Why it’s a Very Bad Idea?

Tax fraudA taxpayer who owes or anticipates owing a substantial amount of income tax to the IRS may be tempted to transfer his or her property to a spouse, a relative or a nominee entity with the hope of preventing the IRS from collecting the outstanding tax debt. Similarly, a taxpayer may have an incentive to transfer property to a third party, in circumstances where the taxpayer may be subject to the 26 U.S.C. § 6672(Trust Fund Penalty). The taxpayer usually justifies such a transfer as “strategic planning.” Sometimes the taxpayer acts alone. In other instances, the taxpayer may be aided by a complicit, inexperienced or incompetent attorney.

These tactical maneuvers almost always fail and invariably result in the property transfer being judicially set aside, and/or the imposition of personal liability on the part of the transferee. In addition, the illicit transfer of property can result in significant civil and criminal penalties as well as criminal prosecution.

The discussion that follows examines the judicial remedies available to IRS including the commencement of a fraudulent conveyance action in either a state or federal court pursuant to state law or the Federal Debt Collections Practices Act (“FDCPA”). The discussion will also examine the imposition of transferee personal liability under 26U.S.C. § 6901.

Fraudulent conveyance

In general, a fraudulent conveyance represents a conveyance of property to a third party without consideration or for less than adequate consideration. Procedurally, the IRS has the burden of proving that either constructiveor actual fraudexists. Constructive fraudexists where a taxpayer’s property is transferred for less than its fair value and the taxpayer is insolvent at the time of the transfer or is rendered insolvent following the transfer. Actual fraudexists where a taxpayer transfers property to a third party with actual intent to hinder, delay, or defraud the IRS in the collection of the tax debt.

Constructive fraud

In the context of constructive fraud, the IRS must establish the following elements in order to set aside a transfer of property:

    1. That the alleged transferee received property of the transferor.
    2. That the transfer was made without consideration or for less than adequate consideration.
    3. That the transfer was made during or after the period for which the tax liability accrued.
    4. That the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distribution of property that resulted in the insolvency of the transferor.
    5. That all reasonable efforts to collect from the transferor were made and further collection efforts would be futile.

The above elements suffice to establish constructive fraud and it is unnecessary for the IRS to prove actual intent to defraud.

Actual fraud

In order to establish actual fraud, the IRS must prove the taxpayer’s actual intent to hinder or delay or defraud the IRS. The FDCPA identifies eleven non-exclusive factors to be considered including:

    1. Whether the transfer was made to an insider.
    2. Whether the transfer represents substantially all of the taxpayer’s assets.
    3. Whether the value of consideration received by the taxpayer was reasonably equivalent.
    4. Whether the taxpayer was insolvent or became insolvent shortly after the transfer was made.
    5. Whether the transfer occurred shortly before or shortly after the tax debt was incurred.

In addition to commencing an action to set aside a fraudulent conveyance, IRC § 6901provides the IRS with a procedural mechanism for holding the transferee personally liable for the debt of the taxpayer. In contrast to an action to set aside a property transfer, Section 6901 is focused on the transferee rather than to the property. It is noteworthy that commencing an action to set aside a fraudulent transfer and imposing personal transferee liability under Section 6901 are not mutually exclusive remedies. The IRS may consider reliance on the FDCPA or a state’s fraudulent conveyance statute as the basis for imposing personal transferee liability and may also pursue multiple remedies.

Transferee liability

To establish personal transferee liability, the IRS has the burden of proving the existence and extent of the transferee’s liability. In addition, where the taxpayer unsuccessfully contests the liability in a judicial proceeding, the taxpayer as well as the transferee is estopped from contesting the liability either in a fraudulent conveyance action or for purposes of imposing personal transferee liability. The IRS has the burden of establishing the taxpayer’s tax liability and the amount. However, the transferee’s liability is capped at the value of the property transferred. The transferee seeking to avoid or mitigate transferee liability must prove the taxpayer’s liability is less than the amount asserted by the IRS.

A taxpayer, who is considering making a transfer of property to avoid his or her income tax obligations is creating a substantial risk that the transfer will be set aside and/or the transferee will be personally liable. Moreover, a taxpayer may soon find himself/ herself the subject of a criminal investigation. When considering such a decision, a taxpayer should always first consult with a knowledgeable and experienced tax attorney for a comprehensive review of all the relevant facts. Depending on the circumstances, payment arrangements can be made with the IRS.


IRS Hard at Work Despite the Pandemic

Financial crimesIndividuals, who have failed to report their foreign financial accounts, may feel a sense of relief, in light of the corona virus and its effects on IRS investigations. Better think again!

The DOJ recently announced the superseding indictment of Dr. Charles Lieber, a former Chemistry chair at Harvard University for:

  • Failureto file Foreign Bank and Financial Accounts (FBAR) and;
  • Filing false federal income tax returns.

The initial indictment charges the former Harvard Chair withmaking false statements to federal authorities.

Lieber served as the principal investigator of the Lieber Research Group at Harvard University and received more than $15 million in federal research grants from 2008-2019. In addition, the charging document records that from 2012 until 2015,  Lieber served as a Strategic Scientist at Wuhan University of Technology (WUT) and thereafter as a Contract Participant in the Thousand Talents Plan (a program established by the Chinese government in 2008 for purposes of attracting global scholars to assist in Chinese development).

Subsequent indictment shows that Lieber entered into a three-year agreement with Thousand Talents that required WUT to pay Lieber a salary of up to $50k a month, living expenses totaling $150k and $1.5 million for purposes of establishing a research lab at WUT. The DOJ alleges that Lieber failed to report the income he received from WUT in 2013 and 2014 on his federal income tax return. Individual U.S. tax residents are required to report their income on a worldwide basis, irrespective of where the income is earned.

