IRS Fights Against Tax Fraud

In recent years, the booming real estate market has helped increase mortgage fraud and other phony real estate related schemes. The perpetrators of these schemes range from mortgage brokers looking to make a fast buck to drug dealers laundering their ill-gotten gains. Every year, these fraudulent schemes victimize individuals and businesses from many walks of life, including struggling low-income families lured into home loans they can´t afford, legitimate lenders saddled with over-inflated mortgages and honest real estate investors fleeced out of their investment dollars.

Through federal tax fraud investigations and money laundering charges, the Internal Revenue Service is playing a key role in the fight against real estate fraud.

The number of real estate fraud investigations initiated by IRS Criminal Investigation (CI) doubled between Fiscal Year (FY) 2001 and Fiscal Year 2003. Similarly, the average prison term handed out by federal judges to defendants in these schemes nearly doubled over the same period. FY2004 statistics reflect a three year high of the number of cases recommended for prosecution as well as indicted, convicted and incarcerated.

In addition, the IRS has thousands of returns under audit involving individuals and entities associated with the real-estate business.

In these real estate fraud cases, the income earned from these schemes is often laundered to hide the proceeds from the government. Money laundering is the process of attempting to make money earned illegally appear to be legitimate. Many criminal tax investigations focus on money laundering because it is often inseparable from tax evasion.

As the following statistics indicate, IRS criminal investigations of real estate fraud continue to be an area of concern.

Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year. Therefore, in fiscal year 2004, the data should reflect an increase in convictions and sentenced due to the fiscal year 2003 increase in case initiations, prosecution recommendations and indictments.

Statistical Information*	FY 2001	FY 2002	FY 2003	FY 2004
Case Initiations	107	166	215	194
Prosecution Recommendations	69	83	117	148
Indictment/Information Filed	67	71	94	102
Convictions	85	57	81	89
Sentenced	103	64	65	78
Incarceration Rate	71.8%	82.8%	87.7%	92.3%
Average Months to Serve	24	27	46	41
* How to Interpret Criminal Investigation Data Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year. Therefore, in fiscal year 2004, the data should reflect an increase in convictions and sentenced due to the fiscal year 2003 increase in case initiations, prosecution recommendations and indictments.

The following case summaries are based on public record court documents on file in the judicial district in which the cases were prosecuted.

On Dec. 20, 2004, in Los Angeles, Calif., Satish Shetty was sentenced to 15 months in prison and ordered to pay $37,478 in restitution. Shetty pleaded guilty in April 2004 to bank fraud and money laundering charges. In the plea agreement, Shetty admitted that he submitted applications to lenders that contained false information used to approve the funding of loans. According to court documents, Shetty, through his companies, entered into escrows to purchase residential real estate at or near fair market value and at the same time, entered into escrows to resell the properties to “straw’ buyers at inflated prices. A “straw’ buyer refers to a person whose identity is used to co-purchase real property and who spends none of his or her own money to purchase the property and does not intend to occupy or pay the mortgage on it. To obtain mortgage loans for “straw’ buyers, Shetty admitted that he prepared fraudulent loan applications falsely representing that the “straw’ buyers were creditworthy and that no part of the down payments had been borrowed.

On Sept. 2, 2004, in Greensboro, N.C., George Monk was sentenced to 87 months in prison, followed by three years supervised release, fined $200, and ordered to pay $224,368 in restitution after pleading guilty to numerous tax and fraud charges. Monk and others devised a scheme to utilize various mortgage brokers to submit materially false information to mortgage lenders to obtain mortgage loans. Monk recruited individuals to act as purchasers “straw-buyers’. He then deceived them into believing that following the purchase of the real estate in their names, that he would pay all monthly mortgage payments and promptly transfer the parcels of real property out of the straw-buyers´ name. Monk failed to pay the monthly mortgage payments allowing the property to go into default and causing the sale of the property through foreclosure.

On April 13, 2004, in Providence, R.I., William Ricci was sentenced to 27 months in prison fined $20,000 and ordered to perform 1,000 hours of community service for a money-structuring scheme. Ricci admitted that he generated the appearance of business cash flow by cashing checks at a check-cashing company and depositing cash and money orders generated by those checks into various business accounts. In February 1998, Ricci embarked on a scheme to obtain financing for his various real estate companies by submitting fraudulent documentation that artificially inflated the value of the companies. Ricci generated the false appearance of cash flow in those companies by cashing a series of checks all for amounts of less than $10,000, and depositing the cash and money orders obtained with those checks into his company accounts. Some of the checks Ricci cashed were payable to himself. Others were payable to existent and non-existent third parties who were made to appear as if they were subcontractors. Ricci admitted that, between February 1999 and December 1999, he structured approximately $1,307,498 with 400 checks, all for amounts less than the $10,000 reporting level.