In 2016, tax attorney Paul Dagueras was sentenced to 180 months for conspiring to defraud the IRS, evading taxes, mail and wire fraud, and four counts of tax evasion relating to the use of tax shelters for clients. Prosecutors called him “the most prolific, pernicious and utterly unrepentant tax cheat in United States history.” He was tried twice, the second time after it was discovered an original juror had lied to get on the jury. It was until only recently that Mr. Dagueras held the distinction of biggest tax cheat; his $1 billion scam now pales in comparison to Robert Brockman’s $2 billion tax evasion case that broke earlier this year. (U.S. v. Daguerdas (September 21, 2016) U.S. Court of Appeals, Second Circuit, Case No. 14–2437–cr)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection Live Webinar. Click here for more information.

AB 80, the bill that would allow up to $150,000 of expenses to be deducted if paid with PPP forgiven loan amounts has not yet passed. There has been no activity, and we can’t get good information on when and if it will pass, and what will actually be included in the final bill. Here are a few important things to know:

• We will send you a Flash E-mail as soon as it passes providing complete information on the details of the final bill (Click here to sign up for our free Flash E-mail);
• Because there is speculation that the $150,000 amount could change, we suggest you extend any returns where the taxpayer received a PPP loan or had EIDL or other federal grant payments until we know the details;
• Consider filing extensions for all returns that have been filed and if there is a change you can file a superseded return, rather than an amended return.

Get details on the American Rescue Plan — as well as a brief update on AB 80 when you attend The American Rescue Plan: Tax Implications webinar on March 22 or March 23. Click here for more information or to register for the webinar.

A restaurant owner in Nashville is facing 45 years in prison for tax evasion, money laundering, failing to pay employment tax, and harboring illegal aliens who he employed at his restaurant. The workers were from China and Guatemala, and lived with the taxpayer at his home. He would transport them back and forth to work in the restaurant, where they only worked in the kitchen so they would avoid interacting with restaurant patrons. (www.justice.gov/usao-mdtn/pr/clarksville-resturant-owner-pleads-guilty-alien-harboring-and-tax-fraud-conspiracy)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection Live Webinar. Click here for more information.

A Pennsylvania couple is facing up to 30 years in prison for mail fraud, filing false tax returns, and submitting falsified loan documents. The wife was the COO of a hospital and used her position to embezzle $1.3 million, which the couple used on vacations, home renovations, and a 70-acre motocross course. She used her corporate credit card for many of the purchases, and then disguised the charges as business-related. For example, she purchased hundreds of gift cards worth more than $350,000, claiming they were for distribution to “focus groups” or physicians. Ironically, her husband was a financial crimes detective who investigated theft and fraud. (www.justice.gov/usao-wdpa/pr/butler-county-couple-plead-guilty-fraud-and-tax-charges)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection Live Webinar. Click here for more information.

Brothers who own one of the two locations of Mama Lu’s Dumpling House in Monterey Park have been charged with underreporting sales by millions of dollars and underpaying sales and use tax, and the CDTFA is steamed. The Lu brothers face 17 counts, including conspiracy to file false sales tax returns, filing false sale tax returns, and filing false income tax returns. The second Monterey Park location is under separate ownership and is not being investigated. Still, you may want to pick up some xiao long bao before we have to say xiao long to one of these locations. (https://laist.com/latest/post/20210216/charges-mama-lus-dumpling-house-monterey-park-11-million-tax-sales-fraud-attorney-general)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

“Don’t put all your eggs in one basket” is typically good advice, except in the case of a North Carolina tax preparer who diversified her practice to include dealing meth. When an undercover agent placed an order for a pound of meth and she took the bait, it was safe to say that she was likely engaged in other unsavory business practices. It turned out she had been fraudulently e-filing returns claiming false wage income and had done so on at least 489 false returns that generated $3.2 million in fraudulent refunds. She faces five years in prison for tax fraud and five to 40 years for methamphetamine distribution. (https://www.accountingtoday.com/news/tax-fraud-blotter-junior-achievements)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Former Illinois senator Sam McCann was indicted on charges of fraud, money laundering, and tax evasion for misuse of over $200,000 of campaign money for personal expenses. After a failed run for Governor, he employed a scheme that caused the Conservative Party of Illinois to issue approximately $187,000 in payments to himself personally and an additional $52,282 in payments for payroll taxes by using a payroll service to conceal himself as the payee. He also spent campaign funds on an RV, a Ford F-250 truck, credit card charges related to a family vacation in Colorado, charges from Apple iTunes, Amazon, a skeet and trap club, Best Buy, a gun store, and cash withdrawals. He’s facing 20 years in prison. (https://wrex.com/2021/02/03/former-illinois-senator-indicted-for-alleged-misuse-of-campaign-funds-tax-evasion-money-laundering/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Virginia tax preparer was sentenced to two years in prison for filing over 400 false returns. The preparer owned At Ease Tax Services, a tax preparation business that was so at ease that she operated it out of hotel rooms, preparing tax returns that claimed fraudulent credits and deductions that inflated her clients’ refunds. She did not sign any of the returns, she didn’t review the completed returns with clients, and she never provided a copy of the return, even when clients asked for one. Early in 2020, her husband was convicted of felony murder. She met him in 2015 while preparing his taxes. (https://www.dailypress.com/news/crime/dp-nw-federal-tax-fraud-20200814-mtamqe3h7bbcvpvvknr6t6fmwe-story.html)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

