The owner of a Los Angeles tax preparation service has been sentenced to 15 months in prison for promoting a $1.5 million fraudulent tax loss scheme.

Richard Allen Edgar, 72, owner of Phoenix Spirit Enterprises, pleaded guilty to charges that he prepared false federal income tax returns on behalf of clients, causing losses to the Internal Revenue Service of approximately $358,000. He was sentenced Monday afternoon by U.S. District Judge Gary A. Feess.

Edgar, a tax preparer and former CPA, pleaded guilty late last year to two counts of aiding and assisting in the preparation of false tax returns.

According to the plea agreement, from at least 2004 through 2009, Edgar sold false “tax losses” to his clients to offset his clients’ income, thereby eliminating or drastically reducing taxes otherwise owed by the clients to the IRS. 

He typically charged clients approximately 12.5 percent of the losses purchased, according to the IRS-Criminal Investigation division’s Los Angeles Field Office, and the U.S. Office for the Central District of California. The losses Edgar sold were purportedly non-passive partnership losses generated by Creative Financial Solutions, LLC, and Why Not Entertainment, LLC, both of which Edgar managed and controlled.  The clients whose returns included the losses were not partners of any kind in Creative Financial Solutions or Why Not Entertainment and were unaware of what the companies did.

To encourage his clients to buy these sham tax losses, Edgar would prepare and send each client two versions of the client’s tax return, one without any claimed tax losses, showing a large tax liability owed to the IRS, and the other with tax losses offsetting all or virtually all of the client’s taxable income, showing either no taxes owed or even a refund due. 

Edgar would often send clients a tax loss schedule, in spreadsheet form, showing how the purchase of various amounts of tax losses ($50,000, $75,000, $100,000, etc.) could reduce or eliminate the client’s tax liability.

After a client purchased the losses, Edgar would have the client execute a backdated “Membership Subscription Agreement,” purporting to show that the client had become a member of Creative Financial Solutions or Why Not Entertainment in the tax year at issue.

According to documents filed with the court, for the tax years 2004 through 2007, Edgar sold over $1.5 million in fraudulent “tax losses” to his clients, causing losses to the IRS of $358,274.  Assuming Edgar charged 12.5 percent of the losses purchased, he likely pocketed approximately $187,500.

For the two client tax returns to which Edgar pleaded guilty, one return falsely reported that the individual had incurred $128,424 in losses from Creative Financial Solutions. The second return falsely reported that the individual had incurred $30,136 in losses from Why Not Entertainment.

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