1099-OID scammers sued by DOJ

[Demosthenes]

FOR IMMEDIATE RELEASE TAX
MONDAY, OCTOBER 25, 2010 (202) 514-2007
WWW.JUSTICE.GOV TDD (202) 514-1888

JUSTICE DEPARTMENT SUES RETURN PREPARERS IN FLORIDA AND MISSOURI WHO ALLEGEDLY CLAIMED MORE THAN $70 MILLION IN FRAUDULENT TAX REFUNDS

Two Suits Are Part of Nationwide Enforcement Effort Against
Promoters of Fictitious Withholding Scam

WASHINGTON - The United States has sued Iliana Sorensen of Hialeah, Fla., and Gerald A. Poynter II of Kansas City, Mo., seeking to bar them from preparing federal tax returns for others, the Justice Department announced today. Sorensen and Poynter are both alleged to prepare tax returns claiming fictitious withholding on their customers’ returns in an attempt to claim large tax refunds.

The government’s civil injunction complaints allege that Sorensen and Poynter have prepared federal income tax returns for customers claiming more than $70 million in fraudulent tax refunds that are based on fake withholding reported on Forms 1099-OID. While the Internal Revenue Service (IRS) detects and stops most fraudulent refund claims, the complaints allege that Poynter’s and Sorensen’s fraudulent tax return preparation has resulted in more than $7 million in erroneous refunds to their customers.

According to the complaints, the scheme Poynter and Sorensen employ is part of a trend among tax defiers to file frivolous tax returns and forms in an attempt to escape their federal tax obligations and steal from the U.S. Treasury.

Customers who participate in tax fraud schemes of the type alleged in the complaints may be subject to sizeable penalties for filing returns with excessive refund claims—including a penalty equal to 20 percent of the amount improperly claimed. The penalty applies even if, as usually happens, the IRS detects the false claim and blocks a tax refund. Thus a taxpayer improperly claiming a $2 million refund could be liable for a $400,000 penalty as well as other penalties and possible criminal prosecution.

Courts have barred preparers who used similar schemes in California, South Carolina, Georgia, and Tennessee from preparing tax returns for others.

In the past decade, the Justice Department’s Tax Division has obtained hundreds of injunctions against tax fraud promoters and dishonest tax return preparers. Information about these cases is available on the Justice Department’s website.

[jcolvin2]

FOR IMMEDIATE RELEASE TAX
MONDAY, OCTOBER 25, 2010 (202) 514-2007
http://WWW.JUSTICE.GOV TDD (202) 514-1888

JUSTICE DEPARTMENT SUES RETURN PREPARERS IN FLORIDA AND MISSOURI WHO ALLEGEDLY CLAIMED MORE THAN $70 MILLION IN FRAUDULENT TAX REFUNDS

...

Customers who participate in tax fraud schemes of the type alleged in the complaints may be subject to sizeable penalties for filing returns with excessive refund claims—including a penalty equal to 20 percent of the amount improperly claimed. The penalty applies even if, as usually happens, the IRS detects the false claim and blocks a tax refund. Thus a taxpayer improperly claiming a $2 million refund could be liable for a $400,000 penalty as well as other penalties and possible criminal prosecution.

...

While the DOJ press release indicates that the section 6676 20% excessive refund penalty can apply to amounts claimed and not actually paid out, the IRS has concluded that the 6676 (excessive refund) penalty does not apply to falsely claimed Form 1099-OID based refunds that are not actually paid out. However, the section 6662 20% accuracy penalty (and perhaps the section 6663 75% fraud penalty) does apply to actual understatements of tax, which normally would include amounts actually paid out on the basis of a bogus 1099-OID refund claim:

UILC: 6676.00-00
Release Date: 5/7/2010


Date: March 30, 2010

CC:PA:BR:2:CWGorham - POSTN-100343-10

to:
Mark H. Howard
Senior Counsel (Salt Lake City)
(Small Business/Self-Employed)

from:
Ashton P. Trice
Chief, Branch 2
(Procedure & Administration)

subject:
Section 6676 Penalty and Form 1099-OID Schemes


This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.

