Tax Advisers Who Ran Shelters, Evaded Taxes, Could Face Prison

The IRS and Justice Department are harsh on tax evaders. The authorities can be especially harsh on advisers who lead others down a path of tax evasion, or who otherwise appear to exploit the tax system. That is true with tax preparers, and with other tax professionals too. Of course, the authorities like to publicize their victories as examples to others, and those victories can include guilty pleas that avoid the time and expense of a trial. A good recent example was Harold Levine, a New York tax attorney, and Ronald Katz, a Florida certified public accountant. The two have pled guilty to tax crimes based on their roles in a corrupt multi-year tax evasion scheme.

It started with tax shelters, but ended up involving their  failure to report millions of dollars in their own fee income to the IRS that the pair earned in the tax shelter deals. Like everyone else, tax lawyers and accountants are required to report their income to the IRS. However, Harold Levine and Ronald Katz instead engaged in a corrupt scheme to evade taxes on millions of dollars of income. According to the allegations in the Indictment to which Levine and Katz pleaded guilty, and statements made during the plea proceedings and other court proceedings:

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Between 2004 and 2012, Levine, a tax attorney and former head of the tax department at a major Manhattan Law Firm, schemed with Katz, a certified public accountant, to obstruct and impede the due administration of the Internal Revenue laws by evading income taxes on millions of dollars of fee income generated from tax shelter and related transactions that Levine worked on while a partner of the law firm. Levine failed to report approximately $3 million in income to the IRS on his personal tax returns during the period 2005-2011. For his involvement in this scheme, Katz received and failed to report to the IRS over $1.2 million in income on his personal tax returns.

As part of the scheme, Levine caused tax shelter fees paid by a law firm client to be routed to a partnership entity he co-owned with Katz. Thereafter, he used those fees – totaling approximately $500,000 – to purchase a home in Levittown, on Long Island. Levine caused the home to be purchased as a residence for a law firm employee with whom he had a close personal relationship.  Although Levine allowed the law firm employee to reside in the Levittown house for over five years without paying rent, Levine and Katz prepared tax returns for the entity through which the home was purchased that claimed false deductions as a rental property.

In or about 2013, Levine was questioned by IRS agents concerning his involvement in certain tax shelter transactions, and about the fees received by Levine and Katz from those transactions. During that questioning, Levine falsely represented that the law firm employee paid him $1,000 per month in rent while living in the Levittown home. This is another lesson from the case: don’t lie to the IRS. In addition, when the law firm employee was contacted by the IRS and summoned to appear for testimony, Levine urged the employee to falsely represent to the IRS that she had paid $1,000 per month in rent to Levine.

Levine and Katz are scheduled to be sentenced by Judge Rakoff on October 11, 2017. Levine, 59, of New York, New York, and Katz, 59, of Boca Raton, Florida, each pled guilty to one count of corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws, and one count of tax evasion. The obstruction charge carries a maximum sentence of three years in prison. The tax evasion count carries a maximum sentence of five years in prison.

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Those $133,000 NBA Finals Tickets Were Probably A Tax Write-Off

There were a number of pricey ticket resales leading up to the Game 5 NBA finals game in Oakland. But the priciest of them all was a new NBA record: a buyer paid and astounding $133K for two courtside tickets to Game 5. Those were for two floor seats, and the deep pocket surely wanted to see the Golden State Warriors win their second title in three years. That came true, and it was a great game, but those are still some expensive tickets. We don’t know who paid for the stratospheric tickets. But since sports tickets are sometimes used for business entertainment, these might have been too.

It’s worth asking whether American taxpayers should foot part of the bill for this kind of business entertainment. As early as 1961, President Kennedy said that, ‘‘The slogan—‘It’s deductible’—should pass from our scene.’’ But it hasn’t happened. If anything, the focus on tax deductions has gotten worse. Generally, the tax law says you can deduct reasonable business expenses, but not lavish or extravagant ones. So how can expensive sports tickets be deductible? First, only 50% of the cost is usually deductible, even if you are doing business. To claim a deduction for tickets, a sporting event must be directly related to the conduct of business. This generally requires a business meeting, negotiation, discussion, or other bona fide business transaction during the event. Is that realistic at a noisy sporting event? It may not be.

