ALJDEC decisions subject to certification as final

08F-2008.020-ACY · State Board of Accountancy · 2008-02-05

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: January 29, 2008 at 1:30 p.m. APPEARANCES: The Arizona State Board of Accountancy appeared through Daniel Christl, Esq., Assistant Attorney General; Respondent Licensee Frank W. Loncto appeared on his own behalf. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure 1. The Arizona State Board of Accountancy (“the Board”) issued to Respondent Frank W. Loncto Certified Public Accountant Certificate No. 13111-R and issued to Frank W. Loncto, CPA P.C. Certified Public Accounting Firm Registration No. 1186-C. 2. On January 8, 2007, the Board received Mr. Loncto’s completed Revised Registration form., which provided his business address as N. Acoma Blvd., Ste. 104, Lake Havasu City, AZ 86403 and the firm’s business telephone number. 3. On January 8, 2007, the Board also received Mr. Loncto’s Firm Renewal Form for Frank W. Loncto, CPA PC, which provided the firm’s main address as 84 N. Acoma Blvd. Ste. 104, Lake Havasu City, AZ 86403 and the firm’s business telephone and fax number. 4. On September 14, 2007, the Board received a two-page handwritten complaint from Sandra Ives, which alleged the following: Mr. Loncto has done my taxes the last couple of years. Although I haven’t been completely satisfied with his work – he was slow, missed deadlines, unorganized – we were able to “work through” most of our problems. Approximately 5 wks. ago, I took Mr. Loncto some paper work I received from the IRS – questioning my 2005 return. He told me to bring the paper work and he would correct the return. I was to come to his office in two days. I did attempt to call him & went to his office. I probably left messages on his phone – none were returned. The last time I called him his phone had been disconnected & his office vacated with a sign on the office door. His landlord left the note saying his tenant had moved out – late one night – owing rent.

I desperately need my paperwork & files back from Mr. Loncto – the IRS has been writing & calling me. I feel that Mr. Loncto has an obligation to me and my husband & I’m hoping there might be some way you could let me know how to contact him. Rumor is he went to work for the Blue Water Casino in Parker, AZ – but after calling them they will not confirm or deny this. . . .

The complaint letter was dated September 12, 2007. 5. On September 18, 2007, the Board’s Executive Director Valerie Elliott sent a letter to Mr. Loncto, to which she attached Mrs. Ives’ complaint. The letter informed Mr. Loncto that the Board had not made any determination about the merits of the complaint and that an investigator would be assigned to investigate the complaint. The letter concluded with two paragraphs in bold typeface as follows: Please review the enclosed complaint and allegations. A written response is required, pursuant to Arizona Administrative Code R4- 1-455.03(F), and should be received in the Board office no later than 30 days from the date of this letter. The Board requests that you include any attempts you have made to rectify this matter and any documentation you wish to be considered.

If you fail to respond to this request, this failure may be considered a knowing violation of a regulation promulgated by the Board in violation of A.R.S. Section 32-741(A)(9).

[Emphasis in original.] 6. The Board sent the September 18, 2007 letter via certified mail to Mr. Loncto’s address of record, his business address on N. Acoma Blvd., as well as to his home address on Lancer Lane in Lake Havasu City, which the Board had on file, because Mrs. Ives’ complaint indicated that there might be a problem with the business address. 7. The certified receipt for the copy of the Board’s September 18, 2007 letter that was sent to Mr. Loncto’s home address on Lancer Lane was signed by his wife, Cathy Helland. Ms. Helland did not date the receipt. 8. The certified receipt for the copy of the Board’s September 18, 2007 letter that was sent to Mr. Loncto’s business address on Acoma Blvd. was signed by his former landlord, Jim Johnston, on September 19, 2007. Mr. Johnson returned the letter in its envelope to the United States Postal Service (“USPS”) with the notation, “RTS/MLNA.” The USPS returned the envelope to the Board stamped “Return to Sender/Attempted/Not Known.” 9. On October 2, 2007, the Board’s contract investigator Marshall King, CPA, reported to its Tax Practice Committee members that he had interviewed Mrs. Ives to confirm her complaint allegation. Mr. King reported that “Ives stated . . . that Loncto agreed to correct the return. However, he has failed to correct the return and is not returning phone messages (phone is no longer in service).” Mr. King concluded that Mr. Loncto “[was] in violation of the Board’s Rule R4-1-346, Notice of Change of Address,” which “requires Board Action before the investigation can proceed.” 10. Mr. Loncto did not respond to Ms. Elliott’s September 18, 2007 letter within the 30 days allowed. 11. Pursuant to A.R.S. § 41-1092.05(D), the Board referred the matter to the Office of Administrative Hearings. 12. On November 29, 2007, the Board received via fax a letter from Mr. Loncto, in relevant part as follows: I closed my public accounting office here in Lake Havasu City hastily when I received an excellent offer in the private sector.

