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prosecutions, felonies and misdemeanors

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Did you know that the Internal Revenue Service – Criminal Investigations (IRS-CI) is the only federal agency that devotes 100% of resources to investigating financial crimes? IRS-CI is also the only agency with jurisdiction over federal tax crimes.

You can test how much you know about the agency here:

How’d you do?

For more on IRS-CI, you can click here for the podcast episode listing, or listen to my interview with Chief Fort below:

We have a winner! Jim and Mike both guessed – at the same time – that Capone’s preferred nickname was Snorky. You both get mugs! Keep watching for our next question.

It’s tax season! Okay, it’s a weird tax season, but still tax season. And that means tax trivia!

Our tax trivia question is:

Infamous tax evader Al Capone is best known today as Scarface, but he actually hated the nickname. His close friends called him something else, as a nod to his sense of style. What was his preferred nickname?

What’s your guess? You must leave your answer in the comments below. 

The first correct answer wins a Taxgirl coffee mug.

To see a complete copy of the rules, including eligibility, click here.

It appears that two New England businessmen took the concept of “free money” way too far.

David A. Staveley (a/k/a Kurt D. Sanborn) of Andover, Massachusetts, and David Butziger of Warwick, Rhode Island, have been accused of conspiring to illegally obtain funds through the Paycheck Protection Program (PPP). The PPP offers billions of dollars in potentially forgivable loans to keep workers on the payroll, guaranteed by the Small Business Administration (SBA).

Staveley and Butziger claimed to have dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses. They allegedly sought more than a half-million dollars in loans.

“Every dollar stolen from the Paycheck Protection Program comes at the expense of employees and small business owners who are working hard to make it through these difficult times,” said Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division. “The Criminal Division is committed to working with our law enforcement partners to root out abuse of the important relief programs established under the CARES Act.”

The pair were specifically charged with conspiracy to make a false statement to influence the SBA to obtain a loan (in violation of 18 USC § 371) and conspiracy to commit bank fraud (in violation of 18 USC § 1349). Staveley has also been charged with aggravated identity theft (in violation of 18 USC § 1028A), while Butziger has also been accused of bank fraud (in violation of 18 USC § 1344).

According to court documents, the fraudulent loan requests were to pay employees of businesses that were not operating before the start of the COVID-19 pandemic and had no salaried employees. One of the restaurants had previously been open, but it was closed by March 10, 2020, when the town of Berlin revoked the business’ liquor license for numerous reasons. Another restaurant used in the scheme has not been functional since it was closed in November of 2018 and is currently in disrepair with dumpsters on-site and “Stop Work” notices posted on the property. 

In another instance, it is alleged that on April 6, 2020, Butziger filed an application seeking a PPP loan as the owner of an unincorporated entity named Dock Wireless. He claimed that he had seven full-time employees on Dock Wireless’ payroll, including himself, that he brought on full-time on January 1, 2020, and laid off at the end of March. Butziger claimed the employees continued to work without being paid through April 2020, and that he would use SBA PPP funds to pay them. However, the Rhode Island State Department of Revenue provided information to the IRS of having no records of employee wages having been paid in 2020 by Butziger or Dock Wireless. And agents interviewed several of the supposed employees who reported that they never worked for Butziger or Dock Wireless. 

Email correspondence between the two suggests a plan to fabricate records, including forms 941 (payroll records). For example, the complaint indicates that in April of 2020, Butziger emailed Staveley, “I can create a bull sh[*]t 2020q1 for Oakland beach if you want.” In a series of emails, Staveley eventually replied, “These look good. It says we need payroll reports for the past 12 months? Can we get what we have from toast payroll on New Flatt Penny L.L.C.? And should we dream up 1st quarter on the other two? Please advise…..thank you David.” 

“The alleged actions of defendants Staveley and Butziger are criminally reprehensible,” said Special Agent in Charge Kristina O’Connell of the IRS-Criminal Investigation (IRS-CI). “Defrauding a government program designed to provide financial assistance to small business owners during the Coronavirus pandemic is tantamount to taking money directly out of the pockets of those who need it most. Today’s arrests exemplify the hard work, dedication and efficiency of IRS-CI and the entire investigative team.”

