IR-2014-16: IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List
IR-2014-16, Feb. 19, 2014
WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
“Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.
The following are the Dirty Dozen tax scams for 2014:
Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.
The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.
Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.
Pervasive Telephone Scams
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.
These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.
Characteristics of these scams can include:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security Number.
- Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to firstname.lastname@example.org.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.
False Promises of “Free Money” from Inflated Refunds
Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.
Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.
Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.
Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.
The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.
While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.
The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.
Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.
Beware: Intentional mistakes of this kind can result in a $5,000 penalty.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).
The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.
Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.
IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.
At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.
Impersonation of Charitable Organizations
Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
- To help disaster victims, donate to recognized charities.
- Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
- Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
- Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
False Income, Expenses or Exemptions
Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.
Those who promote or adopt frivolous positions risk a variety of penalties. For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.
Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.
Falsely Claiming Zero Wages or Using False Form 1099
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.
What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Form over substance are the most important words to remember before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. The promoters of abusive tax schemes often employ financial instruments in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?
Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.
IR-2013-27: Enrolled Agent Disbarred for Steali ng a Client’s Tax Payments and Preparing Returns with False Deductions
WASHINGTON — The Internal Revenue Service today announced that its Office of Professional Responsibility (OPR) obtained the disbarment of enrolled agent Lorna M. Walker for stealing a client’s tax payments and for preparing tax returns with false deductions for multiple clients.
Walker’s enrolled agent status and her ability to prepare federal tax returns were revoked for at least five years. Walker practiced in the Seattle area.
“Practitioners who disregard their responsibilities to the tax system and their clients can expect to hear from OPR,” said Karen L. Hawkins, director of OPR. “Any tax professional who steals from a client or causes them undue tax problems is unfit to practice before this agency.”
In a Final Agency Decision, the Administrative Law Judge (ALJ) disbarred Walker for misappropriating client payments intended for the IRS in furtherance of an offer in compromise, and for preparing multiple returns containing Schedule C deductions for which she could not produce substantiation on audit.
Walker was engaged to represent a taxpayer in a collection matter. The client gave Walker two money orders totaling $1,500 to forward to the IRS along with an offer in compromise for delinquent taxes. It was found by the ALJ that Walker altered, endorsed and cashed the money orders for her own personal use, which are acts of willful incompetent and disreputable conduct under Circular 230.
The ALJ also found that Walker prepared Forms 1040 for seven clients claiming Schedule C deductions that were unsubstantiated and unsupportable. It was found that Walker failed to exercise due diligence in preparing the Schedule C’s thereby violating multiple due diligence provisions contained in Circular 230.
Walker also failed to respond to the administrative complaint and the motion for default judgment. The ALJ determined that because Walker failed to respond either to the complaint or to the motion for default judgment, she was deemed to admit all the allegations in the complaint, and to not oppose the default motion.
The text of the ALJ Decision can be found on IRS.gov.
Stacie Kitts, CPA
I hate you is harsh, but warranted.
I have no reservation is saying ” I hate you if you are a tax scammer con artist.” You give the tax preparer profession a bad name and I hate you. You put taxpayers in a precarious position and I hate you. You make my job harder and I hate you. You are a disgusting low life taking advantage of low income and elderly taxpayers and I really hate you!!!!
The IRS announced a new series of scams involving tax credits. The scammers promise the taxpayer a large refund and charges a huge amount of money to prepare the return.
After the IRS rejects the taxpayers claim, the taxpayer realizes they are out the preparation fee with no recourse because the tax preparer has disappeared.
WASHINGTON — The Internal Revenue Service encouraged taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.
The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled. Many of these recent scams have been targeted in the South and Midwest.
Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous promoters deceive people into paying for advice on how to file false claims. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS sponsored Volunteer Income Tax Assistance partners. In other situations, identity theft is involved.
Taxpayers should be wary of any of the following:
- Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
- Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
- Unfamiliar for-profit tax services teaming up with local churches.
- Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
- Offers of free money with no documentation required.
- Promises of refunds for “Low Income – No Documents Tax Returns.”
- Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
- Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.
In some cases non-existent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives.
Promoters of these scams often prey upon low income individuals and the elderly.
They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.
Unsuspecting individuals are most likely to get caught up in scams and the IRS is warning all taxpayers, and those that help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.
Anyone with questions about a tax credit or program should visit www.IRS.gov, call the IRS toll-free number at 800-829-1040 or visit a local IRS Taxpayer Assistance Center.
For questions about rebates, credit and benefits from other federal agencies contact the relevant agency directly for accurate information
By Stacie Kitts, CPA
When I read a story about someone who appears to have been messing with the tax system for some thirty years, it makes me wonder…..who in the heck did their taxes, and why did it take so long to get busted.
The Orange County District Attorney is reporting that James and Dorothy Klinger, owners of Jamo’s Gardening and Modern Tree Services Inc. are charged with 28 counts of failing to file a return with intent to evade tax, 28 counts of willful failure to pay taxes, and some felony counts for lying about their business to a worker’s compensation insurance company.
These two are looking at spending the rest of their lives in prison if convicted.
They appear to have used an old school tax crook technique and kept two sets of books. You know, one that showed the “real” dollars and one that was a work of fiction.
Was it worth it? You decide….
They are accused of underreporting about $3.6 million in income and $3 million in wages. This translates to about 1.9 million that should have been paid over in taxes (give or take) that they got to keep – for a little while anyway.
I don’t know about you, but $2 million isn’t enough money to risk a 40 year prison sentence. Am I Right!?
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Stacie says: “I don’t know about the suspsension period mentioned below. The IRS reports that attorney Michael McCall was suspended for 24 months from practice before the IRS for writing a bogus tax opinion. Frankly, if this guy wrote a bad opinion on purpose, I think it should be a permanent suspension. But that’s just me.”
WASHINGTON — The Internal Revenue Service has accepted an offer of consent to suspension from bond attorney Michael W. McCall. Under the terms of the settlement agreement, McCall will be suspended from practice before the IRS for at least 24 months for writing a false tax opinion. Thereafter, he may petition for reinstatement.
“Practitioners have a duty to their clients, the system, and the municipal finance bond community to ensure that the tax advice they are giving their clients complies with the law and is complete and accurate,” IRS Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.
