Michael Bennett and an FBI Sting

Here is another former-NFL-player goes wrong tax story: Michael Bennett has been convicted of wire fraud and will serve 15 months in prison.

Who is Michael Bennett? He was drafted by the Minnesota Vikings in the first round of the 2001 draft. He was a Pro Bowl player. He was in the NFL until 2010, although he was a backup player for much of the time. Still, he earned millions of dollars from football. May we be so lucky.

How did he get arrested? It has to do with identity theft and tax refund fraud in North Miami. South Florida is a hotbed for tax refund fraud, and the FBI was operating a tax-refund and check-cashing storefront. It sounds like the business was quite lucrative, as the FBI was charging fees ranging from 35% to 45% of the face value of the checks. People would go the store and cash fraudulently-obtained checks, presenting false identification and sometimes forging the victim’s signature on the back of the check.

There was one ring of seven people which cashed approximately $500,000 of refund checks. The FBI caught the conversations and transactions on tape. Sadly, two former NFL players were in this crowd. Perhaps that is how we get to Michael Bennett.

In walks Bennett. He is not part of the tax-refund ring, but he does want to borrow money. He wants to borrow $200,000. I can understand. Surely many of us have been returning from lunch and decided to stop in at the cash-and-dash to borrow a couple of hundred grand. Bennett presents a bank statement showing that he had buckets of bucks at UBS, and the statement is accepted as “collateral” for a loan. On April 30, 2012 Bennett picked up a $150,000 check. He was supposed to pay back $280,000 after three months.

NOTE: Yes, I wrote the amounts correctly.

There was no money in his account, of course. Bennett admitted to altering his UBS statement to make it look like he had a lot of money there. He was arrested for wire fraud. He has until January 18, 2013 to begin serving his sentence.

My Take: Sad.

Thanks to Russ Fox for his post

A TIGTA Report on IRS Contractor Payments

The Treasury Inspector General for Tax Administration (TIGTA) has released a new report titled “Deficiencies Continue to Exist in Verifying Contractor Labor Charges Prior to Payment.”

What happened is that the IRS received appropriations from the American Recovery and Reinvestment Act of 2009. You may remember this Act by another name – the “Stimulus.” TIGTA was auditing certain expenditures and also reviewing IRS internal controls over contract review, approval and payment.

TIGTA selected a statistical sample of $1 million in labor charges. What did it find?

(1)   The IRS could not document $394,430 of invoiced labor hours that were paid.

(2)   The labor rates paid were not verified to the contract for the qualification level of the individual paid.

(3)   Although the IRS verified the qualification and experience of key contract personnel, they did not do so for other personnel. The IRS was supposed to do this by the contract.

My Take: I am glad that someone is keeping an eye on these expenditures. An error rate of 39.4% is not too reassuring, however.

A Wake for Flanagans

Have you got a restaurant to sell? If you do, you may want to hear the story of John Psihos (JP) and Flanagan’s Restaurant.

JP was a Greek immigrant who came to the U.S. in his 20s. He did very well and eventually owned three restaurants in the north Chicago area: Flanagan's, Cafe Oceana and Full Moon. Flanagan's was the most successful. He seemed to be a good employer, willing to help his employees. He was also generous in his charitable pursuits.

The problem was that JP was keeping a double set of books on Flanagan’s. He used the second set to prepare his tax returns, a ruse undetected until he tried to sell the restaurant. JP listed the restaurant through a broker, providing a fact sheet showing his average monthly receipts at $170,000 and average yearly operating profit at approximately $554,000. These numbers were from the first set of books.

This caught the IRS’s attention.

The IRS dispatched two special agents who posed as husband and wife. They met three times with JP, who explained how he kept track of the actual receipts at Flanagan’s. Each night at closing the managers would assemble envelopes with all of the money, as well as receipts, register tapes and payout sheets. Standard stuff for a restaurant. JP then provided this material to one of his managers, who prepared weekly summaries. JP, feeling brave, provided these summary sheets to the two “buyers,” stating further that he had these records going back to 2001 showing what he “really got” from Flanagan’s.

