Tax Fraud on the Rise in Georgia--52,000 False Returns in 2010

According to the Atlanta Journal-Constitution, the IRS found more than 52,000 fraudulent tax returns filed in Georgia in 2010, worth $41 million in refunds, an increase over the 29,000 fraudulent returns discovered in 2009 and the almost 16,000 returns in 2008. Last year, the Service and the Georgia Department of  Revenue launched more than 20,000 investigations of tax fraud in Georgia, and initiated 200 criminal cases.

Many of the fraudulent returns involve identity theft, including stolen Social Security numbers and bank information. The article also cites the cases of tax preparers who have become involved in fraudulent tax schemes. It furthermore describes a scheme by Decatur, Georgia, residents Michael Romeo St. Romain and Brian Dupree several years ago which obtained more than $475,000 in fraudulent refunds and would have netted another $1 million in refunds before St. Romain and Dupree were caught. The men are currently serving approximately five year sentences in federal prison. Another Georgia man, Michael Stringer, obtained $560,000 from false state tax returns in 2008, attempting to defraud the State of $1.4 million.

Representatives of the Gwinnett County Police Department stated that their White Collar Crime Unit receives approximately 10 cases of tax fraud each week, increasing to 15 to 20 per week in March and April.

Georgia Prisons Big Source of Tax Fraud According to USA Today


An article in USA Today claims that prison inmates in Georgia, Florida, California and elsewhere caused the Internal Revenue Service to issue $39 million in undeserved federal tax refunds in 2009. Georgia came in second with $3,560,562 in fraudulent refunds issued to prisoners, but was far outstripped by Florida's $12,576,944 in refunds. The IRS identified 44,944 false or fraudulent tax returns filed by prisoners in 2009, however an audit identified 54,410 tax returns which the IRS had failed to identify as having been filed by prisoners.The number of undeserved refunds paid out was up from $13.4 million in 2004.

While some inmates came legally receive income from investments, inheritances and other sources, the false tax returns are typically based on fictitious jobs and taxes that were never withheld. Although inmates do work in prison, prison jobs do not pay enough to trigger withholding. The scams often involve the theft of Social Security Numbers and other information from others. In some cases, the inmates will find the names of businesses which have declared bankruptcy, in order to make it more difficult for the IRS to verify the claims.

A Florida inmate, Danilo Suarez, obtained $58,022 in tax refunds by filing 14 or more false tax returns. Jeanni Renee Hillin, a Tennessee inmate, received $58,651 in refunds in 2006. 

UBS Hands Over Account Information on 4,450 U.S. Citizens to IRS; Government Sues to Stop Two Cobb County Tax Preparers

We knew it was coming, but Bloomberg reports today that Switzerland's Federal Tax Administration has said that it expects to deliver account data on almost 4,450 U.S. clients of UBS AG to the IRS in exchange for the IRS' withdrawal of a "John Doe" summons served on UBS and accompanying lawsuit. The IRS had sought information on approximately 52,000 UBS accounts, however the agency and UBS entered into a settlement in August 2009 in which UBS would provide information on 4,450 accounts. UBS also paid the U.S. government $780 million as part of the settlement. UBS was alleged to have aided wealthy U.S. citizens in evading taxes from 2000 to 2007.

The article notes that, since February 2009, the Justice Department has filed criminal tax charges against 17 U.S. clients of UBS clients, two UBS bankers and three others accused of aiding tax evasion.

And in Georgia tax news, the government has sued two tax preparers in Cobb County, Georgia, seeking to put them out of business, according to a press release. A complaint was filed in the U.S. District Court for the Northern District of Georgia against Christopher Musyoki, Samuel Nganga and Musyoki’s tax preparation business, Simba Consultants Inc., alleging that the defendants allegedly underreported their customers' income on tax returns and made false claims for earned income credits, child tax credits and fuel tax credits.

Wesley Snipes, Actor, "Foreign Diplomat" and "Fiduciary of God," Has Tax Convictions and Sentence Affirmed by Eleventh Circuit

On Friday, the Eleventh Circuit Court of Appeals issued an opinion in the highly-publicized tax evasion case against actor Wesley Snipes, U.S. v. Snipes, No. 08-12402, which may be read here. The odd facts in the case are as follows: around 2000, Snipes became involved with a tax resistance organization, American Rights Litigators (“ARL”), operated by Snipes’ co-defendant Eddie Ray Kahn, which made various arguments on behalf of its clients against the IRS’ collection of taxes, including that domestic earnings of individuals allegedly do not qualify as “income” under 26 U.S.C. § 861 because the earnings do not come from a listed “source.”

