A federal grand jury has indicted 55 individuals for participating in a massive income tax fraud scheme based in Southern California that illegally sought over $250 million in tax refunds.
Special agents in the Internal Revenue Service’s Criminal Investigation division began rounding up the defendants last Friday in a takedown termed “Operation Stolen Treasures.” The investigation has resulted in 32 federal indictments naming 55 defendants, many of them associated with companies: Old Quest Foundation Inc. in Fontana, Calif., and De la Fuente and Ramirez and Associates in Rancho Cucamonga.
Eighteen defendants were arrested Friday, an additional 27 defendants will receive summons to appear in a federal court for arraignments in the coming weeks. Ten other defendants are either fugitives or have agreed to surrender Monday.
A 19-defendant indictment related to Old Quest alleges that its associates filed false Forms 1099-OID collectively reporting that more than $1 billion in federal income tax had been withheld. Original Issue Discount, which is reported on IRS Forms 1099-OID is a form of interest income typically realized on debt instruments that were issued at a discount to, or purchased for less than, the ultimate redemption value of the debt instrument, such as Treasury bills (but not U.S. savings bonds), zero-coupon bonds, and other debt instruments that pay no stated interest until maturity.
The scheme allegedly resulted in more than 400 fraudulent federal income tax returns being filed with the IRS, seeking a total of more than $250 million in fraudulent refunds. The IRS said it erroneously issued millions of dollars worth of tax refunds, including one tax refund check for $1,192,653.
Old Quest—which did business in Fontana under the names Old Quest Foundation and Old Quest Services—promoted the scheme by telling customers they could receive tax refunds of hundreds of thousands of dollars from a “secret government account.” During presentations made across the Southland region of California, members of the group promoted the supposedly secret government account and told prospective clients that the United States was bankrupt and was actually owned by England.
Potential customers heard presentations from people falsely claiming to be attorneys, accountants, CPAs and former IRS employees. Those who chose to sign up were required to make “donations” as high as $10,000 to Old Quest and were required to pay the company a percentage of any refund they fraudulently received.
The 88-count indictment alleges that, in exchange for the payments from the customers, Old Quest prepared and filed false income tax returns that routinely sought hundreds of thousands of dollars—and sometimes millions of dollars—in income tax refunds. One of the tax returns allegedly sought a refund of $4,656,566. According to the indictment, when Old Quest customers received IRS letters warning that their tax returns were frivolous, employees assured customers the IRS sent letters only to “intimidate” them because the “IRS did not want to pay.”
During a search warrant executed at Old Quest’s offices two years ago, IRS agents seized several false tax returns before they could be filed, including one signed return that fraudulently reported $10,500,106 in federal income tax withheld and would have sought a $6,868,675 refund. The indictment alleges Old Quest received approximately $1 million in payments from customers of its fraudulent scheme.
All but one of the 19 people named in the Old Quest indictment are charged with conspiracy to defraud the United States in a count that alleges 421 overt acts.
In addition to the indictment that outlines the Old Quest scheme, a federal grand jury also issued indictments naming Old Quest customers, including one who was charged with fraudulently obtaining a $767,963 income tax refund; a California attorney who had previously been ordered by a federal judge to permanently stop preparing tax returns; and a tax preparer for a national tax preparation firm who is charged with filing a false tax return that led to a refund of $279,846.
In the scheme related to De la Fuente and Ramirez and Associates, four people were named in an indictment that alleged a conspiracy to defraud the United States by filing more than 35 false income tax returns claiming over $80 million in fictitious federal income tax withholding and seeking more than $19 million in income tax refunds. The group used seminars and one-on-one consultations to recruit people, who were charged $2,500 to become customers. According to the indictment, DLFRA operated a similar type of fraudulent tax scheme as Old Quest.
