Criminal Investigations Division

1. Tax Practitioner Liaison Meeting November 17, 2011 Criminal Investigations Division

2. What it does: • Assists with collection of tax revenues through the review and investigation of alleged tax law violations and criminal tax violations. • Investigates serious misconduct allegedly committed by Louisiana Department of Revenue (“Department” or “Revenue” or (“LDR”) employees. • Its staff consists of nine (9) people. • Its territory spans the entire state of Louisiana. overview of the Criminal investigations Division

3. Suspicious Filers (“SF”) Program • The Federation of Tax Administrators administers • Memorandum of Understanding • Forty-one participating states, including Louisiana • Participating states share suspicious filer information • Use information received to block accounts on LDR’s integrated tax system by SSN, preparer identification number, and bank routing and account numbers • IRS had to implement the “Questionable Refund Program “because it allowed more than $1 billion in fraudulent refunds to be issued for 2007. They asked the SF states to share. • Tax Refund Review • 5-day refund review period before refunds issue • All refunds are included on a report and are subject to review • Refund Reports are analyzed by using Cognos (Bus. Intelligence Software) • Multiple refunds to same routing or bank account number • Multiple refunds to same address • EFIN (Electronic Filer’s Identification Number) • ETIN (Electronic Transmitter Identification Number) • Areas, cities, addresses or banks associated with fraud always reviewed. • Use Random Integer Generator to select some of the refund requests to review • Identity Theft The cid tax refund intercept program (“trip”) Unit

4. Investigates tips received via: • Fraud Hotline at 1.866.940.7053 • Telephone at 225.219.2280 • Fraud Mailbox at http://revenue.louisiana.gov/ • Facsimile at 225.219.2287 • Mail at P.O. Box 2389, Baton Rouge, LA 70821 • Walk-ins at 617 N. 3rd St., Baton Rouge, LA 70821 • Scours newspapers, internet and United States Attorneys Press Releases for leads. • X-Factor is usually one of the best sources for information • Xfriend • Xspouse • Xpartner • xemployee The cid investigation Unit

5. The IRS has seen a 181% increase in tax fraud from 2009 to 2010. • The LDR has also seen more attempts at tax fraud, especially related to identity theft. Fraudster seeks a fraudulent refund by filing instead of or ahead of the real taxpayer, or fraudster amends actual taxpayer’s return requesting a fraudulent refund. • Identity theft is the number one fraud and a lot of identity theft is related to taxes, especially to refund fraud. Returns are filed using information obtained from: • Dead people • Prisoners • Nursing home residents • Hospital Patients • Minor children • Information sold over the internet • Organized crime and drug dealers are getting into the act. Healthier business, low cost and the punishment is less severe if caught. Fraud is the fastest growing crime in america

6. 10 – 80 – 10 Rule • 10% of the population will never commit fraud. • 10% of the population actively seeks ways to commit fraud. • 80% of the population will commit fraud given the right circumstances (Fraud Triangle – pressure, opportunity and rationalization) Why tax fraud is increasing?

7. Pressure (usually stems from a significant financial need) • Medical Problems • Unreasonable performance goals • Spouse loses a job • Divorce • Starting a new business or current business is struggling • Criminal Conviction • Civil lawsuit • Purchase a new or second home, or remodeling a home • Want to maintain a certain lifestyle • Excessive Gambling • Drug or alcohol addition • Greed Fraud Triangle (pressure, Opportunity & rationalization)

8. Opportunity – the ability to commit fraud. • Weak internal controls. • Poor management oversight. • Failure to implement adequate procedures to detect fraudulent activity. • Rationalization – justification for committing fraud • Fraud is justified to save a family member or loved one. I am a hero. • Everything will be lost if fraud is not committed. Don’t want to be poor. • Belief that no help is otherwise available. Hopeless. • Intention to repay what was taken. It’s a loan. • Job dissatisfaction. I deserve it. • Doesn’t care about who is harmed by his actions. Doesn’t have a conscious. Fraud Triangle (Continued)

9. Wheeler/Dealer Domineering/Controlling Don’t like people reviewing their work Strong desire for personal gain Have a “beat the system attitude” Live beyond their means Close relationship with customers or vendors Unable to relax Too good to be true work performance Don’t take much leave Work excessive overtime Appears to be trustworthy Common Personality traits of fraudsters

