It is well-known that the Justice Department and Internal Revenue Service increase the frequency and intensity of their press releases announcing tax charges as “Tax Day” approaches (which is April 18 this year), so as to warn would-be tax evaders of the severe consequences that may result. The logic behind this media blitz is that taxpayers who are preparing and finalizing their tax returns will think twice about cheating on their taxes when they see announcements about criminal tax cases in the news. Academic research confirms that the DOJ issues a disproportionately large number of tax enforcement press releases in the lead-up to “Tax Day” every year:
Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).
This year is no different, with the U.S. Attorney’s Office for the Western District of North Carolina leading the way with a dire warning to tax cheats in a press release entitled “Message To Potential Tax Cheats From Federal Prosecutors: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences And Fines.” This press release is notable in several respects. First, it initially focuses on the recent indictment of the owner of a payroll company for failing to pay over $9 million in employment taxes withheld from employee wages, confirming a recent trend by the Justice Department and IRS to aggressively enforce the employment tax laws both criminally and civilly. Second, the press release goes on to highlight numerous instances of tax evasion and tax fraud prosecuted in that district. The press release also highlights the government’s efforts to prosecute fraudulent return preparers and the perpetrators of stolen identify refund fraud.
As we approach April 18, we expect to see more press releases along these lines from both the Justice Department and the IRS. The full text of the U.S. Attorney’s Office press release is set forth below, followed by the text of the Justice Department release:
Message To Potential Tax Cheats From Federal Prosecutors: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences And Fines
Owner of Charlotte Payroll Company Indicted for Failure to Pay over $9 Million of Federal Payroll Taxes
CHARLOTTE, NC – With the deadline for filing income tax returns rapidly approaching, Jill Westmoreland Rose, U.S. Attorney for the Western District of North Carolina, and Thomas J. Holloman, III, Special Agent in Charge, Charlotte Field Office, IRS Criminal Investigation, jointly announce recent tax fraud prosecutions and sentencings, and deliver a powerful warning to those who are thinking about breaking the law by committing tax crimes.
“During this time of the year, IRS will receive millions of tax returns from honest taxpayers who file their returns on time and pay taxes they owe,” said U.S. Attorney Rose. “Today’s warning is not for them. Today’s warning is for tax cheats who break tax laws and abuse our tax system. If you belong in this category, pay close attention. My office will hold accountable anyone who participates in a tax fraud scheme that puts an added tax burden on honest taxpayers and drains our public finances.”
“Tax fraud exists in many forms, from unscrupulous tax preparers filing false and fraudulent returns, to identity thieves, and to those that go complex lengths to hide their income and evade paying the taxes they owe. If you are considering engaging in this criminal activity, you will be caught.” said Special Agent in Charge Holloman. “There is no offseason for IRS Criminal Investigation, as we continue to engage in a year-round effort to investigate potential criminal violations of the Internal Revenue Code and other financial related crimes, in a manner that fosters confidence in the tax system and compliance with the laws. IRS Criminal Investigation will continue to vigorously pursue those who unjustly enrich themselves through tax fraud schemes.”
On March 16, 2016, Frank Alton Moody, II, an operator of Charlotte-area payroll services company CenterCede Services, Inc., was indicted for failing to pay more than $9 million in federal payroll taxes to the IRS that had been withheld on behalf of CenterCede’s clients. According to the indictment which was unsealed yesterday, Moody instructed and supervised others to prepare, sign and file employer’s quarterly federal tax return, Forms 941 and thereafter did not remit payment of taxes reflected. (3:16-cr-00070).
The prosecution of Moody for his role in failing to pay over employment taxes is just one example of our district’s commitment to prosecuting tax cheats including those who cheat on their own taxes, those who prepare false tax returns for others, and those who file fraudulent tax returns using stolen identity information.
TAX EVASION AND FILING FALSE TAX RETURNS.
Over the last year, the U.S. Attorney’s Office has prosecuted and convicted numerous individuals for omitting income from their individual tax returns, and defendants have received substantial sentences for tax charges, ranging from several years in prison to home confinement. For example, the following individuals were sentenced for lying to the IRS about their taxable income:
Amy Hilty (3:15-cr-00233), an accountant and former resident of Stanley, N.C., was sentenced to 18 months in prison in February 2016. Hilty pleaded guilty to tax evasion for hiding more than $520,000 in personal income from the IRS and failing to file tax returns for years 2008 through 2011. Hilty also pleaded guilty to wire fraud.
