Seeking Shelter

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Just as a properly built shelter provides a place of rest and relief from outdoor elements, a tax shelter can provide relief from the amount of income tax owed. (Who wouldn’t like to be relieved of owing money to Uncle Sam?) An article published in The Orange County Register tells about how the CEO and President of a tax preparation business illegally used tax shelters to steal approximately $1.6 million from the Internal Revenue Service (IRS).

There are a variety of tax shelters available to taxpayers. (Some of the most common are individual retirement plans including IRAs and 401(k)s.) The tax shelter most commonly pedaled by the man in this case required clients to purchase equity interest in limited liability corporations (LLCs) with the condition that the LLC could repurchase the interest for substantially less than the price paid within two years. (Typically, this would amount to about $1.) The ruse was then carried out when the tax preparer included his clients’ false losses from the LLCs on their income tax returns, drastically lowering the amount of federal taxes due.

The 62-year-old man filed at least 125 bogus federal income tax returns over a period of three-and-a-half years, causing losses of about $1.6 million to the IRS. He is facing up to nine years in prison and a $750,000 fine. He may also be required to pay more than $1.6 million in restitution. According to his plea deal, he is barred for life from preparing federal tax returns with the exception of the ones for himself and his spouse. (That is definitely an appropriate punishment.)

That’s not the end of the story – there’s more. This offense happened to be the tax preparer’s second run-in with the law. He previously served a two-year prison sentence and paid $500,000 in restitution for defrauding investors of nearly $2 million through false securities. Five years later, while residing at a halfway house for his crime, he pleaded guilty to making false statements to the federal government. (He prepared false W-2’s that enabled him to collect nearly $300,000 in federal tax returns.)

Obviously, tax shelters should be used to lower taxes, not evade them. In this case, the fraudster offered a tax shelter with the sole purpose of lowering his client’s taxes without providing any other economic benefit. (This should be a red flag to anyone considering a tax shelter.) The transactions also involved below fair market value prices for the equity interest scam. The clients should have questioned the validity of the offer before agreeing to participate. (Ironically, this man sought shelter from the government and he may end up getting it, however; it will most likely be in the form of a jail cell.)

Source: Today’s ”Fraud of the Day” is based on an article titled, ”Laguna Hills Man Pleads Guilty to Tax Fraud,” written by Matt Lemas and published by The Orange County Register on June 8, 2015.

A Laguna Hills man pleaded guilty Monday to filing false tax returns in a 3 1/2-year scheme busted by the Internal Revenue Service.

From about May 2010 to October 2013, Randall Craig Hutchens, 62, prepared and filed at least 125 false federal income tax returns, with losses to the tune of at least $1.6 million, according to the IRS.

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Larry Benson, Senior Director of Strategic Alliances, LexisNexis Risk Solutions - Government

Larry Benson is responsible for developing strategic partnerships and solutions for the government vertical. His expertise focuses on how government programs are defrauded by criminal groups, and the approaches necessary to prevent them from succeeding.

Mr. Benson has 30 years of experience in sales and business development. Before joining LexisNexis® Risk Solutions, he spent 12 years founding and managing two software technology startups. During the 1990s he spent 10 years as a Regional Director helping to grow a New England-based technology company from 300 employees to 7,000. He started his career with Martin Marietta Aerospace working on laser guided weapons and day/night vision systems.

A sought-after speaker and accomplished writer, Mr. Benson is the principal author of “Fraud of the Day,” a website dedicated to educating government officials about how criminals are defrauding government programs. He has co-authored WTF? Where’s the Fraud? How to Unmask and Stop Identity Fraud’s Drain on Our Government, and Data Personified, How Fraud is Changing the Meaning of Identity.

Benson holds a Bachelor of Science in Physics from Albright College, and earned two graduate degrees – a Master of Business Administration from Florida Institute of Technology, and a Master of Science in Engineering from Lehigh University.