Tax Debt Information BLOG

Illinois Tax Preparer Indicted For $1.6 Million in Tax Fraud

Illinois tax preparer Delaun Leflore of Belleville, Illinois was indicted this week for conspiracy charges and perpetrating over $1.6 million in tax fraud.  Leflore and his business partner, Carey Herron, were the owners of Prime Time Tax Services in Shiloh, Illinois.  The company falsified IRS tax forms for clients from 2009 until 2011, giving out $500 to employees who helped perpetrate the crimes. 

Tax fraud has become a rising issue across the country.  The IRS has been overwhelmed with cases of identity theft and fraud.  The IRS has estimated that over $26 billion will be paid out in tax refunds over the next five years to criminals perpetrating fraud and identity thieves submitting other taxpayer’s information and stealing their tax refund.  Over the last four years, 490,000 taxpayers have been identified as victims of identity theft by the IRS. 

It’s important to protect yourself from being abused by fraudulent tax preparers.  Ask for references from past clients of the preparer.  Tax preparers may or may not have a Preparer Tax Identification Number from the IRS that you can use to verify them with the government.  If they do not, the preparer should still not have an issue signing his or her name to your IRS income tax return.  You should also receive a copy of your tax return from the preparer before it is filed.  Check the address and filing status on your income tax return before filing. 

Leflore pled guilty to conspiracy charges and has been sentenced to seven and a half years in federal prison.  His business partner was sentenced to three years and ten months in prison.  Both men were banned from tax preparation in the future.  

Tax Tips For Relocating For A Job

Many individuals choose to move during the summertime to avoid the hazards of winter and take advantage of the school semester break.  While moving can be a costly endeavor, there are some tax deductions that can be taken advantage of for smart taxpayers that plan ahead.  The first thing to keep in mind is that in order for a taxpayer to deduct moving expenses, they must be moving in relation to beginning a new job. 

Generally the time period that is acceptable for relocating deductions is within one year from the first date you began working in a new location.  Another thing to keep in mind when relocating for your job is the distance test.  The distance test is an IRS rule that only allows for deductions when a new job is at least 50 miles farther away from a taxpayer’s home than the previous job location.  A taxpayer must also be working full time for at least thirty nine weeks during the first twelve months at the new workplace.  The “time test” begins after an individual arrives at the new job location.  For self-employed individuals, the IRS takes into account the first seventy eight weeks of the first twenty four months.  Usually if the taxpayer expects to meet these requirements for the time test, they can still deduct their moving expenses even if the tax deadline arrives before the amount of required time has passed. 

If all requirements for work are met, there are some other moving expenses that are deductible.  The cost of lodging and travel can be deducted for you and your household members while moving from a former home.  You can deduct hotels, airfare, vehicle mileage, parking fees and tolls.  You can deduct most of your expenses, but only one trip per household member per move.

Once you arrive in your new home, you can deduct some basic start up costs as well.  The cost of connecting utilities and disconnecting utilities can be deducted.  In addition, packing, crating and transporting your assets and personal property can be deducted from your tax return.  The same applies for insuring and storing any items during your move. 

Unfortunately, aside from the actual act of moving, things like car tags, drivers licenses and entering a lease are not deductible as moving expenses.  You also must subtract any reimbursement that your employer provides for the cost of moving.  

$190 Million Tax Refund Case Lost By HP

Hewlett Packard lost a decision on Monday in the United States Tax Court against the IRS.   The ruling was over an aggressive tax-cutting strategy employed by the corporation that involved trading derivatives with the aim of generating capital losses and foreign tax credits.  These types of trades ended in capital losses, a strategy created by AIG Financial Products and bankrolled by European banks.  In the scheme, U.S. companies would invest in foreign entities usually in low-tax jurisdictions.  These investments would then be claimed on their U.S. income tax returns as credits which would lower or offset the payments made or owed to foreign tax authorities for the investment. 

Essentially, the IRS called these strategies out as being artificial.  The foreign tax credit generators lacked economic substance and were found to be not valid for IRS deductions.  HP invested in a Dutch entity called Foppingadreef which was funded by a Dutch bank ABN-Amro.  HP used the Dutch entity to generate $178 million in tax savings for foreign tax credits that are not allowed.  The Tax Court judge ruled that HP’s investments in Foppingadreef were not valid for more than $15.5 million in capital losses. 

