9th Circuit: Online Poker Accounts Not Reportable on FBAR

On July 21, 2016, the Ninth Circuit in United States v. Hom, No. 14-16214 D.C. No. 3:13-cv-03721-WHA (9th Cir. 2016), determined that a taxpayer who held an online poker account with PokerStars and PartyPoker was not required to report those accounts on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR).  The taxpayer, however, was required to report his FirePay account on an FBAR.

The Ninth Circuit overturned the decision of the United States District Court for the Northern District of California, in part, which had held that all these three accounts were reportable on an FBAR.

The key issue was whether either PokerStars, PartyPoker or FirePay was a financial institution.

The Ninth Circuit stated that:

“[F]inancial institution” is in turn defined to include a number of specific types of businesses, including “a commercial bank,” “a private banker,” and “a licensed sender of money or any other person who engages as a business in the transmission of funds.” 31 U.S.C. § 5312(a)(2).

Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. See 31 U.S.C. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5) (2006). FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.” See 31 C.F.R. § 103.11(uu)(5) (2006). Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.See IRS, FBAR Reference Guide, https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf (last visited July 19, 2016) (“Typically, a financial account that is maintained with a financial institution located outside of the United States is a foreign financial account.”).

In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.

Chicago Restaurant Tax Case Highlights Broad DOJ Authority

May 25, 2016


The U.S. Department of Justice’s filing of criminal charges against a Chicago restaurant owner who failed to pay state sales tax demonstrates the perils business owners face if they underreport their gross receipts to avoid paying sales tax. Hu Xiaojun, who owns and operates nine restaurants in the Chicago area, was charged with federal wire fraud and money laundering offenses arising from his failure to pay Illinois sales tax on nearly $10 million in cash transactions occurring at his restaurants over a four-year period.[1] On May 16, 2016, Xiaojun pleaded guilty to one count of wire fraud and one count of money laundering. He faces a prison sentence of 41 to 51 months, and must pay restitution of over $1 million to the Illinois Department of Revenue as well as forfeit an additional amount as punishment for his misconduct. Sentencing is scheduled for Aug. 22, 2016.

The Offense Conduct

According to the publicly filed guilty plea agreement, between January 2010 and September 2014, Xiaojun failed to pay sales tax on transactions in which customers paid cash. To conceal cash sales, he instructed restaurant managers and employees to provide him with daily summaries of restaurant sales, which he would in turn alter to conceal cash sales. Xiaojun and others would destroy the daily summary reports and cash transactions receipts, replacing them with incorrect reports that omitted the bulk of each restaurant’s cash sales. To hide cash sales from the state tax authorities, the defendant instructed employees to withhold cash generated from the restaurants from the corporate bank accounts to avoid creating financial records for those cash sales. The defendant instead used the cash to pay restaurant employees and suppliers without recording those expenses in the corporate books and records. The defendant also deposited a portion of the cash into his personal bank account, which he then used to pay personal expenses.

During the 2010 to 2014 time period, the defendant instructed others to submit fraudulent sales figures to the Illinois Department of Revenue on monthly sales tax returns. Each month, the defendant directed his employees to provide false sales figures to his accountants, who in turn provided those figures to the state. In all, the defendant underreported his sales to the state by nearly $10 million, resulting in his underpayment of sales taxes by more than $1.1 million.

The wire fraud charge to which the defendant pleaded guilty is based upon his sending of an email containing false sales figures for the month of May 2014. The money laundering charge to which the defendant pleaded guilty is based upon a series of financial transactions that he conducted using proceeds of his scheme to defraud the Illinois Department of Revenue. Specifically, the defendant deposited over $72,000 in cash into his personal bank account, which he knew consisted of funds derived from cash sales at his restaurants that were concealed from the state tax authorities. The defendant thereafter withdrew $60,000 from that account and purchased an official bank check, which he then deposited into a different business account. The defendant used the funds in that second bank account to purchase a restaurant and equipment, which he subsequently operated.


