Taxable Talk

This week's tax evasion stories share a common theme: the alleged evaders (and those convicted) should have known better.

Let's start in Sin City, where a personal injury attorney liked cash as a way to conduct his business. There's nothing wrong with that, but when you don't declare the cash income and you purchase assets and hide them in others' names, problems can arise. When the total amount involved is $2 million over six years and there's a sham child support agreement, it's trouble with a capital t. Edmund C. Botha was found guilty last week of one count of tax evasion. Based on federal sentencing guidelines, Mr. Botha is looking at about three years at ClubFed plus probable restitution when he's sentenced in early 2009.

Moving east, Danny Gladden is the former tax collector of Crawford County, Missouri. He was elected in 1991 and soon after discovered a lucrative side job: He embezzled from the county. A state audit discovered the missing funds in 2005, and he was later convicted of theft and sentenced to seven years in state prison. This past week he was convicted of tax evasion. Mr. Gladden forgot that tax must be paid even when the source of your income is stealing. Given that he owed about $82,000 in tax he's looking at about two years at ClubFed based on sentencing guidelines.

Next, let's look at two stories that both feature payroll taxes. First, the US Department of Justice calls this "the largest cash wage scheme in Massachusetts history." Now, there's nothing wrong with paying employees in cash—it's completely legal. But you still must withhold payroll taxes, and you still must report them accurately to the government, and you do have to remit them to the appropriate agencies. What happens when you don't do any of those things? Well, if you get caught, tried, and convicted, and the amount involved is over $43 million, you'll likely find yourself at ClubFed for a long time.

And that's exactly what happened to husband and wife Daniel and Aimee King McElroy. About $43 million in payroll was paid under-the-table, with the loss to the IRS being around $10 million and the loss to workers compensation companies was $7 million. In total the husband and wife were each found guilty of 19 counts. The husband was previously sentenced to 108 months at ClubFed; last week the wife received 78 months. They were also ordered to make restitution of $9.1 million.

Our final story comes from Worcester, Massachusetts. Attorney Christopher Uhl allegedly withheld money from his employees' wages for payroll taxes. That's good. He also allegedly didn't remit that money to the federal government. That's not good. He's been indicted on six counts of tax evasion and six counts of willful failure to pay taxes.

If you have employees make sure you're in compliance with payroll taxes. This is not an area to skimp on. Those taxes are called "trust fund taxes," and the federal government and state governments almost always vigorously go after individuals who withhold but don't remit. Committing this sort of tax evasion is a losing proposition.

It's something about prostitution that somehow leads to tax evasion. While perusing my email this evening in Connecticut I noticed yet another guilty plea by a man who charged personal expenses on his corporate tax return. Somehow the IRS did not find as humorous as I do the idea of deducting visits to prostitutes as "necessary and ordinary" corporate business deductions.

John Kelso of Monroe, North Carolina pleaded guilty to tax fraud. He agreed to make restitution of $18,000 and faces up to three years at ClubFed and a fine of $250,000.

My thanks to Joe Kristan for highlighting an interesting and amusing (to me) Tax Court case today: Baisden v. Commissioner. Mr. Baisden is a CPA, and he had a unique way of preparing tax returns:

In an effort to explain his bookkeeping and accounting methods, petitioner explained that since approximately 1998 [Mr. Baisden] had developed for his use and for the use of his clients a novel and insightful tax strategy that may be described generally as follows:

(1) Booked sole proprietorship income would be totally or almost totally offset by the payment by the sole proprietorship of “royalties” to the owner of the business;

(2) the so-called royalties would not be paid directly to the owner but rather would consist of payments by the sole proprietorship of the owner’s personal and family expenses;

(3) the “royalty” payments would be treated as fully deductible by the sole proprietorship, and they would reduce the booked net income of the sole proprietorship
to zero; and

(4) the owner would report “royalties” paid with regard to personal and family expenses as “other income” not subject to employment taxes. The primary savings were apparently intended to be derived from petitioner’s tax strategy through the conversion of sole proprietorship business income subject to self-employment taxes into royalties not subject to self-employment taxes.

