It’s Who You Know

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Federal tax refund fraud is a growing problem that has the IRS on its toes.  Over the past few years the IRS has intensifyied its efforts to combat refund fraud, but it has been a challenge for the IRS to keep pace.

Some tax criminals are unsophisticated, inexperienced solo operations that are just not very good at what they do.  These are the people we end up reading about in the news after IRS Criminal Investigation nails them.  The more successful tax fraud schemes involve multiple moving parts, or so they think.  For example, when the unsophisticated, inexperienced individual fraudster is well-connected — if he has the right kind of friends — he believes that his potential for swindling the government will increase exponentially.

And if one of his connections happens to be a banker, then he thinks he’s golden.  Hilda Josephine Hernandez-McMullen, a former employee of Wells Fargo Bank, pleaded guilty to seven felony counts of bank fraud.  She admitted to assisting members of an identity theft and tax fraud ring that had sought $25 million in false refunds.  She opened bank accounts for people knowing the information provided to her was inaccurate and she cashed fraudulent checks totalling about $38,000.

Ten members of the fraud ring were charged, and Hernandez-McMullen herself is looking at 30 years in prison for each count of bank fraud if she receives the maximum sentence.  Not so golden afterall…

An IRS January Tradition

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On Thursday the IRS announced a massive nation-wide identity theft crackdown, and I believe I’m starting to see a pattern now. Around the end of December each year we tend to get together with our extended families to drink eggnog, decorate trees, exchange gifts, and engage in various other annual family traditions. Well, the IRS appears to have a tradition of its own, although far less jolly than ours. Each January the IRS gets together with the Department of Justice and the US Attorney to sweep the nation for tax cheats — not exactly the kind of party you want to be invited to.

Here are the results of this years’ festivities:

  • the “sweep” involved 32 states and 215 cities
  • 734 enforcement actions (2,400 total in fiscal year 2012)
  •  109 arrests
  • 189 indictments
  • 47 search warrants
  • visits to 197 money service businesses (i.e., check cashing joints)

Read about specific cases here.

There is no doubt the IRS is strengthening its identity theft prevention and prosecution efforts.  Last year there were only 69 indictments and 58 arrests.  Sentencings are also on the rise, and jail times are getting longer.

The IRS is spending an unprecedented amount of resources on identity theft.  Perhaps the best evidence is the dramatic increase in criminal identity theft investigations:

  • 276 criminal identity theft investigations started in 2011
  • 898 criminal identity theft investigations started in 2012
  • 560 criminal identity theft investigations started so far in 2013

I’m not sure how they would do it, but the IRS could probably do a better job publishing this information and these stats.  It’s great that they’re stepping up efforts to punish identity theives, and the timing is perfect (right as people begin getting their taxes done), but if it’s only the tax attorneys and other tax professionals who are in the know, I would consider it a big opportunity lost.

IRSAC 2012 Report, Part II

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image via networkeducator.com

Identity theft is another prevalent issue for the IRS and another topic that the IRSAC has attempted to address in its report.  But I don’t think their recommendation for curbing identity theft would be popular with most taxpayers who (mistakenly) see their April refund check as the ultimate form of tax relief:

The IRS should strongly consider delaying refunds until after verification of the taxpayer’s identity. For taxpayers that rely on an early refund in January, the IRS should consider a process under which 25 percent of the refund is issued prior to verification, and the remaining 75 percent issued after verification.

Everything the IRS has done up until now has been aimed at speeding up the refund process and shifting over to a “real-time” tax system.  See IRS Real Time Tax Initiative.  But with the onslaught of fraudulent refunds obtained by using stolen identities, the IRS may have to backpedal somewhat.  The thought of having to wait a little longer will be very frustrating to the average taxpayer.  I imagine it would be somewhat like having to go back to a dial-up internet connection after being accustomed to DSL.  Of course, from a tax attorney perspective, the solution is to adjust your withholdings so you don’t end up with a huge refund in the first place.

