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Tuesday, January 24, 2023

A Procedural Twist on Dealing with Fraudulent Tax Return Preparers 

Usually when I write about misbehaving tax return preparers, I am sharing news of an investigation, an indictment, a conviction, a sentencing, or some combination of the foregoing. I have discussed these sorts of events in commentaries 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, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad, and When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers.

This time, in U.S. v. Simmons (behind a paywall), the court faced a procedural question in connection with the federal government’s attempt to prevent tax return preparers from continuing to engage in their activities. The government sought both a preliminary injunction and a temporary restraining order (TRO) against the defendants, specifically, two preparers and their tax return preparation business. The government alleged that the defendants, who prepared more than 2,000 individual tax returns each year, had been repeatedly filing false returns on behalf of customers who did not know what the preparers were doing. IRS audits of some of the customers revealed hundreds of thousands of dollars of tax deficiencies.

On January 17 of this year, the government filed a motion for a preliminary injunction and a TRO. Though in this instance both the injunction and the TRO would order the defendants to not do something, the procedural requirements attached to each are different. That is what the court needed to analyze. The preliminary injunction would prohibit the defendants from preparing tax returns until the substantive case was decided, that is, until the court determined if the defendants were in fact engaging in the fraudulent return preparation that the government alleged. The TRO would prevent the defendants from offering and providing tax preparation services when tax season opened on January 23. Issuing an injunction requires the submission of briefs and presentation of arguments at a hearing, and that takes time. A TRO takes immediate effect and would prevent the defendants from acting as preparers while the injunction was being considered.

The court attempted to determine if the defendants would agree to a TRO while briefing and arguments on the injunction request were underway. The defendants’ attorney explained that they would consider agreeing to a TRO prohibiting them from engaging in specific activities but not to an injunction prohibiting them from being tax return preparers. The government argued that limited injunctive relief would be inadequate considering the evidence presented with respect to the defendants’ activities.

Though the defendants claimed that they had made significant efforts to “correct errors in their tax return preparation,” the government demonstrated that the defendants had not made any changes with respect to many other practices in their business. The court agreed that the government had demonstrated that the defendants had understated their customers’ tax liabilities by filing returns on which the defendants took positions they knew or should have known lacked substantial authority and that they had acted either willfully or with reckless disregard of the law. The court also pointed out that the defendants had previously been subject to enforcement penalties that put them on “full notice of the consequences” of their conduct.

Accordingly, to allow for briefing and a hearing on the request for an injunction, the court declined to decide that question, but issued a TRO prohibiting the defendants from acting as tax preparers. The TRO expires on February 3, when the decision on the injunction is expected. To appreciate the scope of the TRO, consider its scope:

The Court enters this temporary restraining order enjoining Defendants, individually and doing business as Simmons Tax, their officers, agents, servants, employees, and attorneys, and anyone in active concert or participation with them, directly or indirectly, from:

1. Preparing or assisting in the preparation or filing of federal tax returns, amended returns, and other federal tax documents and forms for anyone other than themselves;

2. Advising, counseling, or instructing anyone about the preparation of a federal tax return;

3. Owning, managing, controlling, working for, or volunteering for an entity that is in the business of preparing federal tax returns or other federal tax documents or forms for other persons;

4. Providing office space, equipment, or services for, or in any other way facilitating, the work of any person or entity that is in the business of preparing or filing federal tax returns or other federal tax documents or forms for others or representing persons before the IRS;

5. Advertising tax return preparation services through any medium, including print, online, and social media;

6. Maintaining, assigning, transferring, holding, using, or obtaining a Preparer Tax Identification Number (PTIN) or an Electronic Filing Identification Number (EFIN);

7. Representing any person in connection with any matter before the IRS;

8. Employing any person to work as a federal tax return preparer other than to prepare or file the federal tax return of one of the Defendants;

9. Referring any person to a tax preparation firm or a tax return preparer, or otherwise suggesting that a person use any particular tax preparation firm or tax return preparer;

10. Selling, providing access, or otherwise transferring to any person some or all of the proprietary assets of the Defendants generated by their tax return preparation activities, including but not limited to customer lists; and

11. Engaging in any conduct subject to penalty under 26 U.S.C. § §6694, and 6695, or that substantially interferes with the administration and enforcement of the internal revenue laws.

The lesson for misbehaving tax return preparers is that despite their right to hearings and trials to ascertain their innocence or guilt, the fact that those hearings and trials take time will cause the federal government to request that the preparers in question be shut down until those hearings and trials are conducted and final determinations are made. Though in theory this may be a harsh result if the preparer ends up being found innocent, in practice the Department of Justice and the IRS don’t bring charges against prepares until and unless they have an open-and-shut cases. Unfortunately, no matter how many misbehaving preparers are identified and closed down, others are popping up just as quickly.

Tuesday, January 10, 2023

Cutting Off the Tax Revenue Nose to Spite a Political Face 

How many people will understand what actually is happening in the House of Representatives, now that a very tiny minority of a national minority has managed to take over what it intended to be a representative legislative body? The first legislative act of the House of Representatives was the passing, by a totally partisan vote, of the Family and Small Business Taxpayer Protection Act, which, of course, does not protect families or small businesses. Who does it protect?

