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Millionaire tax vote opens door to new clash over Chicago wealth

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When Illinois Governor JB Pritzker sought to boost the state income tax on the rich at the height of the pandemic, Ken Griffin used his fortune to torpedo the initiative. 

The billionaire financier still quit the state for Florida two years later. Now, a handful of Illinois politicians are once again eyeing a new tax on the highest earners — a move that risks alienating the state’s wealthiest residents, including in cash-strapped Chicago. 

Next week, Illinois voters will weigh in on a proposed extra levy of 3% on annual incomes of more than $1 million, with the proceeds going to ease property taxes. The ballot measure is nonbinding, but approval would potentially open the door to a new debate after the failure of Pritzker’s 2020 plan, which called for raising state income tax rates on higher earners. 

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Illinois Governor J.B. Pritzker

Joshua Lott/Photographer: Joshua Lott/Getty

“This time around we don’t have Ken Griffin to protect us anymore,” said Dan Rahill, a wealth strategist at Chicago-based Wintrust Wealth Management, predicting that higher taxes would prompt more Illinois residents to consider establishing residency in nearby Wisconsin or Indiana. Or Florida. 

The latest tax vote will unfold amid a tumultuous budget season in Chicago, where Mayor Brandon Johnson is feuding with the city council and the public-school system over yawning fiscal shortfalls. Johnson proposed a $300 million property-tax hike this week, breaking a campaign promise, saying the increase was needed to close the city’s budget deficit of almost $1 billion.

At the same time, local leaders have increasingly been looking to the city’s wealthy to plug budget gaps, even as both Chicago and Illinois contend with persistent population declines and corporate departures. 

Backers of this year’s proposal say taxing millionaires would bring relief to everyday homeowners struggling to pay Illinois’s notorious property levies. Based on property taxes paid as a percentage of home values, the burden on people in Illinois is the highest in the country except New Jersey, according to the nonpartisan Tax Foundation. The ballot measure would raise about $4.5 billion, according to a preliminary estimate by the Illinois Department of Revenue. 

“This referendum is the first time where people have a specific chance to lay out a plan that can give relief to broad numbers of everyday folks,” said Pat Quinn, a former Illinois governor who’s spearheading the proposal. 

The measure has backing from two of Quinn’s fellow Illinois Democrats, Rep. Danny Davis and Chuy Garcia. Pritzker, also a Democrat, said he believed in a graduated income tax system as the ideal method to lower property taxes in Illinois but said the referendum could be popular with voters.

“We all believe in lowering property taxes in the state of Illinois,” Pritzker said at a press conference in September. “So I can see that it might be one that is popular among people, but as far as I’m concerned, a graduated income tax is the way to go.”

Two other Chicago billionaires, Pat Ryan and Sam Zell, contributed to the 2020 fight against Pritzker’s approach, but Griffin made the largest donations by far. He spent about $50 million on the effort before ditching Chicago two years later and moving to Miami. 

Griffin’s Citadel empire was one in a string of companies leaving the Chicago area including Caterpillar Inc. and Boeing Co. amid rising concerns over public safety, regulation and taxes.

The data is mixed on whether high-tax environments really push wealthy people to move to other states, said Chris Berry, a property-tax expert at the University of Chicago. But a more straightforward approach to easing the burden of property taxes would be to rein in local government spending that’s “out of control,” he said. 

“Only in Illinois will you find politicians who think the way to cure runaway taxes is by creating yet another new tax,” Berry said.

Population decline

The state population fell by more than 87,000 in 2022, which translates to a loss of $9.8 billion in adjusted gross income, according to the Internal Revenue Service. Adding that to declines from the four years before that, the five-year outflow totaled $41.7 billion.

Since the tax measure on the November ballot is nonbinding, it may never have any practical effect. But few issues galvanize Illinois residents, and especially Chicagoans, more than property taxes. And the pressure on local-government revenue is likely to rise.

After the city’s south suburbs saw a substantial jump in property taxes this summer, Cook County Assessor Fritz Kaegi proposed “circuit-breaker” legislation, suggesting that the state find a funding source to provide some sort of relief for low-income homeowners who get a sharp increase in property taxes. 

Quinn, the former governor, said the ballot measure he supports could work in concert with Kaegi’s circuit breaker proposal — and both could be funded by the millionaire tax. 

“If you want to emphasize homeownership as a positive thing for our society and our economy, then you don’t want to have a property tax burden that is excessive,” Quinn said. “We need to do something about it, rather than just complain about it.” 

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Accounting

Tax Fraud Blotter: Partners in crime

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Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.

Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients. 

He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.

Sandiego, who previously pleaded guilty, caused a tax loss to the IRS of some $4,586,154. 

He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.

Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.

The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.

According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.

The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.

The government contended that the total harm to the Treasury could be $10 million or more.

Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.

Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.

The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.

Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.

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Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.

Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.

From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.

Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.

Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.

Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.

Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.

Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.

St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.

Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.

From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.

Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.

Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.

Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.

In total, the defendants caused a tax loss to the IRS of more than $22 million.

Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.

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Accounting

On the move: KSM hired director of IT operations

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Hannis T. Bourgeois celebrates 100 years with charitable initiative; KPMG and Moss Adams release surveys; and more news from across the profession.

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Accounting

AICPA wary of new PCAOB firm metrics standard

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The American Institute of CPAs is still concerned about the Public Company Accounting Oversight Board’s new firm and engagement metrics standard, despite some modifications from the original proposal. 

During a board meeting Thursday, the PCAOB approved two new standards, on firm and engagement metrics, and firm reporting. Both would have significant implications for firms. 

Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. The metrics cover the following eight areas:

  • Partner and manager involvement;
  • Workload;
  • Training hours for audit personnel;
  • Experience of audit personnel;
  • Industry experience;
  • Retention of audit personnel (firm-level only);
  • Allocation of audit hours; and,
  • Restatement history (firm-level only).

The AICPA reacted cautiously to the announcement. “We’re still studying the components of the final firm metrics requirements but, as we stated in our comment letter to the PCAOB this past summer, these rules will place a significant burden on small and midsized audit firms and could lead some to exit public company auditing altogether,” said the AICPA in a statement emailed Friday to Accounting Today. “This is not just conjecture: a majority of respondents (51%) to a recent survey we did of Top 500 firms with audit practices said they would rethink engaging in public company audits if the requirements were approved.”

AICPA building in Durham, N.C.

The PCAOB it made some modifications to the original proposal in  response to the comments had received since April:

  • Reduced the metric areas to eight (from 11);
  • Refined the metrics to simplify and clarify the calculations;
  • Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
  • Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)

The AICPA welcomed those changes but doesn’t think they go far enough. “We’re glad the PCAOB took some comments to heart by extending implementation dates, particularly for smaller firms, and lowering the number of required metrics,” said the AICPA. “But the potential consequences of the remaining requirements — reduced competition and market diversity in the public audit space — are a significant risk. We hope the SEC will give these unintended outcomes the weight they deserve before giving final approval to the requirements.”

The Securities and Exchange Commission would still need to give final approval to the standard, as well as the new firm reporting standard. Last week, the PCAOB decided to pause work on its controversial NOCLAR standard, on noncompliance with laws and regulations, until next year. On Thursday, SEC chairman Gary Gensler announced he would be stepping down in January, which may affect the timing of its approval or disapproval by the SEC. With the incoming Trump administration, the SEC is expected to take a far less aggressive stance on enforcement and regulation. On Friday, the SEC announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.

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