OAKLAND, CA – JUNE 12: Kevin Durant #35 of the Golden State Warriors is interviewed after defeating the Cleveland Cavaliers 129-120 in Game 5 to win the 2017 NBA Finals at ORACLE Arena on June 12, 2017 in Oakland, California. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and or using this photograph, User is consenting to the terms and conditions of the Getty Images License Agreement. (Photo by Ezra Shaw/Getty Images)

However, entertainment can be tax deductible even if actual business isn’t conducted, provided that the entertainment either precedes or follows a business meeting. If you want to read about IRS line-drawing for these expenses, check out IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. The IRS says that even if your expenses do not meet the directly-related test, they may meet the ‘associated test.’ To meet this associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: associated with the active conduct of your trade or business, and directly before or after a substantial business discussion. Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. The purpose may be to get new business or to encourage the continuation of an existing business relationship.

Whether a business discussion is substantial depends on your facts. A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. It is not necessary that you devote more time to business than to entertainment. You do not have to discuss business during the meal or entertainment.

If you qualify, the amount identified for the ticket price, along with any food and beverage expense, is deductible subject to the 50% limit generally applicable to meals and entertainment expenses. And since we’re talking about high ticket prices, how high is too high?Even if a business expense is legit, you can’t deduct it if it is lavish or extravagant. Exactly what is lavish or extravagant isn’t clear. It is sometimes defined as a business expense that is significantly higher than what is considered reasonable. Say a company pays triple the market rate for something. That amount may be a lavish or extravagant expense. That makes them–or at least the portion deemed lavish by the IRS–not tax deductible.

The mere fact that you might conduct business entertainment at a high-end restaurants or hotels doesn’t mean that your expenses are lavish. And sometimes even outrageously expensive meals and entertainment are considered deductible. And if you do deduct something, how much does a tax deduction reduce the cost? If your combined state and federal tax rate is 50%, a costly item is actually half price, which isn’t bad. In some cases, you can even deduct items when you don’t have receipts. A rule the IRS does not advertise is that receipts are sometimes optional.

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More Americans Renounce Citizenship, New List Released

Every three months, the U.S. Treasury Department publishes a list of people who have renounced their U.S. citizenship. The latest list names the individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency during the first three months of 2017. Although the list is meant to be of all those who expatriated, there has long been debate about how complete these numbers are. The number of this quarter’s list was 1,313. The total for calendar 2016 was 5,411, up 26% from 2015, when the total was 4,279 published expatriates. The 2015 total was 58% more than 2014.

These numbers may seem small, but expatriations have historically been much lower than these figures. There is no single explanation for the increase, although some renouncers write why they gave up their U.S. citizenship. The reasons for renouncing can be family, tax and legal complications. The numbers are small compared to the influx of immigrants. However, giving up citizenship is a solemn step. Expatriating is rarely about politics, unless you call worldwide tax reporting and FATCA politics. The Foreign Account Tax Compliance Act was enacted in 2010, and took years to implement. It is having an impact bigger than these expat numbers reveal. 

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Despite the official list, many leavers are not counted. Both the IRS and FBI track Americans who renounce. Some renounce because of global tax reporting and FATCA. Dual citizenship is not always possible, as this infographic shows. FATCA has been painstakingly implemented worldwide by President Obama’s Treasury Department. It now spans the globe with an unparalleled network of reporting. America requires foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties.

America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Like pariahs, they may be shunned because of their American status by banks abroad. Foreign banks are sufficiently worried about keeping the IRS happy that many do not want American account holders. Americans living and working in foreign countries must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income.

Many claim a foreign tax credit, but it generally does not eliminate double taxes. Moreover, the annual foreign bank account reports called FBARs carry big civil and criminal penalties. Even civil penalties can quickly consume the balance of an account, so enforcement fears are palpable. FATCA has ramped up worldwide and requires an annual Form 8938 filing if foreign assets meet a threshold. Still, leaving America can be costly. To exit, you generally must prove 5 years of IRS tax compliance. And getting into IRS compliance can be expensive and worrisome. A good recent example is Britain’s Foreign Minister Boris Johnson. It makes it all the more frustrating if the reason you are getting into compliance is so you can renounce! Kafka might appreciate that, but many people do not.

