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United States v. Brown

United States District Court, D. Minnesota

September 20, 2019

United States of America, Plaintiff,
v.
Joseph Jay Brown, Defendant.

          REPORT AND RECOMMENDATION

          ELIZABETH COWAN WRIGHT UNITED STATES MAGISTRATE JUDGE

         On April 16, 2018, Defendant Joseph Jay Brown (“Brown” or “Defendant”) was indicted on seven counts of Aiding and Assisting in the Preparation of False Individual Income Tax Returns in violation of 26 U.S.C. § 7206(2). (Dkt. 1.) This matter is before the Court on Brown's Motion to Suppress Statements, Admissions, and Answers (Dkt. 22) and Motion to Suppress Evidence Obtained as a Result of Search and Seizure (Dkt. 23).

         The case has been referred to the undersigned United States Magistrate Judge for a report and recommendation pursuant to 28 U.S.C. § 636 and Local Rule 72.1.

         On June 26, 2019, the Court held a hearing on the pretrial motions (Dkt. 29) in which the Government presented a witness and offered nine exhibits.

         Brown filed a post-hearing brief on July 26, 2019 (Dkt. 37) and the Government filed its response brief on August 29, 2019 (Dkt. 42). For the reasons stated below, the Court recommends that the Motion to Suppress Statements, Admissions, and Answers (Dkt. 22) be denied and the Motion to Suppress Evidence Obtained as a Result of Search and Seizure (Dkt. 23) be denied.

         I. FACTUAL BACKGROUND

         A. Search Warrant and Supporting Affidavit

         At the June 26, 2019 hearing, Special Agent Marissa Pitzen (“SA Pitzen”) of the Internal Revenue Service - Criminal Investigation (“IRS”) testified about her tax return preparer investigation of Brown and the executed search warrant. (Tr. 4.)[1]

         The search warrant, signed by United States Magistrate Judge Steven E. Rau on June 10, 2015, permitted SA Pitzen and IRS agents to search Number 1 LLC (“Number 1 Tax”), a tax return business located in Minneapolis, Minnesota. (See generally Gov't Ex. 1, App. for Search Warrant at 1.) SA Pitzen supported the search warrant with an affidavit detailing her investigation into Number 1 Tax and Brown's activities. (See generally Gov't Ex. 1, Aff. at 4-23.)

         The supporting affidavit described the initial investigation by the IRS and stated:

