Curtis Morris, 43, of Elizabeth, Colo., and Richard Kellogg Armstrong, 77, of Prescott, Ariz., were found guilty on April 30, 2012, by a jury for mail fraud, filing false claims against the United States and conspiracy to file false claims against the United States, announced the Justice Department’s Tax Division, the U.S. Attorney’s Office for the District of Colorado and IRS-Criminal Investigation. In addition to these counts, Armstrong was also found guilty of engaging in monetary transactions in property derived from the mail fraud. The guilty verdicts were the result of a three week trial before U.S. District Court Judge Robert E. Blackburn. Morris and Armstrong are scheduled to be sentenced on Aug. 10, 2012.
Morris and Armstrong were indicted by a federal grand jury in Denver on June 8, 2010 and were subsequently charged in a superseding indictment on Feb. 15, 2011. The superseding indictment charged a total of twenty-eight counts as well as forfeiture allegations and included, as a defendant, the late Larry Hall. The jury returned guilty verdicts against Morris and Armstrong on all counts with which they were respectively charged. Morris was found guilty of three counts of mail fraud, seventeen counts of filing false claims against the United States and one count of conspiracy to defraud the United States. Armstrong was found guilty of one count of mail fraud, eight counts of filing false claims against the United States, three counts of engaging in monetary transactions in property derived from mail fraud and one count for conspiracy to defraud the United States.
According to the testimony at trial, the scheme involved Hall and Morris working with others to solicit individuals to file tax returns claiming large tax refunds based upon fictitious federal income tax withholdings taken from bogus Forms 1099-OID. Morris was the scheme tax preparer. He prepared over fifty fraudulent tax returns for at least twenty clients claiming illegal refunds of approximately $22 million. Original issue discount (OID) income is a form of interest income typically realized on debt instruments issued at a discount to, or purchased at less than, the ultimate redemption value of the debt instrument. This type of income is reported to the IRS on a Form 1099-OID and can be subject to federal income tax withholding in certain exceptional circumstances that didn’t apply in this case. As part of this scheme, Morris and others fabricated IRS Forms 1099-OID claiming large amounts of bogus federal income tax withholding to make it appear that these forms had been issued by legitimate financial institutions. Morris then used these bogus forms to prepare false tax returns for clients such as Armstrong. He used the federal income tax withholding amounts reported on the bogus Forms 1099-OID to offset and exceed his clients’ calculated income tax liabilities often resulting in hundreds of thousands of dollars in claimed refunds per client per year.
Armstrong was one of the clients who successfully secured a refund through the filing of tax returns prepared by Morris and subsequently served as a promoter and recruiter for the scheme. Armstrong received over $1.6 million and, according to the testimony at trial, quickly moved most of this money into accounts in the names of shell entities and offshore bank accounts. The government seized and is seeking forfeiture of Armstrong’s private plane and two pieces of real property purchased with the fraud proceeds, one of which is a house in Brighton purchased through Larry Hall by a nominee land trust.
“Those who defy the tax laws by preparing or filing false and frivolous tax returns risk criminal prosecution resulting in conviction, substantial penalties and time in prison, as well as being required to pay their taxes, interest and penalties,” said Assistant Attorney General for the Tax Division Kathryn Keneally. “The Tax Division remains committed to prosecuting tax defier conduct.”
“The guilty verdicts are a tribute to the hard work of the trial team,” said U.S. Attorney for the District of Colorado John Walsh. “The defendants have been held accountable for their fraudulent scheme thanks to the prosecutors and IRS-Criminal Investigation. Tax preparers should take note that if they attempt to defraud the IRS they will be caught and held accountable.”
“This verdict should send a clear message that promoting or participating in a fraudulent tax scheme will not be tolerated; rest assured those who do will be brought to justice,” said Sean Sowards, Special Agent in Charge, IRS Criminal Investigation, Denver Field Office.
Mail fraud carries a penalty of not more than 20 years in prison and up to a $250,000 fine, per count. Filing false claims against the United States carries a penalty of not more than 5 years imprisonment and a fine of up to $250,000 per count. Engaging in monetary transactions in property derived from mail fraud carries a penalty of not more than 10 years imprisonment and a fine of up to $250,000 per count. Conspiracy to defraud the United States carries a penalty of not more than 10 years imprisonment and a fine of up to $250,000 per count.
The case was investigated by special agents with IRS-criminal investigation. It was prosecuted by Assistant U.S. Attorney Kenneth Harmon and Special Assistant U.S. Attorney Kevin Sweeney. Kevin Sweeney is a trial attorney from the Justice Department’s Tax Division, currently on detail to the U.S. Attorney’s Office.