An office manager/bookkeeper at a medical office was sentenced to four years in prison after it was discovered she had been writing checks to herself and adjusting invoices and expenses to cover up the theft. She opened a business bank account in the owner’s name without his knowledge and deposited checks made out to the Oregon Department of Revenue into her own personal account. When the IRS came calling, the office manager created a fictitious IRS revenue agent named “Linda Gibson” – complete with a phone number and voicemail – and “assisted” the owner with the collections action using this alias. (www.justice.gov/usao-or/pr/eastern-oregon-medical-practice-employee-pleads-guilty-tax-crimes-bank-fraud)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Northern California man who opened a wine storage facility was charged with stealing wine from customers (wineries) who stored their product there. He sold the stolen wine using aliases and kept the proceeds. After he was charged with stealing 8,000 bottles, he burned down the facility, destroying 4.5 million bottles valued at over $100 million. The fire also damaged pasta sauce stored in the facility by the Francis Ford Coppola brand and sugar stored by C&H Sugar. Sentenced to 27 years in prison and $73 million in restitution, he sought release to home confinement due to COVID-19. He was denied due to risk of harm to the community and the fact that he had already contracted the virus once and recovered. (U.S. v. Anderson (January 6, 2021) United States District Court, Eastern District of California, Case No. 2:07-cr-00096-KJM)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The former chief of collections for the D.C. Office of Tax and Revenue was sentenced to 14 months in prison for his conviction for a bribery charge. He paid an OTR official $5,000 to remove $150,000 in tax liabilities for a business; he then turned around and charged the business $25,000 for his efforts in having their tax liability reduced. After collecting part of the payment, he met the OTR official in a parking garage to split the cash. His arrest was part of an ongoing investigation and years-long audit that also nabbed two other government workers and a businessman who were involved in the scheme. (www.justice.gov/usao-dc/pr/former-office-tax-and-revenue-head-collections-sentenced-paying-bribes-otr-official-help)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A former EDD employee, Andrea Gervais, is accused of filing 100 false Pandemic Unemployment Assistance claims. Of those claims, 12 were processed for over $200,000 in unemployment benefits; if all 100 had been processed, she would have received around $2 million. Authorities were tipped off to the scam when $21,000 in PUA benefits were filed under Senator Dianne Feinstein’s name. Gervais was then caught on camera withdrawing cash from an ATM using at least seven PUA debit cards, including the one issued to Senator Feinstein. If convicted, Gervais faces 20 years in prison. (https://sacramento.cbslocal.com/2020/12/18/fired-edd-employee-andrea-gervais-edd-fraud/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A New York tax preparer was already serving 41 months in federal prison for preparing false returns, and during his stay he used a smuggled smartphone to continue to prepare returns for clients and divert the refunds to an account he controlled. The clients received documents showing a lower refund amount and in some cases the tax preparer took a $900 fee from their refunds without their knowledge. Several clients did not know that the tax preparer was in prison when he filed their returns. (www.nytimes.com/2020/12/03/us/abdel-soliman-tax-fraud.html)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Hitesh Patel has been sentenced to 20 years in prison for his role in operating and funding India-based call centers that defrauded U.S. victims out of millions. Patel ran a complex telephone scheme in which employees from call centers in India impersonated officials from the IRS and U.S. Citizenship and Immigration Services. Victims were threatened with arrest, imprisonment, fines, or deportation if they did not pay money supposedly owed to the U.S. government. Victims were instructed to provide payment by purchasing reloadable debit cards or wiring money. Patel was prosecuted after being extradited from Singapore in April 2019 and he was ordered to pay $8,970,396 in restitution. (www.justice.gov/opa/pr/owner-and-operator-india-based-call-centers-sentenced-prison-scamming-us-victims-out-millions)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The owner of Beebe’s Roaring River Waterslide in Cassville, MO is in hot water: he’s facing prison time after meeting with an undercover federal agent to discuss the sale of his business. During the meeting, Beebe showed the agent records with the business’s true gross receipts, which were different from the amount reported on his federal tax returns. Beebe also admitted to routinely destroying business records, explaining to the agent that he was in “the mode of secrecy” and used cash whenever possible. But old records were found during a search of his residence, and he now owes restitution to the state and the feds.

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A taxpayer claimed that in 2015 she sustained a deductible theft loss of approximately $2.5 million, which resulted from her ex-husband’s refusal to transfer marital property awarded to her in their 2008 divorce. She further argued that the theft loss generated a net operating loss in 2015, which she attempted to carry forward to 2016 and back to 2013 and 2014. While the court noted it was true that the ex-husband consistently ignored court orders to transfer assets to the taxpayer, the taxpayer wasn’t able to prove a theft had occurred and the court ruled against her. (Bruno v. Comm., TCM 2020-156)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The office manager for the Rapid City Rush, an East Coast Hockey League team, will be spending 37 months in the ultimate penalty box: prison. Over the 11 years that she worked for the team, she embezzled more than $700,000 from the Rush organization, and of course failed to report and pay tax on the income. Her attorney noted that she is indeed guilty but had committed her crimes within the organization’s “culture of corruption.” The theft was discovered when the team came under new ownership and the owners scrutinized the bookkeeping. (https://apnews.com/article/hockey-crime-embezzlement-tax-evasion-courts-663e4bbd4af1fb24cff1dbcb30129199)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The IRS has released its Criminal Investigations Annual Report for 2020. During 2020, the IRS Criminal Investigations division initiated nearly 1,600 investigations and identified $2.3 billion in tax fraud schemes. As the only federal law enforcement agency with jurisdiction over federal tax crimes, Criminal Investigations has one of the highest conviction rates in federal law enforcement: 90.4%. In fiscal year 2020 alone, more information was shared through the Joint Chiefs of Global Tax Enforcement committee regarding cryptocurrency, tax crimes, and related enforcement, than in the previous ten years combined. The full report can be found at: www.irs.gov/pub/irs-pdf/p3583.pdf.

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

In 1989, Mrs. Green was hit by a shopping cart while at a grocery store, sustaining injuries that she claimed made it impossible for her to continue to work at her job. The Greens claimed $53,888 and $102,242 in medical expenses for 2004 and 2005 respectively, which included a personal driver to take her to doctor appointments, the grocery store, and hair and nail appointments; two housekeepers to cook, clean, and serve the Greens; and accrued but not yet paid medical expenses (the Greens argued that they were accrual basis taxpayers). While the Greens did not meet enough of the badges of fraud to prove that there was intent to evade tax, the court did find the taxpayers guilty of negligence. Note: Mr. Green was an IRS tax service representative and auditor for 20 years. (Theodore M. Green, et ux. v. Comm., TCM 2010-109)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

While Al Capone is the classic case of a gangster finally getting popped for tax evasion rather than his numerous other crimes, Heidi Fleiss is another such example. Known as the Hollywood Madame whose call girl scandal exploded in the 1990s, she was not convicted for pandering, but rather for money laundering and evading tax on hundreds of thousands of dollars by funneling cash into relatives’ savings accounts and a house that was purchased in her father’s name. Her father, a Los Feliz pediatrician, pleaded guilty to conspiracy and making false statements on loan documents. Heidi served her 37-month sentence and now lives alone in a parrot sanctuary in Pahrump, NV. (www.latimes.com/archives/la-xpm-1997-01-08-me-16452-story.html)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

