Tax Fraud

Tax Fraud Penalties Upheld First By Tax Court, Then by Ninth Circuit

March 15, 2012 | by Dennis N. Brager

Tax fraud penalties were recently upheld against Miguel Robleto of Oregon by the 9th circuit. These were civil tax fraud penalties pursuant to IRC Section 6663, not criminal tax evasion charges under IRC Section 7201. The difference is that although you can wind up paying a lot of money if civil tax fraud penalties are imposed at least you won’t go to jail. In some cases the IRS brings criminal tax evasion charges, and then goes after you for the taxes, plus a civil tax fraud penalty. Although Mr. Robleto probably doesn’t think so he may have been lucky that the IRS didn’t bring criminal tax evasion charges.

The civil tax fraud penalty under IRC Section 6663 is 75% of the tax that is owed. The process of imposing the civil tax fraud penalty is a lengthy one. Generally the first step is a tax audit, sometimes followed by an appeal to the Internal Revenue Service’s Appeals Division. Next the IRS will issue a notice of deficiency, after which the taxpayer may petition the United States Tax Court to decide his case. In order for the Tax Court to uphold the fraud penalty it must find clear and convincing evidence of tax fraud. That’s just what happened in Mr. Robleto’s case.

Mr. Robleto was a small business owner, and under the auspices of the Oregon DMV charged non-English speakers a fee for administering Oregon drivers’ license exams. Although the Tax Court determined, and Mr. Robleto pretty much admitted, that he failed to report over $300,000 spread over four years his excuse was that he had never operated a business before, that he was overwhelmed by all of the customers he had, that he was totally inept in handling the financial aspects of his business, that he couldn’t even pay his utility bills on time, that he had unopened envelopes of cash lying around his home, and that the filing of his incorrect income tax returns was at worst grossly negligent, but not fraudulent.

The Tax Court didn’t buy it. Instead the Tax Court looked at various so-called badges of fraud including inadequate books and records, concealment of ownership of assets, cash transactions and cash hoarding. As the Tax Court so subtly put it:

Dealing in large amounts of cash and not keeping any records thereof often go hand in hand with intentional underreporting of income and taxes. Noteworthy are [Robleto’s] placement of assets in nominee names and [his] lack of cooperation.

Robleto probably wasn’t helped by the fact that he had a safe in his house with almost $200,000 of cash contained in it, or that he had a side business of preparing tax returns. He hired an accountant to prepare his own tax returns, but neglected to tell the accountant about the income from the preparation of the tax returns.
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FBAR Non-Filers Beware: Either Tax Fraud OR Filing a False Tax Return Can Result in Deportation

March 2, 2012 | by Dennis N. Brager

Recently the Supreme Court held in Kawashima v. Holder (Feb. 21, 2012) that filing a false tax return in violation of IRC Section 7206(1) as well as other criminal tax offenses are aggravated felonies which can result in deportation of a resident alien. Just over two years ago we blogged about the 9th Circuit decision in Kawashima which came to the same conclusion. The Supreme Court has now upheld that decision.

To review the background, Mr. and Mrs. Kawashima were legal residents of the United States having moved to Los Angeles from Japan in 1984. According to an article in the Los Angeles Times they opened several sushi restaurants in the West San Fernando Valley area of Southern California. They were accused of violating various criminal tax laws, and in 1997 Mr. Kawashima pled guilty to a single count of violating Internal Revenue Code (IRC) Section 7206(1) (filing a false tax return). Mrs. Kawashima pled guilty to IRC Section 7206(2) (aiding and assisting in the filing of a false tax return). The tax loss was around $245,000. This would have included interest and penalties so the actual tax would have been much lower. It is possible that the Kawashimas pled guilty to charges under IRC Section 7206 to avoid the IRS bringing tax evasion charges under IRC Section 7201. Tax evasion carries a maximum penalty of 5 years, and a $250,000 fine; whereas filing a false tax return “only” has a penalty of $100,000 and 3 years in prison.