The two agents executed a search warrant on one of JP’s restaurants, seizing, among other things, the weekly summary sheets. They also seized records detailing Flanagan’s nightly sales and cash payouts. The IRS reviewed these records to recalculate the actual gross receipts for years 2001 through 2004. They determined that JP had underreported his receipts by over $3 million over the four years. He was indicted on felony charges by a federal grand jury.

One has to give JP credit for the chutzpah he displayed before the District Court. He argued that he had left out all kinds of expenses, such as:

·        Amounts paid to DJ’s

·        Cash wages

·        Complimentary food and drinks

·        Payments to Café Oceana for food supplied

He even prepared a chart which he presented to the Court. According to his analysis, the actual loss to the government was approximately $22 thousand. He argued that the Court had to give him credit for the expenses he didn’t claim because, well, you know, he hadn’t wanted to double dip. He had a conscience, after all. The Court was having none of this and observed that the expenses were undocumented except for his word and that his word was not credible. The Court ordered him to pay more than $800 grand and go to jail for a couple of years

My Take: JP could not have this both ways. Once he decided to underreport his gross receipts to the IRS, he then had to consistently underreport for all purposes, including any sale listing. I am not making a moral call here, just observing how this works.

Once caught, there was little hope that anyone would believe him about unclaimed expenses. How credible was he at that moment? 

And why would someone go to all this effort if the end result was only $22 thousand?

What does it tell you that the IRS became aware of (a) the sale listing and (b) correlated it to gross receipts on Flanagan’s tax return? Remember: tax information is supposed to be confidential. Returns are not supposed to be laying around on someone’s desk or kitchen table. Are you telling me that someone “remembered” Flanagan’s gross receipts? Could it be that JP was already under scrutiny? The court decision does not give us background on this point, although it is this point that I find chilling. I can almost hear JP saying “how would they ever know?” I agree: how did they know?

Talking About 2014 ObamaCare Employer Taxes

I have been reviewing two ObamaCare employer taxes that are scheduled to kick-in in 2014. It’s more than a year away, but let’s say you call me and we meet for coffee. It’s a business meeting. With cheesecake.

I’ll start the conversation off:

Me:                  If an employer has enough employees, then the employer is expected to provide health benefits.

You:                 What constitutes “enough employees?”

Me:                  More than 50 full-time employees. Full-time is defined as 30 hours per week, by the way.

You:                 So if I have less than 51 full-time employees, I escape the tax?

Me:                  Yes.

You:                 What if I have more than 50?

Me:                  Depends.

You:                 On what?

Me:                  On whether any employee receives a government subsidy.

You:                 And I am supposed to know this how?

Me:                  Trust me, you’ll find out.

You:                 What if I have more than 50 employees but no one gets a subsidy?

Me:                  How did you accomplish that, Houdini?

You:                 All my employees have their insurance covered by their spouse.

Me:                  Congratulations, Harry.

You:                 What if one divorces and gets a subsidy?

Me:                  You have a problem.

You:                 What problem?

Me:                  Your penalty will be either $2,000 or $3,000, depending.

You:                 Depending on what?

Me:                  Depending on whether you offer no insurance or offer unaffordable insurance.

You:                 So if I offer no insurance it will cost me $3,000 multiplied by some number?

Me:                  No.

You:                 You are getting on my nerves.

Me:                  The penalty for not offering health insurance is $2,000.

You:                 Per employee?

Me:                  No. You get to exclude the first 30 employees.

You:                 Huh?

Me:                  I didn’t write this stuff.

You:                 Say I have 55 full-time employees. What is it going to cost me?

Me:                  (55 minus 30) times $2,000 = $50,000.    

You:                 What if I fire 5 employees?

Me:                  Then you meet the 50-employee limit and have no tax.

You:                 Seriously?

Me:                  Yep.

