Pure with Tax Fraud

Yesterday, Kelly Doll, a former employee at the popular Las Vegas nightclub Pure, pleaded guilty to one count of filing a false tax return, reports the Las Vegas Review-Journal.

Tip income is taxable. Over $220,000 in tips he received between 2005 and 2006 didn’t make its way onto his income tax returns.

You may think I sound like a broken record. That’s because this is the third time I’ve written about former Pure employees/owners committing tax fraud. See here and here. I think I’m running out of catchy headlines.

Doll’s sentencing date is September 24.

Offshore Tax Investigations: First Switzerland, Is Israel Next?

Maybe.

The strongest indication emerged last week when a superseding indictment was unsealed, charging three American tax preparers for assisting their clients with concealing assets and income in unidentified Israeli banks.

U.S. residents must report all income earned to the IRS. U.S. residents must report whether they have a financial interest in a foreign financial account worth more than $10,000 in a particular year.

According to the Department of Justice press release:

The superseding indictment alleges that the co-conspirators prepared false individual income tax returns which did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ ownership and control of assets and conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel-Aviv, Israel, with more than 300 branches across 18 countries worldwide. Bank B is a mid-size financial institution also headquartered in Tel-Aviv, with a worldwide presence on four continents.

The federal government has aggressively pursued offshore tax evaders since 2008, when Swiss-based financial firm UBS was accused of assisting U.S. residents with committing tax evasion by shielding assets in offshore accounts. In 2009, UBS agreed to pay $780 million to the U.S. in fines, penalties, interest and restitution.

Over the four years since then, the IRS has run three offshore voluntary disclosure programs (in 2009, 2011, and 2012) to encourage taxpayers with undisclosed financial accounts to come forward and pay stiff penalties.

A benefit to participating in the program, if eligible, is that criminal charges will not be pursued against taxpayers making complete and truthful disclosures. Read more about the pros and cons of a voluntary disclosure here.

Undoubtedly the IRS and DOJ have collected a lot of information from these programs. “Enablers” such as those indicted above have not been eligible for the programs, however. It’s very possible these enablers were discovered through disclosures of their own clients.

CNBC is reporting the recent indictment may be the first of a series involving U.S. tax evasion by shielding assets in Israeli banks via “cash-transfer banking,” by which an offshore banker is set up with an American taxpayer seeking to withdraw and deposit the same amount of cash with the foreign bank:

The bankers appear in the U.S., typically at a hotel, and arrange for couriers to bring the cash to the hotel from the depositing customer, and later turn it over to the withdrawing customer, only later crediting each account for the transaction back in the foreign bank offices.

In somewhat related news, yesterday Israeli authorities arrested nine individuals and questioned fifteen more in connection with the possibly largest tax fraud scheme in Israeli history. I don’t see any connections aside from the nature and location of the crimes, however.

Hat tip: Federal Tax Crimes

Another Former Madoff Employee Pleads Guilty

In his plea allocution, Bernie Madoff strongly implied he ran the largest Ponzi scheme in history all by himself.

Craig Kugel used to work in human resources at Madoff’s firm, Bernard L. Madoff Investment Securities LLC (“BLMIS”). Earlier today, he became the seventh individual to plead guilty in connection with the federal investigation into Madoff’s former firm, according to Bloomberg.

Kugel was charged with, among other things, making false statements in relation to documents required by the Employee Retirement Income Security Act (known as “ERISA”), and subscribing to false income tax returns.

From the U.S. Attorney’s Office press release:

KUGEL was aware that there were individuals on BLMIS’s payroll who did not work for the firm but who nevertheless received salaries and benefits, and he created and maintained false BLMIS employee records on their behalf.  Specifically, KUGEL was responsible for submitting an Annual Return (“Form 5500”) concerning BLMIS’s employee benefit plan to the United States Department of Labor (“DOL”).  Form 5500 required KUGEL to identify accurately the number of employees at the firm, but instead, he included a number of employees who in fact did not work there.

During his tenure at BLMIS, KUGEL also charged more than $200,000 in personal expenses, including luxury clothes, jewelry, and vacations for himself and his family, to a corporate American Express card, but did not report it as income on his tax returns.

