Tips from two IRS agents that could help you avoid tax problems
By Kenneth J. Hines, Special Agent in Charge, IRS Criminal Investigation, Seattle Field Office and Daniel Wardlaw, Special Agent & Public Information Officer, IRS Criminal Investigation, Seattle Field Office
We're from the government and we're here to help you -- really...
That old line makes us laugh. But believe it or not, we in the government really do want to help you, and that's no joke. We genuinely and sincerely want to help you stay out of trouble from two of the federal crimes that we investigate -- income tax fraud and health care fraud. As an added bonus, we'll include some very good Web links from the civil side of IRS, which should prove helpful regarding your taxes.
You see, we're criminal investigators (also called special agents) for the Internal Revenue Service-Criminal Investigation. You may think our goal is to put people in jail for cheating on their taxes. Actually, it isn't. We'd much rather increase people's awareness of the tax laws, hope they obey them, and leave it at that. Unfortunately, just as some people drive 25 miles per hour over the speed limit, there are those willing to steal from us all by cheating on their taxes or committing health care fraud. In those instances, it's only fair to law-abiding citizens that law enforcement takes steps to hold cheaters accountable.
In the last 27 months, our agency has helped prosecute about two-dozen dentists throughout America for tax fraud, health care fraud, or other federal financial crimes. With this article we want to arm you with solid information to help ensure that this never happens to you.
Let's start with a few case summaries taken straight from the public records so that we're all on the same page regarding what we're talking about. The first is an example of health care fraud. The rest are examples of tax fraud.
Dentist No. 1
In November 2005, Dentist No. 1 was sentenced in Illinois to 63 months in prison and ordered to pay $1,654,213 in restitution and forfeiture, as well as a $20,000 fine. Dentist No. 1 engaged in a series of actions that defrauded the Illinois Department of Public Aid, including performing and attempting to perform unnecessary dental procedures on healthy teeth, and billing for procedures that were either not performed or were not performed as claimed. The practice of Dentist No. 1 is now closed.
Dentist No. 2
In late 2008, Dentist No. 2 was found guilty in Alaska of attempting to evade over $575,000 in federal income taxes for the years 2000 through 2003. Dentist No. 2 hid his money offshore, funneling it through Ireland, Nevis, and the Bahamas, and channeling it through shelters. Dentist No. 2 created a corporation for his dental practice in 2000. This corporation "leased" the business to an Ireland company that paid Dentist No. 2 a relatively small salary while funneling the dental practice's income into accounts over which he had control. Dentist No. 2 also hid income through other tax shelters and a sham trust, and then claimed large deductions on the smaller income so that his tax bill all but disappeared.
Dentist No. 2 deducted nearly every expense in his life as business expenses, including a $1,504 charge to a house of prostitution in Nevada, clothing, groceries, gas, and his vacation home utilities. Dentist No. 2 also claimed expenses for payments to massage parlors as continuing education. Dentist #2 was sentenced to five years in prison in March of this year.
Dentist No. 3
In early 2007, Dentist No. 3 was sentenced in California to 24 months in prison, following his conviction for conspiring to defraud the United States and evading his income taxes from 1998 through 2001. According to the indictment and evidence introduced at trial, in 1995 Dentist No. 3 became a client of Tower Executive Resources, a Denver organization that promoted a tax evasion scheme involving the use of false invoices and secret offshore bank accounts. Dentist No. 3's dental practice paid bogus expenses to Tower to generate false tax deductions. Tower then deposited the bulk of the funds into a secret offshore bank account that Dentist No. 3 controlled. Over a 10-year period, Dentist No. 3 sent approximately $300,000 to a secret offshore bank account through the Tower system. In addition, when the IRS learned of the Tower scheme and audited Dentist No. 3's tax liabilities, he stopped filing income tax returns and claimed that he believed the law did not require him to file returns.
Dentist No. 4
In 2008, Dentist No. 4 was sentenced in Louisiana to 30 months in prison and ordered to pay $155,683 in restitution, as well as reimburse the government for the cost of prosecution. Dentist No. 4 was charged in a three-count indictment with willfully failing to file income tax returns. A federal jury convicted Dentist No. 4 on all three counts. According to testimony and evidence at trial, Dentist No. 4 stopped filing income tax returns after a dispute with the IRS in 1995. In an effort to defeat the payment of taxes, Dentist No. 4 renounced his U.S. citizenship in 1997 and claimed he did not have to pay federal taxes because he was not a U.S. citizen, but a sovereign citizen of the Republic of Louisiana. Later, Dentist No. 4 filed paperwork declaring himself an "Ambassador of Heaven" who was subject to diplomatic immunity from the jurisdiction of the federal government.
Dentist No. 5
In 2006, Dentist No. 5 was sentenced in Missouri to 12 months and one day in federal prison for failing to pay employee withholding taxes. Dentist No. 5 pled guilty in late 2005 and admitted that he withheld taxes from his employee's wages, but failed to send the tax money in to the IRS.
Dentist No. 6
In early 2009, Dentist No. 6 was sentenced to 24 months in prison following his late 2008 conviction on six counts of tax evasion. The government presented evidence at trial that Dentist No. 6, who had been a practicing dentist in Texas for decades, stopped paying taxes in 1992 after he was audited. Even though Dentist No. 6 earned substantial income during the years covered by the indictment, he failed to pay almost $240,000 in taxes from 1992 through 1996, and another $87,900 for the most recent years in the indictment, 2001 through 2005. The government showed that Dentist No. 6 evaded his income tax obligations by attempting to conceal his assets and income from the IRS through the use of various nominee trusts and by using false or misleading information in connection with his employment and other financial transactions. The jury rejected Dentist No. 6's testimony at trial that he had a good faith belief that he had no legal obligation to pay taxes.
In addition to these examples, we could add the occasional dentists who "skim" patient payments from their practice (perhaps those made in cash), or overcharge an insurance company or state assistance program through clever but phony record keeping.
Our point is: Dentists are highly respected and valued members of our society. The services you provide may be the finest of anywhere in the world. So why put your reputation, freedom, finances, and even employees at risk by getting involved in some silly and fraudulent income tax scheme or health care fraud scheme? If we can dissuade even one dentist from making a poor choice, then the time spent writing this article was well worth it.
IRS Media Relations Specialist Judy Monahan, who works in the civil side of IRS, will now offer Web site information. Thank you for your time and attention.
Judy Monahan: The following Web links, from www.irs.gov, offer helpful information to assist with your federal income taxes. These links should address most of the questions that you as a dentist and business owner might have.
1) Small Business and Self-Employed "Filing Season Central"
http://www.irs.gov/businesses/small/article/0,,id=134947,00.html.
2) Publication 334 (2008), Tax Guide for Small Business
(For Individuals Who Use Schedule C or C-EZ) -- For use in preparing 2008 Returns: http://www.irs.gov/publications/p334/index.html
3) Publication 15 (2008), (Circular E), Employer's Tax Guide -- (Including 2008 Wage Withholding and Advance Earned Income Credit Payment Tables) -- For use in preparing 2008 Returns: http://www.irs.gov/publications/p15/index.html
Check www.irs.gov for the latest revisions to the following publications:
* For travel, entertainment, gift, and car expenses: Publication 463
* For business expenses: Publication 535, Business Expenses
* For how to depreciate property: Publication 946 — How to Depreciate Property
You can contact the IRS at (800) 829-3676 and ask for tax publications to be sent to you for free.
