Ep. 21 – From Sugar Baby to Tax Scandal: The Shocking Case That Unveiled a Money Laundering Scheme!

Jamie Gruol : Welcome back to Diary of a Tax Practice Owner. I am your co host, Jamie Gruol,

Jessica Smith: and I am Jessica Smith.

Jamie Gruol : All right. Well, we are back with another episode of our special series where Jessica is spilling all the tea.

She is sharing with us some of her juiciest stories of clients. She’s been in the industry for a really long time and she has seen some things guys. So while we’re sharing these juicy stories, she’s also going to share with Some of the things you need to know when it comes to the different cases that she has been, a part of and give you some, some background on it so that you are maybe taking away, filing away these little nuggets.

So in the future, if you ever bump into any of these , which I hope you don’t, honestly, some of them are pretty gnarly, um, that you are able to say, I remember hearing about this. Here’s what I should do next. So let’s dive in. And Jess, what do we have today? So who are we talking about now?

Jessica Smith: I’m going to call it my, for those of you listening, I’ve got my Let’s Commit Tax Fraud shirt on, applicable for what we’re going to chat about today. Um, and just a disclaimer, this is not a promotion of committing tax fraud. We are saying this in jest. but I want to talk today about an interesting case involving, a, a escort.

Or, or sugar baby, whatever you want to, to label her as, um, who was potentially involved in a money laundering scheme.

Jamie Gruol : Oh, you tell more. That’s crazy.

Jessica Smith: All right. So for a little background guys, I used to work at a law firm, a tax law firm, and we handled a lot of criminal cases. And so we had a team of attorneys, a lot of the stuff that we had come across our desk didn’t necessarily rise to criminal nature, but sometimes we would have cases Could very much turn into that.

And so, um, there were a lot of things that we were kind of trained to recognize early on, um, just to see, like, what exposure might our client have in the event, this very innocent on its face. situation looks like, what could it turn into? So we had a client come in and, um, she, she had no problem with us understanding what she did for a living.

And so she, she said, you know, I am, I am an escort. Um, I, I, uh, have a gentleman that I am currently seeing. Um, he, I’m, we are, we are monogamous. It was a, it was a monogamous, And, um, and she really enjoyed spending time with this gentleman and, um, you know, like all sugar baby relationships, he was very, very, uh, uh, friendly with, with the money that he would provide her.

And at some point, you know, she had been in this arrangement for a couple of years. And, you know, she felt that the amount of money that was coming into the arrangement, um, was, was enough that it would make sense that she probably should at least file taxes, claim it as income, so at the very least, like, there was some protection for herself, because she didn’t want, I think at some point she wanted to buy a home and she needed to have some record of, like, where her income came from, so that kind of was, was the start of it.

Jamie Gruol : Yeah.

Jessica Smith: And so she, she was concerned because she said, look, I’ve been in this arrangement now for a couple of years and I haven’t felt any tax returns and I have about this much money that I’ve earned. So I’m just wondering, you know, how do I get current? Right. So it kind of came to us as like, Oh, I’m just, I’m just a non filer.

And you know, there was no judgment there. All, all income is taxable unless you tell the IRS otherwise, whether it’s earned, you know, legally or not. And we weren’t there to judge the, the reason behind how the income was earned. We were just there to kind of like discuss. What her exposure was, um, yeah,

Jamie Gruol : I want to know. Like, are we talking like thousands? Are we talking hundreds of thousands? Are we talking

Jessica Smith: I think it,

Jamie Gruol : that?

Jessica Smith: I think it was definitely like, I think it started in the hundreds of thousands and then maybe teetered a little bit later starting to get closer to like the million dollar number um, yeah, so,

Jamie Gruol : That’s

Jessica Smith: yeah, no, it was, it was a lot. I mean, She, she was concerned, right? And so, um, you know, we, we, we went through the process.

So typically with clients like this, um, I believe she didn’t have any books or records. So because she was self employed, right, this was not a W 2 position. We were going to have to report this as if she were a self employed individual. We needed to produce books and records, right? Because of course we weren’t going to just file or assist her with filing a tax return.

