Clinton residents Angela Christina Lainez-Flores and her daughter Karen Mejia filed fraudulent federal tax returns for refunds totaling $1.4 million from tax years 2006 through 2012, IRS special agent Bennett Strickland stated Thursday at a probable cause hearing in a Raleigh federal courtroom.
Lainez-Flores and Mejia had been charged with conspiracy to defraud the federal government by filing fraudulent income tax returns. The scheme involved fabricated identities, phony W-2 earnings statements, and the listing of dependents who do not exist. If convicted of all charges, the maximum penalty would be imprisonment for 10 years. Each woman waived her right to a detention hearing and will remain in custody until trial.
This type of crime often is referred to as Stolen Identity Refund Fraud, or SIRF, and the IRS has described it as the No. 1 tax fraud scheme for 2013. It affects an untold number of innocent taxpayers, costing the federal government billions. It relies on two weaknesses in the operations of the Internal Revenue Service: its desire to get returns to taxpayers quickly, and a timing gap in how it deals with employees and employers.
Over the past several months, Carolina Journal has reported of a SIRF scheme involving five Hondurans who tried to cash fraudulent refund checks in Sampson County, and separate schemes at which fraudsters used mailboxes on a street in Durham to collect illegitimate tax refund checks.
The arrests of Lainez-Flores and Mejia followed an IRS undercover operation conducted with the assistance of an unnamed cooperating witness who is a cooperating defendant in another matter. The cooperating witness prepared the fraudulent tax returns with information provided by the defendants.
A criminal complaint filed in federal court stated that seven fraudulent returns claiming a total of $60,784 in refunds, signed by Lainez-Flores or Mejia, were prepared for tax year 2012.
The complaint stated that Mejia and Lainez-Flores, with the help of a tax preparer, conspired to file numerous false tax returns as far back as 2009. They obtained identification documents of people who do not reside in the United States and used those IDs to make fraudulent applications for Individual Tax Identification Numbers.
They generated fake W-2 earnings statements from companies that did not employ them. On the returns, they included exemptions for multiple dependents who didn’t exist. One return filed in 2010 under the name Jose Garcia claimed 11 dependents.
They requested that the year 2012 returns be mailed to a post office box in Clinton. They had been paying the tax preparer $100 for each false form, but for forms filed this year, the tax preparer raised the fee to $400.
According to the complaint, three other females assisted with the scheme, including Lainez-Flores’ sister Aracely Villela. During a meeting when Villela paid the tax preparer $1,600 in cash for four years of false returns that her sister ordered, Villela warned the tax preparer that the scheme was wrong.
The complaint also stated that Mejia and Lainez-Flores planned to order additional fraudulent refunds from the tax preparer this year.
The women made an initial appearance May 16 in federal court in Raleigh. Mejia, 25, and Lainez-Flores, 44, live in Clinton but they “represent a substantial risk of flight as they are in the U.S. from Honduras,” according to the criminal complaint filed.
As Carolina Journal Online previously reported, April 5 the Sampson County sheriff’s office caught five people trying to cash IRS checks that had been obtained in a manner similar to the Mejia and Lainez-Flores scheme. The refunds totaled $34,380. The suspects also were from Honduras and admitted to sheriff’s deputies they were illegal aliens. Each had a phony ID that matched the name on the IRS check.
Deputies also obtained copies of the fraudulent tax returns indicating they were prepared by a tax preparer from Clinton. CJ was unable to determine if this scheme is related to the Mejia and Lainez-Flores case.
Deputies seized the checks and briefly detained the five people but did not arrest them. Sheriff Jimmy Thornton told CJ that the matter is in the hands of the IRS.
Last year, federal officials charged New Bern residents Jeffrey Glenn Toohey and Christopher Fleming with SIRF, bank fraud, and related crimes. In 2010, Toohey and Fleming broke into the New Bern Jackson Hewitt tax office, stealing more than 300 files containing the personal information of tax clients.
They opened credit card accounts with the stolen identities and purchased items with the fraudulent accounts. They used public Wi-Fi access spots to open Yahoo and Gmail accounts with the stolen identities. Then they filed 2010 tax returns in the names of Jackson Hewitt clients and directed the tax refunds to either debit cards or addresses they controlled.
In October, they pleaded guilty to several charges. Toohey was sentenced to 125 months in prison and ordered to pay $261,354 in restitution. Fleming, who had a lesser role in the schemes, was sentenced to 30 months in prison and ordered to pay $204,799 in restitution.