Since then, I have been sorting paperwork belonging to clients for delivery to them or to the new accountants at their request. This process has had to be performed evenings and weekends, since I am working during the day. Mr. and Mrs. Ives’ items were delivered to them on October 14, 2007. I am in possession of a receipt verifying that fact.

Additionally, I have placed the accompanying notice in the Lake Havasu Newspaper, which was published for two weeks beginning October 4, 2007.

As stated, I am no longer practicing public accounting. I do intend, however, to maintain my license in Arizona. Please let me know of any further action you believe necessary.

Mr. Loncto attached to the fax a copy of an advertisement in a newspaper’s classified section that advised “CLIENTS OF Frank Loncto Cpa I closed my business 08/31/2007. I can be reached at 928-208-7141 and leave a message.” 13. On December 19, 2007, the Board issued a Complaint and Notice of Hearing, which set an administrative hearing on January 29, 2008. The Complaint charged Mr. Loncto with violations of A.R.S. §§ 32- 741(A)(15), 32-741(A)(9), 32-742(A) and (B)(1), A.A.C. R4-1- 455.02(B), A.A.C. R4-1-455.03(A), and A.A.C. R4-1-346(A) and (B). 14. A hearing was held on January 29, 2008. The Board presented the testimony of Mrs. Ives and Ms. Elliott and had admitted into evidence eleven exhibits. Mr. Loncto testified on his own behalf and had admitted into evidence six exhibits. Hearing Evidence The Board’s Case Mrs. Ives 15. Mrs. Ives testified that she and her husband moved to Arizona ten years ago. She was referred to Mr. Loncto after the CPA who had been preparing their tax returns was injured in an automobile accident and Mr. Loncto took over his practice. Mrs. Ives testified that Mr. Loncto prepared her tax returns for 2004, 2005, and 2006. 16. Mrs. Ives testified that, on April 19, 2007, she received a letter from the IRS regarding her failure to claim gambling winnings on her 2005 tax return, which resulted in an increased tax of more than $1,000.00. Several days later she contacted Mr. Loncto, who told her that he would take care of the matter and instructed her to obtain “coin-in” statements from the casinos documenting her gambling losses to offset the winnings. 17. Mrs. Ives testified that, in early May 2007, she obtained the “coin-in” statements from the casinos and took them to Mr. Loncto. According to Mrs. Ives, he told her that he might have to do an amended statement, but would complete the necessary paperwork in a few days. 18. Ms. Ives testified that, on May 14, 2007, she went back to Mr. Loncto’s office. He said he was not quite finished with the paperwork but that she could return in a few hours. According to Mrs. Ives, Mr. Loncto told her, “Don’t worry; I’ll take care of it.” Mrs. Ives testified that her husband later went back to Mr. Loncto’s office, but Mr. Loncto was still not finished with the paperwork. 19. Among the Board’s exhibits was a hand-written log prepared by Mrs. Ives, which purported to show all of her contacts with and attempts to contact Mr. Loncto. According to the log and her testimony, Mrs. Ives attempted to contact Mr. Loncto six times between May 16, 2007 and June 12, 2007, but she either was only able to leave a message, which was not returned, or there was no answer. 20. Mrs. Ives testified and her log shows that she received a second letter from the IRS on August 6, 2007. Her next attempt to contact Mr. Loncto occurred on August 7, 2007, when she met with him at his office and told him that the IRS said they had not received anything. According to Mrs. Ives, Mr. Loncto “seemed surprised” and said that he would “check it out.” He kept the second IRS letter. 21. According to Mrs. Ives’ hearing testimony and log, she attempted to contact Mr. Loncto nineteen times between August 9 and September 5, 2007, but again she either was only able to leave a message, which was not returned, or there was no answer. When she called Mr. Loncto’s office on September 7, 2007, she was told that the telephone was no longer in service. 