Saturday, February 3, 2024

Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)

 I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (Federal Tax Procedure Blog 12/24/25), here. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.

I have two developments to report:

1. Newsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), here.  I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:

           The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."

           Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.

          "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"

          Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.

          "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.

          Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."

          "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.

          "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."

          Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.

          "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." 

Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.

2. That reporting led me to the DOJ Tax announcement of Castro’s indictment.  Mansfield Man Charged in Fraudulent Tax Return Scam (USAO ND TX Press Release 1/10/24), here. The press release says that Castro “was indicted on thirty-three counts of aiding and assisting in the preparation and presentation of a false and fraudulent return.” [Note that aiding and assisting is the crime described in § 7206(2); in the preceding paragraph of the Press Release the nature of the charges is  described as “33-counts of filing fraudulent tax returns;” although that is cryptic, it is a misdescription of the aiding and assisting charges under § 7206(2).]

Other excerpts from the Press Release are:

          According to the indictment, Mr. Castro owned and operated Castro & Company LLC. a virtual tax preparation business with locations in Orlando, Florida, Mansfield, Texas, and Washington, D.C. Starting in 2016, Mr. Castro devised a scheme to falsely create and submit false tax returns on behalf of unsuspecting taxpayers. Taxpayers would seek out Castro’s assistance in filing personal tax returns and Mr. Castro would promise a significantly higher refund than taxpayers could receive from other prepares and on many occasions offered to split the additional refund with taxpayers. In order to achieve these larger refunds, Mr. Castro generated false deductions without the taxpayer’s knowledge.

          In 2018, an undercover agent, posing as a taxpayer, contacted Castro & Company, LLC for assistance. Castro refused to meet in person unless a $5,000 retainer was paid but offered to assist the undercover agent virtually.  During a recorded telephone conversation, Mr. Castro stated that he could project the amount of the tax refund the undercover agent would likely receive from another firm and then compare that figure with the refund that Mr. Castro would obtain.

          According to the indictment, an employee of Mr. Castro’s interviewed the agent over the telephone regarding deductions. The employee stated that Mr. Castro would make any decisions regarding what items would be included on the tax filing. The employee did not identify any deductions that would apply to the agent and in the course of the interview, the undercover agent denied any facts that would support deductions. On March 14, 2018, Mr. Castro filed the agent’s tax return claiming $29,339 in fraudulent deductions. The IRS issued a refund of $6,007, Mr. Castro received $2,999 for his services and the agent received the remaining amount of $3,008.  As Castro told the taxpayer, he would have received only a $300 deduction had he used another tax preparer.

          Mr. Castro continued in a similar pattern with dozens of other taxpayers, resulting in hundreds of thousands of improperly paid claims.

          An indictment is merely an allegation of criminal conduct, not evidence. Mr. Castro is presumed innocent until proven guilty in a court of law.

          If convicted on all counts, he faces up to 99 years in federal prison – 3 years per count.

This blog entry is cross-posted on my Federal Tax Procedure Blog, here.

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