Stop Shoveling, Mr. Edwards

I am looking at a case where the IRS assessed over $1 million in tax and over $790,000 in penalties against a taxpayer.

Apparently this amount was too low, so the IRS added another $202,000 in tax and $152,000 in penalties.

Good grief. Just because you have a shovel doesn’t mean you should keep digging.

If you wondered how $202,000 in tax triggers $152,000 in penalties, it is because the IRS asserted fraud. The fraud penalty is 75%.

This immediately removes this taxpayer (?) from my range of practice. It is one thing to take an aggressive tax position. It is quite another to cross the street, jump the fence and walk into marching-band halftime fraud show.

Fraud requires the IRS to show intent by the taxpayer. This is a difficult standard and made more so by a tax Code that can be heatedly argued by opposing parties.

That said, I was speaking with another CPA this week representing a business tax audit which has stretched over several years. We have bounced ideas on this audit before, and he was telling me that the IRS intends to assert fraud penalties. That surprised me a bit, as there was (to the extent of my knowledge) no indication that revenues were underreported. Deductions, however, were a different story. This was one of those clients that deducted everything in sight – whether or not it was his and twice if you weren’t keeping count. Bam!! Fraud penalty.

And I tell you what I told my friend: I do not believe the penalty will stick if his client pursues the matter. Mind you, the case may have to go to Court, as there is a price to pay for being reckless. His client may not pay the fraud penalty, but the client will pay a tax professional.

Back to our tax case: Edwards.

This case has been in the system for a long time, as the IRS is assessing the 2000 tax year.

Edwards owned a corporation (Magna Corp) in North Carolina. Magna was involved with health insurance and workers’ compensation.  It received commissions from selling insurance, including:

                Sunshine Co                                     $128,239

                Fidelity Group                                   $276,528

Sunshine Co made the checks payable to Edwards individually. This happens, and generally the business owner endorses the check over and deposits it in the business account. That did not happen here.

Fidelity made its checks payable to Capital Marketing, a company owned by a Magna employee.

COMMENT: OK, that is odd. It goes without saying that the money did not make it back to Magna via normal channels.

There must be more to the story, as Capital Marketing also sent over $1.1 million to a Bear Stearns brokerage account owned by Edwards. The account was not in his name, though. It was in the name of “Carolina Green.” 

COMMENT: Folks, here is a tip from a 30-year tax CPA. You probably want to hold up going all Shakespeare-like naming personal bank and brokerage accounts.  Couple that with opaque, almost untraceable and frequent cash transfers and you are likely to have a revenue agent parked in your life for a while.

Edwards was also building a house, and Capital Marketing transferred over $1.4 million to his builder.

                COMMENT:  Enter opaque and untraceable.

Edwards and his wife filed their 2000 tax return and reported a little over $36,000 in income.

Edwards was indicted for mail fraud, wire fraud, money laundering and a rash of other things. He entered a voluntary guilty plea to many of the charges. The IRS held up until the criminal trial was done. That is the reason that we are reading about a 2000 tax case in 2016.

It has to be an upstream row to defend yourself in Tax Court when you have already been criminally convicted. Suffice to say, it did not go well for Edwards.

He could have tried a little harder not to insult the Court’s intelligence, however. He argued, for example, that the $1.4 million that went to the builder was actually a loan to him.

Sure.

Banks make $1.4 million loans to people making $36,000 all the time.