 You're watching FJTN, the Federal Judicial Television Network. Hi, I'm Mark Sherman. This is our fourth program on financial investigation. Today we focus on organizations, but before we take the plunge, I want to cover some points that clarify where we're going with this program. Remember, all of the points and concepts discussed today are explained in the Financial Investigation Desk Reference. First, most organizations fall into one of three categories. There are public corporations, they have stock available for sale to the public, they're regulated by the U.S. Securities and Exchange Commission, and registered with the state. These are legally separate from individuals owning them. Public corporations pay taxes and are also known as C corporations because they're organized under sub-chapter C of the Internal Revenue Code. Finally, they file an IRS Form 1120. The second organizational category is closely held corporations. These are owned by a small group of people, and in this case, stock is not available for sale to the general public. Closely held corporations are like public corporations registered with the state and legally separate from individuals owning them. These are organized as either an incorporated entity or S corporation if incorporated under sub-chapter S of the Code. When it's an incorporated entity, they file IRS Form 1120 or 1120A. But if the business is an S corporation, it files IRS Form 1120S. Our third category of organization is called a partnership. This is an unincorporated business that is owned by two or more individuals, and it's not a corporation, so it doesn't issue stock. This organization is designated as either a general or a limited partnership. In a general partnership, each partner can manage the business, but in a limited partnership, individuals may invest in the business without managing it. Again, it's registered with the state, and partnerships must file IRS Form 1065. Because it's far more common for officers to encounter individual offenders who are self-employed and have financial interests in closely held corporations or partnerships, that's our focus in this program rather than investigation of an organizational offender. Now, I'd like to acknowledge that in conducting financial investigations, pre-sentence officers face some different challenges than supervision officers. Two major differences are number one, timeframe. Pre-sentence officers have less time, and they may have to work with less than complete information. So here are some tips. Have the defendant sign releases immediately following the plea or guilty verdict. And also, prior to the interview, have the defendant complete probation forms 48 and 48-b. Be sure to review the defendant's pretrial services case file for asset-related information, and don't forget the information obtained by the case agent, bank examiner, auditor, etc. Finally, search those online databases for information on a defendant because they can be a rich source. Okay, the second challenging facing pre-sentence officers is the defendant's availability. Offenders awaiting sentence may be incarcerated. Information may be less accessible through the defendant, and the defendant's attorney may, for whatever reason, advise against providing information. This could affect where to get the information. So here are some tips for handling the defendant's availability. In restitution cases, inform the defendant of the statutory obligation to fully disclose information pursuant to 18 USC 3664 D3. And be sure to warn the defendant about the possible impact of a failure to comply regarding acceptance of responsibility and obstruction adjustments. Of course, ultimately, the burden of proving inability to pay is on the defendant, not on the PO. Now, before we move on, I just want to urge you to keep in mind that our goal throughout this series has been to demystify financial investigation by discussing what information to get, where to get it, and what to do with it. Regardless of whether you're a supervision officer or a pre-sentence officer. We've done this by dissecting a single hypothetical case. We do this today with the case of Anita Lone. So I'll move over to the studio and we'll begin. All right, welcome. I am Mark Sherman, as you know, and I'm joined here in the studio by Clay Foster. Welcome back. Thank you, Mike. Pleasure to be back. Deputy Chief Probation Officer from the District of New Hampshire and by several officers on the telephone who are experts in financial investigation. They are Jim Rosika, Senior U.S. Probation Officer from the Eastern District of Missouri. Jeff Gwyn, U.S. Probation Officer from the Southern District of West Virginia. And Brad Vaughn, U.S. Probation Officer from the Middle District of Florida. Welcome to you all. We're going to continue, as I said, with the case of Anita Lone and the facts of the case begin in your participant materials at page two. In the first part of today's program, Lone's supervision officer meets with the financial specialist from his district to give the specialist an update and to get some more help. Now, we realize that not all districts have financial specialists, and that's fine. This is a role that could certainly be played by a supervisor as well. After that, the officer will confront Anita Lone with the new information that he's uncovered in his investigation. Now, Clay, in this first part of the program, the meeting between the officer and the specialist or supervisor, what do we want the audience to get out of this particular segment? I think particularly we want them to concentrate on, this is a continuation of what we've seen in the prior shows where the officer is building on the skill levels he has taken from the prior meetings with the financial specialist or the Suspo in this case. We want to show how he's taken some steps individually to come up with some information that would indicate that Ms. Lone may not have been completely truthful, and how he's used this information to dig even further. And by doing this, we're going to be going into a whole new set of tax returns that you mentioned earlier, the 1120S. We want to show again how the information on that form flows through onto the 1040, which again should be reflected on the 48, so that we have this continuity of information flow that the officers get used to looking for. All right, so let's get started. Playing the part of the officer is Senior U.S. Probation Officer Jim Lee from the Northern District of Georgia, and playing the part of his district's financial specialist is Bob Weinberger, a Sentencing Guidelines Specialist and Financial Investigative Officer from the Eastern District of Pennsylvania. The meeting begins. Thanks for taking the time to go over this case with me again, Bob. Sure, Jim. What's up? Well, you remember the last time we talked about the tax schedules and the discoveries and the inconsistencies and the financial documents that Ms. Lone gave us? Yeah, and if I recall, we came up with revised cash flow. We had her make a lump sum payment, and we also set up a new payment plan, didn't we? But you remember the last time I told you that I did a field visit out in front of her house? I saw an Acura and the license plate came back registered to JL Incorporated. I remember that. You said you were going to look into that. Well, I did, and I found out on the Florida Division of Corporations that the website that the company is registered and the officers are John Lone and Anita Lone. He's the president, and she's the secretary, and it's an act of corporation. So you think she was hiding her involvement with that corporation? Absolutely, I really do, and the reason is she didn't report anything about JL Incorporated on her financial statements or her monthly supervision reports. Okay, so what happened? Well, I decided to do a little intensive supervision. During a two-week period, I did three visits to Johnson's medical supply, which is her reported employment. And each time I went out there, I got a different excuse for why she wasn't there. Once she was running an errand, another time she was on leave, another time she was just gone for the day. So I was a little bit suspicious, and I decided, let me do a little surveillance of her home. So one morning I went out to her house, and I followed her. She was in the Acura. She drove about maybe three miles away from her house to an office complex. And I saw her get out of the Acura and go into one of the warehouses, and right over the entry, it said JL Incorporated. Wow, great investigative work. The more we look, the more we find. What else did you learn, Jim? Well, with everything that keeps unfolding on this case, I decided to keep digging, and I ran a credit report. And what happened was, another credit line came back, and it wasn't one that she told us about, and it wasn't on the net worth statement. So I decided it would probably be a good idea to see the application and what was on it. So I called the flu attorney, and I had them subpoena a copy of the actual credit application. And it came back recently. Wow, that's a great idea. That's right out of our desk reference. Right. And on the application, it actually says JL Incorporated. That's what she put as her employer. And the address is the same one I followed her to at that office bar. So we've got violations that include an unreported business and unreported investment accounts on the net worth statements, unreported employment and income on the monthly supervision reports, and she took out new credit without probation office approval. That's right, exactly. You might want to go ahead and check the tax returns, too. If she hasn't been straight with us on the 48 and the 48B, she's probably misleading us on other stuff, too. Have her sign the IRS 4506T to get the transcripts on her 04 returns, and we'll see how truthful she's been on those. You know, I was thinking the same thing, Bob, so I had Miss Lone and her husband sign the 4506T last week, and the IRS was quick to get it back to me, and that's why I'm here with you this morning. Okay, Clay, what did we get out of that exchange? I saw three points that I really would like to highlight. First of all, field work just because we're doing financial investigations are not something that we forget