In addition to his failure to report the income Lieber received from WUT, the superseding indictment alleges that Lieber failed to file FBARS for 2014 and 2015 with respect to a foreign financial account he opened while in China in 2012. The account was opened to enable WUT and Thousand Talents to directly deposit Lieber’s salary and other payments. A U.S. person is required to file an FBAR (FinCen Form 114) if that person had a financial interest in or signatory authority over foreign financial accounts with an aggregated balance in excess of $10k during any time during the year. It is clear from the indictment that Lieber received more than $10k between salary and living expenses. Failing to report this amount as required by law under FBAR is a crime.

To avoid being indicted by IRS, it is crucial that U.S. persons in foreign countries to report all income earned for tax return purposes and file FBAR for any account(s) they have financial interest in/ signatory authority over with aggregate balance in excess of $10,000. 

Michael Avenatti’s Indictment

Michael Avenatti Case on Criminal TaxThe temptation to use unfilled or altered tax returns as well as doctored financial statements for purposes of securing a bank loan, while not common, does occur. This practice typically occurs where an individual is faced with financial difficulties and sees no other way out. The consequences of submitting false documents including unfiled and false returns are strong evidence of the willful failure to file income tax returns as well as income tax evasion.

Recently convicted in New York for trying to shake down Nike, “Creepy Porn Lawyer” Michael Avenatti(“Avenatti”)must now travel to California to face multiple charges. Among the charges in the 36 count indictment, .

The discussion that follows is limited to the practice of using false tax and financial documents for purposes of securing bank loans and the criminal tax consequences associated therewith.

According to Counts 31 and 32 of the indictment, between 2014 and 2016, Avenatti obtained three loans from Peoples Bank on behalf of companies that Avenatti either owned or controlled. The loans  included an $850k loan to GB LLC (the “January 2014 loan”), a $2,750m loan to  Avenatti’s law firm, Eagan Avenatti, LLP (“EA”) (the “March 2014 loan”) and a loan to EA in the amount of $500k (the December 14, 2014 loan”).

The Indictment

The indictment alleges that in order to secure the March 2014 loan, Avenatti provided People’s Bank with false and fraudulent individual and partnership income tax returns as well as false and fraudulent financial statements, including a 2011 unfiled individual income tax return reflecting adjusted gross income of $4.5m and a tax due of $1.5m. Avenatti also provided the bank with a personal financial statement which failed to disclosethat Avenatti still owed the IRS $850k in unpaid personal income taxes for 2009 and 2010.

In addition to his personal return and financial statement, Avenatti provided the bank with a copy of the EA’s unfiled partnership return(Form 1065) for 2012 reflecting gross income of $11.5m and ordinary business income of $5.8. In October of 2014 Avenatti filed the 2012 partnership return for EA with the IRS. The partnership return filed with the IRS materially differed from the partnership return submitted to the bank. The filed return reflected $6.2m in gross receipts compared with the $11.5m on the return submitted to the bank. Furthermore, the partnership return filed with the IRS reflected only $2.1m compared with the $5.7m in operating income.

In support of the December 2014 loan, Avenatti submitted a balance sheet for EA reflecting a cash balance of $712k as of September 2014, even though the true balance was only $27k. Avenatti also submitted a personal financial statement as of November 1, 2014 which failed to disclose the unpaid 2009 and 2010 tax liability to the IRS. In furtherance of the  December 2014 loan application, Avenatti also provided the bank with copies of his unfiled U.S. individual income tax returns for 2012 and 2013, respectively reflecting $5.4 and $4m in income and estimated tax payments of $1.6m and $1.2m. Furthermore, the 2013 individual return reflected $103k in federal withholding.

According to the indictment, Avenatti last filed individual income tax returns for the 2010 tax year but failed to file individual income tax returns for the tax years subsequent thereto. In addition, Avenatti failed to file partnership and corporate returns.

Fraudulent Conveyances in Employment Taxes

TFR and Fraudulent conveyancesEmployers who willfully fail to remit an employee’s withholding to the IRS are liable to the IRS for the “trust fund recovery penalty” (TFRP). Generally, the IRS will assess the Penalty against any responsible person who fails to collect and pay these taxes to the IRS. A responsible person can include a business owner, a corporate officer, director or office manager and a trustee or executor as well other individuals and entities.

Those who are subject to the TFRP may attempt to impede IRS collection efforts by conveying their personal or corporate assets to relatives or to nominee entities, without fully considering the civil and criminal tax consequences associated with making such transfers.  A fraudulent conveyance can be as simple as transferring an asset to a spouse or child, or may involve multiple entities and other devices. While there may be legitimate reasons for transferring an asset to a third party, making a fraudulent conveyance is not one of them.

IRS Lawsuit on a Fraudulent Transfer Scheme

An excellent illustration of an elaborate fraudulent transfer scheme is United States v. William Planes,et al (8:18-cv-02726) where  William  Planes (“William”) and his wife, Regina Planes (“Regina”), failed to pay employment taxes exceeding $9 million on behalf of  at least ten entities over a 12 year period. The following is a partial summary of what happened. I would, however, recommend reading the case in its entirety.

The IRS filed a lawsuit in the U.S. District Court, for the Middle District of Florida against William. In its complaint, the Government alleged that while employment taxes continued to accrue, but prior to the lawsuit being filed, the defendant, William Planes (William),  fraudulently transferred almost $600,000 to his wife Regina (Regina) Planes.

