Connect with us

Accounting

Tax Fraud Blotter: Public mistrust

Published

on

The price of flame; a guy at the IRS; package deal; and other highlights of recent tax cases.

Nome, Alaska: Businesswoman Tina H. Yi, of Anchorage, Alaska, has pleaded guilty to evading taxes on income from her business.

Yi was the sole owner and operator of SJ Investment, a hotel, bar and liquor store. Yi created the business around April 2007 and operated it until around October 2017, when the property was destroyed in a fire.

From around 2014 to 2018, Yi maintained two sets of financial records relating to the business income and expenses, one accurate and one that understated business income. Yi provided the false records to her accountant to prepare returns, and her 2014 through 2018 returns were false.

Yi caused a total tax loss to the IRS of more than $550,000.

Sentencing is Oct. 11. Yi faces up to five years in prison as well as a period of supervised release, restitution and monetary penalties. 

Houston: Tax preparer Christopher J. Guevara has admitted to aiding or assisting in the preparation of a false 2017 income tax return.

From at least 2018 to 2020, Guevara owned and operated Chris Tax Service and admitted to placing false Schedule A deductions, residential energy credits and Schedule C businesses on returns he prepared, resulting in inflated and undeserved refunds. Guevara admitted to placing $26,857 in false business losses that were listed on the 2017 Schedule C. The tax loss to the U.S. on that return was some $13,390. 

Guevara took responsibility for $123,458 in losses to the IRS and has agreed to pay that amount in restitution. 

Sentencing is Oct. 31. Guevara faces up to three years in prison and a possible $250,000 fine. 

Plainview, Illinois: Former Illinois State Senator William Samuel McCann Jr. has been sentenced to 42 months in prison to be followed by two years of supervised release, and ordered to pay $683,816.61 in restitution for fraudulent use of campaign funds, money laundering and tax evasion.

McCann engaged in a five-year scheme, converting more than $600,000 in campaign funds to his personal use. A state senator from various districts from 2011 to 2019, he formed the Conservative Party of Illinois and, in 2018, launched an unsuccessful bid for governor. He previously lived in Carlinville, Illinois, and owned and operated two construction-related businesses. He also organized multiple political committees and from April 2011 to November 2018 received more than $5 million in donations.

McCann used campaign funds to purchase personal vehicles, pay personal debts, make mortgage payments and pay himself. On his joint return for 2018, McCann failed to report income from rental payments to himself for the RV trailer and motorhome and used $10,000 from a campaign account for a down payment on a motorhome.

McCann pleaded guilty to all nine counts of the indictment, which charged him with seven counts of wire fraud, one count of money laundering and one of tax evasion. The penalty for each count of wire fraud and the count of money laundering is up to 20 years in prison. For tax evasion, the statutory penalty is up to five years.

jail2-fotolia.jpg

Roanoke, Virginia: Brian Hoeppner, owner of a payroll processing and tax prep business, has been sentenced to three years in prison for wire fraud and for filing a false return.

Hoeppner, who previously pleaded guilty, owned and operated Blue Ridge Bookkeeping and had several clients. One hired him to handle her company’s payroll, file the company’s employment tax returns and submit all related paperwork and payments to the IRS.

From at least September 2012 through December 2019, Hoeppner billed this client for her company’s employment taxes. Rather than pay these taxes to the IRS, he spent the money on personal expenses and her company’s employment taxes went unpaid. When the IRS sent notices to this client, Hoeppner lied that “he had a guy at the IRS” who was sorting things out.

After several years of notices, this client demanded that she accompany Hoeppner to a meeting he had set up with the IRS. Just before the meeting, Hoeppner admitted to her that he had been stealing her company’s payments, in all more than $125,000. As of December 2019, this client was still responsible for paying more than $240,500 in taxes, penalties, interest and costs; she almost shuttered her business to come into compliance with the IRS.

Hoeppner was also ordered to pay $58,361 in restitution to this client and $218,445.32 in restitution to the IRS.

Investigation also uncovered that from 2009 through 2013 Hoeppner stole employment taxes from at least one other client. In addition to accruing a debt to the IRS of more than $10,000, the owners discovered that Hoeppner stole a $14,112 federal refund check that the IRS had issued to the company.

