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Tricks the big boys play on IRS

Trusts, charities, claims against the 16th Amendment

— Every February, the Internal Revenue Service sends out a news release warning Americans that unscrupulous tax preparers may use dirty tricks to lower their clients' income taxes. The preparer may wind up in the hoosegow (as several San Diegans have), and the taxpayer, who is ultimately responsible for his or her own return, may have to pay back taxes, penalties, and interest -- and maybe spend time behind bars too.

Bully for the Internal Revenue Service. Taxpayers should get these annual warnings of the "Dirty Dozen" fraudulent techniques employed by tax preparers. Trouble is, it's the wee folk who need such advice. As "Queen of Mean" hotelier Leona Helmsley observed correctly, "Only the little people pay taxes." There is a fine line between legal tax avoidance and illegal tax evasion, and America's richest citizens and largest corporations cross that line with impunity, with help from the most prominent and supposedly respectable law firms, banks, accounting firms, and brokerage houses.

As Charles Rossotti, head of the IRS from 1997 to 2002, noted in his book Many Unhappy Returns, the federal tax agency that he inherited was "like a police department that was giving out lots of parking tickets while organized crime was running rampant."

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It's still that way and may be worse. The IRS admits in its 2007 news release that offshore hanky-panky by corporations and the wealthy continues to be a problem. I'll deal with that in later paragraphs.

One of this year's Dirty Dozen tricks is the misuse of trusts. Unscrupulous tax preparers urge clients to transfer assets into trusts, promising that income, estate, or gift taxes can be lowered. But some trusts don't fulfill the promises, says the IRS, which has 150 trust investigations now under way. Last October, a federal judge here sentenced Susan E. O'Brien to ten years and five months in prison. Her codefendants, Robert Richard Evans and William Dean Cook, got 78 and 24 months, respectively. She and Evans had been selling trusts that concealed income from the IRS. The three had used one of Evans's trusts to conceal many years of income of Dr. Kevin Marie Scoggin, owner of San Diego's Grand Animal Hospital. In addition, O'Brien and her colleagues stashed Scoggin's money in offshore accounts and maintained bank accounts in nominee names. And O'Brien evaded her own taxes.

Another 2007 Dirty Dozen technique is abuse of charitable organizations and deductions. This can happen when a taxpayer moves assets or income to a tax-exempt charity but maintains control over the loot. Last September, William Robert Bradley, one of the founders of the bankrupt Metabolife International, was sentenced to six months in the pokey and told to pay the IRS $6 million in back taxes, penalties, and interest. Among several things, he used a purported charity, the Bradley Foundation, fraudulently. The foundation was only to be used for charitable purposes. But in January 2000, Bradley loaned $2 million to Metabolife. Half the loan came from the foundation. To conceal this caper, the $1 million check was falsely entered as a "donation" on the foundation's books. Around the same time, Bradley financed another loan to one of his enterprises with $4.3 million from the foundation.

Another Dirty Dozen trick this year revolves around claims by extremist groups that the 16th Amendment, which permitted the federal income tax, was never properly ratified; that wages are not income; that paying taxes is voluntary; and that paying taxes violates the 1st, 4th, and 5th amendments. These fallacious arguments are trotted out by militia groups, white supremacists, members of the so-called common law cult, and the like. Southern California, including San Diego, is a haven for such groups. An outfit called "We the People" used such arguments. In June of 2005, Gregory Karl of Solana Beach got 20 months behind bars for his role in the tax dodges; Willie Watts and Teresa Giordano of Murrieta got three years.

On February 16 of this year, Saleh Mahmoud Zahran (aka Mahmoud Saleh Akel, Missa Ahmad Akel, Maysa Ahmad Zahran, and Mausa Ahmad Abide) was charged by the U.S. attorney with tax, Social Security, and Medi-Cal fraud, among other things. As a tax preparer, he allegedly abused the earned income credit to help his clients. The earned income credit is a refundable income tax credit favoring low-income workers.

On February 9 of this year, German Castillo, a self-employed tax preparer, was sentenced to five months in custody for claiming false deductions for his clients. In addition, he didn't report income he received from his own business, noted the U.S. district court judge.

The IRS warns people to be very careful selecting tax preparers. Does that mean you should go to the blue-chip accounting firms? Nope. They're among the worst offenders. KPMG, the big firm that so piously refuses to bless the City of San Diego's 2003 audit, almost got criminally indicted two years ago for selling phony offshore tax dodges to the superrich. Some of its former executives have been criminally indicted, and KPMG faces civil lawsuits over its blatant tax dodges. If the firm had been indicted, it might ultimately have been wiped away, as the accounting firm Arthur Andersen was. The Andersen firm had been the accountant for Enron, San Diego's Peregrine Systems, and other frauds.

