by Brian Mahany
Lester Morrison fancied himself as one of the busiest tax preparers in the New York City metropolitan area. At various times he operated multiple tax return services in New York and New Jersey. The IRS says that Morrison was filing fraudulent returns, thousands of them. Prosecutors say that the tax loss from his crimes is upwards of $25 million. On January 21st, U.S. District Court Judge Sidney Stein sentenced Morrison to 6 years in federal prison. When he is released, he is prohibited from preparing tax returns for others.
Morrison was also ordered to pay $17,340,000 in restitution. It is doubtful that the government will see more than a few thousand dollars of that money.
According to the indictment, Morrison and his business partners used the social security numbers and names of deceased kids to falsely claim them as dependents on clients’ tax returns. They also created phony businesses so that their clients could deduct fictitious expenses, claimed false education credits and created false charitable contributions.
In 2003, Morrison prepared a return for a client that claimed children as dependents. The children had all died some 5 years earlier and were not even the children of the taxpayer.
In most criminal tax evasion cases, it is the taxpayer inflating expenses or hiding income. Preparer fraud is a bit different; here it is the preparer that commits the crime. What is in it for the preparer?
Morrison’s indictment does not say. In most instances, the preparer promises much larger refunds in return for a very high fee. Although many tax services will prepare a simple return for under $100, these preparers charge hundreds or even thousands of dollars.
Fraudulent preparers usually couple their services with refund anticipation loans or RAL’s. The preparer often has the loan proceeds or refund sent to an address he or she controls. The client gets a much higher refund and the preparer gets paid a ridiculous fee.
What happens when the fraud is exposed? The IRS has software designed to detect phony refund claims. For instance if you have not claimed any children, business expenses or charitable contributions for 5 years and suddenly have 3 kids, your own business – and thousands of dollars of contributions – and all on a bus driver’s salary – expect an audit. Both the taxpayer and preparer can be left holding the bag and required to pay back the money plus interest plus penalties.
Are the taxpayers themselves innocent victims of these scams? Sometimes. If they read their own return before signing they certainly are aware of the fraud. The IRS generally does not prosecute the individual taxpayers – there are simply too many of them in the typical preparer scheme. But they do randomly target a few for prosecution and generally make all of them pay back the money.
Filing a false tax return is a felony, even if you did not actually prepare it. If you signed it (manually or electronically) and knew the information on the return was false, you could wind up in prison. In recent years the IRS has hired more criminal division special agents and ramped up their computer forensic techniques designed to spot questionable returns.
There is hope, however. The IRS operates a system of voluntary compliance. In almost every case, you can avoid criminal prosecution and prison if you come forward and admit your error before you are caught. The so-called “first contact” policy is designed to give people who feel remorseful a chance to come clean. If the IRS contacts you first, however, all bets are off. The IRS can and will prosecute even if you amend your returns and pay back the money if they found your mistake first.
Mahany & Ertl is a full service law firm that assists clients in a wide variety of tax problems. Our Wisconsin based tax lawyers concentrate on audit defense, compliance issues, collections, Tax Court litigation and criminal tax defense. We can also help compromise your debts with the IRS. Our offices are in Milwaukee, our clients are located across the United States from Maine to Hawaii. Contact attorney Brian Mahany directly at (414) 704-6731 or through the firm’s website, https://www.mahanyertl.com