The exit when you make it can be expensive too. If you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but taxed or not, many are headed for the exits.

America charges $2,350 to hand in your passport, a fee that is more than twenty times the average of other high-income countries. The U.S. hiked the fee to renounce by 422%, as previously there was a $450 fee to renounce, and no fee to relinquish. Now, there is a $2,350 fee either way. The State Department said raising the fee was about demand and paperwork, but the number of American expatriations still increased after the fee hike. 

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Vegas Strip Club Owner Faces Prison For Tax Evasion

A man who once owned a Las Vegas strip club has pleaded guilty to evading employment taxes. According to documents filed in court, Frederick John Rizzolo, 58, of Las Vegas, who previously owned the Crazy Horse Too strip club, evaded paying more than $1.7 million in employment taxes for 2000 through 2002. Yes, that is many years ago, but the government can have a long memory. Rizzolo paid the club’s floormen, bouncers, bartenders and shift managers in cash. That in itself can be legal, but failing to keep records and then account for all the payments is not. Rizzolo did not provide accurate records of these payments to the Club’s bookkeepers. As a result, he caused false employment tax returns to be filed with the IRS, under-reporting wages paid and underpaying the taxes due.

(AP Photo/Charlie Riedel)

In 2006, Rizzolo admitted this conduct and pleaded guilty to conspiring to defraud the United States. But that wasn’t the end of his criminal activity. Following his plea, Rizzolo took affirmative steps to conceal his assets and income in order to thwart the IRS from collecting the delinquent taxes he owed. Rizzolo directed $900,000 in sales proceeds from the sale of the Crazy Horse Too to an offshore bank account in the Cook Islands. He also withdrew $50,000 from a bank account, writing a check to a third party. The money was handed back to Rizzolo as a way of avoiding an IRS levy and seizure of the funds.

Then, Rizzolo even lied to an IRS collections attorney, falsely stating that he had no income or assets and no ability to pay the taxes owed. The IRS takes a very dim view of actions in an audit or during IRS collection proceedings that are intended to obstruct the IRS from doing its job. And punishments can be severe. Rizzolo’s sentencing is scheduled for Sept. 15. If the court accepts the parties’ agreement, Rizzolo will be sentenced to a period of 24 months in prison and will be ordered to pay restitution in the amount of $2,637,290 to the IRS.

Many payroll tax violations can occur quite innocently. Every employer must withhold taxes from employee paychecks, sending the money to the IRS. The IRS calls this trust fund money, so if an employer fails to hand it over to the IRS, it is like theft. The IRS tends to push hard in such situations, especially when payroll tax failures reflect a pattern. The IRS can close a business, and take court action to make it very clear that the IRS does not want a repeat performance. If you are in business, it can be tempting to focus on keeping the rent paid and supplies ordered. You might think that the IRS won’t miss the payroll tax money if you just divert it temporarily. But, no matter how good the reason, the practice is dangerous. 

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Worst Taxes? Paying Someone Else’s

Paying taxes is rarely satisfying or something you look forward to. Besides, it is almost an article of faith that it is perfectly legal–and just plain smart–to arrange your affairs so you pay as little as possible. But if you think that paying taxes can’t get any worse, you would be wrong. The least satisfying of all taxes would be paying taxes that are not even yours. It is as if no one is going to give you any credit, and you are only stuck with someone’s else’s taxes because you were at the wrong place at the wrong time. That might be how some people view some ‘responsible persons’ who are stuck paying their employer’s taxes. Let’s start with the basics.

If you have employees, paying employment taxes is inevitable. You withhold taxes from employee pay and send it to the IRS. You never want to become delinquent in paying taxes, especially employment taxes. The IRS is vigorous in going after these payroll taxes. They are withheld from wages and are to be promptly paid to the government. This is trust fund money that belongs to the government, and no matter how good a reason the employer has for using the money for something else, the IRS is strict. If you are in business, it can be tempting to figure that you have to keep the rent paid and supplies ordered, and that the IRS won’t miss the payroll tax money if you just divert it temporarily.

