Tax Fraud Blotter: Hoop schemes
Spreading the theft around; re-routed refunds; AIG loses, mostly; and other highlights of recent tax cases.
Beaverton, Oregon: Engineer Jeffrey Fitch has been sentenced to a year and a day in prison for failing to collect or pay over federal employment taxes.
Since 2002, Fitch owned and operated SFA Engineering and SFA Design Group. Between March 2013 and December 2016, he collected federal income, Social Security and Medicare taxes from employees’ paychecks and gave them paystubs reflecting the taxes withheld. He never paid the IRS the tax withheld nor did he file appropriate employer returns. Fitch also failed to pay his employer’s share of federal payroll taxes.
Fitch used a large portion of the withheld funds to pay his and his family’s personal expenses.
Fitch owed the IRS $453,879.40, which he paid just prior to sentencing. He was also ordered to pay more than $453,000 in restitution to the IRS.
San Antonio: Preparer Telesa Hall has pleaded guilty to aiding and assisting in the preparation of false returns.
Between 2013 and 2017 in San Antonio, Copperas Cove and Killeen, Texas, Hall operated the tax prep business Precision Efile Tax Services. She prepared at least 51 fraudulent returns that sought to inflate refunds for her clients. Among other things, Hall falsely claimed substantial business losses on some of the returns.
She faces a maximum of three years in prison as well as a period of supervised release, restitution and monetary penalties.
Carmel, New York: Attorney Francis J. O’Reilly, of Danbury, Connecticut, has been sentenced to 18 months in prison for tax evasion and failing to pay over payroll taxes for the tax year 2015, part of a long-running tax fraud that cost the U.S. Treasury more than $800,000, including penalties and interests.
For over two decades, O’Reilly has been a self-employed attorney whose practice specialized in, among other things, bankruptcy, foreclosure defense and criminal defense. He operated his practice as a sole proprietorship and was responsible for collecting and paying over federal payroll taxes for his employees.
Between 1997 and 2018, O’Reilly failed to pay over some $155,771 in payroll taxes, resulting in a liability of approximately $232,283 after interest and penalties. Also, between 2013 and 2017 he withdrew some $481,673 in untaxed funds from his attorney trust account for personal use, none of which he reported on his returns for those years. He failed to pay even those taxes that he did report, accruing large unpaid liabilities. In total, during the tax years 2007 through 2018, O’Reilly evaded some $566,027 in personal federal income taxes, including interest and penalties.
In or about late 2016, he submitted an offer in compromise to the IRS proposing to settle at least some $691,561 in outstanding tax liabilities for merely $12,400. In the OIC, O’Reilly made several material misstatements and omissions regarding his income and assets, failing to disclose the existence of his attorney trust account, real property and land that he owned in New Mexico, and a 2010 vehicle that he’d recently purchased for about $16,000.
In all, O’Reilly caused the IRS to incur losses of over $800,000, including penalties and interest.
O’Reilly was also ordered to serve two years of supervised release and to pay $801,969 in restitution to the IRS.
Bozeman, Montana: Bookkeeper Anna Michelle Niles, 47, who previously admitted embezzling while working as a bookkeeper for several businesses, has been sentenced to five years of probation and ordered to pay $423,245 in restitution.
The prosecution recommended a sentence of 27 to 33 months and said that from 2009 until 2018, Niles embezzled money from several business entities while performing bookkeeping and accounting services. She diverted funds through checks, by stealing cash and claiming leave she was unentitled to, by receiving unauthorized 401(k) loan payments and using business credit cards on personal expenses. Niles embezzled about $433,018 from the businesses.
Kansas City, Missouri: Former IRS employee Tamara R. Miller, 40, has been sentenced to two years and two months in prison for stealing refunds.
Miller, who pleaded guilty in January, admitted to stealing refunds from two taxpayers, totaling $5,214. She was employed by the IRS as a data transcriber at the Kansas City Service Center.
She handled individual income tax returns received by mail at the Kansas City Service Center. Miller selected returns on which the “Refund” section did not show a routing number or account number for a direct deposit to a financial institution. Miller used taxpayers’ means of identification, including names and Social Security numbers, on their returns to apply for accounts at online banks that issued prepaid debit cards. If she succeeded in opening an online account with a taxpayer’s ID, she entered the routing number and account number for the fraudulently created account in the “Refund” section of the taxpayer’s 1040.
Cincinnati: Yancy D. Gates, 31, a former prominent college basketball player who currently plays professionally overseas, has been sentenced to a year of probation and ordered to pay nearly $270,000 in restitution to the IRS for failing to pay his taxes.
Since 2012, Gates has played professional basketball for teams in Lithuania, Israel, China, Germany and France. He earned anywhere from $80,000 for his first season to $80,000 per month during the season he played in China. In addition to his salary, his teams provided him with all of his needs while living abroad, including his apartment, utilities, a car, health insurance, transportation and several round-trip flights he could use for himself or for family and friends. During the offseason, Gates would return to Ohio to live.
Gates knew he was required to report his foreign earned income on a U.S. return, but has never filed a return nor reported any of his income from playing professional basketball.
New York: A lawsuit brought by American International Group has been settled in favor of the federal government.
The lawsuit involved seven cross-border financial transactions that the U.S. asserted were abusive tax shelters designed to generate bogus foreign tax credits that AIG improperly attempted to use to reduce its federal tax liabilities. AIG filed this lawsuit in 2009, seeking to recover disallowed foreign tax credits and other taxes related to the 1997 tax year.
Evidence showed that these transactions lacked “any meaningful economic substance, were devoid of any legitimate business purpose, and instead were designed solely to manufacture hundreds of millions of dollars in tax benefits to which AIG was not entitled,” the government said.
These complicated transactions, involving hundreds of agreements, numerous shell companies, and intricate cash flows, had no economic substance but rather exploited differences in U.S. and foreign tax laws to create profits from U.S. tax benefits. AIG was able to turn a profit by obtaining credits from the U.S. Treasury for foreign taxes it did not actually pay in full. AIG obtained more than $61 million in foreign tax credits during the 1997 tax year alone, the tax year resolved by the settlement. In 2008, the IRS issued a notice of deficiency to AIG that, among other things, disallowed the foreign tax credits AIG had claimed in connection with the seven transactions and asserted a 20 percent penalty. In 2009, after paying the deficiency, AIG filed a lawsuit against the U.S. challenging the IRS’s determination and demanding a refund.
AIG has agreed that all foreign tax credits that it claimed for the 1997 tax year and all later tax years for these same transactions, totaling more than $400 million, will be disallowed. AIG further agreed to pay a 10 percent penalty.
The settlement allows AIG to retain some deductions relating to six of the transactions that were structured as borrowings, as well as to remove certain amounts related to the transactions from its taxable income. The settlement also resolves some of AIG’s refund claims unrelated to the cross-border transactions stemming from the company’s restatement of its publicly filed financials.