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Tax Times Newsletter -  March 2010

- Jay Schlichting

We help real people with real tax issues - successfully.

TOP NEWS

• IRS Releases 2010 Edition of Frivolous Tax Arguments
  Did someone tell you that filing taxes is voluntary? That only foreign-source income is taxable? You better read about today’s frivolous tax arguments.
       If you’re receiving tax advice that sounds otherworldly, it no doubt is.  Maybe someone finally told you that filing your income tax return and paying taxes every year are voluntary? You were a sucker all these year, filing returns and paying taxes, weren’t you?
       Well, no. You’d be a sucker if you followed the advice of whoever told you filing returns and paying taxes are voluntary.  That’s because this claim is among the better-known frivolous tax arguments — the claims people make to the IRS and in U.S. Tax Court as a way to avoid paying taxes.
       None of these arguments is backed by Constitutional law or case law in any way, and these arguments are regularly struck down in U.S. Tax Court and, in some cases, result in prison for those who make such arguments.  Yet, again and again, year after year, U.S. taxpayers come to the government with these wild, otherworldly claims.
       For that reason, the IRS released its 2010 edition of the most frequently used frivolous tax arguments. Among them:
  • Filing a tax return is voluntary: Proponents of this argument point to use of the word voluntary on an IRS form and in a U.S. Supreme Court decision that stated “taxation is based upon voluntary assessment and payment, not upon distraint.” But voluntary in these cases refers to taxpayer’s initial ability to determine the correct amount of their taxation. Legally, anyone who has received more than a statutorily determined amount of gross income is obligated to file a return and pay taxes.
  • Payment of tax is voluntary: Using a similar argument as above, proponents say the payment of taxes is also voluntary. The Internal Revenue Code clearly disputes that argument, making it clear that paying taxes is not voluntary.
  • Taxpayers can reduce tax liability by filing a “zero return”: In this case, taxpayers show their income as “$0” and employ one in a series of frivolous arguments to support the claim that none of their income is taxable.
  • The IRS must prepare a tax return for anyone who fails to file: Everyone is required to file. Period. Those who cite this argument refer to a legal mechanism that allows the IRS to determine a taxpayer’s income and tax liability in the event the taxpayer does not file.
  • Compliance with an administrative summons issued by the IRS is voluntary: This is patently false. The IRS has been statutorily authorized to inquire about any person who may be liable to pay revenue taxes, and U.S. District Courts can enforce, and have enforced, IRS summonses.

  The deadline to file your 2009 personal income tax returns is approaching quickly.  Be sure you don’t fall victim to a huckster pushing one of today’s many frivolous tax arguments.
   

• Gov’t Contractor Received $575k in False Refunds
       A former Department of Defense contractor was arrested in Fort Worth, Texas, by IRS Special Agents without incident on federal charges that he filed fraudulent tax returns in excess of $575,000.
       The indictment by a Tucson, Ariz., grand jury alleges Michael T. McQuillen, 49, of Saginaw, Texas, and formerly of Tucson — and who been primarily employed with various contractors for the United States Department of Defense — filed eight U.S. Individual Income Tax Returns claiming tax refunds in excess of $575,000.
       It alleges McQuillen attached Forms 1099-OID (Official Issue of Discount) to seven of these returns which falsely claimed withholding of federal individual income taxes approximately equal to the amount of earned income. The indictment alleges McQuillen received actual refunds from two of the fraudulent tax returns totaling $155,986.  He faces up to five years in prison and a $250,000 fine.
   
•  Pastor Aided False Income Tax Return
       A religious leader in Vancouver, Wash., was sentenced to five months in prison for aiding the preparation of a false tax return.   Until last September, Maximo Garza, 47, was the pastor for Victory Outreach Church of Portland, a non-denominational church which has operated in Portland, Ore., for more than 15 years.
       During his plea hearing, Garza admitted he provided false expense invoices which purported to reflect public relations and other services provided by Victory Outreach Church to William Thompson, who was then operating a mail-order divorce service using the name Hallwood Inc. Thompson used the false invoices to take expense deductions on tax returns filed by Hallwood in order to fraudulently reduce his tax liability. Thompson pled guilty to tax evasion and was sentenced to a prison term in 2007.
       Between 2001 and 2003, Garza provided invoices reflecting a total of $735,441 in false business expenses. Thompson agreed to let Garza keep approximately 10% of the expense amounts.
   
• New England Businessman Tried to Evade $109,000
       A New Hampshire businessman pleaded guilty to attempting to evade payroll taxes in connection with the operation of a contracting business he owned.
       Richard H. Taylor, of Weare, N.H., owned and operated R.H. Taylor Drywall, LLC, a construction management company based in Goffstown, N.H. From about April 1, 2004, to July 31, 2004, under Taylor’s direction and supervision, the company paid many of its employees’ wages in cash but did not withhold federal income taxes and Federal Insurance Contribution Act taxes from the cash wages and did not report the payment of those wages to the IRS. Taylor’s conduct resulted in a tax loss to the United States of about $109,000.  He faces up to five years in prison and a fine of up to $250,000.
   
