Kyle Orton’s old lawyer fails to find the Tax Fairy, departs the tax business. From a Department of Justice press release:
A federal court has permanently barred Gary J. Stern from promoting tax fraud schemes and from preparing related tax returns, the Justice Department announced today. The civil injunction order, to which Stern consented without admitting the allegations against him, was entered by Judge Robert Gettleman of the U.S. District Court for the Northern District of Illinois. The order permanently bars Stern from preparing various types of tax returns for individuals, estates and trusts, partnerships or corporations (IRS Forms 1040, 1041, 1065, and 1120), among others.
According to the complaint, Stern designed at least three tax-fraud schemes that helped hundreds of customers falsely claim over $16 million in improper tax credits and avoid paying income tax on at least $3.4 million. Stern allegedly promoted the schemes to customers, colleagues, and business associates. The complaint alleges that his customers included lawyers, entrepreneurs and professional football players, and some of the latter, including NFL quarterback Kyle Orton, have sued Stern in connection with the tax scheme, alleging fraud, breach of fiduciary duty and professional malpractice.
Mr. Stern seems to have led his clients on a merry chase after the Tax Fairy, the legendary sprite who can wave her wand and make your taxes disappear. Kyle Orton is a graduate of Southeast Polk High School near Des Moines, where the truth about the Tax Fairy apparently was not in the syllabus.
Related: Jack Townsend, Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes
The Internal Revenue Service sent 655 tax refunds to a single address in Kaunas, Lithuania — failing to recognize that the refunds were likely part of an identity theft scheme. Another 343 tax refunds went to a single address in Shanghai, China.
Thousands more potentially fraudulent refunds — totaling millions of dollars — went to places in Bulgaria, Ireland and Canada in 2011.
In all, a report from the Treasury Inspector General for Tax Administration today found 1.5 million potentially fraudulent tax returns that went undetected by the IRS, costing taxpayers $3.2 billion.
When your controls don’t notice something like that, you have a lot more urgent problems than regulating preparers. Yet Congress and the Administration think the IRS is ready to take on overseeing your health insurance purchases. What could go wrong?
Tony Nitti is moved to offer the IRS a proposition:
REQUEST FOR URGENT BUSINESS RELATIONSHIP
FIRST, I MUST SOLICIT YOUR STRICTEST CONFIDENCE IN THIS TRANSACTION. THIS IS BY VIRTUE OF ITS NATURE AS BEING UTTERLY CONFIDENTIAL AND ‘TOP SECRET’.
Democrats seeking to raise revenue in ongoing budget talks have circulated a list of tax preferences they would like to see eliminated, including a provision that allows some wealthy individuals to avoid large payroll taxes, the carried interest preference, and the tax break for expenses businesses incur when moving operations overseas.
The “provision that allows some wealthy individuals to avoid large payroll taxes” is called Subchapter S. Form 1120-S K-1 income has never been subject to payroll or self-employment tax. This bothers the congresscritters (my emphasis):
Commonly known as the “Newt Gingrich/John Edwards” loophole, it is most often used by owners of Subchapter S corporations to avoid the 3.9% Medicare tax on earnings, which costs taxpayers hundreds of millions of dollars every year. Many S corporation shareholders receive both wages from the S corporation and a share of the S corporation’s profits, but they pay payroll tax only on their wages.
“Costs” taxpayers? From my point of view, and from that of my S corporation clients, it saves taxpayers hundreds of millions of dollars every year — but keeps it out of the hands of grasping politicians, so it’s perceived as a bad thing, by grasping politicians.
The versions of this “loophole closer” proposed in the past have been lame. When all they have to offer on tax policy is warmed over lameness like these, they aren’t serious.
The IRS can act in ways that violate both the letter and the intent of the tax law. Where such violations either provide benefits to select groups of taxpayers without directly harming others, or where the harm to taxpayers is de minimis, nobody has the ability or incentive to challenge the IRS and require it to enforce the tax law as written.
