Tax Cheaters Entering the Computer Age : Crime: Con artists are filing phony returns electronically and trying to collect refunds. Officials say the scam is most prevalent in Southern California.

Defrauding the government by filing phony tax returns electronically could well become the tax crime of the 1990s, and con artists from Southern California apparently lead the country in practicing this new and growing scam, federal law enforcement officials say.

As evidence, authorities point to a series of convictions and arrests in the Los Angeles area in recent months, particularly the indictment of eight people, including a San Fernando Valley tax preparer, accused of bilking the federal government out of $500,000.

Last week, a Pico Rivera man pleaded guilty to filing 18 phony electronic claims worth about $50,000.

“This is the future of tax filing and this appears to be the future of tax enforcement,” said Jim Bruton, deputy assistant U.S. attorney general in charge of tax fraud.

So far, the U.S. Justice Department has prosecuted 35 electronic tax-fraud cases nationwide, including 14 from Southern California, the most in any state. Nationally, these cases involved more than 3,000 false refund applications. Federal officials expect to see many more in the future.

“We have brought more cases in the Los Angeles region than any area in the country,” said Gina Talamona, a Justice Department spokeswoman in Washington. But law enforcement officials declined to speculate on why Southern California has a relatively high number of electronic tax-fraud cases.

First begun in 1988 for the 1987 tax year, electronic tax filing has been aggressively promoted by the IRS because it can process the returns quickly. But criminals also like the speedier returns.

Typically, the swindlers establish a dummy corporation, creating the illusion by printing company stationery and hiring a telephone answering service.

The corporation recruits “employees,” often the homeless or unemployed, and provides them with false W-2 forms, pay stubs and receipts which the employees take to a professional tax preparer, who files the returns via computer, Bruton said.

About 7 million of the more than 100 million taxpayers filed electronically for the 1990 tax year, and the IRS estimates that 3,650 of those electronic returns were phony and sought at least $6 million.

The largest case this year involved three El Paso, Tex., men who were charged with recruiting people who filed 749 false tax refund claims totaling $714,000, Bruton said. Each tax refund claim sought $953. The case against the trio is still pending.

Electronic tax fraud mostly is a small-stakes scam, with a lot of work for a relatively small payoff, Bruton said.

Although some scam artists wait for the government to send them their tax refunds, most obtain their money quickly from the tax preparer, which waits to be reimbursed by the IRS, said Chris Orozco, IRS electronic filing coordinator for Los Angeles. The maximum amount a tax preparer will advance a client is $3,000.

“At $3,000 a crack, there are easier ways you can make money illegally,” said David Mellem, research manager of the 13,000-member National Assn. of Tax Practitioners.

In the San Fernando Valley case, more than 200 fraudulent tax returns were filed for refunds exceeding $500,000, Bruton said.

The 77-count indictment handed down last month named Daphne Thomas of Los Angeles; Jerome Hearne, 35, of Paramount; Doris Martin, 41, of Van Nuys; Claudell Green, 28, of Van Nuys; Sheila Green, 30, of Van Nuys; Cheryl Jones, 39, of Los Angeles; Chissay White, 26, of Sylmar and Elton Chambers, 45, of Sunland.

All eight are free on bail and face trial Oct. 28 in U.S. District Court in Los Angeles.

Attorneys for the eight defendants either declined comment or could not be reached. Each count of conspiracy to aid payment of a false claim carries a maximum penalty of 10 years in prison and a $250,000 fine. The maximum penalty for each count of making a false income tax claim is five years in prison and a fine of $250,000.

The indictment alleges that Thomas, then a tax preparer for H&R; Block, and the other defendants oversaw the recruiting of more than 200 people who were provided with a paper trail including W-2 forms from a bogus firm.

The recruits were even provided fake child-care receipts, which they included in their income tax forms submitted to Thomas and other tax preparers at an H&R; Block in Van Nuys, the indictment said. The other tax preparers were unaware of the deception, the indictment said.

Most electronic scams do not involve the cooperation of a professional tax preparer, Bruton said.

Other electronic tax fraud cases the Justice Department has prosecuted in Southern California in recent months include:

* Kenneth Eugene Jackson of Pico Rivera pleaded guilty Thursday to five counts of filing false income tax claims, each time using the alias Douglas K. Golec but different Social Security numbers, prosecutors said. Jackson filed claims at several H&R; Block outlets in Southern California.

* John H. Wyatt of Orange County pleaded guilty in June to conspiring to defraud the IRS after he helped arrange for the filing of 13 bogus tax returns seeking about $40,000. In each case, people recruited by Wyatt applied for refund anticipation loans. Wyatt, who faces up to 20 years in prison, is scheduled for sentencing Sept. 4.

* San Bernardino County resident Ernest Tafoya pleaded guilty in July to one count each of filing a false claim and aiding the preparation of a false tax return, prosecutors said. Tafoya, who faces up to 10 years in prison, is scheduled to be sentenced Sept. 16.

* Andrea K. Harrison of Carpinteria in Santa Barbara County pleaded guilty to two counts of filing six false electronic tax returns worth $22,637. Harrison, who faces up to 10 years in prison, is scheduled for sentencing Sept. 9.

Government investigators are reluctant to discuss how they weed out bogus electronic claims. But Orozco, the Los Angeles IRS official, said computerized returns are automatically flagged for review if the name and Social Security number do not correspond.

“If you miss a digit it would automatically be rejected,” Orozco said. Such a review led to the arrest of Jackson, who used 18 Social Security numbers.

In most cases of electronic tax fraud, the employer identification numbers have either been faked or are incorrect, prosecutors said. But it takes about a year to match returns with the employer’s ID number--and only if the employer is audited, Mellem said.

In the Van Nuys case, federal officials apparently relied on an informant, according to court records.

Tax preparers said that if the paperwork appears to be correct it is nearly impossible to detect tax cheats.

“There’s no way that we can tell,” said Nelson Manare, regional director for H&R; Block in Southern California, whose company processed about 150,000 electronic tax returns in the Southland for 1990.

Mellem agreed. “We don’t have time to physically verify the information,” he said. “It’s not our job. If their paperwork is in order, all we can rely on is intuition.”

For example, if dozens of employees from the same company went to the same tax preparer and all filed electronic returns seeking the same amount, a tax preparer might suspect that a scam was taking place, he said.

“It’s very difficult to get caught,” Mellem said. “But the people who make these things up get greedy and act suspiciously.”

Anatomy of a Tax Scam

Attorneys for the U.S. Department of Justice say this is how the typical electronic tax fraud scam works:

CREATE A COMPANY: Scam artists create a dummy corporation and an employment history for each of its fake employees.

HIRE EMPLOYEES: Employees, typically homeless or unemployed people, are given falsified W-2 forms and fake receipts to include in their tax returns.

FILE RETURN: Employees dupe a commercial tax preparer into filing their returns electronically, using their real Social Security numbers, and the fake tax information.

GOVERNMENT ISSUES CHECK: About a week later the government tax refunds, usually $2,000 to $3,000 each, are picked up by the employees.

CASH THE CHECK: Employees cash the refund checks and divide the money with the scam artists, who receives the bulk of the funds.

Source: U.S. Justice Dept.