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By Mitch Reitman

The IRS publishes successful (for the IRS) prosecutions of fraudulent tax preparers to serve as a warning to both preparers and the people who fall victim to their schemes.

San Antonio: Preparer Telesa Hall has pleaded guilty to aiding and assisting in the preparation of false returns.

Between 2013 and 2017 in San Antonio, Copperas Cove and Killeen, Texas, Hall operated the tax prep business Precision E-file Tax Services. She prepared at least 51 fraudulent returns that sought to inflate refunds for her clients. Among other things, Hall falsely claimed substantial business losses on some of the returns. She faces a maximum of three years in prison as well as a period of supervised release, restitution and monetary penalties.

This type of tax fraud is typically accomplished by the filing of an amended tax return.  The IRS allows tax payers to file amended tax returns until three years subsequent to the original, un-extended, due date in most cases.  The typically happens because of a change in the Tax Code or to correct an error on the return.  Although most amended tax returns are to make legitimate corrections, some unsavory tax preparers consider it a way to make a quick buck.  They prepare the original return for the client, then amend the return to show less income, and less tax, and pocked the resulting refund.  While this can result in criminal charges for the preparer, it can also result in a major headache for the taxpayer. 

The best way to prevent this type of fraud is to select a reputable tax professional that you know and trust. 

The next case is a classic example of abuse of the system, and the IRS like to make an example out of this type of incident.  Attorney Francis J. O’Reilly, of Danbury, Connecticut, has been sentenced to 18 months in prison for tax evasion and failing to pay over payroll taxes for the tax year 2015, part of a long-running tax fraud that cost the U.S. Treasury more than $800,000, including penalties and interests.

For over two decades, O’Reilly had been a self-employed attorney whose practice specialized in, among other things, bankruptcy, foreclosure defense and criminal defense. He operated his practice as a sole proprietorship and was responsible for collecting and paying over federal payroll taxes for his employees.  Between 1997 and 2018, O’Reilly failed to pay over some $155,771 in payroll taxes, resulting in a liability of approximately $232,283 after interest and penalties.  This may sound like a massive fraud, but it happened over a twelve-year period, and only averaged a little more than $1,000 a month and was most probably the payroll tax for an individual employee.  Also of note is that the penalties and interest were an additional 50% of the amount in question making this a very expensive way to borrow money.  The fact that Mr. O’Reilly was an attorney, and should have known better, most probably didn’t set very well with the IRS. 

We have represented business owners who were similarly situated and were able to negotiate a payment plan that allowed them to continue in business, repay the debt, and, most importantly mitigate their situation.  I have worked with Revenue Officers for nearly forty years and they are pragmatic people.  While their main goal is to collect unpaid taxes, they are also charged with ensuring future compliance.  Taxpayers who express a sincere desire to get with the program, and “walk the walk” so to speak, don’t suffer as much as those who insist on fighting.  This is where Mr. O’Reilly really screwed up.

Taxpayers who take unreasonable positions in dealing with the IRS, often are subjected to additional scrutiny.  It appears that the IRS performed an audit or Mr. O’Reilly’s business and personal returns and found that between 2013 and 2017 he withdrew some $481,673 in untaxed funds from his attorney trust account for personal use, none of which he reported on his returns for those years.  Failure to report income is a close second to failure to remit payroll taxes when it comes to actions that draw the ire of the IRS.  Case law is full of litigation over the deductibility of expenses, and, while, they may be denied, or considered unreasonable, there isn’t much to fight over when it comes to unreported revenue.  This type of fraud is easy to detect and quantify in an audit, and, the fact that the taxpayer attempted to conceal his actions, escalated the seriousness of his case and most certainly put him on the radar of the IRS Criminal Investigation Division.

To make matters worse O’Reilly failed to pay even those taxes that he did report, accruing large unpaid liabilities. In total, during the tax years 2007 through 2018, he evaded some $566,027 in personal federal income taxes, including interest and penalties.

Just when you would think that Mr. O’Reilly’s situation was as bleak as it could me, he managed to make things even worse.  In or about late 2016, he submitted an Offer In Compromise (OIC) to the IRS proposing to settle at least some $691,561 in outstanding tax liabilities for merely $12,400. In the OIC, O’Reilly made several material misstatements and omissions regarding his income and assets, failing to disclose the existence of his attorney trust account, real property and land that he owned in New Mexico, and a 2010 vehicle that he’d recently purchased for about $16,000.  If he had any chance of avoiding criminal prosecution, abusing the OIC process was a major strike against him.  In all, O’Reilly caused the IRS to incur losses of over $800,000, including penalties and interest.  O’Reilly was also ordered to serve two years of supervised release and to pay $801,969 in restitution to the IRS.  Although he avoided prison, his career was over, and he had to pay restitution and penalties of more than $800,000. 

Although Mr. O’Reilly was his own worst enemy, I have seen taxpayers fall victims to unscrupulous “tax consultants” who engineer schemes similar to these.  Many times a taxpayer falls victim to fast talking con artists who induce them into ridiculous Offer In Compromise schemes, or convince them that moving income into offshore bank accounts will allow them to avoid taxation.  These schemes always end badly.  At a minimum they result in the taxpayer paying the entire amount of the taxes, plus penalties and interest, in the more egregious cases, taxpayers, can find themselves subject to asset forfeiture and criminal prosecution.  The best advice is to work with reputable tax professionals who can help you work out honest, reasonable, resolutions.  Don’t fall for the “I settled my $2 million tax debt for $2,000” ads on late night TV. 

Mitch Reitman is the Managing Principal of Reitman Consulting Group, Inc. He is a member of the TBFAA Board of Directors and can be reached at 817-698-9999