It is no secret that the Justice Department likes to publicize its civil and criminal enforcement efforts in the tax area as April 15 approaches. Every year, we observe numerous press releases from the government announcing high profile indictments or guilty pleas in tax cases in the weeks leading up to tax day. The logic behind the DOJ’s media blitz is that taxpayers who are preparing and finalizing their tax returns will think twice about cheating on their taxes when they read announcements about criminal tax cases in the media. This year is no different, and today the Justice Department issue a comprehensive press release reviewing the government’s accomplishments in several areas, including the prosecution of tax evasion, combatting tax shelters, cracking down on the use of offshore bank accounts to hide assets, and stopping identity theft. The text of the DOJ press release follows:
JUSTICE DEPARTMENT HIGHLIGHTS TAX DIVISION’S ENFORCEMENT RESULTS
Success Demonstrated in Critical Enforcement Areas Including Fraud, Abusive Tax Shelters, Offshore Evasion and Identity Theft as 2014 Filing Deadline Approaches
WASHINGTON – With the annual tax filing deadline approaching on April 15, today the Justice Department announced highlights of its work during the past year to enforce the nation’s tax laws. The Tax Division has worked with the Internal Revenue Service (IRS) to carry out their combined tax enforcement missions in critical areas, including prosecuting tax fraud and evasion, halting the spread of abusive tax shelters, tracking down tax cheats who use offshore accounts and combating stolen identity refund fraud. Previously, the division announced that it has shut down more than 60 fraudulent tax preparers over the past 12 months.
The division’s primary purpose is to enforce the nation’s tax laws fully, fairly and consistently through both criminal and civil litigation. Some of the division’s accomplishments from the past fiscal year (FY 2013) include:
- Favorable outcomes in approximately 95 percent of all civil and criminal cases litigated by the division;
- The division authorized 749 grand jury investigations and 1,495 prosecutions of individual defendants;
- Division prosecutors obtained 125 indictments and 114 convictions (not including the additional criminal tax prosecutions handled exclusively by U.S. Attorneys’ Offices nationwide);
- The division collected over $235 million through affirmative civil litigation and retained over $975 million through defensive tax refund and other litigation and;
- Taking into account the tax dollars collected and refunds not paid as a result of the division’s successful litigation efforts, over the past five fiscal years (FY 2009-2013), the division’s attorneys have returned an average of $14 for each dollar invested to the U.S. Treasury.
“The taxes paid by honest taxpayers pay for important government functions, from support for our military to the operation of our national parks,” said Assistant Attorney General Kathryn Keneally. “Those who would cheat their neighbors and fellow citizens should know that we are committed to enforcing the tax laws. The department will continue to use all available law enforcement tools to recover tax revenue and to punish tax offenders.”
“The IRS and Justice Department continue to make important progress on issues ranging from identity theft and offshore evasion to fraudulent return preparers and abusive tax shelters,” said IRS Commissioner John Koskinen. “As the April 15 deadline approaches, taxpayers should remember that we are working year-round to ensure that everyone plays by the rules and follows the law. The hard work of the Justice Department and the IRS can be seen in the long list of criminal and civil tax enforcement actions across the country during the past year.”
Prosecuting Tax Offenses
The division has supervisory authority over all criminal conduct involving federal tax laws. The division has always maintained the investigation and prosecution of tax crimes as a central focus, including tax evasion, failure to file returns, submission of false tax returns and other conduct designed to violate federal tax laws. Division attorneys are also particularly adept at prosecuting tax defiers, individuals who purposefully refuse to comply with tax laws and use frivolous arguments to support their positions.
Some of the division’s criminal tax prosecution highlights from the past 12 months include:
- April 2014 – Tommy Edward Clack, a paving contractor, was sentenced by a federal court in Winston-Salem, N.C., to serve 66 months in prison for filing a false 2007 tax return and making a false statement to a federally insured bank to obtain a mortgage. From 2004 through 2007, Clack underreported income that he received from his paving businesses, which caused a tax loss of more than $1.3 million.
