Incentives Watch: State Tax Credit Fraud Leads to Federal Prosecution


 

Film Tax Credit Fraud “With its colorful history and rich cultural stew, Louisiana has long been a popular setting for works of fiction, including movies,” according to the U.S. Court of Appeals for the 5th Circuit in United States v. Hoffman, No. 16-30104, 2018 BL 285176 (5th Cir. Aug. 9, 2018). One such work of fiction resulted in three taxpayers being convicted of conspiracy, mail fraud, and wire fraud in connection with a scheme to defraud the state of Louisiana.

Defendants Peter Hoffman, Susan Hoffman, and Michael Arata, owners of Seven Arts Pictures Louisiana, LLC (Seven Arts), were convicted on charges of conspiracy, mail fraud, and wire fraud in connection with their application for Louisiana film credits. Seven Arts was responsible for the development of a film production and postproduction facility in New Orleans. Seven Arts submitted their initial film credit application in October 2007 and estimated total costs for the project to be $9 million.

Over the course of the next five years, Seven Arts continued work on the project and submitted three cost reports with expenses totaling nearly $12 million dollars. After going through a slew of auditors, their scheme finally caught up with them. The Louisiana forensic auditor determined that the cost reports contained numerous misrepresentations, fake invoices, and circular transactions. The three cost reports and the underlying fraud were the basis for the criminal proceedings initiated by federal prosecutors.

Tax credit fraud affects both the federal government and states alike. In 2016, the Internal Revenue Service included tax credit fraud in its “dirty dozen” list of tax scams, noting that fuel tax credits and research credits were large targets.

State film credits have gotten a particularly bad rap due to a series of scandals. In 2012, a Massachusetts film producer pleaded guilty to larceny, false filing, and “procuring the preparation of a false tax return,” according to Forbes. The previous year, a film producer in Iowa was sentenced to 10 years in prison because of a film credit scheme. More recently, Warner Bros. is under investigation due to film credits claimed for the 2016 movie Sully.

Fraud and other abuses inflate the cost of credits and incentives and sometimes result in fines, restitution, and prison time. While a valuable tool in states’ arsenals, tax credits can become the target of sophisticated fraud schemes, such as the one committed by Seven Arts.

Continue the discussion on Bloomberg Tax's State Tax Group on LinkedIn: As both federal and state governments continue to crack down on tax credit fraud, what could they do to prevent scams such as the one committed in this case?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.