IRS Has Problems Identifying Prisoner Tax Fraud

Washington, D.C. (January 3, 2011)

By Michael Cohn from accountingtoday.com

Significant problems remain with efforts by the Internal Revenue Service to identify and prevent tax refund fraud by prisoners after the passage of a 2008 law aimed at curbing such issues, according to a new government report.
The report, by the Treasury Inspector General for Tax Administration, found that despite the passage of the Inmate Tax Fraud Prevention Act of 2008, refund fraud committed by prisoners is increasing at a significant rate. The number of fraudulent prisoner tax returns identified by the IRS has more than doubled from 18,103 tax returns in calendar year 2004 to 44,944 tax returns in calendar year 2009. Fraudulent refunds claimed rose from $68.1 million to $295.1 million during the same period.

“More than two years ago, Congress gave the IRS the authority to share tax information with the Federal Bureau of Prisons,” said Senate Finance Committee ranking member Chuck Grassley, R-Iowa, in a statement. “The IRS and the Federal Bureau of Prisons still don’t have an agreement in place to share information. Meanwhile, the number of inmates’ false returns and refunds continues to rise. This signals that prisoner tax fraud is a low priority for the federal government. The agencies need to take action and correct that impression. While they wait, taxpayers are picking up a growing tab for prisoner tax fraud.”

TIGTA found that, as of October 2010, the IRS had not completed the required agreements to allow the IRS to disclose prisoner tax return information to prison officials. As a result, no information has been disclosed to either the Federal Bureau of Prisons or State Departments of Corrections.

In addition, the Calendar Year 2009 Report to Congress on prisoner fraud is incomplete. The report stated the IRS identified 44,944 false or fraudulent prisoner tax returns during calendar year 2009. However, the processes the IRS uses to identify prisoner tax returns may result in the IRS understating the amount of prisoner fraud. Finally, TIGTA’s review of the process used by the IRS’s Criminal Investigation Division to compile the 2009 prisoner data file identified a lack of managerial oversight to ensure the accuracy and reliability of this file.

TIGTA recommended that the IRS work with the Treasury Department to seek legislation to extend the period of time the IRS has to disclose prisoner tax return data to the Federal Bureau of Prisons and state prison officials. TIGTA also recommended that the commissioner of the IRS’s Wage and Investment Division revise the annual report to provide Congress with a complete assessment of potential prisoner fraud. TIGTA said the IRS should ensure that all tax returns filed by prisoners are processed through the Electronic Fraud Detection System and receive a prisoner indicator. The report also recommended that the IRS revise prisoner filters to validate the wages and withholding associated with prisoners incarcerated for a year who filed tax returns claiming a refund. The IRS should also develop a process to assess the reliability (accuracy and completeness) of data received from federal and state prisons, TIGTA suggested.

The IRS agreed with two of TIGTA’s five recommendations and partially agreed with two recommendations. The IRS did not indicate its agreement or disagreement with one of the recommendations, on providing Congress with a complete assessment of potential prisoner fraud by revising the annual report to include the total number of tax returns filed by prisoners, number selected for fraud screening, and the number verified as false or fraudulent.

However, the IRS noted hat it would continue to report to Congress all of the prisoner information that is required to be reported by the Inmate Tax Fraud Prevention Act of 2008, such as the number of false and fraudulent returns associated with prisoner filings. In addition, the IRS said it would respond to future Congressional requests pertaining to prisoner- related fraud.

The new report is available here.

TIGTA issued a report last September saying the IRS needs to subject tax returns filed by prisoners to greater scrutiny for fraud. The report was largely about how expanded access to wage and withholding information could improve the identification of fraudulent tax returns, but it noted that the majority of tax returns the IRS identifies as being filed by prisoners are not being sent to screening to assess fraud potential.

TIGTA’s review identified 253,929 (88 percent) of the 287,918 tax returns filed by a prisoner as of March 24, 2010, were not selected for screening. Of those tax returns not screened, 48,887 individuals had no wage information reported to the IRS by employers.

These 48,887 prisoners claimed refunds totaling more than $130 million including Earned Income
Tax Credit claims of $78.5 million. Some of these refunds may have been stopped by other compliance activities. For example, TIGTA determined that the IRS prevented the issuance of nearly $18.1 million in EITC claims for 4,532 of the 48,887 prisoner tax returns.

Actor Wesley Snipes reports to prison to begin sentence

From Michael Martinez, CNN
December 9, 2010 1:28 p.m. EST
(CNN) — Actor Wesley Snipes reported to a medium-security Pennsylvania prison Thursday to begin a three-year sentence for failing to file tax returns.

The 48-year-old actor is now incarcerated in McKean Federal Correctional Institution in Lewis Run, officials said.

Snipes’ attorney said he is appealing his client’s misdemeanor convictions for not filing tax returns in 1999, 2000 and 2001.

Snipes was acquitted of felony charges.

