Novel approach to alleged tax scam

Mar. 31, 2014 @ 08:26 AM

A recent federal lawsuit filed against the perpetrators of Zeek Rewards alleges an unusual approach to a tax scam — instead of underreporting income, the pyramid scheme’s architects overstated how much they were making and paying to affiliates.

The lawsuit filed by the attorney seeking to recover money for hundreds of thousands of Zeek Rewards victims says the incorrect figures were part of the effort to hide the true nature of the Ponzi scheme.
Earlier this month, attorney Kenneth Bell out of Charlotte filed lawsuits against the insiders and largest payout winners of Zeek Rewards, which federal authorities called a monumental Ponzi scheme on the verge of collapse when its assets were seized Aug. 17, 2012. Based from a small office in Lexington, Zeek Rewards is accused of bilking about $700 million from more than 700,000 participants in 157 nations.
In the lawsuit against the insiders, the perpetrators of the pyramid scheme are accused of pumping up the amount of payments to affiliates in tax documents to make it appear Zeek Rewards had more revenues than it actually held. Zeek Rewards purported to be a multilevel marketing business and online penny auction site, but authorities say it was the classic pyramid scheme in which initial affiliates were paid with proceeds from later ones.
In 2011, the first full year of the pyramid scheme, Zeek Rewards issued its affiliates documents known as an Internal Revenue Service Form 1099 to indicate their income, according to the lawsuit filed in the U.S. District Court for the Western District of North Carolina. Nearly 10,000 affiliates of Zeek Rewards filed 1099 forms with the IRS as part of their annual personal or business tax filings to report what they believed their income was from Zeek Rewards.
“In an effort to further the appearance that the scheme was a legitimate business enterprise, Zeek Rewards reported affiliate income on the 1099s that had not been paid out to affiliates,” the lawsuit contends. “In total, Zeek Rewards reported affiliate income of over $87 million for the year 2011 on the 1099s issued, while Zeek Rewards actually paid out less than $12 million in cash to affiliates during that year. Therefore, affiliates were forced to pay taxes on phantom income that they never actually received, and Zeek Rewards was able to use the false tax notices to perpetuate the scheme.”
IRS spokesman Mark Hanson told The High Point Enterprise that he couldn’t comment on the case because it involves pending litigation and information about specific, individual tax returns.

pjohnson@hpe.com | 888-3528