Lucent Polymers, Inc. discovered a way to turn “garbage to gold” by using recycled and scrap materials to create high-quality plastics that were flame-resistant and extremely strong. Unfortunately, the business model was a total sham. The flame-resistant products routinely caught fire and impact-resistant materials were too brittle and shattered. But the company’s founders hid this from potential buyers by providing them with falsified lab tests that shows the products performed as claimed. After the company sold twice in quick succession, the SEC caught wind and the founders have been convicted of securities fraud and money laundering.

(https://resource-recycling.com/plastics/2021/03/31/lucent-execs-sentenced-for-federal-crimes/)

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The founder of Argyle Coin, a virtual currency that was allegedly backed by “fancy colored diamonds” received a seven-year sentence and will pay $23 million in restitution for defrauding investors. Argyle Coin, LLC was created when the founder’s prior diamond-selling scam had started to unravel, and he used money from investors in his new “high return, no risk” digital currency to pay off existing investors. He also managed to siphon away $10 million for himself to spend on a house, shopping at Gucci, purchasing horses, and riding lessons for his adult son.

(https://coingeek.com/argyle-coin-founder-involved-in-25m-scam-gets-7-years-in-jail/)

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One of the earliest recorded instances of fraud took place in 300 B.C. Two Greek merchants, Hegestratos and Zenosthemis, took out an insurance policy and borrowed money on a cargo ship that was allegedly going to be filled with corn, but their plan was to sink the boat, keep the money, and sell the corn elsewhere. As Hegestratos was attempting to chop a hole in the hull of the boat with an axe, one of the crew members discovered him. Hegestratos attempted to escape by jumping off the boat and trying to swim to shore, but he drown at sea; Zenosthemis was tried in an Athenian court.

(www.investopedia.com/articles/financial-theory/09/history-of-fraud.asp)

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Celebrity attorney Michael Avenatti was sentenced to 168 months in prison for wire fraud and endeavoring to obstruct the administration of the Internal Revenue Code. He was also ordered to pay $10 million in restitution to four clients and the IRS. Avenatti received funds for his clients and placed them into client trust accounts, but then misappropriated the funds to finance an extravagant lifestyle. He then lied to clients about the terms of their settlement or whether he had received their funds. In one case, Avenatti drained a client’s trust account to fund his own coffee business; in another case, he used the bulk of a client’s settlement to purchase a private jet. Regarding the obstruction charge, Avenatti lied to IRS agents, and changed his company’s name, EIN, and bank information to avoid IRS levies.

(www.justice.gov/usao-cdca/pr/lawyer-michael-avenatti-sentenced-14-years-federal-prison-stealing-millions-dollars)

A Detroit-area personal injury attorney known for his 855-CAR-HIT-U billboards has been convicted for tax fraud for failing to report over $2.6 million in income. He concealed the funds by placing them in undisclosed Interest on Lawyer’s Trust Accounts, which are used to hold funds on behalf of clients. He failed to disclose these accounts to the Michigan State Bar Foundation and his tax return preparer. He’s facing prison time plus penalties for each count.

(www.detroitnews.com/story/news/local/michigan/2022/11/19/metro-detroit-personal-injury-attorney-convicted-of-tax-fraud/69662737007/)

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A Texas tax preparer and his two children were convicted for defrauding the U.S. after filing false tax returns to inflate their clients’ refunds. They fabricated clients’ Schedule A, itemized deductions, and Schedule C, sole proprietorship profit and loss statements, claiming the taxpayer owned a business when no such business existed, claiming unreimbursed employee expenses such as travel and per diem, and claiming business expenses that were never incurred. The company also had a “tax preparation manual,” which was a handbook that outlined exactly how to commit fraud. The manual advised tax preparers to manipulate income to maximize refunds rather than referring to the law to determine whether an activity was a business for income tax purposes and whether expenses properly qualified as a business deduction.

(www.justice.gov/usao-ndtx/pr/san-angelo-tax-preparer-sentenced-14-years-tax-fraud)

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A man who has “won” the Massachusetts lottery in excess of 13,000 times has pleaded guilty to charges of tax fraud conspiracy, money laundering conspiracy, and filing false tax returns. The man and family members operated a lottery ticket cashing scheme that brought in $21 million between 2011 and 2019. In Massachusetts, money owed in federal taxes or child support can be deducted from lottery wins over $600. To avoid this deduction, winners often use underground ticket cashing businesses, which take a cut of the winnings. The family members reported fraudulent gambling losses and understated their income, resulting in large refunds. 

