‘Tis the Season for Tax Returns and Tax Scams

By Elizabeth A. Whitman

My violin was made in 1962 by a luthier[1] named Umberto Lanaro[2], but it bears the label of Eligio Puccini[3] and says it was made in 1947.

Lanaro chose in effect to use Puccini’s identity when making my violin, as Lanaro received no obvious benefit from doing so. Lanaro came from a well-known family of luthiers, and Puccini did not, so the Lanaro name, if anything, would have been more impressive than Puccini’s. Further, Puccini, who was 30 years older than Lanaro, made very few violins, and Lanaro was to become a much more prolific and famous luthier than Puccini ever was. Finally, Lanaro’s use of Puccini’s label was not secret – the well-known dealer from which I acquired my violin was well-aware of the situation, as was I when I purchased the violin.

Although it is a mystery why Lanaro used Puccini’s “identity” when he made labeled my violin, money and theft were clearly the motives when, two years ago, an unknown person used my name and social security number to file an income tax return seeking a hefty tax refund. That identity thief almost got away with the crime too, as the attempted theft was thwarted only when the electronic tax refund bounced, causing the IRS to send me a very large check for my “refund.”

Since I had not yet filed my tax return, I quickly returned the refund check. I did not lose any money because of this theft. However, in order to file a tax return (even one without a refund), I have to provide additional identification in the form of a random PIN chosen by the IRS and changed every year.

Common Tax Scams

My experience is not an uncommon one. As tax season once again approaches, the scammers are likely to be out in full force.

Therefore, it is important for individuals, businesses of all sizes, and even tax professionals, to be aware of the most common methods of identity theft and to guard against them. Here are a few of the ways identity thieves have committed fraud in the tax area:

Wire Instruction Change. In a previous blog, When it Looks Like a Stradivari Violin but Isn’t: Protecting Yourself from Wire Fraud in Your Real Estate Transaction, I shared how by hacking into title companies’ e-mail, fraudsters were able to trick buyers into wiring large sums of money to the hacker’s bank accounts, instead of into the title companies’ escrow accounts. In the tax field, hackers have similarly hacked into or spoofed taxpayers’ e-mail accounts and requested that tax preparers change the taxpayers’ returns so that legitimate refunds are wired into the hacker’s bank accounts.

Tax preparers and taxpayers alike should be caution about relying upon changes of key information, such as a bank account number, via e-mail. It is best to relay that information via another communication method, or at least to verify it via a phone call to the phone number in one’s records (i.e. not the phone number on the e-mail).

W-2 Scam. Another popular scam in the tax area by identity thieves involves a request for payroll information. Typically, a hacker will hack into or spoof the account of a company executive and write to human resources (HR) or payroll expressing a need for payroll information or W-2 forms.  If the unwitting HR or payroll employee complies, then confidential personal information for all of the company’s employees goes into the hands of the fraudster.  In addition to this providing names and social security numbers, which can be used for a myriad of identity theft schemes, the Form W-2 information can be used to file fraudulent tax returns, which may be more difficult for the IRS to detect as such.

Tax Collection Scams. There are a number of tax collection scams. Some of the most common include:

Fake Private Collection Company Fraudsters may call, claiming to be a collection company hired by the IRS and threatening serious consequences, such as arrest, deportation, or home foreclosure if a tax bill of which the taxpayer previous was unaware is not paid immediately. Although the IRS has, in some instances, sent a small number of long-overdue tax accounts to private collection companies, that only has occurred when the taxpayer should have been well aware of the tax debt for years.  Furthermore, though the IRS can foreclose on a tax lien or cause a passport revocation, threats of imminent arrest, deportation, or foreclosure without any right of appeal are signs that a call may not be legitimate.

Phone Calls Offering an Opportunity for Credit Card Payment of Taxes Over the Phone Fraudsters may call claiming to be the IRS and offer the ability to take a credit card payment over the phone. The fraudsters can be quite convincing and may even have a spoofed caller ID or know part of the taxpayer’s social security number. Although the IRS does now have a mechanism to accept credit card payments under some circumstances, those payments are not accepted over the phone.

E-Mails Purporting to be from the IRS A fraudster may ask a taxpayer to log into a supposed online tax account or to pay supposedly past due taxes online via credit card or e-check. The IRS nearly always will first contact taxpayers via US Mail.  The IRS does have the ability to accept some payments via credit card or e-check, but those should be accessed through the IRS’ website, rather than clicking on an e-mail link.

Phishing Scams may target tax professionals or taxpayers. Fraudsters may send an e-mail mimicking a tax software provider instructing the recipient to download a software “update,” which may be a keystroke tracker. Similar scams may instruct a taxpayer or tax professional to sign onto their tax software website. Once the fraudster has the login information, the fraudster can access tax information, including names, addresses, and social security numbers.