On his false personal income tax returns, Hoeppner also failed to report his embezzlement income and overreported withholdings he had paid to the IRS.

Houston, Alaska: Former tax preparer and former municipal treasurer Jess Adams has been sentenced to 30 months in prison for embezzling more than $1 million from the City of Houston, Alaska, and from a Wasilla, Alaska, equipment company and then evading taxes on the embezzled profits.

From 2015 through 2018, Adams was the treasurer for Houston. He used this access to direct electronic transfers from the city’s bank account to a personal account that he maintained to hide embezzled money, creating fictitious entries in the city’s accounting records to disguise these payments as legitimate business expenses.

In October 2018, Houston placed Adams on administrative leave; he resigned his position the next month.

A year later, Adams was employed as a bookkeeper by an equipment company. Again, he directed electronic transfers from the company’s account to personal accounts that he’d opened to hide the embezzled money and used fictitious entries in the company’s accounting software to make the transfers look legitimate. He then laundered the money.

A former seasonal tax preparer for a national tax advisory company, Adams filed false individual income tax returns for 2016 through 2021. These returns did not disclose the embezzled income.

He was also ordered to serve three years of supervised release and pay more than $1.5 million in restitution to the United States, as well as additional restitution to the City of Houston and to the equipment company.

Guilford, Connecticut: Businesswoman Michelle Ann Gilson has pleaded guilty to failure to pay payroll taxes.

Gilson co-owned and co-operated B&M Package Solutions and formerly owned and operated Epic Empirez, both package-delivery companies. Gilson was responsible for company books, payroll and invoices, and for collecting and paying over certain federal taxes from her employees and for her companies paying their share of FICA taxes.

Investigation revealed that beginning in 2017 Gilson failed to report employees’ federal income and FICA taxes and failed to pay over withheld amounts.

Gilson pleaded guilty to one count of willful failure to pay over withholding taxes for multiple quarters during 2017 through 2022. She has agreed to pay some $1,407,831 in restitution to the IRS.

Sentencing is Oct. 9. Gilson faces up to five years in prison. 

Continue Reading

Accounting

Charles Rangel, a voice for the poor in tax debates, dies at 94

Published

on

Charles Rangel, the dapper, voluble U.S. congressman from New York’s Harlem district who for four decades used his perch on the House tax-writing committee to advocate for inner cities and the people who live there, has died. He was 94.

The former congressman died on Monday, according to a statement from the City College of New York, where he had served as statesman-in-residence. No cause of death was given. 

From 1974, when he became the first Black member of the House Ways and Means Committee, Rangel championed tax legislation to foster low-income housing and urban development, encourage trade with Caribbean nations and discourage U.S. business with South Africa’s apartheid government. He said the poor, the elderly and the infirm deserved and needed his protection.

“I don’t believe there’s any compassion in capitalism at all,” he said in 2013. “I believe it’s survival of the fittest.”

In 2007, he achieved his goal of becoming Ways and Means chairman. However, after just three years in the powerful post, he was pressured to step down during an investigation by the House ethics committee.

The panel found him guilty of 11 counts of violating House rules, including using his office to solicit donations for an academic center named after him at City College of New York and — particularly embarrassing for a member of the tax-writing committee — failing to pay taxes on rental income from his villa in the Dominican Republic. On Dec. 2, 2010, he became the first lawmaker censured by the House in 27 years.

Admitted mistakes

Rangel admitted making mistakes but insisted he had never sought to enrich himself.

“I’m not going to be judged by this Congress,” he told lawmakers after the censure vote, “but I’m going to be judged by my life, my activities, my contributions to society, and I just apologize for the awkward position that some of you are in.”

Even as the ethics case was proceeding, voters in New York City’s 15th congressional district awarded Rangel his 21st term in 2010. He finally retired at the start of 2017, at age 86, having served 46 years in Congress.

Rangel was the second congressman to represent his district since its creation during World War II. The first, Adam Clayton Powell Jr., pastor of the Abyssinian Baptist Church, served from 1945 to 1970 but spent part of the late 1960s in exile in the Bahamas, avoiding both a congressional investigation of his use of public funds and a contempt-of-court warrant in New York, where he had been found guilty of defamation. Rangel, a member of the New York legislature at the time, challenged and defeated the absent Powell in the 1970 primary.

