Episode 102: Stories From IRS Investigations with Carla Blake, CPA, CFE
In this season of The Data Sleuth Podcast, titled "From Numbers to Narratives," guest host Justin Burns, tackles topics including FBI Investigations, Anti-Money Laundering, Family Fraud, IRS Investigations, and more. In each episode, Justin is joined by an industry expert to help tell the story behind the numbers and explore the latest in fraud detection and prevention.
In today’s episode we discuss IRS cases with Carla Blake, CPA, CFE. In this episode, Justin and Carla discuss:
· What is the IRS’ process for investigating fraud?
· Investigating tax schemes.
· A case story about a 10-year long embezzlement.
GUEST BIO
Carla Blake is a CPA and Certified Fraud Examiner who spent 15 years as an IRS Revenue Agent uncovering unreported income, applying tax law, and locating hidden assets. Her IRS work included complex cases in the Special Enforcement Program (SEP), Abusive Transaction Investigations (ATI), and joint investigations with IRS Criminal Investigation. She brings a rare blend of government and private-sector experience, including roles as a Regional Controller, NASBA compliance manager, and workers' compensation auditor. Her approach is methodical, fact driven, and built for the courtroom.
Now the founder of Blake Files Forensic Solutions, a boutique forensic accounting firm, Carla helps attorneys and individuals untangle hidden assets, uncover fraud, and make sense of financial records. When she’s not dissecting bank statements or building case narratives, she enjoys the thrill of hunting down elusive ancestors. Like forensic accounting, genealogy is an investigation into the past—what happened, who was involved, and what the documents, coupled with well founded reasoning and analysis, can prove.
Email: info@blakefiles.com
LinkedIn: Carla Blake, CPA CFE
Website: www.blakefiles.com
RESOURCES MENTIONED IN TODAY’S EPISODE
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CONNECT WITH JUSTIN BURNS, CPA, CFE
LinkedIn: Justin Burns, CPA, CFE
Transcript:
Leah Wietholter:
Hi, I'm Leah Wietholter and this is The Data Sleuth Podcast. In this season of The Data Sleuth Podcast, From Numbers to Narratives, our host, Justin Burns, the director of operations for Workman Forensics, discusses a broad range of forensic accounting cases from embezzlement, to money laundering, fraud against family members, and so much more. In each episode, he's joined by an industry expert to help tell the story behind the numbers.
Justin Burns:
Thank you, Leah. I'm Justin Burns and I'll be your host for this season of The Data Sleuth Podcast, From Numbers to Narratives. Together with some amazing guests, we'll take you beyond the spreadsheets and into the human side of fraud investigations. Let's dive in to today's episode. In today's episode of The Data Sleuth Podcast, we discuss IRS investigations with Carla Blake. Carla is a CPA and certified fraud examiner who spent 15 years as an IRS revenue agent, uncovering unreported income, applying tax law, and locating hidden assets. Her IRS work included complex cases in the special enforcement program, abusive transaction investigations, and joint investigations with the IRS Criminal Investigation Unit. She brings a rare blend of government and private sector experience, including roles as a regional controller, NASBA compliance officer, and workers' compensation auditor. Her approach is methodical, fact-driven, and built for the courtroom. Now the founder of Blake Files Forensic Solutions, a boutique forensic accounting firm, Carla helps attorneys and individuals untangle hidden assets, uncover fraud, and makes sense of financial records. Hi, Carla. Thanks for joining me on today's episode.
Carla Blake:
Thank you for having me. I'm glad to be here.
Justin Burns:
Yeah, of course. So most of your career, you've worked with the IRS in some sort of investigative capacity. You worked with multiple groups while you were with the IRS, including the special enforcement program, the Abusive Transactions Investigations Unit, and worked in support of the Criminal Investigations Unit. I know you've got some great stories from your time working with the IRS and I know I can't wait to hear them and I'm sure our listeners can't wait to hear them. So before we get into the stories, I just have some general questions about how these cases work with the IRS. I do investigative work, but I think I'm a little bit uninformed about how exactly the IRS does their work. So I know most people think of the IRS as, well, that's where I send my taxes. And if I don't, they're going to come get me. So can you tell us a little bit more about how the IRS gets their cases? What's the process to work them? Give us a little rundown on that.