Fight Tax Scams

         Here are some things you can do to combat tax scams:

If you receive a phone call, do not give information to the caller. Instead, hang up and call the IRS’s general number at 1-800-829-1040. Legitimate IRS employees at that number should be available to help you determine if you truly have a tax problem.

Do not click on links in e-mails. Do not click on a link in an e-mail. Tax software providers nearly always provide the opportunity to download updates directly from their websites or though an option inside of the software installed on your computer. Use those in lieu of any links.

Do not provide credit card or bank account information to anyone who contacts you. If you want to make a tax payment, either mail a check or use the IRS’ online payment system, available on the IRS website, www.irs.gov (click on “Pay” on the landing page).

Immediately Report to the IRS any fraudulent use of your social security number to file a tax return. In my instance, I immediately called the IRS, reported the fraudulent check, and received information on where to return the check. I did not cash the check but instead returned it via a traceable delivery method. I also filed IRS Form 14039 to officially report compromise of my personal information to the IRS.

Report the theft to the Federal Trade Commission at www.identitytheft.gov and consider having a fraud alert placed on your credit report. If you lost money because of identity theft, you may also need to file a police report, particularly if you have insurance to cover the loss.

Change passwords for any accounts you believe may have been compromised, using complex passwords that would not be easy for a fraudster to guess. One approach is to use the first words of a sentence that is near and dear to you, but which will result in a password with lower case and capital letters and numbers. For instance, I might use “My violin was made by Umberto Lanaro in 1962” to create the password “MvwmbULi1962.”     

Close any bank accounts or credit card accounts you believe may have been compromised and open new accounts with different account numbers AND different online user names and passwords.

Unlike my violin’s luthier, the motives of the tax scammers are obvious; they want to collect money at the expense of unsuspecting taxpayers. The scammers are creative, and they take advantage of the natural pressure taxpayers and tax preparers experience as they prepare tax returns and make final tax payments. However, taxpayers and tax preparers can, with care, stay a step ahead of the scammers and prevent unlawful access to and use of their personal info.

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[1]  Music Geek Fact: A “luthier” is an individual who makes or repairs string instruments. Although nowadays, luthiers typically work on violins, violas, and cellos, originally, luthiers made only lutes.  Thus, the term “luthier” is derived from the French word for lute, which is ”luth.”

[2]  Umberto Lanaro was born in 1930 and trained under his older brother, luthier Luigi Lanaro. Umberto mostly worked out of Padua, although he spent several years with his brother in Argentina in the 1950’s. Unlike many luthiers, including his brother Luigi (who worked from Stradivari models) Unberto Lanaro shunned copying the work of others and rarely entered violin-making competitions, instead relying on the quality of his work to sell his instruments. Lanaro is an innovative luthier, particularly known for his uniquely-carved fittings and his violas, but he also made violins and cellos.

[3]  Eligio Puccini was born in 1900 and worked as a luthier in Empoli, Italy from approximately 1925-1950. Despite his sharing his surname with the famous opera composer, Giacomo Puccini (who was born 42 years some 30 miles away in Lucca, Italy), Eligio Puccini’s work as a luthier was neither prolific nor particularly well-known.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or eawhitman@mirskylawgroup.com

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

Top 5 Effects of the New Tax Law on Family Law Cases, Part 1 – Alimony Eliminated

By David J. Marquardt

Alimony, sometimes called spousal support, is often one of the more unpredictable outcomes in any divorce case. As a result, disagreements over the amount and duration of alimony awards can lead divorcing parties to incur substantial expenses in an effort to either come to an agreement or argue an alimony case in court.

The Tax Cuts & Jobs Act, signed into law in December 2017, will have a significant impact on divorce cases involving alimony. As part of this new federal law, starting with alimony agreements and court orders entered into after December 31, 2018, alimony payors may no longer deduct any payments from their gross income, and alimony recipients are not required to include any payments as income. This change applies to all agreements and court orders starting in 2019, as well as all modifications to pre-2019 court orders starting in 2019.

Why is this significant?

A little background is important to answer the foregoing question. For more than 70 years, federal tax law has allowed alimony payors to deduct payments dollar-for-dollar from their gross income, and has further required alimony recipients to include those same payments dollar-for-dollar as income.

Historically, there have been two major arguments in support of this provision in the tax code.

The first reason for deductibility of alimony payments and taxation of alimony receipts is based on pure fairness. The policy is that alimony payors should not be taxed on income that they received, but are legally obligated to give away and which they are not able to use. Likewise, recipients should not be given money completely tax free. Otherwise, the argument goes, the higher earning spouse is penalized and the lower earning spouse is rewarded, which is unfair.

Second, and perhaps more importantly, is that the former provision theoretically keeps more money in both the hands of payor and recipient, due to the shifting nature of federal tax brackets. Instead of the higher earning spouse being taxed at an even higher rate, the lower earning spouse is taxed at a lower rate.

