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Tax Fraud Blotter: Reached their limit

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Fell a little short; oh brother; only one hitch; and other highlights of recent tax cases.

Tacoma, Washington: The second of two Nigerian men residing in Canada who defrauded U.S. pandemic aid programs has been sentenced to 54 months in prison for wire fraud and aggravated ID theft.

Fatiu Ismaila Lawal was extradited from Canada last July and pleaded guilty in September. Lawal and co-defendant Sakiru Olanrewaju Ambali used the stolen IDs of thousands of workers to submit more than 1,700 claims for pandemic unemployment benefits to more than 25 states. The claims sought some $25 million, but the conspirators obtained some $2.7 million, primarily from pandemic unemployment benefits.

Lawal admitted that he submitted claims for $1,345,472. He submitted at least 790 unemployment claims using the stolen IDs of 790 workers and established four internet domain names that were used for fraud.

Between 2018 and November 2022, Lawal used stolen personal information to submit 3,000 income tax returns for $7.5 million in refunds. The IRS detected the fraud and paid just $30,000. The two conspirators tried to use the stolen American IDs for Economic Injury Disaster Loans, submitting some 38 applications. The Small Business Administration paid only $2,500.

Lawal and Ambali had the proceeds of their fraud sent to cash cards or to “money mules” who transferred the funds according to instructions given by the conspirators. They also allegedly used stolen IDs to open bank accounts and have the money deposited directly into those accounts.

Lawal, who received a substantial portion of the scam’s proceeds, was ordered to pay $1,345,472 in restitution. Ambali was sentenced to 42 months in prison last  March.

Houston: Clothing business owner Philip Ogbeide has admitted making fraudulent and false statements on his federal returns.

Ogbeide signed false U.S. individual income tax 1040s from 2018 through 2022 to receive inflated, undeserved refunds. His returns included false entries claiming fraudulent itemized deductions and undeserved credits. He also omitted income from his clothing business and from the proceeds of a fraud scheme.

He admitted that because of the false deductions and unreported income, he owes the U.S. Treasury $166,929.

Sentencing is April 15. Ogbeide faces up to three years in prison and a $250,000 fine.

Washington, D.C.: A federal court has issued a permanent injunction barring tax preparer Chris Elmer, of Sacramento, California, from preparing federal returns for others after Oct. 14, 2010.

The permanent injunction also bars Elmer’s tax prep company, Associated Tax Planners Inc., and its principals (Elmer’s sons and son-in-law) from promoting a variety of improper tax schemes; it also requires Elmer to divest himself of his interest in Associated. Elmer and the co-defendants consented to the entry of the injunction.

The government’s complaint alleged that Associated repeatedly claimed false or inflated business deductions, many of which were allegedly claimed as business expenses of sham partnerships. The complaint also alleged that in many instances the defendants claimed purported partnership business losses on clients’ individual returns regardless of whether the customers had a partnership or other business.

The government asserted that the defendants often did not file a corresponding partnership return when their customers reported partnership losses on their individual returns or fabricated IRS tax ID numbers for the partnerships.       

The terms of the order also require that any of the remaining defendants (other than Chris Elmer) who wish to continue to prepare returns for others must pass the IRS’s Enrolled Agent’s exam within three years. The injunction also provides for appointment of a neutral monitor to evaluate whether Associated is abiding by terms of the injunction.       

Hands-in-jail-Blotter

LaPorte, Indiana: Raymond Calvin Smith and Bruce Milik Smith, brothers, have been sentenced after pleading guilty to federal felony charges.

Raymond Smith was sentenced to 70 months in prison and two years of supervised release. Bruce Smith was sentenced to 39 months in prison and two years of supervised release. 

From about January to December 2021, the Smiths operated a scheme using Indiana mobile sports wagering applications. Using such personal information of victims as bank account numbers and passwords, they set up dozens of accounts in victims’ names on at least eight different wagering applications and funneled money from victims’ bank accounts to themselves.

The Smiths stole a total of $723,832.64 and unsuccessfully attempted to steal an additional $930,782. Both brothers pleaded guilty to the mail fraud; Raymond Smith also pleaded guilty to evading taxes on the proceeds he received in 2021.

The two brothers were ordered to pay $723,832.64 in restitution to the victims of their offense, and Raymond Smith was ordered to pay $162,928.62 in restitution to the IRS.

Montgomery, Alabama: Tax preparer Cynthia Lee Price, 50, of Cape Coral, Florida, has been sentenced to two years in prison for filing false returns, according to published reports.

News outlets said Price, who worked at No Limit Tax Pro in Montgomery, admitted to preparing fraudulent returns for herself and others from 2017 to 2022, resulting in illegal refunds. Price also reportedly falsified her 2021 return and inflated a client’s charitable contributions to increase the refund.

The total loss to the IRS reportedly exceeded $532,000.

After her prison sentence, Price will be on supervised release for a year and will pay a $15,000 fine along with restitution to the IRS, news outlets added.

Boston: Richard Cooper, of Billerica, Massachusetts, owner of a local paving company, has been sentenced to six months in prison for a multiyear income tax evasion scheme.

From 2017 to 2020, in addition to depositing customer payments into bank accounts in the name of his company, Rick Cooper Paving, Cooper also cashed more than $5.1 million in customer checks. When Cooper had his taxes prepared, he did not tell his preparer about the checks he was cashing, resulting in his returns underreporting the business’ gross receipts by millions. Cooper kept more than $1.1 million that he should have paid in federal and state income taxes.

Cooper, who pleaded guilty in October, was also sentenced to two years of supervised release and ordered to pay $989,819 in restitution to the IRS.

Gardner, Kansas: Business owner Marvin Vail has been sentenced to 17 months in prison for failing to forward more than $1 million in employment tax collections to the IRS.

As owner and operator of Marvin’s Tow Service, Vail failed to pay employment taxes for at least 23 calendar quarters from 2012 to 2017. IRS agents interviewed the office administrator for the company and were told Vail wouldn’t allow the administrator to pay the owed federal taxes.

Vail was also ordered to pay $1,512,283 in restitution to the IRS.

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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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