Tax practitioners and taxpayers can be prosecuted for crimes under the criminal sections of the Internal Revenue Code and under the general criminal provisions in Title 18 of the U.S. Code.
Under 18 USC Section 287, making a false claim against an agency or department of the U.S. government is a felony.
A taxpayer or practitioner can be convicted of participating in a conspiracy to evade or defeat taxes even if acquitted of committing the underlying substantive crime.
The crimes of perjury and making a false statement to the government can apply when a person makes a false statement or provides a false document.
Only a small percentage of the taxpayers who file returns or conduct other business with the IRS ever face criminal prosecution. For example, in fiscal year 2007, only 1,780 criminal investigations were initiated across the entire country.1 Nevertheless, because the consequences of a criminal tax action can be so severe, basic knowledge of the crimes that can apply in tax cases is important for any practitioner. This requires an understanding not only of the criminal parts of the Internal Revenue Code but also of some sections of Title 18 of the U.S. Code.
Title 18 covers federal penal law and includes, among others, sections targeting false claims, false statements, and conspiracies. Case law makes it more than clear that taxpayers, and also accountants doing tax work, can be prosecuted and convicted under these provisions.2 In some cases, such as perjury (18 USC Section 1621) and filing a false tax return (Sec. 7206(1)), for example, acts punished by Title 18 are similar to behavior made criminal by the Internal Revenue Code. However, in other situations, Title 18 provisions considerably expand the reach of prosecutors.3 All of this means that tax practitioners concerned about a potential criminal matter need to know federal tax law and federal penal law.
This article examines some of the Title 18 sections particularly relevant to tax practice. It describes the conduct the section punishes and discusses cases involving taxpayers and accountants. The article includes a description of some warning signs designed to help practitioners recognize criminal law issues and offers advice for CPAs, including comments on the Statements on Standards for Tax Services (SSTS).4 While not a guarantee, compliance with the statements can help practitioners reach decisions that are both professionally responsible and legally correct.
False Claims Against the Government (18 USC Section 287)
Under federal law, a person who makes a false claim against any agency or department of the U.S. government has committed a felony. The maximum sentence under 18 USC Section 287 is a fine and five years in prison, although the actual punishment is likely to be affected by the federal sentencing guidelines.5 Section 287 targets false, fictitious, or fraudulent claims, but in tax cases it has been used even where there was no proof that the return was technically inaccurate. In Kercher, for example, a defendant was convicted when he filed returns without the authorization of the taxpayers.6 The court held that the documents were false because the defendant did not have permission to submit the returns in question.7
To obtain a conviction under Section 287, the government must show that the defendant knowingly made a claim against the U.S. government or one of its agencies or departments, with knowledge at the time of submission that the claim was false, fictitious, or fraudulent.
Submission of a Claim Against the United States
Case law has defined a “claim” as a demand for money or transfer of public property.8 Submitting a claim includes cashing a tax refund check obtained fraudulently.9 This provision has been used to target not only the actual taxpayers who have submitted false information to the IRS10 but also accountants involved in fraudulent tax schemes. For example, in Rappaport,11 an accountant was convicted after masterminding a plan by which he and others obtained tax refunds amounting to approximately $813,400. The refunds were paid in connection with 81 separate returns that reported fictitious employment and tax withholding information.
Courts have upheld convictions under Section 287 in cases in which defendants were indirectly involved in the submission of a claim. This would apply, for example, where an individual presented information to an intermediary who in turn submitted a claim to the federal government. Jury instructions for this theory discuss the rules for aiding and abetting, under which a defendant who willfully causes another to perform an illegal act is punishable as a principal.12 In Tilford,13 for instance, an accountant pled guilty to an aiding and abetting charge under Section 287. Tilford engaged in various tax fraud schemes, including creating false documents and helping persons file false tax returns electronically. The tax documents were used to obtain refund anticipation bank loans, the proceeds of which were divided between Tilford and the person named on the return.
