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Tax Fraud Blotter: No class

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Pushing 100 notices; nothing but the tooth; checking out; and other highlights of recent tax cases.

Le Roy, Minnesota: Tax preparer Craig Jacobson, 67, has been sentenced to two years of probation after pleading guilty to two felony counts of failure to collect and remit taxes, according to published reports. 

Jacobson was reportedly charged after the Minnesota Department of Revenue revealed that he failed to file multiple withholding returns, filed false withholding and federal returns, and failed to pay withholding taxes for four years.

In late 2020, the state began investigating Jacobson after learning about criminal tax violations occurring from 2015 to 2018, according to published reports. During that time, reports said, Jacobson was CEO of two companies — M&I Tax Accounting and C&C Tax Service Inc., both of which were registered with the state for corporation tax, sales and use tax, and withholding tax accounts.

From 2015 to 2016, M&I reportedly withheld taxes from employees’ wages but never turned those taxes in. The state of Minnesota sent more than 60 notices to M&I, reports added. From 2017 to 2018, C&C withheld taxes from its employees’ wages, but again, the state reportedly said no withheld taxes were paid despite tax authorities sending another 30 notices.

During the same period, Jacobson reportedly had substantial gambling winnings and losses but his returns showed no federal taxes reflecting this. A tax specialist for the state compared Jacobson’s individual returns that he filed for Minnesota with those he filed with the IRS. The two didn’t match, reports said.

News outlets added that before the plea deal Jacobson was charged with 10 felony counts of failing to file withholding tax returns, 10 felony counts of failing to pay withholding tax, four felony counts of filing false or fraudulent individual income tax returns and one felony count of filing a false withholding return.

Ft. Worth, Texas: A U.S. District Court has permanently barred tax preparer Ruben Gonzalez and anyone acting with him or at his direction from preparing federal returns for others. Gonzalez consented to the injunction.

Gonzalez is banned from using his business, “Sin Barreras Income Tax,” to prepare returns for others. The government’s complaint alleged that Gonzalez or those working for him significantly overstated clients’ refunds in a substantial number of returns prepared at the business from 2021 to 2023 by fabricating or inflating business losses, by fabricating charitable donation deductions and by falsely claiming energy credits and COVID family sick leave credits. The complaint alleges Gonzalez cost the U.S. more than $20 million in lost tax revenue from 2021 to 2023.

The injunction requires Gonzalez to notify each person for whom he or preparers at Sin Barreras prepared federal returns, amended returns or refund claims from 2021 to the present. Gonzalez must also post a copy of the injunction where he conducts business and post a statement on social media accounts and websites that he is barred from preparing returns.

Princeton Junction, New Jersey: Professor and pharmacy co-owner Gordian A. Ndubizu, 69, has been convicted of evading federal income taxes and filing false returns.

During tax years 2014 through 2017, he was a professor of accounting at a university in Pennsylvania as well as the co-owner of Healthcare Pharmacy in Trenton, New Jersey. Healthcare Pharmacy was organized as an S corporation, the income of which flowed through to Ndubizu and his wife and was to be reported on their personal income tax returns.

He prepared fraudulent books and records for Healthcare Pharmacy, inflating costs of goods sold to reduce and underreport the pharmacy’s profits flowing through to him and his wife. Among other falsehoods, Ndubizu identified certain wire transfers as payments to purchase goods sold by the pharmacy when these wire transfers were made to personal bank accounts under his control and to bank accounts in Nigeria associated with an automotive company under his control. 

Ndubizu’s returns for tax years 2014 through 2017 underreported his income and falsely reported that he had no financial interest in or signature authority over any foreign bank accounts. He failed to report some $3.28 million in income from the pharmacy, resulting in the evasion of some $1.25 million in tax.

Each count of tax evasion carries a penalty of up to five years in prison and a fine of $250,000. Each count of filing a false tax return carries a maximum of three years in prison and a fine of $250,000.

Hands-in-jail-Blotter

Hastings, Minnesota: Tax preparer Tania Fay Pryor, 37, has been sentenced to six months in jail for felony tax evasion, according to published reports.

Pryor, who reportedly once owned five H&R Block franchises and a daycare center, must also pay restitution and serve five years of probation.

Pryor was initially charged with 18 tax-related counts between 2006 and 2008 and owed more than $43,000 in unpaid taxes, reports said, adding that she pleaded guilty last May to four counts of failing to file returns or report her income and to two more charges of failing to pay taxes.

She reportedly failed to file returns or pay taxes, including for her former employees, though she deducted the money from their paychecks. According to cited state records, Pryor did not file withholding returns and tax deposits for her tax-preparing business for 2007 and 2008. A criminal complaint filed in a local county district court said Pryor owed more than $7,500 in withholding tax for 2006 for that business, according to reports.

Newark, New Jersey: Business owner Alain Rodrigues, 49, has admitted evading taxes through a check-cashing scheme.

Rodrigues owned and operated a construction company in Newark and Old Bridge, New Jersey, and beginning around 2017 deposited a portion of the payments from his customers into a business bank account; he then converted the balance to cash and money orders that he deposited in a personal bank account or used to pay cash wages to employees.

Rodrigues only reported the portion of the company’s revenue that was deposited in the business bank account on his business taxes and did not report the business revenue deposited directly into his personal bank account as income on his personal income taxes. The company, under his direction, also did not report to the IRS the cash wages it paid to employees nor collect or pay over employment taxes on these wages.

Rodrigues and his company paid $554,873 less than they owed in income taxes and failed to collect and pay over $793,139 in employment taxes, a total of some $1.35 million.

Sentencing is Dec. 19. Each count of tax evasion and failure to collect and pay over taxes carries a maximum of five years in prison and a $250,000 fine. As part of his plea agreement, Rodrigues has agreed to pay the government $1.35 million in restitution and to file amended returns. 

Pickerington, Ohio: Office manager Eric Moesle has pleaded guilty to failing to pay more than $750,000 in employment taxes and to failure to file returns. 

From 2014 through 2020, Moesle was the office manager for Elemental Dental in Pataskala, Ohio, where he oversaw payroll, bookkeeping and tax return prep. At Moesle’s direction, Elemental withheld Social Security, Medicare and income taxes from employees’ wages but did not pay over those taxes to the IRS nor file employment returns. During that time, the business also failed to pay over the employer’s share of those taxes.

Interviewed by the IRS in 2022, Moesle lied that he didn’t know that the employment taxes hadn’t been paid and that Elemental’s employment tax returns and W-2s hadn’t been filed; he also falsely stated these failures or omissions were unintentional. 

Moesle caused a federal tax loss of $760,255.

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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