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But, no matter how good the reason, the practice is dangerous. It is one reason that in cases where the IRS catches the problem early, the IRS will encourage use of a payroll service. If the payroll service automatically takes out and remits all the payroll taxes, the business won’t have the discretion to divert the money, even briefly. When a tax shortfall occurs, the IRS will usually make personal assessments against all responsible persons who have ownership in or signature authority over the company and its payables. The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person” under Section 6672(a).

You can be liable even if have no knowledge the IRS is not being paid. If you’re a responsible person the IRS can pursue you personally for payroll taxes if the company fails to pay. The 100% penalty equals the taxes not collected. The penalty can be assessed against multiple responsible persons, allowing IRS to pursue them all to see who coughs up the money first. “Responsible” means officers, directors, and anyone who makes decisions about who to pay or has check signing authority.

When multiple owners and signatories all face tax bills, they generally do their best to direct the IRS to someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck, while another may pay nothing. Meanwhile, the government will still try to collect from the company that withheld on the wages.

The IRS can move to collect, too, including via a levy on your bank accounts. But before a levy can be issued the IRS must provide notice and an opportunity for an administrative Collection Due Process hearing. A Collection Due Process hearing is only available for certain serious IRS collection notices. Among other things, it allows you the opportunity to ask for an installment agreement, an offer in compromise or another collection alternative. There are special rules in the case of a predecessor employer. That is, this procedural safeguard won’t apply if you are a predecessor employer. Here’s what the IRS evaluates to determine if one business is a predecessor of another:

  • Does it have substantially the same owners and officers?
  • Are the same individuals actively involved in running the business, regardless of whether they are officially listed as the owners/shareholders/officers?
  • If the taxpayer’s owners or shareholders are different, is there evidence they acquired the business in an arm’s-length transaction for fair market value?
  • Does the business provide substantially the same products, services, or functions as the prior business?
  • Does the business have substantially the same customers as the prior business?
  • Does the business have substantially the same assets as the prior business?
  • Does the business have the same location/telephone number/fax number, etc. as the prior business? See IRC Section 6330(h).
  • A business won’t be treated as a predecessor if there was a genuine change in control and ownership, as where the business was acquired in an arm’s-length transaction for fair market value, where the previous owners have ceased all involvement.The IRS’s guidance lists examples of predecessor status and explains how to determine if a business requesting a Collection Due Process hearing for employment taxes is a “predecessor.”  There’s no right to a Collection Due Process hearing to resolve the employment tax liabilities if you already had your chance.

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Pot Casino? Native American Tribe Sparks Marijuana Business — Tax Free

With medical marijuana legal in most states and recreational marijuana in a growing number, there is still much talk about taxing the profits. Some fear that the industry will be taxed to death, and that the continuing federal tax problems of section 280E of the tax code, the industry faces a tax double whammy. That’s one reason Native Americans might have a clever work-around. Native American gaming is big business, so why not Native American marijuana?

In 1987’s California v. Cabazon Band of Mission Indians, the Supreme Court ruled that in states that permit gaming, tribes can conduct gaming on Native American lands unhindered by state regulation. A year later, Congress enacted the Indian Gaming Regulatory Act of 1988, creating a regulatory framework for gaming on Indian lands. Today, Native American tribes are looking to expand beyond casinos into marijuana, legal for medical use in 29 states and for recreational use in 7.

(AP Photo/Jim Mone, File)

As governments try to exact on taxes to cash in, the idea of a tax-free ticket to the industry is not lost on Native Americans. Some tribes are considering changes to tribal laws as well as looking at commercial opportunities. California’s Pinoleville Pomo Nation was poised as the first tribe to grow medical marijuana. Federal law still outlaws marijuana, and this too could give Native American tribes big advantages. The Department of Justice has taken notice, issuing a memorandum that reviewed their policy on marijuana issues as they relate to Native American tribes. As a sovereign nation, a Native American tribe can open a marijuana resort even in a state where pot is illegalWith spreading legalization and taxes being levied right and left, tribal tax advantages could also be huge.

Now, Electrum Partners and a Seminole Indian-owned company called MCW have announced a new partnership for legal cannabis business development and expansion in a tax-free environment under tribal government. Electrum Partners handles cannabis finance, investment and advisory services. The Chief of the Seminole Tribe, James E. Billie, is joining forces with Electrum. Electrum and MCW hope to deliver a tax free environment, limited liability, permit and zoning advantages.

