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Tax Fraud Blotter: Party’s over

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Unaltered behavior; playing chicken; out on a rail; and other highlights of recent tax cases.

West Palm Beach, Florida: A federal district court has issued a permanent injunction against tax preparer Gregory Salgado, both individually and d.b.a. GMJ Real Investments Inc. and Cuba Salgado Tax & Real Estate.

Salgado is barred from preparing returns, working for or having any ownership stake in a tax prep business, assisting others to prepare returns or set up business as a preparer, and transferring or assigning customer lists to any other person or entity. The court also ordered him to pay $85,000 in gains from his tax prep business. Salgado agreed to both the injunction and the order to pay.

The complaint alleged that Salgado pleaded guilty in 2012 to filing a false personal return and filing a false return for another taxpayer and that the IRS assessed more than $500,000 in civil penalties against him for willfully underreporting tax on returns he prepared for clients.

According to the complaint, neither Salgado’s conviction, 33-month incarceration nor civil penalties altered his behavior. After his release from prison in 2015, Salgado continued to prepare thousands of returns for clients that either reduced their tax liability or inflated their refund claims. He did this largely by falsifying or overstating itemized deductions, fabricating or overstating business income and expenses and falsifying filing statuses and dependents.

Salgado must send notice of the recent injunction to each person for whom he or his business prepared federal returns, amended returns or claims for refund between Jan. 1, 2019, to the present. The court also ordered him to post a copy of the injunction at all locations where he conducts business and on his business’s website.

Cincinnati: Restaurateur Richard Bhoolai, 65, has been convicted of failing to pay taxes he withheld from employees’ wages.

He owned and operated Richie’s Fast Food Restaurants Inc., an S corp used to operate three area fried chicken restaurants since 1991. Bhoolai employed 22 to 34 employees between at least 2017 and 2018 and during that time withheld taxes from employees’ wages but did not pay them over to the IRS. Prior to that period, Bhoolai had not paid over such taxes from earlier years and the IRS had assessed a penalty against him.

Bhoolai instead used money from the businesses for his personal benefit, including gambling.

He faces up to five years in prison for each count of failure to pay taxes.

Bakersfield, California: Miguel Martinez, a Mexican national, has been sentenced to six years in prison for leading a $25 million fraud against the IRS.

From November 2019 through June 2023, Martinez, who previously pleaded guilty, led a scheme to file hundreds of fraudulent returns that claimed millions of dollars in refunds. He used stolen IDs to create fake businesses and report phony wage and withholding information for the businesses to the IRS. He then submitted hundreds of individual federal income tax returns in the names of still other individuals whose identities he had also stolen, claiming that those individuals worked for the fake businesses and were owed refunds based on the phony wage and withholding information.

Martinez used several people to allegedly help carry out the scheme, including a local tax preparer and a former IRS tax examiner who advised Martinez. In exchange, Martinez paid them thousands of dollars and took them out to lavish dinners.

The IRS paid out $2.3 million in refunds. When federal agents arrested Martinez and searched his three homes, he was found with $750,000 in fraudulent refund checks, ID cards for more than 200 individuals and multiple firearms that he could not lawfully possess due to his illegal status in the United States.

He also lied to government agents in the beginning of the investigation, initially saying that he had no knowledge of or involvement in tax prep for others and that he just sold gold and ran a party rental business. He also said that he did not know others who were involved in the scheme and had no relevant evidence.

Hands-in-jail-Blotter

Kansas City, Missouri: Tax preparer Ebens Louis-Loradin has been sentenced to 20 months in prison and ordered to pay $722,121 in restitution for a fraud in which he filed clients’ federal income tax returns that contained false information.

Louis-Loradin, a tax preparer since 2012 and who pleaded guilty earlier this year, prepared and filed 154 fraudulent returns that inflated his clients’ refunds by a total of nearly $1 million and boosted the fees he charged them.

He admitted that he engaged in the scheme from 2013 to 2020. Phony claims on the returns included dependents, inflated withholding amounts, credits for child and dependent care expenses, American Opportunity Credits and the Earned Income Tax Credit, itemized deductions and business losses.

The fraud caused a total federal tax loss of $953,873. Many of his clients, who told investigators they weren’t aware of the false items he placed on their tax returns, have been paying back the IRS for the refund overpayments.

Louis-Loradin also failed to file personal federal income tax returns for 2016 to 2018 and fraudulently used multiple IDs, including those of children, in his scheme.

Springbrook, Wisconsin: Gregory Vreeland, who owns and operates Wisconsin Great Northern Railroad of Spooner, Wisconsin, which provides recreational train rides and rail car storage and rail switching services, has been sentenced to a year and a day in prison for failure to pay employment taxes.

Vreeland, who previously pleaded guilty and who also co-owned and operated the Country House Motel and RV Park, was Great Northern’s president and the motel’s managing partner and was responsible for the companies’ financial matters, including the filing of employment returns. He failed to file employment tax forms for Great Northern from the end of 2017 through all of 2021 and failed to pay over the associated employee withholdings for that same period. Vreeland also failed to file employment tax forms for the motel from the third quarter of 2015 through the third quarter of 2020 and failed to pay over the associated employee withholdings for that same time. He used the withholdings to instead expand Great Northern’s operations and to buy a personal residence.

Vreeland received civil notices from the IRS for non-payment, which he initially ignored and made no attempt to cooperate with the service until it began levying his bank accounts.

Raleigh, North Carolina: Tax preparer Fwala Serge Muyamuna, 55, of Wake Forest, North Carolina, has pleaded guilty to 24 counts of aiding or assisting in the preparation of fraudulent returns and one felony count of obstructing justice.

Muyamuna was sentenced to 16 to 29 months in prison; the sentence was suspended and Muyamuna was placed on supervised probation for two years. Muyamuna was also ordered to serve four days in custody, pay $34,257.10 in restitution, perform 150 hours of community service and no longer prepare North Carolina tax returns.

Muyamuna, the manager, operator and tax preparer of Tax Experts/D & V Taxes and Accounting/DV Taxes, aided or assisted in the preparation of 24 false North Carolina individual income tax returns for clients for 2018 to 2021. Muyamuna also told a client to not cooperate with the investigation or speak with IRS agents.

Hanson, Massachusetts: Business owner Kenneth Marston has pleaded guilty to failing to pay employment taxes.

From 2015 through 2018, Marston owned and operated Bowmar Steel Industries, which engaged in steel fabrication, and Teleconstructors Inc., which provided installation services on cellular phone towers. During that time, Marston falsely treated his employees as independent contractors and failed to withhold employment taxes on more than $3.8 million in combined wages. Marston avoided reporting and paying $1 million in employment taxes owed to the IRS.

Failure to pay over taxes provides for up to five years in prison, three years of supervised release and a fine of $250,000 or twice the gross gain or loss, whichever is greater. Sentencing is Jan. 3.

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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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