(www.casino.org/news/mass-lottery-frequent-winner-pleads-guilty-to-tax-fraud-conspiracy/)

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The Nigerian Prince e-mail scam is a modern interpretation of the Spanish Prisoner scam that dates back to the late 18th century. Originally, businessmen were contacted by an individual allegedly trying to smuggle someone connected to a wealthy family out of a prison in Spain. The scammer promised to share money with the victim in exchange for a small amount of money up front to bribe prison guards. The scam has persisted, shifting to requests for assistance purportedly coming from a Nigerian prince. While Nigeria is most often the nation referred to in these scams, they originate in other nations as well. The scam is also known as the “419 scam”; 419 refers to the article of the Nigerian Criminal Code dealing with fraud (in Chapter 38: “Obtaining property by false pretenses; Cheating”).

(https://en.wikipedia.org/wiki/Advance-fee_scam)

Two female Detroit rappers (known on stage as Deuces Wild) are charged with identity theft and conspiracy for a scheme going back to 2013 that involved filing fraudulent estate and trust tax returns claiming $13.6 million, of which they had already received more than $5 million. The duo filed 122 returns, opened 29 bank accounts, and roped friends and acquaintances into the scheme by promising them a cut of the money in exchange for receiving checks. One of the women used stolen identification to open accounts, rent apartments, open a UPS Box, and purchase expensive items, including jewelry and watches. Both women are facing ten years in prison if convicted.

(www.fox2detroit.com/news/metro-detroit-rappers-charged-with-stealing-over-5-million-from-irs)

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“Tax redirection” is a form of tax rebellion where the individual pays their tax directly to another source rather than the IRS as a form of protest. Julia “Butterfly” Hill, an environmentalist turned proponent of tax redirection, sent about $150,000 in federal taxes directly to schools, arts and culture programs, community gardens, and other recipients, stating in a letter to the IRS, “I’m not refusing to pay my taxes. I’m actually paying them but I’m paying them where they belong because you refuse to do so.” Hill is best known for her tree sit in the late 1990s, when she lived in a 180-foot tall Redwood tree named Luna for 738 days to protect it from being cut down by the Pacific Lumber Company.

(https://en.wikipedia.org/wiki/Julia_Butterfly_Hill)

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In 1791, Treasury Secretary Alexander Hamilton proposed the first U.S. tax, an excise on distilled spirits, to pay down the debt incurred from the American Revolution. Large whiskey producers paid the tax annually at a rate of six cents per gallon, with further tax breaks the more they produced. But small producers were charged nine cents per gallon in taxes. Farmers in western Pennsylvania who used whiskey for trade objected to the tax and protested by tarring and feathering the tax collectors. The rebellion lasted from 1791 to 1794, ending with a confrontation that caused President George Washington to send 13,000 troops to contain what some feared would become another revolution. (www.history.com/topics/early-us/whiskey-rebellion)

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Tax protestors rely on various arguments, such as the Sixteenth Amendment not being properly ratified, income is not defined in the Internal Revenue Code or the Constitution, or that the Internal Revenue Code actually doesn’t require anyone to pay tax. Prior to 1998, the IRS would label such individuals as “illegal tax protestors” in their system to flag them for enforcement actions and alert IRS employees to be cautious in dealing with them. But in 1998, Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206) prohibiting the IRS from continuing this practice because it stigmatized these individuals and biased IRS employees against them, even if they had ultimately paid their tax.

(www.washingtonpost.com/news/federal-eye/wp/2014/09/11/what-is-an-illegal-tax-protester-and-why-cant-the-irs-use-that-term-any-more/)

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A Minnesota dog breeder is in the doghouse after an investigation discovered that they were reporting income on their tax returns from fewer sales of puppies than they actually made in the years at issue. The Facebook page for BrookeMarie’s Goldendoodle Love clearly showed the number of litters and how many total puppies were for sale, which did not match up with the amounts reported. The puppies were going for between $2,500 and $3,500 each, plus there should have been charged 7% Minnesota sales tax, which the breeder also failed to pay. The owner has been charged with three felony counts of filing fraudulent income and sales tax returns and failing to pay or collect income and sales tax.

(www.southernminnesotanews.com/dog-breeder-accused-of-tax-fraud/)

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A California tax preparer was sentenced to ten years in prison for orchestrating a scheme that defrauded the Paycheck Protection Program out of $62 million. At the time he engaged in the fraud, he was on supervised release for a previous fraud scheme in which he filed false income tax returns on behalf of more than nine professional athletes. In the PPP scam, he filed false applications for PPP loans on behalf of small businesses and shell companies in exchange for 30% of the loan proceeds. He also filed fraudulent supporting tax returns that the small business owners never saw or approved. To hide the funds he received from the scam, he asked the businesses to pay the fee with cashier’s checks and to write “payroll” in the memo line.