22. Mrs. Ives testified that, by this time, she was “getting frantic” because penalties and interest were accruing on the 2005 taxes that she allegedly owed. Finally, she contacted the Attorney General’s office, which advised her to make a complaint to the Board. 23. Mrs. Ives testified that, as a result of Mr. Loncto’s failure to amend her tax return or otherwise address the problem, she has incurred accrued interest and penalties. In addition, she had to pay someone else to straighten out her 2005 tax return. 24. Mrs. Ives admitted that Mr. Loncto had returned all documents that he used to prepare her 2004 return. The documents were in the file with the copy of the tax return he had filed on her and her husband’s behalf. She also admitted that Mr. Loncto had returned the documents she provided for him to prepare the 2005 and 2006 tax returns. 25. Mrs. Ives admitted that she had not had an amended return prepared or filed for 2005. She admitted that she knows additional tax is due because she did not have enough documented gambling losses to cover her winnings. 26. Mrs. Ives did not dispute that Mr. Loncto had returned all her documents relating to her 2005 taxes on October 14, 2007 but testified that she did not know whether she had a copy of the receipt that she signed acknowledging return of the documents. 27. Mrs. Ives admitted that she did not know for sure whether she had included the documents of her gambling winnings in 2005 with the other documents that she gave Mr. Loncto to use in preparing her 2005 tax return. She believes that she put these documents in the “organizer” in which she kept tax documents. 28. On redirect, Mrs. Ives testified that, because she needed the documents that she had given Mr. Loncto, including the “coin-in” loss sheets, she could not hire another person to file an amended return. Ms. Elliott 29. Ms. Elliott testified that she had hired Mr. King to investigate Mrs. Ives’ complaint. If the CPA cannot be contacted regarding a complaint, the Board needs to decide how to proceed. Due to scarce resources, the Board usually proceeds to hearing based on the CPA’s failure to notify the Board of a change in contact information. In this case, the Board’s Tax Practice Committee had referred the matter for hearing based on Mr. Loncto’s failure to respond to the complaint. 30. Ms. Elliott testified that Mr. Loncto’s November 30, 2007 letter informing the Board of a change in contact address was not timely. Applicable regulation requires CPA to inform the Board of changes in contact information within 30 days. 31. Ms. Elliott testified that Mr. Loncto still has not provided a written response to the allegations in Mrs. Ives’ complaint. Ms. Elliott testified that the Board had not yet completely investigated the substance of Mrs. Ives’ complaint. 32. The Board had admitted into evidence a printout of a webpage for Mr. Loncto’s firm on Acoma Blvd. at http://westernazbizhelp.com . The printout date was December 11, 2007. Ms. Elliott testified that the information on the webpage was not accurate because Mr. Loncto had informed the Board that he had closed his office some months earlier. Mr. Loncto’s Case 33. Mr. Loncto testified that he has been licensed as a CPA since 1972, first in New York then in Arizona. He has never before had a complaint against his license. 34. Mr. Loncto testified that he had purchased another CPA’s business. From the beginning, the business had lost money. During the summer of 2007, he applied to work in the Bluewater Casino. His employment was delayed while the casino conducted an extensive background check and he was licensed by the Arizona Gaming Department. 35. Mr. Loncto testified that he informed all of his business clients that he was closing the business. He usually has no contact with flat tax clients like Mr. and Mrs. Ives except at tax time. 36. Mr. Loncto submitted into evidence a personal statement and testified about the facts of Mrs. Ives’ complaint, in relevant part as follows: In April of 2007, Mrs. Ives contacted me by telephone and mentioned that she had received a notice from the IRS. I had her bring it into my office so that I could see what it was about, and she proceeded to do that. I believe I saw her the day she called, or perhaps the day after.

