Remember that "13 Investigates: IRS tax loophole" video that went viral? This one?
People went nuts about this supposed loophole that allowed tax credits for undocumented workers to use to beef up their refunds. I said, at the time:
This is not a loophole. It’s tax fraud. Those are two totally different things.
This week, Preet Bharara, United States Attorney for the Southern District of New York, Thomas E. Bishop, Acting Special Agent in Charge of the New York Office of the Internal Revenue Service-Criminal Investigation ("IRS-CI"), and Mark Peters, Commissioner of the New York City Department of Investigation ("DOI"), announced the arrests of seven individuals in connection with a tax fraud scheme involving this exact sort of thing: filing tax returns claiming false credits. The seven individuals who are alleged to have participated in the scheme are Noel Cuello, Luz C. Ricardo (a/k/a/ "Lucy" as in "Lucy Ricardo" and no, I'm not making that up), Francisco Abreu (a/k/a "Seyayin"), Arismendy Cuello (a/k/a "Cheito"), Jonathan Orbe (a/k/a "Jigga"), Catherine Ricart (a/k/a "Cathy") and Joel Vargas (apparently, not everyone gets a nickname).
Under this particular scheme, Abreu, who worked at the time as a fraud investigator with the New York City Human Resources Administration (yes, he was a fraud investigator allegedly committing fraud), sold identifying information of minors, including names, dates of birth, and Social Security numbers. That information was then used to file thousands of fraudulent tax returns, resulting in millions of dollars of losses to the Treasury.
The stolen information was used to prepare fraudulent returns claiming certain tax credits, including the Earned Income Tax Credit ("EITC"). The EITC - long a magnet for tax fraud - is available to qualifying low and moderate income working individuals and families. Generally, the more dependents you claim, the larger the allowable credit. Other tax credits related to dependents include the Child Tax Credit and the Additional Tax Credit (as featured in the video).
Armed with this information, Noel Cuello and Ricardo opened a tax business in the State of New York. With the assistance of Arismendy Cuello, Orbe, Ricart and Vargas, the pair allegedly sought out taxpayers willing to lie about their dependents in exchange for cash and then prepared fraudulent returns using the stolen information.
According to the prosecution, the business filed thousands of these kinds of returns, bringing in refunds worth millions of dollars - and they got away with it for years. According to Bharara, the scheme began sometime in 2009 and lasted through spring 2014.
The scheme continued even after IRS-Criminal Investigation executed multiple search warrants on the business. To confuse authorities and escape detection, Orbe and Ricart established new e-file accounts and opened new bank accounts.
How did it manage to go on for so long despite the focus from IRS-CI and other agencies? For the most part, minors don't file tax returns. So long as their names and personal information do not appear on other returns for their parents or guardians, they remain off the radar - making the fraudulent use of their data more difficult to discover. It's a grim reminder that identity theft can happen to anyone.
Bharara referred to the scheme as "alleged massive fraud." Bharara went on to indicate that the fact the fraud was committed with the assistance of a city agency fraud investigator added "an element of galling irony."
Each of the defendants is charged with one count of conspiracy, which carries a maximum term of 10 years; one count of conspiracy to commit wire fraud, which carries a maximum term of 20 years; and one count of aggravated identity theft, which carries a mandatory minimum term of 24 months. In addition, Ricardo is charged with two counts of subscribing to a false return; Arismendy Cuello is charged with three counts of subscribing to a false return; Orbe is charged with two counts of subscribing to a false return; Ricart is charged with five counts of subscribing to a false return; and Vargas is charged with two counts of subscribing to false return. Each of the false return counts carries a maximum term of three years.
As to those taxpayers who participated in the scheme? Bharara didn't make official comment on what might happen to them. I have, however, worked with clients who were persuaded to claim credits and deductions for which they weren't entitled. The result in those circumstances? Audits. Tax. Penalties. Interest. If you make a mistake - even if it's because the really bad guys convinced you that it was right when you knew it was wrong - you have to pay the price. Not the bad guys. They might get theirs (in this case, some time prison if found guilty) but that doesn't mean that you get a pass for your own lapse in judgment. You're still on the hook when you sign that return under penalty of perjury. Be smart. Cheating on your taxes by claiming false deductions isn't just about you. Every dollar that you take that doesn't belong to you comes from someone else who properly paid into the system. That's why IRS-CI and other agencies make fraud and identity theft a priority.
"Cases that involve refund fraud, identity theft and breaking the public's trust are all investigative priorities for the special agents of IRS-Criminal Investigation. But our real priority is protecting the American taxpayer by leveling the playing field and bringing tax cheats to justice," said Richard Weber, Chief, IRS-Criminal Investigation. "Those who commit fraud by operating through the veil of legitimate businesses and honest public service will be caught and will go to jail. We will continue to vigorously pursue those who unjustly enrich themselves by defrauding the government and abusing public trust."