You:                 Even if an employee gets government subsidy?

Me:                  Did you ever work at Bain Capital?

You:                 What is this “unaffordable” insurance thing?

Me:                  If the insurance exceeds a certain percentage of the employee’s family income, then the insurance is deemed “unaffordable.”

You:                 What is that percentage, oh beacon of despair?

Me:                  9.5% of household income.

You:                 Household income, what is that?

Me:                  An easy answer would be to add the husband and wife’s income.

You:                 How am I to know the spouse’s income?

Me:                  Trust me, you’ll find out.

You:                 How?

Me:                  When the government notifies you about the subsidy.

You:                 I am really starting to dislike you.

Me:                  Hey, I’ve got feelings here.

You:                 So if I see to it that all my employee’s spouses are doctors and engineers, then I can avoid the penalty?

Me:                  You have escaped yet again, Harry.

You:                 Say that I don’t escape. What is my tax?

Me:                  Well, you get to do two calculations. You pay the lower number.

You:                 Are you charging me for this aggravation?

Me:                  Yes.

Me:                  The first calculation is to multiply every employee receiving a subsidy for your unaffordable insurance by $3,000.

You:                 Then what?

Me:                  You do the same calculation as if you offered no insurance at all.  You know, the $2,000 calculation.

You:                 Huh, what’s the difference?

Me:                  The $2,000 calculation excludes the first 30 employees. Then it is just multiplication.

Me (cont’d):    The $3,000 calculation counts only those employees receiving a subsidy.

You:                 So if I offer unaffordable insurance, but no one gets the subsidy, my tax is zero?

Me:                  I am in awe, Harry.

You:                 What if I set up two companies, with neither having more than 50 employees?

Me:                  They already thought of that angle. No go if the companies are related. You owning both makes them related.

You:                 What if I increase my portion of the insurance to, you know, keep it “affordable?”

Me:                  That would work.

You:                 I would have to reduce the actual salaries or eliminate bonuses and raises to make the numbers work.

Me:                  Were you grades too high for community organizing?

You:                 What are other companies doing?

Me:                  Depends on the company. Some companies are too large for the 50 employees to mean anything. Still… Did you hear about Darden Restaurants?

You:                 Darden is who?

Me:                  Think Red Lobster and Olive Garden.

You:                 Are you charging me by the word?

Me:                  I’ll ignore that. Anyway, according to the Orlando Sentinel the company intends to reduce its maximum schedule to 28 hours per week per employee in “selected” restaurants. They told the newspaper that this is "just one of the many things we are evaluating to help us address the cost implications healthcare reform will have on our business."

You:                 Wow, that seems harsh.

Me:                  Where do you have that money tree planted, exactly?

You:                 How does an employee get a subsidy, exactly? Is that what sets this whole thing off?

Me:                  By “whole thing” you mean “unaffordable?”                      

You:                 I am going to hit you.

Me:                  There are two conditions. We already talked about the first one: the 9.5% of household income.

You:                 You mean 9.5% of a number that I have no hope of knowing or finding out?

Me:                  Yep, that one.

You:                 Do I want to know the second one?

Me:                  If you want your head to blow off.

You:                 What…? You have to tell me now.

Me:                  The second condition is that your employee’s household income ….

You:                 Which I do not know, right?

Me:                  Right. Now continuing where I was …. Your employee’s household income must be less than 400% of the federal poverty level.

You:                 You said 400%. I thought accountants were supposed to be good with numbers.

Me:                  I am. And it’s 400%.

You:                 Seriously?

Me:                  You are way too sharp to ever be hired by CNN.

You:                 So… what is 400% for a husband and wife?

Me:                  Close to $90 grand.

You:                 $90 grand! I didn’t make that last year! Or the year before!

Me:                  Maybe you can qualify for the subsidy.

You:                 I think I am going to fire you as my CPA.



Proposal to Report IRS Debt to Credit Bureaus

The General Accounting Office has released a report titled “Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus.”