• Office Manager Receives 30 Months for Tax Evasion
       An Illinois woman was sentenced to 30 months in prison as a result of her convictions for tax evasion, willful failure to file federal income tax returns, embezzlement from an employee benefit plan and failure to pay employment taxes.
       In addition, Mary R. Storer, 40, formerly of Wood River, Ill., was ordered to serve three years of supervised release and pay restitution in the amount of $266,056 to the victim, Elk Heating and Cooling, and $76,267.29 to the IRS.
       The convictions are the result of Storer’s conduct after she was hired by Elk Heating and Sheet Metal as their office manager in 2006. Elk Heating and Sheet Metal is a small, family-owned heating and air-conditioning company in Madison County.
       Storer’s responsibilities included answering the telephones, setting up customer appointments and handling accounts receivable and accounts payable. Storer was also in charge of payroll and filing and paying Elk Heating and Sheet Metal’s payroll taxes. Storer immediately began embezzling money from Elk Heating and Sheet Metal and gambled away almost all of the money that she embezzled. At the sentencing, information was also presented that she had gambled heavily in 2007, with losses exceeding $200,000 for that year.
   
• IOWA BUSINESSMAN SENTENCED FOR TAX, BANKRUPTCY FRAUD
       The former president of Chapman Lumber who committed bankruptcy fraud and filed false tax returns was sentenced to more than three and a half years in federal prison.
       Keith Chapman, 41, of Marion, Iowa, received the prison term after pleading guilty to two counts of bankruptcy fraud and one count of filing a false tax return. He was also ordered to pay $286,492.79 in restitution.
       In his plea agreement, Chapman admitted he made false statements in bankruptcy pleadings he filed on behalf of Chapman Lumber when he denied making payments and transferring money from Chapman Lumber to himself for his own use.
       Chapman admitted that, between 1999 and 2005, he diverted more than $450,000 from Chapman Lumber to a bank account he held in Cedar Rapids. Those funds had been pledged as collateral for a bank loan to Chapman Lumber.
       Chapman used the money himself, including for a membership in a country club, jewelry, golf equipment, clothing and prostitutes.  Chapman also admitted he did not report any of these funds as income when he filed false tax returns.
   
• NEW YORK MAN GUILTY OF OBSTRUCTING IRS
       Michael L. Pendleton, 28, of Albany, N.Y., pleaded guilty to one count of corruptly obstructing and impeding the due administration of IRS laws.  According to court documents and statements made in court, Pendleton in 2005 was a self-employed landscaper in Albany. In 2008, the IRS notified Pendleton that he underpaid his 2005 federal income tax in the amount of $28,623 based on the disallowance of expenses deducted on Pendleton’s 2005 Schedule C. The underpayment resulted in a tax loss to the government in the amount of $4,974.
       Pendleton contested the IRS’s determination by filing a petition with the United States Tax Court, and the matter was scheduled to go to trial in U.S. Tax Court. Prior to the trial date, the IRS Office of Chief Counsel requested that Pendleton substantiate his claimed expenses. In response, Pendleton provided several letters, purportedly from various individuals, which stated that Pendleton made payments to them for goods and/or services.
       The IRS Office of Chief Counsel determined that the letters contained false information and forged signatures.  Pendleton faces up to three years in prison and a fine of up to $250,000.
   
• NEB. COUPLE GUILTY OF FAILING TO FILE RETURNS
       Donald and Kathryn Snoozy, former residents of North Platte, Neb., pleaded guilty to willfully failing to file income tax returns for the calendar years 2003 and 2004. The couple pleaded guilty to failing to file tax returns for the 2003 and 2004 tax years, knowing that they had an obligation to file returns with the Internal Revenue Service. The Information alleges that the joint gross income for the couple was approximately $150,230.00 in 2003 and $169,473.00 in 2004.
   

• ASK THE EXPERTS:

  Question:  I believe in the old adage that “If it’s too good to be true, then it probably is.” Explain to me why that shouldn’t apply to the Offer in Compromise program you have talked about in previous issues.

  Answer:  First off, let me assure you the Offer in Compromise, while a wonderful program for those who qualify, is not too good to be true. The reason for that is in those four words in my last sentence: for those who qualify.
       The IRS isn’t handing out Offers in Compromise to every taxpayer with tax debt. The U.S. tax-collecting agency doesn’t operate on a pay-what-you-wish model by any means. The Offer in Compromise was designed for a specific group of taxpayers who amassed sizeable tax debt through previous earnings and interest but who — for reasons that could be personal, professional or medical — are simply unable to pay that debt off, even over time.
       While this program may seem counterintuitive for an agency tasked with collecting money Uncle Sam is owed, it actually isn’t: For taxpayers who simply can’t pay their debt, the Offer in Compromise offers a greater collection rate for the government overall than the bare-knuckled approached that resulted in fleeing taxpayers ever did.
       Nevertheless, this program can be very good news if you qualify for the Offer in Compromise: By negotiating a settlement offer with the IRS, you can reduce your tax debt to a fraction of what you owe. A tax professional will first review your previous returns — coming to the exact amount you owe the IRS — and then you and your tax professional will negotiate your Offer in Compromise.

       I solve IRS problems like yours every day. I’m an IRS Problem Solver. For a free, no-risk consultation, please call our office..

Tax Times Newsletter is an online Publication by
The Schlichting Group
Specialists in IRS Representation and Tax Preparation