The refunds that customers of a tax preparer received were so big and the service was so popular that Marine Corps commanders in Southern California got suspicious and called in the Internal Revenue Service. Yesterday, the Justice Department accused Western Tax Services of preparing thousands of returns claiming as much as $31 million in improper refunds.
In a civil court case seeking to close the company, the government alleged that the company routinely inflated its customers' legitimate deductions and recommended write-offs that were improper.
Western Tax's owner, Samuel J. DeAngelo, and employees prepared more than 18,000 returns for 1999, 2000 and 2001. Audits of some of those returns showed that 90 percent claimed bogus deductions averaging $1,919, the IRS complaint said. Based on that sample, the loss to the government -- before audits and other recoveries -- would total $31.5 million, the IRS said.
The tax-preparation service charged high fees -- as much as $3,000 -- but they were usually more than offset by refunds, the complaint said.
Paul W. Raymond, DeAngelo's lawyer, said the case "is something we've known about for a while."
"We've cooperated with the government. We feel it's entirely baseless and we'll prevail on the merits," he said.
The IRS said it has increased its enforcement efforts against dishonest tax-preparation companies. "Unscrupulous return preparers cheat all honest taxpayers and tax advisers who play by the rules," Eileen J. O'Connor, assistant attorney general in charge of the Justice Department's Tax Division, said in a statement. The government said Western Tax relied on word of mouth as customers who got big refunds referred friends and relatives. The Marine Corps required many of its personnel to file amended returns and pay the correct taxes.
Other customers, audited by the IRS, were hit with back taxes, interest and penalties. One customer, whose return included a bogus $7,800 charitable contribution and false employee business expenses of $8,114, paid $1,500 to have the returns prepared and now owes the IRS $5,000 in taxes and interest, the government said.
Western Tax and its preparers generally reported accurately items that can easily be checked by the IRS, such as wages on W-2 forms, the government said.
"Time-intensive audits by revenue agents, including interviews with the taxpayer-customers, are usually necessary to ferret out the bogus deductions claimed by the defendants," the Justice Department said in court documents.