That original notice indicated that Mr. and Mrs. Ives had failed to tell me that they had gambling winnings of more than $600 during 2005 when I prepared their return for that year. Any winnings over that amount are reported to the IRS by the casino on a form W-2G. These forms are also given to the winner at the same time by the casino. Casinos require the winners to present ID and to sign for their winnings at this level. The W-2G states that the winnings are taxable. The IRS had matched the W- 2G’s with the Ives return and found that the winnings had not been reported. Like all tax preparers, I asked all my clients if they had any unusual income or deductions each year when they bring in their records. They also have the option of completing an extensive questionnaire when submitting their data each year. I do not know if the Ives chose to do this. I habitually returned these documents to my clients with their records when I delivered their returns each year.

When Mrs. Ives brought that original IRS notice to me, I assumed that they claimed itemized deductions in 2005. I was relying on memory, in an informal setting at the front counter of my office. In fact, they had filed in that manner on their 2004 return. I told her I would prepare a response, and that the worst that could happen would be that they would have to file an amended 2005 return. Gambling losses are deductible to the extent of winnings, and I asked her if they had such losses and was told they did. This had been the case in virtually all prior cases that I had seen in my years of preparing tax returns. I asked Mrs. Ives to get “slot club” statements showing losses and winnings for any casino that they had gambled at in 2005 and she indicated she would do that. I believe that I copied the IRS notice and gave the original to her, which was my normal procedure. At no time did I state that I would prepare that amended return, and had I prepared it, I would have charged additional fees, since the error was the client’s.

I talked to Mrs. Ives a few weeks later when she called to say she had received the statements from the casinos. Either I or my receptionist saw one of the Ives when the statements were brought to my office. Again, these documents were probably copied and the originals returned, as we the normal procedure.

My next contact was with Mr. Ives, when he came to my office to obtain my response to the IRS. In his presence, at the front counter of my office, I wrote a statement on the original IRS notice that no tax was due because the winnings in question would be offset by deductible losses. I then gave it to Mr. Ives to mail, which mailing did occur.

At that point, I thought the matter had been settled. Quite a bit of time passed while the IRS looked into the matter.

I later received a telephone call from Mrs. Ives in which she said she had received a second IRS notice. I asked her to bring it in and she did when she was able. The second notice acknowledged receipt of the response to the first notice, but stated the tax was still due because the Ives had not claimed itemized deductions in 2005. I asked her to leave the notice for me to research and she did. This time it is possible I kept the original, because I was having problems with my copier. When I looked at the Ives 2005 return, I found that indeed, they had paid off the mortgage on their home and thus, since I did not know that gambling losses should be deducted, I had taken the larger standard deduction on their return. I was still not concerned, since itemized deduction could still be used on an amended return.

Shortly after I received that second notice, I began working as an employee at the Bluewater Casino in Parker, Arizona and closed my public accounting practice. The office was closed over the Labor Day weekend in 2007. I filed a forwarding address with the Post Office in Lake Havasu. I have attached a letter from Jose Herrara, the member services manager for the Arizona Society of CPA’s, which verifies that my correct home address has been on file with the society since September of 2006. Therefore, Mrs. Ives could have found my home address quite easily. I have not made any effort to be secretive about my location or telephone number. I was not aware of the Board’s rules about closing the office and I was working 10-12 hour days on a regular basis. I spend another 1½ hours commuting every day.

As soon as I became aware of the Ives complaint, I took the following steps to make sure that I could be reached by any former client:

1. I made arrangements to return her documents to her at the first opportunity, which had to be on a Sunday because of my work schedule.

2. I published the notice attached in the local newspaper for two weeks.

3. I filed a change of address notice with the Board of Accountancy.

Also, since becoming aware of the Board’s rules I have informed the Board that my corporation is no longer practicing. They have informed me that they will act to rescind the corporate practice document at their February meeting. I have deleted my office address from my membership records with the Arizona Society of CPA’s. I have mailed a postcard to all of my personal income tax clients giving them my home address and my cell telephone number, in preparation for the 2007 tax return season.

I do not believe that my conduct in this matter warrants any disciplinary action by the Board, and I certainly intend to abide by all Board rules and regulations in the future.