At first glance, the facts of United States v. Xiaojun read like a typical criminal tax case and include the all-too-common attributes of tax fraud in the restaurant industry: the concealment of cash sales and the use of diverted cash to pay employees, purveyors and personal expenses of the restaurant’s owners. Indeed, the Justice Department’s website is replete with press releases announcing criminal tax charges against restaurant owners who engaged in conduct similar to that of Xiaojun, mostly commonly filing of false income tax returns in violation of 26 U.S.C. § 7206 or tax evasion in violation of 26 U.S.C. § 7201.

For example, in United States v. Happy Asker, the owner of a chain of pizza restaurants in the Detroit area engaged in what the government called “a systematic and pervasive tax fraud scheme to defraud the IRS” by substantially underreporting gross sales and payroll amounts on corporate income tax returns and employment tax returns filed for nearly 60 restaurant locations.[2] Over a three-year period, the defendant and his co-conspirators diverted for personal use more than $6.1 million in cash gross receipts and failed to report approximately $3.84 million of gross income and pay approximately $2.39 million in payroll taxes. A portion of the unreported income was shared among the defendant and most of his franchise owners, in a weekly cash “profit split.” As a result of this conduct, the defendant was charged with, and later convicted of, typical Title 26 offenses: filing false personal income tax returns, aiding and assisting in the filing of false corporate income and employment tax returns for several pizza restaurants, and obstructing and impeding the administration of the Internal Revenue Code.

In another fairly typical case, United States v. Ramon S. Arias, the defendant owned numerous Little Caesars pizza franchises in Alabama, Georgia and Louisiana. In a written plea agreement, the defendant admitted that between 2010 and 2013, he “skimmed” hundreds of thousands of dollars of cash from his restaurants and concealed these cash receipts from his accountant. As a result, the S corporation tax returns underreported gross receipts from the restaurants, and those omissions flowed through to the defendant’s personal income tax returns. The defendant pleaded guilty to one count of filing a false 2013 personal income tax return in violation of 26 U.S.C. § 7206(1) and agreed to pay restitution to the Internal Revenue Service for the years 2010 through 2013.[3]

What makes United States v. Xiaojun notable is that the Justice Department chose not to assert a single federal tax charge against the defendant. Based upon admissions in his plea agreement, the defendant presumably failed to report as taxable income the concealed cash receipts, thereby likely exposing him to multiple federal income tax charges during the five tax years at issue (2010 through 2014). In addition, the defendant’s payment of his employees in cash presumably could have led to employment tax-related charges. But instead of charging Title 26 offenses, the government transformed this garden-variety criminal tax case into a wire fraud and money laundering case by focusing on the defendant’s failure to pay state sales taxes.

Tax Division Directive No. 128

The government’s case against Xiaojun appears to be premised upon a relatively obscure Justice Department policy entitled Tax Directive No. 128, “Charging Mail Fraud, Wire Fraud or Bank Fraud Alone or as Predicate Offenses in Cases Involving Tax Administration.” This directive provides federal prosecutors with significantly expanded authority to use the mail and wire fraud statutes to charge additional crimes, and seek correspondingly increased penalties, in tax-related cases. Under a preceding policy, prosecutors were generally not permitted to use the fraud statutes where the use of the mails or wires was only incidental to a violation arising under the Internal Revenue laws.

Under Tax Directive No. 128, prosecutors may now use mail and wire fraud offenses and, more importantly, state tax violations where the mails or wire communication facilities are used, to transform cases that traditionally would be prosecuted under the tax laws into fraud and money laundering prosecutions. By charging mail and wire fraud in tax cases, the government can significantly change the charging and plea bargaining process. The mere threat of a mail fraud or money laundering charge may well cause targets of government investigations to plead guilty more willingly, and to agree to cooperate against other targets, than would have been likely under the prior policy where the charges were likely limited to federal tax offenses absent exceptional circumstances. In addition, the ability to include mail or wire fraud charges in a tax-related case provides prosecutors with an additional tool not previously available in traditional tax cases — the ability to seek forfeiture of the proceeds of the fraudulent scheme.

