Tax Preparer Fraud
Preparers of tax returns and claims for refunds are held to a high standard of conduct when preparing tax documents. The law exacts penalties for a violation of those standards and puts accounting professions at risk for tax preparer fraud.
For example, 26 U.S.C. § 6694 imposes standards of return preparation; § 6695 contains disclosure and signature requirements with respect to returns; and § 7206(2) provides that a preparer who willfully aids and assists in the preparation of a false return may be charged with a felony. Preparers are also required to comply with IRS Circular 230.
What is Tax Preparer Fraud?
Unlike a criminal tax evasion case, where the taxpayer inflates his expenses or conceals income, preparer fraud occurs when the tax preparer himself commits the fraud. Often this is a professional like a CPA, but it need not be. The definition of a “preparer” is maximally broad, including “any person who prepares for compensation… any return.” 26 U.S.C. 7701(a)(36)(emphasis added).
Tax preparers are subject to criminal or civil liability for aiding another to commit tax fraud or evasion. If certain conditions are met, it may even result in a felony, the imputation of liability to the preparer’s firm, and/or the permanent loss of one’s license to practice as a preparer. Often one’s existing clients are notified of the charge against the preparer, which could spell financial and social ruin for the tax preparer.
It has been held that any misstatement of a material fact is sufficient to constitute a violation of 26 U.S.C. § 7206(2), even if it does not result in a loss of revenue to the government. See Edwards v United States, 375 F.2d 862 (9th Cir. 1967)(holding that the offense to which § 7206(2) is directed is the falsification and the counseling and procuring of such deception as to any material matter, rather than the actual defeat of a tax liability).
To convict for tax preparer fraud, it must be shown that they willfully making a false material statement on a return, and the government must show each of the following beyond a reasonable doubt. Competent counsel is will make it as difficult as possible for the government to prove its case against you.
- That the preparer signed the return, and it contained a declaration that it was made under penalties of perjury;
- the return contains a false statement;
- the preparer knew the statement was false;
- the statement was material; and
- the preparer made the statement “willfully” (with intent to violate a legal duty).
Kawashima v. Holder, 10-577, 2012 WL 538277 (U.S. Feb. 21, 2012). A violation of 26 U.S.C. §7206(1) may result in a fine of $100,000 (or $500,000 for a corporation), and imprisonment up to 3 years.
Whether a false statement is “material” is not determined by an easy rule. Instead it is determined on a facts-and-circumstances basis. Competent legal counsel will be able to inform you whether your misstatement is material, and, to avoid more severe penalties, whether it would be advisable to disclose to the IRS the misstatement before it is discovered on its own. At the Tax Law Offices of David W. Klasing, our Orange County tax fraud attorneys can also assist in the process of making a voluntary disclosure.
In addition to being liable for a violation of 26 U.S.C. §7206(1), a tax preparer and his/her firm may be liable for a number of acts or omissions, including the following:
- Failing to sign a tax return. 26 U.S.C. § 6695(b).
- Disclosing or using a taxpayer’s return information for purposes other than to prepare the taxpayer’s return. 26 U.S.C. § 6713(a).
- Failing to include their tax identification number on tax returns. 26 U.S.C. § 6695(c).
- Failing to provide the taxpayer with a copy of the tax return. 26 U.S.C. § 6695(a).
- Filing to exercise due diligence in assessing a taxpayer’s eligibility for, or amount of, the earned income credit. 26 U.S.C. § 6695(g).
- Aiding and abetting a taxpayer to report an understatement of her tax liability. 26 U.S.C. § 6701.
- Promoting a tax shelter. 26 U.S.C. § 6700.
- Making a gross valuation misstatement in an appraisal. 26 U.S.C. § 6662A.
Increased Scrutiny on the Actions of Tax Preparers and Professionals
Recent signs from the IRS indicate we are entering a period of increased scrutiny for taxpayers as well as tax preparers and professionals who have previously flown under the agency’s radar, particularly as the Covid-19 pandemic begins to subside and agency operations return to normal. The IRS’s traditional weapons against preparers have included return preparer and promoter penalties and injunctions, OPR sanctions, and, sometimes, criminal tax charges, typically under conspiracy and aiding and abetting statutes. Furthermore, there are various other sections of the code that impose reporting and other requirements on “material advisers” like tax preparers, EAs, CTEC certified preparers, Tax Lawyers or Accountants / CPAs. In particular, the agency has publicly made clear that they plan on pursuing more cases against tax preparers for fraud related to micro-captive insurance and conservative easement cases. Previously, these types of cases may have drawn only civil scrutiny, but they are now commonly being referred to the IRS criminal investigation unit.
The implications of this new focus on criminal enforcement against tax preparers are likely to be far-reaching. Tax preparers and professionals will need to conduct additional due diligence regarding potential fraudulent schemes by the taxpayer which they could get roped into. Unlike tax attorneys, accountants and other tax preparers do not have any form of privilege that prevents them for being called as a witness in a criminal tax case against a client. Tax preparers must also be sure to comply with all AICPA & local tax ethics rules and Circular 230, including obtaining conflict waivers where appropriate.
If you learn that one of your clients has been referred for federal of state criminal tax investigation, or you have any other suspicion you may face criminal or civil tax penalties for your conduct, you should reach out to an experienced dual licensed Tax Law Attorney & CPA like those at The Tax Law Office of David W. Klasing right away. We can try to nip whatever problem exists in the bud before any criminal tax charges are filed against you and will attempt to abate or avoid preparer penalties where possible.
How a Skilled Tax Lawyer Can Help if You are a Tax Preparer Facing Potential Charges
Many tax preparers who find themselves dealing with an IRS criminal tax investigation or criminal tax charges may think that their background and experience give them the ability to deal with the situation themselves. However, this is not true at all, and any tax professional facing this situation should reach out to a battle-tested dual licensed Tax Lawyer and CPAs like those at the Tax Law Offices of David W. Klasing as soon as possible. Our main job will be to keep the matter from crossing over from a civil fraud case into a criminal one where you can face jail time and other worst-case consequences, if it has not already done so. Secondly, we will work to mitigate the financial damage as much as possible in terms of the fines and penalty fees you will have to pay. Finally, we will work to protect you from losing your professional license and not being able to practice your career in the future. Again, the quicker you reach out to us, the better chance we have of achieving damage control with IRS or the criminal prosecutors, depending on how far the matter has already progressed.
Defending Tax Preparers Against Criminal Tax Cases
Tax law is notoriously complex, so it is understandable that mistakes occur. The IRS, however, is not so forgiving. That is why if you are tax preparer who has reason to believe that you have intentionally or unintentionally committed one of the above offenses, you need competent legal counsel. Due to the complexity of the intersection of taxation and criminal law, few attorneys are competent to handle this sort of controversy. The Tax Law Office of David W. Klasing, however, specializes in this area of law; we can help you navigate through your legal options.
National Experience Representing Tax Preparer Fraud Cases
Our Office has developed national practice as to criminal federal income tax issues administered and prosecuted by the IRS, so no matter what state you are from we can effectively defend you. It is sometimes said that while the focus of an accountant is accuracy, the focus of an attorney is advocacy. Our Office’s expertise and training combines both fields: We place a premium on both accuracy and client advocacy. Contact me online or call 800.681.1295 to speak to a tax preparer fraud attorney to discuss your case.