Another Tax Preparer Fraud Case

A Cincinnati man has proven there is more than one way to cheat on your taxes. And now, in addition to his huge tax debt, he has criminal charges levied against him.

Yesterday John Humphrey, III, 46, was sentenced to 12 months of home confinement and ordered to pay more than $65,000 in restitution to the IRS. Humphrey, a tax preparer by trade, pleaded guilty to filing false tax returns for both himself and his clients.

His own returns appear to be a mixed bag of illegal tax tricks:

  • 2004 – failed to report wage income
  • 2005 and 2006 – claimed niece as a dependent to claim a false exemption deduction
  • 2007 – omitted more than $100,000 in gross receipts from his business, The Tax Place
  • 2008 – claimed a false “Contract Labor” business expense

Besides the 12 months of home confinement, Mr. Humphrey will also have 3 years of probation and will likely have to find a new profession. His sentencing included a prohibition from preparing his own tax return and from working at a tax preparation firm.

Don’t Forget to Report your Cash Bribes

The number one IRS rule that every taxpayer should remember to avoid tax trouble: you must report all your income, whatever the source.  Even illegal sources.

John Guarini, a former Jersey City housing inspector, pleaded guilty to tax evasion on Tuesday. Here’s what he did:

  1. Accepted cash bribes totaling $20,000 from a government informant in exchange for building permits
  2. Accepted cash bribe meant for another government official, but then pocketed the money for himself
  3. Failed to report any of it on his income tax return

Full story here.

These types of criminals are commonly prosecuted on tax fraud grounds, and this particular criminal faces 3 years in prison and fines of up to $250,000.

Multiple-filers and the Martinsburg Monster

Before the IRS went into full automation mode and before the IRS used computers in any meaningful way, there were the “multiple-filers.” This was the illegal practice of filing false returns (with phony names, wages, and social security numbers) claiming refunds — usually several returns claiming modest refunds so as to not draw too much attention. And it worked. Many refunds were paid out in error this way. But the multiple-filers would get caught sometimes too (the IRS would probably say “most of the time”).

The term “multiple-filing” doesn’t appear anywhere on the IRS website. Today it is more commonly referred to as “refund fraud.”

In the early 1960′s the IRS housed its computers in a single location in Martinsburg, West Virginia. That first IRS computer center began busting multiple-filers and other tax cheats with a computer system known as the “Martinsburg Monster.”

Check out the April 12, 1963 Life magazine story discussing several successful multiple-filer busts by IRS Intelligence Division head, H. Alan Long and his agents.

IRS Has Increased Criminal Investigations and Convictions

According to an August 29, 2011 press release by the Treasury Inspector General for Tax Administration (TIGTA), IRS criminal investigations are up 12.3% and criminal convictions have risen 6.9% since 2009.  These figures include investigations of illegal businesses and income sources, but the Criminal Investigation division of the IRS still spends a majority of its time with “legal source” investigations.

Often a bearer of bad news, the last time I mentioned TIGTA, they had reported a 74% increase in tax lien filings at the IRS.  Of course the government doesn’t see it this way, in fact TIGTA commended the IRS for surpassing its goals and expectations.

The Capone Investigation

Everybody knows the most infamous tax evader of all time: Alphonse “Scarface” Capone, the Chicago gangster with  all the highly lucrative and illegal business. But did you know that some of the internal IRS correspondence from the Al Capone investigation are available online? What follows is a sample taken from a 1931 letter written by IRS agents Hodgins, Westrich, and Clagett. Note the sarcastic tone of the letter (it helps if you read it out loud and with a Chicago accent):

Al Capone, a punk hoodlum, came to Chicago from New York about 1920, as a protegé of John Torrio, who, at the time was a lieutenant of Jim Colisimo. The first heard of Capone was as a bouncer in a notoriously tough joint called the “Four Deuces”. In the course of time, Colisimo, following the path of all good gangsters, was “bumped off” and Torrio took control. True to tradition, the guns again began to blaze, but this time the person behind the gun evidently had poor eyesight, and Torrio, instead of going to the cemetery, took a vacation in the hospital.

