IRS Says Real Estate Tax Fraud Criminal Investigations Doubled - 2/28/2005 - Attorney Lawyer Legal Building Codes Zoning

IRS Says Real Estate Tax Fraud Criminal Investigations Doubled In The Past Three Years, Prison Sentences Nearly Doubled.
by Kenneth R. Harney

The IRS said last week that the number of real estate fraud cases opened by its criminal investigators has doubled in the past three fiscal years alone. The average prison term handed out by federal judges to convicted real estate fraud perpetrators also has soared during the same time period -- from 27 months to 41 months. Last year's number of cases that produced jail time hit a new high -- a stunning 92.3 percent incarceration rate for people convicted of real estate frauds and con games.

What types of schemes are IRS investigators focusing on most intently? The report identified three in particular:

• Double sets of settlement statements. This involves defrauding lenders by preparing one set of closing documents for the property seller -- reflecting the true selling price and other transaction details -- and a second set for the lender, with an inflated selling price. This typically causes the lender to fund a loan that exceeds the property's true market value, and allows the dishonest participants in the fraud to pocket the excess proceeds.

  But just as Al Capone went to the federal pokey because he didn't report his ill-gotten gains to the IRS, so too do home-sale fraudsters risk jail time when they fail to report the income they earn from their con games.

• Property flips. The IRS is especially interested in transactions where real estate investors puff up appraisals to induce quick flips of properties, then fail to report their profits to the Feds.
• "Fraudulent qualifications." This involves "real estate agents assisting buyers who would not otherwise qualify" to purchase a particular home because of their poor credit history or income problems.

As an example of this form of fraud, the IRS cited the case of California real estate agent Satish Shetty, who was sentenced to 15 months in prison and ordered to pay $37,478 in restitutions last December 20. In a plea agreement, according to the IRS, Shetty admitted that he "submitted applications to lenders that contained false information used to approve" mortgages. Through a network of companies he controlled, according to the IRS, Shetty "entered into escrows to resell properties to 'straw' buyers at inflated prices." The straw purchasers were not qualified for the loans, and quickly went into default. Shetty, meanwhile, pocketed the proceeds.

The bottom line from the IRS to real estate investors, appraisers, and agents thinking about fraud: We are doing more criminal investigations than ever, we're getting more convictions, and more than nine out of ten are ending up behind bars.

Don't do the crime if you can't do the time.