Regardless of the strength and credibility of these arguments, the new law will have a major effect on family law cases, namely those divorce cases involving alimony. Negotiation of alimony agreements and the presentation of alimony cases in court will become that much more contentious, at least at the outset, while judges, attorneys, and parties alike try to determine what monetary effect various awards will have. Additionally, in cases where the higher-earning spouse is also in a higher tax bracket, which represents most alimony cases, there will be less funds to divide between the parties. Less funds, however, does not equate to less expenses, so money will be that much more important to each side.

For more information on Family Law issues, please contact David J. Marquardt at (301) 664-7710 or djmarquardt@mirskylawgroup.com.

 Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.

Tax Reform Changes for Sexual Harassment Settlements May Bring Harassers Out of the Shadows, But May Not Help Victims

By Elizabeth A. Whitman

Suppose you are a professional cellist in your 40’s. Over nearly two decades, you have worked your way to first chair of a well-known orchestra, but like most professional orchestras, it’s still a part-time job, and money is tight.

Then, disaster hits – you learn that you have developed tendonitis in your hand, a problem which has ended many a string player’s careers. You quietly seek out medical treatment and medication, maybe even narcotics which dull the pain but prevent you from feeling the warning signs that you should slow down to prevent further injury. It seems worth it so you can keep performing.

Despite your efforts, apparently your tendonitis, and its impact on your playing, has not gone unnoticed. The orchestra conductor, a handsome, gentile, and respected musician in his 60’s whose professional reach is national if not international, says he has noticed your struggle and wants to help. This could be the boost you need; he is wealthy and has a history of mentoring female musicians and boosting their careers. Maybe he can arrange for you to see a specialist physician and help you to afford it.

He suggests you meet in his office after the rehearsal. When you arrive, the conductor motions for you to sit down on the sofa in his office. Standing, says he admires you as a musician and that he sees your struggle and he wants things to work out for you. Then, he sits down next to you.  He strokes your hair and comments that he has always found you attractive.  You are already in a relationship and not interested in looking elsewhere.  Plus, the conductor is married. You like his wife and know she doesn’t deserve his disloyalty.

On the other hand, he is respected and influential in the music world and could ruin your career if you turn him down. Now that you think about it, rumor has it that after a violinist turned down his advances, he told his colleagues not to hire her, and she now is waiting tables to support herself.

Fans of “Mozart in the Jungle,” an Amazon original television series, might recognize this as one of many possible unwritten, back stories about the start of the intimate relationship between Cynthia and Thomas.

In the television show, the relationship is portrayed as consensual, with no back story given. Yet, over and over in the news we also have seen similar stories, where influential people are accused of using their power, authority, and prestige to put sexual pressure (or worse) on less-established individuals trying to climb up the career ladder.

Recently there has been public outrage over learning that a number of powerful individuals and institutions repeatedly had entered into confidential settlements of sexual harassment and sexual abuse claims (I’ll call both sexual harassment for the remainder of this blog), only to have the perpetrators move on to victimize others – sometimes dozens or even hundreds of others.  When reports came out that those “hush-money” settlements were tax deductible, there was a demand for action to stop what was seen as an effective public subsidy these settlements via tax savings.

With tax reform already on the table, Congress responded by adding Section 162(q) of the tax code. Section 162(q) prohibits taxpayers from deducting as business expenses any payments or settlements or attorney fees related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement (NDA).

Many have praised Section 162(q) as a progressive approach to reducing the financial incentive for “hush money,” reasoning that this will draw predators into the public eye and hopefully, stop their pattern of sexual harassment. Publicizing sexual harassment settlements may also increase both the financial and reputational cost for those engaging in sexual harassment and sexual abuse, which in turn, may deter repeat behavior.

Although no one questions the importance of eliminating sexual harassment, some have expressed concerns that Section 162(q) might hurt victims of sexual harassment. If settlements are made public, parties to settlement agreements or others bringing attention to the accused also might publicize the victim’s, as well as the perpetrator’s name, thereby publicizing traumatic experiences that some victims would prefer to keep private.

Section 162(q) also may reduce the dollar amount of sexual harassment settlements. Under Section 162(q), victims who desire a NDA to maintain their privacy might be forced to accept a lower settlement amount to offset the additional “cost” in taxes to the accused or his/her employer.  Likewise, those accused of sexual harassment who want the privacy a NDA affords might offer to pay a smaller settlement to the victim if the payment is not tax deductible.