Jarrett Mitchem (1:14-cr-00035), a resident of Hendersonville, N.C. maintained a UBS bank account with a balance of approximately $4M and failed to report the earnings from the foreign investments on his 2005 – 2008 tax returns. He was sentenced in February 2016 to nine months in prison and three months of home confinement.
Sammie Marks (3:15-cr-00125), a resident of Matthews, N.C., owned and operated a metal and salvage business and failed to report more than $1.1 million of income he received from his business during years 2009 through 2013. Marks was sentenced in December 2015 to one year and one day in prison.
Janice Terry-Kidd (3:14-cr-00243), a resident of Huntersville, N.C., embezzled approximately $526,000.00 from her employer, Wilburn Auto Body, from 2008 to 2013. As a Human Resource Officer responsible for payroll, Terry-Kidd used the social security number of a previous employee to create fraudulent payroll checks and direct them to be deposited into her personal bank account. In addition, Terry-Kidd failed to report income from the embezzled payroll checks on her own personal income tax return resulting in approximately $106,000.00 of tax due and owing. Terry-Kidd was sentenced in November 2015 to 33 months in prison.
Teng Lor (3:15-cr-00080), a resident of Matthews, N.C., and the owner of T&C Equipment, Inc. and LOR Enterprises, Inc. which operated Laundromats in the Charlotte area concealed gross receipts and taxable income of more than $545,000 from the IRS for the 2010 through 2012 years. Lor was sentenced in October 2015 to six months in prison and six months of home confinement.
Mark Le (3:14-cr0010), a Huntersville physician, hid approximately $2.4 million in personal income from the IRS in 2009 and 2010 by falsely claiming that certain payments were business expenses of his medical practice. Le used these funds to purchase and construct a $2.4 million 8000-square foot residence on Lake Norman. Le, who pled guilty to tax evasion and health care fraud, was sentenced to 18 months in prison in September 2015.
FRAUDULENT RETURN PREPARERS
Our office diligently works to investigate and prosecute unscrupulous tax return preparers. Examples of prosecutions of tax return preparers during the last year include:
Malik Shropshire (3:15-cr-00025), a resident of Charlotte, he was sentenced in February 2016 to 51 months in prison for filing false tax returns and lying on a loan application. Shropshire worked as a tax return preparer and aided and assisted in the preparation of hundreds of false tax returns, that included, among other things, false Schedule C businesses, false dependents, and false refundable education credits.
Fitzroy Lawrence (3:15-cr-00057), a resident of Charlotte, he was sentenced in February 2016 to 27 months in prison for filing false tax returns. Lawrence aided and assisted in the preparation of hundreds of false tax returns which were filed with the IRS, seeking fraudulent tax refunds totaling approximately $2.6 million.
STOLEN IDENTITY REFUND FRAUD
In addition to prosecuting tax evaders and fraudulent tax return preparers, our office also investigates and prosecutes those individuals who steal the identities of taxpayers to file fraudulent tax returns. Examples include:
Yolanda Tiess Kitson (1:13-cr-00031), was sentenced to 72 months in prison and ordered to pay restitution of more than $3.9 million for her role in a fraudulent tax refund scheme involving using stolen identities to obtain fraudulent tax refunds.
Cara Michelle Banks (1:15-cr-00032) pleaded guilty for her role in the same fraudulent tax refund scheme as Kitson and is awaiting sentencing.
Federal penalties for each count of conviction of tax crimes range from a maximum of one year in prison and a $100,000 fine for failure to file a tax return, false withholding exemptions, and delivering or disclosing false tax documents, to a maximum of 10 years in prison and a $250,000 fine for conspiracy to defraud with respect to false refund claims. Other penalties include a mandatory term of two years in prison and a $250,000 fine for aggravated identity theft charges, three years in prison and a $250,000 fine for obstructing or impeding an investigation and filing or preparing a false tax return, and a maximum of five years in prison and a $250,000 fine for tax evasion, failure to pay taxes, conspiracy to commit a tax offense or conspiracy to defraud.
