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The Most Common Federal Tax Crimes that Aggressive Tax Professionals Should Know

The Most Common Federal Tax Crimes that Aggressive Tax Professionals Should Know

Some tax professionals such as lawyers, accountants, and enrolled agents are well known for taking aggressive positions on tax returns that seem to reduce federal income tax liability for their clients. Tax professionals who take aggressive positions may find themselves criminally investigated by the Internal Revenue Service (“IRS”). A criminal investigation may ultimately result in the tax professional being charged with specific offenses (contained in the Internal Revenue Code) and with general federal criminal offenses. The tendency in these types of cases is for the prosecutions to pile up charges, indicting the targeted individual for multiple years with a combination of offenses contained in the Internal Revenue Code and other federal criminal offenses as the situation warrants. This article will discuss selected Internal Revenue Code offenses which often come into play in a criminal tax investigation tax practitioners such as lawyers, accountants, and enrolled agents.

Tax Evasion

Internal Revenue Code Section 7201 is designed to reach tax professionals that assist their clients to evade the payment of tax. The elements of tax evasion are as follows: 1) a person owed more federal income tax than was declared due on his or her federal tax returns; 2) the person knew that more federal income was owed than was declared on his or her income tax returns; 3) the person made an affirmative attempt to evade or defeat his or her income tax; and 4) the person willfully attempted to evade or defeat income tax. The maximum statutory penalties for tax evasion for each is: 1) 5 years in prison; 2) $250,000 fine; and 3) restitution.

On its face, this is an extremely broad criminal statute. It reaches “any person,” “any tax” and “any manner” of evasion. It is not restricted to income taxes; successful prosecutions have involved evasion of gift tax, estate tax, and withholding taxes. Section 7201 is also not restricted to the individual filing his or her income tax returns but has included, under the definition of “any person,” including attorneys, accountants or bookkeepers who aid in the filing of tax returns which defeats “any tax” can be charged with tax evasion. Thus, any tax professional assisting a taxpayer to evade or defeat federal income tax may be charged with tax evasion.

Conspiracy to Defraud the United States

18 U.S.C. Section 371 is principally designed to reach tax professionals who assist their clients evade the payment of taxes under a theory of conspiracy. Under 18 U.S.C. Section 371:

If two or more persons conspire either to commit any offense against the United States, or defraud the United States, or any agency thereof in any manner or for any purpose, and one or more such persons do any act to effect the object of the conspiracy, each shall be fined up to $250,000 or imprisoned not more than 5 years, or both. For a conspiracy to exist there must be (1) an agreement between two or more persons, which constitutes the act; and (2) an intent thereby to achieve a certain objective which is the doing of either an unlawful act or a lawful act by unlawful means.
A defendant can be charged with conspiring to impair, obstruct, or frustrate any lawful function of the federal government. A conspiracy to defraud must have the United States or a federal agency or department as a target, but the object or purpose of the conspiracy is not narrowly construed. See ABA 34th Annual National Institute on Criminal Tax Fraud, December 6, 2017. A conspiracy to defraud the IRS is commonly referred to as a Klein conspiracy, after United States v. Klien, 247 F.2d 908 (2d Cir. 1957). The elements of a Klien conspiracy are: 1) the existence of an agreement to defraud or impede the IRS by deceitful or dishonest means, in the assessment or collection taxes; 2) the defendant knew of the agreement and with such knowledge-voluntarily participated in the conspiracy; 3) the commission of an overt act by conspirators in furtherance of the objective of conspiracy.

A Klien conspiracy requires that an objective of the conspiracy be to undermine the efforts of the IRS to determine and collect taxes. The intent to defraud the IRS need not be the only object of the conspiracy; “if one of the objectives, even a minor one, is the evasion of tax.” See United States v. Shermetaro, 625 F.2d 104, 109 (6th Cir. 1980). Klein conspiracies are typically charged against tax return preparers who prepare fraudulent tax returns for their clients and attorneys who promote abusive tax transactions.

Aiding and Abetting or Filing of False or Fraudulent Return

If a tax professional aids or assets in the preparation or filing of false or fraudulent returns or other documents of another taxpayer, the government may charge the tax professional under Internal Revenue Code Section 7206(2). Those convicted of aiding and abetting the preparation or filing of false returns are subject to fines of not more than $100,000 and/or incarceration of up to 3 years per count.

The elements of this offense are: 1) the defendant aided and assisted in, or procured , counseled or advised in the preparation or presentation of a return or document in connection with a matter under the internal revenue laws; 2) the return, statement or other document was false respect to a material matter; and 3) the defendant acted willfully.

This section is principally designed to reach tax advisors who utilize false deductions or credits to reduce or eliminate their client’s federal income tax liabilities. Although Section 7206(2) is designed to target tax preparers, it can and has included attorneys who “aids or assists in, or procures, counsels, or advises.” This kind of prosecution can also be brought directly under the tax evasion statute Section 7201 by reference to 18 U.S.C. Section 371, the conspiracy statute. Under that provision, anyone who “aids, abets, counsels, induces or procures,” the commission of an offense by another may be charged as a principal.