From 1999 to 2004, Snipes earned more than $37 million, however he did not file income tax returns for any of these years. During this period Snipes did, however, send the IRS correspondence, altered tax forms and demands for income which he had paid in earlier years. Snipes made wildly outlandish arguments to the IRS, including that he was a non-resident alien; that earned income must come from sources wholly outside the U.S.,; that taxpayers are legally defined as persons operating “a distilled spirit Plant;” that the Tax Code is limited to the District of Columbia and insular possessions of the United States, and excludes the other 50 states; and that Snipes was “a fiduciary of God” and a “foreign diplomat” who was not required to pay taxes. In addition, Snipes’ companies ceased deduction of income and payroll taxes for employees. Snipes invited his employees to attend an “861” seminar at his home and threatened one employee who questioned the theory, Carmen Baker, that if Baker was “not going to play along with the game plan,” she should find another job.

Snipes, Kahn and Douglas Rosile were indicted in 2006 in the Middle District of Florida for conspiracy to defraud the United States by impeding the IRS in its collection of income taxes, in violation of 18 U.S.C. § 371, filing a false claim for a refund, in violation of 18 U.S.C. § 287; and willfully failing to file tax returns, in violation of 26 U.S.C. § 7203. Snipes filed several motions to transfer venue to the Southern District of New York pursuant to 18 U.S.C. § 3237(b) and Federal Rule of Criminal Procedure 21(b), which were denied by the district court.

Snipes’ trial commenced in January 2008. Carmen Baker testified at trial that Snipes had allegedly ordered her not to talk to anyone or disclose any information when she received a grand jury subpoena, telling Baker that he had a confidentiality agreement with her signature, and that if she contacted the government, she would have to “pay the consequences.”

Snipes requested several specific jury instructions, including that the Sixth Amendment to the U.S. Constitution protects a defendant’s right to trial in the district where a crime is committed, and on good faith and good faith reliance on advice of counsel.

Defense attorney and former Deputy Independent Counsel Craig Gillen also notes regarding the case that Snipes was charged with six counts of willfully failing to file his individual tax returns for tax years 1999 through 2004, in violation of Section 7203. In May of 2002, Snipes and his lawyer had a telephone conference with an IRS agent wherein Snipes was informed that he was under investigation for tax crimes. The agent read Snipes his non-custodial rights which included the right to remain silent. Snipes replied "very interesting." At trial, Snipes requested a jury instruction based on good faith reliance on his Fifth Amendment privilege against self-incrimination. Snipes claimed that because the IRS agent advised him of his right to remain silent, he believed he had a 5th Amendment privilege not to file his tax returns. Snipes claimed that because he had a good faith belief in his right not to incriminate himself, he could not be guilty of willfully failing to file the returns. The trial court refused to give the requested instruction.

On February 1, 2008, the jury convicted Snipes on three--misdemeanor--counts of willful failure to file individual federal income tax returns for calendar years 1999, 2000, and 2001. The presentence investigation report calculated Snipes’s intended tax loss at $41,038,051 under U.S.S.G. §§ 2T1.1(a) and 2T4.1. It also recommended an enhancement for obstruction of justice pursuant to U.S.S.G. § 3C1.1, for Snipes’ direction to Baker to conceal evidence from the grand jury’s investigation, and recommended an overall sentence of 36 months’ imprisonment. The district court overruled Snipes’ objection to the obstruction enhancement and, discussing the sentencing considerations in 18 U.S.C. § 3553(a), imposed a sentence of 36 months. Snipes appealed.

In its opinion, the Eleventh Circuit panel affirmed Snipes’ conviction and sentence. On appeal, the government conceded that Snipes' proposed instruction on good faith reliance on the privilege against self-incrimination was substantially correct. The Court of Appeals, however, held that there was no error because the conduct which formed the basis for Snipes' counts of conviction occurred before  the May 2002 conversation with the IRS agent, and also held that the trial court's instruction on good faith was sufficient. Although the trial court had refused to give the Snipes instruction, in closing arguments, Snipes' counsel did argue to the jury that Snipes' reliance on the IRS agent's pre-interview advice of rights constituted a good faith basis for his failure to file the tax returns. Apparently this argument resonated with the jury--on all counts for tax years subsequent to the May 2002 interview, Snipes was acquitted.