ISSUE


Does the erroneous claim for refund or credit penalty under section 6676 apply to a claim for refund of overstated amounts of income tax that a Form 1099-OID falsely represented as being withheld?

CONCLUSION


Whenever an underpayment results from overstated withholding credits of this type, the section 6676 penalty cannot apply. Typically, when a taxpayer falsely claims withheld income tax on a Form 1099-OID and seeks a refund of that tax, an underpayment will result and accuracy-related or fraud penalties will apply.

FACTS


The Service has received a number of returns to which taxpayers attach fabricated Forms 1099-OID to overstate claimed credits for income tax withheld at the source. These taxpayers generally file income tax returns that report the face amount of income on the Forms 1099-OID either on the Form 1040 lines for interest income or for other income. This amount of income is carried through the returns to the computations of adjusted gross income and taxable income. But these taxpayers generally report no tax due. They list the amount of income stated on the face of the Forms 1099-OID as income tax withheld and then claim refunds based on that false amount withheld.
You have requested guidance whether the section 6676 penalty for filing an erroneous claim for refund or credit applies to these claims.


LAW AND ANALYSIS


Section 6676 imposes a penalty on any claim for refund or credit of income tax that is excessive in amount and lacks a reasonable basis for the claim. The penalty is equal to 20 percent of the excessive amount of the claim. The excessive amount is the disallowable portion of the claim for refund or credit.
Under the facts stated above, the entire amount of a refund claim is an excessive amount; the entire refund claim is disallowable because it is based upon a representation that income tax was withheld, but it actually was not. Also, there is no reasonable basis for the claim because this claim is fabricated.

However, the section 6676 penalty does not apply to any portion of a claim to which the accuracy-related penalty on underpayments under section 6662 or the fraud penalty under section 6663 applies.1 Those penalties apply when an "underpayment" of tax, as defined in section 6664, arises. Therefore, if an "underpayment" exists, the section 6676 penalty cannot apply.

The section 6664 regulations define an underpayment of income tax as the amount by which any income tax imposed under Subtitle A exceeds the excess of (A) the sum of (i) the amount shown as the tax by the taxpayer on his return, plus (ii) amounts not so shown previously assessed (or collected without assessment), over (B) the amount of rebates made. Treas. Reg. § 1.6664-2(a). The definition can be expressed as: Underpayment = W - (X+Y-Z), where W is the amount of income tax imposed,2 X is the amount shown as tax by the taxpayer on his return,3 Y is amounts not so shown previously assessed (or collected without assessment),4 and Z is the amount of rebates made.

The term Amount of Rebates Made for purposes of IRC § 6664 means so much of an abatement, credit, refund or other repayment, as was made on the ground that the tax imposed was less than the excess of (1) the sum of (a) the amount shown as the tax by the taxpayer on his return, plus (b) the amounts not so shown previously assessed (or collected without assessment), over (2) the rebates previously made. Treas. Reg. § 1.6664-2(e).

If the Service does not pay a refund under the scheme stated in the facts, there is no rebate. If the Service erroneously refunds tax on the basis that a taxpayer has claimed withholding of tax on a Form 1099-OID that is more than tax actually withheld, the refund is not paid on the ground that the tax imposed is less than the amount shown as tax by the taxpayer on the return. Instead, the refund is paid as a result of an error in determining the proper credit for withheld tax. See Treas. Reg. § 1.6211-1(f). Because any amount refunded is a nonrebate erroneous refund, it is not a rebate for purposes of section 6664 and will not factor into the computation of an underpayment under section 6664.