By relying upon the authority conferred by Tax Directive No. 128, the government could significantly ratchet up the pressure on the defendant in United States v. Xiaojun. By bringing charges under Title 18 rather than Title 26, the government was able to seek a longer prison sentence: the statutory maximum sentences available for mail fraud and money laundering, 20 years each, are significantly higher than the statutory maximum sentences available for tax fraud or tax evasion, which are three years and five years, respectively. In addition, the United States Sentencing Guidelines for mail fraud and money laundering crimes typically call for longer sentences than those applicable to tax offenses.

Charging mail fraud and money laundering also enabled the government to seek restitution to be paid to the state agency that was defrauded. Had the government only charged federal tax crimes under Title 26, restitution could only have been ordered to the Internal Revenue Service, as occurred in United States v. Asker and United States v. Arias. The government was also able to seek forfeiture of the funds that constitute proceeds of the mail fraud and money laundering offenses, an additional punishment that is not available for tax offenses. As part of his plea agreement, Xiaojun agreed to pay at least $1 million in restitution to the Illinois Department of Revenue and to entry of a forfeiture judgment in an amount to be determined by the court at sentencing. The defendant also agreed as part of his plea agreement to cooperate with the civil tax audit that will inevitably follow his conviction, thereby ensuring that the IRS will be able to assess any tax, interest and penalties that are determined to be due and owing.

United States v. Xiaojun illustrates well how Tax Directive No. 128 provides federal prosecutors with significantly more leeway in charging offenses in what are viewed as traditional tax cases. No longer confined to the criminal offenses enumerated in Title 26, federal prosecutors can significantly increase the pressure on defendants by charging mail fraud and money laundering, seeking longer sentences and extracting substantial financial penalties by requiring defendants to pay both restitution and forfeiture.


[1] See United States v. Hu Xiaojun, No. 16-cr-316 (N.D. Ill.).

[2] See U.S. Department of Justice Press Release, “Happy’s Pizza Founder Convicted of Multi-Million Dollar Tax Fraud Scheme” (Nov. 19, 2014).

[3] See U.S. Department of Justice Press Release, “Owner of Pizza Franchises Pleads Guilty to Submitting False Tax Return That Omitted Income From Skimmed Cash” (May 24, 2016).

“Chicago Restaurant Tax Case Highlights Broad DOJ Authority,” by Matthew D. Lee was published in Law360 on May 25, 2016. Click here to read the article online.

Tax Day Brings Barrage of Criminal Tax Charges and Warnings

With “Tax Day” upon us, the Justice Department’s Tax Division and U.S. Attorney’s Offices around the country have unleashed an avalanche of press releases warning would-be tax cheats of the severe criminal and civil consequences they may face.

From the U.S. Attorney’s Office for the Northern District of Illinois comes a press release entitled “Federal Prosecutions Serve as Reminder to Comply with Tax Obligations as Filing Deadline Approaches” announcing criminal charges against four Chicago-area residents for a variety of alleged income tax frauds.  Two Chicago-area tax preparers were charged with assisting clients in obtaining hundreds of thousands of dollars in fraudulent refunds.  The preparers fraudulently reduced their clients’ tax liabilities by misrepresenting their eligibility to claim tax credits, such as dependent exemptions, education and child credits.  In addition, two individuals were indicted for filing hundreds of fraudulent income tax returns that claimed refunds totaling more than $2.1 million.

The U.S. Attorney’s Office for the Eastern District of California has issued a similar press release entitled “Federal Tax Enforcement Is a Focus of Prosecutions in the First Quarter of 2016.”  This release catalogues five new tax indictments so far in 2016, five convictions so far in 2016, and the sentences handed down in tax cases to date this year.  The press release concludes with this statement:  “More criminal tax investigations are underway.”

