Taxable Talk

Please don't try this yourselves.

You have a successful business (in this case, Ace Tire & Parts of Coraoplis, Pennsylvania). You decide that you don't have to pay payroll taxes; instead, you'll make your employees checks payable to "Cash" and as reimbursements for nonexistent expenses. Your controller agrees to this highly illegal scheme. You save on payroll taxes and your employees avoid income taxes.

And then the IRS finds out.

The two owners of Ace Tire & Parts, Richard & John Schwartz, and the controller, Richard Connell, all pleaded guilty to one count of tax fraud. Given that the tax loss to the IRS was between $400,000 and $1 million, the three are looking at about three years at Club Fed and, I assume, restitution to the IRS. And I wouldn't be shocked if the Commonwealth of Pennsylvania looks at this crime, too.

For the record, this kind of fraud rarely goes undetected. And the DOJ and IRS really, really don't like violators of employment tax laws.

The Western Tax Service method of preparing tax returns is different. Customers love the high refunds. Of course, the deductions claimed on Schedule A were almost all either false or overinflated. Did I mention that Western's proprietor is at ClubFed and will also have to serve time in California?

The Department of Justice is alleging that a Washington, D.C. tax preparer followed the Western Tax Service method. Donald Roberts ran X-Press Refund Tax Service and has been indicted on one count of conspiracy and 22 counts of assisting in the preparation of false tax returns. Mr. Roberts allegedly overstated Schedule A deductions such as charitable contributions and unreimbursed employee business expenses. He's also accused of using incorrect filing statuses and phony education credits on returns.

Mr. Roberts is looking at an extended stay at ClubFed if he's found guilty on all charges. By the way, if you happen to have used X-Press Refund Tax Service, you will likely be audited as the IRS will undoubtedly be looking to have the bad returns corrected.

DOJ Press Release

I've been saying for some time that offshore trusts and bank accounts set up with no purpose at all (except to avoid US income taxes) are definitely in the cross-hairs of the IRS. Another user of this scheme will be paying with five years at ClubFed.

George Schussel founded Digital Consulting Inc. in 1982. The company was successful—successful enough that Mr. Schussel allegedly looked for a means to avoid income taxes.

The government alleged that Mr. Schussel used an offshore account at the Bank of Bermuda to hide $8.5 million. The account was in the name of an alleged sham company. Given corporate tax rates, that's a loss of about $2.75 million in taxes.

Unfortunately for Mr. Schussel, the IRS audited his 1995 tax returns in 1997-1998. The government alleged that Mr. Schussel obstructed the audit and evaded taxes. The jury agreed, and he was sentenced to five years at ClubFed, a $125,000 fine, and must meet with the IRS to resolve his outstanding tax liabilities.

Sometimes it's much, much easier to just pay your taxes in the first place.

News Story: Boston Business Journal

The title of this post is a quote from the 11th Circuit Court of Appeals. Former Atlanta Mayor Bill Campbell had appealed his conviction and his sentence on tax fraud charges. The Appeals Court found his conviction and sentence to be entirely appropriate.

The Court ruling wasn't kind to Campbell. Here are two excerpts that ran in the Atlanta Journal-Constitution:

"[Campbell is]...a first offender with an exceptional personal history who cannot be considered unlikely to commit further crimes."

"The fact that Campbell, a lawyer and former federal prosecutor, committed his crimes while mayor of a major metropolitan city, knowing as he must have that his action would be publicly and deeply scrutinized, belies his assertion that he 'cannot be considered likely to commit further crimes.'"

Needless to say, Campbell will not be leaving ClubFed until, at the earliest, October 2008.

Remember the Conrad Black trial? Verdicts have come out, and it's a mixed bag. All of the defendants (along with Black, there were three co-defendants) were found not guilty of not filing corporate tax returns. However, Black was found guilty of criminal fraud and obstruction of justice. An appeal is expected.

Columnist Mark Steyn has been blogging this trial for Macleans, the Canadian news magazine. Steyn notes,

"[Black] has been found GUILTY in just two narrow areas - "obstruction of justice" re the security camera footage of him removing boxes from 10 Toronto Street, and three "mail fraud" counts relating to the APC non-compete agreement, in which (as the government argued) Black and Radler paid Black and Radler not to compete with Black and Radler."

When you fight the government, you face a tough battle. As Steyn noted, "The US Attorney's office might usefully adopt as its motto the IRA's message to Mrs. Thatcher after the Brighton bombing, 'You have to be lucky every time. We only have to be lucky once.'"

Given Black's age (62), he could be looking at life. Sentencing will be in November.

I'm not a big drinker. The former President and co-owner of Domecq Importers will have 10 years at ClubFed of being a teetotaler after pleading guilty to fraud and tax fraud charges. Domecq Importers was a large liquor importer based in Connecticut.

Michael Domecq had a not-so-good idea. Have some outside vendors (primarily advertising agencies) send in invoices for work that was never done. Then have his company pay the vendors. That's fraud against his own company.

But Mr. Domecq went a step further. He had the vendors then issue checks to shell corporations controlled by him and his accomplices: Chief Financial Officer Alfredo Valdes, Vice President of Marketing Gabriel Sagaz, and Vice President of Sales Thomas Kaminsky. Those three individuals had already pleaded guilty to various charges.

Did I mention those shell corporations used offshore bank accounts? And that the shell corporations didn't pay any income tax? That's tax fraud.

This isn't Mr. Domecq's first trouble with the law. He was convicted in the United Kingdom in 2006 of possessing a false Spanish passport and of illegally getting a U.K. drivers license.

Mr. Domecq, as part of his plea agreement, will submit corrected tax returns for 1989 through 2006, and will pay all of the taxes, penalties, and interest. Given that the unreported income is over $7.6 million, Mr. Domecq will be writing out some big checks to the United States Treasury.

It would have been much simpler to just pay the tax in the first place...but somehow that thought never enters the mind of the tax evader.