Neither the 9th Circuit opinion, nor the Supreme Court opinion stated whether they served any jail time, but according to the Los Angeles Times they repaid the full amount due to the IRS. The Kawashimas probably assumed that their tax problems ended there, but in 2001 the Immigration and Naturalization Service (INS), as it was then known, brought removal proceedings, against the Kawashimas seeking their deportation alleging that they had committed an “aggravated felony.” These proceedings were brought pursuant to 8 USC § 1227(a)(2)(A)(iii) (stating that “[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable”). An aggravated felony is defined in 8 USC Section 1101(a)(43)M)(i) as any offense that “involves fraud or deceit in which the loss to the victim or victims exceeds $10,000.”

The Kawashimas argued that filing a false tax return was not an aggravated felony. They relied on a related section of the law which specifically states that the commission of tax fraud pursuant to IRC Section 7201 is an offense which may lead to deportation. From that the Kawashimas criminal tax lawyers concluded that Congress intended that the only tax crime which would qualify for deportation is tax fraud, and not any other lesser tax crime.

Unfortunately for the Kawashimas in a divided 6-3 opinion the Supreme Court disagreed, clearing the way for the Kawashimas deportation. In her dissent, Justice Ginsburg pointed out that as a policy matter the majority made a bad choice because it would discourage immigrants from pleading guilty to tax crimes since in addition to any jail time they would be exposed to being deported.

In our view Justice Ginsburg hit the nail on the head, and criminal tax lawyers will need to advise their alien clients of this distinct possibility as one of the many factors to take into account when deciding whether or not to plead guilty to any tax crime. The concern for FBAR (foreign bank account report) non-filers is that without regard to whether or not failure to file an FBAR is a deportable offense individuals who do not file FBARs generally have filed false tax returns by checking the “no box” on Schedule B signifying they don’t have a foreign bank account when in fact they do.
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Failure to Pay Payroll Taxes Leads to Criminal Tax Charges

February 1, 2012 | by Dennis N. Brager

Last month, while most people were preparing their Christmas lists, Louis Alba, a New York contractor, plead guilty to criminal tax charges of failing to pay over to IRS employment taxes withheld from employee wages in the amount of almost $780,000 over approximately six years. Failure to pay over payroll taxes is considered a felony under Internal Revenue Code (IRC) Section 7202. It is punishable by up to five years in jail, and a fine of up to $250,000.

In the current economic environment business owners who are strapped for cash sometimes decide to “borrow” from the IRS by not paying the payroll taxes. The theory is that if cash is tight, and the vendors aren’t paid there will be no more merchandise to sell, and therefore the business will go under quickly. The same with the landlord; don’t pay the rent, and one can expect an eviction notice in short order. The IRS on the other hand moves slowly, and the temptation is to believe that if you have another 6 months or so business will turn around, and the IRS can be paid back.

Unfortunately in many cases that doesn’t happen. The IRS doesn’t look on this as borrowing; it views the failure to pay payroll taxes as stealing. Even if criminal tax charges are not brought, so-called responsible officers who fail to pay over corporate payroll taxes can be held personally liable under IRC Section 6671. More and more, however, the IRS is bringing criminal tax fraud charges. For the record persons convicted of tax crimes still must pay the taxes. It’s not one or the other.
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Felony Criminal Tax Charges Filed Against New York CPA for Non-Payment of Trust Fund Taxes

December 21, 2011 | by Dennis N. Brager

The IRS has filed felony criminal tax charges pursuant to Internal Revenue Code Section 7202 for willful failure to collect, truthfully account for and pay over trust fund taxes. This is yet another in a series of criminal tax charges being brought against responsible officers who haven’t paid over corporate trust fund taxes. In most situations the IRS proceeds against responsible officers who willfully fail to pay corporate trust fund taxes, by assessing the tax directly against the individual under Internal Revenue Code Section 6672. This is generally referred to as the trust fund recovery penalty. Sometimes the IRS goes further and brings criminal tax charges.

In this case the defendant is a New York CPA who, according to the information filed in U.S. District Court, failed to pay payroll taxes to the IRS for three years running. Our tax lawyers found this case interesting because the amount of unpaid trust fund taxes was not terribly large. The total the IRS alleged as unpaid was approximately $108,000, fairly small potatoes, as payroll tax cases tend to go.