According to the Department of Justice, the charges are the first in the country linked to the popular SBA loan program. Federal investigators have hinted that more are coming.

The Internal Revenue Service (IRS) has announced the indictment of Michael Rahim Mohammad, a Dutch national. Mohammad, sometimes called “Mr. Dark,” has been accused of operating Dark Scandals, websites that featured violent rape videos and depictions of child pornography. 

According to court pleadings, Mohammad was the administrator of the DarkScandals Sites, which he began operating in or about 2012. The sites were available on the darknet (“DarkScandals Darknet”) and the clearnet (“DarkScandals Clearnet”). 

The dark web, also referred to as “darknet,” refers to content that you don’t typically access through regular internet browsing activities. A “clearnet” website is accessible using traditional web browsers like Internet Explorer; these websites use traditional designations like “.com” or “.co.”

Users of these sites rely on cryptocurrencies like Bitcoin to pay for services because they offer the illusion of anonymity. However, it is often possible to determine the identity of an individual involved in these transactions through several different tools. 

The DarkScandals Darknet and DarkScandals Clearnet sites were virtually identical. They largely offered the same service: directing customers on how to obtain obscene content, including videos that depicted sexual assault and child pornography. Specifically, the sites boasted over 2,000 videos and images, and advertised “real blackmail, rape and forced videos of girls all around the world.”

Users could either pay for the videos using cryptocurrency, such as Bitcoin, or upload new videos to add to the Dark Scandals sites. The Dark Scandals sites included specific rules for the video uploads to the websites, which included “real rape/forced” content, and stated a preference for “own made material.” The site expressly forbade “fake, amateur…or acted movies,” and would reject content if it did not portray real sexual violence. 

A quick word of warning: the indictment (downloads as a PDF) contains language and descriptions that may be disturbing. In fact, Don Fort, Chief, IRS Criminal Investigation, declared, “The types of crimes described in this indictment are the most disgusting I’ve encountered in 30 years of law enforcement. It is a special kind of evil to prey on and profit from the pain of others.”

“Darknet sites that profit from rape and the sexual exploitation of children are among the most vile and reprehensible forms of criminal behavior,” said U.S. Attorney Timothy J. Shea. “This Office will not allow predators to use lawless online spaces as a shield. We are firmly committed to working closely with our partners in the Netherlands and around the world to bring to justice the perpetrators of these abhorrent crimes.”

According to the forfeiture complaint (downloads as PDF), law enforcement was able to trace payments of bitcoin and ethereum to the Dark Scandals site by following the flow of funds on the blockchain. The 303 virtual currency accounts identified in the complaint were allegedly used by customers across the world to fund the website and promote the exploitation of the victims.

Mohammad allegedly received almost two million dollars from selling this obscene and illicit content, and the complaint seeks to recover these funds and return the illegal funds to victims of the crime. The complaint also seeks to forfeit the previously seized website domains associated with DarkScandals.

The charges against Mohammad include various counts of Distribution of Child Pornography, Production and Transportation of Obscene Matters for Sale or Distribution, Engaging in the Business of Selling or Transferring Obscene Matter, and Laundering of Monetary Instruments.

The charges come months after the largest dark web child pornography site was taken down. According to the IRS-CI, agents became aware of that site, Welcome to Video, because of their work on previous dark web marketplaces. As a result of the investigations, Jong Woo Son, 23, a South Korean national, was indicted by a federal grand jury in the District of Columbia for operating the site. Son was sentenced to 18 months in prison in Korea; he still faces charges in the United States. Additionally, in that case, 337 site users residing in 23 states and Washington, D.C., as well as the United Kingdom, South Korea, Germany, Saudi Arabia, the United Arab Emirates, the Czech Republic, Canada, Ireland, Spain, Brazil, and Australia were arrested and charged.

The Dark Scandals investigation was jointly investigated by the IRS-CI (Washington, D.C.) and Homeland Security Investigations (Colorado Springs and The Hague). The Dutch National Police of the Netherlands, Europol, and the German Federal Criminal Police (the Bundeskriminalamt) provided assistance and coordinated with their parallel investigations.