In furtherance of the scheme, Regina lied to the IRS by maintaining that she was not a financially responsible person of South Capital Construction, Inc. The Court subsequently entered a judgment against Regina finding that William made the transfer to Regina in order to prevent the IRS from collecting the penalty from him.

On November 5th 2018, the Government filed a second lawsuit seeking to:

  1. Reduce a separate trust fund penalty of $529,000 assessed against William Planes in 2003 to a judgment.
  2. Disregard the corporate entities that the defendants were using to impede IRS collections.
  3. Apply the entities’ assets to the judgment.

A day after the IRS assessed $529,000 penalty against William, the defendant created the William Planes 2003 Irrevocable Trust and the Regina Planes 2003 Irrevocable Trust. These two trusts, in turn, owned six limited liability companies which William and Regina either owned or controlled.

The Government also requested and secured a temporary restraining order (TRO) on November 6th 2018, enjoining the defendants or anyone acting on their behalf or in concert with from transferring any entity asset.

On November 7, 2018 Regina was served with the TRO. Less than two hours later William transferred the sum of $160,000 from three of the entities bound by the TRO to Coast to Coast, an entity in which William is a director.  A contempt hearing followed. The Court subsequently found the defendants in contempt and converted the TRO to a preliminary injunction.

While this case has yet to be referred to the IRS Criminal Investigation Division, I suspect it will be given the dollar amount.

Trust Fund Recovery Penalty and Prosecution

The amount of the TFRP is for the most part irrelevant in the Government’s decision to prosecute an individual. Taxpayers have been prosecuted where the TFRP was far less. The following cases illustrate the dollar range in TFRP cases that have resulted in criminal prosecution:

  1. On August 27, 2019, a North Carolina woman was sentenced to 14 months in prison for employment tax fraud for withholding and failing to pay over $78,937 in employment taxes deducted from the employees of a Pediatrician where she worked as an office manager, as well as the failure to pay over $35,472 representing the employer’s share of taxes. Instead, the defendant used the money to pay her credit card bills, go on personal vacations and fund a business venture. She also helped herself to $1.4 million from the Pediatrician’s bank account.
  2. In June of 2019 a Long Island business man pleaded guilty to failure to pay over employment taxes to the IRS. According to the documents filed by the DOJ, the defendant owned and operated several steel erection businesses on Long Island. Over a four year period the defendant owed almost $500k in employment taxes. In May of 2011, the defendant changed the name of his business to BR Teck Enterprises Inc. and transferred ownership of the corporation to another individual. Despite transferring ownership of the business to a third party, the defendant continued to operate the business ad continued to pay over employment taxes. From January 2012 through June 2017, the defendant racked up an additional $950K in unpaid employment tax liability.

An Individual who owns or controls a business or is considered a responsible person who has a fiduciary obligation to accurately collect, account for and pay over to the Internal Revenue Service, all federal employment taxes withheld from its employees as well as the employer’s portion of any payroll taxes. Failure to remit such payments will invariably lead to assessment of the TFRP against an individual or entity that is considered responsible.

The above examples make clear that the transfer of corporate or individual assets to another person or an entity as a strategy to defeat or impede IRS collection efforts will seldom, if ever, work. This strategy is viewed by the Government as a deliberative process and has served as strong evidence in criminal prosecutions of intent to defraud the U.S. Government.

Alternatives other than the fraudulent transfer of assets are available when dealing with payroll tax issues. These issues can sometimes be mitigated, when an experienced tax attorney becomes involved at an early stage in the process. Conducting a Google search and handling the problem yourself is no strategy at all. Perhaps, it is time to stop digging.

Reporting personal expenses as businesses expenses on a tax return

business tax deductions 2The justification for purchasing that $75,000 Mercedes, Rolex watch or other luxury item, paying for an expensive vacation, making monthly mortgage payments on one’s personal residence, and paying for home improvements then deducting these expenditures as ordinary and necessary business expenses is sometimes based upon  a sense of entitlement.  In other instances, a business owner who claims deductions for personal expenses may feel justified in financially ingratiating himself based upon a mistaken belief that the sole predicate for tax evasion is the under-reporting of gross income. Nevertheless,  a misunderstanding of the tax rules pertaining to reporting of income and expenses in connection with the operation of a trade or a business or the IRS definition of “Income Tax Evasion”  does not justify cheating the U.S. Government.

The IRS is well aware that business owners and those who are self-employed are in a unique position. Unlike a salaried employee who receives a W-2 or a retiree who is issued a Form 1099R in connection with a pension distribution, business owners have the ability to determine their income tax liability. The absence of third party reporting to the IRS makes this possible.  Although the U.S. Tax System is a voluntary system, the IRS is aware that business owners routinely pay personal expenses from their business accounts and thereafter deduct those expenses as if they were associated with the operation of a trade or a business.

While a  criminal tax prosecution of a business owner can include the failure to file returns or the under-reporting of income and the overstatement of business deductions, many business owners assume that tax evasion is only associated with  income side of the ledger. Nothing could be further from the truth. I.R.C. Section 7201 defines income tax evasion, in pertinent part, as the willful attempt “in any manner to evade or defeat any tax imposed by this title or the payment thereof. . . .” Id.

In addition to tax evasion, business owners, who are caught cheating on their business and/or personal tax returns are oftentimes charged with other crimes  such as Conspiracy to Defraud the United States, money laundering, filing a fraudulent tax return, or theft of government funds.