The U.S. Attorney’s Office for the Middle District of Pennsylvania has issued a lengthy press release entitled “U.S. Attorney And IRS Announce Message To Potential Tax Cheats That Tax Crimes Result In Criminal Prosecution And Lengthy Prison Sentences And Fines And Issue a Fraud Notice To Taxpayers.”  This announcement summarizes recent prosecutions of taxpayers for tax evasion and tax fraud and stolen identity refund fraud.  The release concludes with a “Tax Scam Warning” urging taxpayers to exercise caution during tax season to protect themselves against tax scams.  In particular, taxpayers are warned to avoid the following common tax schemes:

•           Identity Theft

•           Phone Scams

•           Phishing

•           Return Preparer Fraud

•           Offshore Tax Avoidance

•           Inflated Refund Claims

•           Fake Charities

•           Falsely Padding Deductions on Returns

•           Excessive Claims for Business Credits

•           Falsifying Income To Claim Credits

•           Abusive Tax Shelters

•           Frivolous Tax Arguments

In Sacramento, California, the U.S. Attorney announced on April 15 that four individuals, including two current IRS employees, were criminally charged in tax cases.  The two IRS employees, who are married to each other, were arrested when they came to work and were charged with aiding others in the preparation of false tax returns and filing false tax returns themselves.  Separately, an individual was charged with two counts of tax evasion for tax years 2009 and 2010.  Finally, an individual was criminally charged with failing to file tax returns for 2009 through 2012.  In addition to these cases, so far in 2016, eight individuals have been indicted, five have been convicted and 14 were sentenced for either submitting false claims for refunds or evading taxes.

In Alaska, the U.S. Attorney’s Office announced that a criminal defense attorney, who operated a law practice in Anchorage, was sentenced to 14 months in prison following his guilty plea in June 2014 to three counts of willful failure to file income tax returns.  The defendant in that case admitted that he failed to file federal income tax returns with the Internal Revenue Service for the years 2006, 2008, and 2009, causing a tax loss to the government of $886,058.  According to a sentencing memorandum filed by the government, the defendant still has not paid the more than $800,000 in income taxes that he owed for the years 2006, 2008 and 2009.  At the same time that he failed to file his tax returns and pay the taxes due, the defendant made personal expenditures for gambling, cars, and property.  The defendant also failed to file timely income tax returns for the years 2000 through 2004, 2007, 2010 and 2011, failed to file employment tax returns during the years 2004 through 2008, and failed to pay employment taxes to the IRS.  According to documents filed with the court, the defendant also submitted a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to the IRS in 2009.  A Form 433-A is used by the IRS to obtain financial information from a taxpayer to determine his ability to pay an outstanding tax liability.  On the Form 433-A, which he signed under the penalties of perjury, the defendant failed to disclose certain retirement assets.  In a press release announcing the sentencing, the Tax Division’s Acting Assistant Attorney General made the following statement:

“This case is a reminder that no one is above the law,” said Acting Assistant Attorney General Ciraolo.  “Indeed, as an attorney who has defended individuals charged with financial crimes, Mr. Stockler was particularly aware of his obligations under the tax laws and the consequences of violating them.  Taxpayers who willfully disregard their legal responsibilities will be held to account.”

In the Northern District of Ohio, the U.S. Attorney announced today that a businessman was charged with four counts of tax evasion, based upon taking improper tax write-offs and not reporting more than $2 million in taxable income. The defendant is alleged to have diverted corporate funds for his own use to benefit his personal lifestyle, such as to construct a waterfront residence, maintain his yacht, and pay for luxury travel. It was further alleged that the defendant falsely described these expenses as business-related, and provided false information to his accountants about the nature of these expenses. The government alleges that the defendant underreported his taxable income by more than $2 million during tax years 2007, 2008, 2009 and 2010, and owes at least an additional $611,000 in taxes for those periods. According to the IRS Special Agent in Charge, “[a]s this tax filling season comes to a close, we are reminded of our collective duty to accurately file and pay our taxes. Those who willfully abscond from this duty will be pursued and brought to justice.”