How do you hide $2 billion? Apparently, you don’t. Robert Brockman, the CEO of software company Reynolds and Reynolds Co., has been charged with tax evasion, wire fraud, money laundering, and other offenses after it was discovered he hid capital gains income for over 20 years through a web of offshore entities in Bermuda and Nevis and secret bank accounts in Bermuda and Switzerland. This is the largest-ever tax charge against an individual in the United States. However, Brockman, who is #461 on the Forbes billionaires list, so far is cooperating with the investigation. (Source: https://www.nbcnews.com/business/business-news/tech-billionaire-charged-largest-ever-tax-fraud-hiding-2-billion-n1243776)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A rapper known as Nuke Bizzle was arrested after boasting in a YouTube video about getting rich off an unemployment benefit scam. He applied for Pandemic Unemployment Assistance benefits under the CARES Act using stolen identities, and ninety-two pre-loaded debit cards with more than $1.2 million in fraudulently obtained benefits from the California Employment Development Department were sent to an address linked to Bizzle. In the video, Bizzle waves a stack of EDD envelopes and informs viewers, “You gotta sell cocaine, I just file a claim.” This advice also applies to how to land oneself in prison, because he’s now facing a sentence of up to 22 years. (https://www.yahoo.com/news/rapper-charged-coronavirus-benefit-fraud-163101525.html)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Back when reality TV was in its infancy, Richard Hatch, winner of the first season of “Survivor,” served two jail terms for failing to file amended returns to pay the tax owed on the $1 million he won on “Survivor.” The first accounting firm Hatch hired to prepare his 2001 tax return calculated that he owed $441,501 in taxes, but he never filed the return. He went to a second preparer who came up with about half the amount owed, but Hatch didn’t file that return, either. That second firm then prepared an “informational” return that didn’t include the winnings at all, but warned Hatch not to file it. Of course, he immediately did. He served a total of 51 months in federal prison. (www.brysonlawfirm.com/news/253-the-irs-woes-of-the-first-survivor-winner.html)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The EDD unveiled its new ID.me identity verification system after opening up its claim processing system that was shut down for two weeks to address the hundreds of thousands of unprocessed unemployment insurance claims. (EDD News Release No. 20-52) The new ID.me system is an automated identification verification process that uses multiple data sources to authenticate identity documents or a virtual in-person session requiring specific knowledge of an individual’s financial history. The EDD aims to have more than 90% of unemployment insurance claims processed automatically, reducing the current 40% of cases that have been flagged to be processed manually.

A Los Angeles-area cannabis product manufacturer is being investigated for conducting unlicensed operations that put illegally manufactured cannabis products back into the legal market. Affected products include 3.3 million Kushy Punch brand gummies with an estimated value of $64 million. The complaint against the company also alleges they were making a product called “Kushy Punch T.K.O.” that contained more than the legal limit of THC. The company’s manufacturing licenses have been revoked, and a penalty could apply in the amount of up to three times the amount of the $75,000 license fee for each day of unlicensed operation. (https://cannabis.ca.gov/2020/09/24/cannabis-licensing-authorities-file-civil-action-against-vertical-bliss-kushy-punch-for-unlicensed-activity/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

How much does it pay to be a whistleblower? If the taxes, penalties, interest, and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15–30% of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. For dollar amounts under the $2 million/$200,000 thresholds, there is a different process and the awards through this program are less, with a maximum award of 15% up to $10 million, and are at the discretion of the IRS. The whistleblower program has been around since March 1867. (www.irs.gov/compliance/whistleblower-informant-award)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

During the month of September, federal investigators have arrested 44 people in Beverly Hills who were involved in a complex fraud ring involving unemployment benefits obtained from the EDD by out-of-state individuals using stolen identities. Those arrests netted 129 EDD debit cards with a total value exceeding $2.5 million, along with $289,000 in cash and seven handguns. The funds on the debit cards could be as high as $20,000 and cardholders are able to withdraw up to $1,000 per day, per card. The EDD is looking at a segment of PUA applications that may have used a vulnerability in the PUA system to fraudulently obtain the benefits. (https://apnews.com/article/arrests-california-archive-2f6f6392a5f3c32312048c0aa77c7770)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The promoters of a bitcoin mining Ponzi scheme have been charged with wire fraud and selling unregistered securities. From April 2014 through December 2019, BitClub Network was a fraudulent scheme in which investors got shares of cryptocurrency mining pools and were rewarded for recruiting new investors into the scheme. Investors were shown fabricated “bitcoin mining earnings” allegedly generated by BitClub Network’s bitcoin mining pool. The promoters of the scheme sold BitClub Network shares—which were securities BitClub Network did not register with the SEC. The scheme defrauded hundreds of thousands of investors out of around $722 million, one of the largest cryptocurrency frauds in the books. (www.justice.gov/usao-nj/bitclub)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Columbus, Ohio, tax attorney was sentenced to 18 months in prison for providing the IRS with false documents and misleading information to help his client cover up tax fraud. The attorney provided false, inflated bills of sale to support depreciation deductions on medical equipment. He also lied to a revenue officer, causing her to believe that some of the taxpayer’s entities were defunct with no assets which led her to close the collection cases. In January 2017, the taxpayer pleaded guilty to drug, tax, and fraud charges, but died before sentencing in that case. (https://www.justice.gov/opa/pr/ohio-tax-attorney-pleads-guilty-obstructing-irs)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Country music star Willie Nelson got into tax trouble after the IRS found that the tax shelters his accountants set up were not valid. Left with a $16.7 million tax bill (negotiated down to $6 million), Nelson’s property was seized and sold at auction. But most of it was purchased by friends and supporters who immediately returned it to him. To pay off the balance, Nelson released the album “The IRS Tapes: Who Will Buy My Memories?” and did an ad spot for Taco Bell. This tactic certainly cannot be used by everyone owing money to the IRS, but it worked for Nelson; his debt was paid off by 1993. (www.rollingstone.com/music/music-country/flashback-willie-nelson-settles-irs-tax-debt-196254/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Under IRS Notice 2020-51 Reminder: August 31 is the final day a taxpayer may roll over an RMD taken on or after January 1, 2020 back into an IRA. The notice also clarifies that the one rollover per 12 month period limitation does not apply to 2020 RMDs that are recontributed to a retirement accounts by August 31, 2020.

The CARES Act provides that taxpayers with an RMD requirement due in 2020 may skip those RMDs in 2020. The 2020 RMD suspension also includes anyone who turned age 70½ in 2019 and would have had to take their first RMD by April 1, 2020. The 2020 RMD suspension does not apply to defined benefit plans.

Eligible retirement accounts are:

• 401(k)s;
• Defined contribution plans (IRC §403(a) and (b));
• Tax-sheltered annuity plans (IRC §403(b));
• Defined contribution plans under IRC §457(b) maintained by a state or municipal government (the waiver does not apply to current or former employees of exempt organizations that maintain an IRC §457(b) plan); and

• An individual retirement plan such as a traditional, SEP, or SIMPLE IRA.