O’Neill ally

In the House, Rangel allied himself with Massachusetts Representative Thomas “Tip” O’Neill, who would rise to Speaker in 1977. An original member of the Congressional Black Caucus from its founding in 1971, Rangel was elected its president in 1974 and led a push to get more Black congressmen onto key committees.

As part of a shakeup that placed 16 members of both parties onto Ways and Means, O’Neill created an opening for Rangel, who remarked that with the influx of new faces, the committee had “swung away from its conservative, rural orientation for the first time since the days of the 13 colonies.”

For the next four decades, no debate on tax or trade policy, Social Security or Medicare could be considered over until Rangel’s distinctive gravelly voice had been heard.

“There’s not a tax bill that poor and working people don’t come out ahead on because of my efforts,” he told the New Yorker for a 2000 profile. “It’s not because I’m that good. It’s just because other people want so many other things that I can say, ‘Hey, hold it. Stop the parade!'”

Reagan years

In no small part due to Rangel’s pressure, President Ronald Reagan approved factoring inflation into the earned income tax credit, which helps the working poor. In 1987, Rangel won passage of a measure — the so-called Rangel Amendment — denying U.S. companies doing business in South Africa, then under White apartheid rule, the customary tax credit for taxes paid in foreign countries.

He worked with Republicans on proposals to create so-called urban enterprise zones, where tax incentives would lure development. The idea was implemented in 1993 under President Bill Clinton, a Democrat, as empowerment zones, with one, the Upper Manhattan Empowerment Zone, located in Harlem. 

In 1996, Rangel condemned as a “cruel monstrosity” Republican-drafted legislation that ended welfare as an entitlement. When Clinton agreed to sign the bill into law, Rangel lamented, “My president will boldly throw one million into poverty.”

Rangel also proposed reinstating a military draft of all men and women from 18 to 42, on the grounds that U.S. wars in Afghanistan and Iraq were being fought “predominantly by tough, loyal and patriotic young men and women from the barren hills and towns of rural and underprivileged neighborhoods in urban America where unemployment is high and opportunities are few.”

132nd and Lenox

Charles Bernard Rangel was born on June 11, 1930, in New York City, where he was raised in the home of his maternal grandfather, Charles Wharton — “by the tough corner of 132nd Street and Lenox Avenue in the heart of Harlem,” as he wrote in his 2007 memoir, authored with Leon Wynter.

His father, Ralph, who left the family when Rangel was six, was “absolutely no good,” Rangel said. He grew up around the apron strings of his working mother, Blanche, and was raised in part by his grandfather and his older brother, Ralph. He also had a younger sister, Frances.

One of Rangel’s early jobs was delivering copies of a newspaper published by Powell from his headquarters at Abyssinian Baptist Church. Rangel himself was Catholic.

As Rangel told it, he was an exceptional student until reaching DeWitt Clinton High School in the Bronx, where he felt “not able to compete” in the Jewish-dominated student body. He dropped out and signed up for the U.S. Army in 1948, an experience that left him with a sour taste for military recruiters — “no more than salesmen,” he said.

Purple Heart

In Korea in 1950, part of an artillery unit, Rangel was wounded by a mortar shell during a battle with advancing Chinese troops. He was awarded a Purple Heart and a Bronze Star for continuing to lead his heavily outnumbered men to safety.

Turning to the Veterans Administration for help in what to do next, Rangel said, he was given two options: electrician or mortician. But one counselor urged him to finish his education. Rangel took one year to complete his last two years of high school, then went on to graduate from New York University in 1957.

At St. John’s University, studying law on a full scholarship, he got involved with student government and displayed an ease with the ethnic politicking that dominates New York City elections.

“A group of us actually started our own national fraternity — mainly to stick it to the dean, because we thought he catered to one Irish fraternity,” Rangel wrote in his memoir. “And who was in our fraternity? Everybody except the preferred Irish majority.”

Enters politics

Following his graduation in 1960, Rangel worked as an attorney in private practice and a federal prosecutor while testing the waters in local Democratic politics. In 1966, he won election to the New York State Assembly to succeed Percy Sutton, who had been appointed Manhattan borough president. They became longtime allies.

