According to a Department of Justice press release, Chandra Yarlagadda, 54, of Bloomfield Michigan, pleaded guilty to filing false income tax returns. Chandra’s criminal tax activity related to an extreme overstatement of deductions that resulted in a massive underpayment of federal income tax. This story is a prime example of how overstating deductions or understating income can result in criminal tax consequences, including being sentenced to a term in federal prison and restitution.
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According to a Department of Justice press release, Yarlagadda was the owner and operator of Alpha Bioenergy LLC. The company was in the business of purchasing and selling biodiesel fuel. As some may be aware, pursuant to the Clean Air Act and other regulations promulgated by the federal government, companies that are in the business of purchasing and selling biodiesel fuel must purchase Renewable Identification Numbers (RINs) covering the particular volume of renewable fuel that is purchased or sold. There is an active market for not only the buying and selling of biodiesel fuel, but also for the trading of RINs.
On the Schedule C that was attached to his personal tax return, Yarlagadda vastly overinflated the expenses that he incurred related to acquiring the RINs needed for his company. In 2009, 2010, and 2011, Yarlagadda indicated that his RIN acquisition expenses were more than $14 million when he was only legally allowed to claim approximately $80,000 in actual RIN expenses. The overstatement of allowable deductions resulted in Yarlagadda paying substantially less federal income tax than was actually due. The IRS estimated that Yarlagadda dodged more than $2.3 million in taxes due to his over-inflation of expenses.
Sentencing has been scheduled for next spring and Yarlagadda faces a maximum term of imprisonment of three years. Additionally, he will likely be ordered to serve a term of supervised release upon the completion of his physical incarceration. Lastly, Yarlagadda agreed, as a part of his plea deal, to pay restitution to the IRS in the amount of $2,310,948, representing the taxes that he failed to pay as a result of his criminal tax evasion activity.
Although the defendant in the story above was in the business of dealing fuel, and the issue of accounting for expenses related to the buying and selling of RINs is likely not a concern for most of our readers, every business owner must properly account for expenses that offset gross income. Although the Internal Revenue Code’s section 162 is relatively lenient, and only requires that an expense be “ordinary and necessary”, the expense must have been incurred and other (more complicated) tax rules may further limit a deductible expense.
One of the most common issues in an individual or business tax examination is that of allowable deductions. If you have received a notice of tax examination or if you believe that your tax returns do not properly reflect the true amount of income your business has earned, it is in your best interest to contact an experienced tax defense attorney as soon as possible. California and federal tax authorities have domestic or offshore programs designed to allow for taxpayers to correct mistakes or even outright fraud like the purposeful understatement of income or the overstatement of deductions. Although you should consult with an experienced tax lawyer about your ability to take advantage of such programs, one thing is for sure, if the IRS or state taxing authority discovers your misstatements before you address the issue, the consequences will likely be exponentially much more severe.
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The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing taxpayers from all walks of life. Whether you are a business owner facing a sales and use tax audit or you have received notice that your individual return is being examined, our team of zealous advocates are standing by to help you develop a sound legal strategy that will keep your personal and financial interests at the forefront of importance. Do not lose sleep over the possibility of tax evasion or other tax-related charges from the IRS or state taxing authorities. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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