Abusive Tax Scheme Investigations
The following examples of abusive tax scheme investigations are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted.
Californian Sentenced for Evading More Than $150,000 in Taxes
On February 6, 2012, in Los Angeles, Calif., William H. Nurick, of Camarillo, was sentenced to 60 months in prison and ordered to pay $286,443 in restitution. Nurick was convicted in September 2011 of evading the payment of more than $150,000 in taxes. According to evidence presented at trial and court documents, the Genesis Fund was an investment fund that operated from approximately 1994 through 2002. Nurick received approximately $1.1 million in distributions from the Genesis Fund between 1995 and 2002. During this time, he used eight different entities to conceal his control over bank accounts, vehicles and real property. In May 2000, Nurick filed an amended 1995 individual income tax return admitting he owed $106,542 related to his investment in the Genesis Fund. Thereafter, Nurick deliberately and systematically attempted to conceal assets between May 2000 and April 2001 in order to evade payment of the balance owed to the IRS for his 1995 income taxes. Following a notice of balance due from the IRS, Nurick transferred approximately $133,000 from an offshore bank account that he controlled to a witness’s offshore bank account. Nurick also submitted a false “Offer in Compromise” to the IRS, offering to pay less than one tenth of his outstanding debt. Nurick’s Offer in Compromise, signed under penalties of perjury, falsely understated his net worth and income, and failed to indicate a bank account in Costa Rica with a balance in excess of $200,000. Nurick also falsely claimed on this document that he would receive no further distributions from the Genesis Fund, when in fact, he received over $350,000 from it through distributions to multiple entities that he controlled.
Certified Public Accountant Sentenced in Tax Evasion Case
On January 26, 2012, in Omaha, Neb., Lowell Baisden, formerly of Bakersfield, California, was sentenced to 37 months in prison and three years of supervised release for tax evasion. According to court documents, Baisden, as a Certified Public Accountant (CPA), provided accounting, tax preparation and consulting services to clients in California and Nebraska. An investigation by the Internal Revenue Service into various clients for whom Baisden prepared tax returns showed Baisden assisted his clients in setting up corporations in other states for the purpose of evading income and other taxes. These corporations enabled Baisden to prepare income tax returns that avoided the assessment and payment of over $2 million in taxes owed to the United States by Baisden’s clients.
California Return Preparer Sentenced for Promoting a $1.5 Million Fraudulent Tax Loss Scheme
On May 14, 2012, in Los Angeles, Calif., Richard Allen Edgar, owner of a Los Angeles tax preparation service, was sentenced to 15 months in prison. Edgar, a former certified public accountant, pleaded guilty late last year to two counts of aiding and assisting in the preparation of false tax returns. According to the plea agreement, from at least 2004 through 2009, Edgar sold false “tax losses” to his clients to offset his clients’ income, thereby eliminating or drastically reducing taxes otherwise owed by the clients to the IRS. Edgar typically charged clients approximately 12.5 percent of the losses purchased. The losses Edgar sold were purportedly non-passive partnership losses generated by Creative Financial Solutions, LLC and Why Not Entertainment, LLC, both of which Edgar managed and controlled. The clients whose returns included the losses were not partners of any kind in Creative Financial Solutions or Why Not Entertainment and were unaware of what the companies did. To encourage his clients to buy these sham tax losses, Edgar would prepare and send each client two versions of the client’s tax return, one without any claimed tax losses, showing a large tax liability owed to the IRS, and the other with tax losses offsetting all or virtually all of the client’s taxable income, showing either no taxes owed or refund due. After a client purchased the losses, Edgar would have the client execute a backdated “Membership Subscription Agreement,” purporting to show that the client had become a member of Creative Financial Solutions or Why Not Entertainment in the tax year at issue. According to documents filed with the court, for the tax years 2004 through 2007, Edgar sold over $1.5 million in fraudulent “tax losses” to his clients, causing losses to the IRS of $358,274.