Carla Blake:
Sure. Yeah, the really interesting thing is the IRS is very transparent. They put a lot of this information on the website, but I think most people don't ever have a reason to interact with the IRS until tax time. So one of the ways that they get cases, which is posted on the website, is through an algorithm, sort of a scientific algorithm method where they use some statistical data from other types of audits that collect the data. And then they compare, someone in industry A gets compared to other data for people in industry A. And if there's something off, that could cause an audit to happen. But there's also the referral system, which maybe some of your listeners would really like to know about because that's the whistleblower program. And you can actually get paid to tattletale to the IRS, believe it or not.
And they'll pay somewhere between 10% to 25%. And so there is a process online for the average everyday person who's aware of something shady going on to report that, so some of those cases come that way. Some of it is truly random. And as an agent working there, you don't always know how that case came to you. You're not always given that information because it's not really relevant most of the time to the work you do because all the cases would be worked the same, no matter how you get that case.
Justin Burns:
Okay. And so how is it decided which unit the cases go to?
Carla Blake:
Well, so the IRS is large and I like to think of it like a hospital. Most people can relate to that. So you think about a hospital is full of general practitioners, so your regular everyday revenue agents would be those general practitioners within their divisions. And so they would know how to audit pretty much anything. Then you have the specialized agents who work in a smaller division, which would be like your surgeons and your special doctors. And so most revenue agents will start out as the general practitioner within a division. Generally speaking, there's two main divisions, really three. There's the small business and self-employed division, which would be any taxpayer with $10 million in assets or less, and then there's the large case. It's gone through many names over the years. Most people just know of it as large case or they call it LBI, whereas small businesses known as SBSE.
And so that of course will dictate whether you get the case, depending on whether it falls within that general rule of the $10 million assets. But then within each of those, there's all the specialized divisions. So there are agents who work employment tax cases. There are agents who work just your run-of-the-mill normal type audit work where there's just meals and entertainment might be a problem on the return or travel expense or something of that nature. But all revenue agents are revenue agents, so everyone's trained to find the income and follow the money, essentially. But yes, the way the flow, it depends on what it is. And then there's also the government division, which I did work in as well. I worked in the government entities division for about three years. And within that, it's specialized. And so I worked within the tribal governments division and so the IRS had a government to government relationship with the tribals because they're a sovereign nation.
And so they had special tax considerations. And so any case related to that, even if it was an employment tax case, which they do pay employment tax, even though they don't pay income tax, then that wouldn't have went to a small business employment tax person. That would've went to an Indian tribal governments. So it's very specialized and there's many different areas to kind of drill down. And then there are special units that work fraud cases and promoter and bad apple preparer type cases, which I also did that type of work as well.
Justin Burns:
Yeah, so I think the comparison to a hospital and the different units and specialties in there is a great one. And I know we mentioned just the three units that you worked with and are there more like that, more like the special enforcement program, the Abusive Transactions Investigations Unit and the CI unit?
Carla Blake:
Yeah. And I didn't work directly for CI, but what CI will do is they use cooperating agents that they pull from the other division. So if CI is working a tribal case, for example, then they would maybe need a cooperating agent from that division. If they're working a preparer or promoter, they usually would pull from the Abusive Transaction Unit that I worked in. And then they also just have your regular tax evasion cases that just relate to, again, things like somebody not reporting their income. And those they would get from, most of the time, the special enforcement program would assist CI, but sometimes they would go out to just the regular run-of-the-mill "general practitioner" agents to help them when they needed something like scheduling out stuff, scheduling out expenses or receipts or going through bank statements. Sometimes they would need assistance if they had a large amount.
