United States v. Sergio Gardea - 05/10/2018

Tax preparer found not guilty on all 30 counts of preparing false tax returns following a 2 week jury trial today. Mr Gardea was represented by Miami criminal tax lawyer David M. Garvin.

Frivolous 1099 O.I.D. Deductions Lead to Conviction U.S. v. Jones, LEXIS 73987 (D. Idaho 2011)

U.S. v. Jones,  LEXIS 73987  (D. Idaho  2011)

The United States filed a complaint against the Defendant, Penny Lea Jones. The United States alleged Ms. Jones ran a fraudulent tax return preparation business in Shelley, Idaho. The government, under 26 U.S.C. §§ 7402(a), 7407, and 7408, sought a permanent injunction and other equitable relief to prohibit Ms. Jones from continuing her fraudulent tax return scheme.  Jurisdiction was proper under 28 U.S.C. §§ 1340 and 1345 as well as 26 U.S.C.§§ 7402(a), 7407, 7408.

The Court found that because Ms. Jones took frivolous positions on the tax returns she prepared the United States argued an injunction under § 7407 and § 7408 is warranted.

Section 7407(a) provides courts with the power to enjoin federal tax return  preparers who engage in conduct described in § 7407(b). 26 U.S.C. § 7407(a). Thus, the United States had to show that Ms. Jones was a tax preparer and her conduct was such that it was within those identified in §7407(b)(1)(A)-(D). Stated differently, in order to obtain a permanent injunction against Ms. Jones pursuant to §7407, the United States was required to establish that she 1) engaged in conduct subject to penalty under § 6694, §6695, or engaged in "any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws"; 2)"injunctive relief is appropriate to prevent the recurrence of such conduct"; and 3) she "continually or repeatedly engaged" in the proscribed conduct such that a more limited injunction prohibiting the misconduct would not be sufficient to prevent such person's interference with the proper administration of this title.
     
The United States asserted that Ms. Jones prepared "frivolous tax returns claiming large, but fraudulent, tax refunds based on an absurd tax-fraud scheme, wherein she submits phony IRS forms to the IRS."  This scheme involved Ms. Jones submitting phony IRS Forms 1009-OID which purport to have been issued to or received by the taxpayer from a creditor of the taxpayer that withholds nearly all of the interest income reported on the returns in the amount of the debt usually a mortgage, car loan, or credit card balance owed by the taxpayer to the creditor.  The alleged creditors on the forms are usually a credit card or mortgage company.

The district court in McIntyre recently described a similar scheme as follows: IRS Forms 1099-OID are used by issuers of financial instruments generating original issue discount ("OID") to report OID income and any federal income tax withheld from that income. OID income refers to the difference between the discounted price at which a debt instrument is sold at issuance and the stated redemption price at maturity; it is taxable as interest over the life of the obligation. IRS Forms Schedule B are used to report interest and dividend income, and are attached to IRS Forms 1040. The fraudulent Forms 1099-OID that Defendants prepare and submit with returns they prepare falsely state that their customers are "payees" who receive OID income from their creditors. The fraudulent Forms 1099-OID typically show false income paid by a customer's creditors to the customer. Some of these forms even show the customer paying OID income to himself.

       The United States contended that Ms. Jones had repeatedly prepared and filed preposterous federal income tax returns reporting false income tax withholding and false interest income, and then requested fraudulent refunds on behalf of her customers.  Ms. Jones had, the United States argued, prepared at least 437 tax returns claiming more than $168 million in fraudulent refunds by understating the claimants' tax liabilities through unreasonable and frivolous positions, preparing "phony" documentation, and claiming "bogus" withholdings.

The Court agreed with the IRS and issued the requested injunction.

Tax Fraud Report
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