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.
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