Share and share alike; fleecing the flock; United they fall; and other highlights of recent tax cases.

Shreveport, Louisiana: Tax preparer Sharhonda Law, 39, of Haughton, Louisiana, has been sentenced to 20 months in prison, to be followed by a year of supervised release, for tax fraud.

She owned and operated Law’s Tax Service, where she was the sole preparer. Law prepared and filed a client’s 2019 federal return that included a fraudulent Schedule F that claimed the client had farming income and had incurred farming expenses and was due a refund. In fact, the client owed taxes for that year. Investigation also showed that Law’s client did not have a farm, nor did they tell Law they owned or operated a farm and had never provided Law with any of the farming-related income or expenses on the Schedule F.

Law pleaded guilty in November to one count of aiding and assisting in making and subscribing a false return.

She made similar misrepresentations on six other returns for clients and falsified her own income on two of her personal returns; she also failed to file returns for other years. The total criminal tax loss was $123,455, which Law was ordered to pay in restitution.

Evansville, Indiana: Marcie Jean Doty, operations manager for a property management business, has been sentenced to five years in prison, to be followed by three years of supervised release, after pleading guilty to wire fraud, failure to file returns and filing false returns.

Between May 2017 and June 2022, Doty stole some $1,803,466.38 from her employer via unauthorized checks and ACH transfers. She executed 99 unauthorized transfers, totaling $503,151.59, and wrote 279 unauthorized checks to herself, totaling $1,300,314.79. The funds were transferred from her employer’s bank accounts to her personal ones. Doty entered false information in the business accounting software, representing that the checks were written to her employer instead of herself. 

In January 2017, Doty agreed to purchase a 25% equity share in her employer’s business. Doty used some of the money she stole via the scheme to make payments towards her purchase of the share.

For tax years 2018 through 2020, Doty didn’t report the income derived from her scheme, failing to report some $786,280.70. She also didn’t file returns for tax years 2021 and 2022, failing to report some $1,006,983.84 in income.

She has been ordered to pay $2,517,343.05 in restitution.

Crofton, Kentucky: Marvin Upton has been sentenced to two years and three months in prison, to be followed by three years of supervised release, for fraud and tax offenses.

Upton, until recently the pastor at local Crofton Pentecostal Church, was sentenced for three counts of bank fraud and three counts of filing false returns. From 2013 to 2016, Upton defrauded one of his elderly parishioners, who suffered from dementia. During that same time, Upton submitted multiple false returns that omitted income from the fraud.

Jacksonville, Florida: Exec Daniel Tharp has pleaded guilty to failure to pay taxes. 

Tharp was managing director for Hangar X Holdings LLC, where he had the responsibility to collect and account for the company’s trust fund taxes from employees’ pay. From October 2014 through December 2019, the company paid wages to employees and withheld these, but Tharp didn’t pay the money to the IRS. In total, he caused the company to fail to pay over $1.2 million in such taxes.

He faces a maximum of five years in prison.

Detroit: A federal court in Michigan has issued an injunction against tax preparers Alicia Bishop and Tenisha Green, barring them from preparing federal returns for others.

The court previously barred Alicia Qualls, Michael Turner and Constance Stewart from preparing federal returns for others and previously barred the business for which all of the preparers worked, United Tax Team Inc., and United Tax Team’s incorporator, Glen Hurst, from preparing federal returns for others.

Hurst, United Tax Team, Qualls, Turner and Stewart consented to the judgments.

According to the complaint, Hurst incorporated United Tax Team in 2016, and was its sole shareholder and corporate officer. Hurst hired the return preparers — including Qualls, Bishop, Green, Turner and Stewart — who worked at United locations in the Detroit area and prepared returns for clients that included false information not provided by clients.

The complaint alleges that Qualls, Bishop, Green, Turner and Stewart each repeatedly placed false or incorrect items, deductions, exemptions or statuses on returns without clients’ knowledge, including, in various cases, fabricated Schedule C businesses; fabricated education expenses; improperly claimed pandemic relief tax credits; improperly claimed head of household status; and fictitious child and dependent care expenses.

Akron, Ohio: Tax preparer Mustafa Ayoub Diab, 41, of Ravenna, Ohio, has been convicted of orchestrating a financial conspiracy that defrauded the U.S. government of pandemic benefits.

Diab was found guilty on 12 counts of theft of government funds, 12 counts of bank fraud, 11 of wire fraud, six of aggravated ID theft and one count each of conspiracy to commit wire and bank fraud and to launder monetary instruments.