- March 2014 – Matthew Bender, a tax return preparer from Detroit, was convicted for aiding and assisting in the preparation of false income tax returns for his clients, as well as failing to report the income he earned as a return preparer. Bender prepared over 3,000 tax returns between 2006 and 2011 and earned over $500,000 in tax preparation fees, which he failed to report to the IRS. Bender placed false deductions on customers’ returns, which caused their tax refunds to be inflated.
- December 2013 – John Hoang, an attorney and certified public accountant from Woodbridge, Va., was sentenced to serve four years in prison for aiding and assisting in the preparation of false tax returns for his clients, resulting in a tax loss of over $1.5 million.
- July 2013 – Timothy Turner, the self-proclaimed president of the so-called sovereign citizen group Republic for the united States of America (RuSA), was sentenced to serve 18 years in prison for conspiracy to defraud the United States, attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the IRS, failing to file a 2009 federal income tax return and falsely testifying under oath.
- July 2013 – Richard Whatley, a former owner of an employee leasing company, was sentenced to serve 51 months in prison for failing to account for and pay over employment taxes.
- May 2013 – Joseph Rizzuti of Stuart, Fla., was sentenced to serve 80 months in prison for conspiracy to commit wire fraud and obstructing the IRS. Rizzuti, an accountant, interfered with the IRS’ ability to collect taxes owed by two clients and admitted to engaging in a conspiracy to commit wire fraud.
Stopping the Spread of Tax Shelters
The division also plays a critical role in the government’s efforts to combat abusive tax shelters. According to U.S. Treasury estimates, abusive tax shelters for large corporations and high-income individuals cost the government billions of dollars annually. In recent years, the division’s civil litigators at both the trial and appellate levels have won important victories in cases involving tax shelters with names such as STARS, Son of BOSS, FOCus, BLIPS, OPIS, DAD and SILO/LILO.
Some of the division’s successes over the past 12 months include:
- December 2013 – In United States v. Woods, the Supreme Court unanimously held that a 40 percent gross valuation misstatement penalty applies when a taxpayer engages in an abusive tax shelter scheme that lacks economic substance.
- December 2013 – The division successfully defended a favorable Tax Court decision in Blum v. Commissioner, a case involving the Offshore Portfolio Investment Strategy (OPIS) tax shelter. The 10th Circuit Court of Appeals held that the taxpayer was not entitled to a $45 million loss generated by the OPIS transaction because the transaction lacked economic substance, and that valuation misstatement penalties should be imposed. As the court explained, the “intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it cannot make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages.”
- September 2013 – After a month-long trial, the division prevailed in the Court of Federal Claims against BB&T Corporation, which had claimed more than $660 million in tax benefits based on a sham transaction known as Structured Trust Advantaged Repackaged Securities (STARS). In Salem Financial Inc. v. United States, the court ruled that BB&T was not entitled to the tax benefits and imposed $112 million in penalties. The court concluded that the conduct of BB&T, the designers and marketers of the STARS transaction and the law firm that provided tax advice supporting the transaction was “nothing short of reprehensible” and that the considerable effort put into the transaction was a “waste of human potential.” This case is currently on appeal.
- August 2013 – The division successfully defended a favorable district court decision in WFC Holdings Corp. v. United States, a case involving a contingent-liability tax shelter. The Eighth Circuit Court of Appeals found that the literal language of the Internal Revenue Code supported the company’s tax treatment of the transaction, but nonetheless disallowed the company’s asserted tax loss and resulting $82 million tax refund because the transaction lacked economic substance and a subjective business purpose.
Investigating Offshore Evasion
The division continues to play a leading role in investigations and prosecutions involving the use of foreign tax havens and remains committed to investigating offshore tax evasion around the globe. The division’s current offshore program began in 2008, with the investigation of UBS, which resulted in the 2009 UBS deferred prosecution agreement. In January 2013, the U.S. Attorney’s Office in the Southern District of New York secured the guilty plea of Wegelin Bank, the oldest private bank in Switzerland and the first foreign bank to plead guilty to felony tax charges. In July 2013, Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein, entered into a non-prosecution agreement and agreed to pay more than $23.8 million stemming from its offshore banking activities and turned over more than 200 account files of U.S. taxpayers who held undeclared accounts at the bank.