N.C. agency also subject to fraud
SIRF also takes place with state revenue agencies. As previously reported by CJ, fraudsters used the Sherron Road address of a Durham homeowner as a drop box for revenue agencies to send their refund checks.
Beginning March 1, the homeowner intercepted several pieces of correspondence and checks addressed to others, including a $1,651 check from the State of Maryland to Sherry D. Arozarena and a $1,746 check also from Maryland to Jessica B. Fonseca, and a $4,108 check Jody A. Freed from the IRS.
The homeowner also received a letter from the N.C. Department of Revenue addressed to a Jody Freed. It said the department could not process Freed’s return and that it must be resubmitted with W-2 and 1099 forms as well as a copy of Freed’s IRS tax return form.
The homeowner saw strange people checking his mailbox and others on the street. Two of his neighbors had also received checks and correspondence addressed to persons who did not live there. The homeowners turned over all checks and correspondence to federal officials.
But in April the North Carolina Department of Revenue issued a $440 state income tax refund to a Jorge Diaz Gonzalez and mailed it to the same Sherron Road home even though Gonzales did not live at that address and is likely using a fictitious name.
The Gonzalez check was issued weeks after CJ informed senior officials in the department that the Sherron Road address was being used in attempts to collect fraudulent tax refunds from the Internal Revenue Service and other state revenue agencies.
’There was a mistake’
Revenue department spokesman Jerry Coble told CJ, “I have investigated the matter and found that we did stop the refund for review as a potential fraudulent refund request but an employee mistakenly approved the refund when it should not have been issued. This was a mistake by an individual employee and we have reviewed the error with that employee for future reference.”
“I am proud to say in both examples you provided me we did identify the refunds as fraudulent,” he said. Coble said his department “has a very effective fraudulent refund detection program” compared to other states. “We hope this error will not overshadow the thousands of fraudulent refunds that were prevented from being issued by our agency every year,” he said.
The department routinely files charges against individuals who fail to file state income tax returns as well as individuals who fabricate W-2 forms, but charges involving identity theft are rare.
By reviewing past press releases, CJ found only one identity theft case since 2008. In 2010, Charlotte CPA Angelene Melton Dunlap pleaded guilty to charges filed by the department. The investigation found that she obtained new Tax Identification Numbers for former clients and submitted at least 33 fraudulent returns using their names.
Coble said his department does not have an estimate of how much money is lost to identity theft.
While SIRF has been going on for years, only recently have federal officials offered recommendations on how to stop it. One of the main problems is that employers are required to deliver Form W-2 statements of earnings and withholding to employees by January 31 of each year, but employers are not required to send the same information to the federal government until March 31 if they file electronically. Fraudsters take advantage of this gap in information flow to the IRS.
In July 2012, Treasury Inspector General for Tax Administration Russell George’s office issued a report stating that for tax year 2011, the IRS reported that it had detected 938,644 tax returns involving identity theft and prevented the issuance of fraudulent tax refunds totaling $6.5 billion. But the losses from undetected identity fraud are substantial. His office’s analysis of data from the 2010 tax year identified 1.5 million returns, representing $5.2, billion, that likely were filed by identity thieves.
To combat SIRF the report stated, “Access to third-party income and withholding information at the time the tax returns are processed is the single most important tool that the IRS could have to identify and prevent tax refund fraud. However, most of the third-party information is not available until well after tax return filing begins.”
At a May 2 meeting of the IRS Oversight Board, Government Accountability Office tax official James White noted in written testimony that beginning last year, the IRS started matching wage and tax withholding information from W-2 forms and other documents “to tax returns in March rather than later in the spring or summer after the tax return filing season. IRS is exploring the possibility of more extensive matching of information and tax returns before issuing tax refunds. This approach could also help IRS address identity theft-related fraud.”
At the same Oversight Board meeting, Social Security Administration Deputy Commissioner Marianna Lacanfora said that before the mid-1970s, employers were required to report wage information to IRS and SSA on a quarterly basis. In 1976, legislation changed wage reporting to an annual process. She said President Obama’s 2014 budget included a provision that would require companies with 50 or more employees to report wages electronically, allowing SSA and IRS to review information from employers more efficiently; the rule now applies to companies with 250 or more employees. A second provision in the budget would require wages to be reported to the government quarterly rather than yearly, enhancing the ability to detect fraud.
Don Carrington is executive editor of Carolina Journal.