The first two pages; a Rainy day; in all modesty; and other highlights of recent tax cases.

Freeport, Texas: Tax preparer Krystal Wright has been sentenced to two years in prison to be followed by a year of supervised release for aiding and assisting in the preparation and filing of false income tax returns.

Wright, who pleaded guilty earlier this year, was the sole owner and only tax preparer at the tax prep firm WW2F. Most of her clients did not have a business nor did they discuss any business income or expenses with her. From 2017 through 2020, she prepared and filed some 83 federal income tax returns that contained false and fraudulent items, including qualified solar electric property costs, gifts by cash or check, business expenses, wages, salaries, tips and supplies. After Wright completed a return, she did not review the completed documents with clients and only provided them with the refund amount and first two pages of the return.

The filings resulted in a total tax harm of $525,404. Wright was also ordered to pay that amount in restitution.

Terrell, Texas: Tax preparer Toronto Henderson, 49, has pleaded guilty to conspiracy to aid, assist, counsel or advise in tax fraud and has been sentenced to two years in prison.  

Henderson owned two tax prep businesses and recruited tax preparers to prepare and file income tax returns for clients. Henderson or others at his instruction personally trained the preparers and instructed them to create, among other things, fraudulent Schedule Cs; preparers used taxpayer information unrelated to the operation of any business or created fictitious and false information with respect to operation of a business to allow the claiming of undeserved losses.

The tax loss totaled $373,230, which Henderson was also ordered to pay in restitution.

Columbus, Ohio: Tax preparer Ali Kasimu Alston, 48, has pleaded guilty to aiding in the preparation of false and fraudulent returns.

From at least 2015 through at least 2022, Alston owned and operated the prep business in Columbus Overtime Ventures LLC, d.b.a. Raining Cash Tax Service. He admitted to systematically falsifying client tax returns to maximize federal refunds, filing Schedule Cs with fake businesses to maximize tax credits. He also tried to bribe one of his former employees with $4,000 to provide false information to law enforcement that was investigating the tax prep business.

Aiding in the preparation of a false and fraudulent return carries up to three years in prison. Alston will also pay more than $1.2 million in restitution to the IRS.

Beaumont, Texas: Tax preparer Michelle Denise Johnston, 42, has been sentenced to 15 months in prison and ordered to pay $196,177 in restitution for federal tax violations.

Johnston worked at Allen and Johnston Tax Service, which she formed with Yolanda Allen Morris in 2011; each had worked as Jackson Hewitt office managers at Wal-Mart locations and had decided to open their own tax prep business. The company existed until Allen and Johnston split in February 2021.

Johnston requested refunds on clients’ federal returns that were not based on the clients’ actual income, expenses, deductions and qualifying credits. She inflated refunds based on fabricated income, expenses, deductions and credits reported by Johnston without clients’ knowledge.

The IRS deposited the refunds with a third-party vendor; Johnston then caused the third party to pay the clients a modest tax refund that she’d originally made known to them. Before the vendor paid, however, Johnston deducted what was essentially a second tax prep fee from the refunds, the amount generally being the difference between the filed, larger refund and the modest refund made known to the client.

Johnston also signed an income tax return and falsely stated the amount of gross receipts and fraudulently stated taxpayers’ total expenses on returns, knowing the information was false.

Fairmont, West Virginia: Tax preparer Jack Lee Oliver, 56, of Rivesville, West Virginia, has been convicted on 26 counts of filing false returns.

Oliver owns an insurance sales and tax prep business known as Insurance Depot. He prepared returns for clients claiming business losses for non-existent businesses without the clients’ knowledge and prepared returns for clients who did have businesses, falsely inflating expenses to cause a business loss, again without the knowledge of the clients.

On his own returns, Oliver claimed the foster son of one of his clients, resulting in thousands in undeserved refundable credits.

The expected federal tax loss exceeds $500,000. Oliver faces up to three years in prison for each count. 

Lenexa, Kansas: Tax preparer Hophine Bwosinde has pleaded guilty to preparing and filing false income tax returns for clients.