Initially seen as reformers, Sutton and Rangel, along with Basil Paterson and future New York City Mayor David Dinkins, became known as the “Gang of Four” for their control of Harlem politics.

Rangel decided to challenge Powell for Congress after traveling to the Bahamian island of Bimini to try to persuade him to come home and serve. Rangel surpassed Powell by 150 votes out of 25,000 in the Democratic primary that September, then breezed to victory in the general election.

Drug trade

His initial priority was the illegal drug trade, and he urged more spending for rehabilitation programs. He was a member of the House Judiciary Committee when it approved articles of impeachment against President Richard Nixon.

While rising in seniority on Ways and Means, Rangel also sought a role in House Democratic leadership but was derailed in 1986, when Representative Tony Coelho of California defeated him for the role of House majority whip.

With his wife, the former Alma Carter, he had two children, Alicia and Steven.

Continue Reading

Accounting

Tax Fraud Blotter: Wholesale fraud

Published

on

Book’im; out of Service; what a pill; and other highlights of recent tax cases.

Greenbelt, Maryland: Jerome Brown, of Detroit, has been sentenced to five years in prison for laundering money stolen from federal and North Carolina state refunds. 

In his guilty plea in 2022, Brown acknowledged that from February through August 2020 he conspired with individuals in Nigeria and Michigan to launder wire-fraud money. Using information from ID-theft victims (including in Maryland), the conspirators put the money on prepaid debit cards that Brown deposited into bank accounts and cashed out through ATM withdrawals and by purchasing money orders and cryptocurrency. 

Brown cashed at least some $540,975.80 from prepaid cards as part of the scheme. He kept about $216,390 and sent some $324,585 in Bitcoin to his co-conspirator in Nigeria.

He was also ordered to pay $604,889.64 in restitution.

Somerset, New Jersey: Tax preparer Vito A. Pascarella has pleaded guilty to preparing false returns for clients.

Pascarella reported false wage numbers, falsely reported that taxpayers owned and operated businesses, and falsely reported that those purported businesses earned gross receipts and incurred business expenses.

He caused a total federal tax loss exceeding $550,000.

Sentencing is Sept. 15. He faces up to three years in prison, as well as a period of supervised release, restitution and monetary penalties. 

Santa Monica, California: Christopher Scott King has pleaded guilty to operating an illegal gambling business, tax evasion and money laundering.

Working out of Los Angeles County, King used a sports betting website in Costa Rica to facilitate bettors wagering on sporting events in violation of both California state and federal law.

Between 2019 and 2022, King also concealed $13,586,493 of income from the IRS by, among other things, not reporting all his income. On his 2022 income tax return, for example, he reported $143,258 in taxable income but had earned more than $5 million that year.

King laundered his money by channeling it through real estate development projects and gold. He also used money from his gambling business to fund brokerage and financial accounts.

He caused a total federal tax loss of $3,804,218.

King has agreed to forfeit $10 million at sentencing, which is Sept. 9. He faces up to five years in prison for each count of tax evasion, operating an illegal gambling operation and accepting a financial instrument for unlawful internet gambling, and 10 years in prison for money laundering. He also faces a period of supervised release, restitution and monetary penalties. 

St. David, Arizona: Roy Layne has been sentenced to four years in prison for filing false returns and loan applications to obtain pandemic relief.

To create the appearance that he was operating several businesses, Layne filed paperwork with the IRS, applied for a business license from the City of Tucson, opened business bank accounts and filed false employment-related returns. In April 2020, he filed an application with the U.S. Small Business Administration that claimed he operated a “wholesale” business with 17 employees that had annual revenue of more than $500,000. In 2021, he submitted a false application for a Paycheck Protection Act loan, claiming that same wholesale business had 31 employees and $1.2 million in revenue.

Layne ultimately received $306,700 in undeserved pandemic-related loans. He also used the personal ID information and the identity of another person to file false claims for federal refunds with the IRS.

In total, Layne, who pleaded guilty last year, claimed more than $7.4 million in false refunds, of which the IRS paid $590,000.