Chief Fort noted, about the investigation, “Criminals should know if you leave a digital footprint, we will find you. If you exploit our children, we will put you behind bars. If you thought you were anonymous, think again. The dark web is not quite as dark today due to the hard work of IRS-CI and our partner agencies.”

Two Florida men will spend time in federal prison for their roles in a stolen identity and tax refund fraud scheme. The men took thousands of names, addresses, and other personally identifiable information and used the data to file fraudulent tax returns between 2012 and 2014.

The men were discovered as part of a collaborative law enforcement program called “Project EFIN.” The program focused on Electronic Filing Identification Numbers (EFIN) with high rates of identity theft. Providers – either individuals or firms – need an EFIN to file tax returns electronically with the Internal Revenue Service (IRS). An EFIN is different from a Preparer Tax Identification Number (PTIN) issued to tax professionals who are paid to file tax returns. Most preparers need both.

The program identified 100 of the largest EFIN holders based on fraud indicators like 100% refund rates and high rejection rates. Investigators pegged approximately 60 EFIN holders who claimed roughly $150 million in fraudulent returns for the tax years 2011 and 2012, and 62 EFIN holders who claimed more than $138 million in fraudulent returns for the tax year 2013.

As part of the investigation, law enforcement was able to link potentially problematic EFIN numbers to IP addresses. Using a subpoena, they found that one of those IP addresses was registered to a company called Capital Financial Management, LLC (“Capital”). Among other things, Capital provided tax preparation services.

According to court documents, Ludrick Joseph worked for Capital. Maurice Marcellus was the manager and sole registered agent of the company and ran the day-to-day operations. Between 2012 and 2014, Joseph and Marcellus prepared and electronically filed federal tax returns for individuals who were later determined to be identity theft victims.

In 2014, law enforcement executed a search warrant at Capital. They seized debit cards, files, and other records containing thousands of names and personally identifiable information like addresses and Social Security numbers. Included in the data were the names of people who Joseph allegedly knew to be deceased. Also on the lists? Students who had previously attended the ATI College of Health in Miami, Florida. Marcellus accessed the information while he was an academic advisor for the ATI College of Health (the college closed in 2012): he passed the data along to Joseph so that he could file fraudulent tax returns.

After a lengthy investigation, a federal grand jury indicted Marcellus and Joseph on February 14, 2019. The pair pleaded guilty on November 13, 2019, to aggravated identity theft and possession of unauthorized access devices. 

U.S. District Judge Marcia G. Cooke sentenced Marcellus to 60 months and three years of supervised release. Joseph was sentenced to 48 months and three years of supervised release. Both defendants are jointly responsible for paying $563,210 in restitution.

The sentence was announced by Ariana Fajardo Orshan, U.S. Attorney for the Southern District of Florida, and Michael J. De Palma, Special Agent in Charge, Internal Revenue Service, Criminal Investigation (IRS-CI), Miami Field Office. Other agencies involved in the efforts include the Federal Bureau of Investigation (FBI), U.S. Secret Service (USSS), U.S. Immigration and Customs Enforcement Homeland Security Investigations (ICE-HSI), and the U.S. Postal Inspection Service (USPIS).

The pair are slated to report to prison next month.

The story is a good reminder that identity thieves are constantly looking for ways to steal the identities of taxpayers. Keep your personal information safe by remaining alert – and when in doubt, assume it’s a scam. For tips on protecting yourself from identity theft-related tax fraud, click here.

What’s better than one organization fighting international and transnational crime? Try five. This week, tax authorities from the United Kingdom (UK), United States (US), Canada, Australia, and the Netherlands combined forces to put a stop to the suspected facilitation of offshore tax evasion. The operation was part of a series of investigations into an international financial institution located in Central America, whose products and services may have been used in a money laundering and tax evasion scheme for customers across the globe. 

The “coordinated day of action” involved evidence, intelligence, and information collection activities such as search warrants, interviews, and subpoenas. Authorities believe that the financial institution aided clients in evading their tax obligations by using a sophisticated system to conceal and transfer wealth anonymously. Additional criminal, civil, and regulatory action is expected. 

“This is the first coordinated set of enforcement actions undertaken on a global scale by the J5 – the first of many,” said Don Fort, US Chief, Internal Revenue Service Criminal Investigation (IRS-CI). “Working with the J5 countries who all have the same goal, we are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration.” 