Bwosinde operated the tax prep business Ambroseli Professional Services and from 2018 through 2022 prepared and filed false returns by either inflating legitimate business expenses or claiming losses related to fake businesses. He also falsely reported negative income on clients’ returns, generating undeserved refunds.

Bwosinde caused a total tax loss of more than $1.5 million.

Sentencing is Feb. 18. Bwosinde faces a maximum of three years in prison as well as a period of supervised release, restitution and monetary penalties. 

Miami: A federal court has issued an order holding Gerald Vito, James Eleby and Kwame Thomas in contempt for violating a permanent injunction that prohibited Vito and Eleby from preparing, filing or assisting in the preparation or filing of federal returns for others.

According to the complaint filed against them in March 2021, the pair prepared returns that significantly understated clients’ tax liabilities by claiming deductions for fabricated or inflated charitable deductions, medical expenses and employee business expenses. The complaint further alleged that the defendants significantly understated clients’ tax liabilities by reporting false or inflated business losses. In December 2021, the court issued a permanent injunction barring Vito and Eleby from preparing returns for others.

Following a hearing in September, the court found that the two violated the injunction by continuing to prepare returns for others. The court further found that Thomas, who was not a defendant in the original complaint, worked with Eleby to prepare returns in violation of the injunction.

The court held Vito, Eleby and Thomas in civil contempt and ordered that they disgorge, in the aggregate, $988,789.56 in fees they earned while violating the injunction. Vito and Eleby were further ordered to disclose to the government the names of all taxpayers for whom they prepared returns after Dec. 27, 2021, notify those taxpayers of the injunction, vacate the premises at which they prepare returns and file an affidavit of compliance with these terms.

San Antonio: Resident Rachel Olivia Markum has been sentenced to 15 months in prison for tax evasion.

Markum and her husband, Robert Franklin Markum Jr., prepared and signed a false joint 1040 for 2016 attesting that the couple’s sole income was gross receipts or sales from the business Camping and Fishing Outlet as $3,530,473. She was aware that the true gross receipts exceeded $4 million.

Rachel Markum pleaded guilty on May 28 to one count of tax evasion and aiding and abetting. Robert Markum pleaded guilty on April 1 to one count of tax evasion, and on Aug. 28 was sentenced to 27 months in prison. The couple was also ordered to pay $359,108 in restitution.

The Internal Revenue Service released its annual financial information Thursday in its fiscal year 2024 Financial Report, pointing to some of its main accomplishments and challenges.

One of the accomplishments included the resolution of a longstanding significant deficiency in information system controls after 11 years. The change comes after the IRS made substantial improvements and beefed up its information technology internal controls.

During FY 2024, the IRS collected over $5.1 trillion in tax revenue, plus more than $98 billion in enforcement revenue thanks to increased funding from the Inflation Reduction Act. The agency also distributed $553 billion in federal tax refunds and other outlays. 

Samuel Corum/Bloomberg

The report presents the IRS’s current financial position and discusses other financial topics, including the programs, accomplishments, challenges and management’s accountability for the resources entrusted to the IRS.

“I am proud of the transformation work we have done in FY 2024, and I am committed to completing the additional work that remains on many fronts: maintaining the outstanding level of service for our main phone line and closing gaps on other lines, expanding digital options for all taxpayers, further strengthening data security, and increasing support for vulnerable populations by such actions as increasing access to the Earned Income Tax Credit and other refundable credits, as well as protecting and supporting scam victims,” said IRS commissioner Danny Werfel in his introduction to the report..

The IRS also noted that it received an unmodified (clean) opinion on its financial statements for the 25th year in a row from the Government Accountability Office. The GAO also provided an unmodified opinion on the overall effectiveness of the IRS’s internal controls over financial reporting, meaning the financial statements are presented fairly, in all material respects, in accordance with U.S. GAAP. 

Vanguard agreed to pay $40 million to settle a potential class-action case over steep capital-gains taxes that hit thousands of investors in the firm’s target-date funds.