But there's the Office of Fraud Enforcement, which is a higher level division. They're the ones who put out that dirty dozen list that probably most people have heard about. There's OPI, which is the Office of Promoter Investigations and they're more high level. They coordinate the efforts of getting those cases out to the agents who actually work them. And there's lots of other specialized divisions within the IRS as well related to things like offering compromise within the collections department. There's fraud units within collections. There's of course council, there's a big IT department. But as far as audits go, most audit work is going to come out of one of those three major ones, which is the TEGE, which is tax-exempting government entities, the SBSE, the small business/self-employed, or the large case, the large business. That's where the majority of the audit work will happen in the investigations.
Justin Burns:
Yeah, I know just in our line of work self-employed is a huge risk. I'm sure it is at the IRS and taxing entity level as well. So you mentioned that no matter what division or what unit you're part of, you're working these cases in a pretty similar fashion. You're following the same processes. So what does that process look like in the investigation and then in the eventual building a case for prosecution?
Carla Blake:
So your regular general practitioner case is going to come out to the field and an agent's going to get it. They're going to review that return and see what the problems are. They come to you with certain things that have to be reviewed because it's went through many processes before it gets to you to determine that there looks like there could be a problem. And so after you kind of do a cursory review and figure out what might be going on, you initiate contact always by letter these days. Because of the scams, that's changed a lot. You'll always get the letter. I know the public's been trained about that a lot lately. And then you get the letter and you have to call that agent. They schedule a time, they issue an information document request known as an IDR, which is not unlike the work that you do in your practice.
And you just request the records that you want to see, which are generally going to be bank statements if there's already an indication that there could be a problem. That cursory review of the return will indicate kind of looking at the overall picture of what's on the return and comparing it to industry standards and just looking to see. Does it seem like a person could live on this amount of income? If they're reporting $10,000 of income, but yet you see that they live in a million dollar house, then that's probably going to mean there's something going on. And so in some cases, bank records will be requested. Lots of times they're requested for small businesses because most people don't keep good records and they're not using a double entry book system. And so the only way to really audit for those is to get out those bank statements.
And so you give that list of documents, the taxpayer brings them with them the day of the appointment, and then you go over them and you start doing all of the analytical work. You start looking at the source of funds and where things went. And it's literally just there's where the money came in, there's where it went, and you look for irregularities. Is there some indication there's another bank statement that they haven't provided to me? Are there unexplained deposits here? And so it's really the same kind of work that forensic accountants do day in and day out. Revenue agents do that exact same process to determine if all the income's been reported. And of course if there are expenses that have been claimed that weren't paid, that's another part of that. And so after the agent goes through all of that, they'll present a report to the taxpayer that shows them if they owe money or not.
Now, sometimes people get a refund. I don't know if you want me to share a story now, but I can. One of my favorite stories is a guy sat down with me and he leaned in and he said, "Little lady, I got something to tell you right now. I ain't got no use for federal government." And I said, "Well, I'm sorry." And so at the end of that audit, he actually got a refund because he traveled extensively and he had all these records for his travel and he had just added it up wrong. And by the time I reviewed it all, he actually was entitled to more mileage than he claimed and he got a small refund. I never saw him again because he had a CPA that handled the rest of the audit for him, so I always wondered what he thought when he got the refund check. But that does happen.
You can find out you have made an error that you didn't realize you made that's to your favor, often are not to your favor, but then sometimes there's no problems and a no change is what happens at the end of those. And so of course in rare cases there's something that comes up where they've done something wrong intentionally and then there are penalties for fraud. And then you could be referred to the criminal area and then you could have yourself an actual criminal problem where you could go to jail.
Justin Burns:
So would you say most cases kind of end at the point where you just come out with that number where you're like, "Okay, well, this is how much you owe with penalties and whatever," or in rare cases, "Here's your refund." But I mean, when it does rise to that level of fraud or something criminal where you're going to be referred to prosecution, are you guys still involved with the case all the way through the prosecution or are you handing that off to someone else?
