Tax fraud, whether perpetrated by the taxpayer, tax return
preparer, or by collusion between the taxpayer and tax return preparer, is a
crime and could be criminally charged as a series of crimes. But what exactly
is tax fraud? How prevalent is it, and who is perpetrating it?
What is tax fraud?
Tax fraud is “… the actual intentional wrongdoing, and the
intent required … to evade a tax believed to be owing. Fraud implies bad faith,
intentional wrongdoing, and a sinister motive. It is never imputed or presumed
and the courts will not sustain findings of fraud upon circumstances which at
most create only suspicion.”1
Tax fraud cases can be brought both civilly
Civil cases have a lower burden of proof
(preponderance of the evidence), are generally less expensive to litigate, and
often arise when “intent” cannot be proven or is not ripe for a criminal
action. A case is not ripe for court action when a dispute has not happened
yet, and a court therefore cannot resolve it.
On the other hand, criminal cases have the highest
burden of proof (beyond a reasonable doubt), are time consuming and are very
expensive to prosecute. They are also a large drain on personnel and financial
resources for the government. Criminal cases often arise out of a taxpayer’s
failure to cooperate in civil proceedings, or in an audit where demonstration
of the required “willful intent” is demonstrated.
Tax fraud costs to American taxpayers
In May 2012, Forbes published an outstanding article,
“Billions in Tax Refund Fraud — and How to Stop Most of It,”2 that
certainly raises questions about the lack of proper process and internal
control within the federal government to protect taxpayers from the blatant tax
fraud occurring under the nose of the IRS.
According to Forbes, the U.S. Treasury “may be losing as much
as $5 billion a year from fraudulent tax fraud claims — and most of that fraud
is entirely preventable.” Citing the New York Times, Forbes exposed a severe
weakness in the IRS’s refund process — identity theft. Criminals simply obtain
the taxpayer’s name and Social Security number, file an electronic tax return
containing a few deductions and tax credits, and have the refunds
electronically deposited to bank accounts or applied to debit cards. In its
July 2012 report , the Inspector General (IG) projected $21 billion in tax
dollars lost to fraudulent returns related to identity theft in the next five
years. In addition, the IG previously noted in 2008: “The IRS was not in
compliance with direct deposit regulations that require tax refunds to be
deposited into an account only in the name of the individual listed on the tax
return.” A couple of examples of tax fraud that slipped through the IRS
- “4,157 ‘potentially fraudulent tax refunds … totaling
$6.7 million … deposited into one of 10 bank accounts. Each … account had
direct deposits of more than 300 refunds.’”4
- During their audit, the IG identified nearly 1.5
million tax returns where the IRS issued more than $5.2 billion in potentially
fraudulent tax refunds.
Statistical data – abusive tax schemes4
The IRS publishes annual statistics related to abusive tax
schemes. Although the number of new investigations initiated appears small, one
must remember that criminal cases consume significant resources to investigate
and prosecute and often involve multi-million dollar tax loss.
|Average months to serve
Note: Federal fiscal year runs from Oct. 1 - Sept. 30
*Incarceration includes confinement to federal prison, halfway house, home detention or some combination thereof.
Data source: IRS, Criminal Investigation Management Information System, as of Oct. 23, 2013
What were they thinking?
Shakopee tax preparer
“If two or more persons conspire either to commit any
offense against the U.S., or to defraud the U.S., or any agency thereof in any
manner or for any purpose, and one or more such persons do any act to effect
the object of the conspiracy.”
According to an IRS agent’s sworn statement, the IRS alleged
the Hammerschmidts acting in and through their business entity, submitted more
than 700 tax returns, filed by illegal immigrants, with invalid claims and
deductions such as dependents and education expenses resulting in invalid refunds
in excess of $2.5 million. The agent also alleged in the affidavit that the
address of a UPS store in Shakopee was listed as the illegal immigrants’
residence while nearly all resided (without authorization to be in the U.S.) in
Both Hammerschmidts previously pleaded guilty to a single
count of fraud and misuse of a visa in Florida in 2009 after being indicted on
charges of conspiracy to obstruct justice, witness tampering, and destruction
of evidence for arranging sham marriages for illegal immigrants so they could
collect government benefits unlawfully.