about. We're talking about locating assets that might be utilized for the victim, and by the very nature, the assets we're looking for are extremely fluid. So if we're not out there looking for new cars, new television sets, we may miss something that would trip us to the idea that there's more money here than we thought. In fact, it was the field work where he first discovered the car parked in front of her house or wherever it was. Absolutely. If he'd been doing his work from his desk and simply looking at documents, he might not have ever uncovered that piece of information. Secondly, the credit report. Again, because of the fluid nature of the assets we're looking for, we need to constantly redo credit reports and make sure something hasn't changed in what we knew prior to this. And finally, the All Ritz Act. That's something that the individual could have used, the officer could have used in order to secure that information as well. And that would have been an alternative to going to the flu attorney? Exactly. Instead of having the flu subpoena, if this district allows it, they could have utilized the All Ritz Act. And I believe in our participant manual, there is a copy of an All Ritz Act that the officers out there can take a look at. In fact, that copy is in the participant materials at page 48, Appendix A, just for you to take a look later on. Let's go out to the field. Jim Rezika, Eastern District of Missouri. You've been in this system quite a long time. You've got a lot of familiarity. What did you take away from that exchange? Mark, I will talk specifically about the importance of the credit report, because I think they are very important. And in this case, as in the vast majority of restitution cases, there's a special condition prohibiting opening new lines of credit or incurring new credit charges. And as a result, we need to do regular credit checks to monitor the offender's compliance with that special condition. And the credit report can lead to the discovery of new lines of credit, as in this case, those can and should be investigated. The credit card application often contains valuable information such as employment and reported income, maybe even false statements. Although ideally, there would be no new lines of credit. If there are, we can also obtain credit card statements, which can reveal a great deal about the offender's spending habits and lifestyle. So I think it's very important to obtain credit reports and follow up on them. Okay. Now, folks, we wanted to make sure we hit on that credit report, because we hadn't really talked about credit reports since our first module in this series on fundamentals, and just sort of wanted to get across to you the notion, Clay, and I think you'd agree with this, and Jim, as well, that these are not static documents. This is a tool that can be used and needs to be used over the course of the investigation. Clay, anything to add to that? Well, absolutely. I think what we find throughout our terms dealing with these types of individuals is once they've signed a release of information to get the credit report, they'll oftentimes think that that's the last time they're going to look. And so they will challenge us or they will take that risk. These are risk takers, and they will go out and secure credit and do something else, hoping that you're not going to run it again, because you've agreed to a payment schedule. They figure you're happy that it's over at that point. And if we take that tact ourselves, and we're really doing a disjustice to not only the victims, but to the offender long term as well, as we try to uncover some of their non-compliant behavior. Right. Now, let's focus very briefly on this Form 4506T, of which there's a copy in your participant materials. You can see the page number on your screen. 4506T, how do you use it? What you want to do, you're going to get exactly what was given to the Internal Revenue Service. In this case, we're suspicious that maybe Ms. Lone did not give a copy of the return to us that she gave to the IRS. That's not unusual, unfortunately. And it's no different than anything else. If an offender gives you some information, you're going to verify it. You're not going to take their word for it. So this is simply a method in order to secure the documentation to show whether or not the offender has given you the correct paperwork. Okay. So in this next part of the exchange, the officer has obtained the transcript of the 2004-1040 having used that 4506T. So let's pick it up from there. What did you find on the line items of the 1040 and the schedules? Well, Bob, when you compare the 2004-1040 and schedules that she gave me and the transcript from the IRS for the 2010-40 and schedules, she submitted to them. This is actually what you see here. I made you a copy. Take a look at line 17 on the 1040. They differ on each by $15,832. If you notice, that's the rental real estate, the royalties, partnerships, and S corporations and trusts. She gave the IRS a figure of $20,392 for that line. But on the copy she gave us, it says $4,560. The Schedule E on Supplemental Income and Loss reflects the same thing. There's nothing on Page 2, Part 2 on the Schedule E she submitted to us for income or loss from partnerships or S corporations. But the IRS transcript, the same Schedule E, has $15,832 on Part 2. That's the... Is that the JL Incorporated? Yeah. It says JL Incorporated in Part 2 on Line 28. I see it's an S corporation. Son of a gun. Yep. Line 32 is Total Partnership and S Core Income. So that would be income from JL Incorporated. She was concealing the JL Incorporated income by not including it on our copies of the 1040 and the Schedules. According to Line 30, if you look there, the corporation had income of $38,832. The $15,832 figure on Line 32 is what the corporation made after subtracting $23,000 in Section 179 expense deductions, whatever those are. I see that. Watch out for the accounting jargon. Section 179 expense deductions are deductions allowed when accompanied by a certain type of property. The corporation can deduct up to the entire cost of the property. Anyway, look at Line 28J. The figures from the corporation's K1 schedules. Either she or her husband made almost $30,000. So now you need to get the tax return of JL Incorporated. The corporation should have filed a return accompanied by a Schedule K1 and a Form 4562, like it says here on the 1040. Schedule E, Part 2, Line 28I. The corporate tax return. You mean the Form 1120S? Yes. The 1120S, along with the schedules like the K1, shows the shareholder income and deductions. The corporate Form 4562 tells you the property that's the subject of the expense deductions. Some of that info flows through to Part 2 of Schedule E on the 1040, but there's other info from the 1120S and schedules that doesn't flow through, and that you'll need to know to get her true financial picture. Okay, that sounds good. Just keep in mind that S corporations are small, closely held corporations with less than 75 shareholders, and they do not pay income tax on their earnings. Rather, the income and loss flows to the individual shareholders who pay the taxes on their personal returns. So look to see what Ms. Lone took in personal income from the corporation. That's going to show up on the K1. Okay, so I should have her sign the 4506T for the corporate tax return transcript? Yes, but remember, she doesn't know that you know about JL Incorporated, and you want to use that to your advantage. You've got good instincts and good skills. If you want to run some ideas by me before you meet with her, just let me know. Anyway, see if you can confirm what's really going on here and get her to sign the 4506T. After you get the transcript, let's talk. Sounds good, Bob. I'll follow up and I'll let you know what happens. Okay, Clay, we've got different 1040s here. What's going on? I'm personally very disappointed that Ms. Lone continues to lie to us. I mean, we're obviously failing this individual. You're shocked and dismayed. I'm shocked and dismayed. And I think, quite frankly, everybody out there has had run into an individual like this. We can't trust anybody. Unfortunately, in our business, we have to verify, verify, verify. And this is just another example of where the good field work by the officer put him on to another lead, allowed him, moved him to a verification mode, and now we have found out that she had lied to us. And so, you know, to paraphrase Mr. Doyle, the game's afoot. Okay, out to Brad Vaughn, Middle District of Florida. Brad, we know we've got different 1040s here. If you look, let's focus right on Form 1040 Schedule E, Part 2, on page 31 of the participant materials. We've seen that the Schedule E that she submitted to the officer on Part 2 did not contain any information about partnerships or S corporations, but then on the information that she filed with the return she filed with the IRS, the transcript of which has been received by the officer, we see in Part 2 all this new information about an S corporation called JL Incorporated, Brad Reactions. Well, I think we've got her. There are obvious discrepancies here that the officer has identified. He's going after the right material. He's going to be able to take what she's put on her written monthly statements, probably her oral statements to us while she submitted to the IRS, the 1040s and the 1120s for the Chapter S corporation, and we're going to get all that information. We're going to examine it closely, and we're going to be able to show her and show her up for what she's already done. Okay, now back to you, Clay, because one of the concepts here that we're going to try to emphasize now and then over the remainder of at least this segment of the program is this notion of, at least with partnerships and 1120s corporations, that notion of the pass-through from the 1120s, from the corporate return in terms of income, to the individual return, the 1040, and sort of why it's important to get that transcript to verify what the offender is telling you and follow that information and follow the money. I think what we're going to see, and we've seen this in some of the previous shows, and we looked at the 1040 and then added some of the schedules, the A, B, and the C for sole proprietorship, that