I thought it was important to blog about this case because clients sometimes assume that the relatively small size of their tax problem will insulate them against criminal tax liability. While that is generally accurate, as this case illustrates, not always.
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Felony Criminal Tax Prosecution Goes Forward

December 20, 2011 | by Dennis N. Brager

United States v. Quinn (D. KS 2011) is one of several recent felony tax prosecutions, not for tax evasion, but for violation of Internal Revenue Code Section 7202. IRC Section 7202 makes it a felony to willfully fail to collect, account for, or pay over any tax due. In this case Ms. Quinn failed to pay payroll taxes for 7 quarters between 2003 and 2005. She finally got around to paying them in 2010, apparently after the IRS had filed criminal tax charges against her. Ms. Quinn challenged the finding that she failed to pay employment and individual tax and argued that since she had subsequently paid the tax due the charges should be dismissed.

The court wrote in its opinion that a person has failed to pay taxes if they have not paid the amount due as of the due date, regardless of whether the taxpayer has subsequently paid. In Ms. Quinn’s case, she had recently paid the amounts due but this was not sufficient for the court to find her not guilty.

This does not mean that late payment of taxes will never prevent a criminal tax prosecution, and those who have not paid their taxes should seriously consider taking care of a tax problem before it turns into a criminal tax problem. Had Ms. Quinn gotten around to making full payment, or indeed even made good faith installment payments much earlier there is a chance that the case would never have gotten as far as it did.
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Swiss Bank Account Holders of Exposure for Tax Fraud and Failure to File FBARs Is Greater Than Ever

November 18, 2011 | by Dennis N. Brager

Until recently even some well-informed tax attorneys assumed that short of disclosure under the Foreign Account Tax Compliance Act (FATCA) in 2013, the IRS would have a difficult time getting information from Swiss banks without litigation. As a result some owners of Swiss financial accounts assumed that they could avoid disclosure to the IRS by closing their offshore account prior to 2013. While there are various treaties which require Swiss banks to turn over account information with regard to individuals who have committed tax fraud or tax evasion, in the past this has been interpreted as requiring the IRS to provide among other things the name of the taxpayer it was investigating. Apparently not any more!

In what appears to be the final nail in the coffin of alleged Swiss Bank secrecy, a committee of the upper house of the Swiss Parliament recommended that the upper house approve a proposed addendum to the June 2010 ratification resolution on the 2009 protocol to “clarify” that so called nameless, behavioral-pattern based requests are allowed under the 1996 double taxation treaty with the U.S.

In a related development on November 16th the Swiss Federal Council approved an amendment to the ordinance implementing the Swiss-U.S. double taxation treaty to provide notice to U.S. clients of Swiss banks who are the subject of so-called behavioral-pattern based administrative assistance requests from the U.S. Notice will be provided by publishing the U.S. administrative request in the

California Man Convicted of Tax Evasion Based in Part on a False Offer in Compromise (OIC)

November 10, 2011 | by Dennis N. Brager

William H. Nurick, age 76, was convicted of tax evasion based on evidence he evaded a tax liability for one year of $157,000. In 2000 Nurick filed an amended 1995 income tax return admitting a $106,542 tax liability. He then attempted to conceal his offshore financial assets from the IRS by transferring $133,000 from an offshore bank account to a third party’s offshore bank account, and then “borrowing” the funds back from the same party, and having that person file a trust deed against his real estate with the apparent purpose of making it appear that it had no equity. He then proceeded to file a false Form 433 with the IRS in support of an offer in compromise (OIC) which among other things failed to list his vehicle, or his offshore Costa Rican bank account with a balance of $200,000.