Fort emphasized, “Tax cheats in the US and abroad should be on notice that their days of non-compliance are over.”

The Joint Chiefs of Global Tax Enforcement, called the J5, organized in 2018 to combat global crime by sharing resources. The J5 consists of criminal intelligence communities from Australia, Canada, the Netherlands, the United Kingdom, and the United States who are committed to collaboration in the fight against international and transnational tax crime and money laundering. Membership of the J5 includes the heads of tax crime and senior officials in tax agencies, including Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Fiscale Inlichtingen-en Opsporingsdienst (FIOD), HM Revenue & Customs (HMRC) and Internal Revenue Service Criminal Investigation (IRS-CI).

This particular investigation began as a result of information obtained by the Netherlands Fiscal Information and Investigation Service (FIOD). Hans van der Vlist, Chief and General Director for FIOD, said, “This is the first outcome of an operational collaboration between five countries on tackling professional enablers that facilitate offshore tax crime.”

Prior investigations – like those involving allegations against Credit Suisse – were multinational but conducted separately. This was a first: a combined effort.

Australian Tax Office (ATO) Deputy Commissioner and Australia’s J5 Chief, Will Day, said the operation is proof that the collaboration is working. “Today’s action shows the power of our combined efforts in tackling global tax crime, fraud and evasion. This multi-agency, multi-country activity should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime.”

“Never before have criminals been at such risk of being detected as they are now. Our increased collaboration, data analytics and intelligence sharing mean there is no place worldwide you can hide your money to avoid contributing your obligations,” Day explained. 

The name of the targeted financial institution was not named by the J5 today, but some tax professionals believe that the investigation is linked to the Panama Papers.

Canada Revenue Agency (CRA) Chief Eric Ferron said, “I am very pleased with the role the CRA is playing in what will be the first of many major operational activities for the J5.” He then warned, “Tax evaders beware; today’s action shows that through our combined efforts we are making it increasingly difficult for taxpayers to hide their money and avoid paying their fair share.” 

Simon York, Chief and Director of Her Majesty’s Revenue and Customs (HMRC) ‘s Fraud Investigation Service, echoed those comments, saying, “Tax evasion is a global problem that needs a global response, and that is what the J5 provides.” He continued, “International tax evasion robs our public services of vital funds, undermines economies and, left unchecked, can enrich the dishonest at the expense of the honest majority.”

York concluded, “Working together, HMRC and our J5 partners are closing the net on tax criminals, wherever they are, to ensure nobody is beyond our reach. The message to them is clear – the J5 are closing in.”

Nobody likes to pay taxes. But prosecutors allege that Thomas and Michelle Selgas disliked paying taxes so much that they hid money from the government and conspired with their lawyer to evade taxes.

In 2003, Thomas Selgas co-founded a company called MyMail. A couple of years later, MyMail settled several patent litigation lawsuits, resulting in a payout to Selgas of $1.1 million. The prosecution alleges that Thomas Selgas, along with his wife, Michelle, directed the cash to a metals trading firm to buy gold coins. According to the complaint, the transaction was intended to hide the income from the government.

In April of 2006, the Internal Revenue Service (IRS) assessed taxes against Thomas Selgas for prior years. According to court documents, for 1998 through 2002, the Selgases did not file valid tax returns so the IRS filed substitute returns. The Selgases each appealed those debts in Tax Court – unsuccessfully. 

Thomas Selgas separately appealed his Tax Court decision to the Fifth Circuit, which affirmed in January 2007. The Fifth Circuit wrote:

Selgas’s arguments are utterly lacking in merit and, as an aside his conduct in this litigation appears to have been inconsistent with that of a litigant endeavoring to aid in the truthful and efficient resolution of contested issues of facts and law. We have no sympathy for Selgas’s behavior or his arguments in defense of what appears to have been a brazen attempt to avoid a few thousand dollars in legitimate tax liability. Selgas v. Commissioner, 475 F.3d 697, 701 (5th Cir. 2007), cert. denied 552 U.S. 824 (2007)

Prosecutors claim that, despite the outstanding tax liabilities, the Selgases did not report the income from the MyMail settlement. Instead, days after they were assessed in 2006, the Selgases allegedly worked to underreport the amount of income paid to the partners by filing false documents. Among other things, the reportedly Selgases submitted to the IRS a “Statement in Lieu of a 1040” that reflected the income reported on a false K-1; the statement significantly devalued the Selgases’ income from over $1,500,000 to $176,640. 