McCall was engaged by a state of Washington county municipal sewer district to act as co-bond counsel and special tax counsel to write an opinion as to the tax-exempt status of the district bonds issued in October 2000 and to perform due diligence with respect to certain transactional matters relating to the bond issuance. The district issued the bonds for its utility local improvement district for a proposed commercial development. The bonds were issued in violation of state law as the utility local improvement district was located outside of the sewer district boundaries. The bonds defaulted and have been determined to be invalid.
The OPR alleged that McCall’s opinion on the tax-exempt status of the district bonds was false under Circular 230, Section 10.51(j), and that McCall’s opinion on certain transactional matters was also false under Section 10.51(j). In addition, the OPR alleged that McCall failed to perform due diligence under Circular 230, section 10.22, with respect to transactional matters related to the bond issuance, including an undisclosed payment to him from bond proceeds received by the developer.
Following an OPR investigation, McCall admitted to violations of Circular 230 for giving false opinions, knowingly, recklessly, or through gross incompetence (Treasury Department Circular 230, Section 10.51(j) (2000)), and for failing to exercise due diligence (Treasury Department Circular 230, Section 10.22 (2000)).
The settlement agreement included a disclosure authorization that allowed the IRS to issue this release.
WASHINGTON — As the April 15 tax deadline approaches, the Internal Revenue Service today announced initial results from its stepped-up effort involving enforcement and education to combat unscrupulous tax return preparers and protect the nation’s taxpayers.
The IRS said it has conducted more than 5,000 field visits to tax return preparers this fiscal year. In addition, the IRS has worked with the Department of Justice to pursue questionable return preparers, an effort that has led to 56 indictments, 25 convictions and 21 civil injunctions since Jan. 1, 2010.
“We are working to help ensure taxpayers receive competent and ethical service from qualified tax professionals,” said IRS Commissioner Doug Shulman. “Our efforts this tax season are part of a longer-term effort to improve the oversight of this critical part of the tax system. The vast majority of tax return preparers provide solid service, but we need to do more to protect taxpayers.”
Shulman announced in January the results of a six-month study of the tax return preparer industry, which proposed new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax return preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. While this longer-term effort is underway, the IRS has taken several immediate steps this filing season to assist taxpayers.
The IRS has worked closely with the Justice Department this tax season to increase legal actions against unscrupulous tax return preparers, obtaining 21 civil injunctions, 56 indictments and 25 convictions of return preparers so far in 2010. More information is available at the IRS Civil and Criminal Actions page on irs.gov. and at the Department of Justice Tax Division page on DOJ.gov.
“The IRS appreciates the strong support of the Justice Department for its efforts to pursue and shut down bad actors in the tax return industry,” Shulman said. “This effort makes a real difference for the nation’s taxpayers and helps protect the many tax professionals who play by the rules.”
“While the majority of return preparers provide excellent service to their clients, a few unscrupulous tax preparers file false and fraudulent returns to defraud the government and the tax-paying public. Those actions are illegal, and can result in substantial civil penalties as well as criminal prosecution, for both the return preparers and their customers who knew or should have known better. Taxpayers should choose carefully when hiring a tax preparer,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.
Also during this filing season, the IRS used investigative tools on a broad basis, including agents posing as taxpayers, to seek out and stop unscrupulous preparers from filing inaccurate returns. To date, the IRS conducted 230 undercover visits to tax return preparers. In addition, dozens of search warrants have been completed.
The IRS will continue to work closely with the Department of Justice to pursue civil and criminal action as appropriate.
In January, the IRS sent more than 10,000 letters to tax return preparers. These letters reminded them of their obligation to prepare accurate returns for their clients, reviewed common errors, and outlined the consequences of filing incorrect returns. The letters went to preparers with large volumes of specific tax returns where the IRS typically sees frequent errors, although simply receiving a letter was not an indication the preparer had problems.
The IRS followed up with field visits to about 2,400 tax return preparers who received these letters to discuss many of the issues mentioned in the letter. Separately, the IRS conducted other compliance and educational visits with return preparers on a variety of other issues. All told, IRS representatives visited more than 5,000 paid preparers to encourage and help them avoid filing incorrect or fraudulent returns for their clients.
The IRS will be reviewing the results of these letters and visits to determine steps for future filing seasons.
The IRS has recently begun to implement a number of steps to increase oversight of federal tax return preparers. This includes proposed regulations that would require paid tax return preparers to obtain and use a preparer tax identification number (PTIN). Later this year, the IRS will propose additional regulations requiring competency tests and continuing professional education for paid tax return preparers who are not attorneys, certified public accountants and enrolled agents.
Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in Publication 4832, Return Preparer Review, issued earlier this year.
Help for Taxpayers before April 15
As the tax deadline approaches, the IRS reminds taxpayers that most tax return preparers are professional, honest and provide excellent service to their clients. But a few simple steps can help people choose a good tax return preparer and avoid fraud:
- Be wary of tax preparers who claim they can obtain larger refunds than others.
- Avoid tax preparers who base their fees on a percentage of the refund.
- Use a reputable tax professional who signs the tax return and provides a copy. Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
- Check the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
- Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.
More information is available on IRS.gov, including IRS Fact Sheet 2010-03, How to Choose a Tax Preparer and Avoid Tax Fraud.
There are many e-mail scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure. The goal of the scam – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use your personal information – such as your Social Security number, bank account or credit card numbers – to commit identity theft and steal your money.
Here are five things the IRS wants you to know about phishing scams.
1. The IRS does not send unsolicited e-mails about a person’s tax account or ask for detailed personal and financial information via e-mail.
2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.
3. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,
- Do not reply to the message.
- Do not open any attachments. Attachments may contain malicious code that will infect your computer.
- Do not click on any links. If you clicked on links in a suspicious e-mail or phishing Web site and entered confidential information, visit IRS.gov and enter the search term ‘identity theft’ for more information and resources to help.
4. You can help shut down these schemes and prevent others from being victimized. If you receive a suspicious e-mail that claims to come from the IRS, you can forward that e-mail to a special IRS mailbox, email@example.com. You can forward the message as received or provide the Internet header of the e-mail. The Internet header has additional information to help us locate the sender.