I strongly suggest that you never attempt to use the above strategy unless you'd like to find yourself facing fraud penalties.

Mr. Baisden also tried to delay his audit by filing a "spurious complaint" with the Taxpayer's Advocate Office. And I'm only just touching the surface of this case....

On the good side, the Tax Court case was about the IRS assessing fraud penalties and, as you'd suspect, the IRS was upheld. On the better side Mr. Baisden remains under a preliminary injunction to not provide tax advice.

Joe Kristan has more.

An interesting week for tax fraud. There's a typical case out of the San Joaquin Valley, a jailed promoter who may have to spend even longer at ClubFed, and an attorney who admitted that he lied under oath to the IRS and that he gave an incorrect legal opinion on a tax shelter.

First, Michael Gordon of Clovis, California (near Fresno) has had his own software company for several years. Between 2001 and 2004 he had his company pay over $339,000 of personal expenses as business expenses. That's not a good idea, and it became a very bad idea when the IRS caught him. He pleaded guilty to tax fraud last week, and has agreed to make restitution of $211,000 and pay all the taxes, penalties, and interest he owes. He's already paid over $570,000 toward his obligations. Note that appears to be far larger than the actual tax he owes which goes to show the impact of penalties and interest. As usual, it's a lot better (and cheaper) to just pay the tax in the first place. Mr. Gordon will be sentenced in November.

Remember Eddie Ray Kahn? He was a co-defendant of Wesley Snipes. Mr. Kahn is already at ClubFed having been sentenced to ten years. Well, he may be spending even more time there. He was indicted this past week along with four others on counts of mail fraud and conspiracy to defraud the United States. What did these individuals do? They allegedly sold worthless "bills of exchange" and other schemes to promote tax fraud.

The indictment alleges that American Rights Litigators/Guiding Light of God Ministries sold more than 4,000 packages to customers in every state. Their "bills of exchange" were supposedly drawn on the US Treasury for payment of taxes. Unfortunately, there's no such thing. Mr. Kahn allegedly was the ringleader of the group. In any case, no trial date has yet been set.

Finally, Peter Cinquegrani was a partner at Arnold & Porter, a law firm. He was instrumental in designing the PICO tax shelter (Personal Investment Corporation). Back in 2003 he testified under oath to the IRS that the shelter had not been designed to avoid taxes.

One of the issues with "tax shelters" is that they must have some economic substance. A basic rule of tax is that transactions that lack an economic substance are ignored for tax purposes. Well, Ernst & Young was looking to develop tax shelters (including the PICO). Mr. Cinquegrani was the primary drafter of opinions stating that the PICO had an economic purpose.

This past week Mr. Cinquegrani pleaded guilty to conspiracy to commit tax fraud, aiding and abetting tax evasion, and aiding in the submission of false and fraudulent documents to the IRS. He admitted that he lied to the IRS back in 2003. He also admitted drafting a phony consulting contract between Ernst & Young and Bricolage Capital. The North Country Gazette gets to the meat of the issue:

He stated that E&Y’s fee for the PICO transaction was calculated as a percentage of the tax loss the client wished to generate, but E&Y’s engagement letter with each client reflected a much smaller flat fee amount in order to conceal that the true fee was a percentage of the targeted tax loss. Cinquegrani admitted that together with individuals at E&Y and Bricolage, he helped arrange for the large balance of E&Y’s true tax shelter fee to be paid by the client to a Bricolage affiliate, and then for the affiliate to pay E&Y.

Mr. Cinquegrani will be sentenced in December. He may also have to make restitution and pay a fine. Arnold & Porter has settled with the IRS and paid a tax promoter penalty.

Remember what I've been saying for years: If it sounds too good to be true it probably is.

There was quite a bit of tax fraud at week's end. Indeed, I had to liberally weed out the stories so the ones below are the cream of the crop, so to speak.