He faces up to 19 years in prison, and will pay at least $2.3 million in restitution. The monies will be used to compensate victims of the fraud. His sentencing is scheduled for December 13.

At today’s hearing Kugel said, “I want to make clear I had nothing to do with the Madoff Ponzi scheme and I was never involved in the Madoff trading operation.”

Kugel’s father, David, was a supervisory trader in Madoff’s operation. Last November, he pleaded guilty to six criminal counts, including falsifying trading and business records, and securities and bank fraud.

It’s rather hard to believe Madoff did not have co-conspirators.

Lacking the Wisdom To Pay Taxes

The Doctor of Philosophy (Ph.D) typically takes several years for one to acquire. The term “philosophy” is in reference to its Greek meaning, “love of wisdom.”

Apparently, not all Ph.D recipients have the widsom to pay their taxes. Earlier this week, the Department of Justice announced its charges brought against David Gilmartin, an economist with a Ph.D, including tax evasion, obstruction of the IRS, failure to file a tax return, and failure to pay taxes.

From the DOJ press release:

Despite being paid compensation for every year between 1989 and 2010, Gilmartin failed to file tax returns with the IRS as required, and failed to pay more than $500,000 that he owed in taxes. As alleged, Gilmartin took various steps to evade his tax obligations and obstruct the IRS’s ability to collect back taxes, including:

• Submitting IRS forms to certain employers in which he falsely and fraudulently claimed to be exempt from taxes, in order to cause the employers not to withhold taxes;
• Providing someone else’s Social Security number to his employer and representing that it was his;
• Refusing to provide an employer with his Social Security number, citing a purported “religious objection,” in an attempt to prevent the employer from withholding taxes;
• Causing checks paid to him as compensation to be made payable to a finance company, in order to pay down a personal line of credit and to prevent the IRS from seizing, pursuant to bank levies, the funds paid to him as compensation;
• Causing checks that were paid to him as compensation to be cashed against a personal bank account rather than be deposited; and
• Causing checks paid to him as compensation to be endorsed directly to a bank rather than deposited in a personal bank account, in order to pay outstanding balances on his credit card with that bank and to prevent the IRS from seizing, pursuant to bank levies, the funds paid to him as compensation.

Of course, Mr. Gilmartin is presumed innocent unless proven guilty. You may view the indictment detailing the charges here.

The indictment alleges Gilmartin refused to provide an employer his social security number, citing a purported “religious objection.” We may have a tax protester before us. Cases involving tax protesters do not end in the taxpayers’ favor.

Hat tip: TaxProf Blog

A Pure Celebration

Just over a year ago, I wrote about Ali Olyaie. Mr. Olyaie was a “VIP host” at the popular Las Vegas nightclub Pure. He pleaded guilty to failing to report income earned while working at the popular club in 2006.

Mr. Olyaie is not the only Pure employee who pleaded guilty to a tax crime. Today we add Steve Davidovici and Mikel Hasen to the list.

Steve Davidovici used to be a part-owner and manager of Pure. Mike Hasen used to be the head doorman at Pure. Earlier today they both pleaded guilty to one count of filing a false federal income tax return for the 2006 year. From the U.S. Department of Justice press release:

[D]uring the years 2005, 2006 and 2007, in addition to fees charged for admission to the nightclub, some of Pure’s patrons made cash payments to Pure door personnel and “VIP hosts” to bypass the general admissions line and to obtain more desirable seating. This money was collected, pooled and generally distributed on a weekly basis to the door personnel and VIP hosts, as well as to managers of Pure such as Davidovici and Hasen. In Hasen’s case, distributions from this “tip pool” comprised the bulk of his compensation during the time he worked at Pure. Davidovici and Hasen each concealed large amounts of this income from the IRS.

Davidovici’s and Hasen’s sentencings are set for June 27, 2012, at 9 a.m.

You would think the club may crumble as a result.

You thought wrong.

In just a couple of hours, Pure is throwing a party to celebrate its 7th birthday. Of course, patrons will continue to pay large sums of cash to bypass the admissions line and land a comfortable spot to hang out.