If we couldn’t, you know, substantiate the numbers, because part of our job was mitigating or at least trying to identify what the risk was going to be. And at the very least, if we were going to, you know, have her bring these, her account current, that we at least want to have the correct income and expenses reported, so that we could at least substantiate what was on the return.

So, we were given bank records, and with anything, right, go through all the bank records, start to total up the income, and we start to kind of notice some things that looked, you know, like a little suspicious or a little strange. And so our, our role is, again, we’re here to mitigate the risk. And so we brought a couple of things up and, um, you know, one of the things that we later got into the conversation on, and I think this was after we had built a rapport with her.

She talked about how, you know, as of more recently, you know, within this arrangement, this gentleman that she was seeing, she would assist him with selling assets, and these were very expensive assets, and they, they varied in what they were, but he, I think because of his, his prominent affiliation potentially with the community, or some kind of like, hey, like, I don’t want the public to know about this kind of thing, he had presented this to her as, hey, you know, so that I don’t have unnecessary scrutiny, In, in what I’m dealing with, you can help by just basically be in the face.

We’ll, we’ll report, I’ll pay the taxes. You can report the income, all that kind of stuff. So that kind of like grew into that. And so she would essentially assist with selling of these expensive assets. 

Jamie Gruol : These houses, watches,

Jessica Smith: were like collector cars, if I recall correctly. So they were, so we’re talking like expensive vehicles.

Jamie Gruol : 100, 000

Jessica Smith: Yeah. And so she, and I don’t recall how many. We’re, we’re involved, but, but it happened a couple, a few times and, and it got to the point where like the way that she was describing it and like the way that the money took place and like, it seemed like these cards were being sold significantly over market value kind of scenario.

Right. We were running into the issue of like, Oh, is there sales tax? And she considered a dealer at this point. Like we were, we were looking at like all the logical like explanations, like what exposure might be here. And at some point. At some point, I believe someone said, Hey, this could be money laundering.

This looks very similar to one of the methods that massive amounts of cash is essentially You know laundered because it’s not earned legally and I’m not an I’m not a legal expert I don’t have like all the information on like how all that comes to be but some of the things that we were trained to look for because again, you know This this corporate transparency acting right?

like it’s it’s supposed to show who are beneficial owners of these llc’s to prevent money laundering and i’ve been on the side of like What it looks like when that potentially could happen and so I did I see like the need for You A law like that to help identify when there are again, just these shell companies that are being created these people file and pay taxes, but it’s it’s they do that to make them look legitimate and then The underlying issue is that they’re actually laundering money.

And there’s so many ways that this can be done. But this was one way was through the selling a significantly over fair market value, these very expensive collector type cars. So she believed, and again, you know, you got to take what your client says at face value. She believed that it was just, Oh, he just is a car collector.

And he knows a lot of brick people and they all want these cars and they’re all buying and selling these vehicles because that’s just, that’s just what they do. Um, and so, you know, you really start to look at all of the underlying facts of the information. And we have no clue who this guy was. Like, there was literally no mention, there was no way to identify.

Who this gentleman was through any of the records that she provided us. I don’t even remember her name So like I have no clue Who he who he truly was? But I think she just got caught up in it and he Was so very generous with his The, uh, with the money, um, that he had given her, um, that, you know, why, why wouldn’t, if you don’t want the cash cow to go away, like, especially if you don’t really, really understand that it’s possibly

Jamie Gruol : Right. telling her, I’m sure, like, this is okay. This is something we

Jessica Smith: I think he was super powerful as well. Yeah.

Jamie Gruol : You know, like, when you have this much money, this is what you do. Like, if you didn’t come from that, you don’t know.

Jessica Smith: Oh yeah.

Jamie Gruol : I mean, look at that. It took you guys undoing all of that to be like, oh, something is up here, right?

Like, she would have to have, like, looked at it through that trained lens, even to. Identify it. So, yes, for all of those that are like, how could she not know? Right.

Jessica Smith: believe, especially like when you actually get the chance to talk to these people, like, I think that there was an actual component of there was. There was feelings for this person, even though it was supposed to be just an arrangement. You know, you, she, I think she did grow to enjoy being with this person.