In an effort the promote compliance, the IRS provides qualifying business owners who have routinely deducted their personal expenses or otherwise cheated their returns with an opportunity to come clean. While there is no guarantee of non-prosecution, a business owner who makes a complete and honest disclosure is more likely to avoid jail time than if he waits for the IRS to discover his nefarious conduct. The IRS Voluntary Disclosure Practice is not suited for everyone. Each case must be carefully evaluated based upon the facts, the taxpayer’s history with the IRS and whether other non-tax laws have been violated.  A taxpayer who has otherwise had a clean tax history may be looked upon more favorably than someone, who had prior problems with the IRS or was under criminal investigation for a non-tax crime (i.e. securities fraud).

Detection of fraudulent business deductions by IRS

The IRS detection of fraudulent business deductions can occur in a number of ways:

  • The first and most obvious way is when a business or an individual is selected for examination by the IRS. Detection can also occur in cases where there are unpaid payroll taxes by a business and the IRS is conducting an investigation to determine whether to assess the Trust Fund Penalty against an individual considered to be a “responsible person.”
  • Where a business is owned by multiple parties, the examination of one principal can potentially lead to the examination of other principals in the business. In other cases, a disgruntled employee, who was passed over for a promotion or a bitter ex may serve as the catalyst for an IRS examination of a business owner’s questionable business practices.
  • On occasion, the IRS has been able to detect illegal deductions of personal expenses by a business through an outside tax preparer. In this case, an outside tax preparer involved in the preparation of the business owners’ business and personal income tax returns is identified by the IRS to be engaged in systematic and pervasive pattern of preparing false returns for business and individual taxpayers.
  • Another way in which the IRS may discover illegal business deductions is through court filings, such as a bankruptcy, divorce, business litigation or post judgment liquidity determination.
  • Nondeductible personal expenses are sometimes discovered as a result of a companion investigation related to mortgage or bank fraud. It is not uncommon to find that a business owner has submitted fabricated and unfiled personal and business income tax returns inflating the bottom line for his business as a basis for securing a business or personal loan, while at the same time, either failing to file or filing false returns with the IRS reflecting tax losses.
  • Finally, social media, statements contained on a business website, the use of analytics by the IRS and cyber security breaches have provided the IRS with a treasure trove of evidence that business owners routinely deduct personal expenditures as business expenses.

Criminal cases

The landscape is littered with those who have tried to game the system and paid dearly. The recent criminal charges  filed in Los Angeles against attorney, Michael Avenatti, illustrate the point. Avenatti’s meteoric rise in notoriety was due, in part, to his representation of porn star, Stormy Daniels, his 147 appearances on CNN and MSNBC as well as his announcement of a possible Presidential bid in 2020. Avenatti’s current legal problems originated, in part, from unpaid employment and personal taxes, submitting fabricated business and income tax returns in connection with bank financing and his lavish lifestyle. In fact, Avenatti failed to file personal and business income tax returns for multiple years. Specifically, Avenatti provided a false 2012 business return for his law firm, reflecting approximately $11.5m in gross revenues and net income of $5.8m (Id. at Page 184). In sharp contrast, the actual business return filed with the IRS for 2012 reflected approximately $6.2m in gross revenue and a $2.1m loss. The tax loss was generated, in part, by significant personal expenses that were deducted as ordinary and necessary business expenses on the law firm tax return.

During the past 25 years, I have been tasked by various clients who were a party to business, matrimonial and bankruptcy proceedings to review business and personal tax returns where fraud was suspected. I have also represented dozens of business owners who have been subject to IRS scrutiny with respect to the deduction of personal expenses as business expenses.

In this regard, my office has reviewed hundreds of business and personal income tax returns of litigants and clients who were self-employed. In many cases, I concluded that the business owner engaged in a rampant and systematic pattern of deducting expenditures for personal expenses as ordinary and necessary business expenses. I have also encountered this pervasive practice during the due diligence phase involving the valuation and sale of a business.

Personal expenses deducted as business expenses

Personal expenses that have been deducted as ordinary and necessary business expenses by business owners have included, but are not limited to:

  • A business owner who was engaged in an oil and gas drilling business constructed a garage at his home at a cost of $350,000. The garage which included a two bedroom upstairs apartment, auto lifts and service bays, was used for servicing and storing the business owner’s collection of vintage automobiles and motorcycles. The proceeds to build the garage came from the corporate business account. The cost of the building was recorded on the books of the business, as if the business owned the garage. The business capitalized the cost of the building over the useful life of the building, reflecting depreciation expense on the business income tax returns. In addition all the costs associated with maintenance of the garage as well as the salary of a full time service mechanic were deducted by the business. Finally, the individual’s automobile and motorcycle collection and related costs were all carried on the corporate books and written off, despite the fact that these assets were titled in the owner’s name, individually.
  • A beach front condominium was purchased for $1.2m by a prominent personal injury lawyer. He and his family used the condominium exclusively as a vacation home. The cost of the condominium was depreciated by the business. In addition, the business owner deducted all of the carrying cost including mortgage, taxes, insurance and HOA fees as ordinary and business expenses for his law practice.
  • A South Florida Certified Public Accountant, who was engaged in the business of providing financial expert testimony during court proceedings, used the funds from his practice to finance a long term extramarital affair. The expenditures included regular trips to Las Vegas, and the Bahamas, the purchase of a $65,000 BMW for the business owner’s girlfriend, multiple shopping trips and the purchase of luxury personal items, as well as the expenses associated with the rental of a penthouse apartment on Brickell Avenue in Miami. All of these personal expenditures were deducted by the business as ordinary and necessary business expenses. Subsequently, the business owner’s wife discovered the affair and filed for divorce. Her divorce attorney retained my office to review the husband’s finances. As part of the divorce proceedings, the business owner was required to provide his business and personal tax returns as attachments to his financial affidavit as well as copies of his business and personal bank statements. These documents were relevant in the context of equitable distribution, alimony and child support.
  • In the early nineties, a South Carolina Real Estate Developer and its principals were sued for bank fraud by a New Jersey lender in connection with a failed real estate project in Atlantic City. A judgment in excess of $18m was entered in favor of the bank. As part of its collection efforts, my office was retained to evaluate the potential for recovery against the developer and its principals. In this regard I reviewed the business and personal income tax returns as well as the business financial statements and bank records, which were submitted to the bank as part of the loan approval process. The returns submitted to the bank reflected robust earnings and substantial liquidity, including cash, trading accounts and work in process. Pursuant to a court order, my office secured the actual business returns submitted to the IRS. In sharp contrast to the information submitted to the lender, the business returns filed with the IRS reflected significant operating losses. The losses were created in part due to the inordinate number of personal expenses that were paid from and deducted by the business as ordinary and necessary business expenses. During my examination of the business returns, my office was able to determine that one of the principals had a son at Cornell Medical School and a daughter who was attending college in Lucerne, Switzerland. In addition, the son had full time use of a luxury company car. The tuition and all expenses were being funded by the corporate entity with the costs deducted on the corporate returns as continuing education, professional conferences and other professional fees. In addition, two of the other business principals, who happened to be brothers, paid all of their personal expenses out of the business and had full time use of luxury automobiles leased by the business. Perhaps the most outrageous expenditure involved cosmetic surgery for the brothers’ wives, which were deducted as “consultant’s fees” on the business return.
  • A Brownsville, Texas couple, who jointly owned a lucrative internal medicine practice, routinely deducted annual business losses associated with a cattle breeding business operated from their home. The losses were generated in part based upon personal expenses that were paid from the cattle breeding business, and thereafter, deducted as ordinary and necessary business expenses on Schedule F of the taxpayers’ personal income tax returns. The initial IRS examination resulted in the disallowance of the losses associated with the cattle breeding business and the imposition of the 75% civil fraud penalty for a period of three years. However, the taxpayers’ problems did not end there. At the conclusion of the IRS examination a referral to criminal investigation was made. While the taxpayers were successful in avoiding criminal prosecution, the time spent aware from their medical practice and the costs associated with their choices resulted in their filing personal bankruptcy as well as a bankruptcy for their medical practice. Ultimately, the couple separated and divorced.

The above examples illustrate that business owners, who engage in the illegal practice of deducting personal expenses as a means of under-reporting their federal tax liability, paid the price for their actions. Deducting personal expenditures as business expenses, at least circumstantially, is probative evidence that a business owner willfully intended to cheat the government and can result in substantial civil and criminal penalties as well as the possible loss of freedom. Even in cases where a business owner reports all of his gross receipts on his business or personal return, claiming personal expenses as ordinary and necessary business deductions can result in more than merely the IRS disallowing the deductions.

Today, we are subject to heightened scrutiny due to social media, the legal and illegal exchange of financial information and cyber security threats. In addition, rarely if ever, do business owners engage in this unlawful practice without knowledge by a third party, such as a partner, employee, spouse or girlfriend, who may be able to corroborate the fraud.

In the past, business owners were able to enjoy the benefits of deducting personal expenses as business expenses in order to defeat the assessment and collection of income taxes. That is no longer the case. If you are concerned about your potential exposure, now is the time to consider coming forward. In some, but not all cases, there is a potential to right the ship by making a complete and honest disclosure. Depending upon your circumstances and particular facts of the case, utilizing the IRS Voluntary Disclosure Practice may be an alternative to jail time. While some taxpayers cite the low number of Department of Justice criminal tax prosecutions as justification for rolling the dice, any business owner who has been prosecuted and convicted for tax and other related crimes will tell you that it was not worth it. IRS tax prosecutions can result in financial ruin, loss of earnings, divorce, family break-up, bankruptcy and, in extreme cases, suicide.

In the 25 plus years I have been representing taxpayers, I have yet to find one that has since departed this earth who was able to take it with him. Ultimately, it is about the choices we make in life.



©April 5, 2019


Promises Too Good To Be True

Fraudulent Tax Resolution Co.In 1931, the famous jurist, Benjamin Nathan Cardozo, in discussing fraud stated that: “Fraud is the pretense of knowledge when knowledge there is none.” Ultramares Corp. v. Touche, 255 N.Y. 170, 179, 174 N.E. 441, 444 (1931). This famous quote has withstood the test of time and is particularly relevant to the tax resolution industry and the rampant fraud perpetrated upon the public each day.

Tax resolution or tax settlement firms are firms that advertise that they have tax experts who are capable of negotiating a settlement with the IRS for pennies on the dollar.  In all but limited circumstances, the IRS will insist on full payment. The IRS offers Installment Agreements and Partial Payment Arrangements. In addition, a taxpayer who is in financial dire straits may qualify as being “noncollectable” thereby suspending IRS collection efforts. In rare circumstances, a taxpayer may be able to reduce the amount that he or she has to pay in order to settle up with the IRS.

False claims are repeated on late night TV, the radio, print ads and the internet. The constant barrage of advertising usually includes assertions that tax attorneys, certified public accountants and former IRS employees are on staff and are prepared to lead the charge on your behalf. In reality, most of these charlatans are merely sales people reading from a script designed to separate you and your hard earned money. Make no mistake, these enterprises are “boiler room” operations engaged in the unauthorized practice of law and operate in violation of federal and state consumer protection laws

Every year, I receive inquiries from taxpayers who have been scammed by one of the many tax resolution companies out there. In each case, the taxpayer paid a tax resolution company anywhere from $3,000 to $10,000 and received nothing in return. Consequently, the taxpayer’s tax problem was not resolved.

