To curb the marketing of tax shelters to corporations and individuals, the Justice Department’s Tax Division has helped the IRS to identify and pursue nearly every customer who engaged in certain abusive tax shelter transactions, while at the same time pursuing the professionals who designed, facilitated or accommodated the underlying tax shelter transactions.
Bringing Fraudulent Tax Return Preparation to a Halt
The Tax Division continues to bring civil injunction suits to stop tax preparers who habitually prepare bogus tax returns. In response to the government’s efforts, courts across the country have barred tax preparers from preparing inaccurate returns.
Since January 2001, the Justice Department has sought and obtained injunctions against more than three dozen tax return preparers, including 18 since January 2006. It expects to obtain many more injunctions throughout the year. The United States recently has obtained injunctions that barred the following schemes by tax preparers:
*Filing tax returns that falsely report “zero income”;
*Claiming that only income from a foreign source is taxable, using a spurious interpretation of Section 861 of the Internal Revenue Code; *Claiming personal living expenses as business expenses;
*Preparing amended tax returns to claim tax refunds without customers’ knowledge or consent; and
*Asserting that casino gaming proceeds paid to Native Americans are exempt from federal income tax.
The Department of Justice also has obtained injunctions against employers who fail to withhold, account for, and pay over employment and withholding taxes and against return preparers who prepare related false returns.
Stopping Tax Evasion
During fiscal year 2006, the Justice Department’s Tax Division authorized prosecutions of nearly 1,200 defendants for tax crimes, an increase of more than 34 percent over the number authorized for prosecution in 2001. The Tax Division’s criminal enforcement priorities include investigating schemes that involve:
*Using trusts or other entities to conceal control over income and assets;
*Shifting assets and income to hidden offshore accounts;
*Making false statements to the IRS in order to claim tax refunds;
*Selling and promoting fraudulent tax avoidance schemes;
*Using frivolous justifications for not filing truthful tax returns;
*Failing to withhold, report and pay payroll and income taxes;
*Failing to report income on individual and corporate returns; and
*Failing to file tax returns.
*Stopping the Promotion of Tax Fraud Schemes
Since April 2006, the Justice Department and the IRS have vigorously pursued the promoters of tax fraud schemes to stop their activity and to warn would-be promoters that promoting tax fraud schemes leads nowhere but to a federal court injunction or to a long stay in jail.
Since January 2001, the Justice Department has sought and obtained injunctions against nearly 200 promoters of tax fraud schemes, including 66 since January 2006. These injunctions have stopped promoters from selling tax evasion schemes on the Internet, at seminars, or though other means. The tax-scam promoters the government has sought to enjoin have cost the U.S. Treasury an estimated $2.5 billion, and have had an estimated 500,000 customers. Among the government’s results in this area are:
In May 2006, David Carroll Stephenson was sentenced to eight years in prison in connection with his promotion of a tax evasion scheme using “pure equity trust” organizations.
In June 2006, a federal judge sentenced five defendants, Dennis Poseley (seven years), David Trepas (five years), Patricia Ensign (18 months), Rachel McElhinney (16 months), and Keith Priest (18 months), to prison terms for their respective roles in promoting a tax evasion scheme that used offshore trusts and bank accounts.
On June 22, 2006, District Judge Elizabeth Kovachevich issued an injunction permanently barring Douglas Rosile, a former certified public accountant whose clients included Wesley Snipes, from preparing federal income tax returns for others and from promoting a frivolous tax argument based on Section 861 of the Internal Revenue Code. Among the documents the government filed in court was a return submitted to the IRS on behalf of Snipes claiming a bogus $7.3 million tax refund.
In November 2006, a federal judge sentenced Milton H. Baxley II to 18 months in prison and fined him $10,000 for contempt of court. On August 9, a jury convicted Baxley on two counts of violating an injunction order barring him from promoting a tax fraud scheme. In December 2006, a federal judge sentenced Thomas Miller to nearly four years in prison for conspiring to defraud the United States in connection with a “pure trust” tax fraud scheme. Miller operated Freedom Education Center, a business in California that sold anti-tax literature and helped people create bogus trusts.
Curbing High-End Tax Shelters
During the past year, the Justice Department and the IRS have continued their vigorous enforcement efforts against the promoters and facilitators of abusive tax shelters. Abusive shelters for large corporations and high-income individuals have cost the U.S. Treasury billions annually, according to Treasury Department estimates. The Tax Division also has had great success in federal court defending the U.S. Treasury against tax shelter-related claims of large companies and individual investors. The Tax Division is currently litigating approximately 86 tax shelter cases or groups of cases, including 47 separate cases involving the Son of BOSS tax shelter. Among the successes during the past year in this area are the following:
In December 2006, Utah businessman Chandler S. Moisen pleaded guilty to conspiracy and wire fraud in connection with a criminal probe of tax shelters promoted by a group of KPMG, LLP executives. In January 2007, Steven Michael Acosta, a former KPMG manager, pleaded guilty to four felony tax charges in connection with his involvement in KPMG’s promotion of tax shelter transactions.
The Supreme Court let stand the decision of the U.S. Court of Appeals for the 6th Circuit that the COLI (corporate-owned life insurance) program The Dow Chemical Company used to claim more than $33 million of tax deductions was an economic sham.
The Supreme Court also let stand the decision of the U.S. Court of Appeals for the Federal Circuit that the IRS was right to disallow the $375 million loss Coltec Industries claimed from its “contingent liability” tax shelter.
The U.S. Court of Appeals for the 2nd Circuit held that the IRS properly disallowed the losses General Electric Capital Corporation claimed from its participation in an equipment leasing tax shelter, resulting in $62 million in additional income taxes. The U.S. District Court for the Middle District of North Carolina granted summary judgment for the United States in the first Lease In - Lease Out (LILO) tax shelter to go to court, BB&T Corporation v. United States.
The U.S. Court of Appeals for the Federal Circuit ruled for the United States on an issue raised by tax shelter participants in several tax shelter refund suits in A D Global Fund, LLC v. United States. The court ruled that the statute of limitations on the return of a person who participates in a tax shelter partnership does not expire at least before the statute of limitations on the partnership’s return does.
Coordinated Civil and Criminal Proceedings
The government brings both its civil and its criminal tools to bear in the fight against tax fraud. An ongoing tax scam causes continuing harm to the federal Treasury and it leaves participants owing taxes, interest, and often, penalties. The government does not wait until a criminal case has been developed to take action to stop the scam. Rather, the Justice Department brings civil injunction suits to stop both the promotion of tax scams and the preparation of false or fraudulent returns. Additionally, in appropriate cases, the Justice Department brings criminal charges against the promoters, preparers, and scam participants to punish them for their unlawful conduct.
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