In 2004, HP transferred it’s shares in the Dutch company and claimed a loss of $15.5 million, which was also considered a false claim.  The judge ruled that the transaction was “cashing out” essentially of an investment, which is also called a loan if made at a pre-determined date.  The ruling on Monday will mean that HP will not be granted over $190 million in tax refunds.  Hewlett Packard has filed separate lawsuits against the IRS for an additional $248.5 million in taxes and interest from 1994, 1995 and 1998.

W-4's and Estimated Tax Adjustments

When looking over your tax return at the end of the year, always make adjustments to your W-4.  Check for the amount of your IRS refund and look at how your income may differ in the current year, adjusting for the difference.  Suppose you are not expecting to have income from any sources other than your employer.  The best thing to do would be to lower the number of allowances on your W-4, to get your refund as close to zero as possible.  The advantage of this is having your money in hand rather than letting it sit in an IRS account until you collect your refund.  Most taxpayers would prefer to have their money in their pocket, or in the stock market, a savings or a CD account where an investment is actually gaining interest. 

Say you have a refund of $2,000 on your 2011 tax return and expect to sell a large amount of stock that will receive a substantial gain in the current year, the net effect would be close to equal.  Extra wages can be covered by excess withholding that was set in the prior year.  If you end up owing $150 and unexpectedly sold a large amount of stock due to favorable shift in the market, it would be best to fill out a 1040-ES voucher for the quarter after the gain.  This form would be filled with a check or other payment to pay a percentage of the income received from the stock sales to cover the estimated tax at the end of the year.  This is easier than adjusting your W-2 every time you sell stock or generate extra income throughout the year. 

These are more simplified examples of how to figure out what and how to pay your estimated taxes.  More than likely there are many other factors that go into computing your proper estimated tax payments, marriage, divorce, buying or selling your home, having children, getting a raise or promotion, new or second mortgage, stock sales, business ventures and unexpected medical bills are just a few of the things that can affect the  precise amount of tax withholding. Proper tax planning is needed for most individuals by using different projections of future income to have a complete strategy in place for both foreseen and unforeseen events to maximize the amount of money in your pocket.  

IRS Tax Credits | Summer Day-Camp Credits

According to the American Camping Association there are over 12,000 camps in the US. The IRS wants to help kids avoid sitting around the house all summer.  The cost of summer day camp can be claimed as a deductible expense. To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information.

The cost of day camp may count as an expense towards the child’s dependent care credit, but there are a few requirements that must be met.

• The parent must be employed or looking for work

• The child must be under the age of 13

• The child must be enrolled in summer day camp (overnight camp does not qualify)

• The credit can be up to 35% of your qualifying expenses depending on your income.  

• You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit to apply.

• Many local park districts offer day camp at affordable rates ($955 Avg.) that have multiple activities Monday through Friday

This is great news for those parents that have children that are about to be headed off to day camp.  Most can agree that many of the things that define a childhood happen during the summer. Whether it is baseball games, going to the pool, riding bikes with friends, or even just hanging out at the park, kids build a lot of memories throughout the summer. For parents, the tax credits help those households who cannot afford  parental supervision for three straight months of the year.   The tax credit is not just an incentive, but a way to release the financial burden of school break.

If you have younger children and don’t feel comfortable sending them to a day camp, rest assured that the government has taken that into consideration. The tax credit is also applicable to babysitters and nannies. Your child will have a lot to look forward to this summer and the IRS helps make the decision to send your kids to camp that much easier.    

IRS Form 4506 | Natural Disasters and Protecting Tax Documents

When a disaster occurs that affects your personal equity, it can make life a challenge to recover. According to the National Fire Protection Association (NFPA), every year over 475,000 structures have fire damage in the US. This does not include other occurrences such as flooding or other extreme weather conditions. Tax records are some of the most important documents that an individual can be responsible for.  Losing your receipts or W-2s can be at the very least a long process to recover and at the worst a financial nightmare.  In order to be more prepared for the worst, here are a few things you can do to avoid losing important documents and help handle your insurance claims.

