US Tax Fraud Cases and Lessons Leant

Being informed about recent global tax fraud cases can help accountants and business owners avoid pitfalls and ensure compliance. Below we provide the highlights of recent cases of the US Internal Revenue Service (IRS).

1. Tax Preparer’s Double Filing Fraud (Miami)

   A tax preparer, Juan Mendieta, fraudulently inflated clients’ tax refunds and secretly redirected extra refunds to his own accounts. He created two sets of tax returns—one for clients and another he filed to the IRS with higher refund claims that benefited him. The IRS found at least 29 tax filings of this nature. Sentenced to 57 months in prison and ordered to repay over $11 million to the IRS.

2. Restaurant Owner’s Payroll and Sales Tax Fraud (Boston)

   John Drivas, a restaurateur operating multiple restaurants, was sentenced to over a year in prison after being found guilty of payroll and sales tax fraud. From 2017 to 2022, Drivas paid nearly $1.5 million in under-the-table wages to restaurant employees, failing to report these payments and avoiding employment taxes. Additionally, he collected sales taxes from customers but did not remit them to the tax authorities. Instead, he withheld over $1.5 million in sales taxes, diverting the funds for his personal use. As a result, he was ordered to pay over $2 million in restitution to the state and the IRS.

3. Fake Farming Business and COVID-Relief Tax Fraud (Los Angeles)

   Kevin Gregory attempted to defraud the IRS of over $65 million by falsely claiming COVID-related tax reliefs for a non-existent farming business. Between November 2020 and April 2022, he submitted fraudulent tax refund claims for a company called Elijah USA Farm Holdings, falsely stating that it employed 33 workers and was eligible for significant pandemic-related tax credits. The IRS issued a portion of the requested refunds, allowing Gregory to receive more than $2.7 million, which he used for personal expenses. However, an investigation revealed that his business had no employees, paid no wages, and did not make any tax deposits. He now faces up to five years in prison.

4. Payroll Tax Evasion in Construction Industry (Jacksonville, Florida)

   Jose Molina-Herrera was sentenced to 27 months in prison for orchestrating a payroll tax evasion scheme in the construction industry. His company, All National Remodeling, acted as a shell company that provided false insurance certificates and helped contractors pay workers off the books. By doing so, he enabled businesses to evade payroll taxes and workers' compensation insurance. He facilitated cash payments for workers, avoiding over $3.5 million in payroll tax obligations while misleading insurance companies into believing workers were insured. He was ordered to forfeit nearly $900,000 in illicit earnings and pay full restitution to the IRS.

5. Home Care Business Owner’s Payroll Tax Fraud (Colorado)

   Shandel Arkadie, the owner of Alternative Choice Home Care Nursing, pleaded guilty to failing to remit employment taxes deducted from employees’ wages. Between 2015 and 2020, her company withheld over $1 million in payroll taxes but did not pay them over to the IRS. Additionally, she failed to pay the company’s portion of Social Security and Medicare taxes, causing a total tax loss of approximately $1.5 million. She now faces up to five years in prison and significant financial penalties.

6. Construction Business Owner’s Cash Wage Scheme (Pennsylvania)

   James Barr, a construction company owner, was sentenced to probation and ordered to pay $337,000 in restitution after being found guilty of failing to report and pay employment taxes. From 2017 to 2020, he paid some of his employees in cash, failing to withhold payroll taxes or submit payments to the IRS. Although he did not receive a prison sentence, he was penalised financially and required to reimburse the tax authorities.

Lessons for Accountants

These tax fraud cases highlight key takeaways that accountants and businesses must keep in mind to avoid legal risks and maintain compliance with SARS regulations:

1. Fraudulent tax returns lead to severe consequences

   • Inflating refunds, false deductions, and tax fraud schemes can result in criminal prosecution, hefty fines, and jail time.

   • Accountants must ensure ethical tax practices and verify all client submissions.

2. Collected taxes must be remitted to SARS

   • Businesses must pay over VAT, PAYE, and other collected taxes promptly to SARS.

   • Using collected taxes as business funds is illegal and can result in severe penalties.

3. Under-the-table payroll payments are illegal

   • Paying employees in cash or off the books does not exempt businesses from payroll tax obligations. Paying employees under the table or avoiding payroll taxes is illegal and carries heavy penalties.

   • Accountants should advise clients to maintain accurate payroll records and ensure proper tax withholding.

4. Scrutinise tax relief and incentive claims

   • SARS is likely to scrutinise applications for incentives or relief, so accountants must verify eligibility before submitting claims.

   • Fraudulent claims, particularly for COVID-related relief, carry heavy penalties.

5. Accountants must stay vigilant against tax fraud

   • Whether preparing returns, managing payroll, or advising on tax compliance, accountants must act with integrity.

   • Regular audits and internal checks can help prevent tax fraud within businesses.

These cases serve as a strong reminder that non-compliance, whether intentional or due to negligence, can have severe financial and legal consequences.

Source: Article in Accounting Today