CPAs Who Commit Fraud (#399)
/Now, CPAs who commit fraud. Keep in mind that all of these cases were brought to court within just the last two years. I’m going to start with a case provided by the same listener who suggested this topic. I love this one. A Kansas CPA pleaded guilty to wire fraud, bank fraud, etc., etc., for using his signatory authority over client accounts to transfer about $400,000 to – wait for it – Middle Finger Ranch, which was connected to his personal account. Could have been a little more subtle there. He concealed the transfers as farm expenses, and used the money to build a home. Now serving four years in prison, where I hope he can come up with some better ranch names.
The theme of the next fraud is go big or go home. A California CPA prepared at least 4,000 false income tax returns. This was absolutely industrial-grade, especially when you consider that he did all this in just four years. He fabricated business losses, made up expense deductions, overstated charitable contributions, and even filed for false residential energy credits. He has to pay back $1.5 million, and is awaiting sentencing. And – surprise – he’s permanently prohibited from preparing any more tax returns.
The theme of the next fraud is consistency in not doing anything. A Texas CPA did not file a personal tax return from 2008 onward, and did not file a business return from 2016 onward. And, to be really thorough, he didn’t remit any employee payroll tax withholdings, either. He was sentenced to 18 months in federal prison.
Look, before I go any further, it might appear as though I’m just getting a chuckle at other people’s expense. But there’s actually a point to be made here, which is that the vast majority of CPAs are quite law-abiding and ethical. Nonetheless, there will always be a small number of people who will break the rules. Now, let’s find out what else they did.
Next up, we have a Massachusetts CPA who specialized in enhancing source documents.
She was the financial manager of a real estate company that owned lots of commercial and residential properties. She forged leases and made up rent rolls for properties in several locations that made them look fully occupied. Lenders relied on these documents to issue $62 million in loans, which resulted in $20 million in lender losses. In most cases, the real estate company didn’t even try to make any loan payments before defaulting. She pleaded guilty, and is looking at up to 30 years in prison.
Let’s stick with Massachusetts. Another CPA showed a great deal of consistency. He had already been convicted of other crimes and ordered to pay the victims restitution. Rather than do that, he concealed a bunch of his income, thereby making less available for restitution payments. Of course, by doing that, he also illegally avoided a bunch of payroll taxes. And, to be really thorough, he also got a $180,000 Paycheck Protection Program loan during COVID and redirected the funds. He got two years in jail.
I’ll move down the coast a short ways to Connecticut, where another CPA engaged in some industrial-grade fraud. This one concealed income from his CPA practice by cashing more than 2,000 client checks into a variety of personal bank accounts in order to hide $1.4 million in income. He then filed personal tax returns that did not include this income. I’m guessing that there was a separation of duties issue on this one. He got three months in prison.
Let’s move down the coast a bit further, to New Jersey. Here, a CPA gave some really comprehensive services to support tax shelters. This included backdating documents, preparing false tax returns, and inflating charitable deductions – by a lot. He’s looking at five years in jail. As a side note, this CPA was part of a much broader scheme involving fake conservation easements that involved a lot of people. The total IRS tax loss on the overall scheme is estimated to be $450 million.
Let’s try Florida, where a CPA was absolutely, positively not going to pay the IRS. In this case, the CPA owed the IRS $2.2 million and did not pay it. So, the IRS announced that it was going to seize the CPA’s assets. So the CPA sold the assets and moved the proceeds to another person’s account so that they were less visible, and then kept spending the money. And on top of that, he then told the IRS that he didn’t have the money. He’s currently awaiting sentencing.
In case you think I’m picking on the east coast, lets turn to Indiana, where a CPA got tripped up by an illegal tax shelter scheme. Participants paid money into an account that was supposedly to license intellectual property in order to get a deductible business expense, and then got most of the money back, but deposited into a different account. This CPA prepared the tax returns of the clients participating in the scheme. He got three years in prison, plus restitution. He wasn’t even promoting the scheme, just doing the tax returns.
What about Tennessee? A CPA owned a bookkeeping service there, where he stole $4.6 million from client accounts. He then created false documents to make the thefts look like legitimate expenses. In some cases, he stole from clients in order to pay back others, so it turned into a bit of a Ponzi scheme. And then, to be really conniving, he prepared at least 80 false federal tax returns that inflated the refunds due to clients, and had the IRS deposit the funds into accounts that he controlled. And then, to be really, really conniving, he prepared another version of each return to show to clients. He’s in prison for nine years, and has to pay restitution.
Let’s finish with a visit to our nation’s capital, where we find a CPA who was willing to do anything to obtain a mortgage. This person had not filed a personal tax return in 10 years. He tried to get bank approval for a mortgage, and was told that he had to provide proof of having filed tax returns. No problem, he made some up, and identified a former colleague as the filer. It worked. He got the mortgage, but he was also charged by a grand jury with bank fraud, identity theft, and failure to file tax returns. He’s in prison for 20 months.
The most damaging thing about this last case was that the CPA had experience as a tax manager, so he knew what mortgage underwriters expected to see. Based on that knowledge, he created plausible-looking returns, and appropriated a former colleague’s professional identity to overcome the lender’s verification requirement. This is an egregious case of using your CPA expertise for personal gain. And that, right there, is the problem with every one of these cases. CPAs are supposed to serve the public good, not use their expertise to take advantage of the system. That might be worth keeping in mind.