While the IRS is chasing down small-time tax-preparation crooks, massive tax evasion is rampant through offshore entities. On August 1 of last year, the Senate Permanent Subcommittee on Investigations released a report, "Tax Haven Abuses: The Enablers, the Tools and Secrecy." It's 370 pages and not easy reading -- but eye-opening. It cited a report noting that $11.5 trillion of the wealth of the world's superrich is stashed in offshore havens. That's about one-third of their total wealth.

Offshore and domestic trusts are major vehicles of deceit. There are 3 million shell companies that create paper transactions designed to dodge taxes.

At the hearing of the investigations subcommittee, Senator Carl Levin, Democrat of Michigan, said that the law "should assume that any transaction in a tax haven is a sham." Amen.

The subcommittee probed some offshore deals by prominent American entrepreneurs now under investigation by government agencies. Their enablers included Wall Street's Lehman Brothers, Bank of America, and renowned law firms such as Morgan Lewis & Bockius, Cravath Swaine & Moore, and Jones Day.

Blue-chip corporations set up offshore operations that are useful in tax avoidance and evasion. In the 1950s, corporations anted up 28 percent of federal revenues; now it's 11 percent, even though profits are a much higher percentage of the total economy. It's called "profit laundering," notes investigative reporter Lucy Komisar. Entities are created so that profits appear to be earned where taxes are low, while losses are shifted to places where taxes are high. According to the publication Tax Notes, more profits of U.S. companies are reported to have been earned in tax havens than in the areas where the companies actually do business. Offshore banking centers constitute 1.2 percent of the world's population but hold 31 percent of the assets and 26 percent of the stocks of American multinationals, according to Komisar.

The subcommittee noted that hedge funds, most of which are based offshore, are exempt from U.S. anti-money-laundering laws. Tax avoidance by hedge funds is legal. Last month, top government officials recommended that these hedge funds remain essentially unregulated.

As Rossotti wrote, the IRS "picks on the little guy" over niggling sums while "largely overlooking an ocean of money hidden in business entities for which the owners, rather than the businesses themselves, were supposed to pay taxes." As the subcommittee pointed out, taxes dodged by the aristocracy have to be paid by the little people.

But the moneybags skirting their taxes are backing politicians financially. So Congress does nothing.

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— Every February, the Internal Revenue Service sends out a news release warning Americans that unscrupulous tax preparers may use dirty tricks to lower their clients' income taxes. The preparer may wind up in the hoosegow (as several San Diegans have), and the taxpayer, who is ultimately responsible for his or her own return, may have to pay back taxes, penalties, and interest -- and maybe spend time behind bars too.

Bully for the Internal Revenue Service. Taxpayers should get these annual warnings of the "Dirty Dozen" fraudulent techniques employed by tax preparers. Trouble is, it's the wee folk who need such advice. As "Queen of Mean" hotelier Leona Helmsley observed correctly, "Only the little people pay taxes." There is a fine line between legal tax avoidance and illegal tax evasion, and America's richest citizens and largest corporations cross that line with impunity, with help from the most prominent and supposedly respectable law firms, banks, accounting firms, and brokerage houses.

As Charles Rossotti, head of the IRS from 1997 to 2002, noted in his book Many Unhappy Returns, the federal tax agency that he inherited was "like a police department that was giving out lots of parking tickets while organized crime was running rampant."

Sponsored
Sponsored

It's still that way and may be worse. The IRS admits in its 2007 news release that offshore hanky-panky by corporations and the wealthy continues to be a problem. I'll deal with that in later paragraphs.

One of this year's Dirty Dozen tricks is the misuse of trusts. Unscrupulous tax preparers urge clients to transfer assets into trusts, promising that income, estate, or gift taxes can be lowered. But some trusts don't fulfill the promises, says the IRS, which has 150 trust investigations now under way. Last October, a federal judge here sentenced Susan E. O'Brien to ten years and five months in prison. Her codefendants, Robert Richard Evans and William Dean Cook, got 78 and 24 months, respectively. She and Evans had been selling trusts that concealed income from the IRS. The three had used one of Evans's trusts to conceal many years of income of Dr. Kevin Marie Scoggin, owner of San Diego's Grand Animal Hospital. In addition, O'Brien and her colleagues stashed Scoggin's money in offshore accounts and maintained bank accounts in nominee names. And O'Brien evaded her own taxes.