(www.wric.com/news/crime/man-sentenced-for-tax-fraud-schemes-resulting-in-more-than-62-million-loss-for-us-government/)

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Sotheby’s auction house is under investigation in New York for allegedly distributing false resale certificates to around a dozen clients, allowing them to pose as art dealers and avoid paying tax on revenue from their sales. The scheme is related to a lawsuit in which a Sotheby’s client purchased $27 million in art for his personal collection in transactions that avoided tax. Initially, it seemed this was an isolated incident, but further investigation revealed multiple fraudulent resale certificates, indicating that staff at Sotheby’s had “willfully turned a blind eye to the fraudulent distribution of resale certificates.” Sotheby’s argues it shouldn’t be held responsible for the actions of low-level employees. (www.artnews.com/art-news/news/sothebys-tax-fraud-investigation-expands-1234637480/)

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France is using AI to find undeclared swimming pools, which so far has generated 10 million in tax. In France, a swimming pool can affect tax because housing taxes are calculated based on a property’s rental value. Since the beginning of the pandemic, and with recent heat waves affecting Europe, the number of pools in France has greatly increased. The AI pool-finding project so far has only covered nine of France’s 96 metropolitan areas, but it has already discovered 20,356 undeclared swimming pools. The French tax office DGFiP (a.k.a., Le Fisc) estimates it can bring in an additional €40 million in tax once it’s finished using AI to analyze the rest of metropolitan France. (www.theverge.com/2022/8/30/23328442/france-ai-swimming-pool-tax-aerial-photos)

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The U.S. will return $1.2 million in forfeited funds to Romania, stemming from a tax fraud scheme involving diesel fuel. A Romanian couple avoided Romanian taxes on imported diesel fuel by claiming the fuel was a lower grade of industrial and maritime fuel. The untaxed income from the sale of the higher value diesel was laundered through a number of bank accounts and shell companies controlled by the couple, and resulted in an overall $58.677 million tax loss to Romania. Before they could be arrested, the couple fled to Washington state, but eventually were extradited, leaving behind a large piece of property and assets that were sold. The funds from the sale will be returned to the government of Romania. 

(www.justice.gov/opa/pr/12-million-be-returned-romanian-government-victim-international-tax-fraud-and-money, www.justice.gov/opa/pr/12-million-be-returned-romanian-government-victim-international-tax-fraud-and-money)

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A German woman who owns a cleaning company that earns revenue from paid public restrooms is on trial for failing to report around €1.2 million. The restrooms have voluntary contribution plates where visitors can leave change, which generated the income that she failed to report. But the case is complicated in that some of the charges date back more than 14 years, the German statute of limitations for tax fraud. Also, some of the restrooms were near the Austrian border and present a jurisdictional problem. And because income from the restrooms is based on voluntary donations, it’s difficult to nail down an exact amount of revenue; even the judge in the case suggested that an amount of €600,000 may be more appropriate than €1.2 million. 

(www.taxbuzz.com/blog/germany-toilet-tax-evasion-trial-begins)

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Owners of a NYC yoga studio are facing 30 years in prison for conspiracy and tax evasion for failing to file returns while the yoga studio raked in millions. The chain of studios closed in 2020 following allegations of questionable business practices such as pressuring instructors to work for free. Yoga session fees were donation-based and collected in tissue boxes that were passed around, but instructors were not allowed to count the money collected. Instead, the cash was brought to one studio owner’s home for “stacking parties” where the bills were counted and stacked. The owners spent the funds on personal items such as $270,000 on airfare, $76,000 on hotels, $40,000 on Denver Broncos season tickets, $39,000 at restaurants, and more than $60,000 spent at country clubs and on event tickets. 

(www.nytimes.com/2022/08/24/nyregion/tax-fraud-yoga-to-the-people.html)

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A Court of Appeals upheld a ruling against a taxpayer for filing false tax returns connected to his wife’s embezzlement of millions of dollars from her employer. The taxpayer argued he thought the funds were his wife’s gambling winnings, which he used to buy a yacht, a snowmobile, and other luxury items. At the appeal trial, the taxpayer argued the district court erred in not allowing evidence of his cognitive deficiencies, consisting of expert testimony and his high school transcript that contained numerous “E” grades. However, the expert could not rule out that the taxpayer’s performance during his cognitive exam was the result of malingering, and the high school transcript contained “an unexplained grading system and imprecise IQ scores.” Based on these and the taxpayer’s own testimony, the court agreed he was aware the couple was spending more than they reported and was found to have not disclosed all income to his accountants. (U.S. v. Mills (July 22, 2022) U.S. Court of Appeals, Third Circuit, Case No. 21-2423)

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The House Ways and Means Oversight Subcommittee has contacted the IRS looking for answers regarding the streamlined process for applications for tax-exempt status, which allowed one fraudster to have 76 fraudulent charities approved. The fake nonprofits all had names that sounded similar to legitimate nonprofits, such as “American Cancer Society of Michigan.” The actual American Cancer Society had even gotten wind of its fraudulent namesake and contacted the IRS. The IRS is now under fire for not noticing that this particular group of fraudulent charities all used the same Staten Island address. It also highlights the IRS’s own statistics that only one in 2,400 of these streamlined applications gets denied. (www.wealthmanagement.com/philanthropy/irs-hot-water-over-fraudulent-charities)