Since 2009, the department has publicly charged 74 account holders and 38 bankers and advisors with violations arising from offshore banking activities. So far, 61 account holders have pleaded guilty, seven were convicted at trial and five await trial. Six bankers and financial advisors have pleaded guilty and several are fugitives. In October 2013, Raoul Weil, formerly the third highest banking official at UBS and the subject of a 2008 indictment for his role in assisting U.S. clients to evade taxes, was arrested in Italy, waived extradition and is now awaiting trial.
Additional highlights from the division and the U.S. Attorneys’ Offices include:
- March 2014 – Former Swiss banker Andreas Bachmann pleaded guilty to engaging in a wide-ranging conspiracy to aid and assist U.S. customers in evading their taxes by concealing assets and income in secret Swiss bank accounts.
- March 2014 – Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted for money laundering and conspiracy to launder monetary instruments relating to assisting U.S. citizens in hiding assets from the U.S. government. According to the indictment, the Caribbean-based defendants assisted undercover law enforcement agents, posing as U.S. clients, in laundering criminal proceeds through an offshore entity in order to conceal thetrue owner.
- March 2014 – Victor Lipukhin, a Russian citizen and former lawful permanent U.S. resident, was indicted for attempting to interfere with the administration of the internal revenue laws and for filing false tax returns relating to several secret Swiss bank accounts. According to the indictment, Lipukhin maintained accounts worth more than $10 million at UBS AG in the name of sham entities based in the Bahamas, failed to report his ownership of the accounts and used fictitious mortgages when purchasing real estate in the U.S. to further conceal ownership of the accounts.
- October 2013 – Ashvin Desai, the owner of a medical device company in San Jose, Calif., was convicted of filing false tax returns, aiding and assisting in the preparation of false tax returns, and failing to file Reports of Foreign Bank and Financial Accounts (FBARs) in connection with accounts held at The Hongkong and Shanghai Banking Corporation Ltd. (HSBC) in India that generated over $1.1 million in interest income.
- October 2013 – Patricia Lynn Hough, a physician and owner of two Caribbean-based medical schools, was convicted of conspiring to defraud the U.S. and filing false tax returns. Hough concealed millions of dollars in assets and income in offshore bank accounts held at UBS and other foreign banks.
- April 2013 – Arizona businessmen Stephen M. Kerr and Michael Quiel were convicted after a jury trial of filing false individual tax returns, and Kerr was additionally convicted of failing to file an FBAR related to secret Swiss bank accounts. Co-defendant Christopher Rusch, a San Diego attorney who assisted Kerr and Quiel, pleaded guilty to federal tax charges in February 2013. All three men were sentenced to serve 10 months in federal prison.
The department is also successfully using a variety of law enforcement tools to gather information for use in future enforcement efforts. In two separate actions in 2013, the U.S. District Court in the Southern District of New York authorized the IRS to issue “John Doe” summonses to several U.S. banks that hold correspondent bank accounts for Wegelin & Co., Zurcher Kantonalbank and The Bank of N.T. Butterfield & Son Limited through which the foreign banks move money into and out of the United States. The division secured a similar order from the U.S. District Court in the Northern District of California relating to a U.S. account used by Canadian Imperial Bank of Commerce FirstCarribean International Bank. Together, the summonses will allow the U.S. government to determine the identity of U.S. taxpayers who may hold accounts in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.
The department also announced a program on Aug. 29, 2013, that encouraged Swiss banks to cooperate in the department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion. The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the Program) allows Swiss banks not currently under investigation to come forward to provide cooperation and pay steep penalties in return for the possibility of a non-prosecution agreement or deferred prosecution agreement. The Program expressly excluded banks that were previously authorized for investigation in connection with their Swiss banking activity, 14 at the time of the announcement, and expressly excludes all individuals. The department has received over 100 letters of intent to participate in the Program from Swiss entities. Every Swiss bank that cooperates under the Program represents an opportunity to obtain valuable law enforcement information.
