Accounting
Tax Fraud Blotter: Hairy situations
Find the subcontractor; think ‘Vandelay Industries’; seen the light; and other highlights of recent tax cases.
Orlando, Florida: Eduardo Anibal Escobar, Carlos Alberto Rodriguez and Adelmy Tejada, all of Orlando, were sentenced for conspiracy to commit wire fraud and conspiracy to commit tax fraud.
Escobar was sentenced to four years and nine months in prison, Rodriguez to 40 months and Tejada to 18 months in prison plus six months of home detention. Each pleaded guilty on April 3. The court ordered the defendants to pay $36,957,616 in restitution to the IRS for unpaid payroll taxes and a total of $397,895 in restitution to two insurance companies for workers’ comp claims they paid out.
Escobar and Rodriguez are legal permanent residents from El Salvador. Tejada is a naturalized U.S. citizen from El Salvador.
From around January 2015 through August 2024, the defendants conspired to facilitate the payment of construction workers off the books to avoid payroll taxes and workers’ comp premiums. The scheme also facilitated the employment of undocumented workers who were not legally authorized to work in the country.
The defendants, through their companies T. Escobar Construction and C. Escobar Construction, entered into agreements with hundreds of construction subcontractors to enable the latter to obtain contracts with contractors. For some 7% of the subcontractors’ payroll, the defendants caused certificates of insurance in the name of the defendants’ companies to be sent to construction contractors from which the subcontractors wished to obtain work, representing that the subcontractors worked for their companies and were covered by the companies’ workers’ comp.
In fact, the companies’ insurance policies were based on applications representing that the policies would cover a handful of employees and a minimal payroll. As a result of the defendants’ using their certificate of insurance to represent that the subcontractors worked for their companies, the insurers unwittingly covered hundreds of workers.
A total of $146,077,535 in payroll checks were deposited into the accounts of the defendants’ companies, from which they withdrew cash for the subcontractors’ workers, after subtracting their fee, without withholding, or paying over, payroll taxes to the IRS. The U.S. Treasury lost $36,957,616.
The defendants’ scheme allowed the construction contractors and subcontractors to disclaim responsibility for paying payroll taxes to the IRS, for ensuring that adequate workers’ compensation insurance was obtained and for verifying that the workers were legally authorized to work in the U.S.
Marietta, Georgia: Carl Delano Torjagbo, a.k.a. Karl Lucius Delano, has been convicted of bank fraud, wire fraud and money laundering after obtaining a fraudulent $9.6 million Paycheck Protection Program loan and filing fraudulent returns that generated a $3.4 million federal refund.
On Feb. 13, 2021, Torjagbo submitted two individual returns to the IRS. Each return was submitted using a different Social Security number and date of birth. The returns falsely alleged that Torjagbo had millions in losses that offset earnings from his purported African gold mining operations, Kremkov Industries. The false representations resulted in a U.S. Treasury check to Torjagbo for $3,366,240.76.
On Feb. 16, 2021, Torjagbo signed a PPP loan application requesting a $9,554,425 PPP loan for Kremkov Industries. He falsely certified that Kremkov Industries was in operation on Feb. 15, 2020, which was required for a company to be eligible for a loan; that he had 493 employees whose principal places of residence were in the U.S.; and that the company had an average monthly payroll of nearly $4 million. Torjagbo falsely certified that all loan proceeds would be used only for business-related purposes and submitted fraudulent documents to the bank, including false returns and fake payroll reports that listed nearly a dozen celebrities and fictional characters as purported employees of Kremkov Industries.
On March 29, 2021, Torjagbo received some $9.6 million in PPP money. He commingled it with the fraudulently obtained $3.4 million refund and paid personal debts and expenses, including on his home, luxury vehicles, a yacht, and real estate and equipment for a new business.
He faces a maximum of 170 years in prison, followed by five years of supervised release. Sentencing is Nov. 3.
Jacksonville, Florida: Survalarie Harris has pleaded guilty to aiding and assisting in the filing of a false return.
Harris worked as a tax return preparer in Jacksonville. While preparing returns for others, she reported false information including false claims of having a business to decrease clients’ federal taxes and inflate refunds. IRS agents determined that Harris falsified returns in a similar manner multiple times by creating business expenses. Despite a lack of documentation from taxpayers, Harris included these fictitious expenses on the returns, indicating a net loss for a non-existent business, thus lowering taxpayers’ adjusted gross income and fascinating application for an Earned Income Tax Credit.
In March 2022, Harris prepared a 2021 return for an undercover IRS agent who posed as a customer. Harris told the agent that she would owe money on her return and asked if the agent did any work on the side, to which the agent said she sometimes braided hair. Harris told the agent that she could help her receive a refund for an additional fee. Moments later, Harris told the undercover agent that she was receiving a refund of $2,950, minus the fee. However, Harris did not ask for, nor did the agent provide, documentation or information associated with business losses or income.
Agents learned that Harris had been preparing falsified returns for taxpayers since at least 2018, estimating that she’d prepared more than 900 falsified returns between 2020 and 2022 tax year. Harris has agreed that the federal tax loss is at least $1,824,279.
Harris faces a maximum of three years. Sentencing is Dec. 10.
Estes Park, Colorado: Timothy McPhee has pleaded guilty to conspiring to defraud the United States and to tax evasion related to promotion and use of an illegal tax shelter. He also pleaded guilty to wire fraud related to his operation of a fraudulent investment scheme.
From 2018 through 2023, McPhee promoted a shelter to taxpayers across the country. The shelter was made up of a private family foundation and three trusts: a business trust, family trust, and charitable trust. McPhee taught clients who purchased the tax shelter how to use the trusts and foundation to evade paying federal income taxes on nearly all income.
Among other directions, McPhee instructed clients to assign nearly all their business income to the trusts and to falsify returns to make it seem as if that income belonged to the trusts, not the client. He told clients to spend the money in the trust bank accounts on their personal expenses and to fraudulently claim those expenses as deductions on the trust tax returns. As a result, clients who used the shelter paid taxes on only about 2% of their income. But because the clients funded the trusts, controlled the money and benefited from the trust funds, the income funneled to the trusts was taxable to the clients themselves.
McPhee acknowledged that he gave directions to clients that he knew directly contradicted IRS guidance and deliberately ignored warnings from accountants and attorneys that the shelter was illegal. In total, use of the tax shelter caused a loss to the U.S. of about $45 million in unpaid federal income taxes.
McPhee also personally used the shelter to conceal from the IRS more than $5 million in income he earned from 2016 through 2021. In so doing, McPhee did not pay some $1.8 million in federal income taxes he owed in those years.
From January 2023 through May 2024, McPhee also operated and promoted the “ROI Cash Flow Fund” as an opportunity for investors to earn a 3% monthly payout on a principal. He falsely told investors that the ROI Fund would generate monthly returns by sending the investors’ funds to a third-party borrower who would engage in foreign exchange currency trading. In total, based on McPhee’s false representations, investors sent more than $8 million to accounts he controlled and used investor funds to make monthly 3% payouts to investors. He also spent investor funds on his own expenses and investments.
Sentencing is Oct. 23. McPhee faces up to five years in prison for conspiring to defraud the U.S., a maximum of five years for tax evasion and up to 20 years for wire fraud.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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