Cheating Hearts: Novel Tales of Tax Frauds
April 2011
IN THIS ISSUE
— Tricks of Tax Fraud: Some Schemes Grow Complex, Others Simple
— Catching Tax Fraud Before it Becomes a Federal Case
GREETINGS!
Welcome to the April edition of our newsletter! In this issue, we’ll examine some of the more interesting recent attempts at tax fraud, and look at how the lessons from each case can be applied to a diligent fraud prevention practice.
TRICKS OF TAX FRAUD: SOME SCHEMES GROW COMPLEX, OTHERS SIMPLE
It’s an old refrain that nothing is certain in life but death and taxes — and often debated as to which is the least painful certainty. But some recent cases of tax fraudsters being prosecuted shed some light on the lengths to which perpetrators will go to enrich themselves and/or avoid paying taxes.
Take the case of James “Jay” McLamb, chief financial officer for third-party benefits administrator Castleton Group. McLamb admitted to his company’s founder and owner, Suzanne Clifton, that he “had prepared and filed false federal payroll tax forms and had failed to pay an estimated $8 million in federal payroll taxes due from the Castleton Group” for its 2005 through 2007 tax years, according to an administrative ruling order. McLamb reportedly kept the diverted funds within Castleton Group’s operations, rather than keeping the funds for himself, but the costs of his scheme to both the company and McLamb were severe — Castleton Group was declared insolvent and closed in December 2007 after once serving more than 100 clients, while McLamb entered a guilty plea to charges of tax fraud, receiving 2 1/2 years in prison and being ordered to make restitution of $8 million. Federal officials also filed civil actions against McLamb and Clifton to recover more than $500,000 of 401(k) contributions that were never actually deposited into employee accounts.
Others, perhaps not surprisingly, attempt to evade taxes as part of furthering other fraudulent schemes. One such case is former Cleveland area medical malpractice attorney Dale P. Zucker. “Zucker used his position as an attorney and a local businessman to convince clients and acquaintances into loaning him money for businesses that either had long-ceased to exist or never existed at all, according to court records,” one news release said. “The Indictment further stated that Zucker lulled investors into a false sense of security by mailing them promissory notes that guaranteed the return of their initial investment at an interest rate of 10% to 25%, depending on the investor,” another statement said. “Zucker knew he would not be able to repay the investors and, rather than fund the businesses as represented, he converted the investments for his own purposes, which included paying earlier investors, the expenses of his law practice and his own personal expenses. In addition, Zucker filed false federal income tax returns for the years 2003, 2004 and 2005, which failed to report combined income of approximately $588,000.” Zucker received a sentence of more than seven years in prison.
CATCHING TAX FRAUD BEFORE IT BECOMES A FEDERAL CASE
As with all types of fraud, vigilance at your company or client is the best defense. The first rule: don’t leave audits solely to authorities. Routine audits of payroll records, accounts payable, vendor services and other “hot spots” for fraud, likely best conducted on a quarterly basis either by internal compliance personnel or outside fraud experts, would probably have caught a tax (and payroll) cheat like McLamb before the damage from the scheme became excessive. Such efforts also will aid your company should authorities become involved at a later date — being able to document what the company, and the efforts made to contain a fraud situation in-house, can go far in terms of currying favor with prosecutors or enforcement agency officials.
As the tax code grows ever more complex — 64,000 pages and counting by some estimates — the ways fraudsters will attempt to subvert also multiply in number. A thorough set of internal controls and regular audits will allow your company to be prepared well before tax authorities come top the door with subpoenas and questions in hand.