Finally, as part of its ongoing efforts to combat return preparer fraud, the Justice Department filed a federal court lawsuit today seeking to shut down a tax return preparer in South Florida.  The civil complaint alleges that the preparer prepares income tax returns that fraudulently understate his customers’ tax liabilities by falsely claiming deductions for business expenses his customers never incurred, fraudulently overstating his customers’ claims for refunds by falsely claiming education or fuel tax credits to which his customers are not entitled, or both.  According to the complaint, the Internal Revenue Service IRS audited 340 of the more than 3,132 returns he prepared since 2009 and found that the preparer understated the tax owed on all but five of the 340 returns—a total of more than $1.8 million in understatements.  As a result of these fraudulent activities, many of the preparer’s customers are now liable for significant tax deficiencies, penalties and interest.

All of these announcements should serve as a reminder, and a stern warning, that taxpayers should take care to ensure that their tax returns are accurate, complete, and filed on time.  Each of the cases described above demonstrate that taxpayers who deliberately understate their income, overstate their deductions,  or otherwise file inaccurate tax returns may subject themselves to criminal liability.  Taxpayers who are unable to file on time today should file for an automatic six month extension of the deadline.

With April 18 Just Days Away, DOJ’s Tax Division Warns Would-Be Tax Cheats

With “Tax Day” fast approaching, the Justice Department’s Tax Division has issued a stern warning of its own to taxpayers thinking of cheating on their taxes.  In a press release entitled “Justice Department Reminds Taxpayers That Willful Failure to Comply with Our Nation’s Tax Laws is a Crime,” the Tax Division cites numerous examples of recent criminal tax prosecutions over the past year, including failure-to-file and failure-to-pay cases; filing false tax return cases; cases involving the concealment of income and assets through nominee entities and offshore bank accounts; cases involving the use of businesses to pay personal expenses; and obstructing IRS efforts to assess and collect taxes.  The full text of the press release follows.

Justice Department Reminds Taxpayers That Willful Failure to Comply with Our Nation’s Tax Laws is a Crime

Highlights Focus on Traditional Tax Enforcement

With the annual tax return filing deadline approaching, the Justice Department’s Tax Division reminds U.S. taxpayers that willful failure to comply with our nation’s tax laws is a crime.  Whether they willfully fail to file returns, file false returns, or evade tax due, taxpayers who cheat will face serious consequences including prison and monetary sanctions.

“Our nation depends on all taxpayers, regardless of age, profession or economic status, to file accurate returns and promptly pay their taxes,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.  “Individuals and businesses that willfully fail to comply with their legal responsibilities harm not only the U.S. Treasury, but also all Americans who are paying their fair share.  The department is committed to continuing to aggressively prosecute those individuals who seek to circumvent U.S. tax laws.”

“Paying taxes is not a choice but a responsibility,” said Chief Richard Weber of the Internal Revenue Service-Criminal Investigation (IRS-CI).  “IRS-Criminal Investigation works with our partners at the Department of Justice to enforce our nation’s tax laws and ensure that we are all playing by the same rules.  IRS-CI special agents are specifically trained to investigate complex financial fraud, and bring their considerable skill and experience to these investigations.  Those who think they can evade our efforts will find they are terribly mistaken.”

Over the past year, the Tax Division and the U.S. Attorney’s Offices have worked closely with the IRS and other law enforcement partners to enforce the nation’s tax laws fully, fairly and consistently through criminal investigations and prosecutions across the country.