He was also ordered to serve three years of supervised release and pay $856,692.91 in restitution to the United States.

jail2-fotolia.jpg

Hackensack, New Jersey: Tax preparer Joshlyn Raye, 49, of Elmwood Park, New Jersey, has been sentenced to three years in prison for tax evasion and for helping her clients file falsified returns that generated larger refunds.

Raye previously pleaded guilty to one count of aiding and assisting in the preparation of a false and fraudulent return, one count of tax evasion and one count of filing a false declaration under penalty of perjury concerning a quarterly return on behalf of her tax prep business.

Between March 2010 and September 2023, Raye owned JB Tax Services. She evaded her personal income taxes over three of those years, filed 177 false returns for clients and filed three false quarterly employment returns for her business. She used fabricated and inflated figures, including expenses and itemized deductions.

She was also sentenced to three years of supervised release and ordered to pay $1,109,214.10 in restitution.

Corpus Christi, Texas: Business owner Timothy Gaines Pollard has admitted failing to pay employment taxes.

Pollard owned and operated Tim Pollard Construction, a residential remodeling and fence-installation business in Bishop and Kingsville, Texas. He admitted that from 2019 through 2021, he was responsible for collecting and withholding employment taxes from his employees’ paychecks. He also admitted that he withheld the money from his employees but failed to pay it to the U.S. and instead used the funds to pay personal expenses.

The total tax loss exceeded $400,000.

Sentencing is July 30. Pollard faces up to five years in prison and up to a $250,000 fine.

Grandview, Missouri: Tax preparer and ex-IRS employee Sandra Mondaine, 64, has been sentenced to 33 months in prison for filing false returns.

Mondaine, who pleaded guilty last year, prepared returns for clients in the Kansas City area, obtaining information from them either in-person or through the mail. She prepared returns with false information regarding residential energy credits, charitable contributions, medical expenses and dependents, among other details.

She retained a portion of the claimed refunds before providing the rest to clients. Authorities said Mondaine also appears to have submitted doctored and fake substantiation documentation when her clients were audited by the IRS.

The total tax loss related to the counts of conviction was $1,113,215.90, which Mondaine was ordered to pay in restitution to the IRS.

Baltimore: Pharmacy owner Moshe Gabay, 54, has pleaded guilty to one count of filing false federal returns.

Gabay underreported his income by more than $3.5 million and so owed more than $1 million in taxes.  

He owned and operated SINU-RX Pharmacy and provided information to his bookkeepers and tax preparers that falsely categorized funds taken from SINU-RX. These funds were listed as business expenses, but Gabay had diverted the money for his personal use.

Gabay agreed to pay restitution of more than $1 million; he also faces up to three years in prison.

Continue Reading

Accounting

Tax pros need to double down on IRS due diligence

Published

on

The Internal Revenue Service makes paid preparers who submit a return that claims the Earned Income Tax Credit, the American Opportunity Tax Credit and others (and one filing status) perform documented due diligence. Preparers don’t seem to mind, though they do freely acknowledge that the fees for non-compliance can snowball fast.

Are clients as accepting about the added work, time and fees? Not always.

“Clients were a bit annoyed by the extra questions and paperwork,” said Larry Pon, a CPA in Redwood City, California. “These questions are included in the organizer, and all of them need to be reviewed and documented. We’re telling clients the IRS requires tax professionals to perform due diligence.”

1040 tax forms for 2017

Extra due diligence “definitely added a layer of complexity” to last season, said Paul Miller, a CPA and managing partner at Miller & Company in New York. “Not impossible but time-consuming, especially with the documentation and follow-up some clients required. Our team focused on clear communication. We told clients, ‘This isn’t about not trusting you. It’s about protecting both of us.’ When clients understand the ‘why,’ they’re usually more cooperative.”

“We require the clients to sign the 8867 (the due diligence questionnaire),” added Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut.

Armstrong’s firm has added client requirements such as birth certificates of all children, certificates of marriage and divorce, death certificates, and other verification that the child resides with the claimant. 

“In the old days we could say, ‘We’ve known this person for 10 years’ or ‘That is my child,'” Armstrong said. “That does not fly any longer.”

“The IRS has made it clear that due diligence is non-negotiable,” Miller added.

‘Not explicitly defined’

“Due diligence is a concept included in multiple sets of professional standards to which professionals providing tax services are subject. Yet the term ‘due diligence’ is not explicitly defined in these standards,” reads the AICPA & CIMA page for the downloadable “Due Diligence in Tax Services Practice Guide.” 