In 2013, a tax preparation business named EMR Tax Service was identified by the IRS's Scheme Development Center (SDC) as preparing questionable tax returns for their clients. . . . [T]wo of the return preparers, Joseph Brown and Calvin Karn, subsequently left EMR Tax Service to start a new tax business, Number 1 Tax. Number 1 Tax was up and running in 2014 in time for the filing of tax returns for the 2013 tax year.
Articles of Incorporation for Number 1 LLC were filed by Joseph Brown with the Minnesota Secretary of State on or about August 12, 2013. . . . Number 1 LLC was established with the IRS in 2013 and issued Employer Identification Number (EIN) 46-2748028. The tax returns filed by Number 1 Tax all list an EIN that matches the digits of Brown's social security number. Calvin Karn is listed as the contact for the business. Number 1 Tax has never filed payroll tax returns with the IRS. Business income for Number 1 Tax appears to be reported as self-employment income on the individual return preparer's tax returns . . . .
The evidence developed to date in this investigation reveals that there are three Tax Return Preparers working at Number 1 Tax: Joseph Brown, Calvin Karn, and Kyesha Williams. Together they filed more than 450 federal individual income tax returns with the IRS for the tax years 2013 and 2014 during the respective 2014 and 2015 filing seasons. The tax returns were submitted electronically to the IRS using an Electronic Filing Identification Number (EFIN) issued by the IRS. . . .
The EFIN listed on the tax returns submitted to the IRS by Number 1 Tax during the 2014 and 2015 filing seasons is registered to Joseph Brown and Calvin Karn as co-owners of Number 1 LLC. . . .
Brown, Karn, and Williams each list their individual PTIN's [Preparer Identification Numbers] for the tax returns they prepared. Approximately one-half of all the tax returns filed through Number 1 Tax during the 2014 and 2015 filings seasons were signed by Brown. Karn signed nearly 40 percent; and Williams signed the remaining 10 percent of the returns transmitted by Number 1 Tax to the IRS during the 2014 and 2015 filing seasons.
Number 1 Tax has one known location at 2038B West Broadway Avenue N. in Minneapolis, Minnesota. The first tax returns transmitted to the IRS by Number 1 Tax were during the 2014 filing season. In late 2014, the IRS SDC identified a number of tax returns being transmitted by Number 1 Tax. These returns contained questionable information and indications of fraud that resembled the suspicious returns prepared by EMR Tax Service that had previously been identified by the SDC. . . . Specifically, the SDC noted the high volume of returns resulting in refund originating from Number 1 Tax; 98 percent for the 2014 filing season. The SDC also noted the high volume of tax returns filed by Number 1 Tax claiming the Earned Income Tax Credit (EITC); 69 percent for the 2014 filing season. Many of these tax returns contain Schedule C or “Self Employment” income from a trade or business. “Self Employment” income is often reported on a Schedule C, Profit or Loss From Business, and attached to the individual income tax return. The total net profit/loss from the Schedule C is reported in the income section of the individual income tax return and is a component that makes up the total earned income for an individual(s). Based on your affiant's experience, reporting false Schedule C business income is a common method that unscrupulous tax return preparers use to increase their clients' refunds by manipulating the earned income of the client in order to increase or qualify clients for refundable credits such as the American Opportunity Credit, the Child Tax Credits, and EITC, all of which are based, in part, on the amount of earned income a taxpayer reports.
I analyzed the tax return data for the tax returns filed by Number 1 Tax in the 2014 filing season and determined that 42 percent of the tax returns filed by Number 1 Tax included one or more Schedule C businesses. I also noticed the following:
a) Nearly all of the tax returns that filed with Schedule C businesses also claimed the EITC and in most instances qualified for a higher amount of EITC because of the amount of business income reported.
b) More than half of the total returns filed by Number 1 Tax claiming EITC also claimed to have Schedule C business income.
c) Of the approximately 110 Schedule C businesses, 43 are hair businesses (Hair Stylist, Barber, Hair Braider). All three return preparers prepared returns containing these Schedule C hair businesses. Other common businesses listed include cleaning service or housekeeping businesses and daycare businesses.
d) A comparison of the W-2 wage and withholding amounts claimed on Number 1 Tax clients' tax returns with the information reported by the W-2 employers reveals that 93 tax returns reported wages and/or withholding amounts that do not verify with the employer data the IRS has on file. Although there are a number of reasons why these data may not match up, such as a client failing to provide their preparer with one or more of their Forms W-2, at least 25 of these tax returns reported higher wages or withholdings than those reported to the IRS by the employer. This indicates that additional W-2 income or withholding was added to the client's tax return. In many instances this increased the amount of federal tax withholdings refunded or increased the earned income of the client enough to qualify them for a higher refundable credit, thus increasing their tax refund.
e) At least 40 percent of the tax returns filed by Number 1 Tax in 2014 claim the refundable American Opportunity Credit. This credit is a refundable tax credit for undergraduate college education expenses.
Analysis of the tax returns filed by Number 1 Tax in the 2015 filing season reveals similar characteristics as the previous year's returns. Approximately 28 percent of the returns filed contained Schedule C businesses. Other notable observations include:
a) Nearly all the tax returns that reported Schedule C businesses income also claimed the EITC and in most instances qualified for a higher amount of EITC because of the business income reported.
b) Approximately 36 percent of the returns filed claiming EITC also claimed to have Schedule C business income.
c) Of the approximately 80 Schedule C businesses, 39 are hair businesses. As in the previous year, other common businesses include cleaning services and housekeeping businesses.
d) A comparison of the wage and withholding amounts reported on the tax returns of Number 1 Tax's clients to the amounts reported by the employers has not been conducted for the 2014 tax returns that were filed this year because the IRS has not yet received the employer data necessary to conduct this comparison.

