MauledAgain

So with a new year heading our way very soon, and aware that 2022 is pronounced 2020, too, I extend to everyone a wish that 2022 not be like 2020. Or, for that matter, 2021.

I hope that 2022 brings tax simplification and tax fairness to federal, state, and local tax systems and laws.

I hope that 2022 brings a decrease in, or even elimination of, the folks who choose to engage in fraudulent tax return preparation.

I hope that 2022 brings a decrease in, or even elimination of, the folks who choose to file fraudulent returns, to engage in tax evasion transacations, and to fail to file and pay taxes that are due.

I hope that 2022 brings an end to the practice of the wealthy using their wealth to decrease their tax burdens so that the need for revenue or the impact of reduced or terminated programs falls on those who are least able to bear those burdens.

I hope that 2022 brings an end to using tax laws to accomplish goals that are best funded directly, openly, and efficiently.

I hope that 2022 brings an end to the pandemic, so that the IRS, tax practitioners, and taxpayers can say goodbye to delays, complications, and confusion.

I hope that 2022 brings a restoration of postal service, not only for the few people who use mail to file tax returns, but also for everyone who uses the postal service because they don't have digital access (yes, there are some in that position), or cannot afford private delivery service, or who are transmitting something that cannot be sent electronically.

I hope that 20022 brings a surge in quality education, and a disappearance of propaganda and social media mistruths, not only with respect to tax, but also with respect to health, shopping, contracts, travel, and everything else for which being educated provides an advantage over being ignorant or misinformed.

I hope that 2022 brings an end to those on the losing end of a score claiming that they are winners, and who seek to cheat rather than accepting the reality of their performance.

I hope that 2022 brings peace, justice, good health, and integrity to all in the world.

One thing that strikes me as bewildering about tax return preparation fraud is that preparers will try the very same stunt that brought other preparers to court and prison. One need only read some of the instances discussed in my previous commentaries on this issue to see what I am describing. Take a look at posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, and It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns.

This time, according to a Department of Justice news release brought to my attention by reader Morris. According to the release, an Indiana tax return preparer was sentenced to 39 months in prison, a year of supervised release, and payment of more than $1 million in restitution after pleading guilty to inventing non-existent income in order to increase clients’ earned income tax credits, and to inventing false information to generate education credits. During the three years in question, the preparer filed more than 300 fraudulent returns, including his own. By charging roughly $1,000 per return, he pulled in hundreds of thousands of dollars in revenue. His falsifications generated more than $1,000,000 in excess tax refunds for his clients. And, of course, he did not report any of his fees as gross income. Even worse, he had previously pled guilty to criminal tax charges five years earlier, was sentenced, and after learning he was being investigated yet again, opened 15 new bank accounts while claiming he no longer prepared returns.

The earned income tax credit ploy has been used repeatedly by fraudulent tax return preparers. One would think that by now they would have figured out that it doesn’t work in the long run. The new bank account trick is also timeworn yet still used by those who think that they are special and won’t get caught. And, of course, another practice, failing to report tax return preparation fees as gross income makes it even easier for the IRS and Department of Justice to find these folks. True, there may be some preparers who have used these “techniques” who haven’t been caught, but it’s simply that they haven’t *yet* been caught.

The parade of tax return preparers trying to get away with a crime and then getting caught continues. If you’ve missed the parade, some portions of it can be viewed by reading the commentaries in which I have discussed the activities of some of these preparers. I’ve done so in posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, and Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer.

But this time, according to a recent Department of Justice news release, it wasn’t a tax return preparer who rigged up a tax fraud scheme. It was a mortgage underwriter who in 2015 and 2016, along with several others, told their clients that they could pay off their mortgage loans by filing forms with the IRS claiming that substantial amounts of taxes had been withheld when, in fact, that was not the case. The mortgage underwriter and his co-conspirators knew that the forms were false. The forms filed by the clients and detected by the IRS generated more than $4 million in unjustified tax refunds. The mortgage underwriter charged fees of between 20 and 35 percent of the refunds, and then shared some of those fees with the others involved in the scheme. When the IRS discovered the fraud and began its investigation, he provided the clients with fraudulent documents to send to the IRS, telling the clients to hide his role in the filing of their returns and also advising a client to remove funds from his bank account to prevent the IRS from collecting the taxes that were due. On account of these activities, he was convicted of conspiring to defraud the IRS, aiding and assisting in the preparation of false tax returns, and obstructing the IRS.

It gets worse. The mortgage underwriter also failed to file a return for 2016. He also did not pay taxes on any of his income for that year, including the income derived from marketing and operating the fraudulent filing scheme. For this, he was convicted of failing to file a tax return.

For all of these crimes, he was sentenced to 12 years in prison. He also was ordered to serve three years of supervised release and to pay about $4.2 million in restitution to the United States.

