Tax Preparers Defraud IRS of $250 Million

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The 2013 tax filing season has begun and those W-2s and 1099s are starting to flood mailboxes across the country. Many taxpayers choose to do their own tax returns while others seek tax preparers who can lead them through the wilderness of confusing tax forms to the land of many green dollars. Today’s ”Fraud of the Day” details a California tax refund scheme that promised ginormous refund checks to clients, but fell short of the so-called jackpot. (If it sounds too good to be true, it probably is.)

Two Southern California men have been convicted of filing 400+ bogus federal income tax returns that resulted in more than $250 million in erroneous tax refunds from the Internal Revenue Service (IRS). (Go big or go home!) The Chief Executive Officer (CEO) was so bold as to file four fraudulent returns of his own, and according to trial evidence, did not pay his taxes for more than 25 years. (Now there’s a surprise.? Both the CEO and the President of the Fontana-based company, were arrested as part of ”Operation Stolen Treasure” (Shouldn’t it be called ”Operation We Found More Dopes”?) in the fall of 2011. The federal investigation has resulted in 19 total convictions thus far and is ongoing.

So how did these fraudsters dupe their clients? The two men told their customers that they would receive tax refunds worth hundreds of thousands of dollars – sometimes millions – from a secret government account. Company presentations promoted the secret account theory and ”tax defier” arguments including the idea that the United States was bankrupt and actually owned by England. Potential customers also heard presentations from company employees that falsely claimed to be accountants, lawyers, CPAs and former IRS employees. Taxpayers who signed up for the company’? services paid fees as high as $10,000 and were required to promise to donate 25 percent of the tax refunds that they received.

While searching the company’s offices, IRS agents seized several tax returns before they could be filed. One signed return claimed over $10 million withheld in taxes which would have resulted in a refund worth more than $6 million. (Wow – they really need to adjust their exemptions.) Bank records showed that the company received approximately $1.9 million – including kickbacks from tax funds erroneously issued by the IRS – from clients who participated in the scheme. During the time of the office search, the two fraudsters were busy moving money around from one bank account to another to hide funds from the authorities.

Prior to the tax refund fraud scheme, the co-conspirators also promoted a ”land patent” program to some of the same clients. This particular scheme promised to eliminate their clients’ mortgages through another mysterious process in exchange for considerable fees. Unfortunately, the land patent program failed quickly and dozens of clients were left homeless due to foreclosure. (Fool me once, shame on you. Fool me twice, shame on me.) Thankfully, the company’s scheme has been exposed and its senior leadership is now venturing on to a new quest – they are each facing maximum sentences of more than 195 years in prison.

Tax preparer fraud is a growing crime, but a little bit of common sense can prevent a taxpayer from hiring a scam artist. Consider the following when searching for a trustworthy tax professional? 1) Get referrals and references from friends and family. 2) Check out credentials. The right tax pros will be up-to-date on continuing professional education requirements. 3) Don’t fall for the promise of huge refunds. 4) Avoid tax preparers who base their fee on a percentage of the refund check. 5) Don’t reply to any email communication from the IRS or related affiliates because the IRS doesn’t communicate with taxpayers through email. Report all phishing attempts to

Source: Today’s ”Fraud of the Day” is based on an article titled, ”Banking: 2 Convicted in $250 Million Tax Fraud Scheme,” published in The Press Enterprise on January 31, 2013.

SANTA ANA – Two Inland Southern California men who ran the Fontana-based Old Quest Foundation have been convicted of running a tax scheme that sought to defraud the government out of more than $250 million, federal officials said Thursday.

Arturo S. Ruiz, 55, of Moreno Valley, the chief executive officer of Old Quest, and Francisco J. Mendoza, 51, of San Bernardino, the company president, were found guilty Wednesday to one count each of conspiracy to defraud the government.


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Larry Benson
Larry Benson is currently the Director of Strategic Alliances for Revenue Discovery and Recovery at LexisNexis Risk Solutions. In this role, Benson is responsible for developing partnerships for the tax and revenue and child support enforcement verticals. He focuses on embedded companies that have a need for third-party analytics to enhance their current offerings.