And, um, I think that given the nature of how much money She was receiving that she didn’t really want that to go away. And here she had this very powerful man, um, which I think could have its own level of concern. Like if you’re thinking like, I don’t want to piss this guy off, like what’s going to happen.

Right. Um, but yeah,

Jamie Gruol : and you’re,

Jessica Smith: it, it just, it just was super, a super interesting case. And again, we, you know, there’s, there’s no judgment for what she chose to do. Cause in her, in her thought process, she came to us and Saying like, I just, you know, I just think that I should be paying tax on this. Like, I think that it would make sense, like, to not,

Jamie Gruol : Yeah.

Jessica Smith: yeah, it did.

And, and, and a lot of the times, especially when it comes to tax representation, I think she probably had an inkling because typically people don’t just immediately go to lawyers, right? Like, and, and this wasn’t, like, a, This wasn’t like a small, like, single shop. Like, this was a very big firm. We handled massive cases in this firm.

And, you know, usually had a team of people, like, working on this. and I think, too, that, again, there was a, just a little, little inkling of, like, hey, maybe something isn’t on the up and up. And she, I think, was looking to maybe first protect herself. But in the long run, I think she’s like, well, I have to make sure that, like, he’s, you know, He said he’ll pay the taxes.

So like, you know, I just want to make sure he’s protected kind of thing. So it was, it was interesting. I don’t recall exactly how that case ended. Cause she came into the firm. closer to the end of my time there. Um, but I remember, you know, like me and all the little girls, uh, at the, at the, uh, the firm, we would all go to lunch and we would just be like, Oh my gosh.

Like, did you see, she walked in with a 5, 000 Chanel handbag. And we were like, I want a sugar daddy. Like totally, totally ignoring the fact that she’s like, Possibly laundering money and doesn’t really know it or, you know, it just, it just sounded, it just sounded so great. But that’s what we would talk about.

We didn’t, we did not care about anything else. We’re like, I could sleep with an old guy for a 5, 000 snow handbag. Yeah. Yeah.

Jamie Gruol : So what, so understanding that you left, so you didn’t actually see the full thing play out, but like how did you guys break it to her? Like when you had to have that conversation with her and be like, Hey, There’s something else going on here. Like we believe this could be something more extensive. what, what was the, just for like the practice owners out there, because this is very big. But when they’re, when you’re having to have those conversations to your point, like you’re, you’re assuming the best of intentions from your client, but you then have to say like, what’s been going on is a very big deal. How did you handle that? And what was the, the approach that the firm took?

Jessica Smith: So it’s, it’s a little bit different when you are engaged with. A an attorney firm, right? So, there is a misconception that if you happen to work with a licensed tax professional, so enrolled agents or CPAs that, that we are bound by the same privilege that an attorney client relationship has, which is absolutely incorrect.

There’s absolutely no privilege. At all when it comes to a CPA or EA client relationship that is strictly reserved for attorneys. So it’s a little bit different. If I were to suggest this from the lens of like just a firm owner who is not an attorney, as soon as you suspect anything that could Potentially have criminal implications, like literally anything.

The best course of action is for one, you as the legal, as the counsel for that person is to go get your own attorney and even just have, get a consultation, get a paid consultation, explain to that attorney, what, what you’re running into and, and, and that attorney can assist with communicating. Hey, we think that you need to.

Seek legal advice. We are going to cease all communications because anything at that point is subject to a subpoena So I recall that I was on a call with a potential client Um, and her business partner got on the line and he almost immediately started talking about he was a tax protester So he believed the taxes are illegal like he didn’t have to pay them.

He Word vomited how many years he had not paid or filed taxes and how he felt it was legal. And I tried to cut him off so many times, and I said, You need to stop talking because I have, there’s, I have confidentiality, I have no privilege. So whatever you are telling to me now, it was a recorded phone call.