While though the government was asking questions about their tax filings, prosecutors allege that the couple continued to hide their income. In addition to buying and selling assets, including real estate, with gold coins, they are accused of hiding income in lawyer trust accounts. Their lawyer and Thomas Selgas’ long-time business associate, John Green, who is also charged in the case, is alleged to have deposited personal funds from the Selgases into various lawyer trust accounts (sometimes called “IOLTA” accounts). According to prosecutors, Green paid credit card bills and other personal expenses for the Selgases out of his trust account.

Green, who is licensed to practice law in the State of Texas, is also a member of the Idaho state legislature. He won the election despite the allegations.

In 2018, the Department of Justice returned an indictment charging the Selgases and Mr. Green with conspiring to defraud the United States; the Selgases were separately accused of tax evasion. According to court records, the Selgases’ bill is nearly $1 million in unpaid tax, interest, and penalties.

They are scheduled to go to trial next month, and the trial is expected to last five days. If convicted, Thomas and Michelle Selgas face a statutory maximum sentence of five years in prison on the tax evasion charges and five years on the conspiracy charge. John Green faces a maximum sentence of five years on the conspiracy. All of the defendants have pleaded not guilty.

Lying about your income is Tax Fraud 101. You’d expect taxpayers to understate their income to avoid paying tax, but a surprising number of taxpayers inflate their income to obtain fraudulent refunds. Typically, those schemes focus on refundable tax credits, which can garner tens of thousands of dollars in refunds. But what happens when taxpayers lie to collect tens of millions of dollars in refunds? That’s exactly what federal prosecutors allege happen in a plot to trick the Internal Revenue Service (IRS) into shelling out $175 million in false refunds – but the IRS didn’t catch on until after they had refunded over $3 million.

According to court documents, 35-year-old Danielle Edmonson and 51-year-old Kenneth Edmonson began filing bogus tax returns in 2015. Danielle filed a tax return for the 2014 tax year, claiming a refund worth $239,700. She attached several fraudulent handwritten forms from entities the U .S. Treasury and Citibank as proof that she had paid over $300,000 in taxes. Based on that return, the IRS issued Danielle a U.S. Treasury check for $239,700. She allegedly deposited the check and used the proceeds to buy a $53,000 BMW; she also withdrew $60,000 in cash.

Emboldened, Danielle filed a similar return in the following year. This time, she claimed she paid $141 million in taxes from winning the lottery and, as a result, was owed $80,112,167. She again attached fraudulent forms. This time, the IRS was suspicious – and turned her down.

That didn’t stop Danielle. She tried again, filing a 2016 tax return in September 2017. She filed a false tax return claiming that she was due a refund of $2,405,073. Remarkably, the IRS approved her request, taking on a few extra dollars. Video surveillance shows that Danielle deposited a check worth $2,405,193 in her bank.

Of course, she tried again in 2018. Realizing that the sweet spot must be somewhere between $2,405,073 and $80,112,167, she requested a tax refund of $9,572,279 for the 2017 tax year. This time, the feds got a search warrant and searched Danielle’s home. 

Also, in 2017, Danielle’s father, Kenneth Edmonson, tried his hand at securing a refund. Kenneth filed a tax return for the tax year 2016, seeking a refund of $725,111. In January of 2018, the IRS issued a tax refund check to Kenneth for $734,266.27 (including $9.036.27 in interest). Kenneth deposited that money into his account at Wells Fargo, and ten days later, the IRS paid him a visit. After they left, Kenneth went back to Wells Fargo and attempted to withdraw the money.

Despite the visit from the feds, Kenneth tried again. On March 20, 2018, he filed an amended tax return for the 2016 tax year seeking a refund of $825,628 based on false withholding.