(Id. at 4-9.)

         The affidavit next described an undercover operation that took place on January 27, 2015, which an IRS undercover agent (“UCA”) had taxes prepared at Number 1 Tax. (Id. at 9.) The affidavit stated:

During the recorded meeting, the UCA presented the return preparer, identified as Joseph Brown, with social security numbers for him/herself and his/her dependent children and a Form W-2 showing wages of $871. After preparing the UCA's tax return, Joseph Brown explained to the UCA that he had increased his/her wages so that he/she would receive a larger refund. The completed tax return provided to the UCA by Joseph Brown and filed with the IRS reported wages in the amount of $8, 371 and was electronically filed from the EFIN belonging to Number 1 Tax.
After completing the tax return and having the UCA sign all of the authorizations and financial disclosures, Joseph Brown explained to the UCA that he increased his/her income a little but not too much. He told UCA that because s/he had a W-2 it was easy for him to report extra income for him/her but that he didn't have to do it in a way where it was “self-employed”.
When the UCA asked Joseph Brown what “self-employed” was, he explained to him/her that it was where you work for yourself and don't pay any taxes in. Brown stated that for the most part you have to prove your income with receipts, bank statements, and “stuff like that.” Brown told the UCA he just added a couple extra thousand of income and that it was okay long as s/he had a W-2. Brown proceeded to offer to make the UCA receipts if “they” were to request that and that “it's not a big deal.”
Brown explained to the UCA that the difference between increasing W-2 income and doing “self-employed” was that he/she would pay more for a “self-employed” return. Brown stated that his partners would have put “self-employed, ” but not him; he knows people want to save money. Brown told the UCA that Number 1 Tax was still cheaper than everybody else when it comes to self-employed and that they (Number 1 Tax) charge $500.
The federal tax refund claimed on the return prepared by Brown for the UCA totaled $4, 575. Had a legitimate tax return been prepared for the UCA, his/her correct federal tax refund would have been $350. Because Brown inflated the UCA's income, this increased the amount of refundable credits, such as the EITC he/she was eligible to claim.

(Id. at 9-10.)

         The affidavit explained that Brown also filed a Minnesota state tax return for the UCA using the same inflated wage amount, which resulted in a claimed state refund of $919, while a legitimate tax return would have generated a state refund of $94. (Id. at 10.) According to the affidavit, Brown “offered the UCA an opportunity to earn extra money by bringing in clients” and “provided the UCA with a Number 1 Tax Compensation Plan that detailed how much weekly pay and ‘commission' the UCA would earn as a ‘temporary' employee by the number of clients s/he brought in per week.” (Id. at 11.)

         After describing the undercover operation, the affidavit stated that the individual tax returns of Brown “include similar characteristics to the questionable returns filed by Brown and others at Number 1 Tax on behalf of their clients.” (Id.) Along the same lines, the affidavit noted that Williams' 2014 federal tax return had “similarities to the false returns filed at Number 1 Tax” which qualified her to receive a tax refund of $6, 709 based largely on the refundable EITC tax credit. (Id. at 12.) Moreover, education credits claimed on Karn's 2013 and 2014 jointly filed tax returns did not match IRS records and Karn's 2012 tax return claimed a tax refund “comprised entirely on false federal withholdings reported on [that] tax return.” (Id. at 11.)

         Magistrate Judge Rau found the application and supporting affidavit established probable cause for the search warrant and signed it on June 10, 2015. (Gov't Ex. 1, App. for Search Warrant at 1.) The warrant identified the items to be seized as “Attachment B” of SA Pitzen's affidavit application. (Gov't Ex. 1, ...


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