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Tax Fraud Blotter: Severe and widespread

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Speedy decision; trouble in paradise; diplomatic imbecility; and other highlights of recent tax cases.

Waxahachie, Texas: Tax preparer Bachary Rushid McGruder, 45, has been sentenced to three years in prison and ordered to pay more than $6.7 million in restitution to the IRS.

McGruder, owner of M&M Enterprises and Consulting, pleaded guilty in November to aiding and assisting in the preparation of false returns.

During tax years 2015 through 2018, he prepared more than 1,000 fraudulent returns for clients, using fictitious Schedule A deductions such as gifts to charity, unreimbursed employee expenses and home mortgage interest, false Schedule C business losses and false residential energy credits. He included the statements on returns without clients’ knowledge and had clients sign forms justifying the deductions and credits without explaining the forms’ contents.

McGruder charged exorbitant fees that were deducted from the refunds — as much as $2,800 for preparing a return.

The fraud resulted in a tax loss of $6.73 million.

Detroit: A federal court has permanently barred Annetta Powell and her seven tax prep-related businesses — Alliance Tax Services, Nationwide Tax Services, Tax Expert Stores, United Tax Services, Top Financial Specialists, United Financial Team Corporation and Speedy Tax Stores Corp. — from preparing federal returns for others and from owning or operating a prep business.

According to the court’s order, Powell, through her companies, operated up to five tax prep stores in Detroit and in Pontiac and Flint, Michigan, first under the name The Tax Experts and then, since 2021, under Speedy Tax Stores. The court found that the “harm caused by defendants’ fraudulent tax preparation scheme was severe and widespread, occurring across five stores for nearly a decade.” The court concluded that the defendants “prepared too many fraudulent tax returns with similar issues … for the pattern to have been random.”

The court noted that Powell refused to cooperate with the IRS investigation and took active steps to thwart the investigation by altering clients’ files and returns and manipulating the use of an EFIN. She could not obtain an EFIN because of her criminal record, so her stores used EFINs under someone else’s name. This misconduct, along with other past fraudulent conduct, led the court to determine that Powell “would likely find new ways to prepare fraudulent returns” if she were not permanently barred.

The court also ordered the defendants to disgorge $689,797.91 to the U.S., representing the ill-gotten gains from 2019 through 2021.

Honolulu: Former resident Sook Young Jung has pleaded guilty to conspiring to defraud the IRS by fraudulently obtaining a refund and then thwarting efforts by the agency to recoup it.  

Jung conspired to file a false 2015 individual income tax return in her name. Jung’s co-conspirators created a fake tax form purportedly issued by a mortgage lender, which Jung attached to her return. The form falsely reported that Jung withheld more than $1.7 million in taxes. As a result, the IRS paid Jung a refund of $1,147,036.

After filing the false return and submitting the fake form, Jung tried to prevent the IRS from recovering the refund. For example, she deposited the refund check into a newly opened bank account and immediately withdrew most of the funds in cashier’s checks. She also paid, through nominees, one of her co-conspirators $500,000 for the co-conspirator’s assistance in obtaining the fraudulent refund.

Jung faces up to five years in prison as well as a period of supervised release, restitution and monetary penalties. 

Hands-in-jail-Blotter

Rochester, New York: Resident Melanie Armstrong has pleaded guilty to wire fraud involving national emergency benefits, filing false claims against a government agency and transfer of a means of identification. 

Between July 2020 and August 2021, Armstrong falsely applied for state unemployment benefits under the identities of others and fraudulently collected benefits in their names. She also collected unemployment benefits in her own name by falsely representing that she had no source of income. Armstrong received $131,400.10 in benefits unlawfully. She also applied for but did not receive additional benefits, resulting in a total intended loss of $250,916.

Between January 2019 and April 2023, Armstrong filed 19 false federal income tax returns for herself, family members and associates claiming false and inflated wages and false and inflated federal income tax withholdings. The IRS issued refunds to Armstrong and to others totaling $101,255.

Between January 2020, and April 2023, she also filed 17 false returns for herself, family members and associates with the New York State Department of Taxation and Finance, claiming false and inflated wages and false and inflated state income tax withholdings. Armstrong attempted to obtain $45,363 in fraudulent refunds but received only $18,758.

The charges carry a maximum of 30 years in prison and a $1 million fine.

Albuquerque, New Mexico: Resident Arturo Archuleta, 50, has been sentenced to two years in prison for tax evasion.

Between 2014 and 2018, Archuleta was the office manager for a chiropractic practice. During that time, he failed to report more than $200,000 in income to the IRS and diverted more than $500,000 in payments to the practice to a nominee bank account that he controlled; he did not report that income to the IRS.

Archuleta, who pleaded guilty in May, paid some $140,000 in outstanding tax obligations to the IRS before sentencing. He was also ordered to pay some $90,000 in restitution to Medicaid for expenses covered by Medicaid while he was evading income tax.

The judge also imposed a fine of $75,000 and ordered Archuleta to perform 100 hours of community service after he is released from prison and to enroll in a state self-exclusion program for gambling.

Houston: Jonathan Louis Lepow, manager of his father’s dental practice, has pleaded guilty for failing to pay taxes withheld from employee wages.

Jonathan Louis Lepow managed the clinic Kenneth A. Lepow DDS Inc., which had some 51 employees from 2015 to 2017. He was involved in financial decision-making at the clinic and oversaw accounting for and paying federal employment taxes. Lepow admitted that during the first quarter of 2015 he failed to pay $544,272 in IRS trust fund taxes collected from employees.

Lepow used the money to pay vendors and transferred funds to accounts of other entities he was establishing.

He has agreed to repay $495,847.

Urbana, Illinois: A jury has returned guilty verdicts on three offenses against Larry Dean Gibbs, of Pembroke Township, Illinois, for filing false federal returns.

In January 2017, Gibbs filed three federal income tax returns for the tax years 2012, 2013 and 2014, each falsely claiming that he had earned $10 million in annual income from the “Larry Dean Gibbs Estate.” He further claimed that the IRS withheld more than $3 million annually from his earnings and that he was entitled to refunds totaling more than $6.8 million.

Gibbs also claimed that he had changed his name to Mulumbua Humraukn El Taikem Bey and that he was the ambassador for the Al Moroccan Empire National Republic, which is not officially recognized by the U.S. At the time Gibbs filed the three false returns, he had just been released from prison for a prior conviction for filing a false federal tax return in 2005, when he had obtained an undeserved $66,282 refund.

Sentencing is July 17. Gibbs faces up to three years in prison and a $100,000 fine on each of the three counts.

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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