet another Bozo scheme due to fail. If your tax preparer offers to sell you a dependent, find another tax preparer fast.