Attorney-at-Law

THE FRAUDSTER’S TOOLBOX

In Uncategorized on 06/17/2016 at 08:28

Don’t Do It

 Incommunicado yesterday, but still got 132 views on my blog; go figure. To make up for missing my Palindrome Day blogpost, here’s Judge Wells discussing how a preparer can commit massive fraud. Don’t do it. The dude got the jail.

The fall-out nails John Finnegan and Joan Finnegan, 2016 T. C. Memo. 118, filed 6/16/16. John and Joan weren’t themselves fraudsters, but their preparer Howell was. He’d had his CPA license lifted for fraud years before, so he invented a platoon of phony preparer entities to sign his returns. Reminds me of ol’ ex-PFC Wintergreen.

IRS wants to nail the Finnegans for a bunch of years, open and closed, based on Howell’s delicitions. They can do this only by proving the Finnegans’ returns were fraudulent.

Our old pal “clear and convincing” is the standard, and IRS wants to use testimony from the IRS thiefcatchers to show the pattern of Howell’s thievery made manifest in the returns he filed for the Finnegans (and which they never read).

Howell used phony partnerships with phony Schedule Es, and moved them about the country, sending the 1065s to processing centers other than that to which his individual customers’ returns were sent, so as to fox IRS. Howell used the same numbers for every phony partnership’s non-deductions.

“These figures are described on the returns with vague terms such as “miscellaneous”, “other expenses”, “other income”, “cash contributions”, “supplies”, “purchases”, and more. The figure $4,896 appears in every partnership return…as “office supplies or expenses”. Finally, for every Form 1040, petitioners showed net income of $2 on Schedule C, Profit or Loss From Business.” 2016 T. C. Memo. 118, at p. 10.

And Howell used the same numbers again and again for the same phony expenses and income. Saves time when you’re cranking out upwards of 750 phony returns per year. A nice book of business.

Much argy-bargy about the FRE and the pre-PATH (Revenue Act of 2015) Tax Court Rules of Evidence, which I leave to the law review writers desperately seeking soporific copy. Bottom line- FRE 406 lets in evidence of routine practice. IRS made reasonable efforts to get Howell to testify (which he doesn’t), so in his absence the trial transcripts of himself and an associate who also goes down get in under FRE 804(b)(3).

Judge Wells makes much of the Eriksen case. See my blogpost “Too Much Truth,” 7/12/12, for the lowdown thereon.

“Petitioners contend that Eriksen stands for the proposition that, to establish fraud, the Commissioner must prove a ‘direct link’ between the commission of fraud and a taxpayer’s return. Petitioners strongly imply that the only way to establish such a direct link is through the preparer’s testimony. In Eriksen, the Commissioner established the existence of fraud by matching the incorrect information on the taxpayer’s return to the preparer’s modus operandi. In other words, even taking petitioners’ contention into account, there are ways of providing an evidentiary link that do not involve a preparer’s specific testimony as to a particular taxpayer.” 2016 T. C. Memo. 118, at p. 26.

Besides, in Eriksen, Jim and Curt, the rogues, testified that not every return they prepared was bogus, even though IRS trotted out 150 examples of Jim’s and Curt’s bogusity. Here, Howell had testified he never did any return that wasn’t “dirty.”

I might mention that, in Eriksen, five of the six taxpayers under the gun (read my blogpost to get this elaborate pun) survived a less-than-stellar IRS cross examination. The sixth stuck her head in the noose by admitting the phony deductions. Contrary to the old saw that “liars need good memories,” they don’t; they need bad memories. “I don’t remember” often works wonders. Here, the Finnegans admit they never heard of these partnerships Howell invented for them.

Of course, what nails the Finnegans for negligence chops (IRS didn’t seek fraud chops against them) is that they never read the returns, and the resulting major tax benefits they got were too good to be true. They hooked up with Howell when their old accountant retired and Howell got them much better results.

I had the contrary experience some years ago when, engaged to prepare a return for the first time, I discovered that the client’s retired accountant invented a massive unsubstantiated deduction in a prior year. When I pointed this out to the client, I got fired. What happened thereafter I know not.

Takeaway- Remember Howell. Don’t do it.

 

 

 

 

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  1. […] Taishoff, THE FRAUDSTER’S TOOLBOX. A case where preparer fraud left the client return open to examination beyond the normal statute […]

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