Two Men Convicted Of Orchestrating Tax Fraud Scheme That Illegally Sought Quarter Billion Dollars In Fraudulent Tax Refunds
SANTA ANA, California – Two Inland Empire men who ran the Fontana-based Old Quest Foundation have been convicted of running a tax fraud scheme that resulted in more than 400 fraudulent federal income tax returns being filed with the IRS that cumulatively sought more than $250 million in fraudulent refunds.
Arturo S. Ruiz, 55, of Moreno Valley, who was the chief executive officer of Old Quest, was found guilty yesterday of one count of conspiracy to defraud the United States and 41 counts of filing false claims against the United States, including four of his own federal tax returns.
Francisco J. Mendoza, 51, of San Bernardino, who was the president of Old Quest, was also found guilty yesterday of one count of conspiracy to defraud the United States and 37 counts of filing false claims against the United States.
The two defendants, both of whom are currently being held without bond, are scheduled to be sentenced by United States District Judge Josephine Staton Tucker on May 10. As a result of this week’s convictions, Ruiz faces a statutory maximum sentence of 215 years in federal prison, and Mendoza faces a statutory maximum sentence of 195 years in federal prison.
The case against Ruiz and Mendoza stems from “Operation Stolen Treasures,” an investigation conducted by Special Agents with IRS Criminal Investigation that led to 55 people being indicted by a federal grand jury in the fall of 2011 (see: http://www.justice.gov/usao/cac/Pressroom/2011/140.html). Ruiz and Mendoza were the lead defendants in a 19-defendant indictment that was at the center of Operation Stolen Treasures.
The evidence presented during a two-week trial showed that Ruiz and Mendoza fraudulently told Old Quest clients they each could receive tax refunds of hundreds of thousands of dollars by accessing “secret government accounts” through a process that included the filing of IRS Forms 1099 OID. During presentations made across the Southland, members of the Old Quest conspiracy promoted the secret account theory and other “tax defier” arguments. In an attempt to give legitimacy to the scheme, Ruiz and Mendoza falsely told clients who attended seminars that Old Quest had employees who were attorneys, accountants, CPAs and former IRS employees. Taxpayers who signed up were required to pay Old Quest fees as high as $10,000, and they were required to promise to “donate” to Old Quest 25 percent of any tax refunds they received.
In exchange for the payments, Old Quest prepared and filed false income tax returns, which routinely sought hundreds of thousands of dollars – and sometimes millions of dollars – in income tax refunds. In some cases, Old Quest filed multiple false tax returns on behalf of clients. During a search warrant executed at Old Quest’s offices, special agents with IRS Criminal Investigation seized several unfiled tax returns, including one signed tax return that falsely reported $10,500,106 in federal income tax had been withheld and fraudulently claimed a $6,868,675 tax refund.
Bank records introduced as evidence showed that Old Quest received approximately $1.9 million from clients who used the fraudulent OID scheme, a figure that includes kickbacks from tax refunds erroneously issued by the IRS. The evidence also showed that while IRS agents were searching Old Quest' s offices, Mendoza emptied more than $250,000 from one of Old Quest’s bank accounts, and that Ruiz hid the funds from authorities by depositing them into another bank account in a different name.
When customers received IRS letters warning that their tax returns were frivolous, Old Quest employees assured customers that the IRS sent letters only to “intimidate” them because the “IRS did not want to pay.” After several refund checks were erroneously issued and the IRS froze the bank accounts of the customers who had received them, Ruiz and Mendoza instructed their employees to open new accounts for customers at different banks in an attempt to avoid further IRS scrutiny. The IRS search of the Old Quest offices and computers in September 2009 revealed numerous emails and printouts of IRS publications warning of the exact same scheme that Ruiz and Mendoza were promoting.
Prior to the tax refund scheme, Ruiz and Mendoza had promoted a “land patent” program to many of the same clients, according to the evidence at trial. Under this program, Ruiz and Mendoza promised to eliminate the clients’ mortgages through an obscure and mysterious process, again in exchange for substantial fees. The land patent program quickly failed, and dozens of clients lost their homes to foreclosure.
In addition to selling the fraudulent schemes to customers across the Southland, Ruiz and Mendoza failed to report to the IRS hundreds of thousands of dollars of their own income, and they filed their own false federal income tax returns that fraudulently sought refunds. The evidence at trial showed that Ruiz bragged about not paying taxes for more than 25 years.
A total of 55 defendants were indicted as part of Operation Stolen Treasures, and with this week’s convictions of Ruiz and Mendoza 19 people now have been convicted.
Release No. 13-017