In the Nov. 6 preliminary settlement awaiting approval in Philadelphia federal court, the asset management giant did not admit any guilt or wrongdoing. However, the payout would add on to another $6.25 million in fines and restitution against Vanguard in 2022 in the settlement of a case filed by Massachusetts regulators on behalf of investors who absorbed capital gains — and the accompanying tax burden — when the firm opened the lower-cost institutional share classes of the funds to midsize retirement plans it had previously shut out from them in 2020.

Those clients rushed into the cheaper shares in a move described by The Wall Street Journal as an “elephant stampede” that caused the target-date funds to sell 15% of the products’ holdings in transactions saddling taxable-account investors with a capital-gains distribution that was 40 times any previous level, according to the March 2022 lawsuit. Less than a year after reducing the minimum-asset requirement for institutional shares to $5 million from $100 million, the firm merged them together with the retail versions of the funds. That adjustment caused no tax impact, leading experts to question why Vanguard didn’t simply do that in the first place.

“You got these huge capital gains that had to be distributed, and that was really the big problem,” said Daniel Sotiroff, a manager research senior analyst of passive strategies for Morningstar Research Services. “Vanguard actually did kind of mess this one up.”

Representatives for Vanguard didn’t respond to requests for comment on the case or the settlement.

READ MORE: How Vanguard’s tax-bomb target-date funds slammed wealthy investors 

It and the plaintiffs had indicated in September filings that they reached agreement in private mediation that month. The investors accused Vanguard and its top executives of breaching their fiduciary duty, aiding and abetting that breach, gross negligence, breaking the covenant of good faith and fair dealing, unjust enrichment and violations of several state laws. In the course of discovery, Vanguard deposed 10 of the plaintiffs and produced 250,000 documents.

The company agreed to the settlement “solely to eliminate the burden and expense of further

litigation,” and nothing in it is “an admission or finding of any fault, liability, wrongdoing or damage whatsoever or any infirmity in the defenses that [the] defendants have asserted, or could have asserted,” according to court filings.

“Defendants have denied, and continue to deny, that they have committed any act or omission giving rise to any liability or violation of law,” the “stipulation of settlement” document stated. “Defendants have asserted, and continue to assert, that the conduct was at all times proper and in compliance with all applicable provisions of law, and they believe that the evidence developed to date supports their positions that they acted properly at all times and that the action is without merit.”

In the agreement ordering Vanguard to pay $40 million to target-date investors who paid the tens or even hundreds of thousands of dollars in taxes three years ago, the plaintiffs agreed to take roughly 15% of the “best-case scenario” payment of $259.5 million in damages, according to their filing for approval of the settlement. The settlement agreement limited attorney fees to no more than one-third of the award and capped litigation expenses at $985,000. If the settlement gets preliminary approval, the plaintiffs would then reach out to potential class members for their reaction before seeking the final green light on the agreement.

The cash settlement “provides an immediate recovery to impacted Vanguard [target-date fund] investors and avoids the considerable risks of continued litigation in this complex class action,” the filing stated. “Plaintiffs and class counsel believe that the case has merit, but they recognize the significant risk and expense that would be necessary to prosecute Plaintiffs’ claims successfully through class certification, continued fact and expert discovery, summary judgment, trial and subsequent appeals, as well as the inherent difficulties and delays complex class action litigation like this entails. As previewed in the parties’ class certification briefing, which focused almost exclusively on damages model issues, proving damages would be risky, complicated, and uncertain, involving conflicting expert testimony.”

READ MORE: Vanguard to pay some — not all — of tax bills created for TDF investors

Besides the substantial payout, the case helped remind financial advisors and their clients of the potential risks involved with holding mutual funds in taxable accounts, Sotiroff said. ETFs or separately-managed accounts could help avoid the tax surprises in non-retirement holdings, even though target-date funds may not be as readily available in that form.

“If you’re going to hold a mutual fund, you have to expect that you’re probably going to get some capital gains distributions from it,” Sotiroff said. “You’re always potentially on the hook for a capital gains distribution.”