Diab owned and operated a tax prep business where he and his co-conspirator, Elizabeth Lorraine Robinson, 33, also of Ravenna, developed a scheme to take advantage of the Pandemic Unemployment Assistance Program and the Paycheck Protection Program. From around June 2020 to August 2021, Diab submitted fraudulent applications for pandemic unemployment benefits and small-business assistance for many of his tax prep business clients.

Without their knowledge, he lied about their employment or about their being small-business owners. Investigators also discovered that Diab opened bank accounts in his clients’ names to receive the benefit funds via direct deposit, which the clients did not have access to, along with accounts in the names of Robinson and Diab’s sister. When the relief money was deposited into these accounts, he withdrew the funds in cash for his personal use, buying real estate and cars and taking international trips.

Diab submitted fraudulent applications in the names of nearly 80 victims, causing the federal government to pay out more than $1.2 million in pandemic benefits that were deposited into the various bank accounts that Diab controlled.

Sentencing is July 28. He faces up to 30 years in prison.

Robinson previously pleaded guilty to conspiracy, wire fraud, bank fraud and theft of government funds; she awaits sentencing and also faces up to 30 years in prison.

Columbus, Ohio: A federal court has permanently enjoined tax preparer Michael Craig from preparing returns for others and from owning or operating any prep business.

Craig, both individually and d.b.a. Craig’s Tax Service, consented to entry of the injunction. 

According to the complaint, many tax returns that Craig prepared made false and fraudulent claims, including losses for fictitious Schedule C businesses; claiming costs of goods sold for types of businesses that cannot claim these costs and without supporting documentation; inventing or inflating expenses for otherwise legitimate Schedule C businesses; and taking deductions for both cash and non-cash charitable deductions that are either exaggerated or fabricated.

According to the complaint, the IRS estimated a tax loss of more than $3.1 million in 2022 alone.

Craig must send notice of the injunction to each person for whom he prepared federal returns or refund claims after Jan. 1, 2022.

The Treasury Department and the Internal Revenue Service are planning to withdraw regulations that labeled basis-shifting transactions among partnerships and related parties as “transactions of interest” akin to tax shelters and stop imposing penalties on them.

In Notice 2025-23, the Treasury and the IRS said Thursday they intend to publish a notice of proposed rulemaking proposing to remove the basis-shifting TOI regulations from the Income Tax Regulations.  

The notice provides immediate relief from penalties under Section 6707A(a) to participants in transactions identified as transactions of interest in the Basis Shifting TOI Regulations that are required to file disclosure statements under Section 6011, and (ii) penalties under Sections 6707(a) and 6708 for material advisors to transactions identified as transactions of interest in the basis-shifting regulations that are required to file disclosure statements under § 6111 and maintain lists under Section 6112.  

The notice also withdraws Notice 2024-54, 2024-28 I.R.B. 24 (Basis Shifting Notice), which describes certain proposed regulations that the Treasury Department and the IRS intended to issue addressing partnership related-party basis-shifting transactions.

The Treasury and the IRS issued the final regulations in January after receiving comments that the original proposed regulations could impose burdens on small, family-run businesses and impact too many partnerships. However, the American Institute of CPAs has urged the Treasury and the IRS to suspend and remove the rules, arguing they were “overly broad, troublesome and costly” after requesting changes in the proposed regulations last year.

The IRS and the Treasury acknowledged in Thursday’s notice that it had heard similar objections. “Taxpayers and their material advisors have criticized the Basis Shifting TOI Regulations as imposing complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax-compliant business activities, creating costly compliance obligations and uncertainty for businesses,” said the notice.

It cited an executive order in February from President Trump on implementing a Department of Government Efficiency deregulatory initiative, which directs agencies to initiate a review process for the identification and removal of certain regulations and other guidance that meet any of the criteria listed in the executive order. The Treasury and the IRS identified the Basis Shifting TOI Regulations for removal and the Basis Shifting Notice for withdrawal.

Last June, former IRS Commissioner Danny Werfel announced a crackdown on related-party basis-shifting transactions that enable partnerships to avoid paying taxes and issued guidance after the IRS uncovered tens of billions of dollars of questionable deductions claimed in a group of transactions under audit.  

“Our announcement signals the IRS is accelerating our work in the partnership arena, an arena that has been overlooked for more than a decade with our declining resources,” said Werfel during a press conference last year. “We’re concerned tax abuse is growing in this space, and it’s time to address that. So we are building teams and adding expertise inside the agency so we can reverse these long-term compliance declines.” 

