Trouble For TaxMasters

TaxMasters, a Houston-based publicly-traded company that bills itself as helping people having trouble with the IRS, stands accused in two states of deceptive business practices. Texas and Minnesota have both filed suit, with the former alleging that the company engages in “false, misleading, and deceptive acts and practices” and the latter filing a civil action accusing TaxMasters of fraud and deception. Minnesotas Attorney General was quoted by ABC News saying, “[t]his is a company which is taking advantage of people . . . when people see it on TV, they do believe in it.” According to the ABC report, TaxMasters is spending millions on advertising on cable channels such as CNN and Fox News.

According to filings with the Securities and Exchange Commission, the company tripled its advertising spent in 2010 to over $45 million. CNN said it was aware of the activity and was monitoring the situation as TaxMasters works with state authorities. Fox, for its part, stated that it forwards viewer complaints to the company, which must be resolved within five days. While Fox acknowledges having received complaints, it declined to state their number or nature. According to a Fox spokeswoman, all complaints had been resolved. ABC aired an investigation into the company on its World News and Nightline programs.

Lori Swanson, the Minnesota attorney general, says many of TaxMasters employees have little knowledge of complex tax issues. Rather, they are skilled telemarketers, like the “talented closers” sought by the companys job posting for a “tax consultant-inside sales representative.” The same ad stated that “[p]revious tax knowledge is not required,” despite television commercials boasting of the companys staff of former IRS agents and other professionals. The commercials feature the companys CEO, Patrick Cox, who declined an interview with ABC. In a statement, he did not address the suits, but wrote that TaxMasters “prides itself in honest customer services, a transparent process with our customer, and seeking fair treatment from the IRS.”

According to Swanson, the main problem is the upfront fee, ranging between $2,000 to $8,000, TaxMasters charges its customers. The “promised help doesnt materialize,” she said. Potential customers are told that TaxMasters has a 97 percent success rate in reducing taxes owed and that IRS collection action ceases “automatically.” The first claim, Swanson says, is “not true,” and the second claim is denied by the IRS.

Swanson further states that “when you hire [TaxMasters] sometimes the situation gets even worse.” A person cited in the ABC investigation, Charlene Lee of Plymouth, Minnesota, says she “ended up owing more in penalties and interest after she paid TaxMasters $4,800 to help her with a tax bill.” After taking months to take her case, the IRS rejected the companys settlement offer and continued to add thousands in interest and penalties.

Officials in both Texas and Minnesota have received hundreds of complaints from former customers. Cox did not comment on the specific cases presented in the ABC investigation.
Additionally, the Attorney General for the state of Texas won a judgment against another income tax consulting firm, JK Harris & Company. The South Carolina company must pay $800,000 in refunds to customers and reimburse the state for investigative, court, and attorney costs. The court also ordered the company to reform its business practices. Texas Attorney General Greg Abbott said, “[t]axpayers from across the state complained to the Attorney General’s Office about the defendants’ misconduct. The agreement seeks to resolve past problems, reimburse Texans who paid for services that were not actually rendered, and prevent additional misconduct in the future.”
The attorneys at Fuerst Ittleman have many years of experience representing clients before the IRS and in litigation against the IRS. If you have a problem with the IRS, please contact us at contact@fidjlaw.com.

U.S. District Court Grants Government’s Motion to Issue John Doe Summons to HSBC

On April 7, 2011, the U.S. District Court for the Northern District of California, in case # 4:11-cv-1686, granted the Governments ex parte motion to issue “John Doe” summons to HSBC. The full text of the order can be found here

Of particular note is the description of the “John Does” “ “United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2010, directly or indirectly had interests in or signature or other authority (including authority to withdraw funds; trade or give instructions to receive account statements, confirmations, or other information, advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through the Hongkong and Shanghai Banking Corporation Limited in India (HSBC India)”.

As we previously discussed, those that have a financial interest and/or control over foreign accounts must disclose the accounts to the Department of the Treasury. The IRS recently announced a second offshore voluntary disclosure initiative to those that still had not come forward to be compliant with the reporting requirements. Our prior discussion regarding this second voluntary disclosure initiative can be found here.