So if he is in prison, how does he come up with $4.2 million? Does he have that much in assets? Probably not. He probably collected about $1 million in fees, gave some to his co-conspirators, and surely spent at least some of what remained. Perhaps he has some other assets. Perhaps not. Will he, when released, have the ability and time to earn the amount that must be paid in restitution? Should he be spared prison so he can earn the amount needed? No. One can only wonder how he would then try to find $4.2 million. Of course, perhaps the IRS can collect some of the fraudulently paid refunds, but even if it does so, it ought not reduce the required restitution.

The lesson? In addition to being careful in selecting a tax return preparer, be just as careful when getting tax advice from someone who is not a tax expert. A mortgage underwriter tells you to file a particular form in order to pay off a mortgage? Take the form to a reputable tax professional and find out if it is legal, not just in a tax sense but also in terms of debtor-creditor law.

Over the years, television court shows have been supplying me with material for this blog. Some of my commentaries about these episodes include Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, and A Taxing WhatAboutIsm Attempt.

This time it’s episode 4 of Hot Bench’s season 8. Piecing together the facts is a bit challenging because both parties were rather disorganized in presenting their case.

Many years ago, the plaintiff and the defendant were in a relationship. The defendant became pregnant, and put the baby up for adoption. The plaintiff and defendant broke up. Years later, they reconnected and got married. The defendant had taxable income. The plaintiff received nontaxable disability benefits. The defendant compared filing a joint return with filing separately, and concluded that filing separately would generate a larger refund than if they filed jointly. However, at another point the defendant suggested that filing separately would cause her to owe additional tax. The parties agreed that the defendant would claim her husband, the plaintiff, on her return – how that was possible was not explained, nor was it clear that is what the defendant did – and also would take a child tax credit for the plaintiff’s daughter from a previous relationship. Again, how that was possible was not explained. The defendant stated that by claiming her husband and his daughter she would receive a refund rather than owing additional tax.

According to the plaintiff, the defendant agreed to give him a portion of her refund equal to $3,500 minus however much was held back to pay back child support owed by the plaintiff. When asked several times during the proceeding how much back child support he owed, the plaintiff gave three different answers, including $700, $1,700, and $3,500.

The defendant denies that there was an agreement. The court pointed out that the plaintiff would not have given the defendant permission to make claims with respect to him and his daughter if he wasn’t getting something in return. At the time of the alleged agreement, the plaintiff and defendant were not on good terms.

The plaintiff then alleged that no child support was taken out of the defendant’s refund by the IRS because the back child support had been taken out of his state income tax refund. There was no inquiry into why the plaintiff would be filing a state income tax return if his only income was nontaxable disability payments. The plaintiff alleged that the defendant did not transfer any money to him, which was why he was suing her.

The defendant then claimed that the plaintiff did get the money and that it went to pay his back child support. She claimed that on her federal income tax return she designated that part of her refund be deposited into the plaintiff’s bank account. When showed the bank account number, the plaintiff stated that it was not his bank account. The defendant then claimed that all of her refund went to pay the plaintiff’s back child support. She claimed that she then had to file an amended return because she received a letter from the IRS telling her to do so, but she could not produce the letter. It was unclear why the IRS would have sent her such a letter, and it is possible that no such letter was sent.

The plaintiff also sued for return of his wedding ring, and the defendant countersued for alleged damage to their house, and for the plaintiff’s alleged harassment and insulting the defendant’s son by a previous relationship. The plaintiff had already filed a different lawsuit for return of his property but did not include his wedding ring because he had not discovered it was missing until after that lawsuit was final.

The judges agreed that there was an agreement as the plaintiff described. They did not find proof that the bank account number was for the plaintiff’s bank account. They also found the plaintiff more credible than the defendant. However, the plaintiff’s confusing statements of how much back child support he owed, for which he gave three very different amounts, left the judges insufficiently convinced that the plaintiff had met his burden of proof with respect to damages.

The judges dismissed the claim for the wedding ring on procedural grounds because the plaintiff had filed a previous suit for property and should file motion for reconsideration of that case in the court that heard it. They rejected the defendant’s counterclaims for lack of proof because she had offered no evidence but her own uncorroborated testimony.

The lessons from this case should be obvious. First, put the agreement in writing. Second, retain evidence of what was done pursuant to the agreement. A written agreement and appropriate evidence would have cleared up the confusion that clouded the case. The plaintiff failed to provide evidence of how much back child support was in play. The defendant failed to produce the alleged letter from the IRS. The plaintiff failed to provide evidence of back child support being taken out of a state income tax refund. The defendant failed to provide evidence that any money was paid to the plaintiff.

It is understandable that people enter into oral agreements, as unwise as that is in many instances, because it is quick, inexpensive, and perhaps a repeat of previous successful deals. But when the two parties are not on good terms, as was the situation in this case, or as is the case when there is litigation to be settled, the agreement must be in writing. And there is no good reason not to put it in writing.