Another 2007 Dirty Dozen technique is abuse of charitable organizations and deductions. This can happen when a taxpayer moves assets or income to a tax-exempt charity but maintains control over the loot. Last September, William Robert Bradley, one of the founders of the bankrupt Metabolife International, was sentenced to six months in the pokey and told to pay the IRS $6 million in back taxes, penalties, and interest. Among several things, he used a purported charity, the Bradley Foundation, fraudulently. The foundation was only to be used for charitable purposes. But in January 2000, Bradley loaned $2 million to Metabolife. Half the loan came from the foundation. To conceal this caper, the $1 million check was falsely entered as a "donation" on the foundation's books. Around the same time, Bradley financed another loan to one of his enterprises with $4.3 million from the foundation.

Another Dirty Dozen trick this year revolves around claims by extremist groups that the 16th Amendment, which permitted the federal income tax, was never properly ratified; that wages are not income; that paying taxes is voluntary; and that paying taxes violates the 1st, 4th, and 5th amendments. These fallacious arguments are trotted out by militia groups, white supremacists, members of the so-called common law cult, and the like. Southern California, including San Diego, is a haven for such groups. An outfit called "We the People" used such arguments. In June of 2005, Gregory Karl of Solana Beach got 20 months behind bars for his role in the tax dodges; Willie Watts and Teresa Giordano of Murrieta got three years.

On February 16 of this year, Saleh Mahmoud Zahran (aka Mahmoud Saleh Akel, Missa Ahmad Akel, Maysa Ahmad Zahran, and Mausa Ahmad Abide) was charged by the U.S. attorney with tax, Social Security, and Medi-Cal fraud, among other things. As a tax preparer, he allegedly abused the earned income credit to help his clients. The earned income credit is a refundable income tax credit favoring low-income workers.

On February 9 of this year, German Castillo, a self-employed tax preparer, was sentenced to five months in custody for claiming false deductions for his clients. In addition, he didn't report income he received from his own business, noted the U.S. district court judge.

The IRS warns people to be very careful selecting tax preparers. Does that mean you should go to the blue-chip accounting firms? Nope. They're among the worst offenders. KPMG, the big firm that so piously refuses to bless the City of San Diego's 2003 audit, almost got criminally indicted two years ago for selling phony offshore tax dodges to the superrich. Some of its former executives have been criminally indicted, and KPMG faces civil lawsuits over its blatant tax dodges. If the firm had been indicted, it might ultimately have been wiped away, as the accounting firm Arthur Andersen was. The Andersen firm had been the accountant for Enron, San Diego's Peregrine Systems, and other frauds.

While the IRS is chasing down small-time tax-preparation crooks, massive tax evasion is rampant through offshore entities. On August 1 of last year, the Senate Permanent Subcommittee on Investigations released a report, "Tax Haven Abuses: The Enablers, the Tools and Secrecy." It's 370 pages and not easy reading -- but eye-opening. It cited a report noting that $11.5 trillion of the wealth of the world's superrich is stashed in offshore havens. That's about one-third of their total wealth.

Offshore and domestic trusts are major vehicles of deceit. There are 3 million shell companies that create paper transactions designed to dodge taxes.

At the hearing of the investigations subcommittee, Senator Carl Levin, Democrat of Michigan, said that the law "should assume that any transaction in a tax haven is a sham." Amen.

The subcommittee probed some offshore deals by prominent American entrepreneurs now under investigation by government agencies. Their enablers included Wall Street's Lehman Brothers, Bank of America, and renowned law firms such as Morgan Lewis & Bockius, Cravath Swaine & Moore, and Jones Day.

Blue-chip corporations set up offshore operations that are useful in tax avoidance and evasion. In the 1950s, corporations anted up 28 percent of federal revenues; now it's 11 percent, even though profits are a much higher percentage of the total economy. It's called "profit laundering," notes investigative reporter Lucy Komisar. Entities are created so that profits appear to be earned where taxes are low, while losses are shifted to places where taxes are high. According to the publication Tax Notes, more profits of U.S. companies are reported to have been earned in tax havens than in the areas where the companies actually do business. Offshore banking centers constitute 1.2 percent of the world's population but hold 31 percent of the assets and 26 percent of the stocks of American multinationals, according to Komisar.

The subcommittee noted that hedge funds, most of which are based offshore, are exempt from U.S. anti-money-laundering laws. Tax avoidance by hedge funds is legal. Last month, top government officials recommended that these hedge funds remain essentially unregulated.

As Rossotti wrote, the IRS "picks on the little guy" over niggling sums while "largely overlooking an ocean of money hidden in business entities for which the owners, rather than the businesses themselves, were supposed to pay taxes." As the subcommittee pointed out, taxes dodged by the aristocracy have to be paid by the little people.

But the moneybags skirting their taxes are backing politicians financially. So Congress does nothing.

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