As tax professionals, we are constantly dealing with the intricacies of the Internal Revenue Code and related regulations. While we strive to maximize legitimate tax benefits for our clients, it is crucial to remain vigilant against fraudulent schemes. A recent decision from the U.S. Court of Federal Claims, Quinones v. United States, serves as a stark reminder of the severe consequences of attempting to defraud the IRS, particularly when claims against the United States are involved. This case highlights the application of the Special Plea in Fraud statute, 28 U.S.C. § 2514, and its "silver bullet" effect on claims before that court.

Case Overview and Taxpayers’ Claim

The case involved pro se Plaintiffs, April Harry N. Quinones ("Mr. Quinones") and Janeth R. Quinones ("Mrs. Quinones"), who sought a substantial tax refund of $4,547,247 following the IRS’s disallowance of their 2021 tax refund request. Their claim was based on their joint 2021 federal income tax return.

On their 2021 return, the Plaintiffs reported a total income of $14,433,860. This included wages reported on attached W-2 forms for both Mr. and Mrs. Quinones. Specifically, Mr. Quinones’s W-2, purportedly from his wholly owned company Fur Systems, LLC, reported $4,962,599 in wages. Mrs. Quinones’s W-2 reported wages of $9,471,261. They also reported significant withholdings: $2,194,242 in federal income tax, $785,775 in Social Security tax, and $224,560 in Medicare tax.

The Plaintiffs alleged to the Court that the IRS violated I.R.C. § 31, which allows for a credit against tax for amounts withheld under chapter 24, and I.R.C. § 37, which addresses overpayments of tax.

The Stark Contrast: Reported vs. Actual Figures

The core issue in this case revolved around the enormous disparity between the numbers reported on the Plaintiffs’ tax return and their actual income and withholdings.

Mr. Quinones: His company, Fur Systems, LLC, actually paid him $91,899.98 in wages in 2021. This contrasts sharply with the $4,962,599 in wages reported on his W-2 and tax return. Actual federal income tax withheld was $14,200.60, compared to the reported $766,832. Actual Social Security tax withheld was $5,697.80, compared to the reported $307,681. Actual Medicare tax withheld was $1,332.55, compared to the reported $71,958. Mr. Quinones acknowledged that the actual wage amount accurately reflected what Fur Systems paid him in 2021. He is also Fur Systems’ only employee, and according to him, the company makes a net profit of around $8,000 per year.
Mrs. Quinones: Her employer, Vistra Corporate Services ("Vistra Corp."), actually paid her $175,393.72 in wages in 2021. This stands in stark contrast to the $9,471,261 in wages reported on her W-2 and tax return. Actual federal income tax withheld was $26,433.49, compared to the reported $1,427,408. Actual Social Security tax withheld was $8,853.60, compared to the reported $478,094. Actual Medicare tax withheld was $2,825.96, compared to the reported $152,602. Mr. Quinones confirmed that Mrs. Quinones earned the actual wage amount from Vistra Corp. in 2021. Mrs. Quinones herself stated at trial that the W-2 from Vistra Corp. accurately reflected her wages and withholdings. However, the numbers on her submitted Form 1040 "in no way remotely resemble" those on her actual W-2.

In addition to inflated income and withholdings, the Plaintiffs also included other items on their return with "completely fabricated" numbers, such as medical and dental expenses, gifts, entertaining expenses, and pet expenses. They reported nearly $8 million in "Medical and Dental Expenses".

Taxpayers’ Explanations: Intangibles, Goodwill, Going Concern, and Receipts

At trial, the Plaintiffs struggled to provide a cogent explanation for these massive discrepancies. Mrs. Quinones deferred to her husband, stating that "intangibles," known only to him, accounted for the differences. She mentioned items like "goodwill and notes" which she described as "financial jargon" or the "value of your assets... like a brand or the name of your brand, your profession... valuations that are not really cash or can be cash at this moment, but in the future". She could not articulate a definition allowing her to claim these values on her 2021 return.

Mr. Quinones, who prepared the joint return and created his W-2 through ADP software using information he provided, testified that the inflated wage and withholding numbers included "intangibles and notes" like going concern value and goodwill. He also included these concepts in Mrs. Quinones’s reported W-2 values.

Mr. Quinones attempted to justify his use of terms like "going concern value" and "goodwill" by citing I.R.C. Section 197 and 26 C.F.R. § 1.197-2 for a definition of going concern value. He read a portion of the regulation defining going concern value as "the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity," including the ability of a business to continue functioning and generating income without interruption. He summarized his understanding as "the ability for a property to function as itself". He also cited I.R.C. § 1012 regarding the basis of property value. However, the Court found his results to be "unrecognizably skewed definitions" of these concepts. He could not point to any other sources justifying the inflation of income and expenses.