California Attorney Failed to File Tax Returns – Sentenced to 6 Months in Prison

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California attorney Kevin Mirecki has been sentenced to six months in federal prison after pleading guilty to three counts of failing to file his tax returns and will not obtain tax relief. Mirecki was also ordered to pay more than $225,000 in restitution and fines. Mirecki entered his guilty plea in 2009 and admitted he failed to report more than $1.3 million in income over a three-year period.

Mirecki also founded Genesis Fund Ltd., which investigators say was a foreign-currency Ponzi scheme that bilked at least $80 million from hundreds of investors. Eight people pleaded guilty and another was convicted at trial in connection with the scam.

According to the indictment related to Genesis Fund Ltd., the defendants falsely claimed that investors received monthly returns of four percent, when investments were actually used to make “profit” distributions to defendants and early investors. The defendants promoted the Genesis Fund as having no reporting obligations to the IRS. Bank accounts in the names of trusts and offshore bank accounts were allegedly used to receive distributions from the Genesis Fund that were not reported to the IRS. Some of the defendants allegedly created “disclosed” and “undisclosed” Genesis Fund accounts for themselves and certain fund investors in order to conceal from the IRS all but a small portion of the fund’s distributions. In addition, some Genesis Fund investors were allegedly advised to create nominee offshore corporations and bank accounts to receive distributions from the fund.

The indictment further alleged that to obscure the operations of the fund and to limit scrutiny of its operations by investors and the government, the defendants caused the Genesis Fund to maintain no financial statements or other statements of operation. Additionally, in or about April 2000, to conceal the true nature of its operations from investors and the government, Genesis Fund’s administrative operations were relocated from Anaheim, Calif., to Costa Rica. At about the same time, paper records were moved to Costa Rica and electronic data on computers was destroyed.

San Diego Couple Busted for Alleged Tax Fraud

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Dr. James Francis Murphy, 51, and his wife Denine Christine Murphy, 49, from the San Diego area, ran a successful medical practice.  But while Dr. Murphy was providing pain relief to his patients, he must have been sneaking toxic doses of tax relief for himself.  According to the indictment, their crimes were “corrupt interference with the administration of IRS laws and presenting false claims to the United States for fraudulent income tax refunds” over a period of about 10 years.

This story illustrates the fact that there is no one demographic for those who would cheat the system by either failing to pay their fair share or by scamming the government out of money by way of false refund claims (or both).  Many of the criminals as of late tend to be trafficking in stolen identities straight off the streets of Tampa, FL.  But there are plenty of sophisticated “professionals” who are scam artists too.

One would expect that the more sophisticated tax criminals would engage in elaborate, complicated transactions to suppress their tax problems and make a buck, but Mr. and Mrs. Murphy preferred to keep it simple.  Their master plan included the following basic components:

  • hide income
  • claim huge unjustifiable refunds
  • pay taxes with checks that bounce
  • threaten IRS employees

See full story here.

What’s with Floridians and their Penchant for Tax Crimes?

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I recently blogged about how Florida is becoming a hotbed of tax crimes.  The US Department of Justice issued a press release this week about a Floridian who appears to be engaging in illegal tax activities right from his prison cell.  I say “appears to be” because, procedurally, this is still just a grand jury indictment, not a conviction.

David Marrero has been charged with corruptly endeavoring to obstruct the Internal Revenue Service (IRS) and filing false claims.  He filed false tax returns in hopes of getting a refund from the government.  He even went so far as to prepare bogus income docs to support his fraudulent refund claims.  Marrero also used other peoples’ financial information as part of his scheme — a common technique in the underground business of false return filing.  If you have tax problems, hopefully this story makes them seem small in comparison.