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After being disbarred for bringing numerous unmeritorious litigations and being declared a vexatious litigant (one trial judge wrote in a statement of decision that the taxpayer is “a relentless bully” who displays “terrifying arrogance”), a former attorney found himself in Tax Court regarding disallowed Schedule C expenses. The claimed Schedule C business activities did not generate a profit and mostly stemmed from litigation relating to challenging the taxpayer’s disbarment and lawsuits that would otherwise personally benefit him. He deducted court filing fees, life insurance policy expenses, and various utility expenses, none of which were allowable expenses because the taxpayer failed to show that he engaged in any business activities for the year at issue. (Kinney v. Comm., TCM 2022-81)

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A Michigan man is facing felony charges and prison time for bouncing three checks he wrote to pay his taxes. The man, who also claims to be a sovereign citizen, sent the State of Michigan three checks for $1 million each, which bounced because they had routing numbers for TCF Bank. That in and of itself is not a crime, except he did not actually have an account at TCF Bank. Under Michigan law, no-account checks/writing checks on closed account is a class H felony that carries up to 2 years in prison. (www.michigan.gov/ag/news/press-releases/2022/02/10/self-proclaimed-sovereign-citizen-charged-with-writing-fake-checks)

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After being accused by the Spanish government of failing to pay €14 million in tax on income earned between 2012 and 2014, pop star Shakira has rejected a plea deal with Spanish authorities and is moving forward with a trial that she says will prove she has already paid the tax in question and owes no tax debt. For the tax years at issue, Shakira’s official residence was the Bahamas, but she also lived with footballer Gerard Pique in Barcelona. If found guilty, she could face fines and a prison term. (www.euronews.com/2022/07/27/shakira-opts-to-go-to-trial-in-spain-over-alleged-145m-tax-fraud)

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A Los Angeles tax preparer has pleaded guilty to engaging in two separate fraud schemes. The first involved filing fraudulent income tax returns for at least nine professional athletes, reporting fabricated business and personal losses. The tax pro and his associates claimed they had specialized knowledge that the athletes’ prior tax professionals lacked and convinced the athletes to amend past returns to generate large fraudulent refunds. They then charged the athletes a fee of 30% of the resulting refund and directed the athletes to send the fee to shell entities. Second, the tax pro and his associates applied for PPP loans on behalf of a number of small businesses, shell entities with few or no employees that they controlled, and business entities controlled by others. They inflated the number of employees and monthly payroll costs claimed on the PPP loan applications and submitted fabricated tax returns in support of the applications. Some of the business owners never saw their loan applications before they were filed. The tax pro charged a fee of 30% of the loan amounts. He’s facing up to 25 years in prison. (https://www.justice.gov/opa/pr/second-defendant-pleads-guilty-multimillion-dollar-tax-fraud-scheme-involving-professional)

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A North Carolina tax preparation business owner has been sentenced to almost four years in prison for a tax fraud scheme that involved hundreds of tax returns and that netted him $700,000. Kapital Financial Services had two locations in Charlotte, and the business owner directed employees to falsify clients’ tax returns, including claiming false deductions, business losses, American Opportunity credits, education credits and earned income tax credits. He also trained his employees on how to create the fraudulent returns to avoid IRS detection and provided them with scripts and cheat sheets. Employees were not allowed to provide clients with copies of their returns, they were only allowed to give clients their refund amount because the fees Kapital charged were taken from the inflated refunds. (https://www.justice.gov/opa/pr/charlotte-tax-preparer-sentenced-prison)

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Crypto scams have reached the $1 billion mark for the period between January 2021 and March 2022. Almost 40% of the scams originated on social media. In terms of type of fraud, most scams relate to fake investments that promise large returns, with second place going to “romance scams” that involve gaining trust using a fake online identity and then manipulating funds out of the victim. Most of the scams involve Bitcoin (70%), followed by tether (10%) and Ethereum (9%). (www.forbes.com/sites/rosemariemiller/2022/06/06/bitcoin-leads-crypto-fraud-as-ftc-confirms-1-billion-milestone)

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After busting a tax shelter promoter, the U.S. government seized many of the assets he purchased with the proceeds, including a $750,000 show jumping horse. However, after realizing that it was going to cost at least $50,000 to feed and care for the horse, the government agreed to sell the horse back to the tax shelter promoter’s daughter for $25,000. The daughter had been planning to ride the horse down the aisle on her wedding day. The government has seized horses before; in 2012 they sold 150 horses for $4.8 million, which were seized from a comptroller who had been misappropriating city funds. But maintaining assets before they’re sold can be expensive, as the government has found regarding the maintenance of superyachts seized from Russian oligarchs. (https://finance.yahoo.com/news/horse-seized-tax-fraud-case-133413396.html)

A bust of U.S.-themed candy stores on Oxford Street in London raked in £22,000 worth of counterfeit Wonka bars and over £100,000 of counterfeit goods such as vapes, Apple and Samsung products, hookah products, and watches. All counterfeit vapes recovered contained excessive levels of nicotine and had not been approved by the Medicines and Healthcare Products Regulatory Agency. The Food Standard Agency also warned anyone who purchased the counterfeit Wonka bars not to eat them, as there is no way of knowing what ingredients were used or whether food hygiene practices were followed. The stores are being investigated for millions of pounds in tax evasion as well.