The Family and Small Business Taxpayer Protection Act repeals the IRS funding increase provided by the Inflation Adjustment Act enacted last year. Not surprisingly, that IRS funding increase, intended to provide resources to crack down on tax-evading oligarchs and their ilk, was immediately criticized by the supporters of tax cheaters through the use of lies. As I discussed in Fear Mongering, Tax Style, the opponents of cracking down on wealthy tax cheaters falsely claimed that the increased funding would underwrite IRS actions against people with incomes under $400,000 and small businesses, and falsely claimed that it would permit the IRS to hire 87,000 additional agents. In my commentary I explained why those claims were lies, and why they find “fertile ground in the hearts and minds of those who react quickly to emotions and fail for one reason or another to think critically and dissect the absurdity of the claims.” Supporters of the funding repeal not only presented the same false claims but added their intention to expand the Trump-era tax legislation that was marketed as financial relief for the middle class but that in fact funneled riches into the coffers of the starving oligarchs.

Worse, the Congressional Budget Office issued an analysis of the legislation that demonstrates its impact on the federal budget. According to the analysis, the funding repeal would cut federal spending by $71 billion (in reduced IRS funding) but generate a reduction of $186 billion of lost revenue. Thus, federal budget deficits would increase by $114 billion over a ten-year period. The CBO estimate of lost revenue is on the low side, considering that a dollar of IRS funding brings in five to ten times as much revenue. Coming from a political party that for years has opposed deficit increases, other than when it comes to funneling money to oligarchs, one must wonder what is the true motivation for the legislation. Perhaps it’s simply an attempt to protect campaign donors from the reach of the IRS.

Of course, the same anti-IRS crew has plans to offset the additional tax cuts for the wealthy that they intend to enact. They have put Social Security and Medicare in their sights. Anyone who pays attention to life knows that Social Security and Medicare are vital for the poor, necessary for the middle class, and of little effect on the financial position of the wealthy. So why does this minority of the minority proclaim it is working for the poor and middle class while acting for the benefit of the wealthy? The answer is simple. They mask their true intentions because if they were to reveal their true intentions the outrage would toss them out of power. Instead, they bank on the ignorance of some, they rely on the apathy of others, especially those more concerned with foisting their social views on everyone else, and they count on the support of their campaign donors.

It is unlikely that this most recent legislation, the pride and joy of the anti-tax crowd and hailed by it as the vanguard of the latest chapter in the assault on government, will become law. It is unlikely to pass the Senate and if it did, it would be vetoed by the President. That probably does not worry the advocates of rule by the minority of the minority, because they’re just warming up for January 2025. And they’re likely to succeed, until and unless enough Americans figure out who their political friends actually are. Here’s a clue. It’s not the people intending to, and trying to, tear down what protects the financial well-being of the vast majority who are not wealthy.


Thursday, January 05, 2023

Is a Statewide Beach Tag Fee in New Jersey a Good Idea? 

Reader Morris directed me to a commentary by New Jersey 101.5 talk show host Bill Spadea, suggesting a state-wide “universal” beach tag fee to replace the individual beach tag fees imposed by dozens of New Jersey beach towns.

Spadea begins by expressing his general support for user fees, noting that those who use a “product, service or location” should pay at least part of the cost of providing or caring for those products, services, or locations. He then suggests that the fees charged for “a few hours enjoying the beach and the ocean” are too high. He notes that without beach fees, the cost of maintaining the beaches would fall on local homeowners and retailers. As often is the case with user fees and sometimes with taxes, the issue isn’t whether they should exist but how much they should be.

Spadea contrasts the New Jersey situation, which is seasonal, with Florida, which has year-round beach use. In Florida, taxes on hotel rentals ensure that at least some of the cost of beach maintenance is borne by tourists, that is, non-residents who use the beaches. He notes he has not seen much maintenance on the beaches of the Outer Banks, nor has he seen lifeguards, whereas in New Jersey the beaches are cleaned daily and lifeguards are stationed every few blocks.

Spadea then shares an idea from one of his friends. His friend argues that a person should not be required to pay additional beach tag fees to visit friends on the beach for a few minutes. The solution, he suggests, is a “universal tag that would be accepted across” all New Jersey beach towns. The tag would be sold by the state, and towns that chose to participate would receive a portion of the tag revenue collected by the state. Spadea thinks that this would increase beach tourism, in turn helping local businesses that rely on seasonal revenues to keep afloat and increasing local tax revenue.

Reader Morris asked me, “Does this beach tag fee idea make sense?” My response is the classic, “It depends.”

I set aside the claim that a statewide beach tag fee would increase tourism. Most tourists who visit the New Jersey beaches stay in one town, and though they may go to other towns for dining or gambling, most use the beach closest to where they are staying. But that’s not what generates my response.

To me, the statewide beach tag fee resembles the train passes one can purchase in Europe. A traveler intending to make multiple train journeys can purchase a pass for an amount that is less than what would be paid if each journey were purchased separately. But this makes sense only if the traveler is planning to make enough train journeys to justify the cost of the pass. A traveler intending to make one train journey would be ill-advised to purchase the multiple-trip pass.

Assuming that all beach towns opt in to the plan, which may or may not happen if a statewide beach tag is adopted, cost shifting will occur. Persons who visit multiple beaches will benefit from lower overall costs, whereas those who visit one beach will pay more than they would have paid for a single-town beach tag. There are ways of alleviating this imbalance but it would require a more complicated fee structure. Returning to the European train pass comparison, it is possible to purchase different “levels” of train passes, for example a pass good for 6 days of rail travel in a 15-day period, a pass good for 10 days of rail travel in a 20-day period, and so on. Of course, the cost increases as the scope of the pass widens. Yet what I gathered from what bothered Spadea’s friend is the notion that individuals who visit multiple beaches should not pay more simply because they are making a short trip to a beach. Perhaps I am misunderstanding the proposal, but surely Spadea’s friend isn’t suggesting that a person who purchases a ticket for one train journey should not be charged an additional amount for taking a short ride on another train.

