Archive for Tax Fraud

Coming Clean

April 8, 2012 John R. Dundon II Tax Fraud, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Relief

Quite often people approach me with their tax problems talking in terms of “coming clean” telling dramatic and deeply personal stories, many of which have little or nothing to do with the tax matter at hand. People seem to want to essentially ‘get issues off their chest’ or ‘confess their sins’ as it were which presupposes that I also serve as a pastor, priest, minister, rabbi etc. This has always proven troubling in that I am not formally trained to help people seek relief in these regards.

Having spent years talking to many good friends and fellow tax experts about directing taxpayers when their conversation drifts away from taxes the general conclusion is to redirect and stay focused on the area of expertise, tax. Often taxpayer conversation distills down to the immediate costs associated with correcting mistakes of the past and many people wrestle with whether there is more benefit in ‘doing nothing’ thinking that if they are ‘lucky’ they may ‘get away with it like (friend) or (relative).’ This certainly is one alternative.

My license however requires me to inform taxpayers of their delinquencies as they are reported so ignoring a mistake or problem is not a permanent solution in my reality. That aside there are more important reasons to ‘come clean’ as reflected in these two very true stories that when read together bring an understanding that action (and even inaction) have corresponding consequences reaching far beyond the mechanics of defending or correcting a tax return. I don’t know who authored the following text to give credit but it is worth reading. Let me know what you think…

STORY NUMBER  “ONE”

Many years ago, Al Capone virtually owned Chicago .  Capone wasn’t famous for anything heroic. He was notorious for enmeshing the windy city in everything from bootlegged booze and prostitution to murder.

Capone had a lawyer nicknamed “Easy Eddie.” He was Capone’s lawyer for a good  r eason.  Eddie was very good!  In fact, Eddie’s skill at legal maneuvering kept Big Al out of jail for a long time.

To show his appreciation, Capone paid him very well.  Not only was the money big, but Eddie got special dividends, as well.  For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of  the day.  The estate was so large that it filled an entire Chicago City block.

Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him.

Eddie did have one soft spot, however. He had a son that he loved dearly.  Eddie saw to it that his young son had clothes, cars, and a good education. Nothing was withheld.  Price was no object.

And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong.  Eddie wanted his son to be a better man than he was.

Yet, with all his wealth and influence, there were two things he couldn’t give his son; he couldn’t pass on a good name or a good example.

One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done.

He decided he would go to the authorities and tell the truth about Al “Scarface” Capone, clean up his tarnished name, and offer his son some semblance of integrity.  To do this, he would have to testify against The Mob, and he knew that the cost would be great.  So, he testified.

Within the year, Easy Eddie’s life ended in a blaze of gunfire on a lonely Chicago Street .. But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he could ever pay.  Police removed from his pockets a rosary, a crucifix, a religious medallion, and a poem clipped from a magazine.

The poem read:

“The clock of life is wound but once, and no man has the power to tell just when the hands will stop, at late or early hour.  Now is the only time you own. Live, love, toil with a will. Place no faith in time.  For the clock may soon be still.”

STORY NUMBER  “TWO”

World War II produced many heroes. One such man was Lieutenant Commander Butch O’Hare.

He was a fighter pilot assigned to the aircraft carrier Lexington in the South Pacific.

One day his entire squadron was sent on a mission.  After he was airborne, he looked at his fuel gauge and realized that someone had forgotten to top off his fuel tank.

He would not have enough fuel to complete his mission and get back to his  ship.

His flight leader told him to return to the carrier.  Reluctantly, he dropped out of formation and headed back to the fleet.

As he was returning to the mother ship, he saw something that turned his blood cold; a squadron of Japanese aircraft was speeding its way toward the American fleet.

The American fighters were gone on a sortie, and the fleet was all but defenseless.  He couldn’t reach his squadron and bring them back in time to save the fleet.  Nor could he warn the fleet of the approaching danger. There was only one thing to do.  He must somehow divert them from the fleet.

Laying aside all thoughts of personal safety, he dove into the formation of Japanese planes.  Wing-mounted 50 caliber’s blazed as he charged in, attacking one surprised enemy plane and then another.  Butch wove in and out of the now broken formation and fired at as many planes as possible until all his ammunition was finally spent.

Undaunted, he continued the assault.  He dove at the planes, trying to clip a wing or tail in hopes of damaging as many enemy planes as possible, rendering them unfit to fly.

