Table disservice; down on the farm; a barebones job; and other highlights of recent tax cases.

Miami: Tax preparer Juan Mendieta has been sentenced to 57 months in prison after pleading guilty in October to one count of criminal conspiracy and four counts of aiding and assisting the preparation of false returns.

Beginning in 2019 and continuing through at least 2023, Mendieta conspired to prepare fraudulent returns for clients by using false business losses and expenses. These false items resulted in inflated federal refunds.

For multiple clients, he prepared two sets of returns. One set directed certain federal refunds to Mendieta’s clients; Mendieta provided this set to clients and told them he would file these returns with the IRS. Instead, he filed a second set of returns that directed even greater refunds to bank accounts that he and a conspirator controlled.

The IRS has identified at least 29 tax filings that fraudulently inflated refunds, which Mendieta filed on behalf of at least 13 clients. The IRS is entitled to more than $11 million in restitution.

Boston: Restaurateur John Drivas, of Hampton, New Hampshire, has been sentenced to a year and a day in prison, to be followed by a year of supervised release, for defrauding the IRS of federal employment taxes and the Massachusetts Department of Revenue of state meals taxes.

Drivas, who pleaded guilty in September, owned and operated three restaurants in Salem and Peabody, Massachusetts, and in Seabrook, New Hampshire. He was the sole shareholder of the Salem restaurant until he sold it to an employee in 2022, the 100% owner of the Peabody restaurant with his wife and the 52% owner of the Seabrook restaurant with his children.

From at least January 2017 to June 2022, Drivas paid under-the-table wages of $1,496,417 to multiple restaurant employees and did not report those wages to the IRS or pay employment taxes on them, causing more than $439,000 in employment tax losses.

He also collected the state and local meals taxes paid by restaurant customers, which he failed to pay over to the state: In Massachusetts, owners and operators of restaurants and bars are required to collect 6.25% sales taxes on meals. Salem and Peabody also require restaurants and bars to collect an additional 0.75% local option meals excise tax. Although Drivas collected the taxes from restaurant customers, he intentionally withheld $1,596,775 of those taxes from monthly reports and payments owed to Massachusetts.

Drivas was also ordered to pay restitution of $1,596,775 to the state and $439,341 to the IRS, in addition to a $20,000 fine. 

Los Angeles: Area resident Kevin J. Gregory has pleaded guilty to seeking more than $65 million by falsely claiming that his non-existent farming business was entitled to pandemic-related tax credits.

From November 2020 to April 2022, he made false claims to the IRS for the payment of nearly $65.4 million in tax refunds for a purported Beverly Hills-based farming-and-transportation company named Elijah USA Farm Holdings. The IRS issued a portion of the refunds Gregory claimed, and he used that portion — more than $2.7 million — for personal expenses.

Specifically, in January 2022 Gregory made a false claim to the IRS for the payment of a tax refund of $23,877,620, which he submitted as part of Elijah Farm’s quarterly federal return. He claimed that Elijah Farm employed 33 people, paid nearly $1.6 million in quarterly wages, had deposited nearly $18 million in federal taxes and was entitled to nearly $6.5 million in COVID-relief tax credits. In fact, Elijah Farm had no employees and paid wages to no one and had not made federal tax deposits in the amounts stated.

Sentencing is May 16. Gregory, who’s been in federal custody since May 2023, faces up to five years in prison.

Jacksonville, Florida: Jose Molina-Herrera, of Honduras, has been sentenced to 27 months in prison for conspiracy to commit wire fraud and conspiracy to defraud the U.S. for the purpose of impeding the IRS.

Between 2019 and 2020, Molina-Herrera conspired to facilitate payment of construction workers off the books to avoid paying payroll taxes and premiums for workers’ compensation insurance. Construction contractors and subcontractors entered arrangements with the conspirators through which All National Remodeling, a shell company formed by Molina-Herrera, facilitated both the distribution of proof of insurance and the payment of workers with cash.

In exchange for 6% to 8% of the contractors’ and subcontractors’ payroll, Molina-Herrera and others caused the distribution of certificates of liability insurance in the name of All National, which contractors and subcontractors then used as nominal proof that workers were supposedly insured. In reality, All National Remodeling’s insurance policy was issued based on a fraudulent application that never disclosed that contractors and subcontractors would be employing workers who were ostensibly insured under the shell company’s barebones insurance policy. The insurance company was defrauded of more than $2.2 million.