There’s much to say in favor of a statewide beach tag system. It eliminates the inconvenience of needing to purchase a beach tag each time a person visits another beach. It streamlines the administrative burden of collecting fees and distributing tags by consolidating operations. It even helps the environment by letting a person carry one, rather than multiple, tags. It could work if structured in a way that did not shift the burden from heavy users of multiple beaches to people who are occasional visitors to one beach. And that is why I respond to the question from reader Morris with “It depends.”


Saturday, December 24, 2022

Does a Tax on Robot Value Help Retain Workers Or Is the Solution Less Simplistic? 

MIT has released a recent study by MIT economists with the tagline, “Should we tax robots?” The study isn’t suggesting that robots be required to file tax returns. Instead, it suggests “that a tax on robots should range from 1 percent to 3.7 percent of their value.” The reasoning is that the tax would give employers “incentive to help retain workers” as well as to replace the “dropoff in payroll taxes when robots are used.”

If the suggested tax were to be imposed annually, the cost of a robot would increase significantly. But that’s not the only concern. Most employers live in jurisdictions that impose property taxes, so wouldn’t the robot-value tax simply be a duplication of the property tax?

Imagine where we would be had a similar “tax on worker replacements” had been in effect when street-cleaning vehicles with one driver replaced perhaps a dozen street sweepers, when one painter with spraying equipment replaced several or more painters using brushes, when one employee driving a snow plow truck replaced however many workers moving snow with shovels. In every instance of technological advance and replacement, the key has been to shift employee tasks. Individuals working in buggy whip factories took jobs in automobile factories. Employees of carriage making companies went to work for Fisher Body and similar companies.

As increasing numbers of robots are manufactured and placed into service, employees are needed not only to build robots, but to design them, to write programming code for them, to work in the factories that manufacture the components, to work for agencies that check the quality and safety of the robots, and to repair or reprogram robots that are misfunctioning or need to be adapted to a different use. The key to these shifts is education. The learning of new skills, especially as a person gets older, is challenging. Yet it often is a necessity, has been so throughout history, and will continue to be a requirement of progress and survival. Companies that want to manufacture and program robots, and companies that want to use them, need to retrain employees, and need to enter into arrangements with companies closing down or laying off employees because of robot replacement. Should those costs be funded by a tax on the owners of robots? On the manufacturers of robots? On the companies laying off employees? Or perhaps on the consumers of the goods and services provided by the robots, as part of a price increase that puts the burden on those who benefit from the lower costs generated by the use of robots that would be partially offset by the price increase? The analysis of how increasing replacement of human workers with robots needs to reach beyond the simplistic concept of a tax on the value of robots and examine instead the correlation between who benefits from the use of robots and the cost of retraining humans to function in a robot world.


Wednesday, December 14, 2022

The Tax Consequences of Social Media Influencing 

Though there wasn’t a tax issue mentioned, a television court show presented facts that caused me to wonder about what actually is happening for tax purposes in the sort of transaction at play in the case. Yes, I’ve written about television court shows many times, in posts such as 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, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, and When a Tax PIN is Used Without Permission.

This time I’m watching America’s Court with Judge Ross, a repeat episode from 2020 but the program doesn’t give me the episode number. The case is a breach of contract claim by a hotel against a social media influencer. The defendant, who bills herself as a social media influencer, approached the hotel and proposed that she be allowed to stay free for several night in exchange for her posting favorable commentary on social media. Because of questionable behavior by a member of hotel management, the defendant did not publish the second and third promised commentary. The hotel sued, seeking payment for the value of the hotel stay. The judge held in favor of the defendant because of the inappropriate behavior of the hotel employee. So the defendant ended up with the value of a hotel stay without paying for it, in exchange for one social media posting. Of course, my brain asked me, “What are the tax consequences?”

At the theoretical level, there’s no question that the value of whatever an influencer receives in exchange for a contractual obligation to publish favorable commentary is included in gross income. Social media influencers, who operate on their own, are independent contractors and are taxed as such.

At the practical level, depending on the value of what is provided, the person or entity providing cash, property, or services in exchange for the favorable commentary may or may not issue a Form 1099. The influencer is responsible to track the amount that is received even if no Form 1099 is received. As a practical matter, influencers probably find it easier to keep track of cash, checks, and digital payments, while overlooking the value of goods and services.

Another practical problem is liquidity. It’s one thing to receive cash or its equivalent and set aside a portion to pay taxes. When a substantial portion of the influencer’s receipts consist of goods and services, the influencer may face the need to sell some or all of the goods, apart from those that cannot be sold (for example, cosmetics), in order to raise cash to pay taxes. However, that’s more easily said than done, and even if a sale can be made the sale price might end up being less than what the influencer bargained for when entering the contracts with the providers of the goods. It is possible that savvy influencers who are paid with goods and services would request a supplemental amount of cash to fund the resulting tax liability, but providers might resist because it is much easier to provide an otherwise empty hotel room or excess inventory holding a sunk cost than to dip into cash accounts.

I suppose some readers might ask, “You’re just now realizing there are tax issues with social media influencing?” My response is, “Yes, because I don’t pay attention to that side of the digital world. I’m not into advertising and marketing, other than to be on the target end of incessant emails, phone calls, and postal mail. I’m not into the clout rage. I’m not a celebrity whose talent with one activity causes people to think I’m an expert on some unrelated service or product. I’m not a celebrity wannabe desiring to make efforts persuading people to use a particular service or purchase a particular product. I doubt the world has any interest in knowing what brand shoe I am wearing or cares about which automobile dealership I prefer to patronize. I suppose some might then ask, “Isn’t MauledAgain designed to influence? Haven’t you, as a teacher for many years, tried to influence students?” To those good questions, I point out that to the extent I try to influence people, it’s not to influence them to purchase or use particular goods and services, but to influence behavior. For me, that matters much more.


