Fourth Circuit Upholds Tax Return Preparer's Conviction for Filing False Returns

(Parker Tax Publishing September 2017)

The Fourth Circuit upheld a tax return preparer's conviction for criminal conspiracy to file fraudulent income tax returns. The preparer, and others who worked at the tax preparation business, prepared numerous tax returns on which they claimed fraudulent business expenses for non-existent businesses of clients in order to gain bigger refunds for clients. U.S. v. Samuels, 2017 PTC 364 (4th Cir. 2017).

In January 2012, the IRS identified several potentially fraudulent individual income tax returns prepared by Daitech Tax Services, LLC, a tax-preparation company located in Columbia, South Carolina. In March 2012, IRS Special Agent Shan-Tika Watkins arrived at Daitech, posing undercover as a potential customer. Daitech employees assisted and encouraged Special Agent Watkins to claim false deductions. Based on this undercover operation, the IRS served a search warrant on Daitech and uncovered a pattern of filing fraudulent tax returns on behalf of its customers. During their review, investigators examined and sorted tax returns by preparer name and determined that Daitech owner Eric Pinckney, Daitech office manager Lemuel Brown, and Brandon Samuels, a part-time tax preparer for the company, filed the most returns during their time at Daitech.

Samuels was indicted on July 22, 2015, along with co-defendants Pinckney and Brown, on one count of criminal conspiracy to file fraudulent income tax returns. During the two-day trial, multiple witnesses testified about Daitech's practice of filing false tax returns. For example, Pinckney admitted that he personally, along with Samuels and other Daitech employees, filed false returns in an effort to get his clients more money. He explained that Daitech could create false returns in a variety of ways, depending on the client's situation. One of the ways Daitech employees falsified tax returns was creating fraudulent business expenses for clients. Pinckney testified that Daitech employees, including Samuels, would claim a client's entire cell phone bill as a business expense even when that would be improper. Pinckney also testified to (1) claiming vehicle mileage, meals, and entertainment as expenses for a business that had no sales, and (2) using a per diem expense calculation that Pinckney made up. He said that Daitech was known for being a place where clients could go without having a lot of income and yet receive a decent refund.

Several other witnesses testified about Samuel's actions at Daitech, where he worked from 2007 through 2011. Lutrica Singletary, a former Daitech customer, testified that she requested that Samuels prepare her tax return in 2009, and that Samuels claimed food, entertainment, and utilities expenses for a childcare business even though he was aware she did not own or operate a childcare business. Frank Hyland, another former Daitech customer, testified that Samuels knowingly created fraudulent mileage, costs of goods sold, advertising, and utilities expenses on Hyland's returns for a non-existent personal training business.

In 2016, a jury found Samuels guilty of conspiracy to file fraudulent income tax returns. A district court sentenced Samuels to five years of probation and ordered him to pay to the IRS restitution of $18,070 out of the $152,859 total tax loss attributed to the conspiracy. Samuels appealed both the conviction and the restitution amount.

On appeal, Samuels claimed that the evidence upon which his conviction was based was insufficient. Although several Daitech customers testified that he created false tax returns for them, Samuels argued that there was not sufficient evidence to establish his agreement with Pinckney or Brown to engage in a conspiracy to file fraudulent returns. Samuels also argued that his restitution should be reduced to only the amount attributable to false returns for Daitech customers who specifically identified him as their tax preparer.

The Fourth Circuit upheld Samuels' conviction and the restitution amount. To obtain a conspiracy conviction, the court noted, the government had to prove an agreement to commit an offense, willing participation by Samuels, and an overt act in furtherance of the conspiracy. A common purpose and plan, the court said, may be inferred from all the circumstances. According to the court, the government may prove knowledge and participation in a conspiracy by circumstantial evidence. The court concluded that Pinckney's testimony, along with other witness testimony describing Samuel's preparation of false tax returns, was sufficient for the jury to infer that Samuels agreed to file fraudulent tax returns and willingly participated in the conspiracy.

With respect to the restitution award, the court said that an award is appropriate if the act in question that harms the victim is either conduct underlying an element of the offense of the conviction, or an act taken in furtherance of a scheme, conspiracy, or pattern of criminal activity that is specifically included as an element of the offense of conviction. The court noted that Samuels' restitution, which the district court had recognized could be much higher, included only tax returns with Samuel's name and PTIN and did not include those filed after Samuel's departure from Daitech. The Fourth Circuit observed that the district court also credited Samuel's with the $6,027 made in repayments by Daitech customers to the Treasury. Thus, the court concluded, the district court did not abuse its discretion in holding Samuels responsible for restitution relating to those returns filed using his name and PTIN even absent testimony specifically identifying Samuels as the preparer.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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