For the purposes of using the First-time Homebuyer Credit, a taxpayer who was living in a shed on his property was deemed not to have owned a principal residence within the three years prior to the purchase of a new home. After losing his home in a fire, the taxpayer lived with friends, family, and his girlfriend, and then moved into a storage shed on his property. The taxpayer only spent about 40% of his time living in the shed; the rest of the time was spent living mostly with his girlfriend. The shed was found not to be the taxpayer’s principal residence because he did not spend the majority of his time there. (CCA 201104037)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Of the famous tax cheats, one of the few women on the list is hotelier Leona Helmsley, a.k.a., The Queen of Mean. Illegal billings tied to the renovation of one of the Helmsleys’ weekend mansions clued investigators in to tax evasion. In the end, Helmsley was ordered to report for her jail sentence on April 15, 1992. She was famously quoted as saying “We don’t pay taxes. Only the little people pay taxes.” That may be so, but the big people go to jail.

(https://en.wikipedia.org/wiki/Leona_Helmsley)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A taxpayer had an oral agreement with her then-son-in-law to repay money she lent him; after her daughter divorced him and payment was not made, the taxpayer filed a Form 1099-C discharging $30,000. Her ex-son-in-law filed suit, claiming that the filing was fraudulent and was done only with the intent to cause him to pay extra tax. The Court of Appeals determined that the district court should have thrown out the case because the nine types of false information returns for which an injured taxpayer may recover do not include Form 1099-C. Although the taxpayer was not required to file a Form 1099-C, she was not prohibited from doing so. (Cavoto v. Hayes (February 28, 2011) U.S. Court of Appeals, Seventh Circuit, Case No. 10-2681)

Two taxpayers were sentenced and ordered to pay $22 million in restitution for their fraudulent loan scam where they would “flip” gas stations by lining up a buyer for a station before they had even purchased that station. Along with several co-conspirators, they falsified just about all of the documents needed for the buyers to get the loans; the buyers were almost never in a position financially to be able to purchase a gas station. They had relatives act as sham co-signors on the loans, and an accountant who would prepare false tax returns to show nonexistent income. The bank providing the funds ultimately issued more than $38 million in loans as part of the scheme. (U.S. v. Ghuman (July 16, 2020) U.S. Court of Appeals, Seventh Circuit, Case Nos. 19-1734, 19-1745)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Florida man was busted for overstating his payroll expenses for the purposed of getting a huge PPP loan, which he immediately turned around and spent on luxury items. First, he dropped $320,000 on a Lamborghini Huracán EVO, $9,000 at a jeweler, and $5,000 at Saks Fifth Avenue. Other payments from the account where he deposited the PPP funds were also clearly not business expenses, including two $15,000 payments to “Mom.” (https://abc7.com/florida-man-david-hines-lamborghini-huracn-evo-ppp/6340991/)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A grocery store owner was caught filing fraudulent returns that failed to report almost $500,000 of income over two years, mostly tied to food stamp fraud. The owner argued against the unreported income, saying that the cash register’s void function didn’t work, and that he used the cash register mostly as an adding machine. He also claimed that cash back transactions were rung into the register as sales and that he made cash payments to vendors but didn’t record them in the register receipts. (U.S. v. Mohammad (July 8, 2020) U.S. District Court, Northern District of Ohio, Case No. 1:18CR735)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A prominent political figure in PA was sentenced to 7 years in prison for skimming almost $2 million from a federally supported nonprofit, which helped people with substance abuse, and failing to report the income. She jacked up the rents on the clinics and then approved the increases herself, for example charging monthly rent of $75,000 on one of the clinic’s buildings when the market rate was around $23,000. Her husband, who was also involved with the non-profit, was not charged, although he has spent time in prison for bribing elected officials in Atlantic City. (U.S. v. Tartaglione (June 9, 2020) U.S. Court of Appeals, Third Circuit, Case Nos. 18-2638, 18-3017)

A tax preparer from the Bronx was sentenced to two years in prison for engaging in numerous filing schemes, one of which involved charging her clients an extra fee to use stolen names and ID numbers as false dependents. She recycled those same names and ID numbers for various returns over a four-year period. She also used stolen personal information to file returns that generated refunds, which she collected. (U.S. v. Bayuo (June 17, 2020) U.S. Court of Appeals, Second Circuit, Case No. 19-1854)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

TIGTA has issued a report urging the IRS to address non-filing preparers and high-risk preparers with their own balance due tax liabilities and penalties. The report identified 10,495 preparers who prepared more than two million tax returns for clients in 2016, but who did not file a corresponding 2016 personal tax return. The top 100 preparers prepared approximately 1,000 to 6,000 tax returns for clients and received between $189,000 and $1 million in compensation for tax preparation. TIGTA estimated $45.6 million in potential taxes could be assessed if the IRS worked 6,903 of the cases. (www.treasury.gov/tigta/auditreports/2020reports/202030027fr.pdf)

CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Here are a few tax evasion stats: Nearly all Americans believe that cheating on taxes is morally and ethically unacceptable. The voluntary compliance rate in the U.S. is generally around 81% to 84%. This is one of the highest rates in the world. By contrast, Germany’s voluntary compliance rate is 68% and Italy’s is 62%. The typical tax evader in the U.S. is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations. (Source: https://en.wikipedia.org/wiki/Tax_evasion_in_the_United_States)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Blast from the past: A veteran agent with the CA Bureau of Narcotic organized the biggest drug theft from a CA police agency, conspiring with two others to swipe 650 pounds of cocaine from the agency’s Riverside office over the 1997 Fourth of July weekend. The steal had an estimated street value of $3 million. The agent was caught a year later in an unrelated drug bust involving his girlfriend, who immediately turned him in. The first jury deadlocked on the drug charges but convicted him of filing a false tax return; a second trial resulted in a life sentence with no parole. (https://www.latimes.com/archives/la-xpm-2000-jan-20-me-55840-story.html)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A taxpayer who owned and operated various mobile clinics was found to be the responsible person for collected but unpaid California sales and use taxes. The taxpayer, who was an engineer, claimed that he had no background in accounting and shouldn’t have been expected to know that he had to actually pay over the tax charged to and paid by his customers. At his appeal, the taxpayer tried to throw his bookkeeper under the bus, accusing her of embezzling the funds and changing the books to reflect nontaxable sales, but he produced no evidence of the embezzlement and she had started working for him after the years at issue. (Appeal of Mello, 2020-OTA-070)

Another ramification of using an unscrupulous ghost preparer: pilfered economic impact payments. A typical tax prep scam involves the preparer diverting a client’s refund to their own account and sending the client a separate, smaller refund amount. When these preparers put their own bank information on their clients’ return, guess which bank account the EIP is deposited into? Bingo. The preparer’s, whose bank info is on file.