Saturday, December 03, 2022

When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers 

When it comes to the filing of fraudulent tax returns, it’s often the preparer who initiates the scheme, in most instances leaving the client unaware of the malfeasance or brought into it on the assurances of the preparer, viewed by the client as more knowledgeable about taxes. More than once I’ve advised people to be careful when choosing a preparer. I’ve written about the woes of misbehaving tax return preparers in commentaries 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, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, and Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad.

But it’s not always the preparer who is at fault. Not long ago, according to this Department of Justice press release, a jury convicted a Michigan attorney of filing five fraudulent tax returns. Were his tax return preparers at fault? Apparently not. According to the press release, the attorney, who also owned a real estate company and two medical-related companies, concealed income “from his tax preparers and the IRS” by depositing receipts into his lawyer’s trust accounts. These accounts, known as IOLTA, are used by lawyers to hold funds that belong to clients, are not to be used for any other funds, and are subject to strict regulation designed to protect clients.

The attorney was convicted of filing fraudulent individual returns for 2012, 2015, and 2018, for filing a fraudulent amended individual return for 2012, and for filing a fraudulent corporate return for one of the medical-related companies for 2015. The jury relied on evidence that the attorney did not report roughly $600,000 of income earned in 2012, $800,000 of income in 2015, $300,00 of income in 2018. Altogether the attorney failed to report more than $2,600,000 in income. Sentencing awaits.

I’m not sure if the three-year pattern of 2012, 2015, 2018 was by design or happenstance. Perhaps the usual three-year statute of limitations that apples in non-fraud situation was some sort of factor in the attorney’s thinking.

What should a preparer do when handling a client’s tax return? It is possible, as this case demonstrates, for a client to succeed in hiding information from a preparer. Preparers need to ask questions, and document the answers. Perhaps this attorney’s preparers did that. Imagine them asking, “And did you receive any other receipts or income?” and getting “No” as a response. Unless there are clues that raise suspicions, such as expenditures far exceeding receipts and income, preparers cannot search and seize the client’s records that the client doesn’t provide to the preparers. Of course, if the preparers are suspicious and are dealing with an uncooperative client, they can terminate the relationship.

Sadly, the conviction of this attorney leaves the clients in a bad spot. The challenges faced by the clients and the options for them to have their cases handled are mapped out in an article by an unrelated attorney whose firm handles the same sort of personal injury cases as did the convicted attorney. Though I leave the “how to switch attorneys” issue to commentaries by those who specialize in the impact of professional responsibility rules on personal injury cases, I did learn from the article that the convicted attorney used for marketing purposes a telephone number converted to the slogan “855-Car-Hit-U.” Clever, in contrast to the foolishness of plowing receipts and income into IOLTA accounts prohibited from receiving them.

I wonder who has the phone number “855-IRS-Hit-U” and, no, I did not and will not “dial” it. (I put “dial” in quotation marks because as its use as a verb in connection with telephone calls is fading away and has become one of those benchmarks used to guess a person’s age!)


Tuesday, November 29, 2022

Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad 

Though as I’ve shared not long ago, I don’t write about every tax return preparer who gets into trouble because most of the cases aren’t very different, if at all, from previous ones. Yet I’ve written dozens of commentaries about misbehaving tax return preparers, 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, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, and When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns.

Today I read a Philadelphia Inquirer story about a tax return preparer, and then re-read part of the story to make certain I had seen what I thought I saw. According to the story, a New Jersey woman was sentenced to 159 months in federal prison and ordered to pay $565,091 in restitution for her role in a conspiracy to file fraudulent income tax returns using stolen identities. What made me re-read part of the story wasn’t the identity theft, the filing of false returns, the receipt of undeserved refund checks, and the hiring of people to cash the checks, because at this point those misdeeds aren’t novel. What caught my eye was the number of fake tax returns the group filed. The schemers filed more than 3,300 fraudulent tax returns for 2013 alone. The woman who was sentence cashed 13 of the checks, each of which for an amount exceeding $5,500. She also provided some of the runners involved in the scheme.

It's unfortunate that each guilty member of the conspiracy hasn’t been sentenced to one month in prison for each fraudulent return. Even one week for each fraudulent return could cause other would-be fraudsters to think twice about getting involved in this sort of antisocial conduct. The sentence handed down to this woman amounts to about one and a half days in prison for each fraudulent return. And what of the more than 3,300 people whose lives have been turned into misery because of the identity thefts?


Thursday, November 24, 2022

One Day of Thanksgiving, A Year of Thanks 

Today is Thanksgiving. For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, in 2014 with Giving Thanks: “No, Thank YOU!” , in 2015 with Thanks Again!, in 2016 with Thankfully Repetitive, in 2017 with Never-Ending Thanks, in 2018 with Particularly Thankful This Time Around, in 2019 with Quest'anno è il Ringraziamento, in 2020 with Different, But Thanksgiving Nonetheless, and in 2021 with Still Different, But Thanksgiving Nonetheless.

As I stated the past nine years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.

So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:

Sixteen years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , even yet again in 2015 in Thanks Again!, even still again in Thankfully Repetitive, yet once more in Never-Ending Thanks, yet even once more in Particularly Thankful This Time Around, again in Quest'anno è il Ringraziamento, once more in Different, But Thanksgiving Nonetheless, and last year in Still Different, But Thanksgiving Nonetheless. For me, it does not lose its impact:
Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.
I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.