10. Displays a drastic change in personality or behavior • Suddenly buys houses, cars, boats, clothes, jewelry, electronic, etc. • Brags about new purchases • Starts to carry unusual amounts of cash • Creditors/Bill collectors show up at work or call frequently • Borrows money from coworkers • Becomes more irritable or moody • Becomes unreasonably upset when questioned • Becomes territorial over their area of responsibility • Takes little if any vacation or sick time • Works unneeded overtime • Turns down promotions • Starts to come in early or to stay late • Redo work to make it neat • Talks a good deal about family or financial problems • Exhibit signs of drug or gambling addiction (absenteeism, looks ill, loss of sleep, etc.) • Exhibits signs of dissatisfaction (reduced productivity, change in schedule or attire, etc.) Common Personality traits of fraudsters (Continued)

11. Whenever there is a recession or down economy, many people look for ways to get money they don’t deserve from the states and the Internal Revenue Service. This is one of those times. • In 2008, the declining value of the dollar was brought on by the collapse of the derivative market and the subprime mortgage crisis. • Home prices have fallen by 26% since their peak in June 2006. • The Dow Jones Industrial averages has fallen from 13,930 in 2008 to below 12,000. • Public debt has ballooned to $14.72 trillion or 98% of Gross Domestic Product. • Unemployment is hovering at 9.1%. • 3.8 million Foreclosures in 2010, up 2% from 2009 and 23% from 2008. • An abundance of Anti-Government and Anti-Tax sentiment. Our current environment

12. Continue to work with local taxing bodies; the Federation of Tax Administrators (FTA), especially its Suspicious Filers’ group; the Southeastern Association of Tax Administrators (SEATA); the Multi-State Tax Commission (MTC). Continue to reach out to other agencies for joint investigation opportunities. Continue to automate and seek access to software and databases to assist in investigations. Continue to seek improvements to LDR’s integrated tax system (“DELTA”). Continue to seek new technology to assist in conducting investigations. Continue to review the LDR-CID processes and procedures with an eye towards increased effectiveness and efficiency. Study best practices of other agencies and determine whether they would be beneficial to implement at the LDR. Continue to rely on tax fraud tips from the public. How the department confronts fraud?

13. Criminal investigations division statistics

14. Preparer Fraud • Preparer fraud generally involves the preparation and filing of false tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may also manipulate income figures and/or falsify income to obtain tax credits. Also see Refund Schemes. • Taxpayers may not be aware of the false expenses, deductions, exemptions and/or credits shown on their tax returns; however, when the false return is detected, the taxpayer – not the return preparer – must pay the additional taxes and interest and may be subject to penalties. • Usually involves fly-by-night preparers, not major preparation companies, CPAs or Attorneys. Types of tax fraud

15. Abusive Tax Shelters - activities or devices used to derive illegal tax benefits. • Recent UBS AG, (Switzerland’ largest bank) • International tax evasion by hiding assets offshore. • UBS has agreed to pay $180 million in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. Government. • IRS has: • Total collections via their Voluntary Disclosure Program (VDA) to date is $2.7 Billion, including tax, interest and penalties. • With 80% of their 2009 VDA Program, they collected $2.2 Billion. • Collected an additional $500 Million through their 2011 VDA. • Total voluntary disclosures are over 30,000. • Cases come from everywhere in the world (140 countries). • For those who did not take advantage of the VDA program, they are prosecuting. • Louisiana relies on Revenue Ruling No. 06-009, which provides that the Department will impose the penalty for filing a false and/or fraudulent return and the negligence penalty pursuant to La. R.S §§47:1604 and 1604.1 along with any other applicable penalties if taxpayer participates in an abusive tax shelter. Types of tax fraud Continued

16. Non-Filers are usually broken down into three categories: • People who often try to fly under the radar and not be detected by any taxing body – the “catch me if you cans” or “tax evaders”. • Tax protestors who are bold in their belief that government has no right to impose and collect taxes. Often times they rely on bad information that they have downloaded from the internet. • Taxpayers who claim to have insufficient nexus with the State of Louisiana for it to impose taxes on them. These are usually resolved civilly. Types of tax fraud Continued

