News: CJ Exclusives

Tax Preparer Exposes Rampant Refund Fraud

Hispanic preparer concerned about fake child credits

A Charlotte-area tax preparer who contacted Carolina Journal last year about an illegal tax-refund scheme involving tax preparers who cater to Hispanic clients has conducted her own undercover operation to show that the scam is continuing.

The preparer, who is Hispanic, enlisted the aid of a male friend, also Hispanic, to visit 10 tax preparation offices in the greater Charlotte area and record reactions to his suggestion that fictitious children be included on his tax return.

They found that tax preparers engaged in the scheme are urging customers — typically using federal taxpayer identification numbers rather than Social Security numbers on IRS documents — to pocket fraudulent refunds by claiming on their income tax returns children as dependents who may not exist or who live outside the United States.

The scheme is one of two illegal tax-refund ploys CJ has reported on over the past three years. Despite federal efforts to combat the schemes — the IRS claims it thwarts several billions of dollars in refund scams yearly — fraud continues here and around the nation.

In one scheme, taxpayers claim as dependents children who either do not live with them in the United States or may not exist at all. Each phony dependent claimed on an income-tax return will result in a refund of roughly $1,000.

The second type is stolen identity refund fraud, in which a group of criminals use stolen or fabricated identification documents to file multiple income tax returns claiming fraudulent refunds. Court documents show that illegal immigrants living in North Carolina have been involved in a number of SIRF schemes.

Preparers encourage fraud

Last year, CJ reported on a North Carolina tax preparer of Hispanic descent who claimed several tax preparers in her region helped their clients commit federal income tax fraud by claiming false tax credits for children. The preparer, who spoke to CJ under the condition that her name and location not be revealed, will be referred to as Juanita.

CJ met with Juanita in February and March. She sent a friend, Francisco (not his real name), to 10 tax preparation offices in the greater Charlotte area. Because Spanish was the default language used at each location, all the tax preparers appeared to be owned by Hispanics and cater primarily to Hispanic clients.

Francisco arrived at each office with a fake W-2 wage and tax statement as well as fake individual taxpayer identification numbers for four fictitious children who, he claimed, lived in Mexico.

Francisco also carried an audio recording device, which was concealed from the preparers. He asked each tax preparer to calculate the return with and without the children. Each preparer informed Francisco that if he wanted to get a refund from the federal government, he would have to say the children live with him. Each phony child was worth about $1,000 in refunds. In every instance, Francisco qualified for a $3,657 refund if the “children” lived with him; but if they lived in Mexico, he would owe the IRS $343.

In one of the recordings, Francisco asked the preparer, “Am I going to be in trouble?” The preparer responded, “If you get audited, the most that could happen is that you will be asked to return the money, but the chances of being audited are slim.”

Juanita refuses to include phony children on tax returns, even though some potential clients have asked her to do so. One potential customer came with 12 government-issued ITINs, and said he wanted to use only four. She refused to prepare his return.

She hopes the IRS will crack down on this type of fraud. “I realize now that it is going to be a huge fight to try to stop this,” Juanita told CJ.

She also said that the unscrupulous tax preparers do not charge extra for preparing returns using phony children.

Stolen identity refund fraud

The extend of tax refund fraud has caught the attention of the federal government at high levels.

“The high potential for financial gain and low physical risk have made stolen identity refund fraud the new choice for drug dealers and gangs,” Acting Assistant Attorney General Caroline Ciraolo said March 12 in testimony to the U.S. Senate Committee on Finance.

“Combating the illegal use of Social Security numbers and other personal information to file false returns seeking fraudulent refunds is a top priority of both the Tax Division and the U.S. Attorneys’ Offices across the country, “ she said.

Ciraolo explained the schemes included filing returns containing inflated, false deductions, false W-2 income statements, or preparing returns and failing to remit the refund to the taxpayer. She said that the more aggressive SIRF schemes have spread across the country at an alarming rate.

“The plan is frighteningly simple — steal Social Security numbers, file tax returns showing a false refund claim, and then have the refunds electronically deposited or sent to an address where the offender can access the refund checks,” she said.

The schemes often are implemented in early January before honest taxpayers file their returns. The goal is to take advantage of the IRS’ effort to pay refunds quickly. A taxpayer whose Social Security number has been stolen and used for a fraudulent return will face problems when he files his return with the IRS. “The economic and personal consequences can be severe and often long-term, she said.

“The prosecution of SIRF crimes is a national priority, and, together with our law enforcement partners, we will continue to look for the most effective ways to bring this conduct to an end and to punish these wrongdoers. Indeed, enforcement efforts are critical, but the goal is to stop fraudulent refunds at the door,” she said.

Ciraolo did not discuss the magnitude of illegal immigrants involved in SIRF or the phony-children fraud schemes.

North Carolina/Tennessee scheme

One of the more spectacular hauls by illegal immigrants using these tax fraud methods involved a couple living in North Carolina.

Honduras native Mario Iberra Raiz, also known as Jose Vallecillo-Lozano, and girlfriend Miriam Alvarado-Barahona — who lived at the Alta Mobile Home Park in Clayton — had perpetrated more than $1 million in SIRF fraud before their January 2014 arrest.

According to court documents, the pair was part of “an ongoing multimillion-dollar tax refund fraud scheme that is being perpetrated primarily by Hispanic persons, many of whom are Honduran nationals, and many of whom are illegally in the United States.”

Their cases were handled by the U.S. attorney’s office in Nashville, Tenn. Raiz and Barahona transported fraudulently obtained IRS refund checks from North Carolina, using an accomplice who worked at a check-cashing business in Nashville to cash the checks “for a fee that significantly exceeded what the facility charged for cashing legitimate checks,” court documents reported.

When arrested in Tennessee, Raiz and Barahona each admitted being in the United States illegally. Barahona is the parent of two or more children.

The source of the fraudulent checks was a person living in Raleigh or Durham identified as Mario A. Carcamo. Records indicate officials are pursuing Carcamo, known as El Primo in federal documents, but the status of his case is unclear because most of his court filings are sealed.

According to the original criminal complaint, “The elaborate scheme initially involves the acquisition and use of identity documents pertaining to persons who for the most part reside outside the United States, to fraudulently apply for individual taxpayer identification numbers, which are used by aliens who do not have Social Security numbers. These ITINs are then used in the preparation and filing of fraudulent federal income tax returns which falsely purport to be filed by persons identified therein, and which falsely claim income, withheld federal income taxes, and a tax refund owed. The refund checks are mailed to and acquired by perpetrators who are not the persons named on the refund, who then seek out an accomplice who is willing and able to cash the checks. …”

In September, Raiz and Barahona each pleaded guilty to a charge of conspiracy to defraud the United States. Each received a sentence of 24 months in federal prison and jointly they are responsible for $1,044,910 in restitution.

If deported, each “shall not re-enter the United States without the express permission of the Attorney General or the Secretary of the Department of Homeland Security.”

Obama executive action

If it stands, President Obama’s executive action deferring the deportation of illegal immigrants would complicate the relationship between some immigrants and the IRS.

Obama’s action — currently on hold as court challenges proceed — would allow those illegal immigrants to file amended tax returns claiming Earned Income Tax Credits going back three years. As a result, approximately 800,000 claims could cost the government $1.7 billion over the next 10 years, based on an estimate by the Joint Committee on Taxation.

Don Carrington is executive editor of Carolina Journal.