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McDonald’s France has agreed to pay a total of €1.25 billion in fines, penalties, and back taxes to settle a tax evasion case after years of negotiations.  McDonalds France was accused of hiding French profits in lower-tax Luxembourg from 2009 through 2020, and reporting lower profits in France. An investigation was started in 2016 after union officials reported the company for tax evasion. The settlement is made up of a €508 million fine and €737 million in back taxes and is the second-biggest tax settlement in French history. (The largest was the €2.1 billion fine paid by aircraft builder Airbus in 2020.) (https://abcnews.go.com/Business/wireStory/mcdonalds-pay-france-13-billion-tax-fraud-case-85434599)

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Austin St. John, the actor who played the Red Power Ranger in the 1990s TV show Mighty Morphin’ Power Rangers is facing up to 20 years in prison for participating in COVID-19–related wire fraud. St. John was part of a ring of 18 people who filed for $3.5 million in fraudulent PPP loans for existing or newly created small businesses. This is just the latest in the curse of the Red Power Ranger: in 2017 the actor who portrayed the Red Wild Force Ranger in Power Rangers Wild Force pled guilty to voluntary manslaughter for stabbing his roommate with a sword.

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A 70-year-old tax collector in Pennsylvania was sentenced to one year in prison for filing false returns that understated her income. She started underreporting in 2014 and gradually increased the unreported amount each year until her actual income was six times higher than what she reported to the IRS in 2018. She used the funds to buy a mobile home at the Jersey Shore, fund home renovations, and pay for a family vacation to Hawaii. The tax collector and her family argued for her to serve the sentence at home so she could begin paying restitution to the IRS, but the judge was unmoved considering the seriousness of the crime and the fact that she was an elected county tax collector who used her position to not pay her own taxes. (https://www.inquirer.com/news/rosezanna-czwalina-ridley-township-false-income-tax-sentence-20220518.html)

A Tennessee woman is serving 51 months in prison for attempting to cash a fraudulent $1 million bill of exchange from a foreign source. The bill of exchange was flagged because it didn’t have magnetic ink coding like an ordinary check, it contained an “autograph” line instead of a signature line, and wording at the bottom of the document contained the misspelled word “neogotobile.” A private investigator at the bank alerted the police that the bill of exchange was fraudulent. Just prior to the bank fraud incident, she had also filed a fraudulent tax return claiming a $250,000 refund. At trial, it was revealed that in 2006 she had been convicted of multiple counts of filing fraudulent returns using personal information stolen through Sheep Ministries, Inc., the faith-based nonprofit that she ran. (United States v. Marilyn Cook (May 6, 2022) U.S. Court of Appeals, Sixth Circuit, Case No. 20-5622)

Tax investigators from the J5 (Joint Chiefs of Global Tax Enforcement) have uncovered evidence of a $1 billion cryptocurrency Ponzi scheme. The leads concern transactions around the world, including crypto transactions in the J5 nations: the U.S., the U.K., the Netherlands, Canada, and Australia. Some of the leads involve individuals with significant NFT transactions; NFTs are becoming a new tool in money laundering practices. The IRS is now making tracking cryptocurrency one of its primary priorities, because the lack of regulation and oversight makes cryptocurrency vulnerable to fraud. (https://www.thestreet.com/investing/crypto-ponzi-scheme-irs-regulators)

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Married taxpayers were liable for fraud penalties for failing to report wage and dividend income from the daycare centers they owned and operated. The taxpayers also each had a credit card tied to the corporate bank account, which they used to purchase personal items such as college tuition, vacations, jewelry, and other luxury items. Their adult children also made personal purchases using the corporate credit cards, even though they were not employees of the daycare centers. The daycare center also paid for a Hummer, a BMW, and an Escalade for the taxpayers and their children to drive as their personal vehicles. (Hacker v. Comm., TCM 2022-16)