5. Remember, the official IRS Web site is http://www.irs.gov/. Do not be confused or misled by sites claiming to be the IRS but end in .com, .net, .org or other designations instead of .gov.
Link: Suspicious e-Mails and Identity Theft
WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.
“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”
Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.
The IRS urges taxpayers to avoid these common schemes:
Return Preparer Fraud
Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.
Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009.
Hiding Income Offshore
The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.
IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.
Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.
Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.
Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: firstname.lastname@example.org.
Filing False or Misleading Forms
The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099-Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.
Nontaxable Social Security Benefits with Exaggerated Withholding Credit
The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.
Abusive Retirement Plans
The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
Disguised Corporate Ownership
Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.
Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
Fuel Tax Credit Scams
The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.
Monica Lawver over at The Tax CPA has some great commentary regarding this IRS release. You should check it out. She provides some interesting insight on regulating the profession in her post The Three Rules.
WASHINGTON — A Certified Public Accountant has been suspended for twelve months from practice before the Internal Revenue Service by the Office of Professional Responsibility for providing false or misleading information in connection with the preparation of his clients’ tax returns.
“Practitioners have a duty both to their clients and to the system to insure taxpayers are complying with tax laws and filing complete and accurate tax returns,” Karen L. Hawkins, Director of the Office of Professional Responsibility said.
Robert A. Loeser, a certified public accountant from Houston, Texas, assisted his clients to lower their tax bills by claiming false business expenses on tax returns he prepared.
For no legitimate business purpose, Loeser’s clients were advised to forward funds from their businesses to two corporations Loeser controlled. The corporations then rebated the funds to his clients. Loeser prepared the clients’ books and business tax returns expensing and deducting the entire amounts that were paid to the corporations.
The IRS alleged Loeser violated Circular 230 by giving false or misleading information to the Department of Treasury and the IRS.
The settlement agreement included a disclosure authorization that allowed the Office of Professional Responsibility to issue this release.
The Office of Professional Responsibility (OPR) establishes and enforces standards of competence, integrity and conduct for tax professionals — enrolled agents, attorneys, CPAs, and other individuals and groups covered by Treasury Circular 230.
WASHINGTON — The Internal Revenue Service released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.
Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.
The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.
Top 12 tax scams
It’s a new year and a good time to remind [you] about the top tax scams. / more+
Pass-through entities must timely file original tax returns claiming new jobs tax credit in order for owners to claim the credit
A new jobs tax credit of $3,000 is available to small businesses with 20 or less employees for each additional net full-time employee hired and employed in California for tax years beginning on or after January 1, 2009. The total amount of the credit that we can allocate may not exceed $400 million, and claims must be made before a statutorily provided “cut-off” filing date. / more+
Using the Annualization Method in 2009 and 2010
Estimated tax payments have undergone many changes since we started filing season one year ago. / more+
Timing is everything
[Are you]considering making an S corporation election? Selling or exchanging 50 percent or more of the total interests in an LLC or limited partnership? / more+
Ask the Advocate
Withholding and estimate tax payment changes
This summer the California legislature again revised the estimated tax payment percentages, and also passed some clean-up legislation to clear up confusion on how wage earners with only wage withholding would meet the new estimated tax payment requirements. / more+
Take a look at the changes happening here at FTB. / more+
[The FTB’s] monthly summary on bringing tax criminals to justice, and closing the tax gap one case at a time. / more+
California code of civil procedure and foreclosures
Will you clarify how California civil procedures interact with the Internal Revenue Code (IRC)? Specifically how does California Civil Procedure Code (CCP) Sections interact with IRC Section 108, Income from Discharge Indebtedness? / more+
From The Stupid Preparer Files – Woman Claims Connecticut Residents are Not Subject to Federal Income Tax – a Good Post From the Past
[I do love this story – another good post from the past]
By Stacie Clifford Kitts, CPA
I do enjoy reading about how stupid some tax preparers can be. It’s like a tax preparation train wreck. You know the kind you want to slow down to see. Moreover, the messier the scene, the harder it is to look away.
Nevertheless, regardless of how many stories I read, I am still amazed at tax preparers who are willing to go to jail over some income tax. Honestly, the blatant stupidity is genuinely mind numbing.
A favorite concerns a Connecticut woman, Sunita Buddhu who took over her father’s tax practice following his incarceration. Yes, I said it, his incarceration. Daddy went to jail for -get this – producing counterfeit checks from his place of business. The same business where he also prepared tax returns.
Now what do you suppose she told her father’s tax clients? Ummmm – I am sorry that my dad’s in jail – but no worries, I can still prepare your tax return, no need to worry about that fake check thingy.
Apparently, whatever she said worked because she continued preparing returns. But more baffling even than her clients who agreed to let her continue to work on their returns, is why she agreed to step in. Now let’s see, dad is in jail for fraud, ya think there might be a problem with his tax practice? Ya think- just maybe?
Well yes Sunita, there did appear to be a problem. Following her father’s incarceration, the IRS started a tax preparer investigation and proceeded to audit over 600 returns she and her father had prepared.
Oh, but now the story really gets good. As a result of the investigation, Ms. Buddhu decided it would be a good idea to file amended returns for her clients moving false and obviously disallowed Schedule C deductions to Schedule A. Huh, okay if the deductions are bogus, which apparently they were, hello – they are still bogus regardless of the schedule they’re on. Duh.
But wait, there’s more.
Undaunted, her behavior gets even more bizarre when she informs her clients that the IRS does not have the authority to conduct examinations of Connecticut resident’s tax returns. Okay, talk about frivolous arguments. What is so special about Connecticut?
But wait, there’s more.
She also told her clients that because they were residences living and working in the United States, they were only required to pay social security taxes, but were not subject to income tax. Yep that’s right, according to the Buddhu’s only non-resident aliens are subject to income tax.
But wait, there’s more. Oh, I do love this one.
She actually prepared letters that she mailed to the IRS stating her frivolous tax arguments 1) the IRS did not have jurisdiction over Connecticut residents and 2) U.S. residents living and working in the U.S. were not required to pay income tax.
Unfortunately, not only will this crazy out of control tax preparer suffer from this train wreck but so will her clients. They are now responsible for paying the additional taxes and associated penalties and interest that resulted from the audits of their returns. And at least one client had to barrow against their house to pay the debt to the IRS.