Offer in Compromise (OIC)

When a tax resolution company claims that they can settle IRS debt for pennies on the dollar, they are referring to what is known as an Offer in Compromise (OIC). Offers are rarely successful for a number of reasons. First, the documentation is substantial. Second, there is a high level of IRS scrutiny when reviewing an Offer. Finally, whether an Offer is accepted is based upon objective criteria including income and expenses, assets and liabilities and the time remaining under the statute of limitations for collections.  The notion that a representative from a tax resolution company is going to march into an IRS and negotiate face to face is nothing less than absurd and conjures up the vision of a personal injury attorney negotiating the settlement of a slip and fall case with an insurance carrier.

Tax liens & Levies

These Companies utilize aggressive sales tactics and typically represent that they can have tax liens removed from public record and also remove levies. While it is possible to have a tax lien withdrawn in certain cases, the IRS will generally not subordinate its claims against a taxpayer. Nevertheless, tax resolution companies boast that they have the ability to magically have liens and levies released.

Many Taxpayers have told me that when they asked for a refund, the Company told them to go pound salt or engaged in dilatory tactics, thus avoiding having to refund the client fees.  The most extreme case I handled involved an offshore disclosure where the Taxpayer paid a Tax Resolution Company over $45,000. The Company did nothing, except obtain the Taxpayer’s transcripts from the IRS exposing the Taxpayer to significantly greater penalties than would have been assessed had the Company taken appropriate action.

Tax resolution companies’ business model

The tax resolution business model compensates most of its employees based upon commission, which is an invitation for misrepresentations to the public, since the goal is to sign as many individuals as possible, irrespective of the facts surrounding a particular tax case. The sales people are well trained to tell anyone who calls that their case can be settled for a fraction of the outstanding tax debt. These assurances are generally made without ever reviewing a document or interviewing the client. Consequently, false advertising and representations are the order of the day.

 Standards of practice

Since most of these scammers are unlicensed they operate outside the State Bar Ethics Rules, State Regulations governing Certified Public Accountants or Circular 230 all of which proscribe standards of practice, ethics and continuing professional education. The Department of the Treasury, Office of Professional Responsibility handles consumer complaints, as they relate to those subject to Circular 230, which includes attorneys, certified public accountants and those enrolled to practice before the IRS.

There has been ongoing debate in terms of who is subject to Circular 230 particularly in light of Loving v. Internal Revenue Service, a 2014 decision. In Loving the U.S. Court of Appeals held that a Department of Treasury rule governing a “tax return preparer,” (which is defined as a person who prepares tax returns for compensation) exceeded IRS rule making authority. The 2011 regulations required a tax return preparer to register with the IRS, pay a fee and pass a qualifying exam.

Karen Hawkins, former Director of the Office of Professional Responsibility, asserted that

“there is no doubt that OPR has jurisdiction over the tax debt resolution industry and those working in it.” OPR Targets Debt Resolution Industry in Campaign Against Sanctionable Practices. Since OPR only reports the names and professional designation of those who are disciplined by the OPR, it is difficult to assess the number of individuals who are engaged in the tax resolution business who have been sanctioned.  In addition, an integral part of tax resolution involves tax return preparation including original and amended tax returns. As such, the OPR’s assertion that they have jurisdiction over the tax resolution industry is suspect.

Legal actions against tax resolution companies

In addition to the OPR, some states have taken legal action against tax resolution companies. In September of 2017 the State Attorney General for the Commonwealth of Virginia filed a lawsuit against Wall & Associates, Inc. (“Wall”) alleging that the Company misrepresented its tax debt settlement services, while at the same time they collected large retainers and monthly payment from their victims. The lawsuit alleges that Wall violated Virginia’s Consumer Protection Act by deceiving consumers by claiming that Wall’s average client settled his or her IRS debt for 10% of the total amount. The complaint further alleges that the Company made false claims concerning the tax related experience, qualifications and abilities of its employees, including characterizing sales people as “tax consultants” or “tax experts” and claiming that Wall’s employees were authorized, qualified or certified to practice before the Internal Revenue Service or state tax authorities when they were not. Id.

In December of 2018, the Attorney General for the State of Minnesota sued Wall alleging that the Company  violated Minnesota’s consumer protection laws by failing to register with the state and collecting large advance payments, while remaining unresponsive to customers.

Other honorable mentions include the television “Tax Lady” Roni Deutch, who was sued in 2010 by the State of California for swindling thousands of consumers who were facing serious IRS problems. Other Companies such as JK Harris and Tax Masters were subject to multiple suits for deceptive practices and elected to file for Bankruptcy.  Needless to say, these firms are no longer in business. In fact it is estimated that some 109 tax resolution companies have gone out of business from 2001-2011.

If you are contemplating retaining a professional in order to resolve your tax debt, you should only hire a duly licensed tax attorney who has the requisite training and experience to assist you in achieving closure with the IRS.  If you do your homework, you can find a tax attorney whose fees are commensurate with the fees charged by the scammers.


By: Anthony N. Verni, Attorney at Law, Certified Public Accountant

© March 29, 2019.