Filing a false tax return that fraudulently shows the taxpayer is entitled to a refund has been treated as making a claim against the United States.14 However, merely filing a false return that underreports a defendant’s tax liability apparently is not sufficient to trigger prosecution under this provision.15
False, Fictitious, or Fraudulent Claims
To obtain a conviction under Section 287, the government also must show that the claim filed by the defendant was “false, fictitious, or fraudulent.” There is a difference of opinion among courts on the interpretation of these terms. Some courts have held that a claim is “false” if it is untrue when made, while a “fictitious” claim is one that is not real or does not correspond to what actually occurred.16 However, other courts use “false” and “fictitious” interchangeably and hold that the government only must prove the claim was untrue when made or used.17 In any case, in order to be convicted, defendants must have acted “knowingly.” This means that they acted voluntarily and intentionally, and not by mistake or carelessness.18 It is not necessary to show that defendants knew their actions were criminal, as long as they were aware at the time that the claim being made was false or fictitious.19
In prosecuting a fraudulent claim, the government must show that the defendant had a specific intent to deceive20 in order to obtain money or property from the United States or one of its agencies or departments.21 Preparation of false documentation to support a claim for a tax refund has been treated as fraudulent. It is not necessary to show that the government actually relied on the material the defendant submitted.22
Courts have reached conflicting results when considering whether a false, fictitious, or fraudulent claim being prosecuted under Section 287 must be proven to be material.23 The issue has not yet been considered by the Supreme Court. Where materiality is required, the statement must be shown to relate to an important fact or must have the potential to affect or influence a government function. Actual reliance on the statement need not be proven.24
Conspiracy (18 USC Section 371)
The conspiracy statute is frequently used to prosecute tax professionals, including CPAs, involved in evasion or other fraudulent tax schemes.25 A conviction carries a maximum sentence of five years, plus a fine, although the punishment will be less where the object of the conspiracy was to commit a crime classified as a misdemeanor rather than a felony.26 A conspiracy charge involving an attempt to evade or defeat taxes is subject to a six-year statute of limitation. This means the prosecution must begin within six years of the last affirmative act taken by the conspirators to accomplish their goal.27
A conspiracy can be thought of as a “partnership in crime.”28 More specifically, it involves an agreement between two or more persons either to commit an offense against the United States or to defraud the federal government.29 Both theories have been used in prosecutions involving tax cases. For example, in Johnson,30 the defendants were moonshiners who sold untaxed whiskey to federal agents masquerading as liquor buyers. Johnson, his wife, and three others were convicted of various charges including conspiring to violate federal alcohol tax laws. By comparison, the prosecution in Larson 31 relied on a conspiracy-to-defraud theory. Larson, an accountant, was part of a scheme that sought to avoid reporting income by hiding assets in sham trusts. Although Larson’s clients retained full control over trust assets, they nonetheless failed to report the income that those assets generated, in violation of the grantor trust rules. Larson prepared false tax returns, opened accounts, set up trusts, and was involved in recruiting clients. The plan ultimately resulted in a tax loss to the federal government of at least $2.6 million.32
To obtain a conspiracy conviction, the government must prove that two or more persons entered into an unlawful agreement that the defendant knowingly and willfully joined. It must also be shown that one of the conspirators knowingly committed an overt act that in some way furthered one of the conspiracy’s goals.33 A conspiracy charge is separate from the substantive crime the agreement was designed to commit.34 In other words, in a tax scheme a defendant may be charged with both evasion and conspiring to evade. Acquittal on one of the counts does not bar conviction on the other.35 For example, in Klein,36 defendants were convicted of conspiring to obstruct the Treasury Department’s collection of revenue, although at trial the judge directed verdicts of acquittal on the separate charges of evasion.