Congress could control the IRS’s abuse of the tax law. Using insights from the literature of administrative oversight, this Article proposes that Congress provide standing on third parties to challenge IRS actions. If properly designed and implemented, such “fire-alarm oversight” would permit oversight at a significantly lower cost than creating another oversight board. At the same time, it would be more effective at finding and responding to IRS abuse of the tax system and would generally preserve the IRS’s administrative discretion in deciding how to enforce the tax law.
Right now the IRS — and by extension the administration in power — can pick and choose what parts of the law it wants to apply. For example, the current administration has chosen to allow tax credits for participants in federal insurance exchanges, which the law does not authorize, while unilaterally delaying the employer insurance mandate but not the individual mandate. Somebody should be able to challenge this sort of fiat government.
More on the shutdown of Instant Tax Service, a story we covered yesterday:
Department of Justice press release: Federal Court in Ohio Shuts Down Nation’s Fourth-Largest Tax-Preparation Firm and Bars CEO from Tax-Preparation Business
Peter Reilly, Ninth Circuit Rules Against Irwin Schiff Sentence Appeal:
Irwin Schiff is probably one of the more famous alternate tax thinkers. His seminal work “How Anyone Can Stop Paying Income Taxes” is available in hardcover on Amazon for one cent.
Mr. Schiff appealed his sentence on tax crimes on the basis that his attorney failed to raise a “bipolar disorder” defense and what an attorney I know calls the “good faith fraud” defense — the Cheek argument that you really thought the wacky stuff you were saying is true. Peter wisely notes:
The problem with the Cheek defense is that you have to be smart to raise it, but if you show that you are too smart, then it does not work.
Its a fine line — smart enough to spend “thousands of hours” researching the tax law, but not smart enough to avoid a massive misunderstanding of it.
Jana Luttenegger, IRS Change to Use-Or-Lose Rule for FSA Accounts (Davis Brown Tax Law Blog): “New IRS rules permit employers to allow participants in a health Flexible Spending Arrangement (FSA) to carry over unused amounts up to $500 from one plan year to the next.”
Paul Neiffer, Trusts Get Hit with New 3.8% Tax too. And hard.
Brian Strahle, IGNORANCE MAY NOT BE BLISS WHEN IT COMES TO ‘ZAPPERS’ These are software apps designed to hide point-of-sale receipts from the taxman.
Phil Hodgen’s Exit Tax Book: Chapter 9 – Estate and Gift Tax for the Covered Expatriate
Catch your Friday Buzz with Robert D. Flach!
Leslie Book, TIGTA Report on VITA Errors (Procedurally Taxing)
Howard Gleckman, Can Expiring Tax Provisions Save the Budget Talks? (TaxVox). “Sadly, it is hard to see how.”
Not strictly tax-related, but good reading anyway: How to Put the Brakes on Consumers’ Debt. (Megan McArdle). Megan points out the wisdom of spending less than you take in, in preference to trying to get the government to cover your shortfalls.
News you can use: 3 ways to screw up your next website (Josh Larson at IowaBiz.com)
News from the Profession: Failed PwC Auditor Finds Success in Burning Bridges With This Ridiculous Farewell Email (Going Concern)
Quick thinking. From The Des Moines Register:
A Des Moines man awoke to find a stranger in his living room Thursday afternoon, police said. When the victim confronted the burglar, the suspect reportedly offered to mow the victim’s lawn for $5.
Guy needs to work on his pricing model.
Tags: Anthony Nitti, Brian Strahle, Going Concern, Howard Gleckman, Irwin Schiff, Jack Townsend, Jana Luttenegger, John Edwards Shelter, Kay Bell, Kyle Orton, Leslie Book, megan mcardle, News from the Profession, Paul Neiffer, Peter Reilly, Phil Hodgen, rush nigut, S corporations, Samuel Brunson, tax administration, tax fairy, TaxGrrrl, TaxProf, TIGTA