ataxingmatter

Tax Snitches--a big one revealed

This is a double gotcha moment.  As Tax Prof reported this afternoon, Bloomberg.com reveals that UPS Lobbyist Secretly Spurred Ohio to Demand Taxes from FedEx.  Kenneth Kies, the former chief of staff of the Joint Committee on Taxation, left Congress to become a lobbyist.  One of his clients was UPS. And Ohio has just revealed that Kies was the author of a detailed report delivered to Ohio officials back in December 2006 about FedEx's employment practices--a tricky little matter of several hundred thousand in taxes possibly due on drivers that FedEx classifies as independent contractors (here's its website about independent contractor recruiting), but that may instead be employees. 

FedEx had already been found to have inappropriately classified certain drivers as independent contractors in California, in a Dec 2005 decision.  See this link.  Massachusetts reached a similar decision about FedEx drivers, and there've been other lawsuits by drivers across the country, see this link, as well as the FedEx Watch site that has links on litigation around the country.   Information is also available on the class action lawsuit's website.   Here's a site, Braun Consulting, that contrasts independent contractor status with employee status, comparing FedEx and UPS.

Why would UPS care?  Because UPS treats its drivers as employees, so it is at a competitive disadvantage when FedEx does not, for essentially the same work.  They both apparently wear uniforms, drive trucks with the company's logo on them, deliver packages according to the company's mandates, with routes set by the company.....hard to see how one set could really be employees and the other set drivers, though there may be a number of factual differences that aren't obvious on the surface.  At any rate, Ohio launched its own investigation and concluded that the FedEx drivers are indeed employees.

So there's a "gotcha" for FedEx (assuming that the classification of drivers as employees holds). And if they are employees for state tax purposes, it is quite possible that they should have been treated as employees for federal tax purposes as well.  The IRS has already tentatively determined that they owe several hundred million in back taxes just for 2002 due to the classification of some drivers, and is investigating the company's classification of about 13,000 drivers in 2004-2006.  See this Trading Markets.com story.  So double "gotcha."

But there's also a "gotcha" for Kies.  In the letter turning the report over to Ohio, Kies asked for confidentiality.  Guess he didn't want to get a reputation as being willing to snitch to tax authorities.  But Ohio released the letter.   So Kies has been outed.

When I was practicing, I heard at various ABA conferences and elsewhere that brown envelope revelations were not an uncommon thing for the IRS.  Companies who were offered a tax shelter by a promoter, for example, may have refrained from buying in, yet recognized that they would be at a competitive disadvantage to companies that aggressively pursued the deal.  Snitching evens the playing field, and lets the IRS find out about the newest tax "inventions" long before it otherwise would have.  I never asked, but I always assumed that the snitching was done anonymously--materials from a promoter sent in a brown envelope with no trace or obvious identification of the sender.  I guess Kies was trying to be more up front, and hoping that his candor would encourage Ohio officials to honor his confidentiality request. 

We tend not to like snitches, of any kind, and thus the "gotcha" sense about Kies' outing.  But we really do want people to help ensure that everyone complies with the tax laws and be willing to report gross miscompliance rather than be cowed by fear of being known as snitchers.  I suspect states and the fed should err on the side of protecting the identity of snitches, and be grateful for the evidence that helps end noncompliance.

Liechtenstein: UBS ex-banker to confess to aiding tax evasion

Lynnley Browning reported on May 30 that Bradley Birkenfeld, the ex-UBS banker accused of aiding wealthy individuals in hiding their money in Leichtenstein will "confess" on June 9 (after originally pleading "not guilty" on May 13) in a way that will point to others at UBS and at other financial institutions who aided such tax evasion.  See Ex-UBS Banker Expected to Plead Guilty and Cooperate with Investigation, NY Times, May 30, 2008.

Wealthy clients have been creating bogus trusts, private banks, and private "foundations" in various island nations, including the Phillipines, which sometimes advertise these entity forms in ways that are intended to avoid prosecutions while letting wealthy potential clients get an idea of how to use them to avoid paying US income taxes (e.g., cast as though it is advice about not engaging in a tax shelter--like the person who says "I won't mention here the way you can evade taxes by creating a company in which you place assets through nominee relationships.....").  These prosecutions of bankers should make them somewhat leery of engaging in accommodation transactions in the future.