Seems self-explanatory.

The report was provided to Sen. Max Baucus (D-Montana), chairman of the Senate Finance Committee, and Sen. Charles Grassley (R-Iowa), ranking Republican on the Senate Judiciary Committee. At the end of 2011 the IRS was carrying an inventory of $373 billion in receivables: $258 from individuals and $115 from businesses. Under current policy the IRS cannot directly report these debts to credit bureaus, although it does provide indirect clues by filing tax liens to secure its debts. The liens become part of the private record, which can in turn be picked up by credit bureaus and included in their data bases. There are firms that troll these records to solicit IRS representation, as a number of our clients can attest. There is one outfit in California that seems quite aggressive, as I have seen their form letters with regularity.

Credit reporting is not yet IRS policy, but the GAO report does indicate that the Senate tax committee is looking seriously at this matter. As Congress considers ways to address runaway deficits, it seems a viable proposal to raise revenue.

Are there issues here? Of course.  Many employers are using credit reports as part of their hiring process, and they are also being increasingly used in housing (think renting) decisions. These credit reports have real-life consequences.

On the flip side, reporting may encourage recalcitrant taxpayers to resolve their IRS issues sooner rather than later.

I am not sure I am comfortable with this proposal. I have worked IRS representation for many years, and while my experience with the IRS has been generally positive, I also have my share of war stories. I have arrived at agreement at examination, only to have exam reverse its decision and force me into Appeals. I have had the IRS battle me on a research credit, where the business owner is a professor at the University of Cincinnati and is commercializing his research. I have a client in Florida with two daughters. He is divorced, and his wife pays child support. We are battling the IRS because they do not want to believe that the two girls live with him. This affects his filing status (head of household), as well as his child credit ($1,000 for each girl). It would seem an easy case, as the girls’ mother lives in northern Kentucky. The girls are in Florida, for goodness sake.

Remember: these are people who can afford to hire me.

Of the $373 billion, $60 billion was in dispute or already in installment plans. $110 billion has been classified as uncollectible (I have several clients included in that total). That leaves about $200 billion that could be brought into the system, I suppose. The distribution curve of the debt is pretty much what one would expect. Well over half the taxpayers owe small dollars - less than $5,000.  The big dollars are concentrated in a much smaller group of taxpayers: debts over $5,000 add-up to $310 billion of the $373 billion total.

Still, how much of this is contestable IRS debt but the taxpayer cannot afford a tax pro?

Taxmaggedon

You may have read or heard about the “fiscal cliff” and “taxmaggedon.”

There are a couple of things going on here. Taxmaggedon refers to tax increases and the fiscal cliff refers to the federal budget and sequestration. The combination of the two is slated to happen in less than 3 months unless Congress and the White House act.

Let’s talk about the taxes.

There were revisions made to the tax code back in 2001 and 2003. These revisions have become known as the “Bush tax cuts,” which seems a reasonable description, and the “temporary tax cuts,” which doesn’t seem so reasonable. My daughter was in elementary school back when these tax changes were made. Today she is in college. To refer to these tax cuts as “temporary” is an abuse of the language.

Congress’ new thing is to put an expiration on tax legislation. It is somewhat like getting married but giving your spouse a term of only 5 or 7 years. At that date the marriage would be reviewed and – if found advantageous – would be extended for another period. I suppose one could stretch such a marriage out for many decades, but it seems bad form. Congress however seems to think that this is a fine way to pass tax law.

 A lot of tax law is expiring very soon. When it does, chances are that your taxes are going up. Why? There are a few items in there that we have come to take for granted, and by “we” I mean ordinary people who set an alarm clock and leave for work every day. Here are some examples:

(1)    Do you like your 10% individual tax rate? Well, that rate is going away. Sorry.

(2)    Have you managed to stash a couple of dollars in a mutual fund for your kids’ education? Tax on the dividends from that mutual fund will no longer be capped at 15%. Only rich people have mutual funds anyway.

