Examples of Abusive Tax Schemes - Fiscal Year 2014
The following examples of abusive tax schemes are written from public record documents on file in the courts within the judicial district where the cases were prosecuted.
Foreign Exchange Currency Trading Company Executive Sentenced
On Sept. 16, 2014, in Boston, Massachusetts, Craig Karlis was sentenced to 108 months in prison, three years of supervised release, and ordered to pay $4,835,744 in restitution. Karlis pleaded guilty to nine counts of wire fraud and two counts of tax-related crimes. Karlis’ business partner, Ahmet Devrim Akyil, was also charged, but remains a fugitive and is believed to be in his native Turkey. According to court documents, Karlis and Akyil founded Boston Trading and Research (BTR) and recruited approximately 1,200 customers to open accounts so that Akyil could trade the customers’ money in the foreign currency exchange (FOREX) market. Karlis and Akyil told customers that BTR was compensated based on a percentage of trading profits and that, through BTR’s computerized customer trading platform and daily e-mailed account statements, customers would see every trade that was placed using their money. Karlis and Akyil used millions of dollars from BTR customer accounts to pay BTR’s business expenses and to pay for their own personal expenses, such as houses, cars, and jewelry. Karlis and Akyil concealed this misappropriation from BTR's customers on the computerized customer platform and account statements. Karlis also filed a false tax document with the IRS in which he concealed the fact that he owned a second home that he had purchased with more than $600,000 in BTR customer money and then filed a false 2008 tax return.
Dentist Sentenced for Obstruction and Interfering with IRS
On Sept. 8, 2014, in Denver, Colorado, Jerold R. Sorensen, of Fresno, California, was sentenced to 18 months in prison, one year supervised release and ordered to pay a fine of $100,000 for obstructing and impeding the Internal Revenue Service. Sorensen was convicted by a jury on June 16, 2014. According to court documents, Sorensen practiced dentistry and oral surgery. Beginning in September of 2000 and continuing through May of 2008, Sorensen obstructed and impeded the administration of the Internal Revenue laws by working with an entity known as Financial Fortress Associates, (FFA), an organization that promoted and advised its clients on schemes to avoid the payment of income and other federal taxes. Furthermore, Sorensen took additional steps to substantially under-report his income to the IRS for calendar years 2002 through 2007. These steps included filing individual federal income tax returns which failed to report as income millions of dollars deposited into the bank accounts he controlled and which he used for personal expenses. Eva Melissa Sugar, a Denver attorney who helped facilitate the FFA scheme, pleaded guilty to conspiracy to defraud the United States in connection with the collection for taxes and her sentencing has been scheduled for a later date.
Israel Bank Client Sentenced for Filing False Tax Return
On Aug. 4, 2014, in Los Angeles, California, Monajem Hakimijoo, aka Manny Hakimi, a U.S. citizen, was sentenced to six months in prison and one year of home confinement for filing a false federal income tax return for tax year 2007. According to court documents, Hakimijoo and his brother maintained an undeclared bank account at Mizrahi Bank in Israel in the name of Kalamar Enterprises, a Turks and Caicos entity that was used to conceal their ownership of the account. Hakimijoo and his brother used the funds in the Kalamar account as collateral for back-to-back loans obtained from the Los Angeles branch of Mizrahi Bank. Although Hakimijoo and his brother claimed the interest paid on the back-to-back loans as a business deduction for federal tax purposes, they failed to report the interest income earned in their undeclared account in Israel as income on their tax returns. In total, Hakimijoo failed to report interest income of approximately $282,000. Hakimijoo has agreed to pay a civil penalty to the IRS in the amount of 50 percent of the highest balance of his one-half interest in the Kalamar account. The highest balance in the Kalamar Enterprises account was approximately $4.03 million. Hakimijoo is also ordered to pay a $30,000 fine.
