Fake Research Tax Credit Scheme: Certificates, Assignments and Expenses That Never Existed

Promoters can run a fake research tax credit scheme by selling a tax reduction using credits that never existed. The paperwork can include a certificate supposedly issued by the IRS, an assignment and a tax form promising the recipient a share. In a California civil complaint, the Justice Department alleged that a promoter used those documents to distribute nonexistent credits supposedly awarded for scientific breakthroughs. If you handled the research expenses, the assignment or the return, you may know where the promised tax benefit parted company with the work.

This page follows the certificates and purported transfers behind that alleged tax credit scheme. Our page on preparers replacing client expenses with invented deductions follows the neighboring problem: what the preparer did with the facts the client supplied.

The Fictitious IRS Certificate Behind the Research Tax Credit

The Justice Department alleged that the research tax credit scheme used a fictitious IRS certificate to document an enormous credit award. Its complaint for a permanent injunction described a document titled IRS Tax Credit Opinion Certificate Debt Instrument. According to the complaint, the promoter represented that the IRS had prepared and issued it. The complaint said the IRS issued no such certificates.

The document claimed that $1.347 billion in tax credits had been issued in 1993 based on $270,000,000 in qualified research expenses. Those were the certificate’s claims, which the Justice Department alleged were false. The complaint said the promoter had not made the expenditures necessary to generate anything approaching the research credits he claimed to possess.

A prospective participant could be shown a document purporting to settle both the existence of the credits and the government’s recognition of them. In the Justice Department’s account, we see the promoter supplying both the asset and the government’s supposed approval of it. The certificate vouched for itself.

A Research Credit Assignment With No Research Expenditure Behind It

A research credit assignment with no research expenditure behind it was central to the Justice Department’s allegations. The complaint tied research credits to qualified expenditures and challenged the promoter’s claim that the United States had awarded them as compensation for scientific work. It also challenged his personal ownership: if the work had been funded and conducted through his nonprofit research organization, the claimed credits would belong to the organization.

The promoter claimed to have conducted research through Energetic Psychoanalytic Institute and Training School. According to the complaint, that organization had listed tax credits as its only asset, and the IRS disallowed them when they could not be substantiated during an audit.

The complaint described a website that invited individuals and companies to become beneficiaries of a trust and use its supposed credits. It also quoted the promoter’s sworn testimony to the IRS acknowledging a problem with that promise:

According to the complaint, the sales process began by asking how much tax relief the customer needed. The promised paperwork included an agreement for the purchase and transfer of credits and a Schedule K-1 supposedly stamped by the IRS. The website also offered gift certificates for tax credits. For someone who prepared the agreements or answered customers’ questions, the significant comparison is between the entitlement being promised and the expenditures said to support it. In the alleged sales pitch, the customer’s tax bill came first. The research spending had yet to turn up.

Research Tax Credits Offered and Claimed

The amount promoted and the amount claimed on tax returns describe different parts of this scheme. The Justice Department alleged that the promoter partnered with Southwest Louisiana Business Development Center, a nonprofit in Jennings, Louisiana, to try to sell $24 billion of fictitious credits. The complaint described a contract allowing the center to sell, lease or rent the certificates and split the proceeds with the promoter.

The center’s supposed entitlement came through a Schedule K-1 issued by the trust. The complaint said the contract did not state the basis for the credits and alleged that the attempted sales had not succeeded. The contract supplied a distribution arrangement for an asset the Justice Department said did not exist.

The complaint separately identified 25 purported trust beneficiaries whose returns claimed a total of $198,567 in general business credits for tax years 2002 through 2007. It said the IRS had learned of or audited those returns and had disallowed the credits in every beneficiary audit it conducted. The promotional billions belonged to the offer. The smaller figure belonged to identifiable tax claims.

For an insider, the connection runs from the promoter’s offer to the particular recipient, tax year and return entry. A sales agreement can explain what someone was promised. The filed return shows how much of that promise became a claim against federal tax owed. We follow both, keeping the claimed credit attached to the taxpayer who used it.

Which Records Connect a Research Credit Assignment to a Return?

The useful records connect the promised credit, the work and spending said to generate it, the transfer and the recipient’s return. Preparers and advisers translate source records into tax positions, while businesses hold the underlying books, ownership records and payments. Someone working at either end may see only part of the transaction. Our broader page on tax fraud evidence follows those connections across other schemes.

For fabricated research credits, the comparisons are specific:

• Certificate and source: what the document says the IRS issued, who supplied it and what communications accompanied it.
• Research and expense: what work supposedly generated the credit, who performed it, who paid for it and which business records support the expenditure.
• Ownership and assignment: which person, company or trust claimed the credit, and how the agreement purported to move it to the recipient.
• Calculation and return: how the credit amount was computed, what the client told the preparer and what the filed return claimed.
• Earlier IRS responses: disallowance notices, correspondence and the instructions given to customers after those responses arrived.

The California complaint shows why the assignment and the tax form belong together. It alleged that the promoter issued Schedules K-1 purporting to give beneficiaries rights to credits. The complaint challenged both the existence of those credits and the trust’s ability to distribute them. A preparer seeing the recipient’s form and a participant seeing the transfer agreement could each hold a different part of that account.

We examine the original information supplied to the preparer alongside the calculation and the filed return. If you know who created the certificate, supplied the expense figures or instructed someone to claim the credit, that knowledge connects the paperwork to a decision inside the business.

The IRS Answer the Research Tax Credit Promoter Allegedly Ignored

The Justice Department alleged that the promoter had received IRS advice against selling research credits before posting the scheme online, issuing beneficiary forms and contracting with the Louisiana center. An associate had asked the IRS whether a company could transfer or sell a previously reported research credit. According to the complaint, the IRS response said the credit did not appear transferable or salable to another company, and the associate forwarded that answer to the promoter.

The complaint also described what happened after beneficiary audits began. It alleged that the promoter continued using his website to encourage beneficiaries to fight denials of their claimed credits. For someone who saw the correspondence or handled those customer communications, the earlier answer and the later sales message belong in the same conversation with us.

The IRS response identifies information the promoter allegedly received, while later communications show what he continued telling participants. We look with you at who received the answer and who controlled the next representation to the customer.

The Court Barred Promotion of the Fake Research Tax Credits

A federal court in Los Angeles permanently barred the promoter from promoting the bogus federal tax-credit scheme, the Justice Department announced on December 28, 2011. The department said the civil injunction prohibited him from telling prospective customers he could transfer tax credits to them. It also required him to identify everyone to whom he purported to distribute credits.

For a whistleblower familiar with a similar arrangement, the customer communications and recipient records can connect a broad promotional claim to the people and returns it reached. The same certificate can appear in a marketing file, a transfer package and a tax-preparation file, with different people responsible for each step.

Research Tax Credit Whistleblowers and Rewards

Federal research tax-credit information belongs in the IRS whistleblower program, which can pay an IRS whistleblower award for qualifying information that helps recover money. Federal tax claims are excluded from the federal False Claims Act. We assess with you which taxpayer claimed the credits and what your information can show.

Qualifying state tax cases have separate False Claims Act routes. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What Was Behind the Certificate

If you saw a research-credit certificate offered to customers and know what the underlying spending records show, speak with our whistleblower experts about the fabricated research credits. We work beside you to build the case around the promised credit, the actual expenditure and the decisions that put it on a return. We bring in tax fraud whistleblower lawyers who understand research-credit claims and stay with you through the process.