North Carolina Business Owner Sentenced for Evading $1.5 Million in Taxes
On February 8, 2012, in Charlotte, N.C., Ricky Dean Hardee was sentenced to 21 months in prison and three years of supervised release. Hardee has made a full payment of $1,525,150 in restitution to the Internal Revenue Service (IRS). In June 2010, Hardee pleaded guilty to tax evasion in connection with his scheme to evade approximately $1.5 million in taxes. According to court documents, from about 1997 to 2007, Hardee operated a successful masonry contracting business in Charlotte. From 2002 to 2007, Hardee earned gross receipts of $4.2 million from his business but failed to file income tax returns and engaged in a sophisticated scheme to conceal his income and assets from the IRS. Specifically, Hardee purchased and utilized a system of nominee entities, sham trusts and related domestic and foreign bank accounts, including a bank account in Panama and ten different domestic bank accounts, to hide money from the IRS.
Three Men Sentenced in Investment/Tax Fraud Scheme
On December 21, 2011, in Newark, N.J., a principal of Mid-Atlantic Trustees and Administrators (MATA) and two of the company’s employees were sentenced to prison terms or home detention for conspiracy to defraud the United States through the marketing of two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. Michael Balice, of Metuchen, N.J., was sentenced to 48 months in prison; Angel Done, of Queens, N.Y., was sentenced to 12 months of home detention; and Wilson Calle, of Queens, was sentenced to three months of home detention. Balice and Done were convicted by a jury on June 20, 2011, of one count each of conspiracy to defraud the United States, mail fraud and wire fraud. Balice was also convicted of one count of tax evasion. Calle had pleaded guilty to one count of mail fraud during the trial. According to court documents and evidence at trial: Balice was a principal of MATA, a company formed in 2005, which marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). From the formation of MATA through July 2010, the defendants established several hundred PTOs for their customers, the express design of which was to conceal income and other assets from the IRS, thereby impeding the IRS in its tax collection efforts. In creating, marketing, and selling PTOs, the defendants made concerted efforts to make it appear that PTO customers had no control over the assets in the account and the trustees had complete control. The customers, however, always maintained unfettered access to their assets. In May 2007, MATA began to market and sell a second product, BIC, as a debt elimination program. For thousands of dollars per customer, MATA, its principals, and its employees manufactured false and fictitious bonds, often with face amounts of tens of millions of dollars, which were sent directly to the United States Treasury Department. According to MATA, once a customer’s bonds were sent to the Treasury Department and accepted, the customer was “bonded,” and, with MATA’s help, could draw down that bond to pay “public” debt, including mortgage debt, credit card debt, and tax obligations. As part of the BIC process, customers paid MATA to send hundreds of bonds to the U.S. Treasury, the IRS, and other government agencies in an attempt to discharge their tax and other debts. In total, MATA flooded the U.S. Treasury, IRS, and other government agencies with hundreds of billions of dollars in worthless paper. Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all.
Self-Proclaimed “Governor” of Alabama Sentenced for Tax Fraud
On May 29, 2012, in Montgomery, Ala., Monty and Patricia Ervin, of Dothan, Ala., were sentenced to prison for conspiring to defraud the United States and tax evasion. Patricia Ervin was also sentenced for structuring transactions to avoid bank reporting requirements. Monty Ervin was sentenced to 120 months in prison. Patricia Ervin was sentenced to five years of probation, with the condition that she spend 40 consecutive weekends in jail. The Ervins were also ordered to pay $1,436,508 in restitution to the IRS. The Ervins owned and managed Southern Realty, a property management company in Dothan, Alabama. Based on the evidence introduced at trial, the Ervins amassed hundreds of investment properties over the last decade, receiving more than $9 million in rental income. Despite receiving this income, the couple paid no federal income taxes. As the evidence showed at trial, the couple concealed their assets from the IRS by placing investment properties into the names of nominees. Patricia Ervin also structured deposits into Southern Realty’s bank account in an effort to evade federal currency reporting requirements.
Former Pennsylvania State Auditor Sentenced for Tax Evasion, Obstructing and Impeding IRS
On April 10, 2012, in Harrisburg, Pa., Troy A. Beam, of Shippensburg, was sentenced to 74 months in prison. Beam was convicted on May 4, 2011, by a federal jury of tax evasion, obstructing and impeding the due administration of the Internal Revenue laws, and willful failure to file federal income tax returns. According to evidence introduced at trial, Beam, a former certified public accountant and former state auditor in the Pennsylvania Auditor General’s Office, operated a home construction business known as “Sunbeam Builders,” as well as owned and operated two real estate businesses that purchased, rented and sold real estate. Despite earning substantial income from these businesses, as well as other activities, Beam failed to file any federal income tax returns since April 1996. In April 1996, Beam filed false amended federal income tax returns for 1992, 1993 and 1994, seeking tax refunds for taxes he previously had paid for those years. The evidence at trial proved that from 1999 to 2007, Beam earned more than $10.3 million in gross income from his various home construction and rental property businesses. Beam obstructed the IRS in its attempt to calculate and collect his taxes by using numerous sham trusts and other entities, including North Star Investment Holdings Ltd. to hide his income and assets. He used North Star to set up a bank account in the Cayman Islands into which he deposited nearly $3 million of income derived from his construction business.
