Avoiding the Sec. 7206(2) criminal penalty for false/fraudulent return preparation.

• Author: Altieri, Mark P.
• Position: Internal Revenue Code section 7206(2

Sec. 7206(2), which punishes aiding or assisting in the preparation of a false or fraudulent return, carries a penalty of a fine, imprisonment, or both. According to the courts, a three-prong test applies in determining whether a defendant has violated that section. This article explores this test, the standards the courts use in applying it and ways to avoid Sec. 7206(2)s application.

Sec. 7206(2) provides that any person who

willfully aids or assists ill, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim or document ... shall be guilty of a felony.(1)

As is clear from the statute's language and as is detailed in the case law, a Sec. 7206(2) offense contains three elements: (1) the act of aiding or assisting, (2) material falsity and (3) willfulness.(2)

Aiding or Assisting

According to Hooks,(3) to establish the first element, there must exist some affirmative participation that at least encourages the filer of the false return; the aider must knowingly participate in the venture with the intent to defraud the government. As stated in Hooks, "to aid and abet another to commit a crime it is necessary that a defendant in some sort associate himself with the venture, that he participate in it as in something that he wishes to bring about, and that he seek by his action to make it succeed."(4)

Criminality under the statute is not limited to the direct tax preparer of the fraudulent return, but extends to any person participating in the fraudulent preparation in any material capacity. A variety of "indirect" activities have been found to constitute aiding and assisting; thus, Sec. 7206(2) is invoked if the aider assisted in the preparation or filing of a knowingly false return. As stated in Kelley,(5) the legislative intent behind the predecessor to Sec. 7206(2) was "to reach the advisers of taxpayers who ... might wish to keep down the taxes because of the credit they would get with their principals, who might be altogether innocent."

Tax or legal advice that is clearly or arguably proper in might of established law, cannot constitute Sec. 7206(2) aiding or assisting.(6) The aiding or assisting must be directed toward the preparation or presentation of an intentionally false return; thus, proof that a defendant embezzled money from his employer corporation and falsified invoices to conceal the theft (but not specifically to falsify a tax return) was insufficient to sustain a determination that he willfully aided or assisted in the preparation or presentation of a false or fraudulent corporate return.(7)

Material Falsity

The case law has established a relatively low evidentiary requirement for materiality in false return cases; a particular item is "material" if it must be reported for a taxpayer to estimate and compute his tax correctly.(8) Although the materiality standard seems fairly straightforward (and a low threshold for the government to meet), the Supreme Court recently added a procedural hurdle. In Gaudin,(9) the Court unanimously affirmed a Ninth Circuit opinion holding that the concept of materiality in any Federal perjury case (including a tax fraud case) is a question for the jury, not a question of law for the court.

Willfulness

Although somewhat intertwined with the "aiding or assisting" criteria, the third requirement for the invocation of Sec. 7206(2) is willfulness on the aider's part in preparing or presenting the false or fraudulent return. Unlike the first requirement, the case law presents the prosecutor with a formidable evidentiary hurdle.

A number of tax crimes found in IRC Chapter 75, Crimes, Other Offenses and Forfeitures, have a willfulness element. The Supreme Court has determined that the willfulness element in

* Sec. 7201, Attempt to Evade or Defeat Tax;

* Sec. 7202, Willful Failure to Collect or Pay Overtax;

* Sec. 7203, Willful Failure to File Return, Supply Information, or Pay Tax; and

* Sec. 7207, Fraudulent Returns,

Statements or Other Documents, has the same meaning as the willfulness requirement in Sec. 7206.(10) As discussed below, the courts have stated that in an statutory tax crimes, "willfulness" requires a showing of specific intent to commit the illegal act that aids in or causes the creation and/or filing of a fraudulent return; more than a showing of careless disregard is required.(11)

This standard imposes a higher burden of proof on the prosecution than in most other criminal cases. Generally, in a criminal case, ignorance of the law is not a defense; the prosecution need only show that the...