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Sioux Falls tax preparer skimmed his way into 9 years in prison after preparing over 2,200 returns that reported fictitious itemized deductions, including household and personal expenses, and Schedule C deductions for clients who did not own a business. The clients were mostly non-English speaking and the tax preparer provided their completed returns in a sealed envelope with the refund amount written on a Post-It note. At trial, the tax pro argued that just because the IRS knows that household and personal expenses aren’t deductible doesn’t mean the average sole practitioner would know that, and that he was just confused and uninformed when he prepared the returns. (U.S. v. Eviglo (May 5, 220) U.S. Court of Appeals, Eighth Circuit, Case No. 19-1123)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Al Capone may be the most famous tax evader, but American telephone entrepreneur Walter Anderson was convicted in the largest tax evasion case in U.S. history. Anderson admitted to using aliases, shell companies, offshore tax havens, and secret accounts to hide $365 million of income. In 1998, Anderson admitted earning more than $126 million, but he had claimed $67,939 on his federal income tax return, and paid only $495 in taxes. But because of a typo in the plea agreement, Anderson was relieved of paying $175 million of his restitution. Anderson still had to pay $23 million in restitution to the District of Columbia.

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

LuAnn is single and was a fulltime grad student in 2018 and 2019; she doesn’t have any dependents and had no earned income, and as such, she did not file a return for either 2018 or 2019.

If LuAnn doesn’t file those returns, she will not receive an economic impact payment. But if she files a 2020 return in 2021, she’ll get a credit against her 2020 tax liability. Or, if she files a 2019 return with zero tax liability, she should receive the payment in 2019.

Unanswered question: Again, we don’t know how long the IRS will make payments to taxpayers who file 2019 returns. However, we believe they will make payments up until December 31, 2020.

Practice Pointer

The IRS has provided information to tax software providers as to how to process and e-file these zero returns. So keep your software updated. Or, taxpayers can go online to enter payment info at:

www.freefilefillableforms.com/#/fd/EconomicImpactPayment

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Two men have been charged in the first fraud case involving Paycheck Protection Program loans. Together, the men created fictitious employees for several businesses that were not in operation prior to the start of the COVID-19 pandemic and used this information to obtain loans totaling almost $550,000. One of the businesses had never existed at all and one was a separate business operation unrelated to either of the men. Both are charged with conspiracy to make false statements and conspiracy to commit bank fraud. One of the men posed as his brother in real estate transactions and is also charged with aggravated identity theft. (USA Today: https://bit.ly/2SCYQN0)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Cher is a U.S. citizen living and working in Europe. She files her 2019 return and excludes her foreign-source income, and her AGI is below the threshold for a single taxpayer.

Even though she’s not living in the U.S., she still meets the criteria for eligibility and she will receive $1,200. There is no earned income threshold.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Jett and Cole are divorced, and each year they alternate who claims their five-year-old son Ed on their returns. In 2018, Jett claimed Ed as a dependent.

Assuming both of their incomes are below the threshold amount, if Jett doesn’t file a 2019 return before the economic impact payment is issued, he’ll receive $1,700 based on his 2018 filing, which is the $1,200 plus the $500 for Ed. If Cole files her 2019 return, she’ll also receive $1,700.

Unanswered question: We don’t know if the IRS will deny the dependent credit to Cole if Jett received the refund for that dependent already.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

A North Carolina minister of a faith and finances ministry was sentenced to five years in prison for failing to pay taxes and filing false tax returns. He was also involved in a check-cashing scheme. He claimed business expenses of $227,700 for clothing purchases, and $140,000 for meals and entertainment expenses at various restaurants and movie theaters. He purchased three BMWs, two Ferraris, a Maserati, a Land Rover, and a Regal 2500 boat under the names of the companies he owned. In 2012, his ministry purchased a $1.5 million condominium to be used as a parsonage. (U.S. v. Coontz (April 17, 2020) U.S. Court of Appeals, Fourth Circuit, Case No. 19-4167)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Alexei and Marla are married, but they file separately. Alexei’s AGI is $60,000 and Marla’s AGI is $85,000. Using the threshold for single taxpayers, Alexei will get an economic impact payment of $1,200. Marla will receive $700 ($1,200 − ($85,000 − $75,000) × 0.05).

Practice Pointer

If they could agree and file a joint return, they could get a $2,400 payment. Maybe they could split the difference.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Tran and Nancy filed jointly in 2018 when they had AGI of $150,000. In 2019, their AGI increases to $175,000, and they also had a baby.

Their economic impact payment will be based on the 2018 return, and they would qualify for $2,400 if they do not file their 2019 return before the economic impact payment is disbursed.

If they do file the 2019 return, they should get an economic impact payment of $1,150 ($2,400 − ($175,000 − $150,000) × 0.05). If the IRS doesn’t process the 2019 return prior to sending the payment, they’ll be eligible for the $500 dependent payment when they file their 2020 return if their AGI is below the threshold.

However, in 2020, due to a large capital gain in January, their AGI is $250,000. They are not entitled to any economic impact payment, so there would be no adjustment, and as the law is currently written they will not be required to pay back the excess payment.

Unanswered question: We don’t know the cut-off date when the IRS might process the 2019 return, causing it to supersede the 2018 return.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Luka is 72 years old and single. She receives Social Security and income of over $100,000. She has not filed her 2018 or 2019 tax returns. However, because she receives Social Security, she will receive a $1,200 payment.

Unanswered question: At this point, the IRS may not require a refund of overpaid economic impact payments, but will this law be changed?

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Laura and Cindy got married in 2018, and they filed their 2018 return jointly. But then they divorced in 2019, and neither one has filed their 2019 return. On their 2018 return, their refund was deposited into Cindy’s bank account (only her name is on the account).

Unless Laura files a 2019 return with her own bank account information, she won’t receive a separate economic impact payment, and the joint economic impact payment is going to go into Cindy’s account. Or, Laura could use the IRS portal to provide her bank information.

Unanswered question: Will the IRS send a check to Laura if she doesn’t file a return? If the IRS sends the whole amount to Cindy, can Laura reconcile the credit on her 2020 return and claim her half of the credit on the 2020 return, or will her only recourse be to get her half of the payment from Cindy?

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Omar is single and claims his 80-year-old mother as a dependent on his 2019 return. His AGI is $87,000. His mother lives in a nursing home, and in 2019 she had $11,000 of Social Security benefit income.