Molina-Herrera and others also facilitated deposit of checks into the shell company’s bank accounts as well as the withdrawal of cash to be paid to workers, all without withholding, or paying over, payroll taxes to the IRS. Through these arrangements with the conspirators, the construction contractors and subcontractors could disclaim responsibility for withholding and paying payroll taxes to the IRS or ensuring that the workers were legally authorized to work in the United States. By facilitating payments to workers of more than $14 million without payroll taxes being withheld, Molina-Herrera and his co-conspirators caused the U.S. Treasury to lose more than $3.5 million in tax receipts.

Molina-Herrera, who pleaded guilty in November, was also ordered to forfeit $867,005, the proceeds of the wire fraud, and was ordered to pay $3,558,579.42 in restitution to the IRS. One co-conspirator, Oscar Molina-Avila, was previously sentenced to 52 months in prison for his role in the scheme.

Agate, Colorado: Businesswoman Shandel Arkadie has pleaded guilty to not paying employment taxes.

Arkadie operated Alternative Choice Home Care Nursing and was responsible for withholding Social Security, Medicare and income taxes from employees’ wages and paying those funds over to the IRS each quarter. She was also responsible for paying over Alternative’s portion of Social Security and Medicare taxes.

Between January 2015 and December 2020, the company withheld more than $1 million from employees’ wages but did not pay the funds over to the IRS or file the quarterly returns. The company also owed some $500,000 in Social Security and Medicare taxes that Arkadie did not pay.

In total, she caused a tax loss to the IRS of some $1.5 million.

Sentencing is May 15. She faces a maximum of five years in prison, a period of supervised release, restitution and monetary penalties. 

Cogan Station, Pennsylvania: Businessman James Michael Barr has been sentenced to time served plus two years of probation, including 10 months of home confinement, for failing to pay employment taxes owed by his construction company.

Barr pleaded guilty in July to failing to account for and pay over employment taxes owed by Barr Construction from 2017 through 2020. In addition to a normal paycheck from which taxes were withheld, Barr also paid his employees in cash and did not withhold federal taxes from the cash payroll or remit taxes to the IRS.

The sentence also imposed a $5,000 fine and required Barr to make $337,000 in restitution to the IRS, plus penalties.

The Internal Revenue Service needs to do more to enable whistleblowers to report on fraud, waste and abuse, even if they’ve signed nondisclosure agreements, which should provide anti-gag provisions allowing them to speak out, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, comes in response to a congressional request to assess whether the IRS complied with the Whistleblower Protection Enhancement Act of 2012 by including the required anti-gag provision in its NDA and related documentation as required by law. It’s unclear whether the congressional request was related to the IRS whistleblowers who complained about preferential treatment of Hunter Biden’s tax evasion case.

The anti-gag provision informs employees that their rights and obligations to report wrongdoing to Congress, the Inspectors General, or the Office of Special Counsel supersedes an NDA, the TIGTA report noted. 

The IRS estimates that approximately 500 to 1,000 of its employees and 6,000 of its contractors sign an NDA each year. “Without anti-gag provisions in the NDAs, employees and contractors might be reluctant or discouraged to report on fraud, waste, and abuse activities, which would cause reputational harm for the agency,” said the report. 

TIGTA found that the IRS has guidance that references whistleblower protections and addresses prohibited practices of retaliation against whistleblowers. However, specific reference to the anti-gag provision was not included in its NDAs, policies or whistleblower protections training. 

In addition, the IRS’s guidance on prohibited personnel practices under the Whistleblower Protection Enhancement Act document states that the NDA policy, form or agreement must include the anti-gag provision before the policy, form or agreement can be enforced. Because NDAs in use by the IRS at the time of TIGTA’s review did not contain anti-gag provisions, they may not be enforceable, according to the report. 

TIGTA reviewed 22 NDAs signed from August 2018 to April 2024 and found that five contained a partial reference to the anti-gag provision, but 17 did not contain any reference to the anti-gag provision. Some of teh existing internal guidance referenced NDAs and whistleblower protections. However, TIGTA did not see evidence of a dedicated NDA policy that required the anti-gag provision be included.  

