Wednesday, February 18, 2009

In support of the overall IRS Mission, the IRS Criminal Investigation serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.

Tax Fraud Alerts
If it sounds too good to be true, it probably is! Seek expert advice before you subscribe to any scheme that offers instant wealth or exemption from your obligation as a United States Citizen to pay taxes. Buying into a tax evasion scheme can be very costly.
Criminal Investigation At-a-Glance
Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.
Criminal Investigation Enforcement
Criminal Investigation (CI) developed a Compliance Strategy to assist in identifying, developing, and investigating cases that foster confidence in the tax system and compliance with the law.
Criminal Tax Fraud Publications, Facts-Figures-Closed Cases, and News Releases
Maintaining public confidence in the fairness of the tax system is vital to effective tax administration. The publicity of criminal tax cases demonstrates IRS's commitment to ensuring that everyone is paying their fair share of taxes.
IRS Criminal Investigation (CI) is comprised of approximately 4,400 employees worldwide, approximately 2,800 of which are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.
Compliance with the tax laws in the United States relies heavily on self-assessments of what tax is owed. This is called voluntary compliance. When individuals and corporations make deliberate decisions to not comply with the law, they face the possibility of a civil audit or criminal investigation which could result in prosecution and possible jail time. Publicity of these convictions provides a deterrent effect that enhances voluntary compliance.
As financial investigators, CI special agents fill a unique niche in the federal law enforcement community. Today’s sophisticated schemes to defraud the government demand the analytical ability of financial investigators to wade through complex paper and computerized financial records. Due to the increased use of automation for financial records, CI special agents are trained to recover computer evidence. Along with their financial investigative skills, special agents use specialized forensic technology to recover financial data that may have been encrypted, password protected, or hidden by other electronic means.
Criminal Investigation’s conviction rate is one of the highest in federal law enforcement. Not only do the courts hand down substantial prison sentences, but those convicted must also pay fines, civil taxes and penalties.
On July 1, 1919, the IRS Commissioner created the Intelligence Unit to investigate widespread allegations of tax fraud. To establish the Intelligence Unit, six United States Post Office Inspectors were transferred to the Bureau of Internal Revenue to become the first special agents in charge of the organization that would one day become Criminal Investigation. They formed the nucleus that built the Intelligence Unit into an elite group of highly trained, dedicated professionals, who are recognized as the finest financial investigators in the world.
The Intelligence Unit quickly became renowned for the financial investigative skill of its special agents. It attained national prominence in the thirties for the conviction of public enemy number one, Al Capone, for income tax evasion, and its role in solving the Lindbergh kidnapping. From these promising beginnings the Intelligence Unit expanded over the intervening decades, investigating tax evasion by ordinary citizens, prominent businesspersons, government officials, and notorious criminals.
In July 1978, the Intelligence Unit changed its name to Criminal Investigation (CI). Over the years CI’s statutory jurisdiction expanded to include money laundering and currency violations in addition to its traditional role in investigating tax violations. However, Criminal Investigation’s core mission remains unchanged. It continues to fulfill the important role of helping to ensure the integrity and fairness of our nation’s tax system.
If you suspect or know of an individual or company that is not complying with the tax laws, you may report this activity by completing Form 3949-A. You may fill out Form 3949-A online, print it and mail it to:
Internal Revenue Service
Fresno, CA 93888
If you do not wish to use Form 3949-A, you may send a letter to the address above. Please include the following information, if available:
• Name and address of the person you are reporting
• The taxpayer identification number (social security number for an individual or employer identification number for a business)
• A brief description of the alleged violation, including how you became aware of or obtained the information
• The years involved
• The estimated dollar amount of any unreported income
• Your name, address and daytime telephone number
Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential.
FS-2009-7, January 2009
Return preparer fraud involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may, for example, manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.
In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return.
However, when the IRS detects a fraudulent return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.
The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.
While most preparers provide honest service to their clients, the IRS urges taxpayers to be careful when choosing a preparer –– as careful as they would be choosing a doctor or lawyer. Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don't understand.
Helpful Hints When Choosing a Return Preparer
• Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
• Avoid preparers who base their fee on a percentage of the refund.
• Use a reputable tax professional who signs the tax return and provides a copy.
• Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.
• Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
• Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied with the service they received.
Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify. By doing so, they are trying to help their clients avoid penalties, interest or additional taxes that could result from an IRS examination.
Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.