not every piece of income or money that is generated by a business or received by an individual ends up on the tax return. We try to dissuade people from spending too much time looking at the adjusted gross income figure. We're going to see the same thing with the 1120s, that there's a lot of assets out there that if we just rely on the front page of the tax return, we're going to miss. Again, as the 1120s flows through to the 1040 through the Schedule E, and then again all that over to the 48, that this idea that you have to match up and compare items is something that we really want the audience to take home with them, is that this is not a one-time thing that we're going to be doing. Okay, so we're following the money forward and we're following it backward. We're looking forward from the 48s through the 1040, and now the officer needs to get the 1120s. When he gets the 1120s and the schedules, he follows that money backward through the Schedule E and the 1040, and then back to the 48s to make sure that the numbers line up, which we're already having a feeling, well, we already know that the numbers don't line up. They're not going to do it. Okay, so the officer has had Anita Lone sign the 4506T for the corporate return, and now he meets again with his financial specialist to talk about what he's uncovered. What happened, Jim? Well, Bob, it was interesting. I think she's still playing us as dummies. I mean, I told her that I followed her out to jail, and that I saw her go into the business, and I expected her to just turn three shades red and cave in and say, I've been concealing the income and everything. You mean she didn't? No, she didn't. I mean, she admitted working for the company for JL Inc., but she says that Johnson Medical Supply, her reported employment with her brother, that's her main employment, and she's only helping out at JL Inc. But she signed the 4506T. Yeah, that's the amazing thing. My take is that she either thinks we don't have a clear understanding of the numbers that are going to come back, or she's just planning on coming up with some other explanation between last week's meeting and the next one we're going to have. So how did you leave the meeting? Well, I played down things a little bit. I just, I didn't get too worked up. I wasn't too animated about it, and maybe that was what spurred her on to take chances and not admit the extent of her involvement with the company. Anyway, I told her that I didn't want to discuss things in detail until we first got back to transcripts on the corporation, and she was okay with that, and she expects to meet again sometime soon. Hey, great. If she wants to think that we're idiots, we know what we're happy to be idiots. In the meantime, let's discuss what you found on the 1120S transcript, and let's come up with the game plan. Sure. Well, it's like you said last time. A lot of what's on the Form 1120S, it does flow through to the individual tax returns. Since the tax is on the S corporations, they're paid by the shareholders, and they're the ones who receive the income. But some of the stuff on the 1120S and the schedules, they don't make it to the 1040. And that's what we want to focus on those figures, in addition to what we already found on the 1040 and the Schedule E transcripts. That way, we'll know what she can really afford to pay towards the restitution, and also what violations she may have committed. Well, this is what I picked up going over the documents. Box D on the first page shows the corporation is forming in October 2003. That's long before I even met her. In fact, she was still in prison then. The corporation wasn't listed on the net worth statement that she completed for us at the beginning of supervision, and she never mentioned it when I went over the statement with her. So as far as I'm concerned, that's a problem. But the biggest shocker was the first line of the return. Line 1A shows gross receipts of $295,000. That's over a quarter of a million dollars. And if you take out the cost of goods sold, the total income for the business is still $165,000. Wow. That's incredible. What about the compensation to officers on Line 7? Right. They put $45,000 there. And I'm assuming that went to Miss Lone and her husband since the Division of Corporations has them as the two listed officers. Jim, what does it say on the schedule K-1? The schedule that shows the shareholders' share of income and deductions. Lone and her husband are the only two shareholders, so there should only be two K-1s. They're attached to the 1120S. You're right. There are two of them. There's one each for Miss Lone and Mr. Lone. The ordinary business income is reported on Line 1 of both forms. For Miss Lone's K-1, the figure is $29,124. And for Mr. Lone, it was $9,708. This totals the $38,832 figure we saw in Part 2 of the Schedule E on the transcript, over $1040. It seems like the explanation for the difference on the two K-1s is the percentage of ownership of both of the two shareholders. That's right. It's here in Part 2 of the K-1s. Miss Lone is reported as a 75% shareholder, and on John Lone's K-1, he's listed as a 25% shareholder. Right, exactly. And if you take the $38,832 figure from the Schedule E transcript, Part 2, it's listed as non-passive income. If you take that number and you multiply it by Miss Lone's 75% shareholding, you get the figure that she reported on her K-1, the $29,124. And if you take Mr. Lone's 25% shareholding and multiply it out, it comes out to what he reported on his K-1, $9,708. Wow. That's a lot of extra income we didn't know about. But don't forget to consider Line 11, because it tells you the amount of the Section 17090 ductions that gets subtracted from the ordinary business income. Uh-huh. It says $17,250 on our K-1. Okay, when you do the math, that means she netted about $12,000, and he netted maybe $4,000. Those are the income figures we're interested in, Jim. Wow. You know, these K-1 schedules make it pretty easy to differentiate between her share and her husband's share and what we can get at for restitution. Right, but it's not only that. Even though we can't touch his income, it boosts his overall income, which should have been reported on the cash flow statement. Therefore, his ability to contribute to the household expenses increases. So that means Ms. Lone could probably part with a bit more of her money towards the restitution. You'll factor this in when you rework her payment schedule. Uh-huh, I will. And look at the 1120S on page 2, Bob. Schedule B, she's in the same business. Cosmetics. Incredible. Okay, so in case you haven't already figured it out, Schedule K-1's a pretty important document. Yes, it is. And that is also in your materials at page 42, and we want to focus on that in this very brief pit stop before we get back to the exchange. Clay, why is it important? Real quick, real briefly. I think we're starting to see the importance of getting the verification with all the attached schedules, because that's where we're going to start to see what she's actually making. And now we're starting to get a clearer picture of the type of money Ms. Lone is putting into her pocket that she somehow forgot to tell us about. Okay, so this is really helping us, K-1 is helping us track specifically what each shareholder has in terms of their percentage ownership in the corporation, which tracks back to Schedule E of the 1040. That's that information that the officer discovered again, inductively, right? Right. He found out this new information. He then got the 1120S, looked at the K-1, traced it back to 1040 Schedule E part 2, and it all starts to make sense. We'll all tie in rather nicely towards the end as we start to see how the numbers actually start to make sense between all the various schedules we're going to talk about, the 1040, the real 1040, and what she has available. Okay, now I know folks, we're getting pretty deeply into this stuff. There's going to be an opportunity to go over it in a few minutes. We'll do a little review. In the meantime, I wanted to remind you that if you have questions or you want to make a comment, you have a suggestion for us based on your own expertise or experience. Please send us a fax that the number appearing on your screen will take it up toward the end of the broadcast. Okay, now the officer wants to now differentiate between the amount of money that a needle loan has pocketed versus the amount of income for tax purposes. So pay attention to that in this next part of the exchange. Okay, Bob, it's been good to go through all of this with you, but I still think I need to nail down exactly what Miss Lone pocketed from the company last year. Okay, we need to be careful here because the company's income is different than what she pocketed. Look at the 1120S Schedule K, Line 17E. It spells out what the corporation made after deductions are considered. That figure, I believe, is 15,832. You see how it matches the 1040 on Schedule E, Line 32? Yeah, so this is JL, INX, Total Income. Yes, after the Section 179 deductions of $23,000 are accounted for, the $15,000, 832 figure is also included on Form 1040, Line 17. The K1s we just looked at tell you what portion of the total income is hers and how much is her husband's. Got it. Next thing to look at is the Form 1120S Page 4, Schedule L. Line 1 lists year-end cash of $28,000. Line 7 tells us that there were loans to shareholders totaling $20,000. Miss Lone and her husband are the only shareholders, so that's $20,000 they received from the corporation. This is huge, Jim. Loans to shareholders is not going to show up on the 1040. Either the 1040 she gave you or the 1040 she filed with the IRS. So this is cash flow in addition to business income. So what you're saying is that what she has available is her share of the ordinary business income from the corporation minus expenses plus the $20,000 in loans to shareholders. Exactly. Now, even though we don't know how much of those loans went to her, there's only two shareholders. So we should say for now that she got all of it. Don't forget the $45,000 in officer's compensation. Again, we don't know how much of that she received. You'll need to look at the figures from the W-2 issued to her by the corporation. And this should also be included with the