IRS refunds to old house kept coming

Blunder: Like a dream machine, the tax agency cranked out checks and mailed them to an unlikely address

March 09, 2000|By Michael James and Jay Apperson | Michael James and Jay Apperson,SUN STAFF

Year after year, steady as a government grant, the checks arrived. Dropped through a mail slot or slid beneath a locked door, the IRS refunds piled up in the dingy vestibule of a rundown rowhouse in lower Charles Village.

It was a fraud artist's dream come true.

For much of the past decade, the Internal Revenue Service mistakenly sent more than 1,000 tax refund checks to the Baltimore house -- unwittingly fueling the criminal ambitions of a loose ring of swindlers that cashed more than $500,000 in U.S. Treasury checks, investigators say.

The allegations spelled out in federal court affidavits as part of a continuing investigation describe what appears to be an exceptional IRS blunder, the likes of which were never seen during recent years of scrutiny by congressional leaders who decried the agency as rife with incompetence.

Among those alleged to have illegally cashed the misdirected checks are a convicted Harford County drug dealer who used IRS money to pay for his court-ordered home monitoring bracelet and a Baltimore barber accused of funneling more than $100,000 worth of Treasury checks into an account for his hair salon.

More than once, the rowhouse's front door was smashed open by someone who presumably wanted to get at the bonanza of Treasury checks inside, court papers say.

The checks were sent by the IRS from 1989 to 1999 to a three-story, four-apartment house at 2429 St. Paul St., where a tax preparation firm once rented the first-floor office.

Tax officials mistakenly sent checks and other mail belonging to hundreds of corporations to the address because IRS computers failed to note that the tax preparer no longer represented the companies, court papers say.

Federal authorities have identified about 200 checks that were illegally cashed after they were sent to 2429 St. Paul St. But they say the IRS can't account for how much the error cost taxpayers, the number of checks that were mailed to the wrong address, or whether more checks may have been illegally cashed.

"It is impossible to determine precisely how many checks have been pilfered and negotiated or how many bank accounts may have been opened," a federal agent wrote in an affidavit filed in U.S. District Court in Baltimore.

At least one person complained to the IRS that checks were being sent to the wrong address, and many company owners who didn't receive their checks called the IRS to ask where their refunds had gone, investigators say.

Because the companies hadn't done anything wrong, the IRS often gave them checks to replace the ones that had been fraudulently cashed.

"We just assumed it got lost or was never sent," said Jerry Gluck, general counsel for Jefferies & Company Inc. of Los Angeles, a securities firm whose refund of $15,396 was stolen in October 1998. "The IRS didn't tell us why we didn't get them. They just sent another check."

Don Roberts, a spokesman at IRS headquarters in Washington, refused to comment on the allegations of IRS mismanagement raised in the affidavits, saying that by law he could not talk about pending criminal cases.

"We cannot discuss the specifics of the case," Roberts said. He said he had never heard of the IRS ever committing an error like the one alleged in Baltimore.

No one has been charged in the alleged check-cashing scheme, which is spelled out in three federal search warrant affidavits filed by the Treasury Department's Office of Inspector General for Tax Administration.

Tax preparer at address

The investigation began at the drab, brick house in a crime-ridden block of St. Paul Street, an unremarkable building except for the fact that it was the inadvertent link between the IRS and opportunistic entrepreneurs.

A decade ago, beginning about 1989, the building apparently became a dead-letter stop for government checks. A tax preparer, James E. Lewis, opened a business called Taxation By Representation in the ground-floor storefront office.

For three years before 1989 Lewis had worked for the Baltimore accounting firm of Control Data Resources (CDR), where he prepared taxes for almost 3,000 corporations. As their tax representative, Lewis had power of attorney for the companies and received their tax correspondence through CDR.

But when Lewis left to start his St. Paul Street business, the IRS failed to document that he was no longer representing many of the companies, a federal affidavit says. Thus, the IRS continued to send refund checks for payroll withholding taxes to his former clients -- in care of Lewis.

"Lewis' power of attorney with respect to CDR corporate clients was mistakenly not withdrawn from IRS computers," says the affidavit, written by U.S. Treasury Special Agent Kenneth D. Grimm. "As a result, tax refund checks have continued to be sent directly by the IRS to 2429 St. Paul St. This misdirection of IRS checks has apparently continued until the practice was stopped in 1999."

Lewis, now a car salesman in Newport News, Va., hinted that he tried to alert the IRS about the problem of misdirected checks.

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