By Gustavo Arellano
By R. Scott Moxley
By Alfonso Delgado
By Courtney Hamilton
By Joel Beers
By Peter Maguire
By Charles Lam
By Charles Lam
After a series of final verifications, an Old Quest processor would log into the IRS FIRE (Filing Information Returns Electronically) website, enter the unique Transmitter Control Code and upload the two forms. The following day, the processor was to log back into the system and check the status of the documents.
"The 1099OID will always come back BAD and be highlighted in red," the process sheet reads.
Because almost the entirety of reported earnings were claimed withheld, the uploaded document would trigger the FIRE system to automatically send a 1099OID Fraud Warning. But all it took to get the ball rolling again was for Old Quest to reply with a standard email, which under penalty of perjury verified the submission and requested the tax agency "please process that file." With the problem resolved, days later, the customer would be called in to sign a 1040X amended return (the operation got into swing after the April 15 tax deadline) claiming the sizable refund.
Old Quest's representatives assured nervous customers their methods were a legitimate interpretation of tax law. According to the IRS, however, the company placed those people in frivolous positions that exposed them to $5,000 fines.
When Old Quest customers brought the frivolous filing letters they received from the IRS to the Fontana office, Ruiz, Mendoza and other employees appeased their worries with a variety of explanations: The IRS just wanted to intimidate them, the letter was a mistake, the warning simply did not apply to the Old Quest program.
* * *
For homeowners such as Lamberto Trinidad, the process was so convoluted, so impenetrable it just sounded plausible. In his testimony at trial and in statements to investigators, the Seventh Day Adventist pastor said he first heard of the Old Quest program at a meeting of religious leaders in 2009, when a fellow pastor told him he knew of a person who claimed he "could set his mortgage to zero."
Trinidad, a college-educated immigrant from the Philippines, attended a seminar Linda Wilson and Greg Adkins presented at the Holiday Inn in Costa Mesa. They told him he was "an American citizen drawn into commerce by the government"—cryptic language typical of the Sovereign Citizens movement.
The Old Quest presenters told Trinidad every time he used his social security number as part of a financial transaction, he was "creating money," and that when he signed a loan document, the bank received nine times the amount he borrowed. They warned attendees to not try the OID process themselves because its complexity would get them into trouble. "Leave it to the experts," they said.
About a week later, the pastor went to Wilson's Costa Mesa home, where she calculated the balance on his mortgages and credit cards that would be claimed as withheld income. Trinidad wrote a $2,500 check that day.
The presenters made it sound as though Old Quest was working with lawyers and accountants. "Who in their right mind would think lawyers would do fraudulent things?" Trinidad told investigators.
It also didn't hurt that Old Quest was able to show him massive refund checks obtained for other customers.
Between March 2009 and February 2010, the IRS sent 11 Old Quest customers tax refunds totaling more than $5 million—payments on which the company got a 25 percent cut.
Those success stories were the crux of the defense Ruiz and Mendoza offered at their trial in January. The defendants interpreted the Treasury checks as "a validation of everything they had worked so hard to accomplish over the past year," said Leon Peterson, Ruiz's attorney.
Prosecutors conceded the IRS not only processed almost a dozen fraudulent refunds, but also did so long after the agency launched Operation Stolen Treasures, its investigation into the company. Robbins, the Assistant U.S. Attorney, characterized those payments as "slip-ups."
The slip-ups raised questions beyond the embarrassing communication failures between various divisions of the tax agency.
It's not a crime to fill out a tax return incorrectly, as long as it is done without intent at deception. Jesse Gessin, another attorney representing Ruiz, argued his client "had a sincere, good-faith belief in the OID program," something taught to him by people he trusted and validated by the IRS. "He didn't come up with the process. He didn't make it up," Gessin said.
As did several former Old Quest employees who testified as government witnesses, the two defendants "believed in the program," according to their lawyers.
As further evidence of their true faith, the defense attorneys noted Ruiz and Mendoza both got their loved ones involved in the business, and they filed OID returns for their own family members, including a $2 million refund for Ruiz's mother. The defendants also wrote several letters to the IRS supposedly seeking clarification on their procedures, and they were never dissuaded by any court-ordered injunction.
"This wasn't something that they created. It was something they borrowed and tried to make work as best they could," Dean Steward, who represented Mendoza, told the jury.
Defense attorneys argued the numbers weren't fabricated; there was just a disagreement regarding the proper boxes in which to put certain figures on a tax form. The IRS has a "different understanding" of how to file an OID, said Peterson, and the dispute should be resolved in a tax court.