Omar will receive an economic impact payment of $600. His payment was reduced due to his income in excess of the threshold amount of $75,000 for single (the payment is decreased $5 for every $100 over the threshold).

Further, he doesn’t get a payment for claiming his mother as a dependent because she’s older than age 17. Taxpayers without a filing requirement receive their economic impact payment based on their current Form 1099-SSA or Form 1099-RRB. But Omar’s mother is not eligible to receive an economic impact payment because she is Omar’s dependent.

Unanswered question: However, we don’t know if the IRS will cross check the  Social Security Administration’s Social Security numbers with returns on file to see if individuals were claimed as a dependent before sending the checks to SSA and Railroad Retirement Act (RRA) recipients. If the IRS sends a check to Omar’s mother, we don’t know whether they will ask for it to be returned.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

Javier and Helen file a joint return in 2019 with AGI of less than $150,000. They claim their son Parker as a dependent; he is 20 years old and a full-time college student.

Javier and Helen are eligible for an economic impact payment of $2,400. They will not receive the $500 payment for Parker because he is not a qualifying child under age 17. Also, Parker is not eligible to receive an economic impact payment because he was claimed as a dependent on his parents’ return. This is the case even if he files a return showing wages from a part-time job.

Subscribers to Spidell’s Federal Taxletter or Spidell’s Online Research Package can read the full article here >> https://bit.ly/ORP-Economic-Impact

In contrast to last week’s Fraud Friday post, another prisoner requested to serve out the remainder of his sentence at home due to a serious heart condition and increased susceptibility to COVID-19 in prison. However, this taxpayer was denied. His health was already considered when he was sentenced to a federal medical facility rather than a general population facility. The taxpayer is serving 18 months for bank theft from a $3 million loan he obtained by lying on the application and then spending the funds on hockey tickets, jewelry, and college tuition. (U.S. v. Korn (April 9, 2020) U.S. Dist. Ct., WD NY, Case No. 15-CR-81S; 11-CR-384S)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A man serving a 70-month sentence for tax fraud has been released into home confinement for the duration of his sentence after testing positive for COVID-19 in prison. Mr. Zukerman pulled out all the stops to avoid paying tax on a $110 million asset sale: lying to his accountant, providing false documents which caused his household employees and family members to file incorrect returns, and making false statements to the IRS. Mr. Zukerman still has a year left of his sentence, but considering his age and health issues, the court agreed to home confinement for the duration. (U.S. v. Zukerman (April 3, 2020) U.S. Dist. Ct., S.D. New York, Case No. 16 Cr. 194 (AT))

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Even before the CARES Act was signed, taxpayers were excited about applying for a loan that could be partially forgiven with no COD and no “personal guarantee”. At the same time, banks were rounding up their best customers and preparing to pop them into the pipeline as soon as the program opened up.

Now, everyone is complaining that their big name bank won’t process a loan for them, even though they’ve been a customer for 5/10/25 years. Or that their bank isn’t doing these loans, and they can find a bank to take them if they weren’t already customers.

The SBA has a site that your clients can use to find a lender to help them with these loans. We recommend that you have the client go to https://www.sba.gov/paycheckprotection/find. This page will give them a list of lenders in their area. We recommend that they contact the smaller banks on that list to request assistance with these loans.

Small, local banks are eager for the business. Of course, their first priority in putting in the effort is to get new customers that will increase their asset base. As a result, they may require borrowers to open accounts with them, or move their banking to that institution and they may require a minimum number of employees (one bank we talked to won’t accept a business with fewer than 20 employees.

A taxpayer who was a Florida psychiatrist was sentenced to 51 months in prison with a special enhancement for using a minor in his scheme. The taxpayer used multiple family members as nominees to hide his income, and he used his 16-year-old son on at least one occasion to move $20,000 via a cashier’s check. The taxpayer also had his son meet with an accountant to prepare tax returns showing income going to the son from one of the taxpayer’s companies. The court noted that it doesn’t matter whether his son understood the true purpose of his actions. (U.S. v. Kranz (March 12, 2020) U.S. Court of Appeals, Eleventh Circuit, Case No. 19-11891)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A Los Angeles tax preparer and former FTB employee is serving a little over five years for preparing tax returns that fraudulently claimed OID withholdings. Over six years, these returns claimed $5.5 million in refunds; the IRS paid out about $3 million before catching on to the scheme. Considering that the statutory maximum for the conviction was 78 years in prison, five years doesn’t seem all that bad.

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The Tax Court warned a taxpayer that his frivolous argument would not be tolerated, he naturally continued to argue that same point throughout his trial. The stance in question was the taxpayer’s insistence that his independent contractor commissions were loans and so they were not taxable income. But there was no evidence of a repayment plan, nor did he make any “repayments” and he also conveniently forgot to file a return for the year at issue. He persisted in arguing the income was not taxable, and lost, plus the Tax Court handed down a $1,000 frivolous argument penalty.

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A mother–daughter duo are facing 15 years in prison each for using stolen Social Security numbers to file 84 returns that netted them just under $450,000 in fraudulent refunds. The daughter tried to argue that she couldn’t have been involved because she was only 20 years old at the time of the fraud, but there was ample evidence that she had not only recruited others into the scheme, she had also acted as the leader and organizer of the operation. (U.S. v. Nunez (December 4, 2019) U.S. Court of Appeals, Third Circuit, Case Nos. 2-16-cr-00148-002 and 001)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

In Appeal of Powe, a taxpayer was liable for the 2.5% early distribution additional tax for a retirement account withdrawal she took before she was age 59½. The taxpayer used the FTB’s CalFile software to prepare her California return, and she argued that by assessing the additional tax, she was being penalized for using CalFile. The FTB countered that taxpayers who owe tax on an early distribution or other retirement plan cannot use CalFile, and the taxpayer didn’t enter her 1099-R information correctly. Because the taxpayer technically shouldn’t have used CalFile and didn’t follow the instructions, she was liable for the additional tax. (2019-OTA-363)

A taxpayer who already had a criminal prosecution for tax evasion was slapped with additional tax of $116,828 and penalties of $87,620 for unreported income from two nail salon businesses. The taxpayer initially argued the sums deposited in various bank accounts were not taxable transactions because the funds represented gifts or loans from family members and friends. He also structured his deposits so he did not have to sign the declaration required when a deposit exceeds the daily limit of $10,000. After the taxpayer made deposits of $5,000 each at six different Union Bank branches over three days, the bank filed a Suspicious Activity Report. (Le v. Comm., TCM 2020-27)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

For those partnerships that have not elected out of the CPAR regime, amended returns can no longer be filed to report a change to a partnership item starting with the 2018 tax year.