“I warn fellow tax professionals of the consequences besides just the preparer penalties,” Pon said. “The IRS can exclude the tax professional from the e-filing program, refer them to the Office of Professional Responsibility or even to IRS Criminal Investigation. The IRS can audit all their clients’ tax returns for errors [when] claiming tax breaks.”

Tax preparers can, of course, incur a penalty if they fail to comply with due diligence requirements as prescribed by IRC 6695(g). 

“Anyone who prepares a return for a client is responsible [for understanding] the client’s facts and circumstances,” said Miklos Ringbauer, founder of MiklosCPA in Southern California. “This is where client questionnaires, collecting supporting documentation and following established procedures are vital for all preparers to determine eligibility for credits.”

The credits in question are the EITC, the Child Tax Credit, the Additional Child Tax Credit, the Credit for Other Dependents (the ODC) and the AOTC. Due diligence is also required for head-of-household filing status.

Paid preparers must:

  • Complete Form 8867 and the Computation Worksheet in 1040 instructions; 
  • Have no knowledge or reason to know that the information used for any credit is incorrect; and, 
  • Retain a copy of each Completed Worksheet and supporting records for three years. 
  • Employers of preparers can also be penalized for improper due diligence.

“Ask adequate questions,” the IRS says in part six of the 8867. (Common errors, the service says in Paid Preparer Due Diligence (more than just a check mark on a form), include credits claimed for a child who is not a qualifying child or who does not have a valid Social Security number; claiming the EITC when married; and incorrectly reporting income or expenses, among others.)

Extra steps — which most preparers charge for either by the hour or by the overall complexity of the return — are necessary to explain to the taxpayer that it’s for their own benefit to prove eligibility during an audit, Ringbauer said. 

“Preparing Form 8867 does take additional time and is an added responsibility on the preparer,” Ringbauer said, adding that taking any unallowed credit may result in barring the taxpayer from future ability to claim the credit.

What is defined is the fine for each violation: $635 currently, indexed for inflation each year.

“Steep, especially for smaller firms or solo practitioners who may not have a compliance officer double-checking every return,” Miller said. “But it has gotten people’s attention.”

“If you’re unfortunate to have all four on a return, that’s $2,540 in fines — and a likely audit of your other returns and fines applied,” Armstrong said. “Bear in mind that the return could be 100% correct. It is our recordkeeping that’s being questioned.”

“While the penalty may seem high to some preparers, it is an example as to why many tax professionals should properly charge fees and understand their professional duties and liabilities,” Ringbauer said, adding that his firm has seen incomplete 8867s filled out by prior preparers.

“If the goal is to promote accountability, it’s working,” Miller said. “I think more proactive education from the IRS would go further than penalties alone.”

No IRS mistakes

Earlier this year, Pon got a call from a tax pro who’d gone through a due diligence audit with the IRS.

“The IRS asked to look at 25 of his tax returns,” Pon said. “The agent reviewed those returns and discovered 44 errors of due diligence for 2023 [when the] preparer penalty was $600 per failure: $26,400. I went through each of the tax returns and, unfortunately, was not able to find any mistakes made by the IRS agent.”

Form 8867 was updated last November, “and the instructions are very clear on what needs to be documented,” Pon said. “You have to document the knowledge requirement and the backup that the taxpayer qualified for these tax breaks. This documentation had to be contemporaneous.”

Armstrong set up his software to disallow an e-file if the due diligence questions are not answered. “The questions themselves could be better written, and I think some are double negatives,” he added.

“Taxpayers feel that we are intrusive, and we advise them that it’s required and that we must document the answers,” Armstrong said. “I don’t ask for all documents for repeat clients but keep the documents in a folder called ‘DD,’ which is in the client’s folder.”

The biggest misconception among clients, Miller said, has been that due diligence is optional or “just a checklist. Some people think if they’ve answered the questions verbally, that’s enough. But it’s not just about asking — it’s about documenting responses, keeping records and being able to show the IRS a full paper trail.”

“This is something we have to inform our clients about and increase the fees accordingly,” Pon added.   

Continue Reading

Trending