Can your tax client (or you) go to jail?

• Author: Hibschweiler, Arlene M.
• Position: Tax Advisers Should Be Aware of What Actions are Criminal and How Crimes Are Prosecuted, part 2

EXECUTIVE SUMMARY

* Federal Sentencing Guidelines, declared unconstitutional in 2005, are now merely advisory, not mandatory.

* There are a number of steps CPAs or tax advisers can take to protect both their clients and themselves against possible prosecution.

* If a client faces actual criminal investigation, the CPA should recommend that the client retain an attorney with experience in criminal matters.

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This two-part article highlights the most common substantive and procedural issues a CPA needs to know about crimes under the Internal Revenue Code. Part I, in the April 2006 issue, described the basic elements and consequences of these crimes. Part II, below, discusses current Federal criminal procedure and sentencing rules, and steps CPAs can take to protect against criminal investigation or prosecution.

Overview of Criminal Procedure

When considering the possibility of a criminal prosecution against a client or even a CPA, it is helpful to understand, at least on a rudimentary level, the process leading to a criminal conviction. For example, under Sec. 6531, the statute of limitations for tax evasion, failing to file or pay, filing false or fraudulent returns or other documents, and assisting in filing false returns, generally is six years from when the offense was committed. When a false return is involved, the six-year period starts on the later of the date the return was filed or its due date. (61)

Constitutionality of Federal Sentencing Guidelines

Criminal cases can be resolved through a trial or plea agreement. In either situation, a defendant convicted of tax crimes is likely to be affected by the Federal Sentencing Guidelines (Guidelines). (62) The Guidelines provide a range of punishment, which generally depends on a defendant's past criminal history and, in tax cases, the loss involved in the scheme.

The Guidelines were declared unconstitutional in Booker, (63) a 2005 Supreme Court decision. In the case, a fractured Court majority pointed to the Sixth Amendment right to a jury trial, meaning that the statutory maximum sentence must be based solely on facts as reflected in a jury's verdict or admitted to by a defendant. The Court found this requirement was violated by the Guidelines' scheme under which a defendant's punishment can be enhanced for "relevant conduct." In Booker, the defendant was convicted at trial of possessing 92.5 grams of cocaine base, commonly referred to as "crack." However, his punishment was enhanced under the Guidelines, due to a post-trial sentencing proceeding conducted without a jury, during which the trial judge found Booker had actually possessed far more crack and also had obstructed justice. This mandated a sentence of 360 months to life. However, based on the jury's verdict alone Booker faced a term of between 210 and 262 months in prison. (64)

The effect of Booker remains unclear. In its ruling, the Supreme Court found the Guidelines would satisfy Constitutional requirements if they were merely advisory, rather than mandatory in nature. As a result, the majority deleted the statutory language requiring judges to follow the Guidelines. It ruled that sentencing courts should consider the Guidelines' ranges, but also take into account other factors when determining punishments to be meted out to defendants. (65)

Discussions have erupted in Congress and elsewhere about a legislative fix that would reinstate a system to reduce judicial discretion and disparity in sentencing across the country. (66) It is not clear whether any Congressional action will ever result however.

Application of Guidelines

Even though they are now advisory only, the Guidelines continue to be relevant to taxpayers facing potential criminal action.

Example: A taxpayer with no prior criminal history was convicted after a trial of tax evasion, based on a scheme that caused a tax loss of $45,000. According to Sec. 7201, evasion is punishable by a fine of up to $100,000, a maximum of five years in prison or both. However, the Sentencing Guidelines result would be 15 to 21 months, (67) plus a fine that also would be determined per the Guidelines' Calculations. (68)

The result could be further reduced in some cases, depending on the facts. For example, under Section 3E1.1 of the Guidelines, in pleading guilty to a crime, defendants are generally entitled to a reduction in the severity of their sentence because they have "accepted responsibility" for their criminal actions. (69) Whatever the result, under Booker the sentencing judge now must consider the Guidelines' calculation along with "other statutory concerns" including deterrence, protection of the public and restitution. (70)

What Should a CPA Do?

Whether a criminal matter is a certainty or only a possibility, accountants can take a variety of steps and measures to assist their client, which will enable them to fulfill their own professional responsibilities and avoid malpractice.

SSTSs

A CPA who suspects a tax client of any criminal activity in connection with filing returns, reporting income, paying taxes, etc., needs to consult and carefully consider the guidance offered in the Statements on Standards for Tax Services (SSTSs), available through the...