Finally, the exasperated Japanese squadron took off in another direction

Deeply relieved, Butch O’Hare and his tattered fighter limped back to the carrier.

Upon arrival, he reported in and related the event surrounding his return.  The film from the gun-camera mounted on his plane told the tale. It showed the extent of Butch’s daring attempt to protect his fleet.  He had, in fact, destroyed five enemy aircraft
This took place on February 20, 1942 , and for that action Butch became the Navy’s first Ace of W.W.II, and the first Naval Aviator to win the Medal of Honor.

A year later Butch was killed in aerial combat at the age of 29. His home town would not allow the memory of this WW II hero to fade, and today, O’Hare Airport in Chicago is named in tribute to the courage of this great man.

So, the next time you find yourself at O’Hare International, give some thought to visiting Butch’s memorial displaying his statue and his Medal of Honor.  It’s located between Terminals 1 and 2.

SO WHAT DO THESE TWO STORIES HAVE TO DO WITH EACH OTHER? Butch O’Hare was “Easy Eddie’s” son!!!!!

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How to Choose a Tax Expert

January 10, 2012 John R. Dundon II Estimated Taxes, PTIN, Tax Abuse, Tax Fraud, Tax Guidance & Preparation, Tax Preparer, Tax Relief, Taxpayer Advocate

With the fallout taking place in the financial services sector as represented by rampant layoffs everywhere you might have noticed that more and more people are going out on their own and hanging their shingle as having a certain tax expertise. It is a natural transition for many but beware usually these people lack acumen as a novice to most any industry would. Worse still many of these sales people are used to working for commissions and as such can only think in terms of wringing money our of your pocket and dripping it into theirs. It never ceases to amaze me what people will stoop to in chasing the almighty dollar. As the Vice President of the Colorado Society of Enrolled Agents I routinely find myself getting reports of specific and egregious allegations of tax practitioner misconduct in violation of United States Treasury Department Circular 230. The point of this blog post is to choose your tax ‘expert’ with care. Take ownership of the process. Make sure that you trust the person you are choosing to be reliable and consistent. Also make sure this person has a reasonable knowledge base and a solid support network. Ultimately you are legally responsible for what is reported on your tax return.

To make an effort at mitigating fraud and abuse starting this year the IRS has mandated that tax preparers who sign tax returns must enter their required IRS Preparer Tax Identification Number (PTIN). The following are some other helpful points to ponder as most recently produced by the IRS.

1. Check the preparer’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Professional Responsibility.

3. Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

4. Ask if they offer electronic filing.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990.  Make sure your preparer offers IRS e-file.

5. Make sure the tax preparer is accessible.  Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

6. Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

8. Review the entire return before signing it.  Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

9. Make sure the preparer signs the form and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint; Form 3949-A, Information Referral (PDF 94K). Or directly contact The Office of Professional Responsibility (OPR). Also be sure to check out - Where Do You Report Suspected Fraud Activity?

Videos: Choosing a Tax Preparer – English | ASL  

Podcast: Choosing a Tax Preparer

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Tax Practitioner Fraud and Incompetence United States Treasury Circular 230

December 20, 2011 John R. Dundon II Tax Fraud

Lately I’ve been getting deluged with cases involving blatant US Treasury Circular 230 violators of regulations governing practice before the Internal Revenue Service. The perpetrators it seems come from all walks of life, some are unregulated tax return preparers while others carry multiple licenses, designations and/or degrees. The accumulated data however indicates that the most egregious violators originate from one of two different camps. On one hand they are older practitioners close to retirement that have found themselves overwhelmed professionally, personally or both and on the other hand they are punk kids with law degrees usually in their 30′s or so that have sold themselves to the devil for the almighty dollar. The former I consider incompetent and usually pity, the later I consider fraudulent and eat for lunch. Both wind up having their licenses reprimanded or tragically revoked. Nevertheless the cases I’ve been working lately have certainly proven to be remarkable in magnitude and scope.

One recent file in particular was exceedingly inane involving a disabled veteran who was charged a very large sum of money to be told after 8 months of ‘research’ that he did not qualify for the first time home buyer tax credit. I almost fell out of my chair when being briefed on the matter. The ‘tax relief specialist’ managing the file was so brazen she sent out an invoice for services rendered with a cover letter demanding payment and threatening litigation not realizing that this very document implicates her incompetence and will result in license revocation.