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A U.S. Consulate officer in Vietnam was charged with conspiracy after participating in a scheme where nonimmigrant visa applicants paid him to approve their visas, netting him over $3 million. He initially kept his payments in a home safe, but as the stash grew, he purchased nine properties in Thailand to attempt to hide the proceeds of the scam. On his tax return for the year at issue, he reported his income from the Consulate Office, but did not report the bribery income. As part of his plea agreement, he agreed to sell the Thailand properties to help pay off the money judgement against him. The properties were sold at a loss, which the taxpayer deducted from his bribery proceeds. But the Tax Court determined that loss deductions are disallowed where the deduction would frustrate federal or state policy. Allowing a deduction for losses arising from the properties obtained through illegal activities would undermine public policy because a portion of the forfeiture would be borne by the Government. (Sestak v. Comm., TCM 2022-41)

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A real estate developer in Michigan is facing five years in prison plus penalties and restitution for lying to the IRS in an attempt to hide his failure to pay employment taxes he withheld from employee wages. During the investigation, the developer (who is a former CPA) lied to IRS special agents about his companies’ assets income, filed false employment tax returns stating he had no employees, and claimed he could not afford to pay his tax debts. Meanwhile, he was using business accounts to pay for his Lake Michigan vacation home, Lansing condo, car payments, college tuition, personal credit card bills, and his boat. In 2021, he had filed a defamation suit against an East Lansing news outlet for publishing a story on his questionable business practices. The suit was dismissed. (www.justice.gov/Usao-wdmi/pr/2022_0426_Chappelle)

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Dear [CLIENT NAME]:

Many people think it’s a good idea to put their child’s name on the title to their home. Sometimes the parent adds the child’s name to the title and sometimes the parent changes the title to the child’s name. This is generally a very bad idea. Here are five reasons why:

1. Gift tax return: If you give your child a gift of equity in the home that exceeds $16,000 in value (in 2022), there may be a gift tax to pay and a gift tax return to file.
2. No gain exclusion: Tax law allows a taxpayer to exclude up to $250,000 of the gain on the sale of a principal residence ($500,000 for a married couple). However, the exclusion is only available if the seller owns and occupies the property for at least two out of the last five years. If the child does not live in the home for that period, the gain on the child’s share of the home is fully taxable.
3. Equity subject to debts of the child: Property is subject to the debts of its owners. If the child owns the home or is a partial owner, a creditor may file a lien on the property for any of the child’s debts. Although your child may have excellent credit and good fiscal responsibility, your home could be lost if there is an accident or a lawsuit.
4. You are now a renter: If you give 100% of the property to a child, you are now at the mercy of the child. If the child decides to sell the property, you must move out. There is no guarantee that the child will continue to care for you.
5. Medicaid problems: Under some circumstances, the gift of the home to the child could be considered a gift for Medicaid purposes. If you give the home to the child and the child subsequently sells it, you could be ineligible for Medicaid benefits in the event of a long-term health crisis.

What should you do instead?

Usually a parent gives the home to the child to make sure that the child easily gets the home at the parent’s death or so the child can manage the affairs of the parent. If this is the case, the parent will be better served by establishing a living trust, along with powers of attorney, so the child can manage the parent’s affairs.

If the reason is to help the child buy his or her first house, a better way is to lend the child money with a low but reasonable interest rate, and set up a program to give annual gifts in the form of principal forgiveness.

If you are considering giving your home to your child, contact me so we can discuss alternatives.

Sincerely,

Your tax professional

In 2020, the 82-year-old owner of a South Philadelphia cheesesteak shop and his son were indicted on tax fraud charges for failing to report more than $8 million between 2006 and 2016. However, there’s so much material to discover in their complex tax case that a Pennsylvania federal court continued discovery until May 2022. The father-son duo are accused of paying wages partially in cash to avoid payroll taxes and filing numerous false returns understating their business income. During a franchising rights dispute, the pair worried their tax fraud scheme would come to light, so they amended several returns to increase reported sales, but then claimed additional fraudulent expenses to offset the income. If they’re convicted, they face five years in prison for conspiracy and for each count of tax evasion, and three years in prison for each false return charge. (https://6abc.com/tony-lukes-tax-fraud-evasion-anthony-lucidonio-sr-nicholas/6332901/)

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If preparing (fraudulent) tax returns is wrong, then I don’t want to be right! A Texas tax pro was banned in 2011 from conducting a tax preparation business after she admitted to preparing or assisting to prepare approximately 200 false tax returns. The tax credits she tried to obtain in that case were described in a filing as “so exaggerated that no reasonable person could conclude they were anything but deliberately fabricated.” But she was back at it again, and since 2016, she had been preparing income tax returns for clients despite the prohibition. She prepared numerous false returns which claimed various false items on her clients’ behalf: false wages, salaries, tips, and tax credits such as the Earned Income Credit, Child Tax Credit, and American Opportunity Tax Credit. She has been sentenced to 15 months in prison. (www.justice.gov/usao-sdtx/pr/tax-preparer-sent-prison-tax-fraud-again)