Failure to File Tax Returns and Failure to Pay Taxes

  • In April 2016, James Redding, the president of an interior construction business in the District of Columbia and Maryland, was sentenced to two years in prison for failing to pay over $1.4 million in income and employment taxes.  Redding also filed false tax returns on behalf of himself and his wife and on behalf of his business.  Instead of paying his company’s employment taxes, Redding used company funds to pay the company’s creditors and for the benefit of himself and his family members.  This case was prosecuted by the U.S. Attorney’s Office for the District of Columbia.
  • In September 2015, Thomas Tilley, a businessman in North Carolina, was sentenced to 32 months in prison and ordered to pay more than $7 million in restitution to the IRS for a decades-long scheme, which included his failure to file returns despite earning a substantial income, sending fraudulent financial instruments to the IRS in an effort to discharge his tax debt, using nominee entities and sham trusts to purchase and sell real estate and placing false liens on his properties to prevent the IRS from collecting his taxes.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Middle District of North Carolina.
  • In June 2015, Ronald Martin, the former owner and operator of a New Hampshire construction company, pleaded guilty to three counts of tax evasion.  Martin failed to file corporate or individual tax returns despite the fact that his company generated more than $1 million in gross revenue over a three year period.  Martin also attempted to conceal the business revenue from the IRS by directing that payments be made in his nephew’s name, depositing only a fraction of the business receipts into the business’s bank accounts, and diverting a significant portion to his personal use.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of New Hampshire.

Filing False Tax Returns

  • In March 2016, Lorenzo Shane Stewart, the owner of an excavation and construction business in Illinois, was sentenced to 30 months in prison following his guilty plea to tax evasion.  Stewart failed to report his business income on his tax returns and failed to pay more than $1.12 million in income taxes.  This case was prosecuted by the U.S. Attorney’s Office for the Central District of Illinois.
  • In February 2016, Avan Nguyen, the owner of a wholesale beauty supply business in Texas, was sentenced to three years in prison, ordered to forfeit $1.1 million, and ordered to pay restitution to the IRS for aiding and assisting in the filing of a false tax return.  Nguyen caused a tax return to be filed for his company that omitted nearly $5 million of income.  This case was prosecuted by the U.S. Attorney’s Office for the Northern District of Texas.
  • In November 2015, Tammy Denise Westbrooks, a Texas resident and manager of a tax return preparation business in Charlotte, North Carolina, was convicted for filing false tax returns and attempting to obstruct the IRS.  Westbrooks underreported her net business profit by inflating her business expenses, paid workers in cash, and failed to file the required Forms W-2 and 1099 to report workers’ compensation to the government.  This case was prosecuted by the Tax Division.

Concealing Income and Assets Through Nominee Entities and Offshore Bank Accounts

  • In April 2016, Michael D. Brandner, an Alaska plastic surgeon, was sentenced to four years in prison for wire fraud and tax evasion.  After his wife filed for divorce, Brandner collected millions of dollars in marital assets and drove from Tacoma, Washington, to Costa Rica, where he opened two bank accounts into which he deposited over $350,000 in cash and hid a thousand ounces of gold in a safe deposit box.  He then traveled to Panama where he opened an account under the name of a sham corporation and in 2008, deposited $4.6 million into the account.  Brandner concealed both the existence of the accounts and the interest income earned on those accounts from the court in the divorce proceedings and from the IRS.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of Alaska.
  • In January 2016, Gregory Claxton, a Michigan certified public accountant and tax return preparer, pleaded guilty to tax evasion after he concealed assets from the IRS to avoid paying nearly $150,000 in taxes.  Claxton admitted he deposited the proceeds of his business into bank accounts in his wife’s name to avoid the appearance that he had the ability to pay his income taxes.  Claxton also admitted that, just two days prior to meeting with the IRS to discuss his ability to pay his outstanding tax bill, he transferred title to his house to a trust in his wife’s name in an effort to thwart IRS collection efforts.  This case was prosecuted by the U.S. Attorney’s Office for the Western District of Michigan.
  • In October 2015, Terry Myr, a Michigan mechanic, who specialized in repairing classic and rare cars, including Ferraris, was sentenced to two years in prison for tax evasion and failure to file tax returns.  Myr attempted to prevent the IRS from collecting nearly $200,000 in taxes by transferring property to third parties, using nominee companies and dealing in cash.  Myr also failed to file tax returns for multiple years to report his income to the government.  This case was prosecuted by the Tax Division.