By Stacie Clifford Kitts, CPA
I have to say that I am completely mesmerized by convicted felons turned white-collar fraud fighters. I mean they’re like freakishly out-of-place anti-heros wielding their personal knowledge of criminal activity like a superpower.
Tell me, who better to call out the bad guy, then another bad guy. Frankly, If I had my way, every single accountant would be required to sit through a semester of fraud “how’d we do it”, hosted by someone who had pulled off a major financial scam.
But I digress; the real reason for this post is to discuss my experiences working alongside a group of people who unknown to the rest of us decided to manipulate the financial statement results of a then public company. The company- Bio Clinic a subsidiary of Sunrise Medical -the year 1995’ish.
I’ve had very few experiences that I would describe as truly surreal. But the day I watched a young woman dressed in a crisp black suit dip her hand into the Corporate Controllers wastebasket pull out a handful of discarded paper and then begin making notes on a clipboard, I thought, what the heck – that’s not right.
In fact, it really wasn’t right. For starters, the executive floor looked like a crime scene. Heck with all the offices taped off, the “do not enter” notices posted on the doors and a group of people dressed like “men in black” moving in and out of the executive suite like a flock of birds, I suppose it was.
To describe my response to this scene as shocked or even confused would be a ginormous understatement. Honestly, at the time, I didn’t know what to think or to do. I began to walk along the hall peering into offices looking for a familiar face. Naturally, I was looking for someone who could explain what was happening, but all I saw where strangers with solemn expressions engrossed in conversation and boxing up offices, right down to the day planners on the desk and the trash in the wastebasket.
But strangely, no one ever stopped me, or even asked me what I was doing there. These bizarre invaders were so focused on their mysterious task that they were completely oblivious to my presence.
Nevertheless, I was exactly where I was supposed to be, which was headed down the hall toward my office so I could start my workday as a young staff accountant, responsible for the state and local tax filings of this company.
I don’t know – maybe I should have paid more attention to what was going on, but as a full-time college student and a mother of three, I had very little time to do anything but keep my head down, do my job, and hurry home. Besides, I had never experienced anything as nefarious as a major financial scandal. So I didn’t have any reasons, let alone skills to recognize the situation for what it was – a huge cluster (you know what) and the beginning of the end for Bio Clinic and the facilitator of what turned out to be a nearly 20 million dollar fraud.
Now, the men (and woman) in black hung around for a few days but as mysteriously as they arrived they disappeared moving their investigation offsite to a place they jokingly called the “war room.” Overtime the investigation and resulting restatement of the financial statements was completed, the board of directors voted to shut down the Bio Clinic division, and the employees either were let go or transferred to other related companies. I had the unique distinction of being the very last employee of Bio Clinic- after all – the taxes still needed to be filed and amended returns needed to be prepared.
Funny enough, throughout the entire process, I never did find out about all the criminal details of the scandal. It was several years later when I found the SEC’s ACCOUNTING AND AUDITING ENFORCEMENT Release, when I learned of all the sneaky things that were going on. In retrospect, the document did offer some interesting a-ha moments.
For instance, it explained why I was reprimanded for asking questions about unexplained amounts that appeared in some balance sheet accounts. Or why the computer generated interdepartmental profit and loss statements used for budgeting purposes did not foot.
This whole experience did offer me some interesting insight though – sort of like valuable fraud training that most CPA’s just don’t have. The most important thing I learned was to watch for a person’s demeanor – for instance, to ask more questions when someone’s reaction to a benign inquiry is aggressive or weird. Extreme defensive or argumentative reactions over financial statement treatment are a sure sign that something is amiss, after all its only numbers and they are what they are. Throughout my twenty years plus of being an accountant, I would have to say that when I have come across a client who was uncooperative or who intentionally held back information, or who was consistently changing accountants, there were problems with the accounting.
Recently I wrote a post Sam Antar “It takes one to know one” and He Knows Patrick Byrne and I have received some interesting feedback. One friend in particular wanted to know why I was so sure that Sam had the answers. Apparently, there is a bit of debate about who the good guys are and who the bad guys are in this ugly online war.
Now, if I am getting this right, Patrick Byrne is the CEO of Overstock.com and a purported owner of a website called Deepcapture.com. The purpose of Deepcapture is to expose the short sellers who are trying to make money off the decline in value of Overstock.com. If you don’t know, what short selling is you can read about it here.
But really, what could be more interesting and telling than this disclosure from Sam Antar:
I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980’s. I committed my crimes, simply because I could.
If it weren’t for the efforts of the FBI, SEC, Postal Inspector’s Office, US Attorney’s Office, and class action plaintiff’s lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.
I do not own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly “retired” crook like me and analyzing Overstock.com’s financial reporting is a forensic accountant’s wet dream.
KPMG’s predecessor firms Main Hurdman and Peat Marwick Main were Crazy Eddie’s auditors. KPMG has sponsored at least two of my free speaking engagements to colleges and universities.
Well, obviously I don’t have any particular insight about who the bad guy is, but I do know this, Sam makes his living calling out bad guys and teaching people how to recognize him – the criminal element. I just don’t see why it would benefit him to intentionally call out people who he didn’t believe were crooks. After all, who would hire him as an expert if his ability turned out to be something else. I just don’t see it. And besides, I do see some elements of what makes me wary when I read about the debate.
Who really knows…I guess time will tell. If you want to know more about Deepcapture, I think this story is interesting if a little bizarre. “Story of Deepcapture” .
For those of you who might be interested, I have included the SEC’s findings of the shenanigans going on at Bio Clinic in the information below:
During Sunrise Medical’s fiscal years 1994 and 1995, 3 Robert S. Barton (“Barton”), vice-president of finance for Bio Clinic Corporation (“Bio Clinic”), one of Sunrise Medical’s operating divisions, orchestrated a scheme to understate Bio Clinic’s expenses by recording fictitious assets and improperly decreasing liabilities. He did this to ensure that Bio Clinic met the earnings targets previously agreed upon between Bio Clinic’s management team and Sunrise Medical’s corporate management team. Sharon Longview (“Longview”), Bio Clinic’s assistant controller (and, later, controller) and Christie Rockwood (“Rockwood”), Bio Clinic’s accounting manager, helped Barton implement the scheme. Vicki Kranawetter (“Kranawetter”), Bio Clinic’s manager of information systems, and Luther Dale Robinson (“Robinson”), Bio Clinic’s outside computer consultant, changed Bio Clinic’s accounting software at the request of Barton and the others to conceal the improperly-recorded accounting entries.