(3)    Remember the tax marriage penalty? That used to mean that two people – if married – pay more taxes than if they had remained single. The penalty is back.

(4)    Are you selling that mutual fund when your kid starts college? If you have a gain, your tax is going up. See (2) above about owning mutual funds.

(5)    Certain credits, such as the education credits, will be reduced. The child credit, for example, will drop from $1,000 to $500 per eligible child.

(6)    Your social security withholding will increase from 5.65% to 7.65%.

Is it going to happen? I have no clue. But if it does, it will not be confined only to the “rich.” It will be all of us – at least, those of us who still pay taxes. That is one of the things that the “Bush tax cuts” did, by the way: remove millions of people from the tax rolls. There was debate at the time whether it was beneficial for society to divorce so many people from contributing to everybody’s government. It will be gallows humor to see the politicians tap dance when those millions return to the tax rolls.

The Cause of Action Lawsuit

Something caught my attention this week. You know how this blog works: if it catches my attention, we likely will talk about it.

So let’s talk.

Do you remember when a senior White House official blabbed-out the following in August, 2010?

"In this country we have partnerships, we have S corps, we have LLCs, we have a series of entities that do not pay corporate income tax," said the senior administration official. "Some of which are really giant firms, you know Koch Industries is a multibillion dollar businesses."

The problem is that this comment implies direct knowledge of Koch’s tax status, which – if offered up by a White House official – is a violation of federal law. You know, the kind of law you or I would go to jail for breaking.

In November, 2011 the New York Times opened its front-page guns on Ronald Lauder, a Reagan administration official and the chairman of the Jewish National Fund and of the World Jewish Congress.  The Times picked on Mr. Lauder for using aggressive techniques to minimize his taxes - the kind you and I might review if you hired me. There may be a point where it is too aggressive for us, but that is a different issue. None of us has a obligation to pay more tax than necessary. I would know your taxes because you would have hired me. However, how would the Times know about Mr. Lauder’s taxes? Point is… they shouldn’t. If I talked about his taxes I would lose my license, have a malpractice claim, likely be sued and who knows what else.

The irony that the Sulzbergers – the owners of the New York Times – probably used the same or similar techniques did not seem to occur to the Times.

Frank VanderSloot is a wealthy businessman who wrote a sizeable check to a PAC which supports Mitt Romney. For this he - and seven other donors - were named on an Obama campaign website as "wealthy individuals with less-than-reputable records." Are you kidding me? This summer he was pulled for audit by the IRS. So was his wife. For two years. Mr. VanderSloot and his accountants do not recall ever being audited. Not bad, considering that (1) he is uber-wealthy and (2) he is 63 years old.

Where are we going with this? In April a watchdog group named Cause of Action filed a Freedom of Information Act request for a listing of tax returns the White House has requested. How does the White House get them? Take a look at Section 6103(g) of the Internal Revenue Code:

6103(g) Disclosure to President and Certain Other Persons.—

 

6103(g)(1) In general.—

Upon written request by the President, signed by him personally, the Secretary shall furnish to the President, or to such employee or employees of the White House Office as the President may designate by name in such request, a return or return information with respect to any taxpayer named in such request. Any such request shall state—

6103(g)(1)(A)  the name and address of the taxpayer whose return or return information is to be disclosed,

6103(g)(1)(B)  the kind of return or return information which is to be disclosed,

6103(g)(1)(C)  the taxable period or periods covered by such return or return information, and

6103(g)(1)(D)  the specific reason why the inspection or disclosure is requested.

The IRS rejected the request, stating that it could not disclose information “specifically exempted from disclosure by another law.” The IRS appears to be referencing the fact that tax returns are confidential and cannot be released pursuant to the FOIA. The IRS has not explained however how a listing of returns requested by the White House is the same as releasing the tax returns themselves.

So this Tuesday Cause of Action filed a lawsuit against the Internal Revenue Service.

I am uncomfortable that a lawsuit was even necessary.