Large Tax Refunds: Are they too good to be true?Ghost tax preparers

The IRS has long cautioned taxpayers against using disreputable tax return preparers. In a recent announcement, the IRS warned taxpayers against using “Ghost Preparers” to prepare their tax returns. A Ghost Preparer is a variation of a disreputable tax preparer. These preparers target mostly immigrants who have just arrived in the U.S. and low to moderate wage earners, who often rely upon a referral from a friend or relative who previously received a large tax refund. Unbeknownst to the taxpayers, they are unwittingly committing tax fraud. Taxpayers who are unfamiliar with the U.S. system of taxation may not understand that they are responsible for the content of their tax returns, which they sign under penalty of perjury. Consequently, any false statement contained in a tax return is the ultimate responsibility of the taxpayer and can lead to unintended results including the assessment of additional tax, interest and penalties, as well as a referral to Criminal Investigation of the Internal Revenue Service.

The following discussion reinforces the point that you should stay clear of those who promise unusually large tax refunds and only hire a licensed Attorney, CPA or Enrolled Agent.

Ways Ghost tax return preparers defraud the IRS

Return preparer fraud and inflated refund claims are two of the IRS “Dirty Dozen” tax scams and have been the focus of the Internal Revenue Service for the past several decades. While technological advancements and the use of analytics have enabled the IRS to identify patterns of fraud associated with the fraudulent preparation of federal income tax returns, fraudulent return preparers continue to prey upon innocent taxpayers.

A disreputable tax preparer is a tax return preparer that promises and typically generates large tax refunds on behalf of its clients by fraudulently preparing income tax returns. The scheme involves making up deductions such as employee business expenses, investment advisory expenses, and other miscellaneous Schedule-A deductions.

They also fabricate medical expenses, charitable contributions and other itemized deductions. In certain cases, an unscrupulous return preparer will claim fictitious dependents to take advantage of or increase the refundable portion of the Child Tax Credit. In other instances, these fraudsters will create a fake taxpayer business and include made up income and expenses on Schedule C in order to maximize the Earned Income Credit. In extreme cases, these return preparers will create fictitious W-2’s utilizing phony federal taxes withheld in order to increase the tax refund.

Often times, the fraudulent return preparer will have the client’s tax refund deposited into an account over which the return preparer has control over. The return preparer will then retain a percentage of the refund or a pre-agreed upon flat fee and thereafter remit the balance to the client. In other cases the fraudulent return preparer will give the client a refund based upon the correct tax liability and pocket the difference generated by refund from the fraudulent return.

The traditional fraudulent return business will generally operate in the form of a corporation or limited liability company with a nominee named as the principal in order to mask the identity of the true owner. More often than not the True Owner is on the IRS radar for past transgressions and may be the subject of an injunction or prior criminal prosecution.

In many respects, the business may appear to be legitimate and will include a store front, phone number and website. As part of the scheme, the business will also have a Federal Employer Identification Number, Preparer Tax Identification Number (PTIN) as well as an Electronic Return Originator Number.  Unfortunately, these identification numbers are in the name of someone other than the true principal and, in some cases, have been stolen.

In response to the recent criminal prosecutions of and civil injunctions issued against unethical return preparers, the Ghost Preparer has emerged as the business model of choice for fraudsters. The Ghost Preparer is similar in many respects to the traditional fraudulent return preparer. The Ghost Preparer makes up deductions, claim credits and create fictitious income in order to maximize the client’s tax refund.  However, the Ghost Preparer differs in several respects.

The Law

Under the law, anyone who receives compensation for preparing a tax return, must have a valid (PTIN) and must sign the return. Unlike his unscrupulous colleagues, a Ghost Preparer does not sign the tax return and   omits any information which could provide the IRS with an audit trail. He will generally instruct the client to sign and mail the return to the IRS. In cases where the return is submitted electronically, the Ghost Preparer will submit the return as “self-prepared.”

The Ghost Preparer insists on cash payment for his services. In other cases, he may have the client authorize the IRS directly deposit the client’s tax refund into an account the Ghost Preparer has control over. Once the refund is received, the Ghost Preparer deducts his fee and remits the balance to the client.

Initially, clients are delighted with the huge refund they are receiving and are quick to the relay their good fortune to their friends and relatives. In turn, friends and relatives flock to the Ghost Preparer in hopes of also receiving a large tax refund.  The process is generally repeated for a period of three or four years before the IRS identifies the irregularities and contacts the taxpayer.

What happens next?

Long after the tax refunds have been spent on a home theater system, vacation and down payment on a new automobile, the taxpayer receives a Notice of Adjustment from the IRS advising him that he now owes $48,745.68 in additional tax, penalties and interest for a three year period. After the taxpayer picks himself off the floor, he contacts the Ghost Preparer only to find that the Ghost Preparer has moved on to greener pastures. Further inquiry reveals that the Ghost Preparer used a fictitious name. Since the tax return was deemed “self-prepared” the taxpayer is left holding the bag.

The taxpayer’s problems are often exacerbated where multiple years are involved and the total additional tax, penalties and interest exceeds $50,000.  A permanent lawful resident of the United States who has recently filed for Naturalization may suddenly find their application denied or subject to an indefinite delay in processing. In addition, a taxpayer may find his or her passport has been revoked or the subject of a Notice of Federal Tax Lien. In extreme cases, a taxpayer may also become the subject of an IRS criminal investigation and subject to deportation.

The fraudulent tax return industry has been able to flourish, in part, due to lack of oversight. Practice before the Internal Revenue Service is limited to Attorneys, Certified Public Accountants and Enrolled Agents who are governed by Circular 230. Unfortunately, tax return preparation is not limited to those who are subject to Circular 230. Consequently, anyone can prepare income tax returns including those intended on defrauding the IRS without having to adhere to the professional guidelines.