Let’s hope Pure personnel who take home the cash learn from the mistakes of their predecessors.

Slip into a Cell

In February, the IRS released its Dirty Dozen Tax Scams for 2012. One of the scams is called False Form 1099 Refund Claims:

In this ongoing scam, the perpetrator files a fake information form, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that he federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Today we meet Ronald L. Brekke. Last Thursday, Mr. Brekke was convicted of conspiracy and wire fraud. Promoting the “1099 OID” fraud, Brekke assisted nearly 1,000 people claim over $763 million in fraudulent tax refunds by preparing bogus tax forms on their behalf. Mr. Brekke had told prospective clients at a seminar that “some of the filings would slip through resulting in a big payout for some of the filers.”

When a tax preparer uses the words “slip through” during a seminar on tax preparation, you probably want to slip out of the seminar immediately and not look back.

Mr. Brekke faces up to 20 years in prison. His sentencing is scheduled for June 15, 2012.

Tidal Wave of Attorneys and Tax Crimes

The curriculum vitae for attorney Leslie W. Jacobs:

• Former President of the Ohio State Bar Association
• Former Senior Antitrust Partner at Thompson Hine
• Harvard Law School

Impressive. His legacy? Anything but. Yesterday, Leslie Jacobs was sentenced to one year and one day in federal prison for making and subscribing false personal income tax returns.

On his 2004 through 2007 personal income tax returns, Jacobs falsely inflated business expenses he incurred while serving as a partner in the Cleveland law firm of Thompson Hine, LLP. As stated in the Department of Justice press release:

Among the deductions that Jacobs improperly took were business expenses for which he was reimbursed by the firm; memberships at clubs, including the Chagrin Valley Hunt Club, the Castalia Trout Club, the Union Club and the Harvard Club, that he knew were not deductible; several meals and entertainment charges at the clubs that were personal in nature, including their son’s wedding rehearsal dinner at the Hunt Club, the florist charge at the club and a Valentine’s Day party at the club, according to court documents.

This story is a disappointing head scratcher. To put all the hard work and accomplishments at risk for what, a lesser tax liability? Can an attorney get so caught up in advising others how to act within the bounds of the law that he recklessly forgets to do the same for himself? Sadly, yes.

It’s a problem within the profession. Last week, former Sullivan and Cromwell partner John O’Brien was sentenced to two years and four months in prison for failing to pay taxes on over $10 million in partnership income earned between 2003 and 2008.

We’re talking about egregious white collar offenses committed by men who presumably charged several hundred dollars an hour for their legal advice. Sickening.

Take It, Then Tax It

Today I write about a recent case out of North Carolina involving U.S. Department of Justice seizure of a taxpayer’s video poker machines at his place of business. Although we hear about similar seizures fairly often, this particular case included a very interesting tax issue.

In 2006, the DOJ executed a seizure warrant at Harrison Amusement Park because the taxpayer, Robert Harrison, was allegedly operating an illegal gambling business there. Showing a little compassion, the DOJ did not take all of the taxpayer’s assets. They left pool tables and jukeboxes. Sometime in 2007, the taxpayer liquidated those assets for $450,000, and then deposited the funds into his personal bank account.

A day after making the deposit, the taxpayer purchased shares in the amount of $450,000 out of a money market fund account. Problem was, the taxpayer’s money market account had been previously frozen pursuant to a seizure warrant. Shortly thereafter, the feds seized the $450,000 and prevented Mr. Harrison from exchanging, transferring, or redeeming the money until court order directed otherwise.

Had the taxpayer simply kept the $450,000 in his personal bank account, it would not have fallen within the scope of the seizure warrants. Alternatively, he could have bought a car or purchased real estate with the funds, as the taxpayer even acknowledged. Whoops.

Authorities brought forfeiture proceedings against Mr. Harrison, alleging violation of several federal statutes, including 18 U.S.C. § 1955 (illegal gambling businesses), as bases for seizure and forfeiture of the taxpayer’s properties.

In 2008, the taxpayer entered into a settlement agreement, and forfeited to the federal government all $450,000 that was frozen, less $10,000 exempt from forfeiture. He also received three years probation.