Criminal and Civil Legal Actions
Here are recent statistics on tax fraud from the IRS Criminal Investigation Division.
Criminal Investigation Statistical Information on Return Preparer Fraud
FY2008 FY2007 FY2006
Investigations Initiated 214 218 197
Prosecution Recommendations 134 196 153
Indictments/Informations 142 131 135
Sentenced 124 123 109
Incarceration Rate * 81.5% 81.3% 89.0%
Average Months to Serve 18 19 18
* Incarceration may include prison time, home confinement, electronic monitoring or a combination.
Some return preparers have been convicted of or have pleaded guilty to felony charges.
Additionally, the courts have issued more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001. The following case summaries are excerpts from public record documents on file in the court records in the judicial district in which the legal actions were filed.
Houston Tax Preparer Sentenced to Prison
On Sept. 26, 2008, in Houston, Tex., Rosalind D. Jones was sentenced to 21 months in prison and ordered to pay $175,206 in restitution to the IRS for filing false income tax returns. In January 2008, Jones pleaded guilty by admitting that she prepared false tax returns in order to create or to increase income tax refunds for her clients. On the count to which she pleaded guilty, Jones admitted that the false items she placed on the tax return in question claimed a false income tax refund of $4,195. Without the false items, the taxpayer was entitled to a tax refund of only $26.
Tax Return Preparer Sentenced to Five Years in Prison for Filing False Claims for Tax Refunds and Identity Theft
On Aug. 25, 2008, in Pensacola, Fla., Deborah R. Adams, operator of Archer Tax and Accounting Services, was sentenced to 60 months in prison, to be followed by three years of supervised release, and ordered to pay $62,802 in restitution to the IRS. Adams pleaded guilty in May 2008 to 31 counts of preparing and filing false federal income tax returns and 13 counts of identity theft. According to court documents, she filed 31 false federal income tax returns during tax years 2003 through 2005. Adams also prepared false returns with the personal identity information and Social Security numbers stolen from former clients and had the false refunds also deposited to bank accounts she controlled. Adams filed fraudulent claims for tax refunds totaling $102,000.
New Jersey Man Who Prepared Hundreds of Fraudulent Tax Returns Sentenced to Six Years
On May 14, 2008, in Newark, N.J., Romanus Okorie was sentenced to 72 months in prison for filing fraudulent tax returns on behalf of numerous New Jersey residents resulting in a loss to the government in excess of $2.5 million. He was also ordered to pay a $100,000 fine and was prohibited from working as a tax preparer for three years following his release from prison. On Jan. 22, 2008, a jury had convicted Okorie of 10 counts of willfully preparing materially false tax returns. Evidence presented at trial showed that more than 100 clients were audited, and the total tax loss based on the audited returns exceeded $1 million. The government presented further evidence that in 2003 Okorie prepared approximately 250, and in 2004 close to 300, tax returns, all but one generating a refund. The government estimated that the actual tax loss for the returns prepared by Okorie — more than 600 — exceeded $4 million.
North Carolina Professional Tax Return Preparer Sentenced to 70 Months
On Feb. 28, 2008, in Charlotte, N.C., Lloyd Anthony Bastfield, a professional tax return preparer for approximately 18 years, was sentenced to 70 months in prison and ordered to pay $6 million in restitution. Bastfield pleaded guilty in April 2007 to conspiring to defraud the United States by filing false tax returns claiming nearly $6 million in false claims for refunds for individuals between 2001 and 2005, and evading over $171,000 in personal income taxes owed by him for the years 2000 through 2004. According to a Bill of Information, Bastfield admitted that between 2001 and 2005, he prepared and electronically filed more than 10,000 fraudulent income tax returns for individual clients which claimed false and fictitious education income tax credits.
Phony Tax Return Preparer Posed as CPA and Prepared Fraudulent Returns
On Oct. 2, 2007, in Atlanta, Ga., Larry Vonzell Black was sentenced to 15 months in prison, to be followed by three years of supervised release. Black pleaded guilty to charges of filing false claims with the IRS on July 16, 2007. According to information presented in court, he falsely told members of the public, friends and acquaintances that he was a certified public accountant trained to prepare tax returns. He advertised his tax preparation services at a booth set up in a check-cashing store in metropolitan Atlanta. Under the guise of preparing legitimate tax returns, he obtained personal information, including Social Security numbers and W-2 forms, from taxpayers. He then submitted false claims by forging a signature on each taxpayer’s tax return, directing the payment of refunds to himself and distributing only a small portion of the fraudulent refunds to his victims. In all, Black submitted false claims for over $46,000.