Saturday, November 12, 2022

Alleged Ignorance of the (Tax) Law: A Justification or an Excuse? 

According to various reports, including this one, the controller of the Trump Organization, Jeffrey McConney, testified that “he followed instructions from former Chief Financial Officer Allen Weisselberg and other high-level Trump Org. executives” to provide fringe benefits and bonus checks to organization employees in ways that permitted those items of compensation to go untaxed, both for the organization and the employees, not only for federal and state income tax purposes but also for purposes of payroll taxes such as Social Security and Medicare. In the case of the bonus checks, not only were they wrongfully reported on Forms 1099 as though the employees were independent contractors, testimony and other evidence revealed that these employees “did not report those bonuses as income on their personal taxes.” The list of fringe benefits provided free of taxation is an indictment of how the wealthy can manufacture tax advantages that the ordinary employee is unable to arrange. McConney also testified that when he filed returns for high-level Trump Organization executives, he “improperly” reported that they did not keep residences in New York City, when in fact they did, and this made it possible for them to evade New York City taxes.

According to the reports of the trial, “McConney testified that Trump Org.’s tax consultant from Mazars, Donald Bender, never told him the practices of underreporting taxable income were illegal,” though he also “acknowledged that Bender told him that he ‘wasn’t a fan’ of the practice of issuing bonuses using 1099 tax forms when they could be booked as part of annual compensation from the Trump Corporation and taxed using a W2 tax form.” Interestingly, in about “2011, Bender advised McConney to stop cutting a bonus check to an in-house lawyer at the company because they could lose their law license for receiving it as an independent contractor, but McConney testified that he never questioned whether the illegality of how they handled bonuses would apply to anyone else.” McConney explained that he and other Trump Organization accounting personnel stopped these practices in 2017 at about “the time that a tax consultant conducted an internal review for Trump Org. and President Donald Trump took office.”

Is it sufficient for a corporate controller to rely on an external tax consultant’s alleged failure to point out the illegality of what the controller is doing, whether or not the controller is acting at the direction of higher-ups? I think not. According to RoberHalf, “Candidates for controller jobs should have a minimum of a bachelor’s degree in accounting or business, but preferably an MBA. They should usually have at least seven years of experience in the accounting field, and some public accounting experience is often required.” According to accounting.com, a controller should “Earn a Bachelor's Degree . . . in accounting or finance, . . . Obtain a Master's Degree, . . . like a master's in accounting or an accounting MBA, . . . Take the CPA Exam, . . . Earn CPA Licensure, . . . Obtain Professional Accounting Experience, . . . [and] Pursue Employment as an Assistant Controller.” Similar or identical advice can be found in educational, career planning, and employment web sites.

Based on this advice, a controller should have an education, licensure, certification, and work experience that includes exposure to basic tax principles. Business and accounting education includes exposure to basic tax principles. It’s one thing for someone whose education and career are not focused on tax to rely on tax professionals’ advice for the tax aspects of complex international transactions, but it doesn’t require an LL.M. (Taxation) degree to know that treating an employee as an independent contractor, providing false residence information, and underreporting employee income are illegal. Those principles are taught in business and accounting programs. The tactic of blaming others for one’s own misdeeds, whether in the form of alleging someone else did the wrong act or in the form of alleging that someone else failed to prevent the commission of the wrong act, has become a feature of present-day culture, perhaps fueled by a widespread parenting technique of making children feel good by telling them that their misdeeds are the fault of others.

There is a fine line between a justification and an excuse. Both terms often are used interchangeably in common conversation but in law there are technical differences. A justification is a claim that the act occurred but that the act should not be punished because it is consistent with societal principles. An excuse is a claim that the act occurred but that the person committing it should not be held responsible because of circumstances beyond the person’s control.

There is no way that underreporting income, misreporting income, and misstating facts on a tax return can be justified. Nor should an excuse based on blaming someone else for something that the actor knew or should have known be accepted as relieving the actor from responsibility. Blaming someone else isn’t justification. It’s an excuse, and in this instance it’s an unacceptable excuse.


Monday, October 31, 2022

Two Not Very Amusing, But Scary, Halloween Tax Challenges 

From the outset of this blog, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy (2012), Some Scary Halloween Thoughts (2013), The Inequality of Halloween? (2014), When Candy Isn’t Candy (2015), Beyond Scary: Tax-Based Halloween Costumes (2016), Another Halloween Treat? I Think Not (2017), If Halloween Candy Isn’t Food, Is it Medicine? (2018), The Halloween Parent Tax: Seriously? (2019), Halloween Chocolate Construction Project (2020). This year, it's a serious consideration, and The Tax Consequences of Halloween Candy Buy Back Programs (2021).

In recent days, reader Morris has directed my attention to two stories that bring both tax and Halloween into play. One is from thirteen years ago and the other is from three years ago, yet neither caught my attention until reader Morris pointed them out.

In a discussion on HauntWorld, someone using the name Front Yard Fright posed this question and background:

I do not charge admission to my haunt (I'm zoned residential so I can't) so what I do is ask for a donation from everyone who enters. If people ask how much admission is, I say it's a $6.00 donation. It's not required, but we ask for $6.00 and do our best to get it out there that it IS in fact a DONATION, and is not required. A portion of my donations actually go towards a local humane society.

My question for you guys is, would I have to pay taxes on these donations? Logic says no, but you never know!

Front Yard Fight explained that he asked his question because “there's a haunt near me that REALLY wants me shut down. He's called the city and has done a lot of messing with me. It was mentioned that he may come after me with the IRS about not paying taxes.”