The attorneys at Fuerst Ittleman, PL have extensive experience in voluntary disclosures, offshore accounts, IRS audits, and criminal tax investigations. You can reach an attorney by emailing us at: contact@fidjlaw.com.

Michigan lawmakers stir controversy proposing State Universities to report stem-cell use

The debate on stem cells continues to raise controversy and impact science and discovery. The latest twist involves Michigan state lawmakers who recently proposed requiring each state public university to report on stem cell use. Michigan has 15 state funded universities. Specifically, under the proposed bill, each university would report the following to the Director of the Michigan Department of Community Health by December 1, 2011:

(a) The number of human embryos and the number of human embryo stem cell lines received by the university during fiscal year 2010-2011.

(b) The number of human embryos utilized for research purposes during fiscal year 2010-2011.

(c) The number of human embryo stem cell lines created from the embryos received during fiscal year 2010-2011.

(d) The number of donated human embryos being held in storage by the university as of September 30, 2011.

(e) The number of research projects using human embryonic stem cells derived from donated embryos being conducted by the university.

The proposal is enmeshed in the states 2011-2012 Higher Education Budget bill, commonly referred to as its “template” or “place-holder,” under the section of University Operations. The appropriations bill, House Bill 4275, was introduced by State Representative Robert Genetski (R) on February 16, 2011 and passed along a party line vote by the Higher Education Subcommittee on April 13th, 2011. Enactment of the bill still requires approval from the House Appropriations Committee, the full legislature and the Governors signature.

The bill is seen as controversial, not necessarily for what is imposed, but the impact of such imposition. The state seems justified requiring its funded institutions to report activity such as stem cell research; however, the requirement may be an objectionable regulatory burden intended to impede the research and discovery process. Michigans State Constitution is one of the few that specifically address embryonic stem cell research outlining a number of requirements to conduct research on embryonic stem cells. Fuerst Ittleman continues to actively investigate the evolving regulatory framework involving stem cell therapies. Contact our attorneys by emailing us at contact@fidjlaw.com for information on stem cell law and regulation.

Thanks to David Jesse, Higher Education Reporter, Detroit Free Press for access to the proposed bill.

Former GlaxoSmithKline in house counsel re-indicted

On March 23, 2011, U.S. District Judge Roger Titus dismissed the indictment of former in house counsel Lauren Stevens due to concerns that the prosecutors erroneously advised the grand jury regarding the advice of counsel defense. We originally blogged about this prosecution here and here.

Under certain circumstances, it is a defense to a charge of willful criminal conduct that the defendant relied on the advice of a lawyer in committing the offense. This reliance on the advice of counsel negates the defendants specific intent to violate the law. When Judge Titus raised the concern that the prosecutors may have improperly advised the grand jury regarding the defense, Judge Titus dismissed the indictment without prejudice, and allowed the government to re-indict Stevens.

The Government re-indicted Stevens shortly thereafter. On April 14, 2011, a different grand jury re-indicted Stevens on six counts that she allegedly obstructed justice, made false statements to the FDA and concealed and falsified documents in regard to a federal investigation, essentially the same charges with which she was originally indicted. Trial is scheduled for April 26, 2011.

Department of Justice Shuts Down Three of the Largest Internet Poker Sites in US, Charge Owners with Unlawful Internet Gambling, Fraud, Money Laundering, and Seek to Recover $3 Billion in Civil Penalties.

On April 15, 2011, federal prosecutors indicted eleven people in connection with their involvement in running PokerStars, Full Tilt Poker, and Absolute Poker, three of the largest internet poker sites in the United States. The Department of Justice has charged these individuals with multiple charges including violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”), conspiracy to commit bank fraud and wire fraud, operating an illegal gambling business, and money laundering conspiracy. A copy of the indictment can be read here.

Additionally, the FBI obtained a court order to block seventy-six bank accounts and five internet domain names associated with the poker websites. As of April 15, 2011, the FBI had shut down two of the sites, Full Tilt Poker and Pokerstars and were working to shut down Absolute Poker. The Department of Justice is also seeking $3 billion in civil money laundering penalties.