On April 2, 2019, the Department of Justice announced charges against Danielle Edmonson and Kenneth Edmonson. Danielle responded with several handwritten notes presented as motions claiming that she was an “aboriginal indigenous Moorish American national.” She has also claimed in court filings that she is “the law.” She has demanded her immediate release and an additional $100 million for a “tort injury fee for my private property (my body)” and other alleged damages totaling close to $400 million. She also claimed that “IRS is not a government agency and [sic] but a mere debt/accounting firm/agency.” She also claimed to be a sovereign citizen not subject to U.S. jurisdiction. Federal courts and federal agencies, including the Department of the Treasury, have consistently rejected claims from sovereign citizens.

For more, you can refer to this fact sheet on the Sovereign Citizen Moment prepared by the Treasury Inspector General for Treasury Administration (TIGTA) or Rev. Rul. 2007-22 (both download as PDF).

Court proceedings began on December 16, 2019, and a verdict is expected before the holidays.

The Justice Department has announced a settlement with Franchise Group Intermediate L 1 LLC, (Liberty), the national franchisor and owner of Liberty Tax Service stores. The settlement, if approved by the court, would resolve a complaint filed with a U.S. District Court in Norfolk, Virginia, by the Justice Department against Liberty.

Liberty is one of the largest tax preparation service providers in the country. According to its annual report filed with the SEC in 2019, Liberty has more than 2,800 franchise and company-owned tax return preparation offices in the United States (Liberty also markets services in Canada). Between 2015 and 2019, Liberty filed approximately 1.3 to 1.9 million tax returns each year through its stores, claiming billions in federal tax refunds on behalf of its customers.

According to the complaint, Liberty failed to maintain adequate controls over tax returns prepared by its franchisees. The company reportedly did not take steps to prevent the filing of potentially false or fraudulent returns prepared by franchisees, despite notice of fraud at some of its franchisee stores.

The government reports that between 2013 and 2018, 10 separate civil law enforcement actions were filed in U.S. District Courts throughout the United States against 12 franchisees of Liberty Tax, or their owners, former owners, or former managers. Judgments were entered in favor of the government in nine of those cases; the tenth, United States v. Doletzky et al., Case No: 8:18-cv-00780-CEH-CPT (M.D. Fla.), is pending.

Where did those franchisees go wrong? At many, the problems were tied to the Earned Income Tax Credit (EITC). Since the EITC allows some taxpayers to get a refund in excess of any tax paid into the system, it’s long been associated with fraud: the Internal Revenue Service (IRS) estimates that about a quarter of all EITC refunds are improperly issued.

(You can find out more about the EITC here.)

Liberty Tax franchise and company-owned stores filed a lot of returns for taxpayers claiming the EITC. According to the complaint, for the tax years from 2012 to 2018, approximately 41% of federal income tax returns that Liberty Tax electronically filed with the IRS included an EITC claim, more than double the rate of other returns electronically filed during that period. Those Liberty EITC refunds exceeded $12 billion. 

And remember those court actions mentioned earlier? From 2010 to 2016, employees at those stores claimed false EITC refunds by reporting income that did not exist and ignoring due diligence requirements.

In some cases, the government alleges that Liberty Tax franchisees recruited customers, including the homeless, and then prepared fraudulent federal income tax returns on their behalf. To boost income, they reported fake wages earned from household work (HSH) like housekeeping, babysitting, or gardening.

For example, in 2015, a Liberty Tax Service franchise owned and operated by Kone prepared over 1,000 tax returns that claimed HSH Income and the EITC. The fraudulent tax returns included over 350 tax returns that reported the same amount of HSH Income ($6,400) and over 300 tax returns that each reported precisely $7,200 of HSH Income. 

The government claims that Liberty either knew or should have known about the EITC fraud at its franchise locations, but didn’t try to stop it. Notably, in January of 2014, the company and its CEO at the time, John T. Hewitt, received complaints that franchisees had prepared tax returns with potentially false EITC claims linked to HSH income. Nonetheless, the number of returns claiming HSH income increased. 

The government also says that when the company identified specific EITC violations, it didn’t take steps to curb the abuse. In 2016, Liberty Tax conducted an onsite compliance review of one franchisee and found errors in over 80% of the EITC files. The company gave the franchisee a failing EITC compliance grade but did not terminate him until the government initiated a civil enforcement action in 2018. 