Like, come on. Anything you are saying to me now, Is subject to a subpoena. So if you later get if you are prosecuted And they want information about a conversation legally I am obligated to I can be called as a witness and I have to produce the evidence that is related to that so as practice owners if you Talk to a attorney that is is versed in those kinds of scenarios that way You’re not like mistakenly like bringing something to a client that Is not to be the case, but you want to know your own legal exposure because you want to at least stop the conversation any further about the matter right away with the client and just leave it at, like, I think it’s in your best interest to seek the, um, seek the advice of an attorney who can, you know, Talk about the potential exposure for criminal, for criminal activity, um, and then, and then furthering that, letting them know that I’m, I’m doing this in your best interest because I am subject to subpoena.

And anything that you say, or communicate with me. I, I’m legally bound to reply to a subpoena. However, if you can have counsel with an attorney, you could have some privileged conversations about what your options are. and. And there are ways as. As non attorneys to work under attorneys through what’s called a cobell agreement They have to be done very specifically like you can’t just willy nilly do a cobell agreement But it allows for the privilege to be extended to a client because the attorney essentially is the one that hires you And all the communication goes to the attorney like you don’t actually have a direct connection communicating with the client um But it’s very specific.

You have to do it.

Jamie Gruol : like,

Jessica Smith: Yeah, you have to do it in a very certain way so there there are ways I hate to say like around it, but really the most important thing for practice owners is any inkling go have a paid consultation with an attorney that you Yeah, protect yourself first and then on their advice Help to facilitate the ceasing of the communication and then moving that matter to someone who could At least like counsel the client.

So in our case We, like, we let them know, we let her know, while we understand you’re not currently under investigation for anything that we’ve discussed now, there is some exposure, mainly because on its, on its face, while you believe it is this, when we file a tax return, that could now expose that the underlying Thing, right?

Like, cause the IRS reserves the right to audit you, right? They might not know, Hey, this is money laundering, right? But they could say, Oh, well, this return is going to be popped because I don’t know, this expense item looks funky and we’re going to audit and that could then expose other things. So, um, I think at that point, the conversation was more around.

We think it could turn into this. And while we are not advising you to not file your tax return and not do these things, you are doing so with the possibility of this.

Jamie Gruol : Right.

Jessica Smith: usually we would also sometimes bring on other counsel so that we could have other outside experts. So it’s different, definitely, in a law firm, but

Jamie Gruol : Yeah.

Jessica Smith: that’s kind of the way that we would approach those cases.

You have to do, you have to do so sometimes from a very sensitive nature because, um, One thing that one of my mentors told me is to avoid the F word, which is fraud. Um, and because clients don’t like it, they, like, if you, it’s super scary if you, even if it truly is, even if you unequivocally believe this is fraud, like, you have to be careful because the last thing the client wants to hear from their counsel is that you believe that fraud has been committed, even though that’s a lot of the times what legal counsel is going to like uncover and they’re going to say, okay, well, now we have to determine how do we defend you.

Yeah, it’s just, it’s just an interesting, it’s just an interesting process. Um, yeah, that was, I think, probably one of the, the, the more interesting, that was probably the more fun case to be on. Because, like, like, it just came in, like, oh, she just wants to file her taxes.

And no, she, like, all this stuff, you know? And she just, and she just came in just, just dripped in the most beautiful garments and um, the prettiest handbags and her hair was always blown out and all of us were like, Oh my God, what a beautiful line.

Jamie Gruol : But you know what? How scary that would be to have so much of your life and, and your, your livelihood tied up into this. thing that ended up like crushing, crumbling down and around

Jessica Smith: Yeah.

Jamie Gruol : wow. Well, thank you for sharing about money laundering and our friendly escort.

Jessica Smith: No hold bar here.

Jamie Gruol : Well, thank you, Jess. I appreciate that. And if you love this story, we have more of these coming for you. This is a short series we’re going to be doing here on Diary of a Tax Practice Owner. If you loved it, please subscribe. Share it with a colleague, let them know so they can learn or at least hear some of these crazy stories. If you love this, do leave us a rating. We would love to have your five stars and let us know that we’re doing a good job. It also lets others find us out there as well. So thank you all for being here. We’ll see you on the next episode of diary

Jessica Smith: Bye.

Jamie Gruol : tax practice owner