Answers offered to Front Yard Fright included (1) no because it is a donation, (2) no provided the money goes to a charity and no charitable contribution deduction is claimed, hedged with “I would call your state tax office,” (3) yes, it is income, but deduct your expenses, and (4) treat it as a business, reporting the income and expenses. Other responses did not offer answers but what could best be described as sympathy.

So what is the answer for federal income tax purposes? Setting up a business appears to be prohibited by the zoning rules, though a closer look at the locality’s ordinances would be required. Not knowing the location, that’s not something I can do. It appears that Front Yard Fright does this every year, so it might make sense to treat this as an activity not engaged in for profit subject to section 183. If donations exceed expenses, the excess would be included in adjusted gross income, but if the excess is contributed to a charity then unless the standard deduction is utilized, the net effect on taxable income would be zero. If expenses equaled or exceeded donations, the excess would not be deductible but the impact on taxable income would again be zero.

What about other taxes? It depends on the locality. Is there a state income tax? Does it have the equivalent of section 183, directly or through using federal adjusted gross income as a starting point in the computation? Is there a state or local sales tax? Does it apply to these sorts of donations? Is there a gross receipts tax? Are these donations considered gross receipts? Are there other possibly applicable taxes? Are there de minimis exceptions? Perhaps Front Yard Fright is in New York State and hasn’t yet been haunted by what happened in the second story.

In a Lexology summary of a New York case, Hollis L. Hyans of Morrison & Foerster LLP describes the outcome in Matter of Ronald J. Doherty, Jr. Doherty was doing business as Eerie Production, operating a haunted attraction in Buffalo, New York. Doherty charged $23 to enter five separately themed haunted houses constructed out of temporary walls and containing various props and animations, along with actors hired to dress as ghouls, vampires, and killer clowns and “scare forward” people going through the attractions.

The Department of Revenue audited Doherty for the years 2010 through 2013 and imposed a sales tax on the entrance fees and on certain purchases. The audit was resolved without any reference to years after 2013. Doherty requested an advisory opinion, and the Department issued one stating that sales taxes were due on the admission charges. When a second audit was conducted with respect to 2014, Doherty asked for another advisory opinion, and again the Department issued one that reached the same conclusion.

Doherty took the matter to an administrative law judge, who concluded that the charges were taxable because Doherty operated a place of amusement, which are taxable under the sales tax law. The exception in place for amusement devices did not apply. Doherty appealed to the New York State Tax Appeals Tribunal. Doherty argued that his operation was not taxable because a previous case had held that the sales tax did not apply to sales of tickets for Ferris wheels, merry-go-rounds, and coin-operated games, and that his operation was within that exception because his haunted houses contained devices such as a dentist’s drill, a chainsaw, a CO2 gun, electric and pneumatic systems operating things such as animated snakes, an airbag, a gravity tilt bridge, vortex tunnels, and simulated ceiling drops. The Tribunal pointed out that customers paid to enter a space where they were entertained by actors to put on a show. It compared Doherty’s operation to peep-show booths held by the Court of Appeals to be places of amusement and not amusement devices. The Tribunal affirmed the decision of the administrative law judge.

In the commentary, Hyans points out that although the distinction between a taxable place of amusement and a nontaxable amusement device depends on the facts, the critical element in Doherty’s situation was that the patrons were not paying for a ride on a device or, I would add, to use a device, but as Hyans notes, they were paying for the “experience of being scared and entertained by live actors employing props and animated devices.” I also will add that perhaps a good bit of sales tax litigation and tax planning challenges could be avoided if sales tax laws did not make razor-thin distinctions between places of amusement and amusement devices or between “candy” and “food and food ingredients,” as I described in Another Halloween Treat? I Think Not, or between candy made of flour and candy not made of flour, as I described in When Candy Isn’t Candy.


Tuesday, October 25, 2022

The Death of Trickle-Down Theory in the United Kingdom: Will Americans Learn the Lesson? 

Anyone who reads MauledAgain knows that I am not a fan of supply-side trickle-down economic and tax policy. I have shared my thoughts in numerous posts, including The Expensing Deduction is an Expensive and Broken Idea, Does Repealing the Corporate Income Tax Equal More Jobs?, Tax Perspectives of the Wealthy: Observing the Writing on the Wall, Tax Cuts for Employers Do Not Create Jobs, Kansas Demonstrates Again Why Supply-Side Economics Fails, Tax Cuts Cause Damage When Misdirected, High Quality Tax and Economics Research Exposes Money Addiction, and Tax Cuts, Tax Repeals: When Will They Ever Learn?

We know that supply-side trickle-down economic and tax policy is a failure. It has failed. Miserably. Though its advocates occasionally write to me, claiming that I am wrong, that I don’t understand reality, that I have no clue about economics, and that I would be best served by supporting the desire of the wealthy for even more money, I continue to reject that nonsense. Study after study, for example this one from the London School of Economics that examined not one but 18 countries that have yielded to the demands of the oligarchs, demonstrate, as I pointed out in High Quality Tax and Economics Research Exposes Money Addiction, “tax breaks for the wealthy increase income inequality by sizeable amounts but have no significant effect on economic growth or employment.”

Why advocates of this foolish theory persist in clinging to their beliefs when it is clear that the theories don’t work puzzles me. Is it simply a belief that this approach to national tax policy increases the chances of each of these acolytes to join the ranks of the wealthy? Is it fear of change? Is it fear of losing clients?