Former Jenkens & Gilchrist Attorney Sentenced For Orchestrating Multibillion-Dollar Criminal Tax Fraud Scheme
On June 25, 2014, in Manhattan, New York, Paul M. Daugerdas, of Wilmette, Illinois, was sentenced to 180 months in prison, ordered to pay restitution to the IRS of $371,006,397 and ordered to forfeit $164,737,500 in proceeds of the offenses. Daugerdas was convicted in October 2013 of conspiring to defraud the IRS, to evade taxes, commit mail and wire fraud, and corruptly endeavoring to obstruct and impede the internal revenue laws. He was also convicted of four counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. According to court documents, Daugerdas, a tax attorney and certified public accountant, orchestrated a massive fraudulent tax shelter scheme in which he and his co-conspirators designed, marketed, and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the IRS. Daugerdas hatched the scheme while working at the Arthur Andersen accounting firm and then continued it while a partner at two law firms, Altheimer & Gray and then Jenkens & Gilchrist (J&G). The 20-year scheme generated over $7 billion of fraudulent tax losses and yielded approximately $95 million in fees to Daugerdas personally. In connection with this same scheme, David Parse, a former broker at Deutsche Bank, was sentenced in March 2013 to 46 months in prison. Donna Guerin, a former lawyer at J&G’s Chicago tax practice, was sentenced in March 2013 to eight years in prison. Former J&G partner Erwin Mayer, former BDO Seidman Vice Chairman and board member Charles W. Bee, Jr., former BDO principal and former member of BDO Seidman’s TSG and Tax Opinion Committee Michael Kerekes, former BDO Seidman Vice Chairman and TSG member Adrian Dicker, BDO Seidman partner Robert Greisman, and BDO Seidman partner Mark Bloom have all previously been convicted in connection with the scheme.
Accountant Sentenced on Tax Charges
On May 29, 2014, in Honolulu, Hawaii, Dennis Duban, a Los Angeles-based accountant and tax return preparer, was sentenced to 24 months in prison and ordered to pay a $30,000 fine. Duban pleaded guilty in October 2012 to conspiring to defraud the IRS and assisting in the filing of a false federal income tax return. According to court documents, Duban was a Certified Public Accountant in Los Angeles, California. He provided accounting and tax planning services to Hawaii residents Charles Alan Pflueger, James Pflueger, and some of the Hawaii-based entities they controlled, including Pflueger, Inc. and Pflueger Properties. Beginning as early as 2003, Duban knew that personal expenses of Charles Alan Pflueger were being paid for by Pflueger, Inc. and illegally deducted on corporate income tax returns as business expenses. Duban also knew that some personal expenses of another co-defendant were being paid for and illegally deducted by Pflueger, Inc. In preparing tax returns for Charles Alan Pflueger and another co-defendant from at least 2003 to 2006, Duban did not include as additional items of income all personal expenses of which he was aware were paid for by Pflueger, Inc. and constituted income to the taxpayers. In connection with the 2007 sale of Hacienda, a San Diego, California investment property owned by Pflueger Properties, Duban agreed with another co-defendant to file a false Pflueger Properties 2007 partnership income tax return and false individual income tax return which falsely reported the gain on the sale of the property, which sold for $27,500,000. Prior to the sale of the Hacienda property, Duban and others assisted the same co-defendant in creating a nominee Cook Islands trust and opening a bank account at Wegelin Bank in Switzerland. Proceeds of the Hacienda sale, over $14 million, were sent to the Wegelin account. Duban and a New York-based firm served as investment managers for the account. Duban and the co-defendant did not timely report the co-defendant’s beneficial interest in the Swiss account on Schedule B of the individual income tax return or by filing a Report of Foreign Bank Account (FBAR). In addition, for at least 2006 and 2007, Duban failed to report his interest in at least one New Zealand account on Schedule B of his individual income tax returns or by filing an FBAR.
