The Internal Revenue Service is taking an ever more active role in the hunt for mortgage and real estate swindlers.
The number of probes into suspected illegal activities by IRS Criminal Investigation doubled between fiscal year 2001 and fiscal 2003, and FY '04 statistics reflect a three-year high in the number of cases recommended for prosecution as well as in the indictment, conviction, and incarceration of housing's rotten apples.
In addition, the agency says it is actively auditing the returns of individuals and entities in the real estate business.
"IRS criminal investigations of real estate fraud continue to be an area of concern," the agency said in its most recent fact sheet.
The increased scrutiny is warranted, it said, because the booming real estate sector has spurred an increase in mortgage fraud and other phony real estate-related schemes. The perpetrators of these scams range from mortgage brokers looking to make a fast buck, to drug dealers laundering their ill-gotten gains.
Every year, these thieves victimize individuals and businesses from many walks of life, including struggling low-income families who are lured into home loans they can't afford, legitimate lenders who are left saddled with over-inflated mortgages, and honest real estate investors who they fleeced out of their savings.
The IRS is involved because in most cases, the proceeds are "laundered" by the perpetrators to hide the gain from the government. Money laundering is the process of attempting to make money earned illegally appear to be legitimate, which makes it inseparable from tax evasion.
Some of the more common schemes seen by IRS criminal investigators include:
- Property Flipping -- A buyer pays a low price for a property, and then resells it quickly for a much higher price. While this may be legal, it is not when false statements are made to a lender.
- Dual Settlement Sheets -- One settlement statement is prepared, and provided to the seller accurately reflecting the true selling price of the property. A second fraudulent statement is given to the lender showing a highly inflated selling price. The lender provides a loan based on the excess value, and after the loans are settled, the proceeds are divided among the conspirators.
- Fake Qualifications -- Real estate agents assist buyers who would not otherwise qualify by fabricating their employment history or credit record. In fiscal '04, the nation's tax collector initiated 194 cases of suspected real estate fraud. In addition, it recommended prosecution in 148 cases, some of which were initiated in previous years, and won indictments in 102 cases.
There also were 89 convictions in fiscal '04, and sentences handed down in 78 cases. In more than 92 percent of the decided cases, the guilty party earned jail time averaging 41 months.
Here are summaries of three of the more notorious cases from the IRS' files:
- In December in Los Angeles, a California real estate agent was sentenced to 15 months in prison and ordered to pay $37,478 in restitution after pleading guilty to bank fraud and money laundering charges. In the plea agreement, he admitted to submitting applications to lenders that contained false information on which mortgage approvals were based.
According to court documents, the agent, 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 is someone whose identity is used to co-purchase real property, but spends none of his or her own money to purchase the property, and does not intend to occupy or pay the mortgage on it.
He admitted that to obtain loans for his fake buyers, he prepared fraudulent loan applications, falsely representing that the buyers were creditworthy and that no part of the down payments had been borrowed.
- In September in Greensboro, N.C., George Monk was sentenced to 87 months in prison, followed by three years of 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 funding lenders to obtain financing. He recruited individuals to act as purchasers. Then, he deceived them into believing he would make all the monthly payments and promptly transfer the properties out of their names after closing.
Monk failed to pay the monthly mortgage payments, allowing the loans to go into default and eventually foreclosure.
- In Providence, R.I., William Ricci was sentenced in April to 27 months behind bars, fined $20,000 and ordered to perform 1,000 hours of community service for a money-structuring scheme.
Real estate broker Ricci was caught in a scheme to obtain financing for his various companies by submitting fraudulent documentation that artificially inflated their value. 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. Between February 1998 and December 1999, he wrote 400 checks, all for less than the $10,000 reporting limit, but totaling nearly $1.31 million.