Using complex maneuvers, high-income taxpayers and  corporations would strip the basis from the assets they owned where the basis was not generating tax benefits and then move the basis to assets they owned where it would generate tax benefits without causing any meaningful change to the economics of their businesses. The basis-shifting transactions would enable closely related parties to avoid paying taxes. The Treasury estimated last year that the transactions could potentially cost taxpayers more than $50 billion over a 10-year period.

“For example, a partnership might shift tax basis from a property that does not generate tax deductions, such as stocks or land, to property where it does, like equipment,” said former Deputy Secretary of the Treasury Wally Adeyemo during the same press conference. “Businesses have also used these techniques to depreciate the same asset over and over again.”

Congress has since removed much of the extra funding from the Inflation Reduction Act that was being used to scrutinize such transactions, and the IRS has been downsizing its staff in recent months, reducing its enforcement and audit teams, with plans for further cutbacks in the weeks and months ahead. 

Optimism is building that a game-changing fund design that will help asset managers shrink clients’ tax bills and grow their ETF businesses will soon be approved by the U.S. securities regulator.

This week, at least seven firms including JPMorgan and Pacific Investment Management Co. filed amendments to their applications to create funds that have both ETF and mutual fund share classes. The filings update initial applications — some of which sat idle for months — with more details about the fund structure, and suggest the U.S. Securities and Exchange Commission has engaged in constructive discussions with a growing number of applicants, according to industry lawyers.

“The SEC signaling is clear. These amendments really constitute the SEC prioritizing ETF share class relief,” said Aisha Hunt, a principal at Kelley Hunt law firm, which is working with F/m Investments on its application. 

The latest round of filings, which also include Charles Schwab and T. Rowe Price, are serving as yet another sign that the SEC is fast-tracking its decision process on multi-share class funds, after F/m Investments and Dimensional Fund Advisors filed amendments earlier in April. DFA’s amendment included more details around fund board reporting and the board’s responsibilities to monitor the fairness of the new structure for each shareholder.

Brian Murphy, a partner at Stradley Ronon, the firm handling DFA’s filing, said other fund managers are receiving feedback and amending applications.

“We understand that the SEC staff is telling other asset managers to follow the DFA model as well,” said Murphy, who is also a former Vanguard lawyer and SEC counsel.

At stake is a novel fund model where one share class of a mutual fund would be exchange-traded. It was patented by Vanguard over two decades ago, and helped the money manager save its clients billions on taxes. The blueprint ports the tax advantages of the ETF onto the mutual fund, and is a tantalizing prospect for asset managers that are seeing outflows and looking to break into the growing ETF industry. 

After Vanguard’s patent on the design expired in 2023, over 50 other asset managers asked the SEC for so-called “exemptive relief” to use the fund design. But it wasn’t until earlier this year, when SEC acting chair Mark Uyeda said the regulator should prioritize the applications, that it was clear the SEC would be interested in allowing other fund firms to use the model.

According to Hunt, the regulator has signaled that it will first approve a small subset of the applicants. 

‘Work to be done’

To be sure, an approval doesn’t mean that an issuer will be able to immediately begin using the fund blueprint. Because ETFs trade during market hours, they require different infrastructure than mutual funds, so firms that currently only have the latter structure will need to hire staff and form relationships with ETF market makers before they implement the dual-share class model. 

“Dimensional has sort of set the template for what that language looks like in the context of these filings. And by extension cleared the way for approval, which feels imminent now,” said Morningstar Inc.’s Ben Johnson. “But then once we arrive at approval, there’s still going to be work to be done.”

Mutual fund firms will need to prepare for shareholders who want to convert, tax-free, into the ETF share class, which would require some “plumbing” and structural changes, said Johnson.

Another point to consider is that mutual funds that have significant outflows may not be ripe for ETF share classes, as that could result in a tax hit, according to research from Bloomberg Intelligence. In 2009, a Vanguard multishare class fund was hit with a 14% capital-gains distribution after a massive shareholder redeemed its shares in the fund. Fund outflows can bring about a tax event when a mutual fund has to sell underlying holdings to meet redemptions. 

Mutual funds have largely bled assets in recent years as ETFs have grown in popularity. As a result, legacy asset managers have found themselves battling for a slice of the increasingly saturated ETF market, which now boasts over 4,000 U.S.-listed ETFs. SEC approval of the dual-share design could open the floodgates to thousands more funds.