Florida Doctor Sentenced for Federal Tax Crimes
On May 9, 2014, in Fort Myers, Florida, Dr. Patricia Lynn Hough, of Englewood, was sentenced to 24 months in prison, three years of supervised release and ordered to pay $15,518,382 in restitution and $42,732 for the costs of prosecution. Hough was convicted by a jury on Oct. 24, 2013 for conspiring to defraud the IRS by concealing millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks, and filing false individual income tax returns which failed to report the existence of those foreign accounts or the income earned in those accounts. Hough conspired to defraud the IRS with her husband, Dr. David Fredrick, who is awaiting trial. According to court documents and court proceedings, Hough owned two Caribbean-based medical schools, Saba University School of Medicine located in Saba, Netherlands Antilles, and Medical University of the Americas located in Nevis, West Indies. Hough and Fredrick carried out the conspiracy by creating and using nominee entities, including a foundation, and by using undeclared accounts in their names and the names of nominee entities at UBS and other foreign banks to conceal assets and income from the IRS. Both schools and the associated real estate were sold on April 3, 2007, for more than $35 million, all of which was deposited into undeclared accounts in the names of the nominee entities. The majority of the proceeds from the sale were not reported to the IRS on their tax returns and no tax was paid. In total, between 2003 and 2008, Hough and Fredrick failed to pay more than $15 million in taxes. The evidence at trial further proved that Hough and Fredrick used emails, telephone calls and in-person meetings to instruct Swiss bankers and asset managers to make investments and transfer funds from their undeclared accounts at UBS. Hough and Fredrick caused funds from the undeclared accounts in the names of the medical schools to be transferred to undeclared accounts in their individual names or in the names of nominee entities. Hough and her husband then used the funds in their undeclared accounts to purchase an airplane, two homes in North Carolina and a condominium in Sarasota, Florida. Hough was also convicted of three counts of filing false tax returns for 2005, 2007 and 2008. She filed false tax returns that substantially understated her total income because she failed to report substantial interest and investment income and because she failed to report her half of the proceeds from the sale of the medical schools in 2007. In addition, Hough failed to report that she had an interest in, or signature or other authority over, bank, securities or other financial accounts located in foreign countries.
Wyoming Businessman Sentenced for Concealing Income in Caribbean Bank Account
On May 7, 2014, in Cheyenne, Wyoming, Robert C. Sathre was sentenced to 36 months in prison, three years of supervised release and ordered to pay $3,113,882 in restitution to the IRS. Sathre pleaded guilty on Feb. 26, 2014, to willfully evading the payment of his 1995 and 1996 tax liability. According to court documents, Sathre sold a Minnesota business and received installment payments in 1995 and 1996 of more than $3 million. Sathre concealed his income by filing a 1995 tax return in which he reported only $64,928 in total income. In addition, Sathre concealed assets by opening a foreign bank account in the Caribbean island of Nevis and by using purported trusts. In a 10-month period spanning from 2005 through 2006, Sathre sent over $500,000 to the account in Nevis to keep the funds out of reach from the IRS. When Sathre sold another business in 2007, he wired over $1,250,000 from the sale proceeds to the trust account of a Wyoming law firm. He later directed the law firm to wire $900,000 from the trust account to his account at the Bank of Nevis. Sathre also provided a false declaration and false promissory note to the Bank of Nevis to conceal the source of this transfer and obtained a debit card linked to the foreign account to access funds locally. In addition, Sathre provided the Bank of Sheridan with an IRS form on which he falsely claimed that he was neither a citizen nor a resident of the United States.
Colorado Man Sentenced for Tax Evasion and Other Federal Charges
On March 6, 2014, in Denver, Colo., Michael Destry Williams, of Pueblo, Colo., was sentenced to 71 months in prison, five years of supervised release and ordered to pay $60,597 in restitution to the IRS. Williams was convicted by a jury on Nov. 5, 2013 for tax evasion, currency structuring, bank fraud and interfering with the IRS’s administration of the Internal Revenue laws. According to court documents and evidence presented at trial, Williams was self-employed as a general contractor focusing primarily on residential construction projects, including roofing, remodeling and the repair and restoration of residential structures sustaining fire and water related damage. He was also self-employed as a real estate investor involved in the purchase, renovation and resale of residential properties. Williams operated under the name of Greenview Construction, Inc., a Colorado corporation. From April 2005 and continuing through January 2008, Williams willfully attempted to evade a substantial amount of income tax and self-employment tax for calendar years 2005, 2006 and 2007. To conceal his income, Williams established and used trusts as part of his tax evasion scheme and structured over $90,000 in deposited funds from July 2008 through September 2008. In November 2009, Williams attempted to defraud a Colorado financial institution by depositing worthless fabricated United States Treasury checks for his own benefit. There were two false treasury checks totaling $55,000 payable to Greenview Construction. From October 2008 through December 2010, Williams mailed numerous frivolous correspondences to the Secretary of the Treasury, as well as various IRS offices, in an attempt to obstruct and impede the administration of the internal revenue laws.