Carla Blake:
No, they're not handled at the same time. In fact, you're not allowed to continue a civil investigation. At the moment you know that it's risen to that level, you have to pass it off because you're not allowed be conducting an investigation because there are certain rights that a person has once they're under criminal investigation that doesn't apply to civil investigation. So once you see something, you refer it, you go through a process, it goes over to CI, and then they may or may not take the case. And if they do, the whole time they work it it's out of your hand. You're not doing anything with it anymore. Eventually it will come back out of that process because people always still owe their tax, but CI has got a different purpose. They're investigating to determine whether or not somebody is going to have fines or jail time. When a civil agent, which is what revenue agents are, versus special agents are the criminal. Revenue agent's job is to determine tax liability, if there is any, and to get that correct amount of tax, so that's the difference.
Justin Burns:
Okay. So those general practitioner sort of agents, once it rises to that level, they send it over to the Criminal Investigations Unit and they take care of it from there?
Carla Blake:
Correct.
Justin Burns:
Okay. Well, that's interesting. So you've mentioned a few times already about preparers and promoters. Can you talk me through types of schemes or things that the IRS would be interested in with preparers and promoters?
Carla Blake:
Sure. So I mentioned the dirty dozen. There's a list that the IRS puts out every year to make consumers, taxpayers, and the general public aware of some of the schemes that could happen. And so at the end of my career at the IRS I was working for the Abusive Transactions Division, which did investigations of preparers and promoters. Now, these weren't audits of them. These were investigations, so the goal of the agents in that job is not to get a tax liability. It's to determine whether or not there's been any kind of wrongdoing with regards to being a preparer or promoter. And in those cases, we were going to issue civil penalties or we would write a referral for an injunction to the Department of Justice to try to have them shut down. And so the way that those would work is imagine there's a seminar that gets advertised and they say for $79 you can show up.
And it's usually in the conference room of some Holiday Inn or something. And they're there and they're saying they have all these inside secrets about this loophole in the tax code where you can take this certain position and they encourage people to do that. That would be a promoter, somebody who claims to have some sort of position that no one else knows about. And you're lucky because you know me and I'm going to tell you all about it. If it sounds too good to be true, it probably is. And so what happens is we would investigate them and we would talk to them about their schemes, what it was they were doing. And most of the time they really think that they're smart, so they want to talk about it because they think they found a loophole or at least they've convinced themselves that they think they have.
And so they sit down and talk to you. Sometimes they don't want to talk to you. And then you basically look at what they're doing, the returns that they have prepared with that scheme. They do get audited and then the results of that are used to build a case. For preparers, those are similar. You sit down and you meet with the preparer, find out their policies and their procedures for dealing with their customers, and then you meet with their customers. We would conduct investigations where we would sit down and interview their taxpayer clients and ask them, "What kind of things did your preparer ask you for? Did they ask you for documents? Did you provide them anything?" And a lot of cases these preparers are putting complete fake Schedule Cs on returns in order to get EITC credit, which is earned income tax credit for the listeners who don't know.
And that's a really significant issue because a lot of people don't realize this, but that hurts the government in many ways and hurts other taxpayers. Because if you get a refundable tax credit like that that you're not entitled to because you falsified income, because these are not people hiding income. These are people creating fictitious income that allows them to claim this credit. And because that is self-employment, they get a self-employment tax credit. They don't get a credit. They get credit for that, so they get a refund of, say, $10,000 from this big credit, the earned income credit, but then maybe $1,500 or $2,000 of that has to go to self-employment tax. So they actually only receive about an $8,000 refund, but they don't care because they were never going to get that refund anyway. So now the Social Security Administration gets that $2,000 self-employment tax, and now they qualify for social security benefits in the future when they never even work this job.
So not only are they not paying their fair share of tax, which there really isn't a fair share because they're not working, so they had no tax liability, but they're getting all this money. They're getting a refund. And then on top of that, part of the refund goes to the Social Security Administration on your behalf and counts towards your credit. So when you get to retirement age, you can draw social security because you have paid in, but you didn't pay it. The government paid it with the credit you weren't even entitled to get. So these earned income tax schemes really hurt a lot more than most people think about. And so these preparers, they create this fictitious income for their clients and then their clients get the big refunds. Sometimes the clients don't even know that it's happening, though, because they have legitimate jobs. They may have a job making $40,000 or $50,000 a year and then the preparer will create a fake loss, a business loss, to lower their income so they can still qualify for this EITC.