Under the facts stated, the overstatement of income tax withheld decreases the amount shown as tax by the taxpayer on his return, as defined in Treas. Reg. § 1.6664-2(c), and increases the underpayment, if any, of tax. See Treas. Reg. § 1.6664-2(g), Example 3; see also Sadler v. Commissioner, 113 T.C. No. 4 (1999); Rice v. Commissioner, T.C. Memo. 1999-65. Thus, in a case where the only inaccuracy on a return is a claim of false withholding, an underpayment results and section 6676 cannot apply.5

Please call 202-622-4940 if you have any further questions.


FOOTNOTES


1 The section 6676 penalty also does not apply when a reportable transaction understatement penalty applies under section 6662A. See IRC § 6676(c). That penalty does not apply to the facts stated because the facts do not involve a reportable transaction.
2 The Amount of Income Tax Imposed for purposes of section 6664 is the actual amount of income tax imposed, not including (A) the credits for tax withheld on wages at the source under section 31 and withheld at the source (for nonresident aliens and foreign corporations) under section 33, (B) any payments of tax or estimated tax made by the taxpayer, (C) any credit resulting from amounts collected as the result of a termination assessment or a jeopardy assessment, and (D) any tax the taxpayer is not required to assess on the return. Treas. Reg. § 1.6664-2(b).

3 The Amount Shown as the Tax by the Taxpayer on his Return for purposes of section 6664 is (1) the tax liability that the taxpayer reports on the return (not including exceptions A-C listed in Footnote 2), reduced by (2) the excess of (i) the sum of the amounts shown by the taxpayer on his return as (a) credits for income tax withheld under section 31 and 33, (b) estimated tax payments and (c) payments made by the taxpayer for a taxable year prior to the filing of the return for such taxable year, over (ii) the sum of the (a) amounts actually withheld under section 31 and 33, (b) amount actually paid as estimated tax, and (c) amounts actually paid with respect to a taxable year before the return for such year is filed. Treas. Reg. § 1.6664-2(c).

4 The term Amount Not So Shown as Previously Assessed (or Collected Without Assessment) consists of two parts: (1) the amounts not so shown as previously assessed, and (2) the amounts not so shown as previously collected without assessment. The amounts not so shown as previously assessed means only amounts assessed before the return was filed that were not shown on the return (e.g., termination or jeopardy assessments). The term amounts not so shown as previously collected without assessment is the amount by which (1) the sum of (a) the credits allowable for tax withheld on wages, (b) the credits allowable for tax withheld at the source, (c) the amount of estimated tax payments, and (d) the amount of other payments in satisfaction of tax liability made before the return is filed, exceed (2) the tax shown on the return (provided that the excess has not been refunded or allowed as a credit to the taxpayer). Treas. Reg. § 1.6664-2(d).

5 Where there are other inaccuracies on the return, including calculations of more tax due than the Code imposes or failure to claim actual credits to which one is entitled, it is possible that an underpayment may not arise. Thus, care should be taken in determining which penalty applies from case to case.

[notorial dissent]

Ouch!!!!! Of course collecting it may be a whole other matter considering most of these idiots can't put together bus fare to get to their parole hearings.

[jcolvin2]

Ouch!!!!! Of course collecting it may be a whole other matter considering most of these idiots can't put together bus fare to get to their parole hearings.

Collecting penalties from the scammers who promote this garbage has never been easy. The scammers who prepare returns claiming ginormous refunds based on non-existing withholding reported on a Form 1099-OID deserve a penalty, and some of their clients probably do as well (other clients are probably among the terminally gullible).

However, asserting a civil penalty against taxpayers in the amount of some percentage of a wacky zillion dollar claim doesn't seem like the best idea, especially since such a civil penalty against the taxpayer would dwarf any potential civil penalty against the real bad guys (the scammers). None of the IRS civil penalties with potential application to preparers - 6694, 6695, 6700, 6701 - could possibly amount to even a fraction of 20% of an excessive $10 million refund claim based on a bogus Form 1099-OID

It really bothers me that DOJ is trying to scare people by raising the spectre of a section 6676 penalty assertion against refund claims that are caught and blocked by the IRS, when the IRS itself has concluded that the application of the penalty is inapplicable in such a situation. (I recognize the Chief Counsel memo isn't binding precedent, but it is a correct legal analysis.)