In regard to Snipes' other arguments, the Court rejected Snipes’ argument that the district court erred in denying his motion for elective transfer under Section 3237(b) as untimely, finding that Snipes failed to properly move to extend the elective transfer deadline. The Court also held that the trial court did not abuse its discretion in not holding a pretrial evidentiary hearing on venue, concluding Snipes was not entitled such a hearing, but rather had a Sixth Amendment right to have the issue of venue decided by the jury. The Court also held that the district court did not err in sentencing Snipes pursuant to Section 2T1.1, or in enhancing his sentence by two levels for obstruction of justice under Section 3C1.1. It concluded that Snipes’ comments to Baker amounted to encouraging Baker to avoid complying with a grand jury subpoena, which may be considered obstruction of justice. Lastly, the Court held that Snipes’ 36 month sentence was reasonable.

Florida Tax Defiers and Advisor to Actor Wesley Snipes Convicted for $1 Billion Tax Fraud Scheme

Eddie Ray Kahn, Stephen C. Hunter, Danny True and Allan J. Tanguay, who operated American Rights Litigators/Guiding Light of God Ministries (ARL), were about making money. Specifically--making over $1 billion in false bills of exchange which purported to be drawn on the U.S. Treasury. A jury in the U.S. District Court for the District of Columbia convicted Florida residents Kahn, Hunter, True and Tanguay of conspiracy to defraud the United States and to commit mail fraud yesterday following an 18-day trial, according to a Department of Justice press release. Khan, the head of ARL, had previously gained notoriety for giving false tax advice to actor Wesley Snipes, who was found guilty of failure to file tax returns in February of 2008.

The government alleged that, from 1996 through 2004, the defendants, through ARL, enrolled more than 4,000 customers nationwide in tax defiance schemes based on deliberate misrepresentations of the legal foundation of the tax system. The defendants were alleged to have manufactured and sold more than 1,000 phony bills of exchange which were sent to the Treasury Inspector General for Tax Administration in Washington for payment of taxes. The defendants also allegedly continued to submit false and obstructionist correspondence to the Internal Revenue Service even after a preliminary injunction was entered in December of 2003 directing the defendants to stop engaging in their schemes.

Image courtesy of

IRS Prosecutions of UBS Customers Widen; IRS Offers Voluntary Disclosure

The Federal government is building criminal cases against more than 150 U.S. citizens holding overseas bank accounts with Union Bank of Switzerland (UBS), as reported by Reuters and the Banking Times. The criminal investigations are part of a Federal crackdown on tax evasion by means of overseas accounts and were facilitated by a settlement between U.S. and Swiss authorities earlier this month in which Switzerland agreed to disclose the identities of some 5,000 U.S. citizen account holders, contrary to Switzerland's longstanding tradition of banking secrecy. UBS has already settled charges that it assisted U.S. customers in evading taxes for $780 million.

As the IRS states on its website, under the agreement, the IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts. UBS will give account holders notice if information relating to the acocunt holders is included in the IRS treaty request. "Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations." "The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action."

Four U.S. clients of UBS, three in Florida and one in California, are already being prosecuted based on the information provided by UBS. And the number of investigations and prosecutions are expected to grow. In a press release,Tax Commissioner Doug Shulman claimed that the U.S./Swiss agreement "puts in place an apparatus for the IRS to obtain information on thousands of offshore accounts. Further the Swiss government is prepared to work with us regarding similar U.S. requests, if any, involving other financial institutions." U.S. and Swiss authorities are reportedly negotiating for the disclosure of thousands of additional names of U.S. account holders. Commissioner Shulman stated that international tax evasion is a "top priority."

Commissioner Shulman stated that the IRS has set a "voluntary disclosure" deadline of September 23, 2009, for UBS customers with unreported, offshore income, and advised persons to contact a tax professional. Customers receiving notification from the bank may come forward under the voluntary disclosure program--however "once the Swiss government sends [the IRS] the name, all bets are off." UBS customers with any reason for concern should strongly consider promptly contacting tax and legal professionals.

Government to Obtain Names of Thousands of Alleged Tax Evaders from Swiss Bank UBS for Prosecution

As reported by the International Business Times and Reuters, the U.S. and Switzerland entered an agreement last week under which UBS, Union Bank of Switzerland, would disclose the identities of approximately 4,500 to 5,000 holders of secret Swiss bank accounts.

