| In January 2006, 47-year-old John Fitzgerald, a certified public accountant in San Diego, California, was charged with two counts of federal income tax fraud relating to the 1998 and 1999 tax returns of Dr. Glenn Kawesch, a prominent eye surgeon.
Fitzgerald was accused of filing returns that understated by hundreds of thousands of dollars Kawesch’s income through his practice, Southwest Eye Care Center.
By the time Fitzgerald went to trial in January 2007 in the U.S. District Court in San Diego, Kawesch had pled guilty pursuant to a cooperation agreement with the prosecution. He was sentenced to five months in prison and ordered to make restitution of $4,198,000.
The evidence showed that after a grand jury began its investigation of Kawesch, he agreed to cooperate and recorded conversations with Fitzgerald from November 2001 to January 2002.
Federal prosecutors alleged that Fitzgerald initially prepared personal tax returns showing Kawesch owed income tax of $181,000 in 1998 and $378,000 in 1999. However, Kawesch asserted that he believed he owed very little in taxes because of a deferred compensation plan set up by Kawesch’s tax attorney, Ernie Ryder. Fitzgerald then prepared amended returns, which lowered Kawesch’s tax liability to $37,000 in 1998 and $38,000 for 1999.
Kawesch testified and admitted that he had avoided paying $4,198,000 in taxes. He said that there were three elements to his fraud. First, he said he failed to report large amounts of cash on his books. Kawesch told the jury that Fitzgerald had no knowledge of the skimming.
Kawesch also testified that a tax attorney named Roland Frasier established a phony company, Telco, and that Kawesch transferred money to it to avoid paying taxes. Fitzgerald had no knowledge of that company or those transactions.
Kawesch also testified that through another tax attorney, Ernie Ryder, he established a deferred compensation plan through an Irish trust that would result in Kawesch paying no income tax.
The evidence showed that Fitzgerald, as he had done in past years, obtained the records from Kawesch's Southwest Eye Care clinic and prepared the 1999 corporate return based on the amounts shown on the books. He then sent the corporate return to Kawesch. It showed income of about $656,000. Kawesch signed the form and sent it to the Internal Revenue Service. When Fitzgerald prepared and sent Kawesch his personal 1040 return for the same year based on the corporate income, it showed a tax due on the $656,000 of income.
Kawesch testified that he did not believe that was correct. Kawesch told the jury, “I was still doing the deferred compensation plan and thought that there shouldn’t be any money left at the end.”
He said he called Fitzgerald and protested the tax calculation. He claimed that Ryder’s Irish Trust was set up to shelter all his business income so as to avoid taxes.
“I called Mr. Fitzgerald…and said, ‘We have to fix this—it’s wrong,’” Kawesch testified.
Kawesch claimed that Fitzgerald said he would talk to Ryder and take care of it. Not long after, Fitzgerald sent a revised personal tax return reducing Kawesch’s tax liability for that year from $377,000 to $38,000 by increasing the expenses of the clinic by $756,000 for “additional leased employee payments in transit at year end.”
The government contended that Fitzgerald knew that there was no record for the additional $756,000 in expenses.
Fitzgerald testified that he had nothing to do with setting up the Irish Trust. He said that he had received a letter of opinion from Ryder saying the trust was legitimate. Fitzgerald said that he relied upon Ryder, a well-known tax attorney with a reputation for setting up legitimate tax shelters.
Fitzgerald also testified that after he sent the revised return to Kawesch, Ryder’s office informed him that Kawesch would be instructed to pay the taxes reflected on the first personal return rather than file an amended corporate return and risk an IRS audit on the program Ryder had set up. Fitzgerald said he was informed that Kawesch would take a deduction the following year for the paid taxes.
However, Kawesch filed the revised 1040 showing no income and not the original 1040 Fitzgerald prepared or the amended corporate return sent him. This obvious discrepancy between the two documents triggered IRS scrutiny.
The government argued that the expense numbers were created without any basis in fact and that Fitzgerald knew it.
During cross-examination, the prosecution extensively questioned Fitzgerald about his work with a business called Tax People. Jesse Cota, a former IRS district Director, had an upper level position at the company and had been indicted in Kansas along with other company officials for tax offenses. The charges, which were then unresolved, had been filed several years after Fitzgerald prepared Kawesch’s 1999 tax return and alleged that Tax People was a “criminal enterprise.”
Fitzgerald denied any involvement with the allegations related to Cota and Tax People.
On January 26, 2007, the jury acquitted Fitzgerald of tax fraud relating to the 1998 return and convicted him of income tax fraud for the 1999 return.
Prior to sentencing, Fitzgerald’s lawyers filed a motion for a new trial. The motion argued that the prosecution should not have been allowed to cross-examine Fitzgerald about Cota and Tax People.
The motion also claimed that the prosecution had failed to disclose tape recordings that Kawesch made with Ryder, the tax attorney who set up the Irish trust. The conversations disclosed that—contrary to Kawesch’s claim that he told Fitzgerald to “fix it”—in fact, he told Ryder to take care of the matter. This, the defense argued, supported Fitzgerald’s claim that he was relying upon Ryder when he prepared the returns.
“At a minimum, a jury could have found from this statement that Ryder gave exactly (the) advice which is consistent with what Fitzgerald testified and also with his contemporaneous notes of the last communication from Ryder's office,” the defense motion said.
Ryder, who was not charged and did not testify, was paid $180,000 by Kawesch for his services. Fitzgerald was paid $1,000 for preparing the 1999 returns, the evidence showed.
In June 2007, U.S. District Court Judge M. James Lorenz granted the motion and ordered a new trial.
“The Court harbors serious concerns regarding the fairness of (Fitzgerald’s) trial due to the introduction of marginally relevant and prejudicial evidence concerning the indictment of Jesse Cota and (Fitzgerald’s) association with the Tax People and the Government’s failure to disclose, prior to trial, the transcripts of the recorded conversations between Ernest Ryder and Dr. Kawesch,” the judge said.
On September 2, 2009, Judge Lorenz dismissed the case. The prosecution did not appeal the dismissal.
– Maurice Possley
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