New York Times:
In a Lawsuit, U.S. Accuses a Tax Adviser of Fraud
By DAVID CAY JOHNSTON
Published: April 15
He Justice Department asked a federal judge yesterday to effectively shut down a business that it says promotes 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 that it had lost at least $324 million in taxes in the last three years because of the company, the National Audit Defense Network, which has 470 employees. But it was the volume of customers that suggested how widespread tax cheating has become in the face of a steady erosion in enforcement of the laws over the last 15 years.
Robert Bennington of Las Vegas, the co-founder 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 comes after years of complaints by customers to the Internal Revenue Service and other government agencies that the business was a scheme to promote fraudulent tax deductions.
Both 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 that it took in at least $150 million since it was founded in 1996 and perhaps much more.
The National Audit Defense Network has advertised a network of more than 1,000 former I.R.S. Agents and others who, the company says, have extraordinary success in winning audits and stopping collection of past due taxes.
Last June, the company sought refuge from creditors in bankruptcy court. It has continued to operate.
One scheme, 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, which were to be modified 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 one Web site exists and its total sales commissions averaged $600 a year.
The company continued selling this program, the Justice Department said, even after its own technical department wrote a memorandum to top managers warning that it was tax fraud.
One 78-year-old Mississippi woman paid for four shopping Web sites even though she did not own a computer, Julia Thompson, a tax preparer for National Audit Defense Network, said in a sworn affidavit. Ms. Thompson said 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 for National Audit Defense Network, that if she questioned the arrangement she would be fired.
Ms. 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 dinner 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.
Ms. Weinstein said she then concluded she had been misled and canceled the original charge, only to learn that the company later persuaded Discover to reinstate it. She said that the charge remained on her Discover card but that she continued to dispute it.
The company also contends that its network of former I.R.S. Agents can settle tax disputes with the government on extraordinarily favorable terms.
The company grew in part because of its success in attracting support from legitimate enterprises through its Web pages.
Ernst & Young, the accounting firm, gave a 1999 entrepreneur of the year award to the company's founders, Mr. Bennington and Cort Christie. The accounting firm said that while the award bears its name the judges were not employees of Ernst & Young.
Many publications, including U.S. News & World Report, wrote favorable articles, and the company said it had alliances with Accuracy in Media, a journalism watchdog organization; WorldNetDaily.com, an Internet news organization; and Americans for Tax Reform, an influential antitax organization in Washington.
Don Irvine, chairman of Accuracy in Media, and Joseph Farah, owner of WorldNetDaily.com, said they had not authorized any marketing of their names by the company.
Jonathan Collegio, a spokesman for Americans for Tax Reform, said it had no concern about the National Audit Defense Network because it and its owners have not been convicted of any crime.
The lawsuit asks that the names and records of all clients be turned over to the I.R.S.
But whether the clients will be audited is in doubt because the agency already lets 78 percent of known tax cheats in some categories go without trying to collect and audits only about one in 200 income tax returns.
The I.R.S. Sought to frame the news in a positive light, noting that several lawsuits have been filed in recent months against promoters of schemes involving home-based businesses and tax credits connected to the Americans with Disabilities Act.
"We are moving aggressively against home-based business schemes and A.D.A. Schemes, " said a spokesman, who insisted his remarks be attributed to the agency and not an individual.
"Currently we have thousands of these types of cases in our audit pipeline, and we have been sharing information with state tax agencies" that are pursuing some of the taxpayers, he said.
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