By the end of fiscal year 1995, Barton and the others had reduced Bio Clinic’s reported expenses by at least $19.6 million. The periodic reports that Sunrise Medical filed with the Commission for fiscal years 1994 and 1995, and the earnings announcements it made for the same periods, materially overstated its pre-tax earnings by over 16% in fiscal year 1994 and over 40% in fiscal year 1995. 4
As a result of the improper conduct at Bio Clinic, Sunrise Medical violated the periodic reporting, internal controls, and recordkeeping provisions of the federal securities laws. 5
Sunrise Medical is a Delaware corporation with its principal executive offices in Carlsbad, California. Through its various operating divisions, Sunrise Medical designs, manufactures, and markets medical devices for institutional and retail customers. Its net sales, as restated, for the fiscal year ending June 30, 1995, were $602 million. Its common stock is registered with the Commission under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. During all relevant times, Sunrise Medical was required to file reports with the Commission pursuant to Section 13(a) of the Exchange Act.
3. Other Relevant Individuals and Entities
a. Bio Clinic , during all relevant times, was a wholly-owned subsidiary of Sunrise Medical with facilities in Ontario, California, and one of Sunrise Medical’s seven significant operating divisions. Bio Clinic designed, manufactured, and marketed pressure management devices (such as disposable foam mattress overlays and inflatable air beds) for institutional and retail customers. Bio Clinic accounted for twenty-one percent of Sunrise Medical’s net sales in fiscal year 1995.
b. Comfort Clinic , during all relevant times, was a division of Bio Clinic with facilities in Atlanta, Georgia. Comfort Clinic designed, manufactured, and marketed mattress pads and pillows for retail customers.
c. Robert S. Barton , 41, was the vice-president of finance of Bio Clinic from September 1989 to December 1995, and the vice-president of operations of Comfort Clinic from March 1995 to December 1995. Barton is a Certified Public Accountant licensed to practice in the State of Texas.
d. Sharon Longview , 36, was the assistant controller of Bio Clinic from September 1989 to January 1994, and controller from January 1994 to December 1995.
e. Christie Rockwood , 48, was the accounting manager of Bio Clinic from 1986 to December 1995.
f. Vicki Kranawetter , 34, was the manager of information systems of Bio Clinic from May 1994 to December 1995.
g. Luther Dale Robinson , 51, is the owner of Universal Information Systems, which provided, and supported, accounting software to Bio Clinic during 1994 and 1995.
Senior management at Sunrise Medical establishes an annual earnings bonus target for each of Sunrise Medical’s operating divisions, including Bio Clinic, based upon an annual profit plan. The process requires each operating division to submit to corporate management a proposed annual profit plan, including detailed monthly and quarterly revenue, expense, and earnings projections. Corporate and division management then discuss and agree upon the proposed profit plan, making it the basis for annual bonus targets. Annual awards under the bonus program are made to division management (including Barton, Longview, Rockwood, and Kranawetter) when that division’s earnings exceed the prior year’s earnings, and payouts increase in a linear fashion as the division meets or exceeds its annual profit plan.
At all relevant times, Bio Clinic reported its financial results, consolidated with those of Comfort Clinic, its own division, to Sunrise Medical every month, including variances to the monthly projections under the profit plan. Sunrise Medical used these monthly reports to calculate its financial results, prepare its periodic reports to the Commission, and make earnings announcements to the public.
Fiscal year 1993 represented a transition in Bio Clinic’s business. Bio Clinic’s primary products had been various types of disposable foam bedding used for medical purposes. By 1993, these products were becoming commodity items, and Bio Clinic began to experience greater competition, causing the profit margins on these products to drop substantially. In anticipation of this trend, Bio Clinic had begun to manufacture computer-controlled, inflatable air beds, and had established a nationwide network of thirty-eight service centers to rent or sell these beds to healthcare institutions. Unlike the disposable foam bedding, the air mattresses were expensive and difficult to maintain. In fiscal year 1994, Bio Clinic started reducing its daily rental rates on the air products at the same time that it was aggressively cutting prices on its foam retail business to stimulate more sales. As a result of these unfavorable pricing developments, margins decreased and Bio Clinic began to have problems meeting its profit plan, even though its sales grew rapidly during this period — from $76 million in fiscal year 1993 to $124 million in fiscal year 1995 (as restated).
b. Hiding Expenses in Accounts Receivable and Property and Equipment
(i) Monthly Entries
Barton reviewed preliminary versions of Bio Clinic’s monthly financial statements before they became final. Beginning in fiscal year 1994, before forwarding the financial statements to Sunrise Medical, Barton met with Longview or Rockwood, or both, and instructed them to reclassify a variety of expenses as assets. These expenses involved primarily costs associated with manufacturing foam products and air beds. 6 No accounting justification existed for recording these expenses in this manner. The resulting reduction in expenses generally enabled Bio Clinic to meet its earnings targets despite the financial problems it had begun experiencing. Barton, Longview, and Rockwood continued to record expenses as assets through fiscal year 1995.
Barton sometimes decided which expense accounts to decrease and asset accounts to increase. At other times, he told Longview to reduce a certain category of expenses by a certain amount, leaving it to her to determine which specific accounts to decrease or increase. After these adjustments had become routine, Longview often showed Barton lists of expenses that she proposed to transfer to asset accounts. Barton and Longview then told Rockwood which expenses to transfer to asset accounts and Rockwood recorded the adjustments in Bio Clinic’s books and records. They sometimes instructed Rockwood to move falsely recorded amounts from one asset account to another if they felt that the amounts appeared too large.
In March 1995, Barton received a promotion to vice-president of operations for Comfort Clinic. He remained in his position (in an acting capacity) as vice-president of finance for Bio Clinic. Barton began spending most of his time at Comfort Clinic’s facility in Atlanta. During his absences from Bio Clinic, Longview and Rockwood continued to record expenses as assets, at Barton’s instructions.