Now to the interesting part. After the taxpayer filed his 2007 North Carolina individual income tax return reflecting no taxable income, the N.C. Department of Revenue challenged the return, asserting that the taxpayer owed tax on the $450,000 he received upon liquidating his company’s assets.

Wait, he owes tax on funds that were seized? That was the Department’s position. And the Department’s legal specialist, who reviewed the ALJ’s decision in favor of the taxpayer, agreed.

Because the taxpayer did not renounce his ownership, dominion, or control over the $450,000 in 2007, the income was taxable. Had the taxpayer renounced or rescinded his interest in the funds, said the Department, he would not have been able to enter into the 2008 settlement agreement.

The logic makes sense. While the result seems unfair, the taxpayer may obtain some relief by claiming a deduction in his 2008 tax year for the amount forfeited to the federal government. Well, maybe not.

In the Fourth Circuit, said the Department, “no deduction may be allowed for the forfeiture of gambling assets due to the frustration of public policy that would ensue.” Put another way, there’s no tax benefit in connection with operating illicit gambling activity. Does that principle extend to a deduction for gambling losses? My reading says no.

The taxpayer may appeal the Final Agency Decision in the Superior Court, but I don’t believe he has a leg to stand on here.

Case: Harrison v. N.C. Dep’t of Revenue, 09 REV 05218 (Sept. 27, 2011)

The Abyss of Ruination

Back in September, I wrote about Maryland criminal defense attorney Stanley Needleman. Needleman had pleaded guilty to income tax evasion and structuring financial transactions.

Last week, he faced sentencing. The Baltimore City Paper reports Needleman will spend one year in federal prison. He also agreed to pay back taxes totaling over $660,000.

Needleman represented drug dealers, including Jose Morales. Back in 2008, Morales had been released on a $30,000 cash bond. Apparently, Needleman supplied Morales the money. No, a lawyer cannot provide financial assistance to a client. In an effort to pay Needleman back, Morales was caught shortly thereafter attempting to charter a jet to fly to Baltimore with several kilos of cocaine.

At his sentencing hearing, Needleman pleaded for mercy:

If I had the power to leap back­wards and freeze frame the hands of time, I would. Since April of this year, I am an emo­tional and intel­lec­tual zombie.

Being a lawyer invig­o­rated my very being as a human being. Now as you look at me, I dwell in the abyss of ruination.

No matter how impassioned with regret, one engaging in criminal activity with clients will not be overlooked by a federal judge. Needleman’s abyss will only seem more bottomless when he begins to serve the time.

Clickjacking the IRS

If you enter the search term “IRS” on yahoo.com, the first result, unsurprisingly, is the homepage of the Internal Revenue Service. And, you would click on that first result to be brought to the homepage.

I didn’t write the immediately preceding sentence to insult your intelligence. I wrote it because some users, in fact, have not been brought to the IRS homepage, but to somewhere else.

Wired is reporting that seven men have been charged in New York with operating a “clickjacking” scheme in a sixty-two page indictment unsealed today. The indictment states the men infected computers in over 100 countries with malware known as DNSChanger. DNSChanger altered DNS settings on a user’s system, redirecting the system’s browser to a DNS server controlled by the defendants. Then, that DNS server directed the browsers to another web site.

Why infect systems to redirect? For money, of course. Allegedly, the men set up advertising businesses which would receive a commission each time a user visited certain web sites. For example, users of infected systems that clicked on the link to the Internal Revenue Service web site were actually brought to a site for H&R Block. Each time a user visited the H&R Block site, the men were paid. The indictment alleges the men generated $14 million through the scheme.

Trend Micro’s Malware Blog claims we’re witnessing the “biggest cybercriminal takedown in history.” Apparently, over 500,000 machines in the United States were infected, at least 100 of which belong to the National Aeronautics and Space Administration (NASA).

The men face 27 charges, including wire fraud and other computer-related crimes. Six of the seven men have been taken into custody.

In a similar vein, taxgirl tells us about an apparently new IRS e-mail phishing scam. Remember, the IRS *never* asks for taxpayer identification information via e-mail. If you receive such an e-mail, forward it to phishing@irs.gov and then immediately delete it.