First, we have another alleged Bozo tax preparer. Julius Nyamweya Kiage says he's a certified public accountant. Mr. Kiage has had an accounting practice called J.K. Accounting & Co. PLLC in Brooklyn Park, Minnesota. Yet Mr. Kiage is not listed as a CPA in Minnesota, Iowa, or Wisconsin.

While the IRS is accusing Mr. Kiage of false advertising that's not their biggest beef. Rather, the IRS noticed that the returns prepared by Mr. Kiage have "exaggerated or fraudulent claims related to education credits, individual retirement account deductions, education credits and charitable contributions." Mr. Kiage has not been charged; the IRS at this point is investigating and has seized computer records and files from Mr. Kiage's office. The IRS told a court (to obtain a subpoena) that Mr. Kiage prepared 1,843 returns over the last two years that resulted in refunds of $4.7 million. The investigation began as a result of a tip.

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Robert P. Peebles of St. Helena, California had a problem that most of us would like to have. He was trustee of his 96-year old aunt's $5 million trust. He allegedly decided to set up his own $4 million trust funded from his aunt's trust, to be repaid with annual payments.

His attorney allegedly told him that he would have to report his trust to the IRS and Connecticut (his aunt was a Connecticut resident) on estate tax returns. So he fired his attorney.

He then hired two accountants to prepare the estate tax returns. But somehow he failed to tell the accountants about his trust (the IRS alleges it was deliberate; Mr. Peebles claims it was an oversight and the accountants didn't ask about it).

The IRS accuses Mr. Peebles of lying to IRS investigators under oath, various tax laws, and mail fraud. He was arraigned in Connecticut and has been released on bail.

And yes, if you do transfer $4 million into your own trust from that of your late aunt you do need to report it on the estate tax returns.

This past week wasn't a good one for tax protesters. Irwin Schiff, who is 80-years old, is spending 13 years at ClubFed in Terre Haute, Indiana. Well, make that 13 years and 11 months—those additional 11 months a result of his sentence for 15 contempt charges he received during his trial.

Meanwhile, Wade Cook was taken into custody to begin serving his seven-year sentence for tax fraud charges. His wife is still serving her sentence for obstruction but is due to be released in January.

I've said this before but it bears repeating—especially on Labor Day. If you want to get in trouble with the IRS either withhold payroll taxes and don't remit them to the IRS or pay your employees under the table (thus not being in compliance with trust fund taxes). Either method starts you quickly on the road to ClubFed.

Thomas Carbo of Wayne, Pennsylvania did the latter. He decided to improve his business' profitability by paying his employees under the table. He did temporarily save on his payroll tax expense...until he was caught. He ended up defrauding the government out of $168,000.

He was apparently caught as a result of a kickback scheme in nearby Norristown. His business appears to have been a Norristown vendor. The government subpoenaed his records but he didn't comply with the subpoena; he's accused of destroying the records instead. The government then investigated, looked at his bank records, and then discovered the tax fraud.

Mr. Carbo has pleaded guilty to one count of conspiracy to defraud and 17 counts of failing to collect and submit the payroll taxes. While he faces up to 90 years in prison and a fine of up to $4.5 million, federal sentencing guidelines suggest he'll receive a little over two years at ClubFed.

Earlier this year officials at the nearby University of California, Irvine announced that about 1,100 student identities were stolen by Texas-based United Healthcare. Now several individuals have been indicted for filing phony tax returns using these students identities (and others).

The indictments were handed down by a federal grand jury in Sherman, Texas. Those indicted, Christopher Chiota of Dallas, Kennedy Mpezini of McKinney, Gilbert Gotoro of Irving, Tendeka Daniel Parirenyatwa of Richardson, Michael Thomas Jr., of Irving, and Kudzai Mangoma all face charges of fraud and identity theft. The indicted allegedly filed returns for 163 UCI students after starting a phony tax preparation business and setting up relationships with several banks.

The problem for the individuals who filed returns for the UCI students was that sooner or later some of the students would file their own returns. Once that happened the scheme was certain to be investigated. UCI police along with criminal investigators from the IRS, Department of Justice and Texas law authorities are still investigating and it's likely that further charges are forthcoming.