Existence of an Agreement
No formal agreement is necessary for a conspiracy; it is enough for the government to show that some sort of mutual understanding existed between two or more parties.37 A defendant cannot be convicted where the only other person in the scheme was a federal agent.38 However, some courts have held that a conspiracy charge is proper in a case involving a corporation conspiring with one or more of its officers.39 A defendant need not be aware of every detail or phase of a plan in order to be found to have participated in an unlawful agreement.40 Nonetheless, the existence of an understanding, at some time during the course of the criminal conduct, is critical. Otherwise a defendant who assists in unlawful activity is more properly charged with aiding and abetting.41
Membership in the Conspiracy
Membership in a conspiracy means a defendant knowingly, willfully, and voluntarily participated in the scheme, with knowledge of its unlawful purpose and a specific intent to further its objectives.42 A financial interest in the plan is not required but can be considered as evidence of a defendant’s membership. A defendant need not know every other co-conspirator or be aware of all their activities.43 Further, the degree of participation is irrelevant—meaning, for example, that a defendant who plays a minor role in a tax evasion scheme by preparing several false documents still could be convicted of conspiracy.44 However, mere knowledge of a plan is not enough for a conviction; actual participation is required.45
Sometimes prosecutors in conspiracy cases rely on a theory of “conscious avoidance” to prove knowledge. For example, in Gurary,46 the defendants were charged in connection with a scheme to sell false invoices to corporations, which used the documents to reduce taxable income by inflating the cost of goods sold. On appeal, the defendants argued that they had no reason to believe the false invoices were being purchased in order to commit tax crimes, since they claimed that such documents are used in the garment industry routinely for other purposes. However, this argument was rejected on appeal. The court noted that the depth of the scheme, which encompassed an eight-year period and involved over $136 million in invoices, served as indirect evidence that the defendants knew their plan would result in the filing of false tax returns.47
Courts have held that reliance on the advice of counsel does not preclude a finding of willfulness sufficient to support a conspiracy conviction. In other words, a defendant aware that a plan is illegal cannot avoid prosecution simply by getting a favorable legal opinion.48 However, the advice of a professional can be considered in determining if a defendant acted willfully.49 This raises the prospect of a client attempting to defeat a conspiracy charge by claiming to have relied on a CPA’s advice. For example, in Meneilly,50 a taxpayer was convicted of conspiracy and tax crimes despite arguing that he had relied on the advice of his accountant. The court found that the claims were not supported by the evidence, basing its conclusion in part on the accountant’s testimony to the effect that he did no more than use the data the taxpayer supplied.51
Caution: All of this points to the importance of careful record keeping by CPAs when giving advice or performing tax services of any kind.
Commission of an Overt Act in Furtherance of the Agreement
The charge of conspiracy requires commission of at least one overt act by at least one of the conspirators.52 A defendant who did not personally commit the act alleged in the indictment still can be convicted as long as one member of the conspiracy knowingly performed the action in question.53 This is true even if the action was taken outside the defendant’s presence and without his knowledge.54 An act can be used against a defendant even though it occurred before she became a party to the illegal agreement.55 However, the action must have been performed while the conspiracy still existed.56
The overt act required for conspiracy purposes need not be illegal. Common and otherwise innocent activities such as meetings and conversations can be sufficient.57 However, the action must have been knowingly and willfully performed in order to advance some purpose of the agreement.58 In tax cases, the overt act may consist of filing or preparing false returns or documentation. It is not necessary to show that the conspiracy caused a financial loss to the government.59
Impossibility is not a defense to a conspiracy charge. This means that defendants still can be convicted of conspiracy even though it was not possible for them to execute their plan successfully.60 Withdrawal is a defense, since it negates membership in the agreement. However, affirmative action to renounce the conspiracy or defeat its purpose is required in order to make this argument; otherwise a defendant is presumed to belong to the conspiracy until its last overt act is committed.61 In Nowak,62 for example, the Seventh Circuit ruled that an attorney’s actions in terminating his legal representation were insufficient to constitute withdrawal from a conspiracy. In order to be effective, withdrawal must occur before the purpose of the conspiracy has been accomplished.63
Merely stopping activity, as where a tax adviser resigns his or her employment, does not constitute withdrawal.64 Good faith is also required in order to raise this claim. For example, in Ingredient Technology Corp.,65 a withdrawal argument was held to be unwarranted where the taxpayers dropped their plan only after being discovered by auditors.