Chief Jim Billie noted the benefits of tribal sovereignty coming to the cannabis industry, and a huge economic development opportunity for the Native American Community. “Investors, cannabis industry entrepreneurs and American Indian tribal governments have reason to rejoice over a 50%-60% competitive advantage in cash flow and federal taxes,” said Mr. Leslie Bocskor, Founder and President of Electrum Partners. “To achieve our mission of creating and owning winners in the market, this game changing, innovative and disruptive model provides new markets for licensed and regulated businesses as well as being the foundation for other business advantages created by attaching tribal government sovereignty to the cannabis industry. This will provide widespread solutions for the tax and liability burdens that most cannabis businesses face, and much more.”

“We believe in tribal sovereignty and its advantages for tribal economic development, thus by adding tribal sovereignty as an economic advantage, we simply decrease the cost and increase the profits for every business partner who takes advantage of the structure we’ve set up,” Bocskor continued. Native American tribes and their wholly owned tribal corporations are not subject to federal income taxes on their earnings. Some types of tax-exempt organizations are taxed on some types of income. Tribes are exempt from federal income taxes even when conducting commercial activities. They can form corporations to conduct business and their income remains exempt. Native Americans are U.S. citizens, and unlike their tribes, individuals are subject to federal income taxes. Even exempt tribal income can be taxed when distributed to individual members of the tribe.

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Dear IRS, I Did Not Report It On My Taxes Because It Was A Gift

A gift you receive is not subject to income taxes. It might be subject to gift tax, but that would be the problem of the giver, not the recipient. With gifts not being subject to income tax, it can seem tempting to try to characterize money or property you receive as gifts. But be careful: the IRS hears this excuse a lot, and is unlikely to be persuaded unless you can document it. Plus, the IRS will expect a gift to occur in a normal gift-like setting. For example, if an employer or former employer gives a loyal employee $10,000 is that a gift? No, it is a bonus, treated as wages.

Even trying to document it as a gift probably won’t change that result. Yet, many people still try the “it was a gift” excuse. They usually fail. Former Presidential Candidate John Edwards even tried the “it was a gift” excuse for not treating money as campaign contributions. Remember, income is taxable whether in cash or in kind. If you receive property, its fair market value is taxed. Examples include a cash bonus from your boss at year-end, the fancy briefcase your employer gave you when you were promoted, the free country club membership you got from a grateful client, you name it.

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All are income. In an employment setting you face employment taxes too, creating withholding problems. Your employer must withhold extra taxes from your cash pay to make up for the value of the property you received in kind. How do you distinguish between income and a gift? It depends on the intent of the person and the surrounding circumstances. Gifts are made out of “detached and disinterested generosity.” Was the transfer of the briefcase or the country club membership detached and disinterested?

The IRS would say no, since they were surely meant to reward you for a job well done. That makes them income. They may also be intended to secure additional services in the future. The IRS can challenge whether what you received (or gave) was really a gift. The IRS is likely to consider large gifts from employer to employee as taxable compensation.

There is an exception for small holiday gifts to employees. The IRS says, you can hand out turkeys and holiday baskets to your employees provided that the gifts don’t exceed $100 each in value. But if a worker puts in extra, unpaid overtime and you reward him with tickets to the Super Bowl, they are wages taxed at their value. Just how do you withhold on Super Bowl tickets? You’re supposed to increase the withholding on his cash wages to reflect the value of the tickets.

Obviously, that works only if you pay your employee with a combination of cash and goods. If a buddy who isn’t a regular employee helps you out at your business occasionally and you thank him with Super Bowl tickets, then the IRS will likely view them as taxable pay on a Form 1099, not a tax-free gift. Gifts are usually between people who have family relationships, like your grandmother who gives you something special for your college graduation. But gifts aren’t limited to family. Under the annual gift exclusion, anyone can give anyone else up to $14,000 a year in money or property without worrying about gift taxes. Your grandmother could give you and your spouse $14,000 each—a total of $28,000 per year—with no gift tax. Gifts in excess of $14,000 per year per donee are taxable, but your grandmother won’t necessarily have to pay any gift tax. Under the gift and estate tax law in effect for 2016, each person gets a $5.49 million lifetime exclusion from gift (and estate) taxes.

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