Combating Identity Theft
The division, in conjunction with the IRS and U.S. Attorneys nationwide, has made the investigation and prosecution of individuals who engage in stolen identity refund fraud (SIRF) a high priority. The division is targeting individuals involved in all stages of these schemes, including those who illegally obtain Social Security numbers and other personal identifying information, those who file the false returns with the IRS, those who facilitate cashing the checks or otherwise obtaining the refunds and those who mastermind or promote these scams.
Some highlights of the division’s success in this area include:
- October 2013 – Vernon Harrison, a corrupt U.S. Postal Service mail carrier, was sentenced to serve nine years and three months in federal prison. According to court documents, tax refunds were placed on debit cards and mailed to addresses on Harrison’s postal route in Montgomery, Ala., which he then stole from the mail and provided to a co-conspirator in exchange for cash.
- September 2013 – Lea’Tice Phillips, an employee of an Alabama state agency, was sentenced to serve seven years and 10 months in federal prison. As alleged in court documents, Phillips had access to databases that contained personal identifying information and conspired with others to file false tax returns using identities stolen from the database.
- July 2013 – Angela Myers, who operated a tax preparation business located in Baton Rouge, La., was sentenced to serve 11 years in federal prison. According to court documents, Myers electronically filed false claims for refunds using the names and social security numbers of identity theft victims, many of whom were nursing home patients.
Return Preparer Fraud
Corrupt accountants and fraudulent tax return preparers present a serious law enforcement concern. Some accountants and return preparers dupe unwitting clients into filing fraudulent returns, while others serve as willing enablers by providing a veneer of legitimacy for clients predisposed to cheat. The division’s civil injunction program, now more than 10 years old, continues to be an effective way to shut down fraudulent return preparers and illegal tax-scheme promoters – especially during filing season – thereby reducing the harm to the public while potential criminal investigations are ongoing. In February, the division announced recent successes in its civil injunction program including more than 60 injunctions entered against both large-scale tax return preparation franchises and smaller, independent return preparers and promoters across the country.
Some of the division’s successes include:
- November 2013 – the division concluded civil actions resulting in permanent injunctions against ITS Financial LLC, the parent company of the Instant Tax Service franchise located in Dayton, Ohio. Earlier in the year, the division obtained injunctions against Instant Tax franchises in Kansas City, Kan., Los Angeles and Indianapolis. Instant Tax Service claimed to be the fourth-largest tax-preparation firm in the nation.
- September 2013 – the division obtained injunctions that permanently barred the owners, Markey Granberry and Derrick Robinson, as well as Eumora Reese, a former manager, of Mo’ Money Taxes, tax-preparation chain based in Memphis, Tenn., that at one time operated as many as 300 offices in 18 states, from preparing tax returns for others and owning or operating a tax return preparation business. Earlier, in March 2013, a federal district court in Tennessee permanently shut down a Nashville, Tenn., licensee of Mo’ Money Taxes LLC and MoneyCo USA LLC.
- Numerous smaller tax return preparation businesses and individual preparers around the country who were engaging in fraudulent practices were also subjects of injunctions, including tax return preparers in Indiana, Maryland, Missouri, Texas, Georgia, South Carolina, Florida and California.
- October 2013 – a federal court permanently barred Tobias Elsass and his companies from preparing federal tax returns, promoting the availability of theft loss deductions or engaging in any other tax-related business. The court found that Elsass and Fraud Recovery Group promoted a nationwide scheme that falsely informed customers that they were entitled to claim large theft loss tax deductions, and then prepared the tax returns that improperly claimed such deductions.
Hiding income offshore, identity theft, and return preparer fraud are all part of the IRS’s “Dirty Dozen Tax Scams.” More information about the Tax Division’s civil and criminal enforcement efforts in these and other areas is available on the Justice Department website. For more on the Dirty Dozen Tax Scams, see the IRS website and the IRS YouTube Channel.