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.