Western Tax Service Return Preparers Sentenced for Filing False Tax Returns
On Oct. 15, 2007, in Santa Ana, Calif., Kelly Agbonmoba David, aka David Kelly, was sentenced to 46 months in prison. David’s co-defendant, Anthony Todd Stefani, was sentenced to 27 months in prison. Both men had been found guilty on charges of conspiracy to defraud the United States and of aiding and assisting in the filing of false tax returns with the IRS. According to the indictment, David was hired in 1999 to assist in the preparation of income tax returns for DeAngelo Tax Service and, later, Western Tax Service. Co-defendant Stefani was employed by Western Tax Service to prepare income tax returns in 2001. The indictment further states that the tax preparers were trained in how to make false, misleading and inaccurate statements on clients’ tax returns, usually without the knowledge of their clients. The preparers at DeAngelo and Western Tax Services prepared and filed over 11,000 income tax returns for years 1998 through 2001. Other individuals sentenced for their role in the conspiracy were Samuel DeAngelo, sentenced on Sept. 24, 2007, to 51 months in prison; Douglas Shields, sentenced on Aug. 6, 2007, to 15 months in prison; Jeffrey Russell Wright, sentenced on Sept.17, 2007, to six months in prison followed by six months home detention; and Erin Cordes, sentenced on Sept. 24, 2007, to one year of probation which includes six months of home detention.
San Jose Tax Preparer Sentenced for Preparing False Tax Returns, Banned for Life from Working as a Tax Consultant
On Nov. 1, 2007, in San Jose, Calif., Jonathan Wendy was sentenced to 12 months and one day in prison to be followed by one year of supervised release. In addition, the judge imposed two special supervised release conditions that Wendy agreed to in the plea agreement — a lifetime ban on working as a tax consultant, and filing complete and accurate federal tax returns for tax years 1998 through 2005. Wendy pleaded guilty on Nov. 1, 2006, to one count of aiding or inducing another to file a false tax return. According to his plea agreement, Wendy, who was a tax preparer for over 20 years, admitted that on July 27, 1999, he prepared a federal income tax return for the 1998 tax year which falsely listed taxable income as $94,347, when he knew the correct amount was approximately $104,929. Wendy also admitted that he intentionally reduced the tax liability by creating numerous false or grossly inflated deductions on the return. In addition to the specific count to which he pleaded guilty, Wendy admitted preparing 17 other individual tax returns and falsely listing the taxable amount claimed on each return. As a result of his conduct, the amount of tax owing to the government by those taxpayers was more than $70,000.
U.S. Court Permanently Bars Washington State Woman’s Bogus “Decoding” Tax Scheme
On Aug. 22, 2008, a federal court permanently barred a Tacoma, Wash., woman from selling a tax scam. The court found that Sharon Kukhahn’s “IMF Decoder” scheme falsely purported to “decode” IRS computer transcripts of customers’ taxpayer accounts to show that the customers were not liable for federal income tax. Kukhahn operates businesses named IMF Decoder; Paralegal Research Advocates; and Advocates for Justice, Liberty and Freedom.
Federal Court Bars Oregon Family and Associate from Promoting Tax Fraud Scheme

On April 11, 2008, an Oregon federal court permanently barred John Fitzgerald of Portland and his three daughters — Marilyn Dial, Martha Farr Sharp and Karen Gray — from marketing a tax fraud scheme involving sham nonprofit corporations that customers used to evade federal taxes. The civil injunction order also barred Noreen McCausland, a family associate, from promoting the scheme. Judge Michael W. Mosman of the U.S. District Court for the District of Oregon found that the defendants, through their business American Family Enterprise, Inc., operated “a one stop shop” for setting up sham nonprofit corporations in Oregon. The defendants falsely told customers they could put their income, assets and businesses into the sham corporations and would not have to file income tax returns or pay taxes.
Texas Man Barred from Promoting Home-Based Business Tax Scheme
On Feb. 8, 2008, a federal court barred Thell G. Prueitt of Kingsland, Tex., from promoting a home-based business tax scheme, falsely advising customers they could claim tax deductions for non-deductible personal expenses, and other fraudulent deductions. The court also found that he promoted an ATM and pay phone tax scam, falsely advising customers that they could claim tax credits and deductions based on artificially inflated purchase prices.
