Tax practice and the federal Criminal Code.

• Author: Hibschweiler, Arlene M.
• Position: Criminal offenses applicable in tax cases

EXECUTIVE SUMMARY

* Tax practitioners and taxpayers can be prosecuted for crimes under the criminal sections of the Internal Revenue Code and under the general criminal provisions in Title 18 of the U.S. Code.

* Under 18 USC Section 287, making a false claim against an agency or department of the U.S. government is a felony.

* A taxpayer or practitioner can be convicted of participating in a conspiracy to evade or defeat taxes even if acquitted of committing the underlying substantive crime.

* The crimes of perjury and making a false statement to the government can apply when a person makes a false statement or provides a false document.

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Only a small percentage of the taxpayers who file returns or conduct other business with the IRS ever face criminal prosecution. For example, in fiscal year 2007, only 1,780 criminal investigations were initiated across the entire country. (1) Nevertheless, because the consequences of a criminal tax action can be so severe, basic knowledge of the crimes that can apply in tax cases is important for any practitioner. This requires an understanding not only of the criminal parts of the Internal Revenue Code but also of some sections of Title 18 of the U.S. Code.

Title 18 covers federal penal law and includes, among others, sections targeting false claims, false statements, and conspiracies. Case law makes it more than clear that taxpayers, and also accountants doing tax work, can be prosecuted and convicted under these provisions. (2) In some cases, such as perjury (18 USC Section 1621) and filing a false tax return (Sec. 7206(1)), for example, acts punished by Title 18 are similar to behavior made criminal by the Internal Revenue Code. However, in other situations, Title 18 provisions considerably expand the reach of prosecutors. (3) All of this means that tax practitioners concerned about a potential criminal matter need to know federal tax law and federal penal law.

This article examines some of the Title 18 sections particularly relevant to tax practice. It describes the conduct the section punishes and discusses cases involving taxpayers and accountants. The article includes a description of some warning signs designed to help practitioners recognize criminal law issues and offers advice for CPAs, including comments on the Statements on Standards for Tax Services (SSTS). (4) While not a guarantee, compliance with the statements can help practitioners reach decisions that are both professionally responsible and legally correct.

False Claims Against the Government (18 USC Section 287)

Under federal law, a person who makes a false claim against any agency or department of the U.S. government has committed a felony. The maximum sentence under 18 USC Section 287 is a fine and five years in prison, although the actual punishment is likely to be affected by the federal sentencing guidelines. (5) Section 287 targets false, fictitious, or fraudulent claims, but in tax cases it has been used even where there was no proof that the return was technically inaccurate. In Kercher, for example, a defendant was convicted when he filed returns without the authorization of the taxpayers. (6) The court held that the documents were false because the defendant did not have permission to submit the returns in question. (7)

To obtain a conviction under Section 287, the government must show that the defendant knowingly made a claim against the U.S. government or one of its agencies or departments, with knowledge at the time of submission that the claim was false, fictitious, or fraudulent.

Submission of a Claim Against the United States

Case law has defined a "claim" as a demand for money or transfer of public property. (8) Submitting a claim includes cashing a tax refund check obtained fraudulently. (9) This provision has been used to target not only the actual taxpayers who have submitted false information to the IRS (10) but also accountants involved in fraudulent tax schemes. For example, in Rappaport, (11) an accountant was convicted after masterminding a plan by which he and others obtained tax refunds amounting to approximately $813,400. The refunds were paid in connection with 81 separate returns that reported fictitious employment and tax withholding information.

Courts have upheld convictions under Section 287 in cases in which defendants were indirectly involved in the submission of a claim. This would apply, for example, where an individual presented information to an intermediary who in turn submitted a claim to the federal government. Jury instructions for this theory discuss the rules for aiding and abetting, under which a defendant who willfully causes another to perform an illegal act is punishable as a principal. (12) In Tilford, (13) for instance, an accountant pled guilty to an aiding and abetting charge under Section 287. Tilford engaged in various tax fraud schemes, including creating false documents and helping persons file false tax returns electronically. The tax documents were used to obtain retired anticipation bank loans, the proceeds of which were divided between Tilford and the person named on the return.