The NDA and whistleblower guidance were not easily accessible for employees to find on the IRS intranet site. Training for new hires and annual briefings for all employees, managers and contractors mentioned the Whistleblower Protection Act of 1989, and addressed the prohibited practices of retaliating against whistleblowers. Although it was not required, they did not contain the anti-gag provision. As a result of TIGTA’s evaluation, in July 2024, IRS officials updated the NDA form template for contractors with staff-like access and non-procurement employees involved in procurement activities to include the required anti-gag provision. The IRS also updated its Expert Witness NDA form template in October 2024. 

TIGTA made four recommendations in the report. It recommended the IRS should ensure that NDAs, policies, forms and other guidance documents include the required anti-gag provision. It also suggested the IRS should create a dedicated section for NDAs in its internal guidance that contains the anti-gag provision. The IRS should also include information about the anti-gag provision in training programs covering whistleblower protections (such as new employee orientation and contractor training), the report recommended, and add a link to TIGTA’s Whistleblower Protections web page on its internal web page and pertinent information to the Employee Resource page on its internal webpage to ensure employee awareness of the whistleblower protections as it relates to the anti-gag provision. 

IRS officials agreed with TIGTA’s recommendations. During the evaluation, the IRS updated its NDA template for contractors with staff-like access, non-procurement employees involved in procurement activities, and expert witnesses to include the required anti-gag provision. The IRS also developed updates to the fiscal year 2025 mandatory Prohibited Personnel Practices and Whistleblower training, and the updates are under final legal review. 

“We appreciate your recognition of our references to anti-gag provisions in our documentation and training, and we appreciate your identifying areas where we can improve our notification of whistleblower protections and whistleblower rights,” wrote IRS chief risk officer Michael Wetklow in response to the report.

The Internal Revenue Service made progress on its customer service and systems last year, but it’s still facing challenges with processing tax returns on time, according to a new report.

The report, released Thursday by the Government Accountability Office, noted that the IRS set a 13-day processing goal for individual paper returns but instead averaged 20 in 2024. In addition, IRS responses to taxpayer mail continued to be delayed, with 66% of them considered to be late at the end of filing season. The IRS has a web page showing the receipt date of taxpayer mail it is processing, but the page didn’t provide timeframes for when taxpayers should expect a response.

The release of the report comes as the IRS began another tax season on Monday while dealing with a hiring freeze imposed by President Trump in an executive order signed on the day of his inauguration, singling out the IRS for an even longer period when it won’t be able to hire. That move has prompted the IRS to rescind some of its job offers amid uncertainty over the more than $20 billion in budget cuts that Congress recently approved as part of a deal to avoid a government shutdown, on top of an earlier $20 billion in budget cuts.

During the 2024 filing season the IRS processed 98% of the nearly 174 million individual and business tax returns it received, as of April 19, 2024, according to the GAO report. However, the IRS continued to face challenges with timely processing of paper returns. For example, the IRS did not meet its 13-day goal for processing individual paper returns, instead averaging 20 days. In January 2024, the GAO reported that the IRS faced similar challenges processing paper returns during the 2023 filing season and recommended that the IRS determine the cause and address processing shortfalls. The IRS agreed and changed its reporting methodology in June 2024 to account for days in which the IRS is still awaiting taxpayer responses. However, the IRS has not yet documented the cause for the shortfalls.

“The 2024 filing season marked significant achievements by the IRS as we continued to modernize our operations by replacing aged equipment and transitioning our process to a more digitally integrated model,” wrote IRS acting commissioner Douglas O’Donnell in response to the report. 

He was named acting commissioner after Danny Werfel announced he would be resigning on Jan. 20, Inauguration Day. Trump had named a former Missouri congressman, Billy Long, to replace Werfel, even though Werfel’s term wasn’t set to end until November 2027.

“We remain focused on improving service to taxpayers, offering them more in-person and online resources as part of our effort to deliver another successful tax season,” wrote O’Donnell. “Taxpayers and tax professionals saw additional improvements in our operations and service in 2024 that made it easier for them to prepare and file taxes.”