Take advantage of paperless recordkeeping. Things like past tax statements and financial records can be backed up onto a memory stick or external hard drive. Digital storage costs have dramatically fallen in the last few years and financial documents are not very memory intensive.  This means you should be able to fit everything onto one external backup.  In addition, important documents such as W-2’s and other tax documents can easily be scanned into a computer and backed up to one of the devices listed above. These devices should then be stored with other important documents such as birth certificates and Social Security cards.

Document any valuable items you keep in your home. The IRS has made disaster loss workbooks available for individuals that can help compile room-by-room lists of personal items. One strategy to use is to take pictures or short videos of the items in every room. This is a fast and simple way to document your belongings. Storing the video and picture files with your paperless records in a safety deposit box is always an excellent measure to take.

The IRS offers ways to request past tax records free of charge. By submitting IRS form 4506 or 4506T you can have past tax returns mailed to you without going through any complicated processes. By being aware of all of these measures and actively using them, you can insure that your assets and important records will be safe and if the worst happens, you will be prepared to show your insurance company and the IRS.

Tax Refunds May Be Delayed Until Summer

Taxpayers this year who were happy to have their tax refunds come quickly thanks to the new IRS e-file system that processed millions of tax returns quickly, may have to reminisce on the convenience starting next year.  The IRS has faced 460,000 cases of tax identity theft already this year and Congress is considering changing the time period for refund returns.  The IRS had a budget cut last year, has had hiring freezes and is generally understaffed for the amount of returns they receive each year.  They have had recent successes in discovering tax fraud and tax evasion that occurs overseas, thanks to an increased effort by a task force designed to catch foreign tax evaders.  However, domestic counts of identity theft have gone up this year. 

Victims of tax identity theft do not have a way of detecting that there is a problem until it is too late.  If they used a criminal tax preparer, the refund is usually deposited into another bank account, or a check is sent to another address.  A victim will wait weeks, then months before noticing that their refund is has not come.  By then, the criminal is long gone. 

Shifting the refund return date several months into the summer would allow the IRS to invest more time into each return.  The agency has already caught 215,000 false returns this year.  More time would mean more information would be available to cross check a taxpayer’s withholding, interest income, dividends, capital gains and partnership income to resolve any discrepancies with questionable returns.  Delaying income tax refunds would have a negative effect for millions of taxpayers who rely on the refund for financial support during the year.  Often times taxpayers use the money from their refund for home improvements, vacations, summer school, or just to pay down their credit.  Without extending the tax refund turnaround, the IRS would need a larger budget to have all the all the wage and withholding information verified. 

The IRS has stated that it may issue roughly $26 billion in fraudulent tax refunds in the next five years to tax identity thieves and tax fraud perpetrators.  They discovered 2.2 million fraudulent tax returns in 2011.

Tax Preparers In Philadelphia Sued By DOJ for $1.7 Million Tax Fraud Case

Three men were sued by the Department Of Justice this week for allegedly preparing fake tax returns from 2006 to 2011.  The DOJ has sued to prevent the three men, originally from Liberia, from preparing taxes in the Americas.  Deron Joe, Edmund Dassin and James Tokpawhie were the proprietors of Urban Tax Professionals, formally Edron Tax Professionals, in Philadelphia, PA.  The men were accused of perpetrating roughly $1.7 million in tax fraud.

The tax preparers were mostly referred to by other Liberians who were either family or friends.  They claimed the First Time Home Buyer Credit and Earned Income Tax Credit for their clients to increase the tax refunds for their clients.  The credits however, were later seen to be falsely claimed.  Apparently the First Time Home Buyer Credit was claimed for every single return that was prepared by Urban Tax Professionals.  The FTHBC is a tax credit for low to moderate income taxpayers who purchase a home.  The taxpayer must have an income below a certain level.  In 2008, the company prepared 232 income tax returns and claimed the FTHBC ranging from $3,750 to $8,000.  The group claimed about $1.7 million in FTHBCs, $1.4 million of which the IRS vetted and disallowed based on the fact that the individuals claiming the credit did not purchase a home or qualify for the credit. 

Many of the tax returns prepared by Urban Tax Professionals also claimed false dependents and deductions for employee business expenses that were fabrications.  Other instances of false reporting were claiming “single” status for taxpayers who were “married” and false deductions on Schedule C which were clearly not possible.  One case that came to light during the investigation involved a tax return that claimed the FTHBC for $7,500 when the taxpayer had not purchased a home that year, and in fact upon further investigation, had never purchased a home.