37. Mr. Loncto testified that he did not know that the webpage that the Board had admitted into evidence was still operational. He testified that he had signed up for the page to be set up and for payment for the webpage to be made through automatic withdrawals. When he closed the business account from which the automatic withdrawals were to be made, he assumed that the webpage would no longer be assessable. 38. Mr. Loncto testified that he did not communicate with the Board after he received its September 18, 2007 letter because he understood that its investigator would be contacting him. But he never heard from the investigator. 39. Mr. Loncto admitted that he did not contact the Board within 30 days of closing his business office on Acoma Blvd. He also admitted that he did not submit a written response to Mrs. Ives’ complaint within 30 days of receipt of the Board’s September 18, 2007 letter. 40. Mr. Loncto testified that he believed he treated Mr. and Mrs. Ives professionally. He denied that he ever indicated to them that he would do work in relation to the IRS letters. He had assumed that they had itemized deductions on their 2005 return, relying solely on his memory. Based on that assumption, which turned out to be erroneous, he had prepared an informal response to the IRS, which Mr. Ives had delivered. Mr. Loncto testified that he does not normally communicate directly to the IRS. 41. Mr. Loncto denied that he had failed to return numerous messages from Mrs. Ives. Until he closed his business office, he had employees, who should have given him Mrs. Ives’ messages. His practice and usual office procedure was to return client calls. He does not believe that his employees would delete messages without informing him. No one had ever informed him of Mrs. Ives’ numerous messages. The Board’s Rebuttal 42. Ms. Elliott testified that the Arizona Society of Certified Public Accountants (“ASCPA”) is a private, non-profit organization that is not affiliated with the Board. She does not know whether ASCPA would release members’ home addresses or personal telephone numbers to the public. 43. Ms. Elliott also testified that applicable statute and regulation requires CPAs to provide current contact information to the Board. Clients such as the Ives are not required to make inquiry to the USPS or the ASCPA to ascertain the whereabouts of their CPA. 44. Ms. Elliott testified that the change of addresses that Mr. Loncto submitted do not comply with statute and regulation because, although he identifies Bluewater Casino as his employer, he does not provide a street address or post office box number, city, state, and zip code. The Board requires CPAs to provide their residence and business address. 45. Ms. Elliott testified that the Board’s standard procedure after being informed that a firm is no longer in business is to send a cancellation form. However, a licensee is allowed to cancel a firm registration only if there are not pending complaints. Mr. Loncto will not be allowed to cancel his firm registration until Mrs. Ives’ complaint is resolved. Although the Board had Mr. Loncto’s home address, it considers the home address confidential and would not release this information to member’s clients, such as Mrs. Ives. CONCLUSIONS OF LAW The Board has been created and authorized to regulate and control the profession of Certified Public Accountancy in Arizona.[1] This matter lies within its jurisdiction. The Board bears the burden of proof to establish Mr. Loncto’s statutory and regulatory violations by a preponderance of the evidence.[2] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[3] A preponderance of the evidence is “evidence which is of greater weight or more convincing than evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.”[4] Under applicable regulation, registrants such as Mr. Loncto are deemed to have knowledge of the rules.[5] Applicable regulation required Mr. Loncto to “give notice to the Board, within 30 days, of any business, mailing, or residential change of address by filing a revised Biennial Registration form.”[6] Applicable regulation also required Mr. Loncto to “give notice to the Board of the . . . closing of any existing office . . . by filing a revised Biennial Registration Form.”[7] Mr. Loncto admitted that he violated these regulations when he closed his business office over Labor Day weekend in 2006 and did not inform the Board of the closure until November 30, 2007. Applicable regulation requires that, “[w]hen requested, certified public accountants or public accountants shall respond to communications from the Board within 30 days of the mailing of such communications by registered or certified mail.”