Other improper acts include erroneous dependent claims, false claims for expenses, and fraudulent claims for refundable education credits. There were also reported violations of federal Preparer Tax Identification Number (“PTIN”) regulations, including stores that allowed employees to share PTINS so that employees without PTINs could prepare tax returns.

In 2019, Liberty admitted in its annual report that it “did not maintain effective internal control over financial reporting” and “[t]he control environment, risk assessment, control activities, information and communication, and monitoring controls were not effective.” Still, the government says that the company failed to take sufficient measures to prevent fraud and errors at its stores. In many cases, the complaint alleges that Liberty only terminated franchisees after the United States or other law enforcement agencies took action.

How bad was it? According to the complaint, for tax years from 2012 to 2016, the IRS assessed over 25,000 separate penalties against tax return preparers for tax returns prepared at Liberty franchises and company-owned stores. For tax years from 2012 to 2017, 20,000 of the 28,000 audits of Liberty customer tax returns resulted in changes to correct false or incorrect items reported on each return – a whopping 70%.

Under the settlement, Liberty would be required to take steps to identify and curb abuse going forward. Those steps include a ban on employing the company’s founder and former CEO, John T. Hewitt; Hewitt would also not be allowed to hold an interest in or serve on the board of directors of any Franchise Group of the company.

Liberty would also be required to establish enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance. The company must also take steps to ensure effective quality control throughout its stores, including conducting onsite compliance reviews and using mystery shoppers. Additionally, the settlement mandates disclosure of any potential violations to the government. 

The high-profile complaint and settlement is an acknowledgment that return preparer fraud is a serious problem – so much so that the IRS included it in its Dirty Dozen Tax Scams for 2019. To protect yourself, use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). For hints on finding a tax preparer, click here. For more information about return preparer fraud, check out IR-2019-32.

Winston Shrout has been apprehended. The former fugitive and tax fraud promoter had been on the run from law enforcement for months, but he was caught in Arizona this month by the U.S. Marshals Service.

Shrout, 70, was convicted in April 2017 on six misdemeanor counts of willful failure to file tax returns and 13 felony counts of producing, presenting and shipping fictitious financial instruments to various banks and the U.S. Treasury. He made and issued more than 300 fake “International Bills of Exchange” that he claimed were worth more than $100 trillion. The bills were supposedly authorized by the Office of International Treasury Control (OITC). According to the organization’s website, the OITC was established in 1995 “for His Excellency, Dr. Ray C. Dam.” The OITC explains, “Dr. Ray C. Dam is a person, but His Excellency Dr. Ray C. Dam is a certified and indemnified international Central Banking financial institution operating as The Office of International Treasury Control.” Further, the OITC claims it was granted “Sovereign Entity Status under the United Nations Charter Control No: 10-60847.” Among other things, the website claims that “the OITC has become the largest single owner of Home Mortgage Securities in the World today.”

Not surprisingly, the federal government considers the OITC a fraudulent organization. The feeling is mutual: As a sovereign citizen, Shrout does not recognize the authority of the federal government.

Shrout touted his illegal schemes to others via his website (since taken down) and paid seminars, even after his court appearance. According to evidence presented in court, Shrout did not file his 2009 through 2014 tax returns despite earning income from pensions and promoting his tax-avoidance schemes.

Shrout admitted that he had not filed or paid income tax for at least 20 years, despite earning more than $100,000 in some of those years.

Prosecutors sought 20 years in prison for Shrout. In contrast, his defense attorneys argued for leniency, arguing that he had not committed a violent crime and other than failing to file his taxes, had not cost the government any real money.

The judge disagreed. On October 22, 2018, Judge Robert E. Jones sentenced Shrout to serve ten years in prison, with five years of supervised release and $191, 226 in restitution.

“You’re 70 years old. This may well be a life sentence,” U.S. District Judge Robert E. Jones said.

Shrout replied, “I’m well aware of that.”

And then, months later, he took off. Shrout failed to report to prison in March 2019. He remained a fugitive until his recent arrest. He will now be handed over to the Bureau of Prisons to begin serving his prison term.