Prosecutors allege that, in an effort to get around the prohibitions on unlawful internet gambling under UIGEA, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred and payments being processed. Authorities allege that the companies used highly compensated third party payment processors to disguise money received from US poker players as payments to non-existent online merchants and phony companies. Authorities alleged that the phony websites, ranging from flower shops to pet supply stores, were all created to handle credit card payments to get funds from US players. A copy of the Department of Justices press release can be read here.

Though the law does not specifically address internet pay for play poker sites, UIGEA defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. However, since UIGEAs passage, debate has raged over whether pay for play poker qualifies under the act with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

The indictments may mark a shift in the strategies of federal prosecutors in dealing with internet pay for play poker websites. As we previously reported, prosecutors have previously focused their efforts on payment processors, the financial outfits that move money between online poker sites, their players, and the banks, rather than internet poker sites directly. However, with these new indictments, the Department of Justice has made clear its belief that internet pay for play poker sites do, in fact, violate UIGEA.

If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittlemans experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

FDA Commissioner Testifies on FDA’s Screening Efforts at the Border

On April 13, 2011, U.S. Food and Drug Administration (FDA) Commissioner Margaret Hamburg testified before the U.S. House of Representative Energy and Commerce Subcommittee on Oversight and Investigations regarding the Agencys implementation of the new Predictive Risk-Based Evaluation for Dynamic Import Compliance Testing (PREDICT). PREDICT is a Web-based system designed to target inspections strategically based on risk factors chosen by the FDA.

Using an FDA-regulated products historical data, importer, manufacturer, country of origin, and any inspection and laboratory results, PREDICT will generate a numerical score for the product when it comes into port. It will also track information related to natural disasters and foreign recalls. It is intended to flag highest-risk items by notifying FDA inspectors at the port if a products PREDICT number is above an FDA-specified threshold. The FDA inspectors can then detain, examine, or refuse the product entry into the United States.

The Subcommittee noted in an internal memo, “[t]he sheer volume of imports precludes the FDA from inspecting more than two percent of the products under its jurisdiction before they enter into U.S. commerce.” In fact, between 15 and 20 percent of food consumed in the United States is imported. PREDICT was submitted to the FDA in 2005 to assist the FDA with identifying higher risk products at ports of entry. Since 2005, the FDA has only implemented the system in four districts”Los Angeles, New York, San Francisco, and Seattle.

Subcommittee members pointed out that at the rate FDA is putting PREDICT into effect in the field, it would take over five years to get it up and running in all 20 districts. Commissioner Hamburg stated that “technical difficulties” with the PREDICT system had been resolved and “back on track.” She further added, “[i]f successful, it will then be rolled out across the country.” FDA staff have assured congressional aides that Florida and Puerto Rico ports will be using PREDICT by the end of the month.

Hamburg testified as to the challenges and complexities that the FDA face and explained that, “[t]his year we expect nearly 24 million shipments of food, devices, drugs, cosmetics, radiation-emitting products, and tobacco products will arrive at U.S. ports of entry.” She added, “[j]ust a decade ago, that number was closer to 6 million, and a decade before only a fraction of that.”

Subcommittee Chairman Cliff Stearns (R-FL) stated, “I dont see any reason not to push more aggressively for [PREDICTs] immediate deployment nationwide. I also expect to have the Commissioner back here before the Committee at a future time to comment on the progress of PREDICTs deployment.”

We will continue to monitor the FDAs progress implementing PREDICT nationwide. For more information on importing FDA products or the PREDICT system, please contact us at contact@fidjlaw.com.

IRS Says Taxpayers Should Review Revised FBAR Instructions When Preparing Income Tax Returns

In Notice 2011-31, available here, the IRS stated that beginning on March 28, 2011, “the recently published final FBAR regulations will be effective, and should be referenced, along with the revised FBAR form and instructions, when answering foreign financial account-related questions on 2010 tax and information returns.” We previously blogged about the changes to the regulations; see here.

The guidance came on the very same day that the Treasury Department released the new FBAR and instructions. The instructions clarify issues such as who must file the form and when and where the form must be filed. Of particular note is that the FBAR form is due on June 30th, whereas personal income tax returns are due on April 15th.

