How vulnerable to fraud is the state’s film tax credit?
That’s the question quietly being asked on Beacon Hill in the wake of a 10-count indictment against director Daniel Adams for allegedly inflating expenses on two films he shot in Massachusetts and claiming millions of dollars in tax credits he wasn’t entitled to.
Adams’s alleged crimes went undetected with the first film, a 2006 movie called The Golden Boys. It was only when he did something stupid trying to claim tax refunds in connection with the second film, the 2009 movie The Lightkeepers, that a Department of Revenue official became suspicious and the alleged scheme began to unravel.
The state’s film tax credit offers a 25 percent tax credit for most payroll and production expenses incurred while shooting films in Massachusetts. The credit is extremely attractive to film producers because it can be converted into cash by selling it back to the state or a third party. But that cash option also makes it susceptible to fraud.
There are safeguards in place. All of a movie’s production expenses have to be reviewed by an independent auditor, who certifies their accuracy. The auditor’s report then goes to the state Revenue Department, which looks the paperwork over but generally relies on the auditor’s assurances about its accuracy. In Adams’s case, the auditor or auditors who reviewed his expenses have not been identified.
Assistant Attorney General Margaret Parks said in court this week that Adams went to great lengths to make his expenses appear legitimate. She said he provided false listings of expenses, printouts of bank account activity showing fictitious payments and deposits, altered wire transfer receipts, forged acknowledgments of receipts, and false images of paid checks.
At his initial arraignment last week, state officials said Parks obtained a total of $4.7 million in fraudulent tax credits. But Parks earlier this week said Adams obtained a tax credit of $1.7 million for The Golden Boys when he was entitled to a tax credit of just $600,000. For The Lightkeepers, she said he received a tax credit of $4.3 million when he was entitled to a tax credit of only $3.2 million. Combined, the two films would have yielded $2.2 million in fraudulent tax credits. Investigators say Adams sold the tax credits for an undisclosed price to Wal-Mart and Bank of America, which used them to reduce their Massachusetts tax liability.
Adams’s tax credit application for The Lightkeepers was moving smoothly through the regulatory process when a Revenue Department official noticed that $360,400 in state withholding tax had not been paid on the salaries of three actors. DOR notified Adams of the omission, and he responded by paying the withholding tax. He then prepared tax returns for each of the actors that would have yielded tax refunds. Sources say Adams mailed in the tax returns and asked that each of the refunds be deposited in his production company’s bank account, which raised eyebrows at DOR, prompted additional investigation, and eventually led to the indictments.
Beacon Hill was remarkably silent this week about the Adams indictment. No calls for oversight hearings. No thundering about potential waste of taxpayer dollars. Indeed, several lawmakers whose committees oversee the film tax credit did not return phone calls about the issue.
Irene Wachsler, an accountant who has audited more than 90 film tax credit applications, said she worries that the Adams indictments could tarnish the whole program. Even though she said forgeries can be hard to spot, she said she goes to great lengths to verify a film production company’s expenses. “I’m still very confident that the program’s integrity is there,” she said.