Section 7206(2) is an incredibly broad statute and targets anyone (even a relatively small actor) who aids or assists in, or procures, counsels, or advises.” This is demonstrated in United States v. Morrison, 833 F.3d 491 (5th Cir. 2016). In Morrison, the Fifth Circuit Court of Appeals held that a conviction under Section 7206(2) can be supported even when a defendant has no direct involvement in preparing the false tax returns. In this case, Gladstone Morrison and Jacqueline Morrison, spouses, owned and operated a tax preparation firm, Jacqueline Morrison & Associates. From 2006 through 2009, Jacqueline Morrison & Associates prepared many returns reflecting grossly-overstated or simply-fictitious Schedule C losses. The Morrisons were both indicted and charged for conspiracy to prepare false tax returns and aiding and abetting in the assistance of preparing false returns. The Morrisons were convicted and sentenced to 187 months in prison. They were also ordered to pay restitution of $17,807,106. Gladstone appealed his conviction.

The Fifth Circuit held that although a “close call,” there was sufficient evidence to uphold the conviction of the Section 7206(2) counts. The court acknowledged Gladstone’s point that Section 7206(2) is typically applied to individuals who have involvement with a specific return, but held that restricting the application of the statute to those circumstances is inconsistent with general principles of aiding and abetting. The concept of aiding and abetting with respect to Section 7206(2) does not require direct involvement in the preparation of the specific returns charged, but can be met through “active involvement in, and knowledge of, the scheme” to prepare returns charged, but can be met through “active involvement in, and knowledge of, the scheme” to prepare false returns. To support the conviction, the defendant must “share in the principal’s criminal intent” and “take affirmative steps” to aid or assist the person committing the underlying crime. The same evidence underlying the conspiracy charges against Gladstone also supported his Section 7206(2) aiding and abetting violations: Gladstone co-owned the business, served as the chief operating officer, oversaw the entire business operation, prepared several false Schedule C, and prepared a false return for himself and Jacqueline Morrison. Additionally, Gladstone created client forms, including information-verification and Schedule C due-diligence forms. Although he had no direct involvement in the preparation of many of the returns underlying the Section 7206(2) charges, he personally prepared at least two returns containing fraudulent Schedule C losses. The court held that Gladstone’s active involvement in and knowledge of the overall scheme served as sufficient evidence upon which a jury could base the conviction. Accordingly, the evidence was sufficient to support Gladstone’s active involvement in and knowledge of the overall scheme served to support Gladstone’s guilty verdict for knowingly assisting in the submission of all the false returns underlying the Section 7206(2) counts.

Wire Fraud

Tax professionals preparing tax returns and attorneys promoting tax shelters or other abusive transactions should understand their potential exposure to the crime of wire fraud contained in 18 U.S.C. Section 1343.

18 U.S.C. Section 1343 states as follows:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency […], or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

A prosecutor may file wire fraud charges if there are multiple fraudulent tax returns prepared by a fraudulent tax return preparer or against professionals that promote fraudulent tax shelters if these schemes defraud the IRS out of large sums of money. A prosecutor can also indict an individual under a theory of wire fraud for any telephone calls, emails, or text messages sent in connection with funds being transferred to undeclared foreign financial accounts on behalf of a client.The statute of limitations for the crime of wire fraud is 5 years (one year shorter than most tax offenses) and, in the case of a conspiracy to commit wire fraud, begins to run from the date of the last overt act committed in furtherance of the conspiracy.

In order for a defendant to be convicted of wire fraud charges, the prosecution must prove that the defendant intentionally used some kind of electronic communication, such as a phone or email, for purposes of committing a fraud. The elements of wire fraud are as follows:

1) Scheme or artifice to defraud. This element requires the prosecution to prove that there was a scheme or plan to cheat somebody of money or something else that has value.

2) Scheme involved false representations that were material. The prosecution has to prove that false statements were made and material, which means the statements were capable of influencing someone.

3) Intent to defraud. This requires the prosecution to prove that the false statements were made with the purpose to deceive, and not for some other purpose.

4) Wire transmission in interstate or foreign commerce. This requires the prosecution to prove use of an interstate wire. Interstate wire includes the internet or telephone.

Although wire fraud is not frequently charged against tax professionals, it is not too difficult to imagine a scenario in which the Government utilizes this statute to go after fraudulent tax return preparers and attorneys that promote abusive tax motivated transactions.

Conclusion

Tax professionals accused of preparing fraudulent tax returns or advising clients to violate the Internal Revenue Code their freedom, professional licenses, fines, forfeiture of assets, and payment restitution. The stakes could not be higher.  If you are a tax professional and are being investigated by the IRS it is extremely important to retain a highly qualified tax attorney to represent you as early as possible.

Anthony Diosdi has more than 20 years of experience representing closely held businesses and individuals in civil and criminal controversy matters. Hei has represented individuals accused of tax evasion and other tax related crimes by the IRS and the United States Attorney both pre and post indictment.

Anthony Diosdi is admitted to the California and Florida bars.

Diosdi & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.

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