(ii) Aggregating and Concealing the Improperly-Recorded Expenses
Near the close of fiscal year 1994, Barton, Longview, and Rockwood aggregated the expenses that they had improperly recorded into two asset accounts on Bio Clinic’s general ledger: accounts receivable and property and equipment. This created discrepancies between Bio Clinic’s general ledger and its accounts receivable and property and equipment subsidiary ledgers. To avoid detection with respect to the accounts receivable discrepancy, Barton, Longview, and Rockwood increased the total on the last page of the accounts receivable subsidiary ledger so that the subsidiary ledger appeared to reconcile with the general ledger. The total reflected on the subsidiary ledger was therefore greater than the sum of the detailed customer accounts listed on the subsidiary ledger. 7 These changes required alterations to Bio Clinic’s accounting software that were made by Kranawetter, the manager of Bio Clinic’s information systems.
To address the property and equipment discrepancy, Barton, Longview, and Rockwood made line-item entries on the property and equipment subsidiary ledger to correspond to the amounts by which they had increased the general ledger. They made some of these entries appear to represent specific property and equipment. 8 Because of these fictitious assets, the property and equipment subsidiary ledger appeared to reconcile to the general ledger. Fearing that the fictitious line-items on the property and equipment subsidiary ledger might come under the auditors’ scrutiny, Barton, Longview, and Rockwood asked Kranawetter to suppress the printing of the line-items on the subsidiary ledger that represented the fictitious property and equipment. Thus, the total on the property and equipment subsidiary ledger did not accurately reflect the sum of the printed detail.
Sunrise Medical’s auditors received copies of Bio Clinic’s altered subsidiary ledgers for accounts receivable and property and equipment. By the end of fiscal year 1994, Barton, Longview, and Rockwood had overstated Bio Clinic’s accounts receivable and property and equipment by at least $3.5 million and $2.3 million, respectively.
During fiscal year 1995, Barton, Longview, and Rockwood continued to hide expenses in asset accounts. In May 1995, Rockwood created a fictitious customer account in the accounts receivable subsidiary ledger into which she placed what, by then, amounted to about $8.8 million of improperly-transferred expenses. Kranawetter arranged for Robinson (Bio Clinic’s outside computer consultant) to program Sunrise Medical’s accounting software to suppress the printing of the fictitious customer account, while still including the amount in the overall total for accounts receivable. Barton, Longview, and Rockwood also continued the suppression of the false assets on the property and equipment subsidiary ledger that they had begun during fiscal year 1994. By the end of fiscal year 1995, the overstatement of accounts receivable and property and equipment due to the improperly-transferred expenses had reached $8.8 million and $4.9 million respectively.
(iii) Discovery of Discrepancies
An internal auditor employed by Sunrise Medical performed certain of the audit procedures at Bio Clinic in connection with the fiscal year 1995 audit of Sunrise Medical performed by Sunrise Medical’s independent auditor. As part of these procedures, the internal auditor manually added the line-items on the accounts receivable and property and equipment subsidiary ledgers. In doing so, the internal auditor discovered a discrepancy of several million dollars between the total of the line-items and the total actually reflected on the subsidiary ledgers. Unbeknownst to the internal auditor, this discrepancy resulted from the suppression of the fictitious assets when the ledgers were printed. When the internal auditor asked for an explanation, Barton and Kranawetter told the internal auditor that Bio Clinic was in the process of changing accounting software (which was true) and that the ledgers had come from a test batch of data that had been incomplete (which was false).
The internal auditor asked that Bio Clinic provide copies of the subsidiary ledgers that correctly totaled. To provide such a copy of the property and equipment subsidiary ledger, Rockwood, at Barton’s instruction, asked Robinson to undo the suppression of the fictitious assets on the subsidiary ledger. Then, at Longview’s suggestion, Rockwood, with Robinson’s help, changed the name of the largest fictitious asset account from “Overhead A” to “Soft Goods.” Because Longview and Barton had previously given the auditors a rationale (which the auditors had accepted) for capitalizing costs arising out of the manufacturing of soft goods, they felt it less likely that the auditors would test an asset account bearing that name. Rockwood, with Longview’s assistance, also broke up another fictitious asset account into eight to ten smaller amounts, hoping that the internal auditor would not test them. Rockwood gave the internal auditor a copy of the altered subsidiary ledger.
Providing the internal auditor with an accounts receivable subsidiary ledger that correctly totaled posed a more difficult problem. The fictitious customer account, which had previously been suppressed when the subsidiary ledger had been printed, contained about $8.8 million of improperly-transferred expenses and bore the customer name “Miscellaneous.” After much consultation with the others, Barton decided to eliminate the fictitious customer account and replace it with invoices that Bio Clinic customers had already paid. Rockwood and Longview then asked Robinson to perform the programming necessary to include paid invoices in the subsidiary ledger and make them appear as if they were open receivables. Robinson, in consultation with Kranawetter and Rockwood, did so. Robinson needed over a week to complete the programming. Longview gave the falsified subsidiary ledgers to the internal auditor.
The falsified accounts receivable subsidiary ledger posed yet another problem because of the inclusion of invoices that had already been paid. The audit procedures planned by Sunrise Medical’s independent auditor included the confirmation of a sample of the accounts receivables with Bio Clinic’s customers. Any customer that had already paid an invoice would obviously not confirm that it still owed the invoice amount. The rush surrounding the completion of the audit offered Barton an unexpected solution – a person on the internal audit team allowed Longview and one other Bio Clinic employee to fax the confirmation requests to the sample of Bio Clinic’s customers. After consulting with Barton, Longview inserted blank pages into the fax machine instead of confirmation requests for those customers that had in fact already paid the invoice purportedly to be confirmed. She then took the facsimile transmission reports printed by the facsimile machine (indicating that the facsimile transmission had been successful), attached them to the real confirmation requests, and showed them to the auditors as proof that the she had faxed the confirmation requests.