transcript of the 1040 that she filed with the IRS. Remember, while we're doing this, Jim, first, to see if there's other sources of income that can be channeled towards the restitution. Second, is to verify what Miss Lone's been reporting to us, especially what she's given us in the 48s. And those are the two principal documents for assessing the ability to pay restitution. Right, I got it. So far, counting her share of the business income of $12,000, her husband's share of $4,000, the $20,000 in loans, you found over $35,000 in annual income in cash flow that was not reported on her 48. That illustrates the purpose of looking at these documents. The function of looking at these corporate tax documents is also illustrated when you examine the net worth statement and see that she failed to report ownership of the company and the loans that she received from the company, among other things. We never would have known as had you not obtained and reviewed the corporate tax returns. Okay, Clay, we are zeroing in here on the Schedule L and the balance sheet per books. Talk a little bit about that and then I want to go out to Jeff Gwynne. Okay, basically the Schedule L is really nothing more than the 48 for the corporation. And there are certain things on there that are really applicable for the tax purposes of the corporation that we don't have to be worried about, but as was pointed out by the supervisor, Line 7 of that return is often used by individuals to secure money out of a corporation without creating a taxable event. And the IRS has very strict rules. If you run into this type of thing with an individual or a case that you're working on, ask the accountant, ask the individual in charge of the corporation to show you the repayment agreement that the offender or the individual has with the corporation to repay these loans. If there is not one available that shows a due date, interest rates, et cetera, that is not or should not be considered a loan to the corporation to the officer, but in fact should be considered cash into that person's as income and therefore not only is it taxable for the IRS purposes, but it should be something we as well can take and in either way you've got two issues here. Either they've lied to you again by getting new lines of credit without telling you about it or they're trying to defraud the IRS by taking money out of a corporation to pay taxes. Now reading balance sheets can be somewhat difficult for people if they haven't done it for a while. This is a pamphlet that's offered by Merrill Lynch. It's not like a commercial. But it's not. On their website and their website should be coming up on your screen, you can log on and download this and this is an extremely useful document in pamphlet if you want to learn how to read a balance sheet completely and know what each one of those lines means and how it may or may not impact your investigation. So just in case you needed any more light reading, there you go. Well thank you Clay. Out to Jeff Gwynn, our resident CPA and US probation officer Southern District of West Virginia. Jeff, talk a little bit about this notion of the amount of money that she took out via a loan to shareholders versus income. Well it's kind of like we discussed before in previous sessions about how the taxable income of an entity, whether it be on an individual level or the corporation, is not necessarily how much cash she actually received. Like a specialist said, this would not have been known had the officer not obtained this copy of the 1120S and schedule L. That's the only place that it would show up and basically $20,000 came out of this corporation in the form of cash passed to either a needle owner or a husband and we would not be aware of this had we not been able to see the schedule L. Okay, and I think one of the things we're also trying to get across here is the importance of understanding, of obtaining the schedules and understanding what they mean going back to this notion of the pass through of the information from the 1120S to the 1040, the information on the schedule L, in this case loans to shareholders, as was said in the exchange, doesn't pass through. And that's additional cash flow that is available for restitution that the officer wouldn't have known about had he not obtained the schedule L and known what he was looking for. Exactly. Okay, all right. Let's continue with the exchange in this next part of the exchange. The officer and specialist focus on schedule M2. Bob, I think we've covered almost everything that I wanted to ask you about, but there is one more question I have, and it's about the 1120S schedule M2. Okay. Take a look at that on line seven. It says that there was a distribution of $10,000. Now my mental reflex is, say, when I see distribution, something was distributed. The question I have is where the $10,000 went. Jim, that's where I was going to go next. Schedule M2 indicates distributions from what they call the accumulated adjustment accounts. This is a fancy term that refers to the total of the net income generated by an S corporation that goes undistributed during the year. So she received $10,000 from the company from this account. I see. So I guess that's the same $10,000 that shows up on line 16 of her K-1 schedule? Yes, it was a property distribution, which is why the capital D is next to it. Yeah, right. I saw those codes listed on page two of the K-1. Anyway, the most important thing to remember here is that the distribution is in addition to any supplemental income reported on form 1040 line 17. So what you're saying is that Miss Lone received $10,000 in the form of a distribution, which isn't reflected on her 1040 like the business income on line 17? Yes. Just like the $20,000 loan to shareholders that's in Schedule L but isn't in the 1040. Okay. So if we add it all up, we have the officer's compensation of $45,000. We have the $12,000 of her business income. And then we have the $20,000 in loans to shareholders and $10,000 from the accumulated adjustments account distribution. That's over $85,000. Another $7,500 per month or so that's available for paying restitution and she didn't even tell us about it. Plus there's the $4,000 of her husband's income from the corporation that she didn't put on her cash flow, her cash inflows. Well, basically that's right, Jim, although the figure may actually be less. You should double check the figures on the form 1040 that she gave you and the transcripts of the 1040 that you got from the IRS. If the figure on line 7 for wages and salaries on the two 1040s is the same, then she probably already included the $45,000 and you've already taken into account in your initial calculation of what she should pay. Yeah, yeah, that makes sense. I definitely don't want to double count. I think those figures are the same, but I'll go back and check. Still, the larger point is there's more money available for restitution than she reported. Last thing, the 4562 on the depreciation amortization that's attached to the 1120s, look at part one which contains expenses for certain types of property that can be deducted under section 179. Oh yeah, the section 179 expense deductions again. Right, we talked about those before, but this is where you can actually see what the expenses actually were. Look at line 6. They bought office equipment and a forklift which together cost $23,000 and they were deducted from the business income. I think you've got it, but the other thing to note on the 4562, Jim, is the line 26 item on page 2. This is the part of the form where they show listed property which is used in the business and depreciated according to its use. She's listed a 2004 Acura RL, so she's driving around that car on the company dime and she still has a 2002 Lexus that's costing her over $400 a month. That might be something to consider in revising her cash flow statement. In addition to everything else, we may want to encourage her to sell the Lexus and use the Acura. They don't need three cars so I'll follow up on that with Ms. Lung. Yeah, Jim, it's time to confront her with this information and cite chapter inverse to hers clearly as possible and the consequences of her violations including the possibility of being sent back to prison. If that doesn't wake her up for a fantasy land, then nothing will. We'll come up with some options for dealing with her and we'll discuss that at our next meeting. Anyway, there's a few ways you can go about doing this. Okay, Bob. I'll work on it and I'll report back to you. Thanks for all the help. Okay, Clay. Schedule M-2, Accumulated Adjustments Account. A fancy term. How does it help? Well, I think, again, it indicates and shows how an individual can take income or funds out of a corporation and sort of hide it from the probation officer because it's not going to flow through to the 10-40 and scheduling like where we've been looking at. Again, like the supervisor said, just like the Schedule L loans to officers. And I'll certainly leave the details to my good friend, Jeff Gwynne. And with that, let's go out to Jeff. Jeff, give us a little bit more information on what the meaning of this Accumulated Adjustments Account is and the distributions that can take place under it and how that is helpful to the officer. Okay. Well, to call it the short name, common name, the AAA account, it's basically an account where at the end of the year the corporation closes out the activities of the business each year into the individual shareholder's AAA accounts. Okay. You can see on the page 39, Schedule M-2, at the beginning year there was $801 balance and with the ordinary income added, the section 179 subtracted. Plus, you see this distribution and that's where $10,000 was basically taken out of this company. At the end of the year there's $6,633 and that would be the beginning of the 2005 balance. So basically, the stockholders wouldn't necessarily have to take money out. The income flows through per their K-1 back to their 1040 and they are taxed on that income. There may be several thousand dollars that is built up in this account that they could access anytime and that they have paid tax on this money already, but they could just as accessible to the individual stockholders up to their basis in the corporation. Okay. So