Suit Names O.C. Firm in Tax Scam

The Justice Department sued an Orange County tax firm and five Southland tax preparers Tuesday, accusing them of filing bogus returns, many of them for Marines.

Anaheim-based Western Tax Services Inc., a high-volume tax preparation service that employs four of the five individuals named in the suit, repeatedly fabricated and overstated deductions to net hefty refunds for clients, the suit alleges.

The Internal Revenue Service said it was tipped off to the alleged scam by Marines stationed at Camp Pendleton.

The agency said it audited 93 of the roughly 18,240 returns prepared by the defendants during the 2000 to 2002 filing seasons and found that more than 90% contained false deductions for charitable contributions, job expenses or both.

“Unscrupulous return preparers cheat all honest taxpayers and tax advisors who play by the rules,” said Eileen J. O’Connor, assistant attorney general in charge of the department’s tax division in Washington.

“Shutting down fraudulent tax schemes is a high priority for the Justice Department and the Internal Revenue Service.”

The suit, filed in U.S. District Court in Santa Ana, alleges that fraudulent returns filed by the defendants have cost the government about $31.5 million. The suit seeks a court order barring the defendants from filing additional tax returns.

The five individual tax preparers named in the suit are Samuel DeAngelo of Yorba Linda, owner of Western Tax Services; Jeffrey R. Wright, the firm’s president; Kelly David, a Newport Beach resident who works for the firm; Alan M. Hovey, a former Western employee from Cathedral City; and Joe Gordon Shields, who works for Tax Matters Inc. in Riverside.

“We are aware of the government’s interest in this case. We have known about it. We have cooperated with them and we feel it is entirely baseless,” said Paul Raymond, an attorney representing DeAngelo and Western. Raymond said he would be filing a response to the government’s suit today.

Other Western employees did not return calls. Shields could not be reached for comment.

Western targeted middle-income wage earners and military members recruited through friends and relatives who raved about the big refunds the firm secured for them, according to the government’s complaint.

Western benefited by charging unusually high tax preparation fees -- from $300 to $3,000 -- which it justified by the amount of its customers’ refunds.

Government officials said they don’t know yet whether some of the taxpayers claiming inflated refunds were involved in the scheme. However, the Western clients named in the complaint “were duped,” said Assistant U.S. Atty. Robert F. Conte.

At least 100 service personnel were clients, largely because Western’s offices were close to the shuttered El Toro Marine base near Irvine, the suit says.

However, in 2001, Marines working at volunteer income tax assistance centers at Camp Pendleton and the Marine air base at Miramar began to notice that returns prepared by Western were producing suspiciously large refunds.

On further investigation, the officers determined that the refunds were based on bogus deductions. They contacted the IRS and military personnel, urging them to come forward and file corrected returns.

According to the government’s lawsuit, the tax preparers didn’t tell their clients about the inflated deductions. Instead, tax returns were prepared in person on a computer during a short interview. At the end of the process, the client would be asked to electronically sign the return, using a pin number, and authenticate the signature with a one-page form. The return would then be filed electronically with the IRS.

When the process was complete, the client would receive a copy of the return. But because the return was already filed, the client had little incentive to verify its accuracy, the complaint charges.

One instance cited in the complaint involves a social worker who met with Wright, Western’s president, for about 10 minutes, saying that she had donated about $3,500 to the Salvation Army.

According to the lawsuit, Wright asked if she had a computer, desk, chairs and a bookshelf at home and told her that she could deduct these items because she took work home.

Wright prepared her return, claiming $6,500 in charitable contributions and bogus employee business expenses of $15,173, according to the suit. She paid $1,050 in preparation fees, but initially received a refund. The IRS has since examined her return and determined that she owes $4,568 in tax and interest.