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After a routine inspection by the Bureau of Alcohol, Firearms, Tobacco, and Explosives (ATF) uncovered violations that resulted in a taxpayer’s business ultimately closing, the taxpayer hatched a plan for revenge. Five years later, he issued W-9s to the two ATF agents, requesting their Social Security numbers. He never received that information, and he then issued a Form 1099-MISC to each of the agents, showing he paid them $250,000 apiece. The agents did not report the income, and the taxpayer deducted $500,000 on the company’s return, flowing the loss through to his individual return. At trial, the taxpayer insisted he had spoken with an IRS agent who said it was acceptable to write off the $500,000. He was sentenced to two years in prison for filing false returns. (U.S. v. Petrunak (May 4, 2017) U.S. Court of Appeals, Seventh Circuit, Case No. 16-3631)

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A taxpayer successfully argued that $10,500 in checks she received from her boyfriend were gifts, not income. Her boyfriend had reported the payments on a 1099-MISC and deducted them from his income, claiming that he had paid her wages. As a result, the IRS had come looking for income tax since the taxpayer had not reported the income. At trial, the ex-boyfriend changed his story and was evasive in answering questions. The taxpayer, on the other hand, answered every question asked — even those that did not help her case. The court found the taxpayer’s testimony to be forthright and the ex-boyfriends to be untrue, and determined that the $10,500 was paid to the taxpayer with “detached and disinterested generosity,” and held that it was a gift, not reportable income. (Jue-Ya Yang v. Comm., TCS 2008-156)

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The owner of a Georgia IT business is in prison for almost seven years for using a computer program that he built to store stolen identities and automatically submit fraudulent tax returns using those stolen identities. The program could be accessed remotely, and he hid his IP address whenever he accessed the program, making it difficult for the IRS to trace a tax return back to “one particular origination point.” Refunds were issued on prepaid debit cards and totaled around $600,000. After being indicted, he was out on bond, but was discovered to be threatening potential witnesses against his case and sent back to prison. (www.sacbee.com/news/nation-world/national/article259620689.html)

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IRS Criminal Investigation (IRS-CI) is the only federal law enforcement agency authorized to investigate federal criminal tax violations and related financial crimes: money laundering, corruption, currency violations, and terrorist financing. IRS-CI seized more than $3.5 billion of illicit cryptocurrency in fiscal year 2021, and they’ve already seized more than this amount in fiscal year 2022. So far in 2022, $3.6 billion has been seized by CI agents who tracked unauthorized transactions that sent stolen Bitcoin from a 2016 digital asset exchange hack to digital wallets under the control of the launderers. (FS-2022-18)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection On-Demand Webinar. Click here for more information.

A California woman and her five co-conspirators have been charged with defrauding the California Department of Public Health for a scheme that diverted CDPH funds for their private use. The woman was a former manager at CDPH and she billed the agency for “consulting work” that included purchasing a large number of gift cards supposedly as patient incentives, but which she herself used. She and the other fraudsters also billed the state for HIV prevention services that were never provided. Together, the group scammed CDPH out of $2 million; the woman is liable for $750,000 and faces 20 years in prison if charged. (https://fox40.com/news/local-news/former-manager-with-cdph-office-of-aids-charged-in-connection-with-fraud-scheme/)

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In 2020, Robert Brockman was charged with tax evasion, wire fraud, money laundering and other crimes as part of a nearly 20-year scheme to conceal billions in income from the IRS and defraud investors in software company Reynolds & Reynolds, of which he was the CEO. In December 2020, Brockman’s attorneys announced that despite the fact that he was running a multi-billion dollar software company up until November 2020, he was suffering from extreme dementia which prevents him from standing trial. Most recently, he has been accused of continuing to hide assets offshore and transferring property to family members in an attempt to avoid paying his $1.4 billion tax bill. (https://www.autonews.com/dealers/former-reynolds-and-reynolds-ceo-robert-brockman-still-hiding-assets)

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Two sisters are serving prison sentences for tax evasion and defrauding the government. The sisters created five different companies, some in the names of other people, and filed over 16,000 false returns that netted them almost $25 million in fraudulent refunds. The sisters used the funds to purchase multiple luxury homes and vehicles, before the IRS caught on that one sister had earned over $1 million during one year they were engaged in the fraud, but she had only reported earning around $200,000. In addition to prison time the sisters will pay to the IRS restitution of $24.9 million plus $500,000 for tax evasion. (www.irs.gov/compliance/criminal-investigation/orlando-sisters-sentenced-in-25-million-tax-fraud-scheme)