really, that explanation just sort of drives home the point that income is not necessarily the same as what somebody takes out. Absolutely. Okay. All right. Good. We have reached the end of this segment. What we want to do now is take a step back. We've covered a lot of ground already and covered some technical concepts and some technical forms to take an opportunity to help you all put it together again with a little review of what we've already covered. Take a few minutes to do that and then we'll come back with the officer confronting a need alone with the new information that he's uncovered. Okay. Let's take a moment to review some of the concepts that we've been discussing and put Humpty Dumpty back together. Again, this is about the officer figuring out what to get, where to get it and what to do with it or even more simply just following how through are tax returns to verify net worth and cash flow for a restitution payment. In this hypothetical, we're dealing with an S corporation. So remember, S corporations are legally separate from the individuals who own them. They file a form 1120 S tax return. S corporations do not pay separate taxes. Income from S corporations pass through to their shareholders. Shareholders report and pay taxes on S corporation income via their individual tax returns. Therefore, information about this income will be included on form 1040. This is a key point. So let's take a look at a need alone's 1040, shall we? Here it is. It's in your participant materials on the page number that's appearing on your screen. Okay. On page one, line 17, we see rental real estate, royalties, partnerships, S corporations, trusts, et cetera, attached Schedule E and the amount. There you are. $20,392. So let's move over to Schedule E. Supplemental income or loss on the page number appearing on your screen. We see on page one, part one, there we are, bear with me, income or loss from rental real estate or royalties. As reviewed in our last program, document analysis two, the total rental income of $4,560 shows up here. Right here, there. On line 26. Now here's where things get interesting. Turn the page. You'll see that on page two, part two, under income or loss from partnerships and S corporations, right there. Income or loss from partnerships and S corporations. It identifies the type of organization and income and expense deductions over here. Right there. Here, behind my head there. On line 32, total partnership and S corporation income, we find $15,832. Note also the references to Schedule K1 and our friend, Form 4562. Schedule K1 is filed with Form 1120S by the S corporation, so the officer now knows he needs to obtain Form 1120S of JL Incorporated in addition to the 1040 of the individual offender. All of this is new information because Anita Lone initially submitted a bogus 1040 to the officer, remember? Okay, so let's turn to the page number on your screen to find Form 1120S. You'll see that on page one, line 21 of the 1120S, there's ordinary business income listed in the amount of $38,832, right here. Got it? Okay, this matches line 30 of Schedule E, Part 2, that we just went over. Okay, so you're seeing the connections between the 1040 and the 1120S. Now, let's turn a few more pages and find Anita Lone's Schedule K1, which contains information about the shareholder share of income, deductions, credits, et cetera. It's an attachment to Form 1120S and there's one Schedule K1 for each shareholder. Take a look at Part 2, line H. Here's the shareholder's percentage of stock ownership, here it is. Here it is, 75% people. The only other shareholder is her husband. So he must own 25%, right? And on Part 3, you'll find the shareholder's share of income, deductions, credits, and other items. Here it is, 29,124. That and the deductions also a little bit further down under Part 3, 25%, simply amazing. So as officers whose job it is to verify the offender's specific net worth and monthly cash flow, you should now be able to see the connections, why obtaining both the 1040 and the 1120S with all the schedules is so important. Okay, to recap, the 1040, our friend here, provides you with the basic information about the S corporation and the income generated by it. Yes, over here, and the Schedule K-1 in particular provide more specific information on income and the shareholder's share of it. But we're not done yet, sorry. Income does not necessarily translate into cash flow. Owners of a corporation may choose not to take any income out of the business for themselves. On the other hand, economists said they might take money out of the corporation in the form of loans or other distributions. Unlike S corporation income information, information about loans and distributions other than dividends, key point here does not pass through to the form 1040. That's why you gotta get 1120S. It reinforces the importance of obtaining and closely examining the 1120S and its schedules. For example, turn to form 1120S Schedule L. This is the corporate balance sheet. Here it is. By looking at Schedule L, remember the officer discovered $20,000 in loans to shareholders. Check out line 7. Here it is, line 7. It reveals loans to shareholders of $20,000. There you'll see it on the schedule. Now look at Schedule M2. It's just below Schedule L. Analysis of accumulated adjustments account, et cetera. On the same page, you'll recall that by examining this schedule, the officer discovered that there was a distribution of $10,000. It's on line 7, so take a look at line 7. Distributions other than dividends. $10,000. Okay, there it was. You saw it. $10,000 to the $20,000 in loans. And that's $30,000. An extra cash flow that's not reflected on form 1040. Because for tax purposes, it's not income. That's a sizable number. And the officer wouldn't have known about it if he hadn't examined the schedules and understanding what he was looking at and understood what he was looking at. Due diligence, folks. You know, we've been talking a lot about bottom lines over the course of this entire series, so here's another one to keep in mind. While it's fair to say that understanding this type of financial information may not be rocket science, it ain't necessarily easy either. Obtaining a true understanding takes a lot of practice. You're going to have to go back over some of this stuff in this program after this program, because it may not necessarily be clear. Also, because financial investigations can be particularly challenging for even the most seasoned professional, you need not be bashful about asking a knowledgeable colleague or financial professional for guidance, okay? So now let's get back to the studio so we can finish up the case of Anita Lone at long last and our analysis. All right, welcome back. Okay, class dismissed. We're done. Psych. We've got a little bit more to go. The officer, it is now time for the officer to confront Anita Lone with the new information. Our process remains the same. You'll watch some role play. We come back for some analysis with Clay and our people on the phone. Clay, what do we want officers to get out of this segment? What we want to see here is how all this hard work that the officer has put forth to date in gathering this information is going to allow him to confront this individual with the facts and just the facts and to avoid the emotionalism of the organization to get the officer off track and maintain his primary goal which is one, to see how much money is available for the victim and two, also deal with the non-compliance to the court order in both taking consideration of monograph 109 issues where we're not only trying to comply with the court order but also make some behavioral changes on the offender that will be long-term in nature. We have a new officer and the offender, Anita Lone, is played by Senior U.S. Probation Officer Sharon Guider from the Northern District of Texas. The meeting begins. Well, Miss Lone, here we are again. We've been through a lot together, haven't we? Well, you're telling me this just drags on and on and on. Yes, but we're getting close to the end of the process. We're usually able to resolve financial matters on cases but the case has been a little more complicated and it hasn't helped that you've omitted some things in the documentation that you've given me. Oh, I guess you could call that an oversight on my part. You know, I've been trying to cooperate. Well, I don't think you have. Since we first met, you've been untruthful about a number of things. You conveniently left the E-Trade financial account and the 401K accounts off of your net worth statement and savings while you were incarcerated. But there's $34,000 in liquidated stock and you still haven't given me a good accounting for that. And then there's the city national account which you didn't report on the net worth statement either and you said you couldn't even remember why. I think there's been a real pattern of dishonesty on your part and I think you've only cooperated superficially with us so far. Oh, I think you're exaggerating this a bit. I mean, I might have left a few things off the net worth statement but I really forgot about the city national. I have given you everything you've wanted. It's not like I'm trying to avoid paying restitution. Really? Yeah. Well, Ms. Lone, you recall two visits ago. We went through the tax returns and the schedules. We revised your net worth and your cash flow statement. We came up with a lump sum payment and what your payment schedule would be. Remember? Well, how could I forget? Well, okay. Then we met a couple of weeks ago and I had you sign the IRS 4506T and we could get the transcripts from the IRS and verify the accuracy of the tax returns you gave us. Yes, and? Well, I received the transcript for 2004, the tax return and the schedules. And I found out there's some more things that don't line up with the documentation that you've given us. Well, like what? J.L. Incorporated? You already knew about that. I probably just gave you the wrong tax returns. Ms. Lone, that's not going to cut it. Here's the reality. The 1040s and the schedules you gave me for 2004, they don't match the transcripts we received from the IRS. That transcript and the transcript for J.L. Incorporated's 2004 tax return, they indicate that your income was