The U.S. Attorney’s Office and the IRS remind tax payers to exercise caution during tax season to protect themselves against a wide range of tax schemes ranging from identity theft to return preparer fraud. Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and to prosecute the criminals behind them. The IRS has issued its annual “Dirty Dozen” which lists common tax scams that taxpayers may encounter, particularly during filing season. Taxpayers are urged look out for, and to avoid, the following common schemes:
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Identity Theft
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Phone Scams
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Phishing
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Return Preparer Fraud
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Offshore Tax Avoidance
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Inflated Refund Claims
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Fake Charities
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Falsely Padding Deductions on Returns
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Excessive Claims for Business Credits
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Falsifying Income To Claim Credits
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Abusive Tax Shelters
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Frivolous Tax Arguments
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Education is the best way to avoid these common schemes. To learn more about the Dirty Dozen scams and for help with recognizing and avoiding abusive tax schemes, the IRS offers educational material at www.irs.gov. Suspected tax fraud can be reported to the IRS using Form 3949-A found on the IRS.gov website.
Justice Department Warns Public to Beware of Fraudulent Tax Return Preparers and Tax Scheme Promoters, Urges Taxpayers to Pay Federal Income Taxes on Time and in Full
With tax season in full swing, the Justice Department urged the public today to avoid dishonest tax-return preparers who fleece their customers and illegally drain the U.S. Treasury. Noting that every taxpayer is ultimately responsible for the contents of his or her own return, Acting Assistant Attorney General Caroline D. Ciraolo of the Tax Division also warned the public to be wary of anyone who guarantees a refund or who claims to sell a sure-fire way to reduce your taxes.
Dishonest Return Preparers Cost Their Clients and the United States
U.S. taxpayers filed approximately 150 million returns in 2014. According to statistics available from the Treasury Inspector General for Tax Administration, the Internal Revenue Service (IRS) identified more than 2.1 million of those returns that claimed fraudulent refunds totaling more than $15.7 billion. As in past years, the IRS has designated return preparer fraud as one of 2016’s “Dirty Dozen” tax scams to avoid during return filing season. In 2015, the Tax Division permanently shut down more than 35 fraudulent tax-return preparers located all over the United States. The defendants in those cases spanned the spectrum from large-scale return preparation franchises to small, independent return preparers.
“Every year, thousands of federal income tax returns are prepared by people who care much more about making a quick buck than about preparing accurate returns,” said Acting Assistant Attorney General Ciraolo. “Most tax return preparers are honest. But some preparers who charge clients a percentage of their tax refund intentionally prepare false returns to increase their clients’ refund, and thus their own fees. Likewise, some preparers who charge by the form will intentionally prepare incorrect forms that their clients don’t need in order to increase their compensation. Taxpayers might think that they’re getting a good deal on their taxes, or that as long as someone else prepares the return, they’re not responsible. They’re wrong. Taxpayers who have their return prepared incorrectly are required to pay the tax they owe, or pay back the refund they weren’t entitled to get. These clients might also owe interest and penalties, which can be substantial. Fortunately, there are red flags that taxpayers can look for and avoid when choosing a return preparer.”
Your refund should never be deposited directly into a preparer’s bank account.
In United States v. Elton L. Barnes, No. 2:14-cv-05621 (C.D. Cal.), the court barred a return preparer who caused other people’s tax returns to be deposited to bank accounts in his name.
Never sign a blank return or a blank form, or sign a return or a form without reading it first.
By law, a return preparer must provide a client with a completed copy of the return no later than the time the customer is asked to sign the return. In United States v. Syed N. Ahmed et al., No. 2:15-cv-11461 (E.D. Mich.), the United States alleged that the defendants’ Liberty Tax Service franchises asked customers to sign blank forms that stated that the customers had non-existent businesses, which were then used to maximize the customer’s refund. Although the defendants did not admit to the allegations in the complaint, they agreed to an order from a federal court permanently shutting down the stores.
Don’t use a preparer who mischaracterizes your expenses.
In United States v. Lawrence Preston Siegel, No. 3:15-00643 (S.D. Cal.), the defendant prepared returns that falsely characterized personal purchases as deductible expenses. For instance, one customer’s return deducted purchases at Tiffany & Co., Louis Vuitton, and Royal Caribbean Cruise Lines as “medical expenses.” The court permanently barred Siegel from preparing tax returns or providing tax advice for compensation.
Do not use a preparer who fabricates business expenses or deductions, or who claims bogus credits to which you are not entitled, such as the Earned Income Tax Credit, the child care credit, or the education credit.
One of the most common dishonest return-preparation practices is to prepare returns that include non-existent businesses, sometimes based on a client’s hobbies. In 2015, for example, federal courts shut down tax return preparers in Kahului, Hawaii; Appleton, Wisconsin; and Chicago, Illinois, who fabricated supposed “businesses” for their clients. Federal courts have also ordered return preparers in Miami, Florida, and Memphis, Tennessee to submit to third-party monitoring at their own expense to make sure they are not preparing returns with fraudulent “businesses.”