To further understand Mr. Quinones’s valuation methodology, the Court proposed hypotheticals:

Medical Expenses: Mr. Quinones stated the nearly $8 million in medical expenses included "intangibles and notes". In calculating these, he included the value of services/medication and "considered it as income in exchange of the going concern value of the contract". He reported the total cost of services, not out-of-pocket expenses. While actual payments were approximately $15,965 for services and $1,000 for medications, with total out-of-pocket costs "around $1,700," the difference to the reported nearly $8 million remained unexplained.
Flu Shot Hypothetical: A $10 flu shot would result in Mr. Quinones adding another $10 for the value of the workforce/know-how of the provider, and another $10 for the person who administered the vaccine, totaling $30, not including the receipt or currency value.
Package of Cookies Hypothetical: A $5 package of cookies involved "goodwill and going concern" intangibles. Goodwill was valued at $5 because it is legal to own property (cookies) in the U.S.. Going concern value was another $5 because the cookie "functions the way it is used to function". Thus, a $5 cookie was valued at $15, with the Plaintiffs believing they could deduct an additional $10 for every $5 spent.
Valuing Receipts: Mr. Quinones also valued the physical receipt itself. For the $5 cookie, the receipt had a value of $5 because it showed the item’s value/cost. He explained that without the receipt, you cannot prove purchase to claim expenses. Applying this, a $200 grocery receipt would be valued at $200.
The Multiplier: Most confoundingly, Mr. Quinones inexplicably multiplied the value of medical and dental expenses by fifty-four (54) "to calculate the total amount, including the intangibles included on the services that I received". His rationale involved valuing the workforce, know-how, goodwill, and going concern of the provider as "trade intangibles," but why 54 was unclear.

Even applying all these valuation methods (e.g., $10 flu shot -> $30 + $10 receipt + $10 currency = $50), the numbers still fell far short of the reported amounts. The final multiplier of 54 led the Court to comprehend "the final destination that produced the fantastical numbers".

The Government’s Defense: The Special Plea in Fraud

The United States asserted an affirmative defense seeking forfeiture of the Plaintiffs’ claim under the Special Plea in Fraud statute, 28 U.S.C. § 2514. They also asserted a counterclaim for $444,323.86 for the 2020 tax year under I.R.C. § 7405, although this opinion focused solely on the Plaintiffs’ original claim for the 2021 tax year. The only disputed issue for the Court’s decision on the Plaintiffs’ claim was whether the facts amounted to fraud under 28 U.S.C. § 2514.

The Court’s Analysis of 28 U.S.C. § 2514

The Court’s analysis hinged on 28 U.S.C. § 2514, which states that a claim against the United States shall be forfeited if any person "corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof". The statute requires the Court to specifically find such fraud or attempted fraud and render a judgment of forfeiture.

The government bears the burden of proving fraud under this statute. To meet this burden, the government must prove two elements by clear and convincing evidence:

The claimant knew the claim was false.
The claimant intended to deceive the government by submitting it.

The statute is intentionally broad, mandating forfeiture of any claim affected by fraud. This statute is considered a "silver bullet" in tax refund suits before the Court of Federal Claims, as even an "attempted fraud" is sufficient to cause forfeiture of the entire suit. The judgment of forfeiture is obligatory once fraud is established; the court has no discretion to ignore an attempt to commit fraud in the statement of a claim.

Fraud must be shown by clear and convincing evidence. This can be demonstrated by "’placing the questioned documents and statements alongside well-known and established facts’". "Mere negligence, inconsistency, or discrepancies are not actionable" under the statute. While claimants can rebut claims of fraud, their burden is to "place in the ultimate factfinder an abiding conviction that the truth of its factual contentions [is] ’highly probable’".

Application of Law to Facts

The Court found that the United States "convincingly met its burden" by clear and convincing evidence. In contrast, the Plaintiffs’ efforts to legitimize their "wildly inflated tax return inputs failed". The Court concluded that Mr. and Mrs. Quinones "supplied every possible piece of evidence necessary to find fraud," short of explicitly admitting intent to defraud.

Crucially, the Court cited the Plaintiffs’ own testimony:

Mrs. Quinones confirmed her actual W-2 from Vistra Corp. was accurate, yet her submitted Form 1040 bore no resemblance to it.
Mr. Quinones confirmed the numbers on his actual W-2 from Fur Systems reflected reality, but his submitted Form 1040 contained "entirely imaginary numbers".

This direct contradiction between their testimony about reality and the numbers they submitted to the IRS established, "without a doubt," that the Plaintiffs knew the numbers on their return were false. This finding was further supported by the fabricated nature of other expenses claimed on the return.

Based on this evidence, including their testimony at trial, the Court found that the Plaintiffs had violated 28 U.S.C. § 2514 and that their claim was "false or misleading, and was intended to deceive the United States at the time that it was submitted".

Conclusion and Order

The Court concluded that by using their false 2021 joint tax return as the basis for their claim, the Plaintiffs attempted to commit fraud not only against the IRS but also against the Court. The Court reiterated that no cogent explanation was offered for the "massive incongruities" between actual income/withholdings and the sums reported.

The Court FOUND and CONCLUDED with support from clear and convincing evidence that:

The Plaintiffs submitted a fraudulent joint tax return (Form 1040) to the IRS for the 2021 tax year.
All of the Plaintiffs’ claims in their Complaint are FORFEITED pursuant to 28 U.S.C. § 2514.

The Court directed the Clerk to enter judgment against the Plaintiffs regarding this claim. The Order noted that further proceedings are required to address the United States’ separate counterclaim for the 2020 tax year.

Implications for Practice

This case underscores the potent effect of 28 U.S.C. § 2514 before the Court of Federal Claims. Any claim against the United States found to be tainted by fraud, even an attempted fraud in its proof or establishment, is subject to complete forfeiture. The burden of proof for fraud on the government is clear and convincing evidence, often demonstrated by comparing submitted documents to known facts. As CPAs, understanding the severity of this statute is vital, especially if any clients are pursuing claims against the U.S. in this venue. The Quinones case serves as a clear example that fantastical or unsupportable valuations and figures, when presented with knowledge of their falsity and intent to deceive, will lead to the claim’s forfeiture. It highlights the need for rigorous adherence to actual figures and supportable positions grounded in the Internal Revenue Code and Treasury Regulations.

Prepared with assistance from NotebookLM.