actually more than you've been reporting to us. And as you know, we use that information that you report to us on the financial statements to come up with the restitution payment recommendation for the court. Now we have a more complete picture based on this newly discovered information and clearly the recommendation we came up with is too low. I've met with you several times, Ms. Lone, in an effort to get a complete picture, a financial picture, and each time you've provided either misleading or misrepresenting information. So as far as I'm concerned, right at this moment, you're in hot water with the court for the non-compliance. And I'll make it plain to you. You can either continue to defy the court and the probation office, which will almost certainly land you back in prison. Or you can begin to cooperate and you can work with us and make the most out of this supervision period. Get your life back on track. Choice is yours. What are you saying? I can't go back to prison. I mean, there's just no way. Oh my god, I can't go back. What am I going to do? Okay, Clay, what are we seeing here? I can't believe that she lied to us. I mean... I know you're still having a hard time with that. Go figure. But I think what we've seen here is now the fruition of all the hard work that the officer has put is now coming to take hold. She now knows the game is up. She knows she's been found out. Now we're starting to see that emotionalism we talked about earlier, that she's now going to play the, I can't go back to prison, it'll impact my family card. And the officer has done a good job of maintaining his professionalism and objectivity to not buy into that. And that's what we want to see. The officer is nice. He basically laid out in such ways that this is what it is. It is what it is, and now we have to deal with it. And we have several methods we can use to do this. Okay, out to Jim Rizziqi, Eastern District of Missouri. Jim, this is stuff you're very familiar with. Give us your reactions to how the officer is approaching this meeting, particularly how he has used the information he's obtained from these fairly comprehensive financial investigation to confront the offender. Yeah, Mark, I agree with Clay that the officer has continued to do just a fine job of maintaining a professional, really a no-nonsense demeanor. He continues to confront the offender with the cold, hard facts which he obtained by putting in a lot of time and effort and by doing his homework. And when she said I've been trying to cooperate he immediately came back with, well, I don't think so. And then he found out why he doesn't think so, pointing out each instance, instance after instance, in which he's been untruthful since the beginning of his financial investigation. He was firm, but he was in control. I can tell you from experience it would be easy for an officer to lose composure having put in so much time and energy, but it's important to maintain a professional demeanor and to maintain the upper hand as the officer in this case has demonstrated. Excellent. Clay, quick reaction Very little to say other than the fact that I think he was right on what we're seeing here is a professional dealing with an individual in a very emotional situation and how he's not letting that emotion control how he reacts. Okay, excellent. Back to the exchange and in this part of it, the officer begins to lay out specifically what the situation is for Ms. Lone. Ms. Lone, you have a choice here and it's pretty simple. The schedule K-1 from JL Incorporated shows that you received $11,874 in income from the corporation. The 1120S shows that either you or your husband or both of you received a total of $45,000 in officers' compensation. Then there's the schedule L. That shows that either of you or both of you or your husband received a loan from the corporation totaling $20,000. Finally, schedule M-2 shows a distribution to you and your husband of $10,000. Now, as an officer of JL Incorporated and a 75% shareholder, you are obviously a lot more involved in this corporation than you let on to me. And as far as I'm concerned, that's one representation, misrepresentation to many. I think we really need to bring this to the court's attention. I just can't believe this is happening to me. I'm a good person. I see all these people driving around in nice cars, you know, living the good life in sunny southern Florida, you know, the land of the beautiful people. You know, some of those people don't even work and they have all this great stuff. I work really hard every day and I want some good stuff too. But it's so darn hard to get. You know, before I took this money from the bank, I hadn't stolen anything. I mean maybe some gum from 7-11. But the money was so easy. And it was from a bank for Pete's sake. It wasn't from some old lady who needed it. Miss Lone, you need to realize the situation you're in, it's not about people doing something to you. This whole situation is a result of choices that you made. You need to take responsibility for it. You know, things aren't going to turn around until you begin to take some affirmative steps to change. It's like I said to you a few meetings ago. You stole money from the bank and there are consequences. The consequences were prison, supervised release and restitution. Nobody forced you to take the money. It was your choice. And right now, as I've been trying to tell you since supervision started, you've got a chance to do things differently. Again, it's up to you. You know, look, I was scared about losing everything when I got out of prison and you were looking at all my finances so closely. I just wanted to be sure that my family had a guaranteed source of income so we could survive. Your idea of survival is totally different. Nobody ever threatened your family and since the very beginning, I've tried to assure you that the court and the probation office was for you doing the best you could to pay the restitution back and still be able to survive. You don't need to drive a new Lexus and get your nails done every week. That's not survival. That's not necessary. You're in a serious situation and you've got to get a grip here. It's not going to get better until you've got this. You know, until now, I just felt like I'd done nothing wrong and this was a huge injustice done to me. I mean, first there was the bank and then the prosecutor and then the judge and then you. Isn't that ironic? I mean, I have to go to prison and go through all of this and not realizing that I'm responsible until my PO tells me I'm going to go back to prison. I've just made so many bad mistakes. I think it's all caught up to me. Well, I can tell you, it's going to take you a long time to process all this and for you to figure out some way to overcome this habit of bad thinking that got you in this position in the first place. You know, people won't just snap out of that type of behavior. But I think, honestly, if you're really contrite at this point, it's not going to hurt you. Still part of my job requires to tell you that you've got violations to answer for. I'm going to go through those with you. First of all, since the first meeting to today, these are your violations. You failed to report the jail incorporated income on your net worth statement. You didn't put the company on your net worth statement. That's a violation of Title 18, United States Code, Section 1001, false statements to a federal officer. Then you failed to report jail incorporated as your employer on your monthly supervision reports and you didn't report the cash inflow of your operation on your monthly supervision reports either. That's also a federal code violation. The same statute I just cited a second ago. And then you add to that the false 1040 and the schedules you gave us for 2004 and you've got three separate counts violating the same federal statute. Then you made untruthful statements last time we got together about the extent of your involvement in JL. You didn't obtain approval for the credit line that I discovered without any help from you when I ran your credit report. That's a violation of the financial restriction the court imposed on you as part of the conditions of your release, credit restrictions. And then finally, still, you have not explained to me the $34,000 in cash from the liquidated stocks. That technically could be a failure to follow the instructions of the probation officer. Well, let me tell you about that money. I can tell you all about that money. We used it for the startup of JL Incorporated. When you look on Schedule D in my 2003 returns, you can see we liquidated that money in January and started the company in October. John worked up the paperwork and we got it opened. We used that money to get the warehouse location and some supplies and just some startup inventory. So why did you tell me when we first went over your tax returns a while back that you weren't even involved in the cosmetics business anymore? Well, I was afraid that you were just going to take everything including my rent house. And I figured if you didn't know what to tell you then you wouldn't find out. Yes, I remember the ad exchange about the rental house. But I also remember that we tried to work out a way for you to pay the rental income toward the restitution and for you to keep the house. I know you said it, but I just wasn't listening to you. You know, I just kept thinking, this guy's out to get me. Okay, Clay, reactions? Well, I think what we're seeing here is a classic example of the white collar personality. I'm not a bad person. I really didn't do anything wrong. It's the bank fault. They let me steal from them. And then they dehumanize. Thank you. That would be it. That would be it. The victim in this case, because it's a bank, it's not a person. They forget that the bank has all the money for the little old ladies as she says she's not stealing from. Right. Well, the bank's insured. It doesn't matter. Exactly. And that's their concept. Everybody's heard the concept that a fool and their money are soon parted. For a white collar offender, they also add the statement they were lucky to get together in the first place. So they have that feeling that it's okay to take from people if they're not smart enough for me not to take from them. Okay. And