Financial and emotional cost related to being scammed by a Ghost Preparer, can be devastating and life changing.  If you have been receiving unusually large refunds, it may be advisable to have a professional take a second look to determine if you are the victim of a fraudulent return preparer. There are steps that can be taken to mitigate the impact of filing such returns.

The takeaway here is that you should only hire an Attorney, CPA or enrolled agent to prepare your federal tax return. In most cases, the preparation fees are no more than the fees charged by those not subject to Circular 230.



Lying on tax return as an immigrant.

The IRS has identified a rise in the number of immigrants who routinely lie Tax Returnson their tax returns in order to secure large refunds to which they are not entitled. To address this trend, the IRS has vowed to heighten scrutiny with the commitment to go after these taxpayers with vigor. As such, you will see increased civil, and in certain cases, criminal penalties being assessed on the perpetrators.

As an immigrant, lying on your Federal Tax Return can also have other consequences such as; denial of citizenship during the naturalization process and deportation.  Immigration law considers tax fraud to be a crime of moral turpitude and an aggravated felony, which upon conviction can result in the commencement of removal proceedings and deportation. Immigrants include individuals who are here legally such as those with student visas as well as lawful permanent residents.

Some of the things that the Internal Revenue Service has been focusing on include; under-reporting income, fabricating expenses and claiming refundable tax credit.

False claims by taxpayers include:

  1. Claiming increased federal and state withholding which does not correspond to the taxpayer’s W-2;
  2. Claiming additional child tax credits to which a taxpayer is not entitled to;
  3. Claiming additional dependents to which the taxpayer is not entitled to claim;
  4. Claiming a false earned income credit;
  5. Making up itemized deductions such as medical expenses, charitable contribution and miscellaneous expenses;
  6. Claiming false employee business expenses on Schedule A including business mileage and unreimbursed employee business expenses;
  7. Filing Form 1040, Schedule C  and reporting made up  income and expenses on a nonexistent business in order to generate a loss;
  8. Failing to disclose foreign financial accounts and other foreign financial assets and income from these assets on FinCen Form 114 and Form 8938;
  9. Lying on Schedule B, Part III, questions 7(a) and 7 (b) by checking “no”  in response to questions concerning the existence of foreign bank accounts and the obligation to file FinCen Form 114 (FBAR); and
  10. Obtaining a false social security number and filing an income tax return, while at the same time, applying and receiving government benefits using the individuals actual social security number.

The above list is only a partial list of things that some immigrants routinely lie about on their tax returns.

It makes no difference whether you self-prepared your tax return or you went to a questionable tax preparation firm to have your return prepared. If you signed the return under “penalty of perjury” you are responsible for its contents. “Willful Blindness” is not a defense.

My office handles hundreds of offshore disclosure cases a year and I routinely come across the above irregularities when reviewing taxpayer returns.  If your return was prepared by a third party and the tax return was filed as “self-prepared,” you can be certain that the return is inaccurate and contains material misrepresentations and omissions.  If you received a large refund, do not assume it is the generosity of the U.S. Government. There is chance that the refund was generated through fraud.

Remember, you have invested a great deal of time and money in order to pursue your dream in America. Processing your status from visa, to permanent resident and ultimately, to naturalization is a great accomplishment. Lying on your taxes is the fastest way to denial of citizenship and in some cases, a one way ticket back to your home country. It’s not worth it!

Pittsburgh Tax Attorney Gets 48 Months For Employment Tax Fraud

Trust fund penalty for tax evasion gets 48 months in jailOn January 12, 2017 Steven Lynch, a Pittsburgh tax attorney, was sentenced to 48 months in prison,following his conviction for the willful failure to pay over payroll taxes (Trust Fund Taxes). The defendant co-owned and operated a recreational sports facility in Washington, County, Pennsylvania between 2004 and 2015.

The sports facility, doing business as “Iceoplex at Southpointe,” included a fitness center, ice rink, soccer field, restaurant and bar. According to facts contained in the DOJ press release dated September 8, 2016, Lynch controlled the finances of the businesses. As a “responsible person” Lynch was required to: (i) collect income and employment taxes from employees of the various businesses; (ii) properly account for the trust fund taxes and file payroll tax returns; and (iii) remit the taxes collected to the IRS.

The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. Instead, Lynch set up SRA Services, a shell company with no assets and transferred the various payroll accounts to that entity. The corporation was set up for the sole purpose of obstructing or impeding the IRS efforts to collect the employment taxes owed.

An employer who collects Federal Withholding Tax from its employees is responsible for filing accurate payroll tax returns and remitting these taxes to the IRS.

Employment Taxes required to be withheld include Federal Income Tax as well as Social Security and Medicare Taxes. The Employer is also required withhold to the Employer’s’ portion of Social Security and Medicare Taxes. Failure to properly collect, report and pay these taxes to the IRS can result in criminal prosecution.

Employment Taxes are considered “trust funds.” As a fiduciary, Employer has an absolute duty to safeguard these funds and the failure to do so can have dire consequences. The Employer also has an affirmative duty to file quarterly and annual payroll tax returns, which accurately reflect the correct amount of Employee Withholding Taxes, as well as the Employer’s contributions for its portion of Social Security and Medicare taxes. Finally, an Employer is charged with the responsibility of remitting the taxes withheld to the IRS.

Over recent years, the IRS and the DOJ tax division have ramped-up criminal enforcement efforts in the area of employment taxes. This case makes clear that employment tax fraud is a top priority for the IRS and they will not hesitate to prosecute anyone, including tax attorneys.

©2017 Anthony N. Verni, Attorney At Law, Certified Public Accountant