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In the first pandemic relief fraud case to go to trial, three San Fernando Valley family members were sentenced to prison for fraudulently obtaining $20 million in PPP loans and EIDL relief funds. The family used dozens of fraudulent and stolen identities – including names belonging to elderly or deceased people and foreign exchange students who briefly visited the U.S. and never returned — to submit fraudulent applications for approximately 150 PPP and EIDL loans. They used the funds to buy homes in Tarzana, Glendale, and Palm Desert, as well as gold coins, diamonds, jewelry, luxury watches, fine imported furnishings, designer handbags, clothing and a Harley-Davidson motorcycle. Two of the sentenced family members are fugitives, having cut their tracking bracelets and going on the run. (https://www.justice.gov/usao-cdca/pr/san-fernando-valley-family-members-sentenced-years-prison-fraudulently-obtaining-tens)

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A Bulgarian national was sentenced to 10 years and one month in prison for operating an online auction fraud that posted ads on craigslist and eBay for high-cost goods like vehicles that did not actually exist. The buyer’s payment then went through a complex money laundering scheme where someone in the U.S. would receive the payment, convert it to cryptocurrency, and then transfer it to foreign money launderers. The man sentenced had laundered nearly $5 million in cryptocurrency over three years. (https://www.justice.gov/opa/pr/owner-bitcoin-exchange-sentenced-prison-money-laundering)

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The founder of a Russian online bank was required to pay $508 million in tax, interest, and a $100 million fraud penalty for large stock gains following taking his company public on the London Stock Exchange. Three days after the IPO, which netted $1.1 billion, he renounced his U.S. citizenship. He did not report his assets on his expatriation forms, which require expats with a net worth of $2 million or more to report their assets and pay tax; he reported a net worth of $300,000. He also filed a false tax return, leading to his arrest and extradition. Had he paid the tax owed after the IPO ($248,525,339), his bill would have been less than half of what he paid with his plea agreement. (www.justice.gov/opa/pr/founder-russian-bank-pleads-guilty-tax-fraud)

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A New Mexico couple has been sentenced to prison for embezzling $11 million over a decade from their guardianship and financial services firm. The couple siphoned payments to clients from the Department of Veterans Affairs and Social Security Administration and used the funds to buy RVs, homes, luxury vacations, and to pay over $4 million in AmEx charges. The authorities began an investigation when employees noticed funds were missing from client accounts. The couple fled before their sentencing because they “wanted to get away one last time before they went to prison,” but were located in Oklahoma and arrested, and handed harsher prison sentences. (www.abqjournal.com/2409934/founder-of-guardianship-firms-gets-47-years-in-federal-prison.html)

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The chief of the Questionable Refund Unit for the New Mexico Taxation and Revenue Department was apparently confused about the purpose of his job. Rather than making sure taxpayer returns and refund claims were on the up-and-up, he altered returns and had the resulting fraudulent refunds deposited into his own bank account. In total, he siphoned almost $700,000 from New Mexico’s taxpayers. He’s facing a minimum of 32 years in federal prison on charges of wire fraud, identity theft, and money laundering. (https://www.krqe.com/news/crime/tax-official-pleads-guilty-to-stealing-nearly-700k-in-taxpayer-money/)

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An antiquities collector has been banned for life from acquiring antiquities after numerous pieces in his collection were determined to be stolen. An investigation into a statue stolen from Lebanon during the Lebanese Civil War led authorities to the collector, and it was determined that 180 pieces worth $70 million in his possession were stolen or had other evidence of looting. The collector claims he had no idea the items were stolen. The lifetime ban was imposed in lieu of a criminal trial, and the collector has stated that he plans to recoup his losses from the antiquities dealers he was working with. (www.wealthmanagement.com/high-net-worth/billionare-michael-steinhardt-surrenders-70-million-stolen-antiquities)

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A French attorney for years had been hounding her client’s stepson, accusing him of stealing her client’s inheritance, which triggered a criminal investigation into his tax reporting of various trusts. The stepson was acquitted of fraud, but the attorney is now in hot water for not reporting the $5 million her client paid her for her efforts. She has been found guilty of aggravated tax fraud and money laundering for her attempt to hide that money, on which she now owes $170,000 in income tax, $135,000 in wealth tax, and $800,000 in fines. (www.artnews.com/art-news/news/claude-dumont-beghi-1234613490/)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection On-Demand Webinar. Click here for more information.

The Cyber Crime Unit of the Internal Revenue Service’s Criminal Investigation Division released a report on its activities, which included seizing $3.5 billion in cryptocurrency in fiscal year 2021 (93% of all of its seizures). The Infrastructure Investment and Jobs Act contained provisions expanding the reporting requirements for cryptocurrency, so this will continue to be a focus for the CI division. The report also noted that in 2021, the CI division identified $2.19 billion in tax fraud and another $8.18 billion in other financial crimes. Tax-related issues accounted for 72% of its direct investigative time, with 15.4% spent on non-tax issues such as money laundering and corporate fraud, and 11.2% spent on narcotics crimes. (www.irs.gov/pub/irs-pdf/p3583.pdf)

CPAs, get four hours of fraud CPE with our 2021 Fundamentals of Fraud Prevention & Detection On-Demand Webinar. Click here for more information.