Tax preparers gone wild

In part one of this two-parter, we examined the schemes of Bonnie G, a self-styled tax preparer who worked out of her basement creating federal and state income tax returns for her clients that contained lies cut from whole cloth to falsely qualify her clients for tax refunds and induce them to continue using — and paying for — her services. Bonnie's lies on her clients' behalf were many, fanciful and liberally applied to the tune of hundreds of returns for five years. Here we'll examine the simpler but equally effective (or lucrative) scheme of Donnie Z., another tax preparer who never made it out of the basement.

First, let's examine Donnie's curriculum vitae, shall we?

Donnie Z.'s résumé

In 1989, Donnie was charged in one complaint with a gross misdemeanor income tax offense and charged in two additional complaints of failure to file state individual tax returns. The latter two charges were dismissed at the same time that the income tax offense charge was continued without prosecution — also in 1989.

On April 2, 1991, an arrest and detention warrant was issued to Donnie for a probation violation in the continued charge. On April 18, 1991, the warrant was returned and quashed, and eight days later the charge was dismissed. In 1992, Donnie was charged with one count of theft by trick, one count of unlawful expenditures of charitable gambling and one charge of failure to file monthly state tax returns. He was convicted of the unlawful expenditures charge in August 1994 and sentenced to one year in prison. The sentence was stayed (meaning he wouldn't have to serve the prison sentence unless he violated the terms of his probation and the stay was revoked) for three years with 300 hours of community service in lieu of workhouse time. In 1997, two separate probation violation hearings were held, and his probation wasn't revoked.

Kinda looks like Bonnie's fraternal twin, yes? However, compared to Bonnie's fairly complex scheme of preparing fraudulent returns to obtain excessive refunds for her clients and thus ensuring repeat business and word-of-mouth referrals, Donnie Z. was Mister-One-Note-On-The-Kazoo. With only a few exceptions, Donnie defrauded his clients by employing one simple method: He stole their refunds by putting his own mailing address and bank account information on his clients' returns. When he was caught and confronted, he lied and said the refunds were compensation for his services.

Vague delaying Donnie

Donnie got his clients largely by word-of-mouth and by using his connections in community sports leagues. His clients were workaday people with little higher education in business management. He prepared, in his own unique way, federal and state income tax returns for these individuals and their businesses for several years.

Donnie's work was characterized by repeated filing delays — sometimes over several years — of individual, business and property tax returns. He also took his clients' financial documents and never returned them. He had them sign power of attorney (POA) instruments authorizing him to communicate with tax authorities on their behalf and often understated the scope of the powers these POAs conferred. He rushed each client through the review of whatever he actually did prepare — often only verbally summarizing the return and revealing only the signature page. He also frequently kept clients in a state of fear and urgency with many purported last-minute filing emergencies and kept them in a state of gratitude for his services.

His fee schedule was vague and usually not in writing. Donnie would simply say, "Just pay me this," and the client would pay it. His clients always paid him for his fees with personal checks. If the client didn't have the money to pay for Donnie's services at the time he'd prepare the returns, he worked out a creative agreement that they'd pay him when the refunds came in.

His notification of a client's due taxes was equally vague. Sometimes Donnie would tell a client to send him a check in a round-numbered amount for state taxes. He fashioned a barter arrangement with one client — a handyman of very modest means. The handyman would do repair work on Donnie's house for an hourly rate in exchange for tax preparation. Despite the client's repeated requests, Donnie never told him who owed what to whom. Invoices never changed hands for either man's services.

Donnie would include his mailing address, and routing and account numbers for his bank account on his clients' returns — instead of the clients' information. He wouldn't tell the clients when the IRS or the state revenue departments would mail refunds to Donnie's home address or electronically transfer them into his bank account. If the clients learned that Donnie was receiving the checks, he'd refuse to relinquish the refunds.

To generate refunds for his clients, he'd channel his inner Bonnie and sometimes underreport their incomes; one time he claimed imaginary net operating losses for a client. However, unlike Bonnie, he didn't do this to encourage repeat business or positive word-of-mouth referrals. He did it so he could get more refunds directly into his own pocket.

Taxing confrontation

This scheme went on for several years, until a couple — now tired of his evasions, postponements and opaque ways — learned their refund went directly to Donnie instead. They confronted him, he refused to relinquish it, his gobbledygook explanations finally lost their mystic appeal and the couple called the police.

A joint investigation by the police and by the state revenue department commenced. A search warrant executed on Donnie's bank accounts revealed 92 deposits into his business accounts of refunds from the IRS or state departments of revenue in which his clients were the actual payees. Donnie later defended his intercepting and retaining these refunds by saying they were compensation for his services, but these same bank records showed that his clients had paid him separately for his services.

And, of course, in keeping with The Fraudulent Tax Preparer Code of Lack of Ethics, he failed to file his own returns and remit his own taxes — eventually accumulating a state income tax debt of more than $71,000.

Donnie was charged with one count of identity theft, 24 individual counts of false/fraudulent tax returns (related to him using his mailing address and bank account number rather than the client's on the returns), and 20 counts of failure to file or failure to pay or collect a tax. He was convicted of one identity theft count and five counts of failure to file/failure to pay state tax; all other counts were dismissed. Donnie was sentenced to one year in prison; the sentence was stayed for 10 years, and he was ordered to pay a total of $57,350 in restitution to individual taxpayer-victims and the state department of revenue.

Sermonette

In the Feb. 25, 2014, edition of The Pew Charitable Trust, journalist Elaine S. Povich in the article, Most States Have No Rules for Independent Tax Preparers, said, "Consumer groups note that independent preparers are less regulated than hair stylists, who are required to be licensed in all states and the District of Columbia."

As reported in Michael Cohn's Dec. 2, 2015, Accountingtoday.com article, Congress Introduces New Tax Bill to Regulate Tax Preparers, U.S. Representative Diane Black (R-Tenn.), co-sponsor of The Tax Return Preparer Competency Act, made this point: "Today . . . there are no minimum standards to stipulate who can charge for these services. This lack of accountability puts Americans at unnecessary risk and contributes to rampant improper payments within the tax system."

Interestingly, the efforts to regulate tax preparers on the state and federal levels don't seem to focus on criminal histories — only on proof that they completed required training requirements and listed themselves on registries. Because Bonnie and Donnie were such habitual liars, it's difficult to know whether they had the competence to be legitimate tax preparers. Hopefully, they won't return to the field, but nothing prevents them from doing so. Nothing.

We all know regulation doesn't bulletproof anything. And we all know that past performance doesn't guarantee future results. But states can and do require applicants for all types of professional licenses and certifications — CPAs, doctors, lawyers, financial advisors, real estate brokers, notaries public — to at least disclose their conviction histories. States can and do reject applicants who have crimes on their records.

To regulate at that de minimis level wouldn't keep all the wolves out of the tent. But it would keep out a few and would notify the public that dishonesty in tax preparation is unacceptable.

Annette Simmons-Brown, CFE, most recently was the senior paralegal at the Hennepin County Attorney's Office in Minneapolis, Minnesota. Her email address is: simmonsbrown22@msn.com.