You see the first time home buyer credit is NOT THAT COMPLICATED. Assessing whether a taxpayer qualifies for this credit is accomplished by asking a few simple questions. I tend to render my analysis in these regards complimentary. 

To a certain extent her ‘manager’ is to blame. He too was dumb enough to sign the letter in question putting his license at risk as well. The most damning aspect of his contribution is the fact that he is ‘leading’ a team of people that behave professionally with gross neglect for ethical standards. Perhaps he was duped and did not take the time to read and understand what he signed. Either way he behaved either fraudulently or incompetently and at the very least deserves reprimand if not license revocation.

Why is this worth blogging about?

It’s been shown with statistical significance that the most personal relationship outside of marriage (or with a life partner) is usually between you and your tax adviser. Trust, discretion and confidentiality are paramount as well as knowledge of the tax code and general business acumen. Fraud and incompetence trample upon that relationship and reflect poorly on the whole tax practitioner industry. It is sickening.

If you have a long term relationship with an experienced tax adviser, great! Consider yourself blessed, but don’t sit back on your laurels. Understand that many people, particularly those that are aging can get overwhelmed and are usually too proud to seek help before unilateral incompetence overwhelmingly ensues. Not that these people generally want to or try to behave badly. When overwhelmed they tend to handle the work load less efficiently and balls get dropped as it were.

The usual signs of a deteriorating relationship with your long standing tax adviser that may or may not be overwhelmed manifest subtly with small unrecognizable indiscretions like failing to return a phone call or email here or there. If not held in check these signs can become exponentially more pronounced as time passes to the point where you might find yourself suddenly in serious tax trouble. This happens A LOT.

Once you get into tax trouble involving public disclosure via tax lien that is when these children with law degrees materialize out of the woodwork selling ‘tax relief’ packages. Or as I like to refer to it, snake oil. Here is a simple rule of thumb, be weary of anyone that is overtly soliciting you with a ‘tax relief’ package for sale. Why? With the IRS cracking down on fraudulent, incompetent tax payers AND tax practitioners alike, those of us that are good at untangling complicated tax matters tend to be working enough files as it is and have no time or desire for overt solicitation. Also every single tax problem that I have encountered along my journey has proven to have its own unique components meaning that it is impossible for any one ‘tax relief package’ to cover all your individual or business tax resolution needs. 

The advice I offer is:

1. Engage someone who is reasonable and charges by the hour for actual services rendered and who is willing to put in writing a detailed statement of services rendered BEFORE expecting any payment whatsoever.

2. Take ownership of your tax problems and learn the implications of proposed strategies in pursuit of achieving tax compliance.

3. Simply throwing money at these type of problems without direct performance accountability usually makes the hole deeper.

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Reconstruction of Tax Records

November 17, 2011 John R. Dundon II IRS Appeal, IRS Audit, IRS Enforcement, IRS Examination, IRS Mediation, IRS Penalties, Tax Abuse, Tax Credit, Tax Deductible Expenses, Tax Fraud, Tax Guidance & Preparation, Tax Problems & Requests, United States Treasury

Treasury Regulation 1.274-5 allows for a deduction without complete documentation if you can show that you have ‘substantially complied’ with adequate adequate record keeping requirements.

This statute is code for … be nice to your examiner.

Basically the practice of disallowing amounts claimed because there is no documentary evidence available to establish precise amounts beyond a reasonable doubt ignores commonly recognized business practice as well as the fact that proof may be established by credible oral testimony.  As such close approximations of items not fully supported by documentary proof can frequently be established through reliable secondary sources and collateral evidence.

It is always best practice to inform the examiner what has been reconstructed in that it builds credibility.  It’s also best to demonstrate that your expenditures are reasonable in relation to income, and that if questioned you can prove that your other financial affairs are in order. The bottom line is that tax records can be and routinely are reconstructed to serve as substantiation if under examination.

However if you are a hot head and freak out on your examiner or demonstrate any other behavior that may lead an examiner to not give you the benefit of the doubt as to the efficacy of collateral evidence you may as well just take your matter to appeals and start the process over. When it comes to reconstruction of evidence it seems to all be about demonstrating and maintaining personal credibility as a law abiding human being.  If you are not that then I suggest saving all of your receipts.

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What taxes can be discharged in bankruptcy

October 17, 2011 John R. Dundon II Bankruptcy, Tax Fraud, Tax Guidance & Preparation, Tax Problems & Requests, Tax Relief

Bankruptcy tax law is complicated and involves a firm grasp of time lines. Getting it right is complicated and requires reflective consideration. I learned this first hand back in 2004. If you get it wrong you loose the privilege of a more thorough ‘fresh start’ as it were.