Washington Abusive Trust Promoter Sentenced for Conspiracy and Tax Charges
On November 15, 2011, in Tacoma, Wash., Sharon D. Kukhahn, aka Sharon Stephenson, was sentenced to 84 months in prison, three years of supervised release, and ordered to pay $856,681 in restitution. Kukhahn was convicted by a trial jury in May 2011 on charges of conspiracy, tax evasion and corrupt interference with Internal Revenue Laws. At Kukhahn’s trial, prosecutors detailed the steps she took from 1999 to 2005 as part of a conspiracy to promote an abusive trust scheme designed to hide individual taxpayers’ income and assets from the IRS. Kukhahn and other conspirators referred clients to David Carroll Stephenson, who sold trust packages to more than 400 individuals. Purchasers used the trust packages to conceal income and assets from the IRS, and, as a result, failed to pay in excess of $7 million in income taxes. The jury found that through her own use of the trust packages, Kukhahn evaded paying income taxes in 2003 through 2006. The jury found that Kukhahn engaged in a business that attempted to thwart the efforts of the IRS to collect taxes owed by advising clients that they did not owe taxes. For a fee, Kukhahn helped clients obtain internal records from the IRS, claimed to “decode” them, and then mailed so-called “rebuttal packages” that supposedly would remove clients from the tax system. In reality, the packages were designed to stop audits and collection by harassing IRS employees, as well as to provide clients with a defense to tax evasion charges by creating evidence which the client could later use to dispute his or her criminal intent. Kukhahn also provided a frivolous letter-writing service for clients that was further designed to thwart IRS efforts to collect taxes owed. Kukhahn sold this scheme to more than 1,400 clients, helping them cheat the U.S. out of more than $4 million in income taxes. David Stephenson was sentenced in May 2006 to 96 months in prison and ordered to pay $8.5 million in restitution.
Honolulu Firearms Business Owner Sentenced on Tax Charges
On March 27, 2012, in Honolulu, Hawaii, Arthur Lee Ong was sentenced to 51 months in prison and ordered to pay $1 million in restitution to the Internal Revenue Service (IRS). Ong was convicted by a federal jury on November 7, 2011, of conspiracy to defraud the United States and six counts of tax evasion. According to evidence introduced at trial, Ong, the owner and operator of Thunder Bug Inc., dba Magnum Firearms, failed to report to the IRS millions of dollars of income he earned from the sale of firearms and related products to federal, state, county and military agencies, as well as to the general public. Ong, with the assistance of a Hawaiian attorney, created multiple sham trusts in 1990 to hide his income and assets. He stopped filing personal income tax returns beginning in 1994 and also filed false tax returns on behalf of the sham trusts that fraudulently reported to the IRS that the income from his businesses was attributable to these trusts and not to him. The evidence at trial showed that Ong evaded more than $600,000 in federal income taxes from 2000 to 2006.
Return Preparer and Client Sentenced for Roles in Offshore False Expense Scheme
On April 25, 2012, in Miami, Fla., Tom F. Castellanos, of Coral Gables, was sentenced to 12 months and a day in prison and one year of supervised release. Co-defendant Manuel Rivero, Jr., of Miami, was sentenced on April 20, 2012, to 30 months in prison and one year of supervised release. Each defendant pleaded guilty to conspiring to defraud the Internal Revenue Service. According to court documents, between 2001 and 2007, Castellanos operated a roofing business called East Coast Metals, Inc. (ECM) based in Hialeah, Fla. One of Castellanos’ return preparers arranged for the creation of a Panamanian corporation called National Steel Processors, Inc. (NSP) and arranged the opening of a bank account for that company in Panama. NSP was a shell corporation that provided no services and had no employees. Court documents state that for income tax purposes, Castellanos claimed that ECM purchased materials from NSP. Acting on instructions from Rivero, Castellanos initially created false invoices purporting to represent his company's purchases from NSP. Later, Castellanos stopped manufacturing false invoices, but continued entering falsified purchases from NSP on the books of ECM. For tax years 2002 to 2007, Castellanos used these fake purchases to claim expenses, or cost of goods sold, that falsely reduced the tax liability of ECM and himself. Rivero prepared tax returns on behalf of ECM and Castellanos with full knowledge that the claims relating to NSP expenses were false. The amount of false purchases claimed during the conspiracy exceeded $10 million. Rivero also knew that Castellanos wrote checks to NSP that were deposited in the Panamanian bank account and that Castellanos had access to these funds. Castellanos used the funds to make loans and to purchase a condominium and boat dock in Bimini.