And they didn't even know because they just went and paid money. They didn't look at their return when they got it back, even though they probably should have. So we would interview them and they're like, "Okay, did you drive Uber?" No, I didn't drive Uber. Well, it's on your return. They'd be like, "No, I don't even have a driver's license. Of course I didn't drive Uber. I don't know where the preparer got that from." It's that kind of stuff. And in those cases, we would try to get them shut down and/or penalties for creating false, fictitious returns.
Justin Burns:
Yeah, I never even thought about the social security angle of these types of cases. I remember reading about a case out of Georgia where this preparer, the way she was caught was by an undercover IRS agent. Which when I was reading this case, that's when I learned that there was undercover IRS agents. This preparer was just creating these businesses for people and just based off of nothing. She would just create entire schedules for them and get them big tax credits. And the IRS agent went in there to get his taxes done and the preparer said, "Okay, well, do you have anything that you do?" And he was like, "Ah, I mean, every now and then I go mow my aunt's lawn, but she doesn't pay me for it or anything."
And she created a whole lawn care business for him that had a big loss and got him a refund. And she was, "Okay, well, the refund will get sent to me. I'll keep a portion of it and you get the rest of it." And that was kind of how she was running her scam to benefit from it, but I think she ended up with eight years in prison by the time it was over. So it was a big deal.
Carla Blake:
Yeah, it happens a lot, unfortunately. And there are special requirements that preparers have for earned income tax credit. They have to do some extra due diligence efforts. If somebody comes in and is trying to claim stuff that doesn't sound right, like a 65-year-old woman who claims this is her biological child she's wanting to claim and it's 10 years old, well, that's possible, but it's rare. So there should be additional questions asked and documented. And if the preparer doesn't ask and document questions for things that don't seem right, then they can be held to penalties for not doing that as well because this is such a big problem and it does cost the government in so many ways.
Justin Burns:
Yeah, and I think that's a great time to go into an ad break.
Leah Wietholter:
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Justin Burns:
Okay, and we're back with Carla Blake. Carla, you've given us a lot of information about how IRS investigations work, the different units involved with these investigations, the different types of things you guys are looking at. So you've given us a lot of background on how the IRS works cases. Would you be willing to share any stories from those cases with us?
Carla Blake:
Sure. What a lot of people don't realize is that the IRS can actually be a good thing. You can be under exam and you can find out some things that are helpful to you. Sometimes people realize that they have kind of dropped the ball and aren't pricing their jobs correctly because they realize that they can't really tell me what they spent on a certain thing and they realize they should change their pricing. And it allows them to realize they just need to get their books in order. That had happened to me when I was at the IRS during my career, but also sometimes you can make a real impact on what you find. And one time I discovered an embezzlement. And so it started most do, run-of-the-mill exam like we had talked about before the break, where I sent out my letter.
It was just your regular audit and it was a corporation. And the policy is that you can only talk to shareholders. You don't talk to anyone else unless they have an explicit power of attorney form. And so in this particular case, I had mailed the letter, as I always do, to those shareholders. And instead of the shareholder calling me, the company controller had called me. And this person called me very, very worried about this exam. Stated that they were on their vacation, but they had become aware of this and just was really wanting to know how this process worked. And I explained to them that I could not discuss anything with them, even whether or not their employer was even under exam. But that if they wanted to know generally how the IRS works, that I could explain that, so that's what I did. I proceeded to tell this person that, just like I told you earlier, we're going to expect to sit down and have a meeting in a couple of weeks.
There are going to be records that we're going to want to look at and we'll come out in person, take a look, and we'll do our investigation that way. And this person was like, "Yeah, yeah, yeah. They've already hired a CPA that's going to handle this. I just really wanted to know." And I remember hanging up the phone thinking, "Well, that was really odd." If they've already secured a CPA that's going to handle this, which is the CPA that does their return, why is this person calling me from vacation? This seems really, really not like a normal thing. And so I kind of just filed that away. And when I arrived the day of the exam, the controller was there, as was the CPA who had been hired to handle this exam. And one of the first things I noticed is that the controller had a very, very expensive brand new vehicle and had their really shiny spot right up front that was identified as such.
