Taxable Talk

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.