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.

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.

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.”

United States Petitions Court for Leave to Issue “John Doe” Summons to HSBC

On April 7, 2011, the U.S. Department of Justice “ Tax Division, filed a petition in U.S. District Court for the Northern District of California, San Francisco Division, for leave to issue a “John Doe” summons to HSBC. The case number is CV-11-1686-LB. On the same day, the Department of Justice issued a press release, available here.

the government alleges that since at least 2002, thousands of U.S. taxpayers of Indian origin have opened and maintained accounts at HSBC. The government further alleges that HSBC used representative offices in New York and California to solicit and maintain those accounts, and that HSBC assured its customers that the accounts in India would not be disclosed to the IRS.

The press release states that although HSBC India closed those offices in June 2010, its clients may still access their accounts at HSBC India from the United States. According to the petition documents, HSBC clients have told IRS investigators that HSBC representatives in the United States assured the clients that they could invest in accounts at HSBC India without paying U.S. income tax on interest earned on the accounts and that HSBC would not report the income earned on the HSBC India accounts to the IRS.

The governments attempt to obtain documents from HSBC comes in the wake of recent activity where grand jury subpoenas have been issued to taxpayers to produce their documents of the foreign bank accounts as required by the Bank Secrecy Act and the federal regulations issued by the Department of the Treasury.

The attorneys at Fuerst Ittleman, PL have been actively litigating against the Department of Justice in response to recent grand jury subpoenas. Additionally, the attorneys at Fuerst Ittleman, PL have extensive experience dealing with both the IRS and the Department of Justice in regards to undisclosed foreign bank accounts, civil and criminal tax evasion, and voluntary disclosures. You can reach an attorney by emailing: contact@fidjlaw.com.

Fair Value Measure Rules to be Issued in April by FASB, IASB

This month the Financial Accounting Standards Board (FASB) and The International Accounting Standards Board (IASB) plan to issue joint final standards on how companies should gauge fair value amounts. FASB regards these rules as “targeted improvements” to the current guidance that features standard statements of generally accepted account principles (GAAP) or FAS 157 as auditors and rulemakers call them.

The changes considered by FASB and the IASB do not greatly depart from common practice in the US as stated during public comment and the later changes to the June 2010 proposed accounting standards update, Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS. Even though the IASB board does not consider the rules a fundamental change to many of the requirements for measuring fair value or disclosing information about fair value measurements, it considers the fair value measurement a major new standard. The IASB points out that the biggest difference between the now existing standard and the one to come is defining fair value “as an exit price rather than as a neutral exchange amount.” Agenda Paper 2A.

FASBs fair value measurement prescriptions are said to become effective for public companies interim and annual reporting for fiscal years commencing after December 15, 2011. The annual period-only reporting for private companies is said to be on the same timetable. FASB is also allowing early adoption of the rules for non-public entities thus allowing them to issue interim-period financial reports during the first quarter of the 2012 year. The early adoption also gives private companies the option of mirroring the timetable for public companies before the private companies annual statements for 2012 are required to be in compliance with the new US GAAP rules.

The IASB anticipates that the new rules will apply by January 1, 2013, allowing entities time to analyze requirements and make necessary system changes. The IASB also anticipates permitting the early adoption of new IFRS rules on fair value amendments.

Aside from fair value measurements, FASB also anticipates prescribing disclosures for changes to valuation methods stemming from the application of the new rules and reporting the quantification of the total effect of the change within the companys report footnotes. The FASB board provided that during the adoption period, all entities should disclose any change in valuation technique and related inputs resulting from the application of the amendments and should quantify the total effect.

For more information on FASB, the IASB, and/or the new rules they plan to prescribe, please contact us at contact@fidjlaw.com.

New York Clarifies Position On Licensing Of Internet Based Money Transmitters

On March 31, 2011, the New York State Banking Department issued an Industry Letter clarifying its position on whether money transmitters with no physical presence in the state of New York are required to obtain a license to do business in the state. The New York Banking Department concluded that even those money transmitters with no physical location or office within the State of New York must obtain a license to do business with residents and persons located within New York. As a result, internet based money transmitters who do business with persons of New York must obtain a license from the state to continue doing business in New York. A copy of the Banking Departments Industry Letter can be viewed here.

New Yorks announcement is a reversal of prior Banking Department opinions which found that physical presence within the state was necessary in order for a money transmitter to be subject to New Yorks licensing requirements. The Department found that New York law contains no express physical presence requirement. Further, the Department cited numerous other states which currently require internet based money transmitters with no physical presence to obtain a license to conduct business as support for its decision. Additionally, the Department found that its prior physical presence requirement was outdated because “with the prevalence of the internet and the growth of a global economy, financial services businesses are no longer necessarily locally based.”

Internet based money transmitters that currently do business with residents or persons of New York have until September 30, 2011 to file to obtain a license from the Superintendent of the New York Department of Banking. Additionally, such money transmitters may continue to operate without a license until six months from the date their application is considered complete or until notified their application has been denied, whichever occurs first.

A special thank you to David Landsman of the National Money Transmitters Association for making this information available to us. Fuerst Ittleman is a correspondent member of the NMTA and will be presenting at the upcoming International Money Transmitters Conference in Los Angeles. For more information on the effect of this decision on your business, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

Tax Court Adopts Daubert Standard for Expert Witnesses in Tax Court Trials

On April 5, 2011, the Tax Court in BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, 136 T.C. No. 14 (April 5, 2011) held in a conservation easement donation case, where the IRS moved to exclude the taxpayer’s experts report as unreliable and irrelevant under Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), that the standards of reliability and relevance apply in trials without a jury, including Tax Court trials, and are subject to the discretion of the trial Judge to receive evidence. The full opinion can be found here.

Although the reach of the Boltar decision is debatable for the majority of Tax Court cases, in the current economic landscape the decision has substantial ramifications for those Tax Court cases where valuation is at issue. In particular, valuations of real property (especially in those locations that saw the greatest appreciation and subsequent depreciation of real property values, e.g. Florida) as it relates to cancellation of indebtedness income and/or bad debt deductions often are dependent on appraisals. The appraisals that are being used, and the correspondent testimony from the same appraisers or independent appraisers that are being offered into evidence before the Tax Court now must withstand judicial scrutiny under Federal Rule of Evidence 702 and as developed by the Supreme Court in Daubert v. Merrell Dow Pharm., Inc.. The full decision can be found here.

The lesson learned from Boltar is that an expert that a taxpayer attempts to use must be fully vetted and his/her methodology must be appropriate for the analysis that is being conducted.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating tax cases against the IRS and the U.S. Department of Justice – Tax Division before the Tax Court, U.S. District Courts, and U.S. Courts of Appeal. You can reach an attorney at Fuerst Ittleman by email us at contact@fidjlaw.com.