Milhaven faces hefty tax penalty
The Internal Revenue Service wants radio personality McGraw Milhaven to pay a $500,000 fine. His offense: avoiding less than $1,000 in taxes.
Milhaven, the morning show host on KTRS, has been caught up in the government’s war against abusive tax shelters. He, and others in the same position, say the IRS is levying giant fines meant to punish millionaires and big corporations on people who aren’t rich and didn’t intend to break the law.
"I don’t have it. I could sell everything I own, and I doubt that I’m worth $500,000. It depends on how much I could get for my Sandy Koufax signed baseball," said Milhaven, 42.
Milhaven has been a fixture on St. Louis radio for a decade and formerly worked at KMOX. He revealed his tax problems on his KTRS show this week. "I’m being persecuted," he adds.
The IRS publishes a list of suspected tax shelters. A taxpayer with such a shelter, or something "substantially similar," must report it at tax time. If not, the tax law makes big fines almost automatic: $200,000 per year for a corporation and $100,000 per year for an individual.
It doesn’t matter how much money was sheltered or whether the taxpayer knew about the IRS list.
Milhaven says he had no idea the IRS frowned on his tax maneuver. "My accountant tells me it’s legal," he said. "I wasn’t taking a midnight flight to the Cayman Islands."
An IRS spokesman declined to comment, saying the agency can’t comment on an individual taxpayer’s situation.
Milhaven says his trouble began when his accountant, Douglas Mueller of MPP&W PC, recommended a way to lessen his taxes. The plan went like this:
Milhaven would create a corporation. Into that corporation would go the money he makes from speeches, appearances and endorsements outside of his KTRS pay.
He would also open a Roth Individual Retirement Account. Money in a Roth IRA can grow tax free, and its owner can spend it without penalty once he turns 59 1/2. That makes it a popular — and legal — way to avoid taxes. However, a taxpayer Milhaven’s age can only contribute $5,000 a year to a Roth.
Milhaven’s IRA would invest in Milhaven’s corporation. The corporation could then pay out its profits into the IRA, avoiding the $5,000 contribution limit.
The IRS has been going after Roth IRA tax shelters since at least 2003, when the Grant Thornton accounting firm in Kansas City drew the tax agency’s ire over shelters marketed to its clients get a free credit report. That year, the agency added to its prohibited list the practice of using a Roth to invest in a taxpayer-owned company unless the Roth pays a fair price.
In papers given to Milhaven, the IRS argues that his shelter violated that warning. The tax agency proposed $400,000 in fines for Milhaven’s corporation, and $100,000 against Milhaven himself. The case is now in the IRS appeals process.
Cases like this have been popping up around the country, said Alex Brucker, an employee benefits lawyer and director of the Small Business Council of America, which is campaigning to change the law.
There are roughly one thousand cases involving the Roth IRA scheme and other tax shelters that fall under the severe penalties, he estimates.
"Of course it’s not fair," Brucker said. "The penalty is disproportionate to the crime."
Last month, the Los Angeles Times reported that the owners of a local commercial printer faced $1.3 million in penalties for a tax-shelter scheme that helped them avoid only $8,385 in taxes.
The large fines were designed to punish big corporations and major tax cheats, not small fries like Milhaven, Brucker said.
Sen. Ben Nelson, D-Nebraska, has proposed a bill that would let the IRS lower the fines if a taxpayer had an acceptable excuse and make fines proportionate to the amount of taxes evaded.
Others are less sympathetic. "The IRS is especially looking at Roths because they are a breeding ground for hanky panky," says Ed Slott, a certified public accountant and publisher of Irahelp.com. "Once money is in a Roth it’s tax-free forever, so people find all kinds of schemes and scams to put money in Roths."
Milhaven says his tax shelter, which was created in 2004, never really worked. After a couple of years, his accountant discovered that one of Milhaven’s largest employers was making out checks to Milhaven, not his new corporation. So, Milhaven dismantled the corporation and filed in 2007 amended tax returns — in effect reversing the whole effort — before the IRS learned of it.