The case is still under
investigation. No information is available on whether the IRS referred the 700
illegal immigrants to the U.S. Immigration and Customs Enforcement (ICE) for
deportation or if Americans remain vulnerable to a repeat of this tax fraud
Minnesota men sentenced in Ponzi
In January 2013, both
Jason Bo-Alan Beckman of Plymouth and Gerald Durand of Faribault were sentenced
to 360 months and 240 months in prison, respectively, for filing false tax
returns and for tax evasion, in addition to conducting a massive Ponzi scheme
and other crimes. Together with Christopher Pettengill of Plymouth and Trevor
Cook, convicted of non tax-related crimes, they were ordered to pay more than
$155 million in restitution to their Ponzi-fraud scheme victims. Beckman and
his wife owed more than $1.3 million in federal income taxes for the 2007-09
Federal inmate in Alabama pleads
guilty to tax fraud perpetrated while in prison
My favorite story is this astonishing case that should be
featured on “Stupid Criminals.” A federal prison inmate serving 10 years for
Medicare fraud pleaded guilty in December 2012 to filing a false refund claim
for more than $2.7 million. David Marrero sent false documents to the IRS,
including false tax returns claiming refunds based on fictitious IRS forms
1099-OID, claiming businesses withheld federal tax from his wages.
Convicted, indicted tax accountants
A recent prosecution of a tax accountant should serve as a
stern warning to tax preparers that they are not beyond prosecution for tax
crimes when they advise their clients to file false returns.
BDO Seidman LLP partner
This case is truly a stain on the accounting profession.8
Former BDO Seidman LLP partner Stephen Favato was sentenced to 18 months in
prison for a litany of tax crimes, including “corruptly endeavoring to obstruct
and impede the Internal Revenue laws and one count of aiding and assisting in
the preparation and filing of a false income tax return.” For at least four
years, Favato tried to obstruct the IRS and also advised his client to falsify
his 2002-04 joint tax returns. Estimated tax loss was $184,000.
December 2013 indictment
On Dec. 23, 2013, the Department of Justice revealed that a
63-count superseding indictment (subsequent indictment with additional charges)
charging Chatonda Khofi, Ishmael Josh, Amadou Sangaray and Francis Saygbay in a
conspiracy to defraud the IRS. It is alleged that the defendants prepared and
filed false federal and Minnesota individual income tax returns that included
false dependents (using stolen identities), deductions, business losses and
From two tax-evasion sentences, a lesson comes10
In April 2013, USA Today provided a great comparison of two
tax-evasion cases and sentences involving offshore accounts.
In the first case, a military doctor from Florida pleaded
guilty to willful failure to notify the IRS about Swiss bank accounts (holding
nearly $1.5 million) that were inherited from his father. The taxpayer pleaded
guilty to one felony conviction that forced him to retire from the Department
of Veterans Affairs medical post after nearly 30 years of military service. The
taxpayer was sentenced to six months in federal prison as a deterrent to
others, paid $1 million in back taxes and penalties, was fined $100,000, and
was ordered to pay $216,000 in restitution and to perform 400 hours of
community service providing rehabilitative medical care.
Facts in the second case are strikingly similar. The taxpayer
was a 79-year-old widowed Palm Beach, Fla., heiress and charity benefactor who
also inherited an offshore account. One key difference from the prior case is
that this taxpayer hired an attorney to contact the IRS when she learned the
account could be subject to tax. Unfortunately, the attorney did not contact
the IRS in a timely manner; the IRS learned of the account during the one-month
delay, costing her an additional $13 million. The taxpayer pleaded guilty to
filing two years of false tax returns, concealing up to $43 million from IRS.
She was ordered to pay $21.7 million in penalties plus $667,716 in overdue
taxes and interest on income. She was also sentenced to one year of probation;
however, the judge terminated the punishment and recommended she file a pardon
Hold yourself and others to a higher standard
Certified public accountants are, and should be, held to a
very high ethical standard in all facets of our work. Tax preparation is no
exception. Tax clients should be vetted to ensure you are comfortable
preparing, signing and filing their tax returns. Ignoring the warning signs can
have devastating effects on your business and your freedom.
Abigail Grenfell is president of Internal Control &
Anti-Fraud Experts, LLC, a firm specializing in fraud prevention, detection and
investigation, development of anti-fraud programs, design and assessment of
internal controls. You can reach her at firstname.lastname@example.org.
1 14 Mertens, Law of Federal Income Taxation, sec. 55.21, page 64 (1991 Rev); Ross Glove Co. vs. Commissioner, 60 TC 569 (1973).
5 IRS raids Shakopee tax preparer, StarTribune, February 16, 2012 http://m.startribune.com/business/?id=139448903