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Tax Fraud Blotter: What nerve

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Journey’s end; just shocking; house cleaning; and other highlights of recent tax cases.

Pueblo, Colorado: Resident Solomon Paul Garcia has been sentenced to a year and a day in prison, to be followed by three years of supervised release, for tax evasion.

Garcia worked for various employers as a journeyman electrical lineman. From 2016 to January 2020, he avoided income tax by submitting to his employers W-4s that claimed up to 99 allowances or false claims of exemptions. During this time, Garcia was only allowed to claim two allowances.

Although Garcia had an opportunity to pay all taxes due and owing for each calendar year by the respective filing deadlines, he did not file a tax return for any of the years, resulting in the evasion of $267,028.50 in federal taxes.

Garcia was also ordered to pay restitution, including interest and penalties, of more than $548,000.

Attleboro, Massachusetts: David Tetreault, 54, the former bookkeeper for an electrical and contracting business, has agreed to plead guilty to concealing income from the IRS and to stealing disability benefits.

Tetreault worked as a bookkeeper for a Massachusetts-based electrical contractor between 2015 and 2021, when he received wages in cash and used company funds to pay his personal credit card bills. He allegedly manipulated the company’s accounting records and bank statements to disguise these payments as business expenses.

Tetreault underreported his personal income by at least $2.1 million and caused a loss to the IRS of more than $600,000.

Charges also alleged that Tetreault failed to report his work for the electrical contractor or his income to the Social Security Administration and submitted false information about his employment and income to the Employees’ Retirement System of Rhode Island. He collected more than $320,000 in undeserved Social Security Disability Insurance benefits and state disability pension benefits between 2016 and 2024. 

He has agreed to plead guilty to one count of tax evasion, one count of theft of government money and one count of wire fraud. Tax evasion provides for up to five years in prison and three years of supervised release; theft of government money provides for up to 10 years in prison and three years of supervised release; wire fraud provides for up to 20 years in prison and three years of supervised release. All the charges also carry a fine of up to $250,000 or twice the gross gain or loss, whichever is greater.

Chester, Connecticut: Resident Evan Bobzin has pleaded guilty to offenses, including tax charges, from a $2 million embezzlement.

From July 2013 until December 2023, Bobzin was employed by Hoffman’s Gun Center in Newington, Connecticut, and, in 2016, became the head of information technology at Hoffman’s. In January 2016, Bobzin began to steal cash receipts from a company safe in the company’s front office.

Between 2016 and 2023, Bobzin and his former spouse made 287 cash deposits of stolen money from Hoffman’s totaling $1,901,250 into his bank accounts, and seven cash purchases of cashier’s checks totaling $161,330. Bobzin used the funds to pay for personal expenses.

In October 2022, the U.S. Attorney’s Office notified Bobzin that he was conducting cash transactions in amounts below $10,000 in a manner indicative of structuring to avoid having his bank file currency transaction reports. Bobzin ceased making cash deposits at his bank, opened new accounts at a different bank and resumed making structured cash deposits into those accounts.

Bobzin failed to report the stolen income on his federal personal income tax returns for 2016 through 2022, resulting in a loss to the IRS of $436,178. As an example, on his income tax return for the 2020 tax year, Bobzin reported taxable income of $9,914 and tax owed of $0. The return omitted income of some $432,615 and understated tax due and owing by some $110,530.

Sentencing is Nov. 26. Bobzin pleaded guilty to one count of interstate transmission of stolen money, which carries up to 10 years in prison, and one count of tax evasion, which carries a maximum term of five years. He has also agreed to pay $2,062,580 in restitution and to cooperate with the IRS to pay $436,178 in taxes, as well as penalties and interest.

Hands-in-jail-Blotter

Madison, Wisconsin: Investment advisor Eric Upchurch has been sentenced to 28 months in prison for wire fraud, making false statements to the Small Business Administration and money laundering related to the Paycheck Protection Program.

Throughout 2020 and 2021, Upchurch submitted fraudulent PPP loan applications on behalf of several businesses, falsely claiming that his businesses earned hundreds of thousands of dollars in revenue and paid employees tens of thousands of dollars in payroll a month. He also provided lenders with forged payroll reports and tax forms.

None of Upchurch’s companies formally employed anyone besides Upchurch, and none had the revenue necessary to cover the claimed payroll.

Upchurch stole $406,211 and attempted to steal an additional $400,378 in PPP money. He also laundered a portion of his fraudulently obtained PPP funds when he purchased $19,000 worth of bitcoin.

Agawam, Massachusetts: Tax preparer Colleen Gruska, 66, has been sentenced to two months in prison to be followed by a year of supervised release (the first six months to be served in home confinement) for filing false returns.

For more than a decade, Gruska used her tax prep service to file dozens of false returns for herself, her relatives and others. On these returns, she reported business losses that were either dramatically overstated or were for businesses that did not exist, resulting in little or no federal income tax owed by the taxpayer.

In her own filings, Gruska reported $189,000 in expenses over four years for a house and yard cleaning business despite there being no actual expenses, enabling her to avoid $36,079 in taxes. For a relative, she filed false returns that claimed a non-existent soccer coaching business with expenses totaling $233,561, enabling the relative to avoid $39,599 in taxes.

Gruska, who pleaded guilty in January, caused a loss to the IRS of $261,102 and was ordered to pay that amount in restitution.

Lee’s Summit, Missouri: Neurologist Maria Donato has pleaded guilty to failing to report cash income from her practice on her federal returns.

Donato owned and operated Forest Park Neurology, where she practiced from 2012 to 2019. Her patients sometimes paid cash for her services from 2015 through 2019, but Donato failed to report the full extent of her cash income on her federal income tax returns. She specifically pleaded guilty to failing to report more than $120,000 in cash income in 2017. She also failed to properly report her cash income on her Missouri tax returns during those years.

Concord, North Carolina: Exec Ronald James McMurphy has pleaded guilty to failing to collect or pay over taxes.

From around the first quarter of 2016 to and including the third quarter of 2022, he was president of McMurphy Hydraulics Inc. and from around the fourth quarter of 2019 up to and including the third quarter of 2022 was also president of Powertek Equipment Inc., a manufacturer of heavy equipment for construction and forestry.

McMurphy was responsible for accounting for and paying to the IRS the employment taxes for both companies. For various tax periods, McMurphy failed to truthfully account for and pay over the trust fund taxes and employer matching taxes due and owing to the IRS on behalf of the companies’ employees.

The employment tax liability for which McMurphy is accountable is $712,017.

Sentencing is Dec. 12. He faces up to five years in prison, as well as a period of supervised release of up to three years and monetary penalties.

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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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