FOR IMMEDIATE RELEASE TAX

FRIDAY, DECEMBER 15, 2006 (202) 514-2007

WWW.USDOJ.GOV TDD (202) 514-1888

Chicago Federal Court Shuts Down

Health Care Reimbursement Tax
Fraud Scheme
Participating Employers Understated Employment
Taxes
WASHINGTON — A federal court in Chicago has permanently barred Carmelo
Zanfei of Steger, Ill., and William Crouse of Greenwood Ind., and their businesses
from promoting a health care reimbursement account scheme, the Justice
Department announced today. The scheme helped hundreds of businesses and
thousands of employees avoid federal employment taxes and, in the case of the
employees, resulted in the under-reporting of income.

According to the court, Zanfei and Crouse, with the help of South Dakota
accounting firm Wohlenberg, Ritzman & Co. LLC, sold illegal or improper health
care expense reimbursement plans - - the HI Plan and the HealthIER Plan - - to
hundreds of employer-customers. The court concluded that the defendants
knowingly misrepresented the tax benefits to employees and employers in selling
these plans. According to the government’s complaint, the IRS estimated that the
defendants’ schemes cost the U.S. Treasury losses of between $12 million and $63
million and would cause ongoing losses of between $6 million to $24 million per
year if the defendants were not stopped.

The court also found that the defendants told employers that they could avoid
employment tax by contributing to such plans. Employees purportedly would also
avoid employment tax and would receive the amounts back by seeking
reimbursement of health care expenditures. The court found that defendants made
numerous false statements in promoting the plans and improperly administered
them. For example, materials supplied to employees as part of defendants’ plans
listed “athletic shoes,” “electrolysis,” “health club fees,” “soaps,” and “day care” as
reimbursable expenses. The court noted that expenses such as these are reimbursable
as health care expenses only in rare circumstances. Moreover, the court found that
the defendants often reimbursed medical expenses without substantiating them. The
court also found that defendants’ HI Plan was illegal because it allowed
reimbursement for health insurance premiums as opposed to out-of-pocket health
care expenses.

The court described IRS audits of two of defendants’ customers—both California

firms, with more than 250 participating employees. These two firms used the
scheme to under-report taxable wages by a combined amount exceeding $450,000 in
one year, and had to file corrected employment tax returns and issue corrected W-2
forms to their employees. The companies had to advise their employees to file
amended income tax returns to correct the errors. When the court issued the
injunction order, it noted that the defendants have not accepted responsibility for the
high level of processing errors in the plans and concluded that the defendants’
history “provides no basis for believing that they have either the knowledge or the
willingness to step carefully around any [legal] line.”

The court also noted that the Department of Labor filed a suit in an Indiana federal
court against Zanfei and Crouse for violating their fiduciary duties under the
Employee Retirement Income Security Act (ERISA) by using employees’ monthly
health insurance premiums to pay for personal expenses. The federal court enjoined
them from acting as ERISA fiduciaries. Since 2001, the Justice Department’s Tax
Division has obtained more than 210 injunctions to stop the promotion of tax fraud
schemes and the preparation of fraudulent returns. Information about these cases is
available at http://www.usdoj.gov/tax/taxpress2006.htm. Information about the
Justice Department’s Tax Division is available at
http://www.usdoj.gov/tax/index.html.

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