Generally speaking for a tax debt to be discharged in bankruptcy, the tax return creating the tax liability must have been due for at least three years, including any extension that may have been filed. The due date is typically April 15 of the year following the relevant tax year — or Oct. 15 if an extension is requested. But holidays and extensions will extend the deadline. This year, for instance, taxes were officially due April 18 because of a holiday in Washington, D.C. So the three-year deadline is April 19, 2014. If an extension was requested, the three-year period will end in October 2014.

For example if you owed taxes for the 2007 tax year, the due date was April 15, 2008. If you didn’t request an extension, your taxes may be eligible for elimination after April 18, 2011. You still have to overcome other restrictions.

You must have filed the tax returns at least two years prior to filing the bankruptcy. Some may think this is redundant. It is not. Let’s say you owed taxes for the 2005 tax year, but did not file your returns until this year, 2011. Right after you file the 2005 return, you file for bankruptcy. The taxes owed aren’t dis-chargeable. You would have to wait two years from the date you filed the returns to declare bankruptcy if you want to try to get taxes discharged.

If the Internal Revenue Service filed a return for you by filing a substitute for return, the taxes will not be dis-chargeable. Even if you filed a return after the IRS assessed these taxes, the IRS takes the position that such a return is not a valid return, so these taxes are not dischargeable. It is very important to consult an Enrolled Agent if the IRS filed a return for you.

Your taxes must have been assessed at least 240 days prior to filing bankruptcy. This is most commonly an issue when a taxpayer is audited, or when an amended return is filed. Normally the taxes are assessed shortly after your return is filed. But if you end up getting audited, an additional assessment may take place years later. With audits, it’s common for a state to issue a new assessment after the IRS issues its assessment. A common trap is to file bankruptcy 241 days after the federal assessment. The problem: The state assessment might have been just 90 days in the past. In that case, while the recent IRS assessment may be discharged, the state assessment isn’t eligible to be discharged.

The deadlines above can be extended, also known as being “tolled,” by various events. Filing a prior bankruptcy, filing for an offer in compromise or filing for a collection due process hearing are all things that can extend some or all of these deadlines.

If you file a fraudulent return or are guilty of willfully evading your tax liability, you cannot eliminate those taxes in bankruptcy. The IRS can review this issue on a case-by-case basis. You could comply with all other conditions, but still be unable to discharge the taxes due to fraud or evasion.

Even if the tax is discharged, the case isn’t necessarily over. If the IRS has filed a notice of federal tax lien, it will retain that lien, which may cause you future problems. The IRS will sometimes voluntarily remove a tax lien after a bankruptcy if the tax was discharged and the debtor has very little in assets. However, if the debtor has real estate that may have equity, or an interest in a pension or 401(k) plan, the IRS will keep the lien in place.

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IRS Criminal Investigation Enforcement Trends

August 31, 2011 John R. Dundon II IRS Collections, IRS Enforcement, IRS Examination, Tax Fraud

Hey everyone, check out what the Treasury Inspector General for Tax Administration is writing…

“Criminal Investigation’s (CI) primary resource commitment is to develop and investigate legal source tax cases. The prosecution of these cases is key to supporting the Internal Revenue Service’s (IRS) overall compliance goals, enhancing voluntary compliance with the tax laws, and promoting fairness and equity in our tax system. In addition, CI uses media and other outreach opportunities to deter financial crime and enhance voluntary tax compliance.”

Believe me, they are doing their job well.  I’ve pulled some other stats out of the report worth a quick review….

“In FY 2010, CI surpassed its goal of completing 3,900 investigations by completing 4,325. CI demonstrated efficiency in processing legal and illegal source investigations by reducing the average days elapsed to complete an investigation to 365 days, an 8.8 percentage improvement (rounded) from the FY 2009 average of 401 days. In addition, CI exceeded its FY 2010 goal of 4,000 initiated subject investigations by initiating 4,706. CI management attributes the increases to better management oversight, which includes stressing the need to complete initial interviews and fact gathering within the first few months of the investigation.”

This is the big one though that should put the fear of God into some people…

“In addition, CI continues to work on increasing its special agent staffing and coordinating with the operating divisions to strengthen the Fraud Referral Program.”  Hmmmm…..  Yikes…!

