U.S. sues to shut tax adviser

Civil lawsuit says company told people how to cheat

100,000 clients allegedly bilked

Government says it lost $324 million in tax revenue

April 15, 2004|By NEW YORK TIMES NEWS SERVICE

The Justice Department asked a federal judge yesterday to effectively shut down a business that it says sells income tax fraud and has bilked the government and 100,000 customers out of $500 million or more.

In court papers filed in Las Vegas, the government said it had lost at least $324 million in tax revenue over the past three years because of the company, the National Audit Defense Network, which has 470 employees. But it was the volume of customers that showed how widespread tax cheating has become in the face of a steady erosion in enforcement of the tax laws over the past 15 years.

Robert Bennington of Las Vegas, owner of National Audit Defense Network, referred questions to MassMedia Vanguard, a public relations firm, which said there would be no comment.

The Justice Department civil action follows years of complaints by customers to the IRS and other government agencies that the business was a scheme to promote fraudulent deductions on tax returns.

The Federal Trade Commission and Nevada took action earlier because of thousands of complaints from people who said they paid for advice in audits but were unable to obtain the services they had paid for in advance. The company charged $1,495 and up for its services, indicating it took in at least $150 million since it was founded in 1995 and perhaps much more.

The National Audit Defense Network has advertised a network of more than 1,000 former IRS agents and others who, the company says, have extraordinary success in winning audits and stopping collection of past due taxes.

The company sought refuge from creditors in bankruptcy court in June but has continued to operate.

One of the schemes, according to court papers, involved charging clients $2,475 for advice on how to claim a $5,000 tax credit, plus a $5,000 tax deduction for the disabled. Customers supposedly acquired their own Internet shopping Web sites, to which they supposedly made repeated modifications to benefit the disabled.

The government said 10,000 people took the $5,000 disability credit and a $5,475 deduction for changes to the Web sites to comply with the disability law, even though only a single Web site exists and its total sales commissions averaged $600 a year.

The company continued selling this scheme even after its own technical department wrote a memorandum to top managers warning that it was tax fraud, the Justice Department said.

One 78-year-old Mississippi woman paid for four shopping Web sites even though she did not even own a computer, Julia Thompson, a former tax preparer for the audit defense network, said in a sworn affidavit.

Thompson said that when she complained that the woman could not possibly qualify for any tax benefits, she was told by Mary Orie, the head of the tax preparation department, that if she questioned the arrangement she would be fired.

Thompson, in her affidavit, said she has continued to work for the company because "I feel a sense of responsibility" to customers whose tax returns she prepares and wants to protect them from the company's tax advice, which she characterized as reckless, false, misleading and erroneous.

The company told clients they could deduct personal spending as business expenses, including the full cost of restaurant meals costing more than $75, and it helped clients prepare thousands of tax returns seeking fraudulent deductions, according to court papers that included transcripts of sales pitches in which sales agents asserted that the tax deductions were lawful.

James Smallwood, a salesman for the company, said in a written statement to the Justice Department that during training he was instructed to tell potential clients to "drop your business card off somewhere on the way to work and you can write off all your commuting expenses" and "when you go to dine with your wife, drop your business card off and you can write off dinner as a business expense."

The government said such deductions were not legitimate. Detecting them, however, would require an audit.

A customer, Valerie E. Weinstein of Nevada, wrote in court papers that she was talked into paying $1,495 for audit protection and income tax preparation for everyone in her household. But she said that after her Discover card was charged, she was called by Mark Bausch, an employee of the audit defense network, who told her that she needed at least two "shell corporations" to take full advantage of the audit and tax preparation services she had just paid for. The corporations were priced at $3,195 each.

Weinstein said she concluded then that she had been misled and canceled the original charge, only to learn that the company later persuaded Discover to reinstate it. She said the charge remains on her Discover card, but she continues to dispute it.

The audit defense network also contends that its network of former IRS agents can settle tax disputes with the government on extraordinarily favorable terms.

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