I think there is, you know, in this whole, you saw her start to break down and this is sort of the, you know, all right, I've seen the error of my ways. Okay. Let's stop you there. Go out to Brad Vaughn, middle district of Florida. Brad, any reactions to this particular exchange, how the officer conducted himself or reactions to anything that Clay has mentioned so far? The officer handled this straight on. He let Alita Nita-Lone know that, hey, we're on to your game. You've really done this to yourself and with your misstatements and misinformation, he used that as a factual basis, not just to attack her credibility, but where they were going in this exchange. He handled it very professionally. He read it to her chapter in verse. This is what you've done. This is when I discovered it. Let's go back to our first meeting, our next meeting, the last meeting we had and really told her, look, you've got these, you know, supervised release violations and these new law violations and, you know, suddenly she has this, you know, epiphany and sees the light. That's all very nice, but it has caught up with her and I think reality now is set in. Right. And, you know, my reaction was, it was interesting to see the way that he established control, continued establishing control of the conversation by using the specifics that he had uncovered over the course of the investigation. I mean, again, chapter in verse, not only in terms of her violations, but chapter in verse in terms of the information that he had uncovered during the violation, during the investigation to sort of, again, establish control in that exchange. He became her reality meter. Whenever she started to come up with and rebuild her house of cards as to why things went the way they did, he was there to blow that house of cards down with the facts and not get involved in the emotional aspects that she was trying to draw him into. So as a professional, you're using those facts as a sort of degree of separation from the offender's approach. Maybe she's on the level. Maybe she's not. That's really not the point. The point is to follow the facts wherever the facts lead and do your job. Exactly. Okay. Let's move on. In this part of the exchange, we're coming to the conclusion of it, the officer and offender talk about how this situation is going to impact her restitution payments and her future. Well, Masonic, I'm glad you're coming clean now and taking some responsibility. It's like I said a few minutes ago, given the fact that we're going to be communicating with the court. It can only help you at this point. Okay. So how's this going to affect your restitution payments? I mean, I really can't go back to prison. You're not going to do that to me, are you? I mean, I can't even think about it. Well, the court sometimes responds to violations like the ones you've committed with understanding and leniency, especially if you're prepared to take some conciliatory measures, like telling me that you're going to cooperate from this point going forward and of course being willing to go along with an increased restitution payment. Those things should help, but still I have to tell you that your supervision could be revoked and you could go back to prison. It's entirely up to the judge, not me. Certainly, there's going to be some sort of sanctions for these violations, but the court might work with you if you're willing to take some positive steps. Oh, I definitely am. I mean, I just can't put my kids through that again. Well, we're going to have to figure out how to adjust your restitution payment schedule. But right now, as far as I can see, you had business income of $11,874 and you had a shareholder loan of $20,000 and a $10,000 distribution. Your husband had almost $4,000 of income from the corporation also and you didn't report that on your cash flow statement. So just the income and the cash flow alone is another $45,000 over 12 months. Okay, just tell me how much more do I need to pay? Okay, well, our current plan has you set up so that you're going to be close to paying off the restitution by the expiration date. We have you set at half your cash flow now. So I don't think it would be unreasonable to have you pay 75% of the total net business income of $15,832, which works out to another $989 a month. Wow, that's a lot of money. Yes, but I also want to look at the current books and records of JL Incorporated to determine the cash flow the corporation has on hand so that we could devote some more money to the lump sum payment, either by a distribution or a loan. And there's the Lexus. If you're driving the Acura and it's paid for by JL Inc., you're going to need to dump the Lexus. That's another $420 a month from your cash flow that we're not seeing go to the restitution. You've got to realize you're not entitled to live a lifestyle just like anybody else. You've got a criminal debt to pay here. And that was a big part that got you in trouble in the first place with the bank. All right, I'll look into selling the car, but you know I love driving it and I just love being seen in it. But if I have to do it, if it'll get me out of this mess, okay. Well, we'll see how the court reacts to all of this. And now I want to meet with my supervisor and discuss this whole situation. I don't want to make any decisions right now, not today. We've covered a lot of ground and I think we're finally heading in the right direction. We'll meet again in a few days, okay? Okay. All right, but one thing I want to remind you is that you're going to need to bring with you the current books and records of JL Inc. and all the other outstanding information I've been asking you for. Okay, I'll bring you anything you need. Okay, Clay, sum it up for us. First thing I'd like to point out is how far this officer has come from the first episode we ever did where we saw the officer sitting on the couch with a psychiatrist terrified into getting involved in a financial investigation because of all the exotic forms and what they mean. And back then I remember saying that we'd like to pass on this information that this is really nothing more than fourth grade math with a nose attached to it. One of my favorite descriptions of forensic accounting. People, if we've moved on, he's become more comfortable with doing the subtraction in addition in knowing how to throw out the chaff from the wheat and only pay attention to those sections of the forms we're talking about that's going to get him to his ultimate goal, how much money went into this woman's pocket. Okay, out to Jeff Gwynn, Southern District of West Virginia. Jeff, what was interesting is that toward the end of that part of the exchange the officer raised the issue of the cars and one of the cars, of course, was being used as part of her business. And he found out that information not just from his observation of the car being parked out in front of her house but from tracing the tax returns and the schedules in the form 4562 for the corporation where it was listed as business property. So that sort of shows us what. It shows us how to use the form 4562 in a very practical sense. Any reactions to that? Well, the Lexus that we knew she had it's very obvious we questioned the amount of the payment initially. But now that we know after seeing her drive it following doing the actual field work and seeing her drive the vehicle to work and confirming it in part five for the 4562 on page two which is page 41 of the investigation or the materials we can see that she's indicated 100% business use which although driving to work is not considered business use it's obvious that this is her main car and she's indicated that she likes to be seen in it she's going to have to change her lifestyle and realize that we're probably going to look at selling the Lexus for either a lump sum which will eliminate the $420 a month payment. Okay, now Clay turning back to you this is supervision and we've talked about the professionalism of the officer and maintaining that professionalism and not getting caught up in whatever emotions are going on with the offender but just sort of paying attention to the facts and I guess one of the things we wanted to try to get across over the course of all of the modules in this series has been this is taking place this investigation is taking place within a context that is set not only by the statutory mandate that the officer has to follow but by the monograph 109 and by the charter for excellence and the charter for excellence also talks about maintaining objectivity and being professional and treating the offender with dignity and respect and the monograph 109 talks about controlling and correcting reactions I think we saw during this portrayal between the officer and the offender he never lost control of the fact that he had a twofold purpose one obviously was to correct the restitution in the best way he could for the victim but secondly is to make some type of meaningful change if that was possible in the behavior patterns of this individual and often times he would when she got off onto tangents that were again trying to build up her little house of cards he very quickly brought her back to reality and reminded her there was this type of thinking that got her involved in a court system in the first place it was this type of thinking that got her involved in the violation process I think the other aspect we want to remember is by maintaining that objectivity and professionalism if you don't buy into the emotionalism you're not going to lose the ability to listen if you paid attention during one of the excerpts from the conversation between those two individuals she made a statement that would have added another violation when she tried to explain the $34,000 if you remember back a few shows ago she indicated at that time her husband had used that $34,000 for living expenses while she's clearly indicating she knew it was used for a start-up start-up money for this corporation we have yet another false information to the officer that can be added to a growing litany of violations okay, now folks in the audience are probably going to be wondering what's the next step we know that there are these violations it's a serious situation and so we know that different districts handle different situations