To view the report, including the scope and methodology, go to:

http://www.treas.gov/tigta/auditreports/2011reports/201130068fr.html.

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Ponzi V. Pyramid Scheme

August 24, 2011 John R. Dundon II Tax Abuse, Tax Fraud

A friend of mine asked me to blog today about my experiences from a tax perspective with Ponzi schemes and pyramid schemes.

Both are for the most part perpetrated by clandestinely malcontent people that have inadvertently grown trustworthy, a “friend” or relative or fellow member of your spiritual congregation for example, or even a guy giving a sales presentation that can draw a connection.  These schemes can go unrecognized for years, particularly when new ‘investors’ are readily available.  The money deposited from these newer ‘investors’ is used to pay off older or original ‘investors’.

Ponzi AND pyramid scheme con artists use words like “trust me” or “personal guarantee” etc. They also claim to offer returns that usually appear to good to be true like ’12% annually guaranteed risk free.’ They prey on weakness and take advantage when you are most vulnerable. What seems to hurt the most is the sense of overwhelming moral abandonment suddenly recognized in someone who is (was) close. From my own personal perspective the ironic trait that presented itself is that many of these perpetrators claim openly to have an extra devotion to organized religion and use this to attempt to control emotion and psyche. Some even work in the field of organized religion as Pastor, Priest, Rabbi etc. Having had victims in my office telling their stories while shedding copious tears I have felt their pain.

So just remember it can be a cruel world.  There are a lot of amoral plebes spinning their wheels screwing friends, family and acquaintances alike without mercy in pursuit of the almighty dollar.  The worst of the bunch for me are the one’s that do it in the name of God. If it sounds too good to be true, IT IS! Now that Bernie Madoff is behind bars more and more of these ‘smaller’ schemes are being rooted out.

That said IRS Revenue Procedure 2009-20 was produced so that victims of Ponzi Schemes can at least deduct their losses for tax purposes.  The loss is reported on IRS form 4684 Casualty or Theft Gain or Loss.  Interestingly enough the amount calculated on form 4684 is then reported on IRS Form 1040, Schedule A, Line 28 Other Miscellaneous Deductions.  It is of utmost importance that substantiating documentation is in order, particularly the court determination pronouncing the perpetrator as guilty.  If you are a victim of Ponzi it is probably a good idea to get familiar with IRS Rev Proc 2009-20.

Pyramid schemes like Ponzi schemes require new suckers to ‘invest’ to keep the house of cards from collapsing.  The big difference is that pyramid schemes seem to rely on many people pulling other people into the ‘investment’ or as I call it, trap.  All with the same expectation, to cash out before collapse. Ponzi schemes on the other hand, at least the ones I’ve worked on, usually involve a single perpetrator and multiple victims, usually from the same extended family.

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Trends in IRS Collection and Enforcement

August 18, 2011 John R. Dundon II Appeals & Audit Resolution, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, IRS Mediation, IRS Penalties, Tax Abuse, Tax Fraud

According to a report filed by the Treasury Inspector General for Tax Administration there has been a 19 % increase of enforcement personnel serving in the Collection and Examination function of the IRS since Fiscal Year 2006. Whereas on average overall IRS staffing increased 4 percent during this same period, from 103,811 employees in Fiscal Year 2006 to 107,622 employees at the end of Fiscal Year 2010.  So yes there appears to be a concerted effort to dedicate disproportionate resources to the collection and examination functions inside the IRS.

The Examination function’s recent increase in revenue agents and tax compliance officers resulted in the most tax returns examined over the past five years. The number of tax returns examined increased across the board for individual, corporate, and S Corporation tax returns in Fiscal Year 2010, while the number of partnership examinations decreased. As a direct result of this the number of delinquent tax accounts closed by full payment increased as did the amount collected on delinquent accounts. However, the IRS Collection function received more delinquent accounts than it closed, gross accounts receivable increased, and the number of tax delinquency investigations closed with the filing of a delinquent tax return decreased. In addition, while the number of taxpayers with delinquent accounts and delinquent returns in the Queue decreased, it was offset by an increase in the number of these cases that were shelved or surveyed.

Bottom line is that the situation is going to get worse before it gets better in my humble opinion.  Take heed and file/pay your taxes on time to avoid complications. No recommendations were made to the IRS based on this report. To view the report, including the scope and methodology, go to:

http://www.treas.gov/tigta/auditreports/2011reports/201130071fr.html.

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