The Internal Revenue Service had filed suit against UBS in February in the U.S. District Court for the Southern District of Florida, accusing UBS of aiding and abetting U.S. citizens in tax evasion and demanding disclosure of the identities of approximately 52,000 U.S. citizens who hold Swiss accounts, upon which the Swiss government ordered UBS to disclose the identities of 250 account holders, bypassing UBS' customer appeal process, in order to settle criminal charges. UBS also paid the U.S. a $780 million fine. The Swiss People's Party has called the U.S. government's actions "blackmail." However, after negotiations with the U.S., the Swiss government held an extraordinary special session last Monday to discuss settlement of the case.

The agreement between the U.S. and Switzerland will supposedly leave Switzerland's banking secrecy intact and UBS will not have to pay a fine. However, under the terms of the agreement, Switzerland is obliged to assist the U.S. if the U.S. seeks its help in a criminal investigation. Swiss accounts below a certain size will not have to be reported, however the precise limit will be kept confidential, leaving account holders without notice as to whether they might be vulnerable. Account holders threatened with disclosure would, however, be able to challenge disclosure in Swiss courts. The U.S. government supposedly backed off its original demands because the U.S. Treasury did not want to cause UBS to fail.

The total amount of fines which the 4,500-5,000 U.S. citizens are estimated to be charged is estimated at $3.74 billion. On April 2, Steven Michael Rubenstein of Boca Raton, Florida, an accountant for a yacht company, became the first U.S. citizen to be arrested for tax evasion as a result of UBS' disclosures.

UBS is the world's largest manager of private wealth assets, and is the second-largest bank in Europe in both market capitalization and profitability. UBS operates in 50 countries nationwide, including the U.S., and has offices across the country. Since 2007, after UBS incurred huge losses, the bank's single largest sharholder has been the Government of Singapore Investment Corporation. Last November, Raoul Weil, Chairman and CEO of UBS' Global Wealth Management and Business Banking and member of UBS' Group Executive Board, was indicted in the Southern District of Florida.


BDO Seidman Exec Pleads to Tax Fraud Charges

Charles Bee Jr., 63, a former Vice Chairman and partner of BDO Seidman, pled guilty last week to tax fraud charges from helping to create $1 billion worth of phony tax shelters for wealthy clients, as reported by WebCPA and The New York Post.

The charges against Bee are part of an investigation of a tax scheme which allowed BDO Seidman's clients to evade more than $200 million in taxes, according to the government. Bee was a member of BDO's Tax Solutions Group, which designed and marketed tax strategies and shelters to upper-income clients. The Group marketed the shelters with the Chicago office of the law firm of Jenkens & Gilchrist and with an international bank in New York.

The government has alleged that the the tax shelters were only allowed by the IRS if there was a reasonable probability of a profit. However, given the fees which BDO charged to its clients, it alleges that the tax shelters marketed by BDO had no reasonable probability of resulting in a profit.

BDO used an opinion letter created by Jenkins & Gilchrist to make it appear that their clients had a legitimate business purpose, containing allegedly false representations about the clients' motivations for entering into the transactions. The Tax Solutions Group also used a consulting agreement containing alleged false statements regarding the fact that the fees charged by BDO were solely for the tax shelters. Lastly, Bee and others are charged with causing clients to file false tax returns.

Bee pled guilty to one count of conspiracy to defraud the IRS for creating one false short option tax shelter for a client. He also admitted that he made false statements during a deposition in a Court of Federal Claims case.

Bee faces 15 years in prison, but prosecutors have promised to seek leniency if Bee cooperates in the investigation. BDO is cooperating with the government in its investigation. He has agreed to forfeit $20 million, as well as four residences in Florida and New Jersey.

Adrian Dicker, another former Vice Chairman of BDO, and Michael Kerekes, a principal of BDO, pled guilty to related conspiracy and tax evasion charges in February and March of this year.


$179 Million Tax Whistleblower Case

We have pointed out the potential rewards which the Internal Revenue Service offers whistleblowers who sound the alarm on tax fraud. A major recent tax whistleblower case is the multimillion dollar dispute between the IRS and Cardinal Health, Inc., a distributor of pharmaceuticals and medical supplies based in Dublin, Ohio.


As reported by the Wall Street Journal, the IRS filed securities filings last month challenging deductions totaling $178.9 million claimed by Cardinal Health from the sale of trade receivables to a special-purpose, accounts receivable and financing entity for the years 2001 to 200. The transactions were facilitated by Rabobank Group, based in the Netherlands.


