Indianapolis CPA Sentenced in Over $2.5M Tax Shelter Scheme

When CPAs start playing fast and loose with the IRS, the consequences hit harder than a surprise audit in April. Just ask Jason L. Crace, an Indianapolis CPA sentenced to three years in prison for orchestrating a bogus royalty deduction scheme. And he’s not the only one switching from spreadsheets to subpoenas lately. Just days earlier, Illinois tax preparer Farooq Khan got 42 months behind bars for snatching $3.6 million in COVID loan funds using ghost companies and phony paperwork. If you thought tax fraud was just shady offshore accounts, think again. Whether it’s fake royalties or pandemic cash grabs, the feds are out to prove one thing: If you're cooking the books, expect to get burned.

The Indianapolis Play That Backfired

Crace, a licensed CPA with nearly a decade of client trust behind him, wasn’t running some rookie operations. Between 2013 and 2022, he helped clients across Mississippi and other states file returns that claimed phony “royalty payments.” These weren’t your typical business deductions; they were straight-up smoke and mirrors. Here’s how the hustle worked: Crace’s clients would send money to a third party, usually a promoter running the scheme. That promoter would take a fee, then quietly return the funds to a second account the client still controlled. On paper, it appeared to be a legitimate royalty expense. In reality, it was just money doing donuts in a parking lot, pretending to go somewhere meaningful.

The damage? According to the Department of Justice, this scheme costs the IRS at least $2,532,936. Crace’s partner-in-fraud, Stephen T. Mellinger III, is already serving an eight-year sentence for promoting the scheme. If you’ve been following MYCPE ONE Insights, this string of tax shelter fraud should sound eerily familiar. Earlier this year, New Jersey CPA Ofer Gabbay pleaded guilty to helping wealthy clients manipulate fake conservation easement deductions in a fraud scheme worth $1.3 billion—yes, with a "B." Three CPAs. Three different states. One common thread: turning tax strategies into tax scandals. You can read our deep dive on the NJ case here: How Did a NJ CPA End Up in a $1.3B Tax Shelter Fraud Scheme?

What Are Royalties, Really?

Let’s get something straight: legitimate royalty payments are made for the continued use of intellectual property, such as licensing a logo, using a patented tool, or streaming a hit song. These payments are tied to real value, clear rights, and contracts that have actual meaning. Crace’s version? Just a paper-thin theater. No intellectual property has changed hands. No licenses. No brand deals. Just a loop of cash designed to fake a deduction and pass it off like it was part of doing business. If it sounds like fraud... that’s because it was.

Don’t Test the Feds

Crace will serve three years in prison, followed by a year of supervised release, and must repay every dime of that $2.5 million. His license? Likely toast. His reputation? Cooked. But here’s the real takeaway: the IRS isn’t slowing down. With upgraded technology, tighter inter-agency collaboration, and smarter audit analytics, even well-disguised schemes are being exposed.

If you're a tax professional, expect closer scrutiny on:

1. Royalty or licensing payments
2. Related-party transactions
3. Sudden deductions without backup
4. Entities with deduction-heavy behavior but no real activity

Now is the time to clean the house. Review past filings. Tighten documentation. When in doubt, lead with ethics, not clever templates.

Lessons for Professionals and CPAs

Let’s cut through the noise. These aren’t just cautionary tales; they’re wake-up calls. If you’re in the business of tax prep, audit, or advisory, it’s time to double down on ethics and scrutiny. Here’s what should be top of mind:

• Form without substance is fraud: No matter how polished the transaction looks, if there’s no underlying business purpose, it will not hold up under scrutiny. Circular money flows, fake licenses, and transactions with little to no economic impact will all be exposed eventually.
• You are the gatekeeper, not the accomplice: Saying “my client wanted it” is not a legal defense. You sign the return. You’re the preparer of records. The moment you stop asking questions and start enabling questionable conduct, your liability begins.
• Know when to walk away: When a client insists on a deduction that raises red flags, walk away. There are always more clients. There is only one license. 
• Documentation isn’t a substitute for ethics: A contract stating that money is royalty does not make it true. The IRS and DOJ are more interested in what actually happened, not what was written to suggest something happened.

These aren’t just best practices. They’re survival tactics.

Bottom Line

The story of Jason Crace is a warning. A credentialed, practicing CPA crossed a clear line and paid the price. This isn’t about finding new deductions. It’s about understanding the weight of the signature you place on a return. There’s a growing message in tax enforcement today. The IRS is no longer chasing small errors. It targets orchestrated, professionally enabled schemes that exploit the trust placed in the accounting profession. If you’re wondering whether a client deduction is worth the risk, ask yourself this: Would you defend it in court five years from now? Inbox feeling dry? Add some financial flavor every week.