California Man Sentenced for Failure to Report Foreign Bank Account
On Feb. 26, 2014, in San Jose, Calif., Christopher B. Berg of Portola Valley, Calif., was sentenced to 12 months and one day in prison and three years of supervised release. Prior to sentencing, Berg paid more than $250,000 in restitution to the IRS, as well as a penalty of $287,896 for failure to properly report his foreign account. Berg pleaded guilty to willfully failing to file the required report of foreign bank account for an account he controlled in 2005 at UBS in Switzerland. According to court documents, in 2000, Berg set up a bank account at UBS in Switzerland to shelter a portion of his consulting income from taxation. Beginning in 2001 and continuing through 2005, Berg used wire transfers to deposit $642,070 in earned income into UBS accounts. Berg used money in these Swiss UBS accounts to purchase a vehicle, to obtain cash while in Europe and to pay the balance on a Eurocard he used while traveling in Europe. Berg did not disclose the existence of his accounts at UBS to his certified public accountant, and also failed to disclose the income earned by these accounts or the consulting income deposited to the accounts.
New Mexico Man Sentenced on Tax Charges
On Feb. 7, 2014, in Albuquerque, N.M., Bill Melot, a farmer from Hobbs, N.M., was sentenced to 168 months in prison, three years of supervised release and ordered to pay $18,469,998 in restitution to the IRS and $226,526 to the United States Department of Agriculture (USDA). Melot was previously convicted of tax evasion, failure to file tax returns, making false statements to the USDA and impeding the IRS. According to court documents and evidence presented at trial and at sentencing, Melot has not filed a personal income tax return since 1986, and owes the IRS more than $25 million in federal taxes and more than $7 million in taxes to the state of Texas. In addition, Melot has improperly collected more than $225,000 in federal farm subsidies from the USDA by furnishing false information to the agency. Specifically, Melot provided the USDA with a false Social Security number (SSN) and a fictitious employer identification number (EIN) to collect federal farm aid. Melot took numerous steps to conceal his ownership of 250 acres in Lea County, N.M., including notarizing forged deeds and titling the property in the name of nominees. Additionally, Melot used false SSNs and fictitious EINs to hide his assets from the IRS. He also maintained a bank account with a Swiss financial institution which he set up in Nassau, Bahamas, in 1992, and failed to report the account to the United States Treasury Department as required by law.
St. Thomas Man Sentenced for Tax Fraud Conspiracy
On Feb. 2, 2014 in St. Thomas, U.S. Virgin Islands, David Haddow was sentenced to 36 months in prison, three years of supervised release and ordered to pay $821,094 in restitution to the Virgin Islands Bureau of Internal Revenue and restitution of $1,104,741 to the IRS. Haddow was sentenced for conspiracy to defraud the United States in the collection of taxes and conspiracy to evade and defeat tax due and owing the Virgin Islands. According to the evidence presented at court, Haddow and co-conspirator, Hansel Bailey, incorporated a business in St. Thomas called Compass Diversified in 2004. In 2005, that company was granted Economic Development Commission tax benefits. Bailey and another co-conspirator marketed a tax-savings scheme that would allow clients of Compass Diversified to claim bogus business deductions on their income tax returns by making payments to Compass, allegedly for management or consulting services. According to the evidence, in the first step, Compass clients made payments to Compass or wired money directly into Compass’ bank account. In step two, Haddow, at the direction of Bailey, transferred by check a substantial portion of that money into the personal bank account of a Compass employee, a native of the Virgin Islands whom Bailey and Haddow convinced to open a personal bank account for the sole purpose of sending tax-free gifts back to Compass clients. Finally, a substantial portion of the original payment was returned by check or wire transfer back to the Compass clients. Compass Diversified never offered consulting or management services to any of their clients even though the clients were encouraged to claim deductions on their tax returns. Bailey was sentenced on Jan. 9, 2014, to 60 months in prison and ordered to pay the same amounts in restitution to the IRS and the Virgin Islands Bureau of Internal Revenue. A third co-conspirator, Dwight Padilla, was sentenced to 15 months in prison, three years of supervised release, and ordered to pay $1,296,941 in restitution to the IRS.