Snipes is nervous, he said, but hopeful that his prayers will be answered.

“We still have prayers out there. We still believe in miracles. So don’t send me up the river yet,” Snipes said in an interview on CNN’s “Larry King Live” Tuesday night.

The actor conceded he was uneasy about losing his freedom if his appeal to the U.S. Supreme Court fails.

“I think any man would be nervous if his liberty is at stake,” Snipes said. “I’m disappointed that the system seems not to be working for me in this situation.”

Prosecutors said Snipes earned $40 million since 1999 but had filed no returns and had been involved in a tax resisters group.

Snipes disputed such involvement and said that the failure to file was his advisers’ fault.

“This is another thing that has been misreported: It has been framed that I was a conspirator and that I was an architect in a scheme by an organization that has been characterized as tax protesters,” Snipes said. “The press hasn’t reported that I was a client of people who I trusted (who) had knowledge and expertise in the areas of tax law that would protect my interests.”

Snipes is best known for his roles in the “Blade” action films, the comedy film “White Men Can’t Jump” and the drama “Jungle Fever.”

In February, a jury convicted Snipes on the misdemeanor charges, but he was acquitted of more serious felony charges of tax fraud and conspiracy. Jurors accepted his argument that he was innocently duped by errant tax advisers.

Defense attorneys in court documents suggested that to sentence Snipes harshly would be to disregard the jury’s verdict.

But prosecutors, in their sentencing recommendation, said the jurors’ decision “has been portrayed in the mainstream media as a ‘victory’ for Snipes. The troubling implication of such coverage for the millions of average citizens who are aware of this case is that the rich and famous Wesley Snipes has ‘gotten away with it.’ In the end the criminal conduct of Snipes must not be seen in such a light.”

Snipes suggested he was unfairly singled out by prosecutors.

“It does seem to be rather unusual and rather bizarre when you had a prosecutor come into the sentencing and say that this is the biggest tax trial in the history of the IRS,” Snipes said. “I think there is a certain amount of selectivity going on here.”

Snipes indicated he was disturbed by some public comments that he was receiving “just punishment.”

“It’s been presented as though I’m worthy of this punishment,” Snipes said. “I’ve been a law-abiding citizen ever since I grew up in the Bronx, New York.”

One juror, Frank Tuttle, gave Larry King Live a written statement that three other jurors had made up their mind that Snipes was guilty before the trial began.

The jury’s verdict was a compromise between those jurors who thought Snipes was guilty and those who didn’t, Tuttle said in the statement.

“That’s when a deal was made to find him guilty on the failure to file taxes and not guilty on the federal tax evasion charges,” Tuttle said in the statement. “We did not think he would go to jail.”

Snipes’ attorney, Daniel R. Meachum, said neither he nor Snipes had any involvement in preparing that juror’s statement to Larry King Live, saying the show’s producers obtained it on their own.

“We on the defense team never suggested that the media reach out to any of the jurors,” Meachum said.

Snipes contended that some media accounts of his trial have distorted public perceptions.

“There have been some egregious and very malicious efforts to report the facts of this case,” Snipes said. “I was never charged with tax evasion. I’ve never been a tax protester.”

Snipes said he has paid his taxes.

“They claimed that there was a certain number that was owed and that number has been all over that place. The press has escalated it and changed it a number of times. But we think we are fully compliant with what was owed,” Snipes said.

CNN’s Jessica Thill contributed to this story.

Val Kilmer — Another $500,000 in Tax Problems

12/28/2010 9:30 AM PST by TMZ Staff  from tmz.com

Val Kilmer is back on Uncle Sam’s bad side — the “Iceman” reportedly left the IRS in the cold … to the tune of $500,000 in unpaid federal taxes — and now it is out to collect.

According to DetNews.com, the Internal Revenue Service filed a $498,165 lien against Kilmer on Nov. 30 in New Mexico … where the actor owns a multi-million dollar ranch.

It’s not the first time Kilmer’s had issues with taxes — the IRS had filed a lien against him for $538k back in 2009 … but Val reportedly settled that debt a few months ago.

So far, no comment from Val’s people.

EXCLUSIVE: Financial Trouble Cooking For Chef Gordon Ramsey ~~ $ 1 Million in Tax Liens

IRS Pressed to Fight Tax Evasion by Business Networks

Washington, D.C. (October 26, 2010)
By WebCPA Staff from AccountingToday.com

Businesses that have developed complex networks of related trusts and partnerships to evade taxes are making it difficult for the Internal Revenue Service’s efforts to close the tax gap, according to a new government report.

The IRS views network-based tax evasion as a problem but does not have estimates of the associated revenue loss, in part because data does not exist on the full population of the networks, according to a report by the Government Accountability Office. A taxpayer can control a group of related entities — such as trusts, corporations, or partnerships — in a network. These networks can serve a variety of legitimate business purposes, but they also can be used in complex tax evasion schemes that are difficult for the IRS to identify.

