Some professionals and sophisticated individuals seem to hold the belief that their accomplishments, intelligence, and standing in the community provide protection from suspicion of tax crimes. For professionals in the accounting industry and related professions, the temptation to engage in practices that may involve some level of impropriety can be even more difficult to resist. They may reasons that even if their first line of defense by reputation fails, their knowledge and understanding of the subject area will permit them to talk their way out of trouble. Unfortunately, more often than not, both of these assumptions are proven incorrect. Reputation alone will not stop an IRS or California Franchise Tax Board investigation. Furthermore, tax agency auditors and investigators are sophisticated individuals who handle audits and investigations every day.
62-year-old California accountant Jimmy Chen faces six counts of tax evasion charges following a California Franchise Tax Board investigation that allegedly revealed a number of improprieties relating to the organization. The investigation into Chen’s activities chiefly concerned his tax-exempt Chen-Sung Family Foundation. The Foundation was set-up, allegedly by Chen, in 2004. According to prosecutors, it appears that the charitable foundation was never used for its stated charitable and humanitarian purposes. Prosecutors have stated that aside from one charitable donation of $250, the charity never made donations to any organizations in pursuit of its stated goals to provide scholarships to children in rural Taiwan.
Instead, prosecutors claim that Chen used the charity as a means to commit tax evasion. Prosecutors claim that Chen used charitable donations to finance an array of personal and other expenses. Prosecutors believe that Chen used the charity’s money to finance a luxury condo furnished with an indoor golf driving range and a karaoke room. Prosecutors also believe that Chen used the charity’s funds to purchase and maintain a life insurance policy for his wife. In all, Chen is believed to have evaded approximately $60,000 in California state taxes through improper deductions claimed on false and inaccurate tax returns.
While the allegations against Chen are certainly concerning, certain individuals may have practical, immediate concerns. Statements by prosecutors seem to indicate that they believe that Chen assisted individuals in Los Angeles, Orange County, and in other areas of California set-up similar charitable entities. While one cannot predict how these individuals used their charitable organization, it is at least feasible that some of these individuals may have drawn inspiration from Chen’s approach.
In fact, the California Franchise tax Board’s investigation revealed that Chen frequently gave seminars on how to set-up charitable organizations. The agency also found that Chen set-up foundations modeled on his own for other taxpayers for a fee. Reports do not seem to indicate if Chen maintained any oversight over the accounts or was involved in their day-to-day administration. However, if so, the likelihood for potential improprieties in these derivative charitable entities is significantly more likely.
Tax evasion is a felony. The crime is defined under 26 U.S. Code § 7201 – Attempt to evade or defeat tax. Under the statute, tax evasion is defined as any willful or intentional attempt to evade or defeat either the assessment of tax or the payment of tax already assessed. Any individual who is convicted of committing tax evasion can face a fine of up to $100,000 and a federal prison sentence of up to five years.
When prosecutors believe that a tax crime has occurred but do not believe that they can prove tax evasion, they may charge the individual with alternative charges. In circumstances similar to Chen’s, one could theoretically face alternative or additional charges including:
All of the foregoing are felony tax crimes and include a potential prison sentence. For example, a taxpayer could face a prison sentence of up to three years for a conviction under § 7206 – Fraud and false statements.
While charitable entities can indeed be used to pursue personal humanitarian and charitable goals while receiving a tax benefit, numerous rules and caveats apply to one’s handling of this situation. An experienced tax professional can assess whether your approach and handling of matters related to a charity are likely to trigger an audit or a criminal tax investigation. To discuss how the tax lawyers and CPAs of the Tax Law Offices of David W. Klasing can assist with your tax concerns, call 800-681-1295 to schedule a reduced-rate consultation.