It was this person's spot. They pretty much were the big wig there. And I thought that was kind of unusual, too, because most accounting folks get stuck with the leftover furniture and stuff like that in businesses because no one really sees the value in accountants. And so I started the process and the controller gave me the tour of the business, which was common and normal. Things went pretty well, gave me all the records. So no big issues there, really, but then I asked for the American Express statements and then that's when I got met with some resistance. Why do you need those? And I don't even know if I have those. I think those are followed away in the warehouse. It's going to take me weeks to find those. You don't need those. And I thought, "Well, that's really weird." We always ask for in business exams, like a corporation, we would ask for the general ledger because we're not going in and looking at bank statements first.
IN that case, when it's a corporation that has records, there's no reason to get into that kind of stuff. As long as we can determine that the books and records actually do reconcile to the return, then we know things that were on the return, you could find your answers in those records, things you wanted to question. You didn't need the bank statements because they had a true double entry record. So nonetheless, I got the general ledger and I noticed immediately that there were no names for payees for any of the disbursements in the disbursements journal. They were just vendor numbers. And so I asked for the list to provide to me, okay, here's vendor numbers. Who are these people? What do they represent? And so that was also met with some level of resistance, which I found odd, but I did receive it. And off on my way I went to the CPA's office because that was the other thing I should mention that I didn't before the break, we would conduct our exams at the taxpayers business because we wanted to do a tour.
That's where the records were. But when they had hired a CPA, we would do the vast majority of our work at the CPA's office. I mean, that's one of the perks of getting somebody to handle it. You don't have to deal with the IRS at your business all the time. And so I had already left to go to the CPA's office and I immediately noticed that there were some extra payments to this controller in the general ledger that were not just salary. And they were in a kind of contract labor type category, if I recall. And so I questioned that with the CPA and she didn't understand why that would be the case either. And so I started adding them up and it was fairly substantial. And she went back to check her records and started to look into it a little more. So the next day when I come back, she sat me down and she said, "Okay, I went back through and this is the total that I came up with. And this is a substantial amount of money." I don't even remember now.
I think the amount I found was some amount less than $20,000. The amount she found was way higher than that. And I thought, well, that's weird. And then we started comparing and I realized she had a different general ledger than I did. So this controller had given me an altered general ledger that was not the same one that they had given the CPA back at the time the return had been filed, so then that's when I knew there was probably a problem. And so there was a problem. This controller had been embezzling from their company. And they had not really tried to hide it until I came along because, again, these were just vendor numbers, so no one would really have any way of knowing who these payments were going to. And so the CPA wouldn't have ever questioned that and so there was no need to give an altered version to that CPA. But when I came along, there was. Now, I later found out from one of the other shareholders that this controller usually worked pretty part-time, even though they were a full-time employee.
This was a company that was not a huge company. We're not talking like a mega corporation or anything, so it was small enough where there was some leeway. I'm not sure what their HR policies were, but the controller was able to kind of come and go and not have to work a 40 hour week as long as the work got done. And so it was my understanding that there were no 40 hour weeks. And then when I came along with this audit, this controller was there all hours of the night, making all kinds of copies on the photocopy, that kind of thing. So obviously that was the general ledgers being altered and photocopied, but this was your run-of-the-mill embezzlement. It hits all of the things we learn about. All CPAs learn about this, all accounting students learn about this, and it's just your run-of-the-mill stuff. Writing checks, the employee will write checks to themselves. Extra checks that are beyond their payroll, which is what happened in this case.