The IRS does know that at least 1 million networks existed involving partnerships and similar entities in tax year 2008. The IRS also knows that many questionable tax shelters and abusive transactions rely on the links among commonly owned entities in a network, said the report.

The IRS generally addresses network-related tax evasion through its examination programs. These programs traditionally involve identifying a single return from a single tax year and routing the return to the IRS division that specializes in auditing that type of return. From a single return, examiners may branch out to review other entities if information on the original return appears suspicious.

However, this traditional approach does not align well with how network tax evasion schemes work, the report noted. Such schemes can cross multiple IRS divisions or require time and expertise that IRS may not have allocated at the start of an examination. A case of network tax evasion also may not be evident without looking at multiple tax years.

In reaction to the report, Senate Finance Committee Chairman Max Baucus, D-Mont., called for new tools to help the IRS fight complex tax evasion schemes. Baucus had requested the report from the GAO as part of his ongoing efforts to reduce the estimated $345 billion tax gap.

“When people skirt their tax obligations, it places an undue burden on the hardworking Americans who do pay their taxes,” said Baucus in a statement. “This report makes clear the IRS needs to develop a comprehensive strategy to fight complex tax evasion schemes and that more work is needed to close the tax gap. I intend to closely monitor the IRS’s progress to make sure they have an effective strategy to root out this tax evasion and close the tax gap once and for all.”

The IRS is developing programs and tools that more directly address network tax evasion. One, called Global High Wealth Industry, selects certain high-income individuals and examines their network of entities as a whole to look for tax evasion. Another, yK-1, is a computerized visualization tool that shows the links between entities in a network. These efforts show promise when compared to the GAO’s criteria for assessing network analyses. They represent new analytical approaches, have upper-management support, and cut across divisions and database boundaries. However, there are opportunities for more progress.

For example, the IRS has no agency-wide strategy or goals for coordinating its network efforts. It has not conducted assessments of its network tools, nor has it determined the value of incorporating more data into its network programs and tools or scheduled such additions. Without a strategy and assessments, the IRS risks duplicating efforts and managers will not have information about the effectiveness of the new programs and tools that could inform resource allocation decisions, said the report.

Among other items, the GAO recommends that the IRS establish an IRS-wide strategy that coordinates its network tax evasion efforts. Also, the IRS should assess its network programs and tools and should evaluate adding more data to its current tools. The IRS generally agreed with these recommendations and noted additional organizational changes the agency is making that will address networks.

“In the end, the IRS will always be challenged to find technological, administrative, or auditing approaches to address the tax problems associated with the ever-increasing complexity and variability of both legitimate and abusive entity structures that use tiered flow-through tax reporting,” wrote IRS Deputy Commissioner Steven T. Miller. “We are in the process of studying potential legislative and guidance changes to reduce the tax risks inherent in network structures.”

 

Anguished 30 Year Retailer Avoids MA DOR Seizure And Bank Foreclosure

Henry was at the end of his rope. Mounting pressure from his bank to pay the delinquent balance of his business loan was beginning to become unbearable. He had already obtained two extensions on his loan. They were not going to wait much longer before foreclosing on his business. The MA Department of Revenue was also growing impatient and was about ready to seize his business in order to pay off nearly $50,000 in back taxes. Many corporate excise, sales, and withholding tax returns also needed to be filed. A loan application with a new lender to refinance and pay off his current bank loan was in danger of being rejected due to the state tax liens on his business and personal property. Without that new loan, he would be unable to pay off his current loan and avoid both a bank foreclosure and seizure by the MA DOR. Since he had also personally guaranteed the business loan and was held personally responsible by the MA DOR for the delinquent state taxes, he would lose all of his personal property as well. At age 54, he would have to start all over again and it would be difficult at best to obtain gainful employment after being out of the employment market for 30 years. He was at a loss as to what to do and called us for help. Our firm worked to submit any unfiled tax returns and then negotiated an installment agreement with the MA DOR for the delinquent taxes. This stabilized his tax situation and gave us time to work out the loan problem. Next, our firm negotiated with the MA DOR to obtain priority for the new lender’s mortgage over their state tax liens. As a result, the new loan was approved, the old loan was paid off, the MA DOR received $30,000 towards the delinquent taxes, and Henry’s 30 year old business was saved. The balance of nearly $20,000 in taxes would be paid off over the next 12 months ending his financial and emotional ordeal. Henry was given a new lease on life.

Distraught Taxpayer Saves Over $35,000 Straightening Out Life

Rosemary hadn’t filed returns in quite a few years and she knew she had a serious problem. She knew it was time to straighten out her financial life. Fortunately, the IRS hadn’t caught up to her yet. Our firm worked to get all Rosemary’s returns prepared and filed and then negotiated an Offer In Compromise settling her old liabilities for less than 16 cents on the dollar. She was very grateful to have her tax problems behind her with a clean slate and a bright future ahead.