Each year, thousands of U.S. citizens pay their taxes properly and without issue. Others have their returns flagged for potential issues by the IRS, which may result in an audit. Rarely do these audits end with no finding of wrongdoing, and most findings of unintentional errors subject taxpayers to only an assessment of additional tax, related interest, and civil penalties. However, if the auditor finds seemingly willful attempts by the taxpayer to commit fraud or intentional actions designed to underpay their taxes, serious criminal tax charges can apply.
Those that have been charged with a tax crime or who believe that they could be charged with such a crime should reach out to an experienced criminal tax defense lawyer like those at the Tax Law Offices of David W. Klasing right away. There are several different ways we can try to remedy the situation, including trying to work out an audit resolution with the IRS before the matter is handed off to the IRS criminal investigations division and later taken to court. Of course, if a tax crime trial is necessary, our skilled trial lawyers are always ready and able to mount your defense. However, after a ruling in a recent district court case, there is one creative defense that we probably will not be able to use.
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In May 2020, the U.S. District Court for the Eastern District of Louisiana decided a case called United States v. Hamden. The defendants in the case were two gentlemen named Hamden and Mousa who owned a chain of food markets called “Brothers Food Mart” throughout Louisiana. The indictment charged them with conspiracy to defraud the government by evading paying federal income and employment taxes through the underreporting of wages and failure to account for and pay certain taxes on trust fund accounts held on behalf of their employees. Furthermore, the two men were charged with aiding and assisting the preparation of falsified income tax returns for third parties.
At trial, Hamden’s attorneys put forward a unique and perhaps unprecedented argument. They filed a Motion to Dismiss most of the counts in the indictment since Hamden had overpaid his federal income taxes in the amount of $5,222,675 for the years 2009 through 2014. Hamden claimed that, in the case of any overpayment of tax, 26 U.S.C. § 6402 authorizes the IRS to credit the amount overpaid to any number of outstanding taxpayer obligations and requires the IRS, subject to certain exceptions, to offset any balance due by the person who made the tax overpayment.
As such, Hamden argued that the amount he overpaid in income taxes should have been applied to offset the alleged $3,419,539 in underpayment of employment taxes, trust fund taxes, and the amounts of false tax returns filed for third parties. Furthermore, he argued that the government could not prove that Hamden willfully attempted to enrich himself, as the statute requires, due to the fact that, during the same period, Hamden voluntarily overpaid his income taxes to the point where he was owed a large refund. Finally, Hamden argued that the government had been unjustly enriched by his overpayments and, as such, that he was shielded from criminal responsibility in this matter.
The district court ruled against all of Hamden’s arguments and denied the motion to dismiss. Firstly, it did not accept as necessarily valid the fact that Hamden had overpaid his income taxes to such an extent as to completely offset the government’s losses due to his and his partner’s fraud. However, the court stated that, even accepting for the sake of argument that Hamden had overpaid his taxes by more than the amount he owed, the statute cited by Hamden does not mandate that the IRS apply overpaid taxes to the taxpayer’s outstanding tax liability. The statute merely authorizes the government to credit overpaid taxes in certain cases at their discretion.
Furthermore, the court ruled that the fact that Hamden overpaid taxes in one instance did not preclude the possibility that he may have willfully defrauded the government to underpay taxes in another instance. Lastly, the court concluded that Hamden’s overpayment of his income taxes did not qualify as unjust enrichment because it did not meet the fifth factor of a five-factor test used in unjust enrichment cases: a requirement that there was no other remedy at law to correct the unjust enrichment. Here, as the court notes, Hamden had the right to bring a civil action for a refund under 26 U.S.C. § 7422(a), if he had actually overpaid.
While the creative arguments put forth by Hamden’s legal team, in this case, did not pass the district court’s smell test, this does not mean that there are no other, valid legal defenses if you are facing criminal tax fraud charges. At the Law Office of David W. Klasing, our attorneys and tax professionals have years of experience helping our clients charged with tax crimes bring their case to the most successful possible conclusion. We will leave no stone unturned in crafting the most persuasive case for your innocence. To schedule a consultation, call our office today at (800) 681-1295.
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