Like other readers of this blog, reader Morris knows that I pay attention to the adventures of tax return preparers who do things that they ought not to do or failed to do something they ought to have done. I have written about these situations on many occasions, including posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, and Don’t Get Burned By a Tax Return Preparer.

Reader Morris came across a news story that he knew would get my attention. Why? Because it tells the tale of a tax return preparer whose misdeeds soar beyond those of the tax return preparers who have been the subject of previous commentaries. According the story, the owner of a tax return preparation business was charged not only with preparing fraudulent returns but also with operating a “Tax School” where the preparer taught others how to prepare fraudulent returns. For the past five years, students at this “school” would pay $500 to learn how to “manipulate returns by listing fake businesses and fake expenses on tax forms.” Prosecutors allege that during one class, the preparer “described how she created a fictitious dog grooming business on a client’s return, created a fake profit and loss statement and even instructing a client to print out dog photos to support the claim of a business.”

The preparer has been charged with one count of aiding and assisting in the preparation of false and fraudulent federal income tax returns. The sentence if there is a conviction is a maximum of three years in federal prison and a $100,000 fine. That’s not enough. Surely the more people she taught how to commit tax fraud, the longer should be the sentence. It’s unclear how many people attended the preparer’s “school” and how many of them went on to prepare fraudulent tax returns. Surely after five years the numbers must be in the dozens if not more. So if, for example, this fraudulent tax return preparer spawned another 36 fraudulent tax return preparers, the maximum sentence is one month for each person led astray. That’s not enough. It’s not even close to what is necessary. It’s also unclear whether prosecutors are tracking down the persons who attended this “school” to determine if they engaged in fraudulent tax return preparation. My guess is that those investigations, if they happened, are already concluded, because the news of the “teacher” at that “tax fraud school” being charged would have the students running for cover. It remains to be seen how many of those students, if successfully sued by their clients for the consequences of fraudulently altering their returns, will in turn sue the owner and teacher of what I would call “Tax Fraud School.”

Reader Morris pointed me in the direction of Yahoo reprint of a Business Insider article that suggests treating loans taken out by the wealthy as realized income. The article points out that by borrowing on assets rather than selling them, the wealthy can extract cash without adverse income tax consequences. That conclusion is correct. The article contends that when assets “are used as collateral to draw a line of credit and avoid a taxable event, it creates immediate value for the owner.” This conclusion is incorrect. There is no increase in value when a taxpayer adds cash to the asset side of the balance sheet and an equivalent amount of debt to the liabilities side of the balance sheet. Income arises when a person is wealthier, and borrowing money does not make a person wealthier.

The key, though, is determining when to tax an increase in wealth. Existing tax law does not tax increases in asset value until that increase is “realized.” Under existing law, borrowing money while using the asset as collateral is not a realization event, whereas a sale of the asset is a realization event. Proposals to tax unrealized income, that is, the increase in asset value that isn’t taxed under current law, encounter objections because determining value can be difficult in some instances. On the other hand, because most lenders limit the amount of a collateralized loan to something less than the asset’s value, the act of borrowing money while using an asset as collateral can establish some amount of a minimum value.

Reader Morris asked me, “Does this article describe an easy way to tax billionaires that would actually work?” I doubt it. First, defining borrowing as a realization event could have unintended consequences. What if the borrowing is designed to raise cash to invest in the business rather than to support consumption? The article describes reducing consumption by the wealthy as one objective of reducing or eliminating the use of collateralized loans to generate untaxed cash flow. Second, finding an appropriate, justifiable, and fair way to spare the non-wealthy from being taxed when collateralizing assets to borrow money would be challenging. It not only requires deciding if wealth or income should be the measuring stick, but also determining where the cut-off should be. On top of that, how to treat taxpayers whose wealth or income fluctuates above and below the cut-off poses challenges. If this proposal were to be enacted and curtail borrowing by the wealthy, what would that do to credit markets and interest rates? Perhaps someone already is doing studies to determine the answer. But without assurance that the outcome would not have undesirable unintended consequences, taking this approach requires great caution.

Reader Morris also asked me, “Do you have an easy way or anyway to tax billionaires that would actually work?” I jokingly replied that perhaps it was a proposal I had seen, perhaps not intended as a joke, that the tax law should have a section that states, “You are now worth a billion dollars. You won! You have all you need. Any income over $20,000,000 a year will be taxed at 100 percent so others can enter the game.” Seriously, the easy way is to repeal the provisions that were enacted under the pretext of trickle-down, and to do so retroactively. One specific provision that has been in the tax law since the beginning that needs to be jettisoned is the allowance for depreciation deductions on property that is not depreciating in value, one of the major types of assets used to collateralize the sort of loans the Business Insider article wants to tax.