Former Tennessee Resident Sentenced for Tax Evasion
On January 14, 2014, in Nashville, Tenn., Jimmie Duane Ross, of Lehi, Utah, and formerly of Sevierville, Tenn., was sentenced to 51 months in prison, three years of supervised release and ordered to pay $532,389 in restitution. On August 7, 2013, Ross was convicted of five counts of tax evasion following a jury trial. According to court documents, Ross won a monetary award of approximately $840,000 in 1999 after arbitration of an employment dispute with a former employer. Ross then filed a false mortgage on his residence, a false lien on his vehicle, dealt extensively in cash, and directed funds to an offshore account in order to avoid paying the full amount he owed in income tax for 1999. In addition, from 2004 through 2007, Ross earned commission income for referring clients to what appeared to be an investment company and evaded his taxes by using nominees and other means.
Californian Sentenced for Tax Fraud Conspiracy
On January 9, 2014 in St. Thomas, U.S. Virgin Islands, Hansel Bailey, of Orange County, Calif., was sentenced to 60 months in prison, three years of supervised release and ordered to pay $821,094 in restitution to the Virgin Islands Bureau of Internal Revenue and $1,104,741 to the IRS. According to the evidence presented at court, Bailey and co-conspirator, David Haddow, incorporated a business in St. Thomas called Compass Diversified. In 2005, that company was granted Economic Development Commission tax benefits. Bailey and another co-conspirator marketed a tax-savings scheme that would allow clients of Compass Diversified to claim bogus business deductions on their income tax returns by making payments to Compass, allegedly for management or consulting services. Compass clients made payments to Compass or wired money directly into Compass’ bank account. Then, Haddow, at the direction of Bailey, transferred by check a substantial portion of that money into the personal bank account of a Compass employee, a native of the Virgin Islands whom Bailey and Haddow convinced to open a personal bank account for the sole purpose of sending tax-free gifts back to Compass clients. Finally, a substantial portion of the original payment was returned by check or wire transfer back to the Compass clients. Compass Diversified never offered consulting or management services to any of their clients even though the clients were encouraged to claim deductions on their tax returns. The jury also convicted Haddow of conspiracy to defraud the United States in the collection of taxes and conspiracy to evade and defeat tax due and owing the Virgin Islands. Haddow’s sentencing has been continued without a date. A second co-conspirator, Dwight Padilla, was sentenced to 15 months in prison and ordered to pay $1,296,941 in restitution to the IRS.
California Businessman Sentenced for Conspiring to Defraud the IRS
On December 5, 2013, in Los Angeles, Calif., Gary Mach, of Palm Desert, Calif., was sentenced to 16 months in prison, two months of house arrest, 18 months of probation and ordered to pay $270,725 in restitution to the IRS. Mach pleaded guilty on August 18, 2013 to conspiracy to defraud the United States. According to court documents, beginning around January 2002 and continuing through December 2010, Mach failed to report substantial income he earned from CSPS, a pool-servicing business operated throughout Riverside County. Mach and others established fictitious trusts which they used to receive income and hold assets in an attempt to conceal the assets and income from the IRS. Mach purported to operate a trust called “Quintessential,” and directed that his paychecks be made payable to Quintessential. He also opened a bank account in the name of Quintessential where he deposited CSPS proceeds. Mach did not report to the IRS any of the income he earned from CSPS between 2002 and 2010. In furtherance of the conspiracy, Mach also attempted to impede an IRS summons issued to a bank for business account records by closing his bank accounts. Mach admitted that his total unreported income for the tax years 2002 through 2010 was $1,410,430.
Real Estate Developer Sentenced for Tax Evasion Scheme
On November 22, 2013, in Seattle, Wash., Winston Bontrager, a real estate developer, and Pauline Anderson were sentenced to prison for tax evasion and false statements related to their scheme to avoid paying taxes on more than $23 million in income. Bontrager was sentenced to 132 months in prison and three years of supervised release. Anderson was sentenced to 39 month in prison. As an Australian citizen, she likely will be deported following her prison term. Bontrager and Anderson were ordered to pay $2,717,510 in restitution. They were convicted following a four-week jury trial in July 2013. Bontrager was convicted of nine tax counts and eight counts of making false statements. Anderson was convicted of eleven tax counts. According to court documents, from 2004 through 2009, Bontrager and Anderson filed false tax returns failing to report more than $23 million in income and failing to pay more than $2.7 million in taxes. Over $10 million was moved into foreign bank accounts in Anderson’s name, and virtually all of the couples’ assets were put in Anderson’s name in order to hide it from the IRS and those seeking to enforce Bontrager’s restitution obligation and collect delinquent taxes.