Tax Fraud Blotter: Prong sung blue
Her (dis)Honor; fenced in; death and taxes; and other highlights of recent tax cases.
Baltimore: Former mayor Catherine Pugh, 69, has pleaded guilty to conspiracy to commit wire fraud, conspiracy to defraud the U.S. and two counts of tax evasion.
In 2011, Pugh ran an unsuccessful campaign to be mayor of Baltimore. Four years later she ran for mayor and won, becoming mayor on Dec. 6, 2016. Pugh also owned Healthy Holly, a company used to publish and sell children’s books she had written, and Catherine E. Pugh and Co., a marketing and public relations consulting company.
Between June 2011 and August 2017, four Healthy Holly books were published, with each book listing “Catherine Pugh” as author. Most books published by Healthy Holly were marketed and sold directly to nonprofit organizations and foundations. From approximately 2011 until December 2016, Gary Brown Jr. worked as a legislative aide to Pugh, campaigning for Pugh’s re-election to the Senate in 2014 and serving as her campaign aide during her 2016 mayoral campaign. Following Pugh’s election as mayor, Brown was hired as deputy director of special events in the mayor’s office. In December 2016, he was nominated to fill the vacancy in the Maryland House of Delegates created by Pugh’s mayoral victory, but the governor withdrew Brown’s nomination after he was indicted for election law violations in January 2017.
Between 2011 until 2019, Brown, who freelanced as a tax preparer and ran three companies of his own, helped Pugh promote the Healthy Holly books. Much of Brown’s work on Healthy Holly occurred during work hours while serving as Pugh’s legislative aide and mayoral staff member; Brown was not an employee of Healthy Holly and received no salary or compensation until approximately mid-2016, when he started to get sales commissions.
Pugh admitted that from November 2011 until March 2019 she conspired with Brown to defraud purchasers of Healthy Holly books to promote Pugh’s political career, and fund her campaign for mayor. Pugh also filed false income tax returns for 2015 and 2016 in which she underreported her income.
Pugh faces a maximum of 20 years in federal prison for the wire fraud conspiracy; five years in federal prison for conspiracy to defraud the U.S. and five years in federal prison for each of the two counts of tax evasion. Sentencing is Feb. 27.
Brown previously pleaded guilty to conspiracy to commit wire fraud, to conspiracy to defraud the U.S. and to filing a false return.
Lebanon, Missouri: CPA Douglas A. Richardson, 46, has been convicted of a $7 million scheme to defraud his employer and clients.
Richardson was the CFO and treasurer of Smart Prong Technologies in Tulsa, Oklahoma, from 2013 to 2016. Smart Prong developed technology and manufactured devices for charging cell phones.
Richardson engaged in a scheme to defraud Smart Prong and several of the clients of his CPA firm from February 2014 to October 2016.
Richardson transferred at least $4.4 million from Smart Prong bank accounts into his personal and business bank accounts. He also solicited loans from several clients and induced them to make investments, telling them that their money would be used for a certain purpose when in reality Richardson used at least part of it for his personal benefit, including to pay off a Chevrolet Corvette.
Richardson faces up to 20 years in prison for each of the wire fraud convictions and up to 10 years in prison for each of the money laundering convictions.
Phoenix: Former preparer Karen Hernandez, 26, has been sentenced to three years of probation and a fine of $11,000 for preparing false income tax returns.
The Arizona Department of Revenue discovered that during the 2016 and 2017 filing seasons, Hernandez prepared nine false returns while working at the prep business Tax Xpress. She would increase her fees by including a Schedule A with false itemized deductions. The taxpayers did not know that Hernandez had falsified their returns.
Hernandez has been ordered to pay restitution to taxpayers to cover the cost of preparing amended returns and any interest or penalties on the unpaid tax due.
Omaha, Nebraska: City council member Vincent J. Palermo, 46, has pleaded guilty to three counts of willful failure to file income tax returns.
Palermo pleaded guilty to not filing for the 2012, 2013 and 2014 tax years, even though he received gross income in those years of nearly half a million dollars.
Sentencing is Dec. 9. Each count calls for a maximum of a year in prison, a $100,000 fine, a one-year term of supervised release and a special assessment.
Kinston, North Carolina: Rosalind Jackson, who recruited individuals to have fraudulent returns prepared, has been sentenced to 37 months in prison to be followed by three years of supervised release, and been ordered to pay $393,724 in restitution to the IRS.
Jackson, who pleaded guilty in July, recruited tax prep clients for Issac Blount, who operated the Greenville, North Carolina, prep service known as Enriched Tax Services. For the tax years 2009 through 2014, Blount filed at least 270 fraudulent income tax returns, seeking $1,746,347 in refunds. The taxpayers were expected to pay an additional $1,500 in cash out of the fraudulent refunds.
After Jackson disassociated herself from her co-conspirators, she continued to assist others in filing false returns. She took her clients’ files containing manufactured wage and tax statements to other prep businesses or prepared and filed the returns herself but falsely represented that the returns were self-prepared by the taxpayer. Thirteen individuals confirmed that Jackson filed returns for them for multiple years; those returns claimed some $363,368 in undeserved refunds.
She also filed false income tax returns in her own name for the tax years 2011 through 2015, seeking some $38,419 in undeserved refunds.
Lincoln, Arkansas: Fencing business owner Derek E. Sands, 37, has been sentenced to nine months in prison to be followed by nine months of home detention and 27 months of supervised release for his conviction on one felony count of attempting to evade or defeat tax.
The IRS began investigating Sands, who pleaded guilty in June, after receiving information that he was, among other things, cashing thousands of dollars of customers’ checks instead of depositing the checks into a bank account. Investigation revealed that Sands last filed a personal federal income tax return for the tax year 2009 and did not file personal federal income tax returns for tax years 2010 through 2017.
Investigation revealed that Sands paid employees in cash and converted customers’ checks to cash. He also gave a family member out-of-state customers’ checks to deposit into the family member’s bank account and then had his relative write Sands a check for the same amount. When customers paid Sands by credit card, he ran the credit card through his company’s material supplier’s account and then had the credit applied to his materials account.
Tax loss to the United States is $409,958.99. Sands was also ordered to pay that amount in restitution.
Apple Valley, California: Tax preparer Scott Douglas Cutting Sr., 70, has been sentenced to 26 months in prison for filing fraudulent federal returns as part of a scheme that illegally generated more than $1 million in refunds.
Cutting, who portrayed himself as a CPA despite his license having expired 30 years ago, prepared and filed fraudulent returns on behalf of clients. He had refunds — typically hundreds or thousands of dollars from each fraudulent return — deposited into his accounts, often giving his clients nothing or only a portion of the refund.
Cutting filed tax returns on behalf of low- or no-income individuals that falsely claimed income or credits. He e-filed the returns with the IRS but did not identify himself as the preparer and often filed returns for people when he had no authority to do so — including for dead people — using personal ID information of individuals and their family members without their permission.
Between 2008 and 2016, he prepared and filed some 477 false or fraudulent returns, and the IRS issued some $1,392,765 in refunds.