However, the amended return prohibition does not prevent a partnership from filing a superseded original return, which is essentially an amended return filed prior to the return due date (including extensions, but only if an extension was requested).

So you should consider filing an extension for all partnership (and LLC filing as partnership) returns so that you can file a superseded return if a late K-1 arrives or there is another change for 2019 that must be made.

You may file the extension even if you have already filed the return. You would want to alert K-1 recipients that there may be a corrected K-1 so they can extend their own returns.

Be sure to file the superseded return on or before the extended due date of the return.

The IRS is continuing to update forms and procedures for amendments or administrative adjustments for partnership returns. We will have complete details on how to amend or change a partnership return at our 2020 Post-Tax Season Update and Review Seminar/Webinar in May. Sign up for just $279 $249.* Click here for dates and a full list of topics.

The woman behind the downfall of Al Capone: Mabel Walker Willebrandt. As Assistant Attorney General, she noticed that mobsters lived large but never filed tax returns and therefore could be convicted of tax evasion. After she went after a South Carolina bootlegger and the Supreme Court upheld the conviction, the IRS focused on Capone and ultimately convicted him of three counts of tax evasion. Willebrandt studied law in Los Angeles, where she argued two thousand cases as the city’s first female public defender. In 1921, she was the second woman to be appointed to Assistant Attorney General and the first to head the Tax Division.

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Beginning July 1, 2020, tax preparers applying for a new CTEC registration must submit fingerprint images and submit to a background check. Note: This requirement does not apply to CTEC-registered tax preparers (CRTPs) who have already registered with CTEC prior to July 1, 2020, unless a CRTP allows their CTEC registration to expire or has their registration revoked. To re-register with CTEC, they not only will be required to retake the 60-hour qualifying education course, but they will also be required to go through a background check and submit fingerprint images to CTEC, even if they had done so in the past.

A disbarred attorney who was a former tax fraud litigation specialist was liable for a §6663 fraud penalty of almost $2 million for failing to report income. The income stemmed from representing clients who were victims of clergy abuse, and when the case settled, the taxpayer placed all of the settlement funds into his personal UBS account, comingling client funds with his own. He also used interest earned on the funds for personal purposes, and did not report the 60% fee for his services representing these clients. (Isaacson v. Comm., TCM 2020-17)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Leonid Teyf, Russian citizen living in Raleigh, NC, was charged with money laundering, bribing a public official, planning a murder-for-hire and possessing a firearm with an obliterated serial number, and immigration fraud. Teyf received kickbacks of Russian government funds that were paid in cash and amounted to more than $150 million over an approximate two-year span, with some of the funds being held in U.S. accounts. The murder-for-hire plot was directed at Teyf’s wife’s ex-lover; he paid a U.S. government employee to have the man deported and then paid an undercover FBI agent $25,000 to kill the man before the end of 2018. Needless to say, Teyf also filed false income tax returns and failed to file an FBAR. (U.S. v. Teyf (February 6, 2020) U.S. District Court, Eastern District of North Carolina, Case No. 5:18-CR-00452-FL-1)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

Taxpayers are disproportionately afraid of the IRS, and this is because very few taxpayers actually end up in jail for tax evasion. IRS resources are dwindling, which means fewer prosecutions. For example, in 2015, the IRS indicted 1,330 taxpayers for legal-source tax evasion, and by 2018 that number dropped to 636. That’s out of around 150 million taxpayers. With funding dropping and the number of revenue agents decreasing, we can expect this trend to continue. However, the IRS does know what to look for to make the most out of the resources they do have: concealed income (like from a side hustle), misreported credits and deductions, and unfiled returns will get their attention every time. www.accountingtoday.com/list/ten-major-trends-in-irs-tax-audits

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A former U.S. Congresswoman lost a recent appeal of her 2017 conviction for funneling money through a fraudulent education charity for her own use. Between 2012 and 2016, Corrine Brown and two co-conspirators used more than $800,000 in donations to fund lavish lifestyles, rather than for the donations’ purpose of funding One Door for Education, which actually was not a registered charity. Brown also failed to report the income on her tax return and on congressional disclosure forms. (U.S. v. Brown (January 9, 2020) U.S. Court of Appeals, Eleventh Circuit, Case No. 17-15470)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

A California solar company got burned for engaging in a $1 billion Ponzi scheme that fooled investors like Berkshire Hathaway and Sherwin-Williams. The company built mobile solar generators, which investors purchased at a reduced cost. The company would then lease the generators to end-users to pay down the remainder and any profit would go to the investors. Instead, the generators weren’t leased, investors were paid from money coming in from new investors, and the company owners were living large off the profits. A former employee tipped off federal authorities, and the owners have pleaded guilty to money laundering and conspiracy to commit wire fraud. (https://www.justice.gov/usao-edca/pr/top-executives-plead-guilty-participating-billion-dollar-ponzi-scheme-biggest-criminal)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

If you’re going to file an appeal, you should stick around for it. A taxpayer was convicted of tax evasion for not filing returns reporting income from his log cabin home building business. The taxpayer filed an appeal, but then failed to report for prison as scheduled. Under the fugitive-disentitlement doctrine, a court is allowed to dismiss a defendant’s appeal if he or she flees while the appeal is still pending. (U.S. v. Birk (January 9, 2020) U.S. Court of Appeals, Tenth Circuit, Case No. 19-1422)

CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.

The “pipe dream”: originally a reference to the fantastical hallucinations caused by smoking an opium pipe.

Looking back over the legislation of the past 40 years, there have been numerous occasions in which a sales tax on services bill loomed over California taxpayers, for example AB 194, which we covered in the July 1995 issue of the California Taxletter. These efforts have been stepped up recently; since Robert Hertzberg became a state senator in 2014, he has introduced such a bill each year (SB 8, SB 1445, SB 640, SB 993, and most recently, SB 522). These bills all failed, and Spidell and other tax advocacy groups have consistently been vocal in speaking out against a sales tax on services.

There are other states that tax some services, but the few attempts to enact a broadly applied tax on services have all failed. For example, in four states (Florida, Maryland, Massachusetts, and Michigan) such laws were passed, only to be almost immediately repealed before they went into effect.¹

In California, sales tax on services bills are generally met with strong opposition. The basic arguments against taxing services are:

• Increased cost to consumers;
• Increasing the competitive disadvantage faced by California businesses (especially small businesses);
• Compliance and administrative nightmares;
• Creating competitive disadvantages between in-state businesses;
• Tax pyramiding, which occurs when taxes are imposed on various stages of production of an item; and
• In years where California has a budget surplus, the necessity of such a tax is questionable.