These things were coded to various expenses that seem to be legitimate. This particular organization had a lot of travel-type expense and so that was a huge expense on their income statement anyway, so it was easy to go hidden in there and not noticed. Unfortunately, the shareholders, the owners of this particular company trusted this person and so therefore had no oversight. They weren't getting copies of bank statements. They weren't getting the detailed general ledgers. They were just getting these high-level know P&L statements. Although it was explained to me that profits had been dwindling and they couldn't understand why, but they had lost some contracts recently and they sort of chalked it up to that over time and changes. It's been a really long time ago that I worked this case, many, many years, but as I recall, I think maybe their business was growing at a pretty good rate.
And so at first they didn't notice because they had a healthy profit, but it turns out this person had also falsified bank statements that they gave me because I ultimately did request bank statements. And I was looking and there was something shiny and I looked and there had been a piece of white paper that had been taped with literally scotch tape over top of the canceled check on the bank statements with a different payee name on it. So basically, this person had typed up a new payee with the address line and everything and just put it across their name and had been photocopying those and had accidentally given me the original instead of the photocopied version. And so only one out of hundreds of pages of bank statements, one slip up where I got that. So that was a pretty major smoking gun.
Justin Burns:
Wow.
Carla Blake:
Yeah, but this person had given themselves a raise, so they were getting paid more salary than the owners thought. So that's something that had occurred. They had been given themselves these extra checks, but they were also using the corporation's credit card like their personal piggy bank. They were going out and having quite a lavish lifestyle, taking their family on vacations, going out and getting a lot of personal service type stuff, memberships while on vacation, getting a really high dollar dog sitter to pay for that kind of thing, housekeeping services for their house, obviously buying vehicles. But the credit cards were very extensively used, had open credit cards in other family members' and friends' names that the company was paying for. Just a lot of really easy to spot things if someone bothered to look. And all the red flags were there for the business itself, of course. You can't just let somebody have keys to the kingdom and never, ever check it out.
And that's one of the things that was the positive that came out of this exam. Normally you're going to be upset if the IRS comes knocking on your door, but when you find out that, wow, they just stop the bleeding. This bleeding I didn't know was occurring is now ... And this person had worked there for a very long time. I think the owners felt like they were friends with this person on some level. I don't know that they hung out necessarily all the time, but they had been friends, had been closer over the years. I think their children might've played together kind of thing. And so they just didn't think this person would do that to them. And that would be the one thing I would say that any business owners that are listening, just because it's somebody that was your best friend in college or they grew up on the same street as you, you should never trust that someone's doing right by your money if you're in a business situation.
And it doesn't mean that you don't trust them, that you look behind them. It's just good business to look behind someone, keep a pulse on what's going on in your business, because this went on for years. It was like 10 years and it was a lot of money. It was was over six figures, so it was a substantial amount of money.
Justin Burns:
Yeah. I mean, that's a long time for a fraud to run.
Carla Blake:
And of course when I discovered this and it got brought to the attention of the owners, they didn't want to press charges on their own. They could have gone to something like the FBI or the local police department and reported this because it's a crime in and of itself, but I don't believe that ever happened because the owner felt ... I think they felt embarrassed maybe, but they also didn't want their customers to learn that this had happened because then they may lose business. But also, because there was that friendship there, I remember the owner saying to me that he didn't want to be responsible for other family members of this person to have ... This person had grandchildren and didn't want them to have their grandchildren have to go see them in prison, which was just kind of funny to me because I thought if you steal a lot of money for me, I'm not going to care. I'm going to want you to pay.
But from my standpoint, I then had to pick this case up. And that's another way that the IRS gets cases and this is also on the IRS website. They'll tell you this. You sometimes will get examined because you're related to some other taxpayer or some other matter. They call those whipsaw issues. That's what the IRS will refer to those to. So you pay alimony, you get a deduction for that. Somebody else receives alimony, they have to pay income tax on that. So if one of those are not being reported properly, it could cause the other one to have an exam, too, that kind of stuff. And so in this case, then I was aware and needed to determine whether this person had reported this embezzlement income on their tax return. Because believe it or not, you have to pay tax on all income, even if you got it from an illegal means.
