Accounting
Tax Fraud Blotter: For the birds
Disunion; cell phones; only the lonely; and other highlights of recent tax cases.
Boston: Frank Loconte, of Beverly Farms, Massachusetts, has been sentenced to 20 months in prison and three years of supervised release in connection with underreporting of overtime hours for his union employees and failing to collect and pay payroll taxes.
From 2009 to 2022, Loconte was the president of NER Construction Management Corp., a Wilmington, Massachusetts, construction company that employed union workers. He was also the president of the company’s employment management company, NER Management. Loconte was responsible for collective bargaining with multiple unions and was bound by agreements with the unions that governed the transfer of worker benefit contributions to employee welfare and pension benefit plans, each of which was subject to ERISA provisions.
From around January 2014 and May 2022, Loconte defrauded the union benefit funds and the IRS by paying certain of its union workers for overtime hours without reporting these hours to the union benefit funds and without making payroll tax withholdings and payments. He caused NER to file fraudulent remittance reports with the benefit funds and the unions that underreported the overtime hours worked by these employees, depriving the benefit funds and unions of contributions. He also caused NER to file IRS payroll taxes that underreported the wages paid.
Loconte used NER business accounts to pay for personal expenses, including vehicles, personal property taxes, household improvements and golf memberships, and failed to report these benefits to the IRS.
He defrauded union workers of more than $1 million for overtime work and defrauded the IRS of more than $3 million.
Loconte, who pleaded guilty in September, was also ordered to pay more than $4.5 million in restitution and a $15,000 fine.
Key West, Florida: Petr Sutka, operator of several staffing companies, has been sentenced to four years in prison for tax and immigration crimes.
Between January 2011 and January 2021, he and others helped run companies that facilitated the employment in hotels, bars and restaurants of non-resident aliens who were not authorized to work in the U.S. These companies did not withhold federal income taxes and Social Security and Medicare taxes from these workers’ wages and did not report the wages to the IRS.
Sutka was also ordered to serve three years of supervised release and to pay $3,551,423.84 in restitution to the United States. His co-conspirators, Vasil Khatiashvili and Zdenek Strnad, will be sentenced on April 22.
Kansas City, Missouri: Tax preparer Ebens Louis-Loradin, 44, has pleaded guilty to a wire fraud in which he filed federal income tax returns that contained false information.
He pleaded guilty to one count of wire fraud and 10 counts of aiding in the preparation of false returns.
Louis-Loradin, a tax preparer since 2012, defrauded the IRS by preparing and e-filing federal returns containing false items from March 2013 to April 2019. He claimed undeserved items on his clients’ federal returns, including dependents, inflated income tax withholding amounts, credits for child and dependent care expenses, American Opportunity Credits and Earned Income Tax Credits, itemized deductions and business losses.
He faces up to 20 years in prison for wire fraud and up to three years for each of the 10 counts of aiding in preparing false returns. Sentencing is Aug. 1.
Fort Myers, Florida: Timothy Meade, who operated a prison phone service under several business names, has been sentenced to 30 months in prison for failing to pay over taxes that he withheld from his employees’ paychecks.
From 2011 through 2021, he withheld taxes from his employees’ paychecks but did not pay over to the IRS the full amount withheld. He also did not pay the business’ portion of his employees’ Social Security and Medicare taxes. The IRS attempted to collect the taxes, but Meade changed the call service’s names and bank accounts to thwart collection.
He caused a federal tax loss of $971,130.
Meade was also ordered to serve three years of supervised release and pay $971,130 in restitution to the United States.
Frankfort, Kentucky: Jeremy Clay Guthrie, 45, of Boaz, Alabama, has been sentenced to 27 months in prison for wire fraud and aiding and assisting in the preparation of false returns.
Guthrie managed a branch of a privately owned aviary supply business until he was fired in September 2017. During his last two years as a manager, he stole more than $550,000 from his employer and customers by charging customer credit and debit cards for products but diverting payment for those products to his own company. He also altered the pay-to lines on checks from customers and routinely offered customers unauthorized discounts in exchange for cash payments, embezzling much of the cash he received, among other schemes.
He failed to disclose all the income he received from this fraud to his tax preparer or to the IRS for 2016 and 2017. Guthrie underreported his income by $325,543 and admitted that he intentionally concealed a significant portion of his company sales and other stolen money to fund a drug addiction.
Camden, New Jersey: Three persons have pleaded guilty to tax evasion and other charges related to their roles in accepting millions of dollars in a romance fraud.
Martins Friday Inalegwu, formerly of Maple Shade, New Jersey, pleaded guilty to one count of conducting an unlawful money transmitting business and four counts of tax evasion. Inalegwu’s wife Steincy Mathieu, also formerly of Maple Shade, pleaded guilty in November to two counts of tax evasion. Oluwaseyi Fatolu, of Springfield, New Jersey, pleaded guilty in January to a count of operating an unlawful money transmitting business.
From October 2016 to May 2020, Inalegwu, Mathieu and their conspirators, several of whom reside in Nigeria, participated in an online romance scheme, defrauding more than 100 victims nationwide. The conspirators made initial contact with victims through online dating and social media websites, corresponded via email and phone, pretended to strike up a romantic relationship with victims and then requested that victims send money to them or to their associates for fictitious emergency needs.
Victims wired money to bank accounts held by Inalegwu and Mathieu in the U.S. and mailed checks directly to Inalegwu and Mathieu. Some victims transferred money to Inalegwu and Mathieu via money transfer services and others wired money to bank accounts held by conspirators overseas. Federal agents have identified more than 100 victims, who sent more than $4.5 million directly to Inalegwu and Mathieu and several million more to conspirators.
Inalegwu and Mathieu failed to pay taxes on the money from victims.
Each count of tax evasion and each count of conducting an unlawful money transmitting business carries up to five years in prison and a $250,000 fine.
Tampa, Florida: A federal court has permanently enjoined tax preparer Kenia Rodriguez from preparing returns for others and from owning, managing or working at any tax prep business in the future.
The complaint alleged that she, through a fictitious entity called Rodriguez Tax Services, reportedly in Lakeland, Florida, claimed fraudulent deductions and credits on clients’ returns to underreport tax liabilities and claim undeserved refunds. The complaint also alleged that Rodriguez did not identify herself on the returns she prepared.
Rodriguez, who consented to the injunction, must send notices of the injunction to each person for whom she prepared federal tax returns after Jan. 1, 2016, and post copies of the injunctions where she conducts business, including social media and websites. The U.S. may conduct post-judgment discovery to monitor compliance and will continue to pursue its claim for disgorgement.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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