Tax Shelters and Complexity

The NonProfit Tax Prof Blog notes an entry in the Chronicle of Philanthropy, based on recent IRS stats about charitable donations of cars.  As most readers are probably aware, prior to 2005 people could donate cars to charities and get a deduction for the fair market value of the donated vehicle, and there was considerable tax administrator concern that the value of donated vehicles was being manipulated to increase significantly the size of the deduction.  The American Jobs Creation Act of 2004, however included a provision that limits the deduction to the actual sales price that the charity gets on the sale of the auto, if the claimed amount exceeds $500, except in those instances that the charity gives the auto to a needy individual, uses it itself, or renovates and sells the auto.  (The latter two exceptions don't appear reasonable--hard to see why the donor should get a bigger donation for cars that the charity uses or renovates and sells.)   See this IRS link for a news release about the Jobs Act change in the law.  Result?   In 2005 with the new law in effect, there was a 60% decline in automobile donations from 2004, but an 80% decline in the amount of deductions claimed, down from $2.4 billion in 2004  to $470 million in 2005.   (There may still be significant donations of old junkers that aren't even counted because there's no valuable deduction.)

Interested in donating?  Here are a few links:

• Donate Car for Charity  (supports a foundation to aid families);
• Purple Heart (supports veterans);
• 1-800-Charity-Cars (provides appropriate donated cars to needy families, but also auctions cars that are not roadworthy to raise money to repair those that can be);
• IRS Publication 561 (determining the value of donated property).

Tax Crimes: guilty verdict in Aegis tax shelter case (US v. Vallone)

A federal jury yesterday convicted six attorneys/promoters of sham tax trusts in United States v. Vallone, in what may have been the most broad-reaching illegal tax scam in U.S. history.  See the government's April 8 press release on the tax fraud indictment, here (noting that two CPAs connected with the scheme were indicted separately from the six attorney/managers) and the indictment (from fraudandscam.com) here and superceding indictment here. 

Most tax shelter schemes are limited to 30-40 taxpayers, because the promoters know that having too many taxpayers involved is likely to bring IRS attention.  Apparently that bit of wisdom had bypassed this group of tax scammers--the convicted sextet had marketed sham foreign and domestic trusts to hundreds of U.S. taxpayers using a network of promoters all over the country.  The six were officers and managers of Aegis, an Illinois-based outfit that purported to help wealthy U.S. taxpayers with investments and financial planning, but instead helped wealthy U.S. taxpayers rip off the federal government to the tune of more than $60 million over the ten years the conspiracy went on.  The trusts were used to conceal assets from the government and fraudulently reduce tax liabilities, even though the IRS had provided notice as early as 1997 that such trusts funnelling assets and income offshore did not prevent the income from being taxable in the United States.

The wealthy taxpayers involved in setting up these domestic or foreign trusts to hide their assets and income clearly must have known they were committing illegal tax fraud.  According to the indictment, in some cases, domestic trusts were backdated, to appear as though they had existed earlier.  In many cases, the Aegis defendants set up a domestic trust and then immediately transferred it to the taxpayer/client as new trustee, so the taxpayers knew that they still had control of the assets and income. The convicted group helped taxpayers file false returns, claiming deductions for ordinary expenses of maintaining their homes, which were claimed to be the "world headquarters" of the trusts! 

Foreign trust arrangements were more expensive and were reserved for the wealthiest clients--I suppose they thought it would be harder to trace the assets to Belize than to a U.S trust.  These are another version of the offshore credit card scams--taxpayers moved income around and ultimately located it in a bank account that was accessed by a credit card.  The money was never claimed on the tax return.

The indictment alleged that the defendants used the same methods to conceal their own lucrative fees from promoting the tax scams from the IRS.

Each count of tax fraud carries a maximum penalty of 5 years in prison and a $250,000 fine.  That should be enough to get such firms' potential taxpayer clients' attention, shouldn't it?  One can expect that there will be a number of wealthy clients of these convicted tax criminals who will face their own Waterloo soon.  Those cases should make the mainstream headlines and help counter the public's perception that tax crimes don't get punished.