Defendant Sentenced on Tax Charges; Failed to Report $8.8 Million in Stock Gains
On March 5, 2012, in San Jose, Calif., Gary Linn Packer, currently of Cheyenne, Wyo., was sentenced to 30 months in prison, three years of supervised release and ordered to pay $1,808,079 in restitution. Packer pleaded guilty on November 28, 2011, to one count of tax evasion. According to his plea agreement, between 1994 and 2001, Packer was employed by Network Appliance, Inc. (NA) in Sunnyvale, Calif. He received a portion of his income in NA stock options. In 2000, Packer liquidated his NA stock, which resulted in a taxable gain of $8,844,949. He did not file a tax return for the 2000 tax year and did not pay the IRS the $1,795,740 of income taxes owed. In order to evade the payment of the income taxes, Packer concealed his assets from the IRS by placing them in nominee names, including several trusts, and used false identification numbers.
Promoter of Abusive Trust Arrangements Sentenced on Tax Charges
On January 30, 2012, in Fresno, Calif., Michael S. Ioane, of Atwater, was sentenced to 108 months in prison and three years of supervised release for a tax fraud conspiracy. Ioane was convicted by a jury in October 2011 of conspiring to defraud the United States and four counts of presenting fictitious documents to the United States. According to the evidence presented at trial, Ioane, who operated under the name Acacia Corporate Management and First Amendment Publishers, promoted sham or abusive trusts that purported to allow people to put their assets and income into trusts that would shield them from the Internal Revenue Service (IRS). When the IRS disallowed various trusts set up by Ioane, he would instruct co-defendant Vincent Steven Booth to set up new trusts, file false liens against his own properties and present bogus “Bills of Exchange” to the IRS that Ioane said constituted full payment of Booth’s tax debt. Booth pleaded guilty in September 2010 and is awaiting sentencing. He is currently working to pay more than $1.3 million in back taxes that are owed to the IRS.
Diamond Merchant Sentenced for Conspiring to Hide $7.1 Million in Swiss Bank Accounts
On November 9, 2011, in Manhattan, N.Y., Richard Werdiger, a former client of Swiss bank UBS AG, was sentenced to 12 months and one day in prison, one year of supervised release, fined $50,000 and ordered to pay a $600 special assessment. Werdiger pleaded guilty in March 2011 to conspiring to defraud the Internal Revenue Service (IRS) by hiding more than $7.1 million at UBS, filing false federal income tax returns, and evading nearly $400,000 of taxes. Werdiger agreed to pay a civil penalty of more than $3.8 million for his failure to report his overseas accounts. Restitution will be determined at a later date. According to court documents and statements made in court, from 1986 to 1988, Werdiger opened multiple accounts at UBS under the name of sham Liechtenstein-based foundations in order to evade taxes on money that he had inherited from his father. To further conceal his ownership of these accounts, Werdiger instructed UBS to permit him to communicate with the bank using the code name “Trygon.” In late 2000, Werdiger opened up yet another account at UBS in the name of a sham Panamanian corporation. This allowed him to continue to invest in U.S. securities without having UBS notify the IRS of his identity or withhold taxes on income arising out of his holding U.S. securities. During the conspiracy, Werdiger used the funds hidden offshore to satisfy various business obligations, such as paying off business debts incurred by his companies, Michael Werdiger Inc. and Eloquence Corporation, which sell diamonds and other jewelry.
