Elias Bermudez, 68, was both an outspoken immigrant rights activist and, as described by the U.S. Department of Justice in a recent press release, a “long-time” professional tax preparer. Unfortunately, Bermudez put his experience to work breaking the law, pleading guilty to assisting with the preparation of false tax returns – a felony offense under 26 U.S. Code § 7206(2). Bermudez, who admitted to improperly claiming child tax credits on ineligible clients’ tax returns, was sentenced in February to 18 months in federal prison. The defendant was also ordered to pay the IRS restitution totaling approximately $131,000 to offset the losses caused by his crimes. Our criminal tax lawyers take a closer look at the offense of aiding false tax returns, and discuss who really qualifies to claim the Additional Child Tax Credit after the Tax Cuts and Jobs Act (TCJA).
“Yes, I did something wrong,” said Bermudez, appearing last month before U.S. District Judge Diane Humetewa, “and I regret it a lot.”
Bermudez, though perhaps better known for his advocacy work with Immigrants Without Borders, was also a tax preparer in the Phoenix area. His career dates back to at least the 1990s – when another tax preparation service owned by Bermudez was investigated for similar reasons.
In both cases, IRS investigations focused on the preparation of false returns. In the most recent, IRS alarms were triggered by Bermudez’s excessive use of tax credits, namely the Additional Child Tax Credit (ACTC), a federal credit which, for certain tax years, enables qualified taxpayers – emphasis on the word “qualified” – to claim refunds up to $1,400 per eligible child. As the IRS explains, the ACTC is for taxpayers “who get less than the full amount of the CTC [Child Tax Credit]. The ACTC may give you a refund even if you do not owe any tax.” A similar case unfolded in 2017 in Philadelphia, where the owners of a tax preparation business used the stolen identities of foster children to commit tax fraud.
The IRS’ new CTC and ACTC regulations are consolidated, under the TCJA, in IRS Publication 972 (2018), Child Tax Credit. The IRS also offers a short questionnaire to determine whether your child qualifies for the CTC.
According to court records, Bermudez, who was originally indicted on, or charged with, 27 criminal counts, pleaded guilty to one offense in exchange for dismissal of the other 26 charges – namely aiding or assisting in the preparation of false tax returns, which violates 26 U.S. Code § 7206(2). While the first section of 26 U.S. Code § 7206 deals generally with taxpayers who willfully file tax returns containing false information – in other words, tax perjury – 26 U.S. Code § 7206(2) is specific to taxpayers who assist others in doing so. This typically involves tax preparers, EAs or CPAs who engage in return preparer fraud on behalf of clients, promising sizable refunds, often for an exorbitant fee. More broadly, however, it extends to cover “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax,” as provided by 26 U.S. Code § 7701(a)(36)(A).
In this instance, the taxpayer violated this law by helping others to improperly claim tax credits, thus “cheating the system” (“and making a living while you were doing it,” in Humetewa’s words). Additionally, there are a number of other actions that could also lead to criminal charges under 26 U.S. Code § 7206(2), such as helping another taxpayer to conceal or underreport income, or helping another taxpayer to alter or destroy financial records.
As is true of any criminal case, prosecutors must establish certain facts and details, or elements of the offense, in order to obtain a conviction under 26 U.S. Code § 7206(2). For instance, prosecutors must prove that, among other elements of the offense occurring, the defendant acted “willfully” (as opposed to “recklessly” or “negligently”).
Critically, it is not an element of this offense that the defendant signed the false return (or other documents) under penalty of perjury, meaning the government need not prove that the defendant signed any paperwork. This stands in contrast to a charge of tax perjury, i.e. a charge of willfully making and subscribing a false return (26 U.S. Code § 7206(1)), which does require, as an element of the offense, that the document in question “contains or is verified by a written declaration that it is made under the penalties of perjury…”
Under 26 U.S. Code § 7206, the maximum penalties for both tax perjury/subscribing a false return (26 U.S. Code § 7206(1)) and aiding or assisting a false return (26 U.S. Code § 7206(2)) are the same: a prison sentence of up to three years, and/or a criminal fine, distinct from IRS restitution, of up to $100,000 (or, for corporations, $500,000). Bermudez, whose request for probation Humetewa rejected, was sentenced to 18 months in prison.
CPAs, tax preparers, and other taxpayers who engage in or facilitate tax fraud risk facing long prison sentences, costly fines, and debilitating restitution orders. If you have been charged with tax evasion or related offenses, or if you are concerned about a criminal tax audit or IRS criminal investigation, you need to seek legal help immediately.
For a reduced-rate consultation, contact the Orange County tax evasion lawyers at the Tax Law Office of David W. Klasing online, or by calling (800) 681-1295. Providing award-winning service throughout Northern and Southern California, our office is backed by more than 20 years of experience handling misdemeanor and felony tax charges, civil tax audits, tax disputes and appeals, strategic tax planning questions, and related matters.
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