California Preparer Promised Customers She Would Represent Them at IRS Audits
On Oct. 2, 2008, a federal court permanently barred Bonnie Arnel, of Newman, Calif., from preparing federal income tax returns. According to the complaint, Arnel told customers she could “find the deductions the IRS [did] not want [her customers] to know about.” Arnel also allegedly promised customers that, as part of her tax preparation services, she would represent them at IRS audits, when she had no intention of doing so and in fact never did.
Imprisoned Tax Defiers Barred from Preparing Tax Returns and Selling Tax Fraud Materials
On Oct.17, 2008, a federal court in Las Vegas permanently barred notorious tax defiers Irwin Schiff and his former associate, Cynthia Neun, from promoting Schiff’s fraudulent “zero tax” plan. The pair was convicted on tax charges in October 2005 and is currently incarcerated. The permanent injunction ensures that Schiff and Neun cannot promote tax-fraud schemes from within prison or when they are released from prison.
Reporting Suspected Tax Fraud Activity
Tax fraud or abusive return preparers can be reported to the IRS on Form 3949-A, Information Referral. This form is available as a download from the IRS Web site at or by calling (800) 829-3676 to order by mail. The completed form, or a letter detailing the alleged fraudulent activity, should be sent to Internal Revenue Service, Fresno, CA 93888.
The mailing should contain specific information about the individual or business, the activity, when the alleged violation took place, the amount of money involved, how the reporter became aware of it and any other information that might be helpful to an investigation. The identity of the person filing the report is not required but it could be helpful in an investigation and it can be kept confidential.
Rewards based on the amount of additional tax, penalties and interest owed can be made to individuals who report fraud. Form 211, Application for Award for Original Information, can be used to claim a reward.
The IRS’ Whistleblower Office will make the final decision about whether an award will be paid and for how much. Award amounts are based on the value of the information you provided compared with the amount of additional tax, penalties and interest collected by the IRS.
In today’s interconnected world, evidence of financial crimes is increasingly stored on computers and at Internet storage facilities. But those who use computers to commit financial fraud can’t hide from Criminal Investigation’s (CI) Computer Investigative Specialists (CIS) who collect and analyze digital evidence for use in criminal investigations. “Think about how technology has changed in ten years. You can now use digital cameras, e-mail, or cell phones to store or transfer data, and evidence of today’s financial crimes can be found in those electronic formats,” explained Jet Larson, CIS, St. Paul Field Office.
CI’s Computer Investigative Specialists are senior agents trained in computer forensics and data storage technology. As agents, they are aware of the types of evidence that are needed in an investigation, and as technical experts they can extract evidence from computer networks. They are also schooled in the law of evidence and the chain of custody rules so they can preserve digital evidence in a manner that ensures its admissibility in courts of law. “We used to go on search warrants and take file cabinets of material; now we take computers.” added Kim Young, CIS, Dallas Field Office. “We are experts in working with computer storage – down to the bit and byte level if necessary – and finding every bit of data that has evidentiary value.”
Today’s investigations are going even further, requiring CISs to follow the evidence out the wire on the back of the computer and into cyberspace as more and more people use the Internet to conduct business and store financial records. Last year, the CISs collected and analyzed over 100 terabytes of digital evidence. To put that in context, the entire Library of Congress fits on 16 terabytes.

There’s something about the word "trust" that makes one feel comfortable and secure. That’s usually the case. In the financial world, however, the word "trust" can be deceiving. If in doubt, ask the Internal Revenue Service’s Criminal Investigation Division, the agency responsible for stopping tax crime. If asked whether your financial portfolio should include "too good to be true" trusts, the IRS will tell you "just because it’s a trust, doesn’t mean it’s trustworthy!"
What is a Trust? A trust is a form of ownership which completely separates responsibility and control of assets from all the benefits of ownership. A trust is controlled and managed by a designated independent trustee. Under federal tax laws, a trust is generally a separate entity subject to income tax (except for certain charitable or pension trusts that are expressly exempted by the tax laws and certain grantor trusts).
The IRS recognizes numerous types of legal trust arrangements. These legal trusts are commonly used in such matters as estate planning, charitable giving, and holding assets for minors and those unable to handle their own financial affairs. Under a legal trust arrangement, you must give up control over income and assets. An independent trustee is designated to hold legal title to the trust assets, to exercise independent control over the trust, and to manage the trust. Taxes must be paid on the income or assets held in trust, including the income generated by property held in trust. The responsibility to pay taxes may fall to either the trust, the beneficiary, or the trustee. All trusts must comply with the tax laws as set forth by Congress in the Internal Revenue Code, Sections 641-683.
