Uncategorized - Spidell

Fraud Friday: Promoters of a bitcoin mining Ponzi scheme

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 WebinarClick here for more information.

Fraud Friday: Inflated bills of sale

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 WebinarClick here for more information.

Fraud Friday: “The IRS Tapes: Who Will Buy My Memories?”

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 WebinarClick here for more information.

August 31 is the last day to roll that RMD

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.

Fraud Friday: Living in a shed

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 WebinarClick here for more information.

Fraud Friday: The Queen of Mean

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 WebinarClick here for more information.

Fraud Friday: Divorce and payment not made

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)

Fraud Friday: Gas Station Flipping

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 WebinarClick here for more information.

Fraud Friday: Lamborghini Huracán EVO

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 WebinarClick here for more information.

Fraud Friday: Food stamp fraud

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 WebinarClick here for more information.

Fraud Friday: The Women’s Tax Resistance League

Just before WWI, the Women’s Tax Resistance League was formed as a direct action group that used tax resistance to protest against the disenfranchisement of women in Britain. Their motto was No Vote, No Tax, and one member said, “The least any woman can do is to refuse to pay taxes, especially the tax on actually earned income.” A similar movement appeared in the U.S., holding it was unfair to the women of the U.S. to have taxation without representation. The war put a damper on these movements, and in the U.S. women got the right to vote in 1920; although it wasn’t until the Voting Rights Act of 1965 that women of color would have their voting rights enforced.
 
(https://en.wikipedia.org/wiki/Women%27s_Tax_Resistance_League)

Fraud Friday: A prominent political figure in PA

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)

Fraud Friday: An extra fee to use stolen names

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 WebinarClick here for more information.

Fraud Friday: Non-filing preparers and high-risk preparers

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 WebinarClick here for more information.

Fraud Friday: Tax evasion stats

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 WebinarClick here for more information.

Fraud Friday: Blast from the past

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 WebinarClick here for more information.

Fraud Friday: The taxpayer tried to throw his bookkeeper under the bus

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)

Fraud Friday: An unscrupulous ghost preparer

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 WebinarClick here for more information.

Fraud Friday: Over 2,200 returns

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 WebinarClick here for more information.

Fraud Friday: Largest tax evasion case in U.S. history

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 WebinarClick here for more information.

Case Study #9: Grad student

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

Fraud Friday: First fraud case involving PPP loans

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 WebinarClick here for more information.

Case Study #8: Living and working abroad

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

Case Study #7: Divorced with child

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

Fraud Friday: A minister involved in a check-cashing scheme

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 WebinarClick here for more information.

Case Study #6: Married filing separately

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

Case Study #5: New child

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

Case Study #4: Social Security recipient

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

Case Study #3: Marriage and divorce

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

Case Study #2: Dependent on Social Security

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

Case Study #1: College student dependent

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

Fraud Friday: Request denied

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 WebinarClick here for more information.

Fraud Friday: Testing positive for COVID-19 in prison

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 WebinarClick here for more information.

How do I find a bank for a Paycheck Protection Loan?

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.

Fraud Friday: 51 months in prison with a special enhancement

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 WebinarClick here for more information.

Fraud Friday: Five years doesn’t seem all that bad

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 WebinarClick here for more information.

Fraud Friday: His frivolous argument would not be tolerated

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 WebinarClick here for more information.

Fraud Friday: A mother–daughter duo are facing 15 years in prison

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 WebinarClick here for more information.

Be sure you qualify before you use FTB’s CalFile

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)

Fraud Friday: Six Banks Over Three Days

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 WebinarClick here for more information.

Extend ALL 2019 partnership returns

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.

Fraud Friday: The woman behind the downfall of Al Capone

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 WebinarClick here for more information.

Rules for new CTEC registrants

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.

Fraud Friday: The Specialist

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 WebinarClick here for more information.

Fraud Friday: Murder-for-Hire Plot

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 WebinarClick here for more information.

Fraud Friday: Afraid of the IRS

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 WebinarClick here for more information.

Fraud Friday: One Door for Education

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.

Fraud Friday: Solar Ponzi scheme

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.

Fraud Friday: If you’re going to file an appeal, you should stick around for it

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.

Then and Now: Sales tax on services: California’s pipe dream?

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

Ghost preparers

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.

FTB sending notices to taxpayers who failed to file forms for 1031

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.

FTB will start taking old corporations or LLCs off the books

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.

Then and Now: Worker classification in 1991 and 2019

There has been a lot of focus recently on worker classification, with the California Supreme Court’s ruling in Dynamex and the passage of AB 5 and the subsequent backlash. One of the as-yet unresolved issues is how to treat workers who may have different statuses for federal and California purposes. Amidst all this turmoil, it’s easy to forget that this issue has been quietly percolating for years.

In 1991, Bob Spidell received a letter (reproduced here) from the FTB regarding licensed versus unlicensed contractors and how to report a contractor who’s an employee for California purposes (but an independent contractor for federal purposes) on the California income tax return.

The FTB’s initial response is that they will not follow this ruling but we are continuing to pursue this issue.

Covered California will increase publicity about penalties

Recently, we’ve begun to hear and see ads on the radio, TV, and billboards about Covered California’s open enrollment. In a move that has become more prevalent in California state government, at a meeting on November 14, Covered California stated that they would take a “positive approach” to California’s new requirement for all residents to have health insurance. This approach means they are including only minimal information about the penalty for failing to have health insurance in their marketing efforts.

With the federal penalty at $0, how are Californians to know that they will pay a penalty — if they don’t qualify for one of the exemptions?

In the November 14 meeting with the FTB and Covered California, it was stated that 93% of individuals in California are already covered by insurance. Of the remaining subset of 7%, approximately 2.7 million, many will qualify for an exemption. Unfortunately, many will not qualify for an exemption and, thinking that they won’t pay for a lack of health insurance because of the repeal of the federal penalty, they will be rudely awakened when they file their state tax returns for 2020.

Although we don’t have a figure for Covered California, the FTB was given a budget of $8.232 million for implementation of the mandate and associated subsidy and penalty provisions. This would include form development, processing and other procedures, regulations, implementation, and marketing. The FTB has done the following:

  • Worked on a brochure that provides definitions, explanations, and timelines for the program, including the penalty; and
  • In partnership with the EDD, will notify employers of the potential penalty for employees with no health insurance. Note: These employers may or may not pass the information along to their employees.

Covered California and the FTB worked together to create a letter to about 900,000 households that they have identified as having no health insurance, but it’s unclear how many individuals will receive no notification at all.

However, brochures and letters will not get the saturation of the massive ad campaign put on by Covered California. We are a society who gets their news through television, radio, and social media, not letters and brochures.

A demand for transparency

After we voiced our concerns, the FTB informed us that some of the Covered California ads mention the penalty … but if it is mentioned, it is not emphasized.

In an interview with NBC’s Conan Nolan, when asked about the penalty, Peter Lee, Executive Director of Covered California, stated that the penalty could be more than $2,000 for a family of four and goes up with higher income. He then said that the real penalty was going into the ER and leaving with an $80,000 bill. He next talked about health plans lowering the rates because more people have insurance.

In a public service bulletin, the penalty is briefly mentioned but not highlighted.

As a result of our demand for clear transparency, Covered California has indicated they will start putting more emphasis on the penalty so people aren’t blindsided.

Then and Now: You have some explaining to do…

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.

Then and Now: Get your laws off my ice cream!

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

Top 10 new California nonconformity issues for 2018 returns

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.