c. Inventory Overstatement at Comfort Clinic
In the second quarter of fiscal year 1995, Barton, Longview, and Rockwood learned that between $2.5 to $3 million of the inventory recorded at Comfort Clinic was not supported by Comfort Clinic’s physical inventory counts. Barton allowed this amount to continue to be recorded as inventory. By fiscal year end 1995, the inventory overstatement had grown to $4.9 million. Barton, with the assistance of Longview, concealed this overstatement by creating a false inventory report for Comfort Clinic. Rockwood altered recorded inventory amounts for different Comfort Clinic locations so that only those locations at which the auditors had not observed physical inventory counts were overstated. Because of the inventory overstatement, Sunrise Medical’s inventory and pre-tax earnings were overstated by $4.9 million for fiscal year 1995.
d. Sham Rebate
Sunrise Medical’s financial statements understated accounts payable and expenses by almost $1 million as a result of a sham rebate that Barton created with the assistance of one of Comfort Clinic’s suppliers. In an effort to ensure that Bio Clinic attain its fiscal year 1995 earnings targets, Barton contacted one of Comfort Clinic’s suppliers to obtain a rebate of $1 million for purchases Comfort Clinic had already made in the fiscal year. The supplier, however, was willing to provide a rebate on Comfort Clinic’s past purchases only if Comfort Clinic accepted a price increase on purchases made in the next fiscal year to offset the rebate. Barton agreed to the supplier’s condition and executed a side letter to this effect. Without the side letter, the agreement between Comfort Clinic and the supplier appeared to be a legitimate rebate. Barton recorded the rebate as a decrease in expenses for fiscal year 1995 without disclosing to Sunrise Medical or its auditors that the supplier had tied the rebate to a price increase on future purchases. 9
B. LEGAL DISCUSSION
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers of registered securities, such as Sunrise Medical, to file annual and quarterly reports with the Commission on Forms 10-K and 10-Q, respectively. These periodic reports must contain, among other things, disclosures concerning the issuer’s assets, expenses, and earnings. Rule 12b-20 under the Exchange Act requires that these reports also contain such other information as is necessary to insure that the statements made in those reports are not materially misleading.
The filing of a periodic report containing materially false or misleading information violates these provisions. See , S.E.C. v. Savoy Industries, Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , 440 U.S. 913 (1979) (Section 13(d)); S.E.C. v. Kalvex, Inc. , 425 F. Supp. 310, 316 (S.D.N.Y. 1975) (Section 13(a)). A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. See Basic, Inc. v. Levinson , 485 U.S. 224, 231-32 (1988) (Rule 14a-9); Savoy Industries , 587 F.2d at 1165-1166. No showing of scienter is necessary to establish a violation of Section 13(a) and the periodic reporting rules thereunder. See Savoy Industries , 587 F.2d at 1167; S.E.C. v. Wills , 472 F. Supp. 1250, 1268 (D.D.C. 1978). The same is true of Rule 12b-20. In the Matter of Curtis L. Dally , Exchange Act Release No. 39144, 65 SEC Docket 1540, 1544 (September 29, 1997). Sunrise Medical violated Section 13(a) and Rules 13a-1, 13a-13, and 12b-20 by filing annual reports on Form 10-K for its fiscal years 1994 and 1995, and quarterly reports on Form 10-Q during each of those years, that materially overstated its earnings.
Section 13(b)(2)(A) of the Exchange Act requires that reporting issuers make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and dispositions of its assets. Rule 13b2-1 thereunder prohibits issuers from directly or indirectly falsifying or causing to be falsified any such book, record, or account. Sectionof the Exchange Act requires reporting issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. As with Section 13(a), no showing of scienter is necessary to establish a violation of Sections 13(b)(2)(A) and 13(b)(2)(B), or Rule 13b2-1. S.E.C. v. World-Wide Coin Investments, Ltd. , 567 F. Supp. 724, 749 (N.D. Ga. 1983); In the Matter of Curtis L. Dally , Exchange Act Release No. 39144, 65 SEC Docket 1540, 1544 (September 29, 1997). Due to the understatement of expenses and cost of sales described above, Sunrise Medical’s books and records contained false and misleading entries relating to, among other things, accounts receivable, property and equipment, inventory, cost of sales, and operating expenses. Accordingly, Sunrise Medical violated Section 13(b)(2)(A) and Rule 13b2-1. Further, Sunrise Medical violated Section 13(b)(2)(B) by failing to implement or enforce internal controls that ensured that Bio Clinic reported accurate financial results.
Based on the foregoing, Sunrise Medical violated Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Sunrise Medical in its Offer of Settlement.
Accordingly, IT IS ORDERED, that:
Pursuant to Section 21C of the Exchange Act, Sunrise Medical cease and desist from committing or causing any violation and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.
By the Commission.
Jonathan G. Katz
1 In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.
2 The Commission makes the findings herein pursuant to the Respondent’s offer of settlement. These findings are not binding on any other person or entity in this or any other proceeding.
3 Sunrise Medical’s fiscal year 1994 ended on July 1, 1994, and fiscal year 1995 ended on June 30, 1995.
4 In February 1996, Sunrise Medical restated its financial statements for FY 1994 and 1995, correcting the understatement of expenses from the fraud and making other, less significant, accounting changes. Thus, the difference between the reported and restated pre-tax earnings shown below is not solely the result of the fraud. The fraud had the following effect on Sunrise Medical’s pre-tax earnings (amounts in millions):FY 1994 FY 1995 Reported Pre-Tax Earnings $42.6 $51.9 Restated Pre-Tax Earnings $36.2 $33.9 Effect of fraud on Pre-Tax Earnings of: Overstatement of Accounts Receivable $3.5 $5.3 Overstatement of Property and Equipment $2.3 $2.6 Overstatement of Inventory - $4.9 Understatement of Accounts Payable - $1.0 Overstatement of Pre-Tax Earnings $5.8 $13.8
5 Contemporaneous with the entry of this Order, the Commission is filing a civil injunctive action in the U.S. District Court for the Central District of California against Barton, alleging that he violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. The complaint also alleges that Barton exercised Sunrise Medical stock options and sold the underlying stock while in possession of the material, nonpublic information that Sunrise Medical’s earnings were overstated. Without admitting or denying the allegations of the complaint, Barton has consented to the entry of a final judgment in that action which will permanently enjoin him from further violations of the above-referenced provisions. The judgment will also waive the payment of disgorgement and civil money penalties based on Barton’s demonstrated inability to pay. The Commission is also issuing a separate Order Instituting Public Administrative Proceedings against: Longview and Rockwood, finding that they violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder; and Kranawetter and Robinson finding that they violated Section 13(b)(5) of the Exchange Act and caused violations of Rule 13b2-1 thereunder. The Order imposes a cease-and-desist order against each of the respondents and requires Longview to pay disgorgement of the bonus she received for fiscal year 1994 and prejudgment interest. Each respondent has consented to the entry of that Order without admitting or denying the findings therein.