So in the current atmosphere of economic panic, as inflation soars, rather than turning to the cause of inflation, such as the half of inflation fueled by corporate price gouging, populists are returning to that failed policy of cutting taxes for the wealthy. There is a lesson to be learned from what happened in the United Kingdom. After being named prime minister, Liz Truss announced that her cure for that country’s inflation mess was to eliminate the top income tax bracket, without providing any alternative source of revenue or spending cuts. If this sounds familiar, it ought to remind people of the mess created by Reagan, Trump, and their comrades in oligarch subservience when they delivered tax cut gift after tax cut gift to the wealthy in whose circles they played.

So what happened in the United Kingdom? When the announcement was made, that nation’s stock markets plunged, the value of the British pound against the dollar fell precipitously, financial institutions roared with criticism, and the Bank of England had to step in to prevent further collapse. The finance minister resigned, and shortly thereafter, Liz Truss stepped down as prime minister.

There is good news and bad news in these developments. The bad news is that there still are people in and close to political power clinging desperately to trickle-down economic and tax policy. Again, I ask why. Fear of change? Desire to become wealthy? Fear of losing political funding from the wealthy? The good news is that the people and institutions of the United Kingdom recognized the danger and reacted before the failed policy was implemented. This limited the damage that otherwise would have occurred.

According to this report, there are those who think that what happened in the United Kingdom is the “last gasp” and “death knell” of trickle-down economic and tax policy. Perhaps that’s the case in the United Kingdom, but I’m not so sure it’s the case in other places, such as the United States, where repressive regressive politicians dangle tax cuts for the wealthy as a carrot for middle-class and poor voters, too many of whom are so easily duped into thinking that they will benefit from something that widens income and wealth inequality and does nothing to reduce inflation. Perhaps I should mention that inflation will probably drop if the price gougers take control of enough legislatures after using inflation fears as a way to put into office politicians dedicated to cutting taxes on the wealthy and on corporations.

What, then, is the solution? As several experts interviewed in that report point out, the key to economic growth is to put investment into the middle class, and, I would add, the poor. What is needed is funding for quality education (not indoctrination), infrastructure, housing, technology, and cyber defense. Doing this creates jobs. How do we know that? It is what is happening at the moment in this country, with the passage of legislation doing those very things, while unemployment drops to near-record and record lows. Isn’t it sad that those who voted against that legislation are now claiming credit for supporting it, that is, lying as usual, while hiding their intentions to reverse that legislation when and if they return to power. They may not be learning the Truss lesson, but hopefully American voters are.


Monday, October 17, 2022

When a Tax PIN is Used Without Permission 

Another interesting television court show case involving a tax return popped up today, a rerun of a show that aired several years ago. I’ve written about television court shows many times, in posts such as 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, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, and Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension.

The show that popped up today was episode 26 of Judge Judy’s season 22. The plaintiff sued the defendant, who was his girlfriend while he was in prison. He claimed that without his permission she used his credit cards for herself, took his federal and state tax refunds, and took some of his personal property.

The defendant explained that she obtained the plaintiff’s credit cards and personal property when the plaintiff’s lawyer gave her various items, such as the plaintiff’s wallet, including his credit cards, a watch, and some jewelry. Defendant claimed she gave the wallet to one of the plaintiff’s friends, and later gave other things to another of plaintiff’s friends. The plaintiff explained that he asked his friends to get his property after the defendant wrote a letter to the prison superintendent that caused the plaintiff to decide that she should not be custodian of his property. He also claimed that she wanted him to marry her, but she disagreed and claimed that it was the plaintiff who proposed to her, but the plaintiff denied having done so.

The defendant admitted to using the plaintiff’s credit cards to make purchases for herself. After reviewing the credit card bills, Judge Judy determined that the defendant made many more purchases for herself than the two transactions she had admitted. Judge Judy pointed out that the defendant, in her answer, claimed that the plaintiff planned on filing for bankruptcy and thus told her to use her credit cards. Judge Judy noted that if, knowing this, she used the credit cards, she was a co-conspirator in defrauding the credit card company.

The defendant claimed that the plaintiff gave her his tax PIN in order to let her get his tax refunds, which amounted to about $1,600. The defendant produced evidence from prison officials summarizing their recordings of the plaintiff’s phone calls with the defendant, in which he gave the defendant PINs. The plaintiff explained that the PINs he gave the defendant were for prepaid debit cards.

Other testimony from the defendant, including her attempt to explain why she had put her cable bill in the plaintiff’s name at her home after he asked her to cancel the subscription, caused Judge Judy to tell the defendant that she was a “hustler.” Judge Judy held for the plaintiff, awarding him the requested $5,000 (which included not only the tax refunds but also the credit card charges).

If the plaintiff did not give the defendant his tax PIN, how did she get it? I don’t know. All I can do is to guess, that it was somewhere in his wallet or in his other belongings. Or perhaps it was the same PIN he used for the debit cards and the defendant took a gamble.

The underlying issue isn’t so much the transfer of PINs and credit cards. It’s a matter of deciding who to trust with that information when it is necessary to find someone to trust with that information. I leave others who have the requisite skill sets to write about identifying who to trust and how to minimize the risk of breaches of trust.


Tuesday, October 04, 2022

When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns 

For many of the years that the MauledAgain blog has existed, I have written about tax return preparers who get into trouble because of their misdeeds. As I stepped back from the every-other-day posting pattern, I decided there were diminishing returns from writing about every tax return preparer indictment or conviction because most of the cases were simply repeats of what some other preparer had done previously. Yet when something different pops up in a tax return preparer situation, I try to give it some attention. Those who are curious can find my previous comments about tax return preparers 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, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, and It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers.