Harry Willner, former IRS agent and now convicted tax crook

In mid-April, the US Attorneys Office for Southern New York issued a press release about the indictment, conviction and sentencing of Harry Willmer for tax fraud.  Willmer had been involved in a purported company (with the same address as Willmer's home address) for which he claimed almost $900,000 in operating losses from a bad debt.  He then promoted a scheme to others whereby they would assign their income to his company, he would report the income but offset it with the NOL, and then he would pay the income to them (as a loan payment) minus a "small" fee for his services in saving them taxes.  He even used the scheme himself, having a school district for which he sometimes taught pay his salary to the company and purportedly saving himself about $20,000 in taxes through the fraudulent use of the purported NOL.

Willmer was sentenced to a year in jail, a year of supervised release, a $10,000 fine, and payment of taxes, penalties and interest.  See this short item on US News & World Report.

About the same time  that Willner was sentenced, Actor Wesley Snipes got his sentence of three years for failing to file tax returns (and of course there's taxes, interest and penalties to pay as well).  Will these cases provide guidance to the tax protestor movement, or will they continue to claim they owe nothing?  Hopefully, these glimpses of prison time for tax cheats will at least cause the protestor movement to have second thoughts about brazen violation of the law.             

Wesley Snipes: convicted tax criminal in the news: jail time ahead

When Weslep Snipes was convicted on three counts of criminal failure to file tax returns but not convicted on tax fraud charges, many of the mainstream media put out headlines that were likely misleading to the tax protestor crowd, suggesting that he'd gotten off.  When I ran a blog entry about his conviction on the three counts, tax protestors emailed me saying Snipes was their hero, and that he hadn't been convicted of fraud so it proved their position (that the income tax is illegal or that it is to be paid only by non US people) was correct. 

So I'm pleased that the judge sentenced Snipes to the maximum--three years in jail and one year of probation,  See Rich Phillips, CNN, Snipes Gets the Maximum (updated 4/24/08).  Snipes made a payment of $5 million on his back taxes owed (plus penalties and interest)--nearly $17 million, which will be the subject of a civil case.

Snipes said he was sorry for his mistakes, but interestingly never specifically admitted having violated the tax laws.  See Wesley Snipes Gets 3-Years for Not Filing Tax Returns, NYTimes, Apr. 24, 2008. 

Snipes claimed at his trial that he was an innocent who had been duped by his co-defendants.  But he had joined his co-defendant's American Rights Litigators group back in 2000, a group which has a goal thwarting federal income tax collection.  See this FOX News.com story from the time of the trial: Carmen Gentile, Bad Financial Advice Behind Snipes Tax Woes, Lawyer Argues, FoxNews.com, Jan. 16, 2008.  The tax deniers' arguments are groundless, but they advertise and acquire followers who apparently can successfully convince themselves of any fantasy position in order to keep more money for themselves rather than pay their fair share of taxes to support important government activities.  As David Cay Johnston, Wesley Snipes to Go on Trial in Tax Case, Jan. 14, 2008, reported:

Tax deniers maintain that the law only appears to require payment of taxes. All their theories have been rejected by the courts, including the one invoked by Mr. Snipes, which is known as the 861 position, after a section of the federal tax code.

Adherents say a regulation applying the 861 provision does not list wages as taxable, though it does say that “compensation for services” is taxable. The courts have uniformly rejected all such theories, and eight people have been sentenced to prison after not paying taxes based on the 861 argument.

Snipes' failure to file returns covered 1999-2004, during which time he earned $38 million and paid no taxes.  Id.

I still find it hard to believe that the jury bought such a defense for someone who has made millions and obviously is no idiot.  I suppose the celebrity cult is hard to avoid even in a jury deliberation room.  Although the jury in February only convicted Snipes on the three failure to file misdemeanor charges, they thankfully convicted his co-defendants Kahn and Rosile on the felony tax fraud counts.  Kahn will serve a 10-year sentence, and Rosile four years.  Wesley Snipes Gets 3-Years for Not Filing Tax Returns, NYTimes, Apr. 24, 2008.  There's a great bit of dialogue from Kahn's sentencing. 

Kahn's Statement to the judge upon sentencing:  "For the record, your honor, I don’t accept that.”

Judge's response: “You may not accept it, Mr. Kahn, but you will serve it.”   Id.

Any other resolution of this case would have made a mockery of justice.  A poor guy who swipes a piece of pizza from a kid in California can go to jail for life under California's ridiculously harsh criminal "three strikes and you're out" law, but wealthy elites who mock the nation's tax laws often get off with nothing but a slap on the wrist, if that.  If all they do is pay their back due taxes and interest, even with a penalty, they may come out ahead, under time value of money principles.   Snipes deserves jail.  It's good that he got what he deserves.