6 Barton, Longview, and Rockwood capitalized unfavorable manufacturing cost variances (the difference between actual and predicted manufacturing costs) regardless of whether those costs related to the products that Bio Clinic sold (which costs they should have expensed) or to those products that Bio Clinic rented to customers (which costs they could properly capitalize).
7 Barton and Longview also transferred amounts from older to newer accounts receivable aging classifications to create the appearance that the receivables generally were less old than they were. Barton and Longview did this to reduce the likelihood that the false receivables would attract attention during the audit.
8 For example, Barton, Longview, and Rockwood capitalized $600,000 of expenses as machinery and equipment which did not exist. In addition, they aggregated over $2 million of unfavorable manufacturing cost variances into a line item labeled “Overhead A” under rental assets on the property and equipment subsidiary ledger. In its restatement, Sunrise Medical determined that Barton, Longview, and Rockwood had unjustifiably capitalized $1.7 million of this amount.
9 Barton and the supplier later changed the terms of the sham rebate. Rather than have the supplier actually pay Comfort Clinic the rebate amount and then increase its prices to Comfort Clinic, Barton executed another letter agreement that entitled Comfort Clinic to claim the rebate only if it purchased an amount of product from the supplier that Barton and the supplier knew was unrealistic. Barton did not disclose this revised condition to Sunrise Medical or its auditors.
This article was taken from the FTB’s Criminal Corner – I think this is right up there with one of my favorites.
“On November 19, 2009, a Sunland interior designer was sentenced after pleading guilty to one felony count of state income tax fraud and one felony count of insurance fraud.
According to court documents, Ronald E. Hunt, 56, continued working as an interior designer from 2003 to 2006, including an appearance on an HGTV home improvement show during the time he claimed to be disabled. An employee with the private insurance company paying Hunt’s disability saw the show and alerted the California Department of Insurance (CDI). An investigation confirmed Hunt intentionally and knowingly concealed his secondary employment from his disability insurance company by falsifying written statements and deceiving a company field representative. During the time Hunt claimed to be disabled, he collected more than $400,500 in income as an interior designer while also collecting $147,600 in disability benefits. Hunt also failed to report this income on his state income tax returns for these same years.
Hunt was ordered to pay $151,700 restitution to the private insurance company and $31,000 to us, representing the unpaid tax, penalties, interest, and the cost of the investigation. He was sentenced to 200 hours of community service and 60 months of probation.
Judge David M. Horwitz handed down the sentence on Tuesday, November 17, in Department 50 of the Clara Shortridge Foltz Criminal Justice Center. Los Angeles County Deputy District Attorney David Berton prosecuted the case. This was a joint investigation between the CDI and us.”
Is it really necessary to say Duh here? I mean really.
By Stacie Clifford Kitts, CPA
I’ve watched with interest the online clash between CEO Patrick M. Byrne of Overstock.com and a handful of bloggers and journalists. The basic issue appears to be a consensus, among this group that Mr. Byrne is (allegedly) a crook [and maybe a little unstable] who is also (allegedly) cooking the books of the company he is charged with running.
Sam Antar who has the best bio snippet I have read to date….
I am a convicted felon, former CPA, and former CFO of Crazy Eddie. There is a saying, “It takes one to know one.” I teach law enforcement, professionals, and students about white collar crime and how to catch corporate miscreants….
In my blog, I expose white collar crooks just for the fun of it…
….really really R-E-A-L-L-Y dislikes Mr. Byrne. Based on Mr. Antar’s “it takes one to know one” philosophy, Sam insists that he knows Patrick pretty well.
Mr. Antar has made this determination based on his analysis of the publically available financial information of Ovestock.com. You can read Mr. Antar’s many comments about Mr. Byrne at his acclaimed blog White Collar Fraud.
Mr. Antar’s rehash of his part in the Crazy Edie fraud scandal at his website http://www.whitecollarfraud.com is also a good read. There is no doubt that this recount should be mandatory reading for all new staff accountants.
As for my take….
I’ve always believed based on my experiences working in both public accounting and industry, that the financial statement audit process [limited to large publically traded companies]was for the most part a silly practice that boiled down to ongoing compromises made by auditors to sustain the fine line walked to keep clients. Although the audit practice has tightened up -some – over the years i.e. the PCAOB, I think we are still looking at an overriding drive for accounting firm profit over good sense.
Evidence you ask.
In my opinion, the fact that Overstock.com was able to find an audit firm amidst all the (alleged) controversy is evidence enough. It’s too bad that the audit firm’s work papers aren’t public information, because I would looove to get my hands on the Client Acceptance Form that KPMG put together to prove their acceptance of this client. If only to see how they have addressed these allegations. [I hope they have really good practice insurance.]
Anyway…What’s a Client Acceptance Form you ask?
A Client Acceptance Form is a checklist that an auditor uses to decide whether they should accept a company as a client. This document incorporates questions about whether the firm believes that they have the proper knowledge, training, and staff to handle the engagement. However, it also wants to know things about the target client too. For instance, there are questions about the integrity of the company’s management, the chances that there is fraud in the financial statements, and questions regarding whether there is evidence that management may be motivated to commit fraud.
There appears to be plenty of evidence that the management integrity of Overstock.com is at least in question [if of course you believe the many journalists and bloggers who have commented on Overstock’s current woes]. This alone should have precluded an audit firm from accepting the engagement (in my opinion). Obviously, this acceptance is profit motivated, but KPMG – people – come on -what – are – you – thinking.
If you would like to read, more about the controversy check out this recent post by Sam
Post Script: I saw fraud unfold up close and in person at a public company I worked for in the 90’s. I was not part of the fraud scandal. However, watching what happened after it was discovered makes for an interesting story. Stay tuned for more on that truly fascinating tale.