two more plead guilty to nearly $100 million tax fraud conspiracy
largest false claims case ever prosecuted in mO
KANSAS CITY, Mo. – David M. Ketchmark, Acting United States Attorney for the Western District of Missouri, announced that two more defendants pleaded guilty in federal court today to their roles in a tax fraud conspiracy that attempted to receive nearly $100 million in fraudulent refunds from the IRS in the largest federal false claims case that has ever been prosecuted in Missouri.
Robert E. Morris, 66, of Rocklin, Calif., and Earl Lee Davis, 53, of Monroe, La., pleaded guilty before U.S. District Judge Brian C. Wimes to the charge contained in a Sept. 22, 2011, federal indictment. Davis was a tax preparer and owner of Faster Refund Express, and a business recruiter for the city of Winnsboro, La.
Morris and Davis admitted they participated in a conspiracy that promoted a tax refund scheme across the United States from July 1, 2008, to Sept. 21, 2011. Conspirators received more than $3.5 million of the total $96 million in attempted fraudulent refunds. Davis attempted to receive more than $10 million on behalf of four clients, but none of those returns were paid out by the IRS.
1099-OID Tax Fraud Scheme
Morris, Davis and the other conspirators utilized 1099-Original Issue Discount forms as part of their scheme.
These forms are legitimately used by tax filers who must pay taxes on income they receive from the interest on certain investments, such as some types of bonds. Tax on certain bonds must be paid as income accrues. Such bond holders receive annual forms, called 1099-Original Issue Discount (OID), from the debt issuers. Bond holders then file these OID forms with the IRS, along with their income tax forms.
However, the scheme to which Morris and Davis pleaded guilty today utilized the 1099-OID forms in a nonsensical manner. Clients of the conspirators, working with their branch managers, assembled financial documents such as mortgage and loan statements, car payments, foreclosure records, bank statements, credit card statements, and other records of debt and spending. This debt information – rather than any actual bond income – was used to prepare and/or finalize false tax returns and fictitious Forms 1099-OID.
Robert E. Morris
Using the 1099-OID process, Morris repeatedly submitted multiple Forms 1040, claiming fraudulent refunds, for tax years 2004, 2005, and 2006. Morris used this process to assist others in filing tax returns seeking tax refunds larger than the amount of income earned by the individuals.
According to today’s plea agreement, Morris initially heard about a similar scheme, the “Zero Your Account” (ZYA) method of computing taxes, from a radio talk show host in California prior to joining this conspiracy. Using the ZYA process, Morris filled out a 2007 Form 1099 OID and sent it in. Despite how unusual the process sounded, Morris did not make any attempt to ascertain from the IRS or from an accountant whether the process was legal. In response, the IRS sent a letter to Morris stating he appeared entitled to a refund on his 2007 return, but since he had not filed the 2004 through 2006 returns, he needed to file those returns before he could receive a refund on his 2007 return. Morris then filed 1099 OID documents for the years 2004 through 2006 just as he had done for 2007, and began to receive letters from the IRS saying that these were frivolous filings.
In willful blindness to the legality of this process, and in stubborn defiance of the IRS response to his 2004 to 2006 filings, Morris continued to use the ZYA process. On Feb. 9, 2009, Morris signed an affiliate agreement contract to become a branch manager for this conspiracy. Morris began recruiting friends and family as new clients and helped to facilitate their 1099-OID submissions. In total, Morris introduced at least 10 individuals to the conspiracy. Morris arranged meetings at his residence to promote the OID process.
Morris obtained a Transmitter Control Code (TCC) to submit the Forms 1099-OID and 1099-A electronically to the IRS. Morris’s TCC was used in connection with at least 123 fraudulent filings, claiming $4.6 million in fraudulent refunds.
The IRS seized some of Morris’s fund in June 2009. At that point he destroyed all of his previous paperwork and discontinued these illegal filings. Since that time Morris has filed amended tax returns for years 2004 through 2008, using instructions provided by the IRS agent and his attorney. He has also filed returns for years 2009 through 2011, using accepted procedures. Morris has also been paying the IRS approximately $800 a month for back taxes since August 2009. Further, whenever he has run across anyone who wishes to file similar pleadings ( 1099-OID or other tax fraud schemes) with the IRS, Morris has advised them that doing this was the worst mistake he ever made, and he would discourage anyone from pursuing this type of activity.
Only one person Morris “helped” in filing their return ever received a refund from the IRS. She obtained a refund of $46,063 and paid Morris $6,900 for his efforts in helping her obtain this refund. The IRS recovered all of the refund money paid to this person except the $6,900, for which she is making monthly payments.
Earl Lee Davis
Davis was initially introduced to the conspiracy when he attended a sovereign citizen meeting near Chicago in late 2008 or early 2009. A co-conspirator gave a presentation on the OID return process, which included how loan debt could be used to receive a refund on a tax return. Davis admitted that he was suspicious, and he neglected to do his “due diligence” to check it out. Even though Davis thought the large refunds seemed “far-fetched,” he was having financial difficulties and was interested in making some extra money. Davis admits he did not consult with an attorney or a CPA, nor did he initially contact the IRS, to verify if the process was legal before participating.
Four OID clients were referred to Davis. Davis was to receive a flat fee of $260 per return after the client received their refund. Davis did not receive any money for any of the returns prepared, and none of the returns were paid out by the IRS. The amount of attempted loss attributable to Davis’s conduct totaled more than $10 million.
Two co-defendants have already pleaded guilty. John V. Perdido, 56, of Temecula, Calif., acted as a “branch manager” and recruited clients for the scheme. Perdido received the largest single refund from the scheme – $805,749, which must be forfeited to the government. Jennifer S. Wilson, 35, of Cumming, Ga., pleaded guilty to filing a false claim for a tax refund.
Under federal statutes, Morris and Davis are each subject to a sentence of up to 10 years in federal prison without parole, plus a fine up to $250,000 and an order of restitution. Sentencing hearings will be scheduled after the completion of presentence investigations by the United States Probation Office.
OID Fraud Web Site
A Web site has been established to provide updated information about the status of this investigation. Updates about this investigation and related cases will be posted at www.justice.gov/usao/mow/divisions/OIDfraud.html
These cases are being prosecuted by Assistant U.S. Attorneys Daniel M. Nelson and Thomas Larson. They were investigated by IRS-Criminal Investigation and the Treasury Inspector General for Tax Administration (TIGTA).