17. Employer Fraud - Employers are responsible for collecting and remitting income tax from their employees’ pay; however, some: • Collect the tax, but fail to remit it to the State. • Falsely classify employees as contract labor or independent contractors and sometime issues 1099s or simply pay them in cash. • On September 21, 2011 the IRS Announced (IR-2011-95) its new Voluntary Compliance program called the Voluntary Classification Settlement Program (VCSP). • Available to many businesses, tax-exempt organizations & government entities that erroneously treated their workers, or a class or group of workers, as nonemployees or independent contractors, & now want to correctly treat these workers as employees. • Apply by completing and filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before employer wants to begin treating the workers as employees. • Requires minimal payment from employer covering past payroll tax obligations, approximately one percent of the wages paid to the reclassified workers for the past year. • No interest or penalties will be due. • To be eligible, an applicant must: • Consistently have treated the workers in the past as nonemployees • Have filed all required Forms 1099 for the workers for the previous three years. Cannot file 1099s now & then apply. • Not currently be under audit by the IRS. • Not currently be under audit by the Department of Labor or a state agency concerning the classification of workers. • Minnesota has instituted its own initiative regarding misclassification of employees. • Louisiana is currently studying the matter. Types of tax fraud Continued

18. Sales Tax Fraud - Taxpayers, who are responsible for collecting and remitting sales tax, sometimes: • Collect the tax, but fail to remit it to the State. • Reduce the amount of sales that they report to the State; thereby, reducing the amount of sales tax they pay. • Never recorded sales: • Separate cash register used. • No cash register used. • Register kept open and change given from register, but no receipt given. • One price given if cash and another if by credit card or check. • Zappers, are they here? • Relatively new Point of Sale Suppression Software. • Canada (Province of Quebec) has the most experience dealing with this type of technology. • There has been very few prosecutions • Mostly used by restaurants, but has potential for other retail business types, such as convenience stores. • Louisiana is studying. Types of tax fraud Continued

19. Falsely Claiming to be a Nonresident • Fraudulently claiming to be a resident of another state without an income tax,, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. • Traits common to such persons: • They are mostly wealthy individuals who have the resources necessary to put such scheme in place. • They maintain their Louisiana place of residence; most of their family and friends remain in Louisiana as well as most of their business interests. • They usually rent an apartment or rent/buy a small home or condominium where they claim to reside. • They change their driver’s license to the other state, register to vote in the other state, sometimes vote in elections, claim homestead exemption there and pay the much reduced taxes imposed in the other state. • They continue to spend more time in Louisiana than anywhere else, usually more than six months. • They tend to fail to cancel their memberships to clubs and other organizations in Louisiana. • They tend to continue to claim the benefits that Louisiana has to offer its residents, while avoiding taxation on their income. Types of tax fraud Continued

20. Refund Schemes • Fraudulent W-2s – either changed or completely fake (counterfeit), never worked for alleged employer. • Inflated business expenses – most times no business ever existed, but in order to offset income, this scheme is used. • Inflated itemized deductions claimed. • Child Care Credit - claiming expenses associated with child care when no such expense has been paid. • Questionable Dependents – sometimes dependents are purchased from the parent or parents or related or unrelated adults are sometimes claimed as a dependent. • Questionable filing status – one or both spouses claiming be Head of Household to qualify for the Earned Income Credit. • Natural Disaster Sales Tax Refund Claims – Taxpayers fraudulently claiming to have lost, or to have lost more than they actually lost, tangible personal property during a natural disaster so that they can fraudulently recover sales taxes that was supposed to have been paid at the time of the purchase of the property. Types of tax fraud Continued

21. Refund Schemes Continued • Fraudulently claiming insurance credit – usually claiming the same insurance credit twice or claiming such credit when they never paid the premium that would make them eligible for the credit. • Prepaid debit cards assist those perpetrating refund fraud by committing identity theft. • Can be obtained through a retail store or online • If online, card is received within 7-10 business days • Card must be activated by telephone or online before being loaded. • Can be purchased pre-loaded with various dollar amounts, similar to buying a gift card. • Can be reloaded. • Green Dot Corp, MetaBank, NetSpend Holdings, Inc. are three of the largest providers of prepaid debit cards. • Other major banking institutions are entering into the arena because of the potential profits that result from the high fees normally charged. Types of tax fraud Continued

