Electronic tax filing gives rise to fraud

April 13, 1992|By Jim Newton | Jim Newton,Los Angeles Times

LOS ANGELES -- Jerome Hearne used to rob people for a living, but sometime in the late 1980s or early 1990s he turned to a more lucrative livelihood: robbing the U.S. Treasury.

Hearne's adopted brand of crime was electronic tax fraud. He and a band of Los Angeles cohorts joined a fast-growing legion of crooks who are filing false returns and getting quick, illegal refunds in the form of bank loans.

The scams bring together clever ringleaders and large numbers of low-rent co-conspirators, usually unemployed or homeless people who are willing to have their real names and Social Security numbers used on fake tax returns.

Using the government's computerized tax-return system, returns are filed electronically, then the conspirators apply for bank loans based on the anticipated return. It only takes two to three days for the bank to approve the loan and for the scam artists to have checks in their hands.

By the time IRS auditors discover what has happened, everyone involved usually has disappeared with the money -- sometimes a great deal of it. Hearne and the government fiercely dispute the exact size of the take in his scam, but the total could top $1 million in false returns.

"Whereas Hearne originally robbed others with a gun, he now uses a pencil," Special Assistant U.S. Attorney Eric C. Lisann wrote of Hearne, who denies he was the group's ringleader but has pleaded guilty to tax fraud and conspiracy charges and faces sentencing later this month.

Hearne's case -- which involved seven other defendants charged with similar crimes -- is the nation's biggest so far. But Hearne has plenty of company in the electronic tax-scam business.

Nowhere is the tax scam growing faster than in California. The total value of fake California returns has leaped from $280,000 in early 1991 to $3.4 million so far this year.

And that is just those filed by the ones who get caught. Internal Revenue Service agents cannot even guess how many false returns are slipping through unnoticed, but many officials admit it is bound to be a lot.

In Los Angeles, roughly 40 percent of the IRS' criminal investigation agents now are devoted to electronic filing scams, more than are assigned to drugs, savings and loans or money laundering.

"We could see this coming a couple years ago, and then, boom, it was here," said one IRS official. "It's terrible. It's everywhere."

The electronic filing system was introduced gradually beginning in 1985, and officials say early abuses were relatively rare.

Through 1990, officials had prosecuted about 35 cases. But for much of that time, electronic filing was only available in certain parts of the country and only to taxpayers filing for refunds. As of this year, it is available everywhere and to everyone.

Last year, the Department of Justice prosecuted 65 defendants -- with 43 convictions so far. Those cases involved 319 separate counts of electronic tax fraud. Of those, 133 were logged in Los Angeles, tops in the nation and rivaled only by Houston. This year is bound to be even bigger, authorities say.

It is a mystery as to why Los Angeles and Houston far outpace the rest of the country in electronic filing scams. But experts say the crime tends to spread by word of mouth, so once it catches on someplace, it is hard to shake. In addition, criminals who succeed at first then tend to ratchet up the amount of the scam. They often go from modest returns of a few hundred dollars to claiming several thousand in refunds.

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