Promoter of Anti-Tax Scheme Sentenced for Tax Conspiracy
On January 26, 2012, in Erie, Pa., Donald Turner, aka Don Wood, was sentenced to 60 months in prison, three years of supervised release and ordered to pay $408,034 in restitution to the IRS. Turner was convicted following a jury trial of conspiring to defraud the United States. According to evidence at trial, Turner sold a book titled “Tax Free! How the Super Rich Do It,” which introduced readers to his organization, First American Research (FAR). Through FAR, Turner promoted an illegal scheme to reduce or eliminate an individual’s tax liability through the use of purported offshore entities. In 1991, Donald Turner had sold the program to Daniel Leveto, a Meadville, Pa., veterinarian. As part of the program, Leveto utilized various methods to conceal his income and assets from the IRS as directed by Turner. One of these methods included the purported sale of Leveto’s veterinary business to an alleged offshore entity called Center Company. Leveto actually retained dominion and control over the veterinary business. In 2005, a jury convicted Leveto of all counts, and he was subsequently sentenced to 46 months in prison.
Two People Sentenced in Multi-million Dollar Conspiracy to Defraud the Government
On December 15, 2011, Newark, N.J., Ronald Ottaviano, of Lewes, Del., was sentenced to 62 months in prison. Harriet Foster, of Tuckerton, N.J., was sentenced to 13 months in prison. Ottaviano, Foster and two other defendants were convicted by a jury on June 20, 2011, on charges of conspiracy to defraud the United States, mail fraud and wire fraud. Ottaviano was also convicted of two counts of tax evasion and one count of money laundering, and Foster was convicted of two counts of failing to file a tax return and one count of money laundering. The jury also returned a special verdict forfeiting a home in Lewes, which the jury found Ottaviano and Foster had purchased using the proceeds of the fraud. Ottaviano, a principal of Mid-Atlantic Trustees and Administrators (MATA), and one of the firm’s employees perpetrated a conspiracy to defraud the United States by marketing two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. At no time did MATA conduct legitimate business. Instead, MATA marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all. Ottaviano and Foster spent a portion of their illicit proceeds, more than $500,000, to purchase the Lewes home – in cash.
New York Man Sentenced on Money Laundering and Tax Charges
On February 13, 2012, in Syracuse, N.Y., Charles L. Blomquist, of Skaneateles, N.Y., was sentenced to 87 months in prison and three years of supervised release. Blomquist was further ordered to forfeit his lakefront mansion, currently assessed at over $1.4 million, in addition to cash from foreign bank accounts. According to the plea agreement, Blomquist admitted that beginning in the 1980s and continuing up to 2009, he acquired a significant amount of revenue from ‘specified unlawful activity’ and used some of these monies to fund an overseas financial account with Union Bank of Switzerland (UBS) in Switzerland. Blomquist admitted that he had moved these illegal proceeds to an overseas bank account in Switzerland because it would be more difficult for the IRS and other federal law enforcement agencies to locate them. To further conceal his overseas bank accounts and avoid detection, Blomquist also admitted that he willfully failed to report his ownership of interest income earned from that Swiss Bank account.
Niagara Falls Financial Advisor Sentenced for Promoting and Using Abusive Tax Shelters
On October 4, 2011, in Buffalo, N.Y., Richard Muto was sentenced to 36 months in prison and one year of supervised release for corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws. According to court documents, between February 1996 and March 2000, Muto was a financial advisor, owning and operating his own business called Tax and Investment Strategies in Niagara Falls, N.Y. Muto admitted that he sold and promoted multi-layered abusive trust schemes. The scheme required the user to purchase and create a series of domestic and foreign trusts and internal business corporations (IBCs). The user would subsequently divert personal income into, and place assets into, the purported independent trusts and IBCs to create the impression that the user was relinquishing control of the income and assets through a series of sham paper transactions. The trusts and IBCs, however, remained under the complete control of the user. Therefore, the income and assets diverted into the trusts remained the income and assets of the user. Muto admitted that he knew that the use of the multi-layered trust schemes would cause his clients to file false federal income tax returns with the IRS. Muto also admitted that he misrepresented to clients and potential clients that, by using the multi-layered abusive trust scheme the clients could legitimately reduce or eliminate their federal income taxes. Muto also counseled clients to submit frivolous correspondence to the IRS in response to audit notices as a way to intimidate IRS revenue agents and thwart IRS audits. In addition to promoting the trusts, Muto used the abusive trusts himself, which resulted in his filing of false individual income tax returns for the tax years 1996, 1997 and 1998. Muto’s scheme caused a tax loss to the United States of more than $1.7 million.