Under the new guidance, the Department of the Treasury reiterated that “signature or other authority” means the authority to control the disposition of assets in a financial account by “direct communication” to the person or persons with whom the account is maintained. Importantly, if a U.S. bank acts as a “global custodian” and holds a customer’s assets offshore in an global account, that customer would not have to file an FBAR.

The attorneys at Fuerst Ittleman, PL have extensive experience in addressing foreign account compliance, income tax compliance, and IRS audits. You can contact an attorney by emailing us at contact@fidjlaw.com.

District Court Enforces Summons Issued to Taxpayer’s Attorneys

In United States v. Sideman & Bancroft, LLP (ND CA 4/8/11 – No. 3:11-cv-00736), the District Court for the Northern District of California enforced a summons issued to the taxpayer-target’s criminal defense attorneys, Sideman & Bancroft LLP.

In the case, the IRS obtained a search warrant for the taxpayer’s residence and business premises, and when the IRS executed on the warrant, the documents were missing because the taxpayer had delivered the documents in question to her return preparer, an enrolled agent. During the search, the IRS did, however, find evidence referring to the return preparer. The taxpayer subsequently went to the enrolled agent’s place of business to sign a return. When the taxpayer left, the enrolled agent came to the conclusion that she had documents within the scope of the search warrant. The enrolled agent called the taxpayer’s attorney to have the relevant documents delivered to the IRS. The attorney took possession of the documents but delivered them to the taxpayer’s new attorney instead of the IRS. The enrolled agent advised the IRS of the description of the documents and, using the description, the IRS issued the summons to Sideman & Bancroft.

The District Court held that:

1. The documents were not subject to an attorney-client privilege. Instead, they were subject only to such privileges as the taxpayer might assert if she retained possession.

2. The documents were not subject to a Fifth Amendment privilege because they were pre-existing documents voluntarily prepared or retained by taxpayer.

3. The production of the documents was not subject to the Act of Production doctrine pursuant to which the act of producing documents can have testimonial aspects subject to the Fifth Amendment privilege.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with civil and criminal tax matters. You can reach at attorney by emailing us at contact@fidjlaw.com.

Ninth Circuit Rejects Government’s Hyper-Technical Interpretation of the Internal Revenue Code

In Washington Mutual Inc. v. United States (9th Cir. No. 09-36109), the Ninth Circuit Court of Appeals upheld economic substance over form, but this time for a taxpayer instead of the Government. The full opinion can be found here.

The transaction at issue in the case involved the receipt of regulatory rights by the taxpayer in exchange for incurring the cost of relieving the Government of impending liabilities. The taxpayer argued that the transaction was in substance a purchase of regulatory rights, and also argued that the assets could have a fair market value basis, by operation of Internal Revenue Code section 597. The government objected to both theories on hyper-technical grounds. The district court agreed with the government, holding that the regulatory rights had no basis at all.

Before the Ninth Circuit, the government argued that technical requirements in the reorganization rules trumped the economic reality that the taxpayer had purchased those rights. The Ninth Circuit rejected that argument and ruled in favor of the taxpayer. According to the Ninth Circuit, “absent specific provisions, the tax consequences of any particular transaction must reflect the economic reality” of the transaction. The majority opinion noted that the Governments hyper-technical reading of the Internal Revenue Code based on the “G” reorganization rules did not respect the economic reality of this “all-encompassing transaction.”

More Medical Device Hearings in Congress Scheduled for This Week

Hearings in both the House and the Senate will take place this week to discuss the U.S. Food and Drug Administrations (FDA) medical device approval and clearance processes. The purpose of these hearings will be to examine how the medical device industry interacts and communicates with the FDA medical device regulators.

On April 13, the Senate Special Committee on Aging will hear “A Delicate Balance: FDA and the Reform of the Medical Device Approval Process.” At this time, no agenda or witness list has been provided.

The House Oversight and Government Reform Subcommittee on Health Care will hold a hearing entitled “Pathway to FDA Medical Device Approval: Is There a Better Way?” on April 14. Dr. Jeffery Shuren, the director for the FDAs Center for Devices and Radiological Health (CDRH) will be one witness at this hearing.

These two hearings will be the second round to take place over the last two months examining FDAs medical device approval and clearance processes and proposed medical device process reform.