The IRS has also given Cardinal Health notice of proposed adjustments for tax years 2003 through 2005 relating to the transfer of intellectual property between its domestic and foreign subsidiaries, specifically transfers by Alaris Medical Systems, Inc., a manufacturer of infusion pumps, which Cardinal purchased in 2004. The additional tax proposed by the IRS in these notices totals $598.1 million.


Rabobank has been involved in numerous controversial tax shelters such as the transaction involving Cardinal Health, in which domestic corporations sell accounts receivables to overseas companies at a discount for which they take a tax deduction.


A former Rabobank executive filed a whistleblower claim with the IRS in 2007, claiming that the transactions were designed for tax avoidance and not legitimate business purposes.

Cardinal Health has stated that it disputes the IRS’ adjustments and will vigorously contest them. It has claimed that the accounts-receivable arrangement expired last October.


Justice Souter, Juror No. 6 and Taxes

So, I’m out of the office for a few days and all hell breaks loose in the federal blogosphere. First, Justice Souter announces his retirement from the Supreme Court (don’t you wonder why many Supreme Court Justices die in office). I mean, seriously, at some point doesn’t someone reach retirement age. Seems to me a distinct lack of dignity to just hang on. I believe that Justice Leah Sears on the Georgia Supreme Court will be a serious candidate for the position.

Then, the Letter of Apology blog had an excellent piece over the weekend regarding the use of uncharged and acquitted conduct to enhance a defendant’s sentence. Interestingly, that post originated from a Washington Times article (interesting because it is the more conservative of the two D.C. newspapers) regarding Juror No. 6 from a drug trial in the district several years ago, where the trial lasted 10 months. On finding out that one of the defendants, who was largely exonerated by the jury's verdict, was going to get 16 years based on either uncharged, or acquitted conduct, the juror wrote a thoughtful letter to the sentencing court. It is worth a read.

And, finally, today, the administration announces according to the Washington Post, that it is going to crack down, not only on individual tax fraud by parking monies in secret overseas accounts, but also on the corporate parking of profits in overseas companies for the purpose of limiting tax exposure.

Swiss Seek End to Disclosure of UBS Client Names

As previously reported here, the Department of Justice and UBS entered into a deferred prosecution agreement wherein UBS is to pay a fine and disclose to DOJ the names of its some 52,000 clients that have used UBS to park income in violation of U.S. tax laws. The New York Times reports today that the President of Switzerland has asked Treasury Secretary, Timothy Geithner, to drop what the Times inexactly reports to be a lawsuit to disclose the names of the UBS clients. In fact, under the deferred prosecution agreement, UBS has to cooperate with DOJ by providing the client’s names. My guess, Mr. Geithner, who had his own tax issues, isn’t going to touch this one. DOJ has already prosecuted two folks whose names UBS disclosed and, inevitably, many more such prosecutions will follow.

UBS Client Pleads Guilty Yesterday to Filing False Tax Return

In a well timed guilty plea, the day before tax day, Robert Moran, entered a plea yesterday in federal court in Ft. Lauderdale, according to this report from the Miami Herald, to filing a false tax return. The Herald reports that Moran, the founder and president of Moran Yacht & Ship in Ft. Lauderdale, had $3.4 million in a UBS account in Switzerland as of year end 2007, but didn’t report to the IRS that he had the account and did not declare the income from the account as required by law.

Moran is the second UBS client to face criminal tax charges since UBS agreed in February to a deferred prosecution agreement with the government to provide the IRS with the identities of and account information for U.S. customers of UBS’s overseas accounts. UBS also agreed to pay a fine of $780 million.

Moran faces up to three years in prison and a $250,000 fine.

A Message to Taxpayers: Pay or Be Prosecuted

     While many late preparers are busy filling out forms, the United States District Attorney's Office for the Northern District of Georgia has issued a press release to help motivate taxpayers to be honest with the Internal Revenue Service. United States Attorney David Nahmias told the press last Thursday that "The IRS and other federal investigative agencies are also on the lookout for related fraud, and taxpayers need to know that you--not your tax preparer--are ultimately responsible for the information that goes on your tax return" (not a promising sign for the trusty old good faith reliance on professional tax advice defense, but anyway).
    Mr. Nahmias rounded out the release with a string of cautionary tales--or rather recent tax prosecutions by the USAONDGA against both filers and tax preparers. Among the cases are a tax preparer who neglected to file her own tax returns, despite an income of over $400,000, and another preparer which submitted over 100 returns claiming over $460,000 in false Telephone Excise Tax Credits.