The latest case that got my attention is one deserving of comment. According to Department of Justice news release issued yesterday, a tax return preparer has been penalized for violating a permanent injunction that prohibited him from filing, preparing, or helping to prepare federal tax returns for other people. In May of 2021, the United States sued the preparer, alleging that he prepared returns for customers that fraudulently understated customers’ tax liabilities, overstated their refunds, or both. He allegedly overstated withholdings, invented deductions, and included credits that customers were not entitled to claim. In September of 2021, the preparer consented to the permanent injunction.

In July of 2022, the United States filed a motion asking the court that issued the injunction to hold the preparer in contempt for violating the injunction. The United States alleged that the preparer used the preparer tax identification number assigned to his cousin to “covertly prepare at least 305 tax returns for customers in 2022 in violation of the injunction.” The motion also alleged that at least some of those returns included fictitious deductions and credits. Before the court held a hearing, the preparer stipulated that the United States could prove those facts by clear and convincing evidence, consented to an order finding him in contempt for continuing to prepare returns in violation of the injunction, and agreed to pay $213,500. On September 29, 2022, the court entered an order holding the preparer in contempt. It also ordered him to surrender the fees he had collected, and to reimburse the United States for its investigatory and injunction enforcement costs.

Without access to the order, I cannot determine if the $213,500 that the preparer agreed to pay represents the fees that were collected, the costs incurred by the United States, or a combination of both. If any of that amount represents fees, it is unclear if they will be returned to the customers or forfeited to the United States. The customers for whom these false returns were filed will need to file amended returns, and unless they do that themselves, which is unlikely, they will need funds to pay another preparer to fix the mess. If no part of the $213,500 finds its way to the customers, then presumably they would need to file a civil suit against the preparer, though that also requires funds and might not be successful if the preparer is incapable of paying civil judgments.

There is a saying that doing the same thing over and over and expecting different results is insanity. Though people debate the identity of the person who first offered this definition, it certainly is relevant to the case of the preparer who violated the injunction. He filed false returns, got caught, and was subject to an injunction. What did he think was going to happen when he once again started filing false returns? Worse, because his own preparer tax identification number had been taken out of service, he used someone else’s, which added to the list of violations. The press release doesn’t mention whether the cousin knew or did not know that his number was being used by the preparer who was subject to the injunction. Hopefully not, because if the cousin was in on the misuse the cousin also would be facing charges. Not knowing the cousin’s name there’s no way to check on that at this moment.

It's bad to do something wrong. It’s worse when getting caught and being subjected to punishments and restrictions. What’s worst is doing a repeat, because the punishments and restrictions will themselves get worse. Don’t mess with injunctions.


Friday, September 30, 2022

When Tax Troubles Never Go Away 

It’s been quite some time since I wrote about the tax troubles of former Pennsylvania State Senator Vincent Fumo. In Real Property Tax Assessment System: Broken and Begging for Repair, How to Fix a Broken Tax System: Speed It Up?, and Not the Sort of Tax Loss Taxpayers Prefer I described the Philadelphia real property tax woes that beset the former Senator.

Now comes a Philadelphia Inquirer story that explains Fumo is now facing federal income and gift tax troubles. On Monday, the United States Tax Court will hear Fumo’s petition to set aside an IRS notice of deficiency seeking roughly $3 million in back income taxes and penalties. The IRS asserts that Fumo received economic benefit from the transactions that were at the root of his 237-count criminal conviction 13 years ago. Examples provided by the IRS include “overpaying his Senate staff while using them as personal servants and campaign foot soldiers, and * * * hiring a taxpayer-paid private eye to investigate political enemies, an ex-girlfriend, two strippers and even his own son,” along with “other abuses.” The IRS notice of deficiency also includes penalties for “exploiting the South Philadephia nonprofit he created, the former Citizens Alliance for Better Neighborhoods, tapping its money to pay for political polls, a stealth lawsuit against a legislative enemy, a campaign to protect the ocean view at his shore home, for tools and consumer goods, and more.” In another proceeding, he IRS is seeking more than $300,000 in unpaid gift taxes on a transfer from Fumo to his son, which Fumo contends was not a gift.

Fumo’s lawyer claims the IRS position is “fundamentally flawed because the money in question went to people other than Fumo.” The lawyer gave as an example roughly a quarter of a million dollars paid to pollsters and “not Fumo,” but taxpayers can have gross income even when payments go to a third party if in turn the taxpayer benefits from something done by the third party.

Though the notice of deficiency was issued in 2012, while Fumo was in prison, an assortment of delays, including the pandemic, has let the suit stagnate for a decade. Those sorts of delays are not unusual in the American justice system. Hopefully the trial doesn’t take a decade, even though the IRS has listed 80 witnesses it plans to call to testify. Sadly, ten of the 80 have died since the memo was filed and the IRS intends to use their testimony preserved in transcripts from the criminal trial.

If the IRS succeeds, the outcome will put Fumo in a difficult financial position. During the criminal investigation he surrendered his $900,000 annual salary and position as a member of a law firm. The conviction cost him not only prison time but also his $100,000 state pension and his law license. He was required to pay roughly $4.5 million in restitution. His net worth, estimated to be $11 million when he went to prison, has fallen to $3 million. A few weeks ago, he put up for sale the 29-room mansion that was the subject of those real property tax woes. The asking price is almost $4 million.

According to his lawyer, Fumo is “tired of being a punching bag,” and “would like to move on with his life.” When asked by the Inquirer for comment on the Tax Court case, “Fumo replied by email: ‘have you no shame!!!’ ”

It is more likely than not that the outcome of the Tax Court trial will be known in less than a decade. Perhaps the case will settle. Perhaps the Tax Court’s opinion won’t be appealed. Perhaps there will be continuances. No matter, what is certain is that at least for another year or two or three, Fumo’s tax troubles will not be going away. Perhaps they will never go away.


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