Filing a false tax return that fraudulently shows the taxpayer is entitled to a refund has been treated as making a claim against the United States. (14) However, merely filing a false return that underreports a defendant's tax liability apparently is not sufficient to trigger prosecution under this provision. (15)

False, Fictitious, or Fraudulent Claims

To obtain a conviction under Section 287, the government also must show that the claim filed by the defendant was "false, fictitious, or fraudulent" There is a difference of opinion among courts on the interpretation of these terms. Some courts have held that a claim is "false" if it is untrue when made, while a "fictitious" claim is one that is not real or does not correspond to what actually occurred. (16) However, other courts use "false" and "fictitious" interchangeably and hold that the government only must prove the claim was untrue when made or used. (17) In any case, in order to be convicted, defendants must have acted "knowingly." This means that they acted voluntarily and intentionally, and not by mistake or carelessness. (18) It is not necessary to show that defendants knew their actions were criminal, as long as they were aware at the time that the claim being made was false or fictitious. (19)

In prosecuting a fraudulent claim, the government must show that the defendant had a specific intent to deceive (20) in order to obtain money or property from the United States or one of its agencies or departments. (21) Preparation of false documentation to support a claim for a tax retired has been treated as fraudulent. It is not necessary to show that the government actually relied on the material the defendant submitted. (22)

Courts have reached conflicting results when considering whether a false, fictitious, or fraudulent claim being prosecuted under Section 287 must be proven to be material. (23) The issue has not yet been considered by the Supreme Court. Where materiality is required, the statement must be shown to relate to an important fact or must have the potential to affect or influence a government function. Actual reliance on the statement need not be proven. (24)

Conspiracy (18 USC Section 371)

The conspiracy statute is frequently used to prosecute tax professionals, including CPAs, involved in evasion or other fraudulent tax schemes. (25) A conviction carries a maximum sentence of five years, plus a fine, although the punishment will be less where the object of the conspiracy was to commit a crime classified as a misdemeanor rather than a felony. (26) A conspiracy charge involving an attempt to evade or defeat taxes is subject to a six-year statute of limitation. This means the prosecution must begin within six years of the last affirmative act taken by the conspirators to accomplish their goal. (27)

A conspiracy can be thought of as a "partnership in crime." (28) More specifically, it involves an agreement between two or more persons either to commit an offense against the United States or to defraud the federal government. (29) Both theories have been used in prosecutions involving tax cases. For example, in Johnson, (30) the defendants were moonshiners who sold untaxed whiskey to federal agents masquerading as liquor buyers. Johnson, his wife, and three others were convicted of various charges including conspiring to violate federal alcohol tax laws. By comparison, the prosecution in Larson (31) relied on a conspiracy-to-defraud theory. Larson, an accountant, was part of a scheme that sought to avoid reporting income by hiding assets in sham trusts. Although Larson's clients retained full control over mast assets, they nonetheless failed to report the income that those assets generated, in violation of the grantor trust rules. Larson prepared false tax returns, opened accounts, set up trusts, and was involved in recruiting clients. The plan ultimately resulted in a tax loss to the federal government of at least $2.6 million. (32)

To obtain a conspiracy conviction, the government must prove that two or more persons entered into an unlawful agreement that the defendant knowingly and willfully joined. It must also be shown that one of the conspirators knowingly committed an overt act that in some way furthered one of the conspiracy's goals. (33) A conspiracy charge is separate from the substantive crime the agreement was designed to commit. (34) In other words, in a tax scheme a defendant may be charged with both evasion and conspiring to evade. Acquittal on one of the counts does not bar conviction on the other)s For example, in Klein, (36) defendants were convicted of conspiring to obstruct the Treasury Department's collection of revenue, although at trial the judge directed verdicts of acquittal on the separate charges of evasion.

Existence of an Agreement

No formal...