Taxable Talk

Michael Joseph Calalang Cabuhat had been living the good life. He had a nice house in the Hollywood Hills (of Los Angeles) and drove a Ferrari 360 Spider. Mr. Cabuhat owned a tax practice in Glendale (near Los Angeles) and called himself “celebritytaxguy.”

I will be the first to state that you can make a nice living from a tax practice. Mr. Cabuhat’s methods, though, were on the illegal side. He pleaded guilty to defrauding clients of more than $1.2 million, and will have 46 months at ClubFed to think that over. He also must make restitution of $1,496,416 and will be sending the government just over $426,000 from the sale of his home (and the car).

What did Mr. Cabuhat do? He had two methods of bilking clients but they all had a basis in preparing two returns for each client (and I’m not talking about state returns). In some cases Mr. Cabuhat prepared a return showing a small refund, and gave that return to the client. The small refund amount was duly deposited into the client’s account. However, the actual return filed with the IRS showed a larger refund, with that extra amount being deposited into a bank account controlled by Mr. Cabuhat.

His other method was to prepare a return showing an amount due; however, the return filed with the IRS showed a refund (with that refund being deposited into his account). He also had the clients make the tax payment to him, so that those funds, too, would be absconded.

And of course, Mr. Cabuhat didn’t report the $1.2 million he pocketed from the fraud on his own tax return. And, yes, Mr. Cabuhat had a license from the California Tax Education Council (all California tax professionals are required to have a license, either be an EA, CPA, attorney, or obtain the license from CTEC). As I’ve said before, having a license won’t stop tax preparers from committing crimes.

As for the crime itself, it was guaranteed to be discovered in the long run. Sooner or later a client would be audited or obtain a transcript of his return, and it wouldn’t match the return copy that the client had. Or even the IRS might wonder why 150 tax refunds were all deposited into the same bank account.

As noted in the press release from the Department of Justice,

…Judge Walter said Cabuhat’s scheme was “vicious” because it led to both financial and emotional harm to his victim-clients. Judge Walter noted that the stolen money was used simply to enhance Cabuhat’s lifestyle, allowing him to obtain a big house and a fancy car “all on the backs of these individuals who placed their trust” in Cabuhat.

Mr. Cabuhat will have nearly four years to think this all over.

Back in 2013, Cedric K. Oliphant was convicted of falsifying a tax return.

Specifically, during his plea hearing today [August 30, 2013], Oliphant admitted he knowingly and willfully included materially false deductions for gifts to charity and for unreimbursed business expenses a client’s 2007 tax return. This tax return alone caused a loss to the U.S. Treasury in the approximate amount of $11,261.

Oliphant also admitted he had knowingly and willfully prepared and filed dozens more false federal income tax returns for other clients for tax years 2006 through 2008 that generated excessive refunds and cause aggregate losses to the IRS of totaling approximately $325,000.

Mr. Oliphant was released on bond awaiting sentencing. A condition of his release was that he stop preparing tax returns. I’m sure you’re ahead of me.

He was sentenced back in 2014:

In handing down the sentence today, Judge Harmon noted that Oliphant had prepared hundreds more tax returns with deductions similar to those described in the plea agreement indicating that actual losses to the National Treasury could be as much as $1 million.

Oliphant had been previously released on bond. However, that bond was revoked when it was determined he violated the conditions of his release by continuing to prepare tax returns after conviction. At that bond hearing on April 10, 2014, evidence demonstrated Oliphant had prepared and electronically filed at least 463 client tax returns during the 2014 filing season.

Fast forward to August 26, 2016 (just a week or so ago); Mr. Oliphant was released from prison. Mr. Oliphant’s troubles apparently weren’t behind him. Remember the accusation of preparing returns when he shouldn’t have been? The US Department of Justice alleges it was quite a bit more than that.

Oliphant had been previously charged and later convicted of preparing dozens of false 2006-08 client tax returns as part of his business – Oliphant Tax Services. He had been permitted to remain on bond during that time under a condition that he have no involvement in the preparation of tax returns other than his own. However, according to the new indictment, Oliphant continued to claim the same false deductions for unsuspecting clients while awaiting sentencing on the previous case.

As part of the scheme, the indictment alleges he changed the name of business to “Tax Services” to allegedly make it appear he had stopped preparing client tax returns and that someone else was the owner of his tax preparation business. Oliphant allegedly attributed the fees to the nominal owner of his tax office but manipulated those tax returns to make it appear the tax office had produced almost no taxable income.

But that’s not all. Mr. Oliphant allegedly used nominees to conceal what was going on:

The indictment also alleges Oliphant established a series of bank accounts in the names of others – including minors with custodians other than himself – so the fees could first be deposited to accounts in the names of the nominal owner of his tax office and others. He then allegedly transferred those fees through these intermediate accounts to accounts in his own name. This scheme enabled Oliphant to conceal his personal use of the fees generated by the business during the course of the prosecution on the first case, according to the charges.

The business allegedly generated $2 million in fees and a total loss to the IRS of another $400,000 or more as charged in the new indictment. As part of the his plea agreement in the earlier case, the losses from those false tax returns exceeded $325,000.

If you sign an agreement not to do something—especially if that agreement is with the government—it’s a very good idea to not do that something. And if you do that something, it’s a good idea to be on the up and up; you know you’re being watched. If these allegations are true, Mr. Oliphant might be heading right back to ClubFed.

There are thousands of tax professionals. These range from the huge firms such as H&R Block to mom and pop outfits. The professionals range from Enrolled Agents, CPAs, and tax attorneys to those who have just put up a sign saying that they’re “professionals.”

Liberty Tax Service is one of the huge chains. They have employees dressed up like the Statue of Liberty outside of their locations. According to the IRS and Department of Justice, a Liberty Tax franchisee in metro Detroit took quite a few liberties with tax law.

Craig Comer operates five Liberty Tax Service locations near Detroit. If the complaint lodged by the US Department of Justice is correct, the five franchise locations did the usual illegal things to increase refunds:

According to the complaint, the defendants prepare income tax returns for customers that fraudulently overstate refunds and claim refundable credits by, among other things, claiming false or inflated Schedule C income and expenses, bogus dependents, false filing statuses, improper education credits and false itemized deductions. Based on audit adjustments the IRS has made to tax returns prepared and filed by the defendants for 2008 to 2013, the defendants’ conduct has cost the U.S. Treasury approximately $4.5 million for those years alone, according to the suit.

There are also allegations of forging customer signatures, changing returns that customers have already signed, committed fraud with the Earned Income Credit, and violated IRS PTIN (Practitioner Tax Identification Number) requirements. All tax professionals who prepare tax returns for money are required to put their PTIN on every tax return they file. The government is alleging that this wasn’t done by this franchisee.

This story does show two things. First, requiring every tax professional to obtain a license won’t stop tax fraud. The alleged fraud here was started by an individual with a PTIN, someone who assuredly could obtain the former RTRP designation or the current AFSP “seal of approval.” Second, the Department of Justice news release notes, “In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers.” This is absolutely true, and the DOJ should be commended for their work. It also shows that licensing every tax professional isn’t needed to get rid of unscrupulous ones.