So if you're out here robbing banks, you're expected to pay tax on that. And so this person had not, so I picked up the case and worked it to get the tax that was owed. And so I did ultimately refer that case to criminal because obviously that was an embezzlement. It rose to that level. Once I built up enough information to determine that that had in fact occurred, that was referred. And in this particular case, they took it and it was prosecuted and that person did have jail time. Now, once CI took it, they do their investigation the way that they do. And the sad reality is that financial crimes never seemed to have the amount of jail time is some other types of crime, even though the harm that they do is very significant. I mean, look at these people who have the Ponzi schemes, for example.
They don't usually spend all that much time in jail. Or if they get a big sentence, a lot of it is suspended or they can get time for an ankle bracelet instead or something of that nature. So I don't know. I don't recall what type of sentence this person got, but it did go. But I did look today before coming to meet with you and you can just type in embezzlement and IRS and I found, I don't know, 25 stories that are dated in '24 and '25. So obviously these embezzlements must be quite common, so that's what I would say is the positive of an IRS audit. You might actually find a way to save yourself some money, but you're going to lose an employee. Now, that is not the only embezzlement case I've worked either. When I was with the Indian Tribal Governments Division, I worked a case where tribal council members had been stealing money from the tribe. Similar type situation.
It was also a tribal reimbursement scheme. In that case, the checks had been written to these individuals and coded as if they were tribal reimbursements and they were not, so I have worked that before. Another case I had one time was sort of this romance scammer. He was going around and finding women who had lost their husbands and were kind of lonely and had money and he was getting in their good graces. And he would show up in his Armani suits and his very expensive Bentley and wine and dine them. And so they thought that he had money like they did. And in fact, he had it from the prior victim where he had gotten money from them. So I worked that case and that was a really fascinating case, too, because I interviewed him and his new lady that he had came in. And I remember I had to stop and I said, "Do you want us to continue or am I allowed to speak to you in front of this person?" You can't just be out here interviewing somebody and talking about their financial business.
And he's like, "Oh, yeah, yeah, yeah. Sure." I'm like, "Okay." And so he pulls her over and sits her in his lap and he's all baby and sugar. And it was just so creepy. And as I was asking him questions, some things were coming up about some bank statements and things of that nature. And at some point, I don't remember what, because it's been so long, but she said something he didn't like. He literally threw her off his lap and said, "If you're not here to support me, what good are you to me? Why don't you just leave?" And he made her leave. And of course I went back to the office and told my manager and my manager said, "You're never to be alone with this person again. We're going to bring them in here." But he had falsified records. He had obtained loans with false information. He had scammed other women.
And so it was pretty incredible, the things that he had done. Of course he didn't pay tax on any of it and I don't even remember the outcome of that case. I just remember that it was interesting because these women were clueless and they had given up all of their money to him and got their family members to invest in things that he had suggested they invest in. So that was pretty interesting. Lots of interesting cases when you're an IRS agent.
Justin Burns:
Yeah, I think I'm still stuck on the she sat on his lap during an interview with the IRS. I think I'm still stuck on that fact of the story of why? Just a really wild move to pull in an interview with the IRS.
Carla Blake:
Always say it was my Jekyll and Hyde moment, where I saw a person transform before my very eyes. I saw them be the sweet, nice person and then I saw them turn into the devil before my own eyes. It was very strange.
Justin Burns:
Good Lord. Yeah, that is very strange. Yeah, just a real fun and interesting job. Yeah. Well, thank you for sharing these stories with me today. I really enjoyed having you on the podcast. I know our listeners are going to enjoy hearing these stories. If our listeners want to get in touch with you, what's the best way to do that?
Carla Blake:
They can go to my website, which my business is Blake Files Forensic Solutions. So the website is blakefiles.com. And I'm also on LinkedIn, so they can find me there.
Justin Burns:
Okay. We will put links to both of those in the show notes so people can contact you. And other than that, that's it. Thank you for joining me today.
Carla Blake:
Thank you. Glad to be here.
Leah Wietholter:
Thank you for listening to The Data Sleuth Podcast. If you enjoyed this episode, please leave us a review wherever you listen. The Data Sleuth Podcast is a production of Workman Forensics. To learn more about our investigation services and resources, please visit workmanforensics.com.