Tax Preparer Fraud Is Rampant
In February 2020, Myles Hannigan was sentenced to 52 months in prison. When he gets out, he must pay the IRS $3,270,566.89. His crime? Filing false tax returns on behalf of his customers.
Hannigan ran a payroll business. Or should we say, “was.” When he isn’t allowed to handle other people’s payroll or file anyone’s tax returns except his own.
Until he was caught, Hannigan ran a payroll business called Payroll Professionals, Inc. As part of handling the payrolls of small businesses, he would file their employment tax forms, a common service for payroll businesses.
Prosecutors say that on over 100 of the Forms 941, Employer’s Quarterly Federal Tax Return, that Hannigan prepared and filed for clients, he followed a practice of falsely overstating deposits that he made to pay taxes owed by his taxpayer/clients to the IRS. Specifically, on Form 941, Line 11, Hannigan reported depositing more money to pay tax debt than he actually sent to the IRS. That caused his clients to underpay the IRS. To cover his tracks, Hannigan used his IRS powers of attorney to re-route IRS notices from his clients’ business addresses to his address.
*As this post was being written, a federal grand jury in Charlotte, North Carolina returned an indictment today, charging three tax preparers with conspiring to defraud the IRS. Four other Charlotte tax preparers also named in yesterday’s indictment for similar charges.
According to that indictment, Joseph Octave owned and operated Kapital Financial Services, a tax return preparation business with two offices located in Charlotte. Octave and his employees, allegedly conspired to falsify clients’ tax returns by claiming deductions, business losses, American Opportunity credits, education credits, and earned income tax credits that the clients did not incur, in order to fraudulently increase refunds to be paid by the IRS.
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. Tax preparer fraud is a bit different; here it is the preparer that commits the crime. What is in it for the preparer? In Hannigan’s case, he was stealing his customer’s withholding taxes that should have been paid to the IRS. In the cases of Morrison and Octave, it was probably high preparation fees.
Many preparers that promise huge refunds for customers either take a piece of the action or charge above market rates.
Fraudulent preparers often couple their services with refund anticipation loans. 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.
Are the taxpayers themselves innocent victims of these scams? Sometimes. In the case or payroll processing scams, the customers still owe the IRS even though they already paid once. They owe because the IRS never received their money.
If more traditional preparer schemes, the taxpayers are responsible 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.
IRS Whistleblower Program & Tax Preparer Fraud
The IRS pays cash rewards to people with inside information about tax fraud. That means if you work for a bad tax preparer or are a customer of one, you may be entitled to a reward. Almost every year fraudulent return preparers are on the IRS’ “Top 10” list of scams.
The IRS Whistleblower Program requires that you have inside or “original source” information about someone cheating the IRS. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000.
The IRS also has an award program for whistleblowers in smaller cases. The awards through this program are less, with a maximum award of 15 percent up to $10 million.
Mahany Law is a full service whistleblower law firm that helps people stop fraud and corruption and helps whistleblowers collect the maximum rewards allowed by law. To learn more, visit our IRS whistleblower reward page.
Ready to see if you qualify for a reward? Contact us online, by email or by phone 202-800-9791.
We accept IRS whistleblower cases worldwide. All inquiries are protected by the attorney – client privilege and are kept strictly confidential.