Using Businesses to Pay Personal Expenses

  • In March 2016, Faiger Blackwell, the owner of a North Carolina funeral home and other businesses, was sentenced to two years in prison for tax fraud and bankruptcy fraud.  Blackwell filed for bankruptcy after accumulating more than $300,000 in federal taxes and more than $1 million in other debts.  During the bankruptcy proceedings, Blackwell concealed rental income and used the money to pay for business and personal expenses.  After the IRS levied one of Blackwell’s business bank accounts, he set up another company and corresponding bank accounts to divert and conceal funds and circumvent the levy.  Blackwell used these funds to pay business and personal expenses, including paying for a cruise.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Middle District of North Carolina.
  • In September 2015, Sheila Mohammed, a doctor in Florida, was sentenced to one year in prison and ordered to pay restitution for filing false income tax returns for herself and her medical practice.  Mohammed used the more than one million dollars she failed to disclose to the IRS to purchase vehicles and properties in Florida, Hawaii and New Mexico.  This case was prosecuted by the U.S. Attorney’s Office for the Northern District of Florida.

Obstructing IRS Efforts to Assess and Collect Taxes

  • In January 2016, James S. Faller II, a former private investigator and legal consultant in Kentucky, was sentenced to serve three years in prison for obstructing the IRS, tax evasion and failing to file tax returns.  Faller failed to file tax returns to report his income, which ranged from $126,000 to $289,000 per year, and attempted to hide his income from the IRS by having his income paid to a nominee and using nominee bank accounts.  Faller also signed and submitted a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to an IRS revenue officer as part of the IRS’s efforts to collect his unpaid taxes.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the Eastern District of Kentucky.
  • In August 2015, F. William Messier, a Maine businessman who earned income by leasing telecommunications towers located on his property, was sentenced to one year and one day in prison for conspiracy to defraud the United States and corruptly endeavoring to impair and impede the due administration of the internal revenue laws.  Messier attempted to obstruct the IRS by, among other things, providing false tax documents to customers, submitting a fake money order and other false documents to the IRS, and dealing extensively in cash.  This case was prosecuted jointly by the Tax Division and the U.S. Attorney’s Office for the District of Maine.
  • In April 2015, John Fall, a Rhode Island real estate consultant, was sentenced to 30 months in prison for obstructing the IRS, tax evasion, and aiding in the filing of false corporate tax returns.  Fall used nominee entities and business names to conceal his business and financial transactions, caused false tax returns to be filed in the name of his wife’s dental practice, and attempted to obstruct an IRS audit by encouraging his wife’s accountant not to provide information to the IRS and providing false documents during the audit.  This case was prosecuted by the Tax Division.

“The Justice Department, along with our colleagues in the IRS, will continue to identify and vigorously pursue those engaged in tax crimes,” said Acting Assistant Attorney General Ciraolo.  “These efforts are critical to the continued integrity of our national tax system and send a strong message to those individuals who make good faith efforts to comply with their tax obligations that we will hold accountable those who do not. If someone suspects or knows of an individual or a business that is not complying with the tax laws, we encourage them to report that information to the IRS.”

More information about the Tax Division’s civil and criminal enforcement efforts in these and other areas is on the division’s website.  The IRS website also has information about how to report tax fraud.

As Tax Day Approaches, Justice Department and IRS Increase Intensity of Public Warnings

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:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

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.

The Justice Department’s Tax Division has issued a similarly-worded press release focused on fraudulent tax return preparers, entitled “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.”  Reminding every taxpayer that they are ultimately responsible for the contents of their tax returns, the Justice Department warns taxpayers to be wary of any preparer who guarantees a refund or claims to sell a “sure-fire way to reduce your taxes.”

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.


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.


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.


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:

  • Identity Theft
  • Phone Scams
  • Phishing
  • Return Preparer Fraud
  • Offshore Tax Avoidance
  • Inflated Refund Claims
  • Fake Charities
  • Falsely Padding Deductions on Returns
  • Excessive Claims for Business Credits
  • Falsifying Income To Claim Credits
  • Abusive Tax Shelters
  • Frivolous Tax Arguments
  • 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.