[notorial dissent]

i agree, I more than suspect this will end up in front of one court or another before long.

I think it should apply to the scammers and not the scammed, but in either instance, is the penalty actually going to be collectible, considering my previous point? As you previously pointed out the scammers usually claim huge returns, but they lie about the process working, so there is no reason to believe anything else they claim. I realize there have been some really big scammers that this would and should apply to, but do they even really have anything in comparison to what the penalties would amount to?

[Judge Roy Bean]

i agree, I more than suspect this will end up in front of one court or another before long.

I think it should apply to the scammers and not the scammed, but in either instance, is the penalty actually going to be collectible, considering my previous point? As you previously pointed out the scammers usually claim huge returns, but they lie about the process working, so there is no reason to believe anything else they claim. I realize there have been some really big scammers that this would and should apply to, but do they even really have anything in comparison to what the penalties would amount to?

Frankly, I cannot fathom any circumstances in which a person who willingly participates in the scam could present themselves to a court as having clean hands.

[Demosthenes]

The dumbs dumbs have now been indicted.

http://www.kansascity.com/2011/09/22/31 ... efund.html

Excerpt:

According to the indictment, the returns then were filed as if the clients themselves had prepared them, while the conspirators separately filed other bogus documentation backing up the false claims.

“They made the tax returns appear as if they were entitled to larger refunds than they were entitled to,” Nelson said.

Once the IRS made the refunds, each of the “branch managers” — as Poynter called his partners — kept some of the money and then shared it with Jerry Love Ministries as a “love donation,” the indictment alleged. He also maintained a website, called “Luckytown,” to allegedly promote the scheme.

Poynter filed more than 80 such returns for his direct clients, claiming about $25 million in refunds.

While the conspiracy allegedly attempted to obtain a total of about $96 million in refunds, the IRS denied most of those claims and actually paid out about $3.5 million.

In addition to Poynter, others charged in the 72-count indictment: Shirley J. Oyer, 70, of Overland Park; Kristi L. Jones, 38, of Riverside; Earl Lee Davis, 52, of Monroe, La.; Nkosi Gray, 38, of New Fairfield, Conn.; Billy Ray Hall, 72, of Newton, Ala.; Kimberly Johnson, 41, of Chickamauga, Ga.; Darryl E. Larkins, 49, of Chicago; Robert E. Morris, 65, of Rocklin, Calif.; Mark J. Murray, 49, of Newton, Ala.; Jeffrey and Karen Olson, both 40, of Wood Dale, Ill.; John V. Perdido, 55, of Temecula, Calif.; and Jennifer S. Wilson, 34, of Cumming, Ga.

[notorial dissent]

I can see why the IRS was a bit irked about the whole thing, that is a fair bit of money any way you look at it.

[JamesVincent]

Now would it be possible if taxpayer A was mooched by Tax preparer B and then caught by the IRS and fined to turn around and go after B since they prepared an incorrect return?

[notorial dissent]

Only I suspect if they could prove they were really really clueless and didn't know that their preparer was using them in a tax scam. I actually suspect it has been done, but haven't seen any cases so far. I am sure that out there some where is some little old lady that one of these "preparers" did as a favor and who ended up getting used by the scammers. I'm sure some will come to light as they start nailing more and more of these guys. Most of the "preparers" and "victims" were co conspirators in this little exercise in tax fraud.

[Hilfskreuzer Möwe]

It appears Gerald Poytner a.k.a. Brother Jerry Love has pled guilty to a number of tax offences:

• http://www.infozine.com/news/stories/op ... sid/57448/

He will receive a 13 year no parole sentence and is required to pay a little under $1 million in restitution. This newspaper report indicates a number of other involved defendants have also pled guilty.

SMS Möwe