Some other fraudulent schemes and practices that have been stopped through injunction orders entered by federal courts throughout the country include:
In January 2016, a federal court in Orlando, Florida entered a preliminary injunction against Jason Stinson, who ran a series of tax return preparer storefronts under the name “Nation Tax Services,” requiring him to shut down the stores pending resolution of the case. As part of its explanation for why it was ordering Stinson’s stores to shut down in the middle of the case, the court said that Stinson’s business “exposes . . . [his] customers to individual tax liability. Both the Government and Stinson’s customers will suffer irreparable harm if an injunction is not granted. Moreover, it is in the public’s best interest to protect vulnerable customers from the inaccurate preparation of their taxes, not to deplete Government resources, and to maintain the public trust in the tax system.” The case is United States v. Jason Stinson et al., No. 6:14-cv-1534 (M.D. Fla.).
The IRS advises taxpayers who ask a tax professional to prepare their return to be careful in the professional they select. The IRS offers some basic tips and guidelines to assist taxpayers in choosing a reputable tax professional and is also offering taxpayers a number of instructional YouTube videos to help them prepare their own taxes for the upcoming filing season. Several options, including free assistance with preparation and electronic filing for the elderly and individuals making $50,000 or less, are available to help taxpayers prepare for the current tax season and receive their refunds as easily as possible.
Tax Division Sues to Shut Down Promoters of Fraudulent Tax Schemes
In addition to return preparers who deliberately falsify returns, the Tax Division targets those who peddle schemes that purportedly reduce taxes—but in fact rely on false statements or financial sleight-of-hand.
In United States v. Wayne Reeves et al., No. 12-cv-1916 (D. Nev.), the court found that defendants Wayne Reeves and Diane Vaoga advised their clients “to set up sham trusts and have their wages directed into accounts for those trusts as a way to improperly reduce their tax liability.” They advised their clients that the income the clients received from the trusts was “nontaxable and did not need to be reported on tax returns.” The court further found that Reeves prepared tax returns that “willfully attempted to understate his clients’ correct tax liabilities,” and that Vaoga assisted him in doing so. In January 2015, the court permanently barred both Reeves and Vaoga from preparing returns or giving tax advice to others.
In November 2015, the Tax Division sued to shut down an alleged tax scheme based on a purported solar energy generation facility in Utah. The case is United States v. RaPower-3 LLC et al., No. 2:15-cv-00828 (D. Utah). The United States’ complaint alleges that the defendants purportedly sell “solar thermal lenses” to customers, and tell their customers that they are entitled to claim depreciation expenses and the solar energy credit for the lenses—even though the defendants allegedly know or have reason to know that their customers are not in the business of producing and selling solar energy and that the defendants’ purported solar energy facilities do not actually produce solar energy in a manner that meets the Internal Revenue Code’s requirements for claiming the credit.
And in the same month, in United States v. James Tarpey et al., No. 2:15-cv-00072 (D. Mont.), the Tax Division sued to shut down an alleged timeshare donation scheme. According to the United States’ complaint in that case, the defendants have their customers give rights in a timeshare to “Donate for a Cause,” a tax-exempt entity operated by Tarpey. The complaint alleges that the customers receive an appraisal that grossly overvalues the donated timeshare rights and use that appraisal to claim a large charitable donation deduction, even when the true market value of the timeshare right is a small fraction of the appraised value.
“The Tax Division is committed to stopping those who promote fraudulent tax shelters and other schemes or who prepare false returns,” Acting Assistant Attorney General Ciraolo said. “Along with our colleagues at the IRS, we will find dishonest preparers and fraudulent tax-scheme promoters and work to shut them down. We will hold accountable those who willfully assist taxpayers to file false returns. And in appropriate cases, we will prosecute them. But everyone can help stop fraud and protect our public finances. Pay attention to your tax return and make sure that it’s right. If you think that a tax return preparer is deliberately preparing incorrect returns, or you suspect someone is selling a phony tax-loss scheme, report that person to the IRS.”
The IRS website has information about how to report a dishonest return preparer, as well as information about how to report other types of tax fraud. The Justice Department’s website has a list of tax-return preparers and tax-scheme promoters whom the courts have shut down.
In addition to the civil enforcement through injunctions that stop their illegal actions, many return preparers and promoters also face prosecution. Examples of those investigations can be found for fiscal years 2014 and 2015.
