Jeffrey Harmon of Lexington, S.C., was sentenced to 24 months in prison for preparing and filing false individual income tax returns for himself and his clients.
According to court documents and statements, Harmon owned and operated TFL Worldwide, a tax preparation business, in South Carolina. To reduce his and his clients’ tax liability, Harmon consistently deducted non-deductible personal expenses, including rent and mortgage payments for personal residences, personal vacation travel, personal fitness and golf equipment, and country and hunt club membership fees.
According to sentencing documents, Harmon used a coaching service to deliver what the feds described as “bogus tax advice to unsuspecting and relatively naïve customers who trusted what he told them.” The feds noted that Harmon had been a CPA and had been preparing tax returns since 1988 (an entry on the South Carolina Board of Accountancy indicates that his license lapsed years ago). His company, TFL Worldwide, Inc., was billed as a reputable consultant in proactive tax planning, business coaching, and seminar training. Harmon advised his clients on tax strategies, typically charging clients between $350 and $1,000 to prepare their tax returns. He charged up to $7,000 to prepare QuickBooks and for “business coaching.”
According to prosecutors, on his personal tax return, the married father of six consistently underreported his business income by falsely deducting items such as a swimming pool, golf cart, and Netflix
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as business deductions on Schedule C. Specifically, on each of his personal returns for the tax years 2012 through 2016, Harmon wrote off the rent for the home he lived in with his family as a business expense—approximately $30,000 a year. He described the rent deducted from each of his returns as “the twelve times during the year he rented the house from himself,” which he claimed was permissible under the Augusta Rule.
The Augusta Rule
The August Rule is another name for an exclusion found in section 280A of the tax code. The rule makes clear that if you rent your personal residence for fewer than 15 days, you do not report any of the rental income and do not deduct any expenses as rental expenses. However, if you rent your home for 15 days or more during the year, you would include all your rental income in your income.
The law, which has been around since 1976, is sometimes called the Augusta Rule, in a nod to the Masters, which is hosted by the Augusta National Golf Course each year in Augusta, Georgia. Local homeowners saw the income potential, but funds you receive for the use of real estate – even if it’s your personal residence – are usually taxable as rental income. It didn’t seem very sensible to require the inclusion of rental income for a short-term rental that was never intended to be treated as a business. The result was the 280A exclusion.
Remember that for a business expense to be deductible, it has to be necessary and ordinary. And even if an expense is ordinary and necessary, the cost is deductible only to the extent that it is reasonable in amount.
Impermissible Deductions On Personal Returns
According to the government, Harmon admitted that he knew that the Augusta Rule required an actual flow of funds and an arms-length transaction. As part of his coaching plan, he advised clients to get comparison rental values, execute lease agreements, and keep records of the rental use. But despite advising his clients of these steps, Harmon did not execute a lease, obtain “reasonable” rent quotes for other facilities, or keep records to justify his annual $30,000 write-off of his home as a business expense.
On his personal returns for the tax years 2012 through 2014, Harmon reported business expenses on his Schedules C for employee benefit programs. These expenses were classified as “Medical” in his QuickBooks. These were from personal medical expenses, such as purchases from CVS, Walgreens, Walmart
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, dermatologists, eye doctors, and other physicians. Because he was self-employed, Harmon was not entitled to a deduction for a self-insured medical reimbursement plan. In fact, he advised his clients, “If you run your business as a proprietorship, partnership, LLC, or ‘S’ corporation, you’re considered ‘self-employed,’ and not eligible.”
Finally, on his personal returns for the tax years 2012 through 2015, Harmon deducted “[u]tilities” on his Schedule C that were actually for his personal residence. These expenses included payments for water in 2012 and for TV and movies, including DirecTV, Netflix, and Amazon
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, each year.
Client Returns
Harmon was also accused of mischaracterizing personal expenses as business expenses on client returns, including claiming rental expenses for personal residences and deducting all meals and travel expenses (those are subject to limits). According to court documents, there were also other improper deductions, including insurance, legal and professional services, utilities, cost of goods sold, office expenses, gifts, supplies, and memberships.
Generally, the clients indicated they provided documentation such as bank and credit card statements to Harmon who would prepare their returns without ever going over those line items. Harmon also advised clients that they could rent their personal residences—using the Augusta Rule—to their Schedule C businesses and claim it as a business expense. Most of Harmon’s clients indicated that they did not do anything to “rent” their house to their business—they did not sign a lease or contract, did not write checks to pay for the rentals, did not research comparable rates, and did not provide Harmon with any figure as to what the rental rate would have been.
Sometimes, clients stated that Harmon classified personal expenses as business deductions without their prompting or knowledge.
Prosecutors wrote, “[p]reparation for the prosecution of Harmon was one of the most complex, convoluted ordeals this prosecution team has been through.” They indicated that Harmon covered his tracks by burying deductions and making false annotations on tax returns and schedules.
While pushing for a significant sentence, the government noted, “Nefarious tax avoidance schemes abound, particularly in the age of social media, where misapplication of the Augusta Rule and other creative (and illegal) strategies proliferate. Every prosecution of an unethical and fraudulent tax preparer pushes this trend back in the proper direction, but only if the consequences are significantly punitive.”
In total, the U.S. suffered a tax loss of $53,639 for Harmons’ personal returns and $266,366 for his clients, for a total tax loss of $320,005.
Plea And Sentencing
On April 21, 2023, Harmon pleaded guilty to one count of filing a false tax return and one count of aiding and assisting in the filing of a false tax return.
In addition to 24 months in prison, Harmon was ordered to serve one year of supervised release and to pay $320,005 in restitution to the United States.
IRS-CI
IRS-CI investigated the case.
IRS-CI, the sixth-largest law enforcement agency in the U.S., is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations like tax fraud, narcotics trafficking, money laundering, public corruption, healthcare fraud, and identity theft. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the tax code.