differently depending on what the approaches are in their district or whatever so let's sort of go around the table here at least with our panelists and I want to ask you how would you handle it in your district and then we'll ask the folks on the phone I think absolutely this case will be brought back before the court in violation status these type of non-compliant behavior is not something we could overlook simply by saying well, I missed my meeting I forgot to go to where you're on job these are serious law violations and I think we would be derelict in our duty to not bring this back to the court's attention let the court decide what the next step is going to be the court has several options they could go everywhere from revoking this individual supervision and sending her back to prison or taking some intermediate sanctions it might be indicated in the 109 you have house arrest, you have intermittent confinement there are a lot of things you could do to sanctions this person at the same time taking consideration we don't want to throw the baby out with the bathwater with the corporation and the assets that's available to us there's going to be a trade-off there could very easily be a trade-off okay, out to Jim Rzika, Eastern District of Missouri Jim, same question how would your district handle this? well, same basic answer as Clay in this case, given the number of the repeated violations including serious law violations we would definitely submit a violation report to the court and we would pursue revocation and of course as to whether the court would revoke that would depend upon the particular judge and how he or she views the case my experience is that most of the time in cases like this just by initiating the revocation process this leads to negotiation between the offender through her attorney with the government and it often results in a sizeable lump sum payment and a sanction like halfway house placement or home confinement just like Clay talked about that last point in particular I think is helpful I can't tell you how many times I've seen in several years I've seen in news and views reports coming out of the districts sometimes submitted by chiefs talking about how due to the gumshoe investigative work of their officers financial investigative work the officer came across some assets that the offender did not present to the officer and as a result through those negotiations the offender ended up paying off the restitution out to Brad Vaughan the same question how would you handle it Mark exactly the same way we're going to notify the court of the supervised release violations the new law violations the deceptive practices that she's entered into since being on supervised release but I think our focus is going to be on making the victim whole again as quickly as possible she has the necessary assets to pay that off in its entirety and I think the previous commenter was correct we're going to want that money and we're going to want to fashion some kind of punishment that we get that money in the same stroke a punisher for her misdeeds Jeff Gwynn how would you handle it basically the same way we'd definitely notify the court and attempt to make the victim whole thing to keep in mind that some victims just the supervision is worse than going back to jail and having to answer to us if we extend that and attempt to monitor their assets and their activities like some of the others have said a lump sum will often be offered up and it's something that we can, it's a tool to show that the money is there and she's willing to pay it we are now rejoined by our roleplayers Sharon Geiter, Bob Weinberger and Jim Lee welcome back guys, great job I wanted to give you a bite at this too if you want to take a shot at it Sharon let's start with you how would your district deal with this type of a situation I've been very lucky in my district that the judges have supported us in bringing back financial offenders to the court, the key here though is that you have to be able to demonstrate to the court that they have the ability to pay but just not the willingness and that is the key in terms of taking punitive action against them that's great, Bob Weinberger reactions well speaking from the pre-sentence process this is where the pre-sentence officer has a lot of discretion and he could recommend an enhancement for obstruction of justice for a 1001 violation for filing false financial information in the alternative or he could also in the same context not recommend a reduction for acceptance or responsibility or if you want to make things smooth and you think that's maybe what the judge might want to do you could confront the defendant with his attorney and say listen we need a big lump sum payment because there's some serious issues here that could definitely affect the outcome of the sentencing and finally Jim Lee reactions financial offenders are a little bit different than other types of offenders in that their crimes that they've committed are actually what I call reversible we can get the money back into the hands of the victim you can't undo a violent bank robbery or some other types of offenses so it doesn't always profit the offender or the victim to put a problematic financial offender like Miss Loneback in prison because you're not going to get the money back what you can do is work with her especially if she has the ability the offender has the ability to pay and see what you can do to use the court at times like this in this scenario to pressure her to cooperate but putting her back in custody is really the last thing you want to do you go there if you have to okay thank you all right now we have come basically to the end of the series here we started out in our first module on fundamentals talking about the 48s we worked through the 1040 and the schedules A, B, and C in the second program and in the third module we got a little bit deeper into the 1040 and talked about schedules D and E and depreciation and capital gain and loss those kinds of in the form 4562 and now here we are talking about the form 1120S and offenders and Clay give us a brief summary of what the audience maybe should get out of both this program but also the series as a whole well hopefully what the audience will gain from this is that this is easily something any one of them out there can do this is not as somebody said rocket science but this is something that with a little bit of practice and a little bit of training a little bit of help from either your your financial advisor or the flu unit you can become better at as you continue and I would say this that what we've touched upon over these last four shows is really just the beginning of financial investigations we really this was like financial investigations 101 if you take a look at some of the items in the financial desk reference there are a lot of other things that officers can if they are interested in following up on this type of training take a look at the officer in our scenario could have used some indirect methods of proof to determine whether or not we have more assets things like net worth investigations source and applications of funds investigations these are all very good methods that can be utilized and been utilized by the internal revenue service and other agencies over the years to determine that there was money out there that we didn't know about and again that ties into the whole concept of appropriate and good solid field work with the financial aspects of the case we're going to move to the round table sharing guide or same question tell us in your view we've started out at a particular place talking about fundamentals and the 48's worked up to organizations in your view what should the audience get out of this series Mark, similar to what Clay said I think we meant to demystify the whole process we've talked about that officers need to know where to get materials what materials they need to have and then what to do with those things what resources available to them we have the monograph 114 we have the desk reference we have peers that have lots of experience and now we have this financial series and really what it is is just putting together the pieces of the puzzle to provide a full complete picture of an offender's financial status and we have all those pieces it's just making sense to make a hole Excellent, Bob Weinberger, same question Use your common sense when you go out to an offender's home compare that to the monthly cash flow the net worth statements the supervision reports and ask yourself does this make any sense in our series we're dealing with someone who was filing tax returns and reporting all their income sometimes you need to give thought to people who are skimming cash and how are they paying for everything we have a lot of cases we don't always have the time to do the most thorough job in every case but there are cases that will jump out at you when you see someone who reports the $4,000 in expenses of $12,000 yet they have no assets and no money in the bank that's a red flag and that's something you need to take a good look at and Jim Lee finally Mark, not every offender is going to be a need alone but you're going to look at each offender on their own merits and we should be able to know that if the case is a little more complicated than the next one what we can ask for to try and find out if this offender is being honest with us and what they're doing with their self employment for example it's not really too difficult if you just know what forms to ask for and what key points on those forms to look for the sources of income or inconsistencies like we saw in Miss Lone's case okay, thank you we have reached the end of the line here folks and so let me thank first of all Clay thank you very much for all your help over the past few programs and thank you to our panelists both here in the studio Bob, Sharon and Jim in addition to Clay as well as our folks on the phone I also want to thank the advisory committee of officers who's been helping out with this program over the past year or so done a great job and I appreciate all of the assistance and finally thank you for tuning in don't forget to send us your evaluations fax those to us and now go out there do excellent work and be careful bye bye