Normally records such as these would not be available to the public, but the Capone records were released because they have such extraordinary historical significance. According to the IRS, “No other IRS records meet the unique set of circumstances that make the Capone records publicly available.”

For tax relief that doesn’t involve “bumping off” the collector, contact Montgomery & Wetenkamp.

Richard Hatch Barely Surviving

On this day in 2000, the first season finale of the reality show “Survivor” aired on CBS, with contestant Richard Hatch winning the $1 million prize . . . that he never paid taxes one.  See full story here.

Hatch spent more than three years in prison for not paying taxes on “Survivor” winnings. He was released in 2009 and ordered to refile his 2000 and 2001 taxes and pay what he owed, but he never did, so he was returned to prison. He is appealing this decision and wants a court-appointed attorney to help him, claiming that he is destitute and completely unable to pay for counsel himself.

Hatch claims the Internal Revenue Service has yet to inform him how much he owes on his winnings from 10 years ago. He also says he has new evidence indicating the taxes are due to the government of Malaysia, where the first season was filmed, and not to the United States. It doesn’t look like he’s going to get a court-appointed attorney, and it is going to be an uphill climb for him to get the tax relief he seeks without one.

Tax Crimes

Ever wonder what it would take to be convicted of a tax crime? It’s probably less than what you would think. Hopefully you continue reading this post to satisfy your curiosity and not because you have any real need to know. Obtaining tax relief early in the game will usually help you avoid criminal investigations.

So for inquiring minds, here are some of the more common tax violations:

1. Evasion of Assessment

2. Evasion of Payment

3. Failure to Collect or Pay over Tax

4. Failure to File

5. Fraud & False Statements

All of these offenses require wilfulness, or criminal intent. Take “Failure to File,” for example. You may be guilty under Internal Revenue Code section 7203 for failure to file a return if (1) you are required to file a return, and (2) you willfully fail to file the return when it is required to be filed. Simple as that. If convicted, the penalty can be as high as $25,000, or imprisonment for up to one year, or both.

The “Evasion of Assessment” and “Evasion of Payment” crimes may be applicable even if the tax assessment or payment was not ultimately evaded. For example, you may be found guilty under Internal Revenue Code section 7201 for attempting to evade or defeat a tax if (1) a tax is due and owing, and (2) you willfully attempt to evade or defeat a tax or the payment of a tax. If convicted, the penalty can be as high as $100,000, or imprisonment for up to five years, or both. See the IRS Tax Crimes Handbook for more information.

The silver lining here is that wilfulness is usually a subjective standard in the tax code, meaning that a defendant’s good faith belief that he is not violating the tax laws, no matter how objectively unreasonable that belief may be, is a defense in a tax prosecution.

IRS Warning to Taxpayers Nationwide

The latest in the Internal Revenue Service’s “Summer Tax Tips” series is a firm warning about some of the most prevalent and dangerous tax scams. The IRS identifies 5 scams that pop up any time of the year:

1. Hiding Money in Offshore Accounts
2. Phishing / Identity Theft
3. Return Preparer Fraud
4. Filing Fraudulent Returns or Forms
5. Frivilous Tax Arguments

Some of these schemes are the product of fraud or deceipt on the part of a third party where the victim is the taxpayer. Numbers 2, 3 and 5 fall into this category. Others are the product of deceiptful activities undertaken by the taxpayer where the victim is the government. Numbers 1 and 4 fall into this category. And some of these probably fall into a third category whereby the hustle involves the taxpayer and the third party working together to deceive the government. Numbers 1, 4, and 5 fall into this category. However you want to categorize them, they are activities that you want to avoid. The IRS has taken great care to provide information to the public on how to recognize these activities, how to avoid them when they are encountered, and also what to do if you find yourself a victim.