A fraudulent trust only has the appearance of a trust. It is typically promoted by the promise of tax benefits or avoidance with no meaningful change in the taxpayer’s control over or benefit from the taxpayer’s income or assets. In some fraudulent trust arrangements, the taxpayer indirectly controls the activities of the trust through another individual designated as the trustee. Fraudulent trusts are illegal and are an emerging area of concern for IRS Criminal Investigation.
Common Uses of Fraudulent Trusts
Fraudulent trusts often hide the true ownership of assets and income or disguise the substance of transactions. The following arrangements have been used to promote fraudulent trust schemes:
• The Fraudulent Business (or Unincorporated Business) Trust
The owner of a business transfers the business to a trust. The business trust then makes payments to "unit holders" which are characterized as deductible business expenses or deductible distributions that purport to reduce the taxable income of the business trust to the point where little or no tax is due. Also, the promoter claims the arrangement reduces or eliminates the owner’s self-employment taxes on the theory that the owner is receiving reduced or no income from the operation of the business.
• The Fraudulent Equipment or Service Trust
The equipment trust is formed to hold equipment that is rented or leased to the business trust, often for inflated rates. The business trust then reduces its income by claiming deductions for payments to the equipment trust.
• The Fraudulent Family Residence Trust
The owner of the family residence transfers the residence, including furnishings, to a trust. The trust claims to be a rental business and rents the residence to the owner, who is the caretaker of the property. The trust may attempt to deduct depreciation and the expenses of maintaining and operating the residence.
• The Fraudulent Charitable Trust
The owner transfers assets or income to a trust claiming to be a charitable organization. The trust or payments made by the owner to the "charitable organization" pay for personal, educational, or recreational expenses. The payments are then claimed as "charitable" deductions.
• The Fraudulent Final Trust
Often established in a foreign country that will impose little or no tax on the trusts, the final trust contains multiple arrangements allowing the money to flow through several trusts until the cash is ultimately distributed or made available to the original owner, purportedly tax free.
Promised Benefits of a Fraudulent Trust may Include:
• The reduction or elimination of income subject to tax
• Deductions for personal expenses paid by the trust
• Depreciation deductions of an owner’s personal residence and furnishings
• The reduction or elimination of self-employment taxes
• The reduction or elimination of gift and estate taxes
The IRS takes fraudulent trust arrangements seriously. Taxpayers must take responsibility for their own actions. Should a taxpayer choose to participate in a fraudulent trust scheme, the taxpayer will not be shielded from potential civil and criminal sanctions.
Violations of the Internal Revenue Code may result in civil penalties and/or criminal prosecution. Civil sanctions can include a fraud penalty up to 75 percent of the underpayment of tax attributable to the fraud in addition to the taxes owed. Criminal convictions may result in fines up to $250,000 and/or up to five years in prison for such offenses.
Internal Revenue Service Criminal Investigation is focusing enforcement activities on investigations that reduce the tax gap and increase voluntary compliance. The tax gap is defined as the total true tax liability less tax paid voluntarily. In other words, there is a growing gap between what Americans owe and what Americans voluntarily pay in income tax. Tax gap investigations involve tax charges in legal industries. In conjunction with enforcement activities on tax gap investigations, IRS Criminal Investigation is in pursuit of those who establish and participate in fraudulent trusts.
Why? Quite simply, to stop tax evasion. The loss of this income to our federal government negatively impacts each of us. Although we may not like it, as Oliver Wendell Holmes put it so eloquently, "Taxes are what we pay for a civilized society." Income must be reported by the individual who earned it. No matter how carefully documents are drafted, if the intent of the trust is to illegally avoid taxes, the trust will be treated as a sham by the IRS.
Imposing civil penalties and/or recommending prosecution of those who violate the tax laws demonstrates the IRS’ commitment to ensure all taxpayers pay their fair share of taxes.Buyer Beware!
Internal Revenue Service Criminal Investigation cautions beware of groups and/or individuals who try to circumvent our tax system through the establishment of fraudulent trusts. They may come up with the idea, but it is the participant who will incur civil penalties, pay the criminal fines, and possibly go to jail.
If in doubt about investing in a trust, seek guidance from a tax professional or the IRS. If you have erred by participating in a fraudulent trust, file an amended return.

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