Delray Beach Advisor Pleads Guilty to Multi-Million Dollar Scheme

A Florida financial advisor, Stephen T. Mellinger III, has pleaded guilty to orchestrating a nearly decade-long conspiracy involving an illegal tax shelter, false tax returns, and the theft of millions from his clients. This case underscores the severe consequences of engaging in fraudulent tax practices and betraying client trust.

The Fraudulent Tax Shelter: “Royalty Payments” Scam

Mellinger and his co-conspirators devised a scheme that exploited the concept of “royalty payments” to create fraudulent tax deductions.

How the Scheme Operated

1. Circular Money Flow: Clients transferred funds to accounts controlled by Mellinger, who then returned the money to a different account held by the same client after taking a fee.
2. False Business Expenses: This circular flow was misrepresented as legitimate business expenses, enabling clients to claim substantial fraudulent tax deductions.
3. Massive Tax Loss: The scheme resulted in over $106 million in false deductions and a $37 million loss to the IRS.
4. Profiting from Fraud: Mellinger and a relative earned approximately $3 million in fees from facilitating the scheme.

Client Theft and Misappropriation of Funds

In addition to the tax fraud, Mellinger also stole millions from his clients.

Embezzlement and Personal Gain

1. Discovery of Investigation: When Mellinger learned that some clients were under investigation and their funds were being seized, he chose to steal from them.
2. $2.1 Million Theft: Mellinger and a co-conspirator embezzled more than $2.1 million from these clients.
3. Purchase of Property: Some of the stolen funds were used to purchase a home in Delray Beach, Florida.
4. IRS Discovery: The IRS uncovered the misappropriation, leading to further charges.

Legal Consequences and Sentencing

Mellinger now faces significant legal repercussions for his criminal actions.

Charges and Penalties

1. Conspiracy to Defraud the IRS and Commit Wire Fraud: Maximum penalty of 5 years in prison.
2. Aiding in the Preparation of False Tax Returns: Maximum penalty of 3 years in prison.
3. Sentencing Date: Sentencing is scheduled for September 16, when a federal judge will determine his sentence.
4. Investigating Agencies: The case was investigated by IRS Criminal Investigation and the Department of Defense Office of Inspector General.
5. Prosecuting Agencies: The Justice Department’s Tax Division and the U.S. Attorney’s Office for the Southern District of Mississippi are prosecuting the case.

Key Takeaways for Taxpayers and Business Owners

This case provides essential lessons for taxpayers and business owners to protect themselves from fraudulent schemes.

Protecting Against Tax Fraud

1. Beware of “Too Good to Be True” Deductions: Be skeptical of tax schemes promising unrealistic deductions.
2. Illegitimate Expenses Will Be Uncovered: The IRS has sophisticated tools to detect fraud.
3. Severe Consequences for Fraud Facilitators: Financial advisors and tax preparers face serious legal penalties.
4. Verify Tax Advisor Compliance: Clients should ensure their tax advisors adhere to IRS regulations.
5. Avoid Involvement in Illegal Schemes: Participating in illegal tax shelters can lead to audits, penalties, and criminal charges.

As a professional – Revolutionize your tax workflow with our complete suite of tools: onboarding links, initial interviews, compliance planning, calendars, messaging, task management, and TaxMan for advanced tax research. Please sign up. Our resource directory also offers valuable links to assist in managing various financial and legal aspects of a business or individual.