22. Mauro Aguirre of Lafayette, owner of Escapade Acoustic Drywall, • Joint investigation involving the Louisiana Dept. of Revenue Criminal Investigations Division, the Louisiana Workforce Commission, Louisiana State Police, Louisiana Department of Insurance and the Louisiana Office of the Attorney General. • Underreported its employees and income for 2007 and 2008. • Company reported around 35 employees with a payroll of about $145,347 when it should have reported over 300 employees with a payroll of about $4.2 million. • In May, pleaded guilty to insurance and workers’ compensation fraud . • Sentenced to two-year suspended sentence on each charge and three years probation. • Ordered to pay $200,000.00 restitution. • $95,000.00 to LDR • $100,000.00 to LWC • $5,000.00 to AG’s office Recent successes

23. Marvin Berkowitz , an Illinois resident. • A 64 year old phony rabbi who holds both Israeli and American citizenships. • Was arrested in Israel where he orchestrated the scheme. • Stole personal information of at least 2,900 federal inmates and deceased persons and used it to file false and fraudulent tax returns with the IRS and many states, including Louisiana, • Obtained, at least, $4.5 million in fraudulently state and federal tax refunds. • The scheme involved, at least, ten others, including two of his sons, one of his sons-in-law . • Pleaded Guilty to one count of Conspiracy to defraud the United states and eleven counts of mail fraud. • Sentenced to 60 months on the conspiracy charge and 220 months for the mail fraud, to run concurrently. • $10,232,800.18 Restitution ordered, $93,343.51 for Louisiana Recent successes

24. Chequetta Lakeisha James and David Lamont Hayes of Baker. • Arrested in May 2011 and charged with one count of forgery and one count of refund device fraud for stealing and cashing a Louisiana state individual income tax refund check. • Investigated jointly by the LDR-CID and Baker Police Department. • Awaiting prosecution. John Labee, a Slidell tax preparer. • Arrested and charged with 530 counts of filing or maintaining false public records, 53 counts of issuing worthless checks and for submitting fraudulent returns for himself for 2007, 2008 and 2009. • Joint investigation by LDR and the AG’s office. • Awaiting prosecution. Recent successes

25. Sakita McCray of Baton Rouge. • A former LDR employee, was arrested and charged with felony theft and access device fraud for taking and using a coworker’s credit card. • Investigated by the LDR-CID and Louisiana State Police. • Awaiting prosecution. Damian Raby of Baton Rouge. • 25 year old used his position as a stock clerk at Our Lady of The Lake Hospital to steal 46 patients personal information, which he used to file federal and state individual income tax returns in an effort to obtain fraudulent refunds. • Approximately $20,000.00 in refunds. • Pleaded guilty • One count of identity theft greater than $1,000.00. • One count of access device fraud, greater than $500.00 • One count of theft of a business device fraud. • One count of bank fraud • Sentenced to: • 10 years hard labor (suspended). • 5 years active probation. • $8,270.51 in restitution ($7,770.51 for LDR and $500.00 for the identity theft victims. Recent successes continued

26. Recent successes continued Jamal Roman, of Baton Rouge. • Pleaded guilty to federal conspiracy, bribery and fraud charges for concealing more than $7 million from state and local sales-tax collectors. • 1 count of conspiracy to commit Mail Fraud and Bribery. • 7 counts of mail fraud • 3 counts of bribery • Sentenced: • 53 months. • Restitution • LDR $297,989.64 • $348,871.37 • $23,615.68 • Ascension Parish Sales and Use Tax Authority $56,000.00 • Joint investigation named Operation Zenith involving: • The LDR Criminal Investigations Division. • United States Attorney's Office. • Louisiana State Police Criminal Intelligence Unit. • East Baton Rouge Parish Auditor's Office. • United States Department of Homeland Security. • Federal Bureau of Investigation, • Louisiana State University Police Department. • Louisiana Workforce Commission, • Ascension Parish Department of Revenue. • Internal Revenue Service. • Government of Lebanon.

27. Mohamed H. Ruman, of Baton Rouge. • Manager of several Baton Rouge restaurants owned by his uncle, Jamal Roman, • Sentenced to four months in federal prison and four months of residence in a halfway house for the role he played in committing sales tax fraud. Carol Ann Wilson of Baton Rouge. • A former LDR temporary worker, was arrested and charged with Abuse in office, Theft under $500, Malfeasance in office and Monetary instrument abuse associated with the theft of a money order intended for the payment of a taxpayer’s state income taxes. • Joint investigation between the LDR-CID and Louisiana State Police. Recent successes continued