The IRS financial statement also underreported his income. The case is interesting for several reasons. One there is a perception that the IRS does not prosecute seniors. It does. There is also a belief that if you file an accurate tax return that’s the end of it. Not necessarily. There is a separate tax crime known as the evasion of payment. It too is a felony. Nurick faces up to 5 years in prison and a $250,000 fine.
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Swiss Banks to Turn Over Possible Tax Evaders to IRS

October 11, 2011 | by Dennis N. Brager

According to a report in the Swiss newspaper Tages-Anzeiger the Swiss are poised to send the names of thousands of potential tax evaders who have Swiss Bank accounts over to the IRS, and/or the Department of Justice. The data files are, according to the unconfirmed report, due to begin coming over later in October. The report goes on to speculate that the banks on the list include Credit Suisse, Julius Bär, Zürich Cantonal Bank, Basel Cantonal Bank and Wegelin. These names shouldn’t come as any great surprise because it appears that the IRS has been actively investigating them for some time.

Whether or not the report turns out to be true is unknown. However, if it is, it leaves very little time for U.S. persons who have offshore bank accounts at these Swiss banks to make a voluntary disclosure to avoid a criminal tax prosecution for FBAR violations, tax fraud, or other crimes.

U.S. persons who have offshore financial accounts are required to file report to the IRS on Form TD F 90-22.1, Report of Foreign Bank Account (FBAR) on an annual basis. Failure to do so can result in jail time, or ruinous civil penalties.
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Tax Lawyer Convicted of Aiding and Abetting Tax Evasion

September 23, 2011 | by Dennis N. Brager

A “tax attorney’s” conviction for aiding and abetting tax fraud I am not sure that makes him a tax attorney). The District Court sentenced the attorney to 30 months in prison and 3 years of supervised release. While this seems like a light sentence don’t forget that the tax attorney’s license to practice will most likely be revoked as a consequence of this conviction.

The tax attorney, Barry Jewell, suggested to his client, Carl Evans, a scheme by which a fictitious company agreed to fund the client’s litigation in exchange for 100% of amounts awarded over $250,000 as a result of the litigation. No such offer existed and Evans funded the litigation himself, but Jewell provided Evans a fictitious letter making the offer, on the basis of which Evans’s accountant innocently prepared his tax return. With the aid of Jewell, Evans created a new company, forged documents to backdate its existence, and used it to hide the income exceeding $250,000 that purportedly went to the company that fictitiously funded his litigation.

As a part of his appeal, Jewell contended that there was insufficient evidence to find him guilty of aiding and abetting tax evasions. The appellate court disagreed. Evans testified at the trial that Jewell concocted the above scheme for the purpose of Evans’s tax evasion and the IRS testified that a tax underpayment of over $700,000 resulted. The appellate court ruled that these facts were sufficient for a jury to find that Jewell aided and abetted tax evasion and affirmed the lower court’s conviction.
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Lack of Funds Not a Defense to Criminal Tax Fraud Charges

September 12, 2011 | by Dennis N. Brager

Criminal tax charges were recently upheld by the Sixth Circuit Court of Appeals against an individual who withheld payroll taxes but failed to pay those amounts over to the Internal Revenue Service (“IRS”). The defendant had been convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287. The lower court sentenced the defendant in the case to 22 months in prison and 36 months of supervised release and ordered him to pay the amount owed plus penalties.

The defendant in the case, Richard Blanchard, did not pay trust fund taxes for approximately 6 years despite withholding taxes from his employees. The case started out as a civil tax audit, but then it became a criminal tax case. Blanchard appealed the decision of the district court, stating that the government failed to prove that he was financially able to pay over the employment tax and that the government must do so in order to show that his failure to pay violated the relevant statute. The appellate court found not only that the government did not need to prove that Blanchard was able to pay the tax, but also that Blanchard’s inability to pay that tax would not even constitute a defense to the government’s accusations. The court cited previous cases and stated that every individual must conduct his financial affairs in such a way that he is able to pay his tax liability when it becomes due. Thus, Blanchard’s conviction and sentence of 22 months plus 36 subsequent months of supervised release were affirmed.

The case is disturbing to the extent that it brings to mind the concept of debtors prison. Business owners need to understand that failure to pay withheld tax over to the IRS may result in criminal tax fraud charges as well as civil tax penalties.
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