The Department of Justice is suing four Hawai'i residents and two local firms, alleging they participated in tax fraud schemes involving at least $2.3 million in unpaid federal taxes. It is asking the court for an injunction stopping the practices.

The lawsuit filed yesterday in U.S. District Court in Honolulu alleges the defendants sold or assisted in sale schemes that created fake tax deductions through sham business insurance and bogus individual retirement accounts. The lawsuit alleges the money was funneled back to the taxpayers through phony loans, concocted scholarships and credit cards.

Named in the lawsuit were Morgan Liddell and Cherie Bright of Kaua'i, Edward Coda of Honolulu and Loren Trenholm of Maui.

In addition, Bright Enterprises Inc., a Lihu'e-based accounting and tax service owned by Liddell and Bright, and Hawaii Financial Specialists Inc., a Honolulu-based firm where Coda is treasurer, were named as defendants.

Coda yesterday said he had not heard of the lawsuit, while Bright called the government's allegations "ridiculous." Trenholm did not immediately return a telephone message left at his Kahului office.

"The accusations of the government are false," said Bright. "Before we even did work for these companies we did massive tax research and the code justifies everything."

Bright said the IRS previously had pursued cases against her clients involving similar allegations but has stalled going to federal tax court.

"The parties have been trying to get the cases heard," she said.

Yesterday's lawsuit alleges the tax scheme began as early as 1997 and that audits of about 30 of the defendants' customers found false tax deductions and under-reporting of income that cost the U.S. treasury millions of dollars.

It said the defendants advised clients to buy at least $20 million of business insurance from Asia Pacific Mutual Insurance Co. Ltd., which purportedly is an insurance company based in the South Pacific island-nation of Vanuatu. They also were directed to transfer about $25 million of IRA money to Global Pacific Capital Inc., a Puerto Rican firm.

The lawsuit alleged customers received the money back, less a 20 percent commission, through loans from a Barbados mortgage company that typically did not ask for repayment of the loan principal. Another offshore entity, Wealthshare Foundation, would give the customers fake scholarships to cover tuition for customers' children, the suit claimed.

They could also recoup money through a credit card issued by a trust company in the Turks and Caicos Islands in the Caribbean. The lawsuit alleged customers would use the credit card but never received a bill for the charges.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.