On April 30, 2018, a Nevada district court judge sentenced 63-year-old attorney Delmar Hardy, who was convicted the previous year, to 25 months in federal prison for “filing false individual income tax returns for the years 2008, 2009 and 2010,” according to a Department of Justice press release, in violation of 26 U.S. Code § 7206(1). Hardy unsuccessfully appealed his case to the Ninth Circuit, the federal appeals court which has jurisdiction over much of the West Coast and Pacific Northwest. In an unpublished opinion, the Court upheld Hardy’s conviction, defending the district court’s jury instructions along with its decision to omit certain evidence from consideration. With the final deadline to file a federal tax return for 2018 just around the corner, this outcome is a powerful reminder to taxpayers – not only of the complexity and peril involved in the appeals process, but furthermore, that tax fraud can lead to lengthy prison sentences.
According to the aforementioned press release, Hardy failed to report approximately $400,000 in income to the Internal Revenue Service on federal income tax returns filed for the years 2008 through 2010. Hardy received the unreported funds in cash, which happens to be a major target for IRS tax audits. (Audits on cash-intensive businesses, such as restaurants and convenience stores, are highly common, with large cash transactions making frequent appearances on lists of IRS audit triggers.) The press release stated that “Hardy’s practice of not reporting cash dated back to at least 1999,” ultimately causing the government to sustain a tax loss of approximately $250,000. These cash payments were issued to Hardy’s law firm, which was based in the Reno area.
In addition to sentencing the defendant to just over two years in prison, United States District Court Judge Miranda M. Du also sentenced Hardy to 12 months of supervised release, a period when recently-released tax offenders are required to comply with certain court rules. In addition, Judge Du ordered Hardy to pay a $10,000 fine.
The crime Hardy was convicted of committing is a form of tax fraud known as “willfully making and subscribing a false return,” a felony offense under 26 U.S. Code § 7206(1). Under this section, a taxpayer commits this crime by knowingly (“willfully”) filing a tax return that “he or she does not believe to be true and correct as to every material [i.e. significant] matter,” such as the amount of income reported on the return. This stands in contrast to attempting to defeat tax (26 U.S. Code § 7201), preparing a false return for someone else (26 U.S. Code § 7206(2)), or simply failing to file a return at all (26 U.S. Code § 7203) – each a different form of tax fraud.
Under federal law, the maximum sentence for willfully making and subscribing a false return is 36 months in prison. The maximum criminal fine that may be imposed is $100,000 (or, in cases involving corporations, $500,000). Additionally, defendants are liable for expenses associated with prosecuting the offense, and moreover, may be ordered to pay restitution to the IRS.
Interestingly, the Court’s opinion noted “that accurate tax returns would still have resulted in relatively low liability for Hardy.” However, the opinion continued, “An absence of tax liability is not a defense to false reporting.” This detail is significant for taxpayers who believe that the IRS “will not notice them” simply because they do not owe large tax debts. While the IRS works to prioritize the most serious of cases, auditors or criminal investigators can catch up to tax offenders years after the fact (as we previously wrote about when discussing the IRS statute of limitations). Whether an alleged tax issue occurred recently or many years ago, it is vital to contact an IRS tax attorney for help right away if you have been contacted by a revenue agent (examiner) or special agent (criminal investigator).
In Hardy’s case, failures to report income dated back to the late 1990s, while the returns in question were for tax years as early as 2008. In cases where tax evasion is suspected, the IRS will pursue suspects unrelentingly. In civil cases involving fraud, there is no statute of limitations at all, effectively giving the IRS unlimited time in which to assess penalties.
Taxpayers facing this situation are strongly advised to consult with an experienced criminal tax defense attorney-CPA right away for guidance. A knowledgeable tax attorney can uphold your legal rights, work to reduce the civil and criminal penalties you face, and fight to suppress evidence that could be used to prosecute you. To speak confidentially with a tax lawyer in a reduced-rate legal consultation, contact The Tax Law Office of David W. Klasing online, or call our Irvine tax office at (800) 681-1295 today.
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