Wesley Snipes: convicted tax criminal in the news

Wesley Snipes was convicted of the crime of intentionally failing to file a tax return.  He missed a lotta tax payments (in the millions), so he was trying to rip off Uncle Sam and all the honest taxpayers who pay their taxes with their returns each year (the vast majority of us).

The prosecutors are now before the court arguing that he should receive the full punishment for his crime as allowed by law--3 years in jail and an appropriate multimillion dollar fine.  Sounds right to me.

You can read about it at the BBC, here.

Inflated Art Appraisals: self-help deductions for the wealthy

Al Golbert, one of my colleagues on the Tax Prof listserve distributed an interesting article today from the LA Times.  Jason Felch & Doug Smith, Inflated art appraisals cost U.S. government untold millions, L.A. Times (Mar. 2, 2008).

Donors reap huge writeoffs for art work donated to museums.  It's the way museums acquire most of their items (more than 80%, according to the article), and it's the way many wealthy patrons create a nice collection to view while getting a nice tax write-off for the full fair market value rather than the amount paid.  And if they can get that "fair market value" inflated, that's an even bigger tax write-off.

Seems like quite a few donors engage in this--lots of times on a small scale, for some, and a few times at a big scale, for others.  The article recites a number of the cases that have drawn media attention over the years--several of them in Los Angeles.  The article notes that IRS audits on donations are infrequent--"only a handful of the 100,000 or more tax returns that allow art donors to reap nearly $1 billion in tax write-offs."  And the payoffs for donors are huge, since "[h]alf of the donations checked over the last 20 years had been appraised at nearly double their actual value."

Robert Reich, economist and former Clinton cabinet member, thinks something should be done.  Charitable contributions shouldn't get only half their fair market value credit if they don't directly benefit the poor.  Here's what he had to say.

"We've created a giant loophole right now through which the rich reduce their taxes by supporting culture palaces frequented primarily by themselves."

Liechtenstein Redux: IRS Investigating

I recently noted here that Sen. Levin has called for investigation of the apparent use by US taxpayers of banks in Liechtenstein to hide assets and avoid tax.  In an IRS release today, IR 2008-26 (Feb. 26, 2008) (available on BNA; not yet available at the IRS newsroom), the IRS advised that it is "initiating enforcement action" with respect to more than 100 U.S. taxpayers in connection with Liechtenstein accounts.  The release quotes acting commissioner Linda Staff as follows.

“We are determined to protect the United States tax system from abuse and ensure that taxpayers pay what they owe. We will use all our authority to fairly and effectively enforce our tax laws. It should be clear from recent events that there is no safe hiding place for the proceeds of tax avoidance and evasion.”

Qualified energy improvements: misuses

There was an interesting conversation on the ABA practice group listserve the other day.  Someone had heard something that sounded like a good deal--a 10% tax credit for adding fans to a home--and asked the listserve for information.  Jim Maule, my tax prof colleague at Villanova, filled in the group quickly on the nonavailability of the credit for ceiling fans (see below). 

But that wasn't the end of the story.  Seems that a hospital administrator had bragged at some point to someone else on the listserve about using the credit to help pay for three ceiling fans in his new home.  Now, I would bet that the hospital administrator knew better.  He probably thought he'd take his chances with the audit lottery--probably wouldn't be discovered.  Even if it was, he'd say he had just misunderstood how the statute worked and get off, he figured, without any penalty. 

It's hard to believe that people who ought to know better will stoop to such clearly abusive steps in order to hold onto to some taxes that they really owe to the government.   I hope that somebody gave that hospital administrator the scolding he deserved--and that he amended his return to withdraw the claim for the credit!

Why the credit doesn't cover ceiling fans:  Section 25C provides a credit for 10% of the amount paid for "qualified energy efficiency improvements" and certain residential energy properties installed during the taxable year.  The statute includes "advanced main air circulating fans" in the qualified energy property eligible for the credit.  But the kind of fans that qualify for the credit are most decidedly not ceiling fans--they are the circulating fans internal to a hot air gas, propane or oil furnace!

(Hat Tip to the listserve for this item.)