Further, Section 162(q) may require that victims who want an NDA so that their ordeal remains private pay more in taxes on settlements, because they in turn are not able to deduct attorney fees (which can be 33% or more of the settlement amount) and would be forced to pay taxes on money they never receive.[1]

Back to the cellist. Suppose that we are back in 2017.  The cellist reports him to the orchestra board, but because the orchestra is in the middle of a huge capital campaign, the board doesn’t want the publicity of firing the conductor and doesn’t want the claim to be made public. Therefore, the board offers to pay the cellist a $250,000 settlement and will use the board’s resources to find her another principal cellist job if she will resign from the orchestra and sign a release and mutual NDA.

The cellist could view the settlement offer as favorable to her. Perhaps, $250,000 would pay her therapist’s bill and cover treatment for her tendonitis that her insurance will not cover. There might even be money left over for a Sartory[2] cello bow she had been eyeing.  A move to an orchestra as principal cellist might boost her career, particularly if she there were an NDA that assured that her history of tendonitis would not be disclosed and taint her reputation. Although she might want the conductor’s behavior to be publicized as a warning to other musicians, she might not want his wife to suffer humiliation along with him.

With a nonprofit orchestra, the situation may be no different under Section 162(q). If the orchestra doesn’t pay taxes, then it should not be concerned about whether it can deduct the settlement.[3]  Let’s assume, however, that it is 2018 and the orchestra makes the same offer $250,000 to the cellist, but without the NDA because it is a rare “for-profit” orchestra.

The cellist accepts the settlement, uses it to undergo counseling and quietly receive treatment for her tendonitis (which fortunately is fully healed as a result), and she buys the Sartory bow.

All of us would like to imagine an outcome where the cellist emerges from counseling, strong and brave, to share her story and encourage other victims to come forward. She appears on talk shows as an image of the strong woman, and, in the process, several additional victims are inspired to come forward with accusations of their own. In this outcome, the harasser ends up in shame, his wife divorces him, and the victims end up victorious, admired for their heroism.

Yet, without an NDA, that isn’t the only possible outcome. As we look at Section 162(q), it is important to remember that victims have always had the right to make their accusations public and to have their case heard in a Court.  Yet many have chosen not to do so for one reason or another.

Imagine that our victim is a private person and after counseling, she decides that the best thing for her is to move on with her life and perform on her cello. Then, one day when she reports for rehearsal at her new orchestra, everyone stares at her oddly. Her stand partner tells her in that morning’s newspaper, there is an expose about a pattern of sexual harassment by the conductor of her former orchestra. The reporter has spoken with a source “close to her former orchestra,” and the cellist’s name is mentioned as having received a large settlement. In response, the conductor protests his innocence, claiming he did the cellist a favor by overlooking her unreliable performance due to an “ongoing tendonitis problem.”

Overnight, several of the cellists’ regular free-lance gig sources stop calling her. At next year’s auditions, the cellist is moved to fourth chair of her new orchestra, a pay cut. Two years later, she has sold her Sartory bow and finds herself out of the orchestra entirely, waiting tables to make ends meet. If there had been an NDA, she could have sued the conductor and orchestra for breach of the NDA, but since there is no NDA, and the cellist did experience tendonitis, she likely has no legal remedy.

Unquestionably, there is a public interest in eliminating sexual harassment from our society. Although Section 162(q) might move this process forward, it is far from clear or perfect. For victims who find healing by testifying in Court against their abuser (as more than 150 women did in Michigan in January), Section 162(q) is a step in the right direction.  However, Section 162(q) may make things more difficult for those equally brave victims who stand up against their harasser by reporting sexual harassment, but who prefer personal healing outside of the public eye.[4]  Plus, Section 162(q) has no impact on settlements by non-profits, including certain educational institutions, which do not pay taxes and may increase taxes on settlements for some victims who hire attorneys to help them pursue justice.

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[1] Taxation of settlements for sexual harassment can be complicated and is beyond the scope of this blog post. Although it is too early for IRS guidance interpreting Section 162(q), it is likely that to the extent a settlement is not taxed to begin with, Section 162(q) would not impact it. However, for a settlement that is taxable if it, for instance, is characterized as compensation for lost wages or income, then it would seem that the attorney fees for obtaining the settlement would not be deductible by the victim.

[2]  MUSIC GEEK NOTE: Eugene Sartory was a famous 20th century archetier (bowmaker). His gift for bow making revealed itself when he was in still his teens, and he opened his first workshop when he was just 18 years old, after only a few years of apprenticeship. Unlike some of the old master luthier, Sartory bows, while pricey, are not rare.  They typically will sell somewhere in the five-figure range, with the highest reported auction price being just over $85,000 for a cello bow.

[3]  This also would apply to any settling party that does not pay taxes, including, for instance, some religious and educational institutions, some of which have been accused of ignoring sexual harassment and abuse for years or even decades.

[4]  For example, based upon recent news reports, there were more than 250 reports of abuse in the Michigan case, but about 100 of the victims, for one reason or another, did not testify, so most of their identities remain private.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or eawhitman@mirskylawgroup.com

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.