Spidell will continue to oppose attempts to implement a sales tax on services. In comparison to the revenue such a tax would bring in, the disadvantages would do more to hurt Californians than benefit them. We think the Legislature can put that in its pipe and smoke it.

¹ California Tax Foundation. “The Challenge of Taxing Services” Available at: https://caltax.org/research/sut_20190109.pdf

The FTB and CTEC have begun a Ghost Preparer pilot program. “Ghost Preparers” are tax preparers who fail to provide their PTIN or otherwise failed to identify themselves on tax returns they prepared for compensation.

The Ghost Preparer pilot program includes two new letters, FTB 906A — Tax Preparer Verification, and FTB 906B — Request for Tax Preparer Information. Both letters were created to help identify ghost preparers by requesting the tax preparer’s identifying information. The FTB mailed the FTB 906A letters to tax preparers during the week of November 18, 2019. The response or lack of response received from the tax preparer after 30 days will allow staff to determine who will receive the FTB 906B letter. FTB 906B letters will be mailed to taxpayers in December 2019 and January 2020.

Click here to report unregistered tax preparers and ghost preparers. All complaints go directly to our CTEC staff. CTEC and the FTB will not share your identity and also cannot provide updates about the case due to privacy and disclosure laws.

This month the FTB is sending demand letters to taxpayers who either failed to file or filed an incomplete Form 3840, California Like-Kind Exchanges, in 2016.

If taxpayers do not respond to the demand letter within 30 days, the FTB may open an audit for the tax year. If the audit results in a Notice of Proposed Assessment for the California like-kind exchange, a 25% penalty of the computed tax for the failure to provide information upon legal demand may be imposed (R&TC §19133). Don’t procrastinate.

Beginning on January 1, 2020, the FTB will initiate the Administrative Dissolution/Cancelation of qualified entities that have been suspended by the FTB for 60 or more consecutive months. If a qualified entity is still engaging in a business activity or has assets in the business name and receives the Intent Notice, the qualified entity has 60 days to provide the FTB with a written objection to the pending Administrative Dissolution/Cancelation. If your client wants to be done with the entity, this will be a great way for people who formed but never did business — or went out of business years ago — to get the corporation or LLC wiped off the books.

Sunday, December 01, 2019

By: California Taxletter Staff

Editorial: They realize the positive approach is the wrong approach.

Sunday, December 01, 2019

By: Lynn Freer, EA

For this month’s look-back over the past 40 years, we dug out the 1979 FTB Form 540 and noticed a cryptic note at the very bottom of page 2 under the preparer’s signature line: “If adjusted gross income on Federal return is different from line 31, attach explanation.”

According to Lynn Freer, some taxpayers ([cough] her father) provided the following explanation: “Beats the heck out of me” and never heard anything back from the FTB.

You can see the entire 1979 Form 540 at www.caltax.com/spidellweb/public/editorial/cat/1119-1979ca540.pdf.

In the June 1991 issue of the California Taxletter, we ran an article that highlighted the seemingly arbitrary rules that determined whether a food was taxable. The article stated that (at the time) sales tax applied to certain foods based on random quantity, depending on what the BOE determined was a “suitable” amount for consumption. For example, a pint of ice cream was not considered a suitable amount for consumption so no tax applied, but a one-half pint was suitable and so tax applied. (This anonymous author can eat a whole pint, no problem, and will pay the tax to prove it.)

The issue stemmed from language in 18 Cal. Code Regs. §1603: “… tax applies to sales of cold food products … in a form suitable for consumption on the seller’s premises [emphasis added].”

However, the current version of §1603(c) now includes a clarifying definition:

(A) For purposes of this subdivision (c), the term “suitable for consumption on the seller’s premises” means food products furnished:

1. In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
2. In a size which ordinarily may be immediately consumed by one person such as a large milk shake, a pint of ice cream, a pint of milk, or a slice of pie. Cold food products (excluding milk shakes and similar milk products) furnished in containers larger in size than a pint are considered to be in a form not suitable for immediate consumption.

Note the somewhat subjective terms “large milkshake” and “a slice of pie.”

Sales tax oddities as related to food continue to this day. A favorite is hot food versus cold food:

• The mere heating of a food product constitutes preparation of a hot prepared food product (e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infrared lights, using steam tables, etc.).
• On the other hand, the sale of a toasted sandwich, which is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product.¹

Sales of food products are considered taxable sales of hot food items when a seller’s premises includes microwave ovens accessible only to the seller. If the microwave ovens are accessible to the public, the sales are generally nontaxable because the customers are buying the food cold and heating it themselves.²

¹ 18 Cal. Code Regs. §1603(e)
² CDTFA Annot. 550.1753

With the enactment of the Tax Cuts and Jobs Act (TCJA), nonconformity issues are raised to a whole new level. As we’ve said numerous times before, California does not conform to the vast majority of the changes enacted by the TCJA.

Here are a few of the changes that could have the greatest negative impact on the California return or could easily be missed, causing clients to overpay their California taxes.

1. Property taxes: Itemized deduction for state and local taxes limited to $10,000 for federal purposes but not for California.
2. Mortgage interest: The amount of deductible mortgage interest is limited to $750,000 of acquisition indebtedness on the federal return, but this limitation does not apply to the California return.
3. Moving expenses: This deduction was repealed for federal purposes, but California taxpayers may deduct the moving expense or exclude the reimbursement.
4. §529 plans: Federal law allows tax-free distributions to pay for K-12 expenses at private or religious schools, but for California these distributions are includable and subject to the 2.5% penalty.
5. Charitable contribution limits: Federal law increases the individual charitable contribution limit to 60% of federal AGI, but it remains 50% for California.
6. Miscellaneous itemized deductions subject to 2% floor: Repealed for federal purposes, but still allowed for California purposes.
7. Casualty and theft losses: federal law repeals the individual casualty loss except for those taxpayers in Presidentially declared disaster areas; California still allows a casualty loss deduction.
8. Entertainment expenses: Repealed for federal purposes but still allowed for California purposes for both businesses and as an employee business expense.
9. Technical terminations: Federal law no longer requires a partnership to terminate after a greater than 50% change in ownership, but California still requires two short-period returns.
10. Small business accounting methods: Federal law provides a uniform small business exemption from various accounting method requirements; California nonconformity means separate books and records for state purposes.

Nonconformity issues are clearly laid out in the 2019 edition of The Big Blue Answer Book™ and is now shipping. Click here for more information.