The IRS has promised to scrutinize return preparer certifications that are issued to inmates, perhaps they should also be taking a careful look at any and all returns filed from prisons.  I’m sure they already are, and that is probably why David Marrero’s strategy failed.  So much for getting out early for good behavior…

Tax Crimes in the Sunshine State

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For whatever reason, sunny Florida is a hotbed of criminal tax activities.  Refund fraud is particularly rampant in Tampa, as described in a very interesting article appearing in the Tampa Bay Times over the weekend.  According to the author, Patty Ryan, the new generation of tax criminals either do not fear the IRS or do not believe what they are doing is all that bad when compared to other crimes like drug dealing.

“Frequently, when police find probable cause to search for drugs on a traffic stop, they find trappings of the tax refund trade.

A Nissan Xterra searched in a March 30 drug bust … in East Tampa turned up 48.7 grams of powder and rock cocaine, 100 grams of marijuana, digital scales, $14,957 in cash, four fraudulent tax return checks worth $32,165, and 67 TurboTax debit cards, along with ledgers of personal information for hundreds of people, police said.

The IRS has identified Tampa as an ideal location for a pilot program that would enlist the cooperation of local law enforcement in cracking down on tax cheats.  It’s easy to see why they chose Tampa.

IRS to Cooperate with Local Police in Fraud Probes

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The IRS’ criminal investigation division has kept itself very busy with refund fraud cases in recent years.  They would love to be able to enlist the cooperation of local law enforcement but have always been prohibited from sharing some of the information necessary to apprehend tax criminals.  Individual tax return information, for instance, has always been kept strictly confidential under long-standing IRS rules.  In fact, it is a crime for IRS workers to share this sensitive information outside the context of their work.  Believe me, they are very cautious with this data, even in standard tax resolution inquiries.

However, under a pilot program that will be initiated in Tampa, Florida, the IRS will begin sharing some tax return information to local police, so long as the victims of identity theft and tax refund fraud give their consent.  There is no start date yet.

Surprisingly, National Taxpayer Advocate, Nina Olson, is not opposed to this new legislation, as long as the information shared with police is used strictly for law enforcement purposes.

Your Tax Preparer Might be an Inmate

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It’s 10:00pm; do you know where your children are right now?  What about your tax preparer?

According to a recent TIGTA audit, the IRS approved 331 tax preparer identification numbers to individuals serving prison terms.

  • How did they do it?  In most cases the prisoners lied on their applications by not disclosing their convictions.
  • Why do they do it?  To try to defraud the IRS.  They use false or fraudulent tax returns in hopes of obtaining refunds.  Prisoners have a history of trying to defraud the government, particularly the IRS.  They have enough time on their hands and not much to lose if their scheme is unproductive.
  • What is the IRS doing about it?  The IRS has vowed to suspend tax preparer identification numbers already issued to prisoners and deny any future applications from inmates.

Chances are that these inmate preparers are not actually preparing returns for the average American consumer.  Maybe they’re doing returns for their fellow inmates.  Maybe their laying the groundwork for after their prison terms are over.  Or, even more likely, they are just seeing where this new credential will take them.  Whatever the case may be, it is usually a good idea to actually meet your tax preparer in a face-to-face meeting . . . even if just to confirm they’re working out of an office and not a prison cell.

Another Co-conspirator in the Madoff Scheme

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Today Enrica Cotellessa-Pitz, Bernie Madoff’s former controller, pleaded guilty to conspiracy, falsifying books and records, and making false filings with the Securities and Exchange Commission. She could spend up to 50 years in prison.

Cotellessa-Pitz said she started working at Bernard L. Madoff Investment Securities LLC in 1978 while she was studying economics in college. She was named controller in late 1998. She said Madoff and others within months were directing her to put false entries in the company’s books to make it appear profitable trades were being made and that losses were not incurred.

~ LARRY NEUMEISTER, The Associated Press

She also helped Madoff’s organization reduce its tax liabilities by underreporting income to the IRS. Madoff’s own 2004 tax return was audited when he underreported by millions of dollars. And then when faced with audits, Cotellessa-Pitz perpetuated the fraud by providing false information to the SEC and the IRS.

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