[8] Mr. Loncto admitted that he did not respond to Mrs. Ives’ complaint within days of receiving it from the Board. His lengthy personal statement, which is quoted supra, is Mr. Loncto’s first written response to Mrs. Ives’ complaint. The Board indicated at the hearing that it had not completed its investigation of Mr. Loncto’s alleged withholding of documents from Mrs. Ives and failure to respond to her alleged numerous telephone calls. However, the Complaint and Notice of Hearing alleged this misconduct and charged Mr. Loncto with violating various regulations based on this misconduct. Evidence was presented at the hearing regarding this alleged misconduct. Therefore, the Administrative Law Judge makes recommended Findings of Fact and Conclusions of Law regarding this alleged misconduct. The administrative regulation that the Board has promulgated pursuant to its statutory authority requires that, upon request from a client, certified accountants must furnish, within a reasonable time, records belonging to the client.[9] Mrs. Ives’ testimony that she called Mr. Loncto six times between May 16 and June 12, 2007 and nineteen times between August 9 and September 5, 2007 is not credible. Given the significant gap in alleged attempts, Mr. Loncto’s testimony that he responded to their request and provided a note to the IRS based on his erroneous assumption that the Ives had itemized deductions on their 2005 tax return is more credible. Mr. Loncto’s testimony that his office was taking calls and that he did not receive numerous messages from Mrs. Ives is more credible than Mrs. Ives’ testimony that she called him nine times, stopped calling more than a month for some reason, then made nineteen more calls. On this evidence, it appears more likely than not that the only document that Mr. Loncto took from Mrs. Ives was the second IRS notice during the first week of August 2007. Mr. Loncto established that he returned this notice, as well as copies of all other documents he had made regarding the additional IRS assessment, to Mr. and Mrs. Ives on October 14, 2007, within days of the time he became aware of their demand to the Board that he be required to return the documents. The Board therefore has not established that Mr. Loncto violated this regulation. Applicable regulation also prohibits a certified public accountant from committing any “discreditable acts,” which include violation of any administrative regulation.[10] The Board has not established that Mr. Loncto made an error on the Ives’ 2005 tax return or that he ever agreed to file an amended itemized return on their behalf. Rather, it appears that the Ives did not inform Mr. Loncto of their 2005 winnings, that he thought the liability could be addressed informally, based on his past practice and erroneous assumption that they had itemized their 2005 deductions, and that he did attempt to help them informally resolve the matter with the IRS. Mrs. Ives’ continued failure to file an amended itemized 2005 return makes it appear that she may be attempting to make Mr. Loncto liable for her error in failing to notify him of the winnings when he prepared the 2005 tax return. The Board therefore has not established any discreditable acts, other than Mr. Loncto’s failures to notify the Board of the closure of his business and to timely respond to Mrs. Ives’ complaint. The Board may take disciplinary action against Mr. Loncto’s Certified Public Accountant Certificate and Firm registration after hearing if it has established that the registrant committed a knowing violation of a rule issued or adopted by the Board or that he failed to respond or to furnish information to the Board after legal request, if the information was in his possession or control.[11] RECOMMENDED ORDER Based on the foregoing, it is recommended that the Board suspend for six months Certified Public Accountant Certificate No. 1186-C, previously issued to Frank W. Loncto. It is further recommended that the Board suspend for six months Certified Public Accounting Firm Registration No. 1186-C, previously issued to Frank W. Loncto, CPA P.C. Done this day, February 5, 2008.

______________________________________ Diane Mihalsky Administrative Law Judge

Original transmitted by mail this ____ day of February, 2008, to:

Arizona State Board of Accountancy Valerie Elliott, Executive Director 100 N. 15th Ave Suite 165 Phoenix, Arizona 85007

By ___________________________ ----------------------- [1] See A.R.S. § 32-701 et seq. [2] See A.A.C. R2-19-119; see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [3] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [4] Black’s Law Dictionary at page 1064 (6th ed. 1990). [5] A.A.C. R4-1-102(A); see also Conway v. State Consolidated Publishing Co., 57 Ariz. 162, 171, 112 P.2d 218 (1941) (Everyone is presumed to know the law). [6] A.A.C. R4-1-346(A). [7] A.A.C. R4-1-346(B). [8] A.A.C. R4-1-455.03(F). [9] See A.A.C. R4-1-455.02(B)(3). [10] See A.A.C. R4-1-455.03(A)(3). [11] A.R.S. § 32-741(A)(9) and (15).

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