The illegal conduct of the three defendants has caused over 350 tax returns to be audited for the clients of Urban Tax Professionals.  The customers must pay interest and penalties for the taxes that they owe and evaded.  The three men are being sued by the government for continually causing harm to their customers, fraudulently reporting tax liabilities and helping taxpayers evade taxes.  

Tax Evasion Charges for Suicide Kit Grandmother

There is no federal law against selling or assisting suicides, a fact that was taken advantage of by a 92 year old Southern Californian grandmother.  Sharlotte Hydorn was convicted as part of a plea deal for tax evasion.  Hydorn sold over 1,300 suicide kits across the U.S. and in foreign countries that included asphyxiation hoods.  The hoods included a user diagram and tubing and needed only a helium source, which Hydorn did not supply as part of the kit.  Sharlotte Hydorn sold the kits for $40 and $60 to at least 50 people in San Diego County since 2007 and police knew of at least four of those people in the last year that used the kits to commit suicide.  One of the individuals who committed suicide was a 19 year old boy. 

Most of Hydorn’s clients contacted her by telephone or mail and she began the business after her husband died of colon cancer and was not able to return home from the hospital before he died.  Sharlotte began the business reportedly to allow people to die at home surrounded by friends and family.  When federal agents raided her home in San Diego last year, they found uncashed checks and thousands of dollars in cash from buyers.

Sharlotte Hydorn pleaded guilty and was allowed to settle under the premise that she stop selling the suicide kits.  The U.S. Attorney’s office decided to prosecute her for tax evasion because it was the easiest means of stopping her from selling the kits.  Hydorn made $66,717 in the last three years under the business name “GLADD Group” and did not pay taxes on any of her profits.  The 92 year old was facing a year in prison before Monday’s sentencing, but the federal judge in charge and the prosecution decided that would not be a consideration because of her age.  Hydorn will have to work with the IRS to pay back the tax debt she owes, totaling in more than $25,000.  A stipulation on her sentencing is that she may no longer make and sell suicide kits or advice others on the subject of creating them. 

Hydorn was a retired school teacher before she began her business three years ago.

$26 billion in Tax Refunds Going To Identity Thieves

The new wave of cybercrime has been making headlines in sectors outside of tax.  Most people have been victims or know someone who has been a victim of identity theft in the last three years.  Aside from stealing credit card numbers or worse, bank account pins and personal information, identity thieves have tapped into the tax universe to steal IRS refunds.  For some taxpayers, IRS refunds are a yearly bonus that funds home-repairs, vacations, summer camp or even things like yearly subscriptions for cable and internet.  The IRS has estimated that over $26 billion will go to criminals who steal identities in the next five years.

The IRS updated their computer system in December and has ramped up their security and analysis systems to detect fraud earlier.  Despite the early detection and preventative measures, the Treasury Inspector General’s office reported that last year 940,000 returns totaling $6.5 billion were related to identity theft.  Another 1.5 million tax returns were found in addition to that number with fraud totaling about $5.2 billion.  If you are worried that you may be a victim, know that 2 million fraudulent returns is actually a very small percentage of roughly 213 million individual returns that are filed every year. 

The IRS is projecting $26 billion in fraudulent claims in the next five years as a way of acknowledging the problem and putting an emphasis on their lack of resources.  The agency has faced budget cuts in the last few years, a hiring freeze and staffing reductions.  Identity thieves are often hard to spot, because the tax return may be filed correctly, have the right financial information and the wrong address.  Thieves will also be posing as fake tax preparers, inflating the information on their victim’s return to yield a high tax refund, then having the check direct deposited into their own bank accounts. In some cases, fraud could mean tax debt troubles for victims who are slapped with false-filing penalties and failure to file penalties. 

Close to half a million taxpayers have come forth as being victims of tax identity theft in the last four years.  This number is only expected to increase as cybercrime continues to ramp up.  Before choosing a tax preparer, check their sources, ask for client referrals and even contact the IRS with their Preparer Tax Identification Number (PTIN) to verify that they are legitimate.  Tax preparers are not yet required to have i.d.’s but the IRS has implemented a certification and identification process that will require all preparers to be registered in the next two years.