Delray Beach, FL — A financial advisor from Florida received an eight-year federal prison sentence on Wednesday for orchestrating an extensive tax fraud operation that lasted a decade, promoting illegal tax shelters and embezzling over $2.1 million from his clients.
Stephen T. Mellinger III, who worked as a financial advisor, insurance agent, and securities broker across Florida, Michigan, Mississippi, and other states, devised a scheme that allowed clients to illegitimately lower their tax obligations by reporting fictitious ‘royalty payments’ as business expenses. In truth, the funds never actually left the clients’ possession.
How the Scheme Worked
Court documents reveal that starting in late 2013, Mellinger and his accomplices diverted client funds through a series of accounts they managed. Clients would send money disguised as royalty payments, which were then returned — after deducting a fee — to another account belonging to the client. This arrangement enabled clients to keep access to their money while fraudulently deducting the transfers on their tax returns.
As a result, participants claimed over $106 million in false deductions, causing a $37 million loss in tax revenue for the IRS. In the meantime, Mellinger and a family member, who was also involved, earned $3 million in fees for orchestrating the fraudulent scheme.
When the IRS began investigating the scheme in early 2016, Mellinger didn’t come clean. Instead, he stole over $2.1 million from clients, including funds seized by the government. A portion of the stolen money went toward purchasing a home in Delray Beach.
The Sentence
In addition to the eight-year prison term handed down by U.S. District Judge Keith Starrett of the Southern District of Mississippi, Mellinger was ordered to:
- Serve three years of supervised release following his prison term
- Pay $37 million in restitution to the U.S. government
Federal Crackdown on Tax Fraud
“This case represents a clear warning to financial professionals: schemes to cheat the tax system and betray clients for personal gain will be met with serious consequences,” said Acting Deputy Assistant Attorney General Karen E. Kelly of the Justice Department’s Tax Division.
The investigation was conducted by IRS Criminal Investigation and the Defense Criminal Investigative Service (DCIS) of the Department of Defense Office of Inspector General.
