From 2008 to 2016, California tax preparer Scott Douglas Cutting Sr. filed approximately 475 returns on behalf of his clients. However, the IRS identified two problems with this scenario. The first was that Cutting’s CPA license had expired in 1989. The second was that many of the returns contained stolen information, falsely claimed tax credits, and failed to identify Cutting as their originator. By using personal information stolen from low-income taxpayers and, in some cases, even deceased individuals, Cutting managed to squeeze more than $1.3 million in improper, fraudulent tax refunds out of the Internal Revenue Service. In October, Cutting was sentenced to 26 months in prison for aiding and assisting in the preparation of false and fraudulent tax returns, which is a felony violation of 26 U.S. Code § 7206(2).
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Cutting’s license to practice as a certified public accountant expired during the late 1980s. Without renewing the license, he quietly continued to prepare and file tax returns with the IRS, masking his true identity with stolen information that, in many cases, was taken from deceased or disadvantaged taxpayers.
To steal other taxpayers’ identities, Cutting “often” paid various “recruiters,” who purchased the information from third parties, according to the Department of Justice (DOJ). In some cases, Cutting exploited entire families, “using personal identifying information of individuals and their family members without their permission.”
While several details of the case are notable – the scope of the fraud, the faux credentials – it actually follows a somewhat common pattern that we (and our readers) have seen before. Our tax blog features several examples of cases in which a tax preparer, often assisted by others, uses stolen information to submit fraudulent or falsified returns on behalf of unwitting taxpayers, initially reaping the benefits until being charged with serious tax crimes. We have covered similar cases in Florida, Philadelphia, and Las Vegas, which merely begins to scratch at the surface.
Most cases of this nature, including Cutting’s, involve willfully aiding or assisting in the preparation of fraudulent or false returns (26 U.S. Code § 7206(2)), a felony offense better known simply as “tax preparer fraud” or “return preparer fraud.” Under federal law, the maximum sentence for tax preparer fraud is three years in prison, and/or a criminal fine of up to $100,000 ($500,000 for corporations). However, this limit does not apply to civil tax penalties, restitution, or other fines for tax preparers – which can be substantial. In this case, Cutting was ordered to repay the IRS nearly $1,392,800 to compensate for the fraudulent refunds.
Cutting’s case, like all other federal tax crimes, “was investigated by IRS Criminal Investigation” (IRS-CI). As its name suggests, CI is the branch of the IRS responsible for investigating suspected tax crimes. As of 2019, IRS-CI is comprised of roughly 730 professional staff and 2,000 special agents, the latter of whom are the only IRS employees authorized to carry guns or make arrests. Special agents derive leads from many sources, including tax whistleblowers, members of law enforcement, state courts, and public information. However, many of IRS-CI’s leads come from IRS auditors, who will notify IRS-CI if indicators of tax fraud are discovered during an audit.
At the Tax Law Office of David W. Klasing, we are criminal tax defense lawyers and IRS audit attorneys with over 20 years of experience fighting misdemeanor and felony tax charges in California. If you have been chosen for an audit and have a history of compliance errors, get ahead of the situation now by working with an experienced IRS attorney in California. Contact the Tax Law Office of David W. Klasing online to set up a reduced-rate consultation, or call 24 hours, seven days a week, at (800) 681-1295.
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