An Internal Revenue Service agent testified Tuesday that he noticed problems with a return submitted by a tax preparer accused of scheming to defraud the IRS by declaring bogus withholdings to claim refunds of more than $5 million.

Cubby Wayne Williams, 63, of Alhambra, is charged in Los Angeles federal court with multiple counts of assisting in the preparation of false tax returns for his clients and filing false returns for himself.

Eric Krepp, an IRS employment tax specialist, told jurors Tuesday he was working as an IRS tax auditor in El Segundo in 2015 when he met with Williams about one of the tax preparer’s clients, whose returns showed unsubstantiated interest income.

Williams initially gave him nothing to back up the client’s withholdings, Krepp said, but eventually provided a “hand-written” document that raised questions.

According to the indictment, Williams owns and operates Williams Financial Network, an Inglewood-based tax services company. Prior to forming the company, Williams worked from 1985 to 1996 as a compliance representative in the Franchise Tax Board’s collection division.

Williams allegedly filed tax returns claiming his clients had accrued Original Issue Discount — OID — interest income. OID is a form of interest that accrues over the life of a bond or other debt instrument, but is not payable as it accrues.

Financial institutions use IRS Forms 1099-OID to report the accrued, but unpaid, income and any tax withholdings on it. Williams filed 514 tax returns for clients for tax years 2010 through 2016, fraudulently claiming OID withholdings and seeking nearly $5.49 million in bogus tax refunds, according to prosecutors, who also allege that the IRS paid out about $3 million on the bogus claims. The clients have not been charged in the alleged scheme, according to the U.S. Attorney’s Office.

Williams admitted creating the Forms 1099-OID he gave to IRS auditors, who questioned the withholdings he claimed on the tax returns he prepared for his clients and himself, prosecutors allege.

If convicted of all counts, he could face decades in federal prison, according to the U.S. Attorney’s Office.

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