Department of Justice Seal Department of Justice
(202) 514-2007
TDD (202) 514-1888


Scheme Involved Nevada Corporations, Bogus Insurance And
Consulting Expenses, “Warehouse Bank,” And Offshore Credit Cards

WASHINGTON D.C. - Eileen J. O’Connor, Assistant Attorney General for the Tax Division, United States Department of Justice; Karin J. Immergut, U.S. Attorney for the District of Oregon; and Mark W. Everson, Commissioner, Internal Revenue Service, announced that at the federal courthouse in Portland, Oregon, Terry L. Neal and Aaron Young each pled guilty to felony tax charges. Mr. Neal pled guilty to a charge of conspiracy to defraud the United States by impeding the IRS (18 U.S.C. §371). Mr. Young pled guilty to a charge of aiding and assisting in the preparation of a fraudulent tax return (26 U.S.C. §7206(2)).

Conspiracy carries a maximum penalty of five years imprisonment, a $250,000 fine, or both, and three years of supervised release following imprisonment. Preparing a fraudulent tax return carries a maximum penalty of three years imprisonment, a $250,000 fine, or both, and three years of supervised release following imprisonment. As conditions of their respective plea agreements, both defendants stipulated that the maximum applicable sentence would be appropriate.

“This is one of many pending criminal prosecutions involving schemes to hide income and assets from the IRS,” said Assistant Attorney General Eileen J. O’Connor. “People who promote or use fraudulent tax schemes face federal prison, along with civil penalties and interest on any unpaid taxes.”

“With the April 15 tax deadline looming, it is important for people to have confidence that when they pay their taxes, their neighbors and competitors will do the same,” said IRS Commissioner Mark W. Everson. “Terry Neal and his associates will be held accountable for their efforts to secretly funnel money offshore and undermine our tax system. The government will not tolerate these types of offshore schemes in which people illegally evade their tax obligations.”

On April 23, 2003, a thirteen-count indictment was returned against Messrs. Neal and Young, along with Lee Morgan and James Fontano. It alleged that, since at least 1995, the defendants and other unindicted co-conspirators conspired to hide assets, income and expenditures from the IRS, for themselves and their clients. The defendants allegedly established foreign and domestic “shelf” corporations for themselves and their clients. A “shelf” corporation has no employees or business premises and conducts no business. The defendants allegedly established domestic and foreign bank and securities accounts for the corporations, and devised a variety of ways they and their co-conspirators could use the funds in the United States without making the funds easily traceable to the true owner or paying taxes on them. These methods allegedly included “income stripping,” use of “warehouse banks,” offshore credit or debit cards, false mortgage loans, false insurance policies, and offshore brokerage accounts.

According to the indictment, “income stripping” involved setting up a Nevada corporation, which then billed the client’s legitimate business for fictitious consulting or other services. The legitimate business would allegedly fraudulently deduct the payments as a business expense on its tax return. A “warehouse bank” account is a bank account at a regular commercial bank in which all clients’ funds are commingled or pooled, for the purpose of concealing the client’s ownership of the funds. Clients would allegedly send instructions to Neal or his coconspirators, who would conduct the transactions at their direction. Similarly, offshore bank accounts were allegedly used to conceal a client’s funds, with credit or debit cards issued by an offshore bank used as one means for repatriating monies as needed.

According to the indictment, the defendants also advised clients to purchase an “insurance policy” from a fictitious foreign insurance company. The client’s legitimate business would allegedly deduct the insurance premium as a business expense on its tax return. The money would allegedly be sent offshore to defendants, who kept six to nine percent as their fee. After a year, the balance of the funds would allegedly be deposited to one of the client’s foreign bank accounts and would again be available to the client.

According to the indictment, in order to further conceal the scheme, the defendants prepared false, fictitious, and fraudulent documents to create a veneer of legitimacy to their clients’ tax evasion. These documents included alleged false invoices for “consulting” or “services,” promissory notes, consulting agreements, and insurance policies. They also allegedly prepared and filed false tax returns for the clients’ Nevada corporations, which returns usually showed little or no tax due. When clients were contacted by the IRS, the defendants allegedly advised the clients to lie about their connection to the Nevada and Nevis corporations and to destroy documents. The defendants allegedly charged substantial fees for their services.

Assistant Attorney General O’Connor, U.S. Attorney Immergut, and Commissioner Everson also announced that, in addition to these promoters and their alleged co-conspirators, prosecutions will continue against clients who used the offshore tax fraud schemes.

Assistant Attorney General O’Connor, U.S. Attorney Immergut, and Commissioner Everson thanked Assistant U.S. Attorney Robert B. Ross and Tax Division Trial Attorneys Mark S. Determan and Amanda B. Cruser, who assisted in the prosecution of this case. They also thanked the special agents of the Internal Revenue Service, whose assistance was essential to the successful investigation and prosecution of this complex case.

Messrs. Morgan and Fontano are awaiting trial on the indictment. The charges contained in an indictment are only allegations. In the American justice system, a person is presumed innocent unless and until he or she is proven guilty in a court of law.