Perjury (18 USC Section 1621)
Commonly thought of as “lying under oath,” perjury includes not only giving false testimony but also submitting documents that contain materially false information. Perjury is a felony, punishable by a fine and up to five years in prison.66 A person who files a false tax return could be prosecuted under this section of the criminal law or under Sec. 7206(1). The maximum prison sentence for a conviction under Sec. 7206 is only three years, instead of the five applicable to perjurious conduct under Section 1621. However, the rules of evidence allow only certain tax cases to be prosecuted under Section 1621.67
To establish perjury, the government must show that the defendant either took an oath to testify truthfully or submitted written information under penalty of perjury that was subscribed as true.68 The fact that the testimony or submission may have been compelled by law or subpoena is irrelevant because the Fifth Amendment privilege against self-incrimination allows a person to remain silent but does not protect those who provide false information.69 All U.S. tax returns are submitted under penalty of perjury.70
To obtain a conviction, the government must show that a statement made by a defendant, or the written information he or she submitted, was false.71 A determination of truth or falsity is based on the facts as they existed at the time the offense allegedly occurred.72 Where several statements or items are being considered, a jury must unanimously conclude that at least one particular piece of information is false.73 In other words, a perjury conviction based on an individual tax return would be improper where some jurors felt that a medical deduction was overstated while others found instead that income had been underreported.74 Information that is literally true cannot be the basis for a perjury conviction, even if it is unresponsive to what was requested or intentionally misleading.75
A “two-witness” rule applies to perjury prosecutions under Section 1621. This means that the falsity of the statement made or document submitted must be established by two witnesses or by one witness and other corroborating, independent evidence.76 In a tax case, the testimony of a bookkeeper familiar with a defendant’s business, in combination with independent accounting records, could be sufficient to support a conviction. The two-witness rule does not apply, however, where the accusations concern statements made by the defendant about her own state of mind.77 This would be the case, for example, where the government is trying to show that a taxpayer who claimed under oath that she could not recall a specific business transaction in fact did remember the details about which she was being questioned.
A defendant can be convicted for false testimony or a false document only if the matter giving rise to the allegation was material.78 A statement is material if it has a tendency to influence or is capable of influencing an agency or court’s decision. Proof that the statement actually had an effect is not required.79 In tax cases, it is also not necessary to show the false information related to the defendant’s own return. For example, in Eckhardt,80 a tax shelter promoter who made false statements both in a deposition and before the Tax Court was charged with perjury. Eckhardt had accepted money from clients in connection with a tax shelter involving cattle, whereby loans to purchase livestock were to be taken out in the names of investors, with the animals serving as collateral. However, Eckhardt actually used the funds for other purposes. He then went to considerable lengths to hide the deception after his clients filed a case in Tax Court contesting the IRS’s decision to deny the farm losses and investment credits they had claimed.
Finally, to obtain a perjury conviction the government must show that the false statements or false documents were provided willfully.81 This has been interpreted to require proof that the defendant knew the information was false. Evidence of an evil motive is not necessary.82Important to tax cases, which may involve defendants attempting to navigate laws with which they are unfamiliar, willfulness does not include information provided because of a mistake or faulty memory.83 Circumstances surrounding a defendant’s acts, as well as possible motives, can be considered as evidence of willful intent.84
False Statements (18 USC Section 1001)
18 USC Section 1001 applies where a defendant knowingly and willfully makes false statements to the federal government or submits false documents. Unlike perjury, it is not necessary to show that the material was provided under oath. This means that false information provided to IRS agents in the course of a tax investigation could be prosecuted.85 A defendant who makes false statements in response to government questions, where truthful answers would be incriminating, is not protected under the Constitution.86 In Brogan, the Supreme Court ruled that Section 1001 applies to any false statement, including a denial.87 The majority held that the Fifth Amendment does not confer a privilege to lie to federal officials.88
A taxpayer can be pursued under Section 1001 in addition to being charged with a tax crime under the Internal Revenue Code. For example, in Secor,89 a defendant was convicted for attempting to evade taxes, in violation of Sec. 7201, and also for making false statements, because of answers she gave in response to IRS inquiries.A fraudulent tax return could be prosecuted as a false statement under Section 100190 or under Sec. 7206(1), which is applicable to false statements filed under penalty of perjury. Although Section 1001 provides for a longer maximum prison sentence,91 it is subject to a five-year statute of limitation.92 The period of time within which a Sec. 7206(1) prosecution must be brought is six years.93
False Statement or Document; Concealment
A defendant who makes a material statement that is false or fraudulent has violated 18 USC Section 1001, assuming the other elements of the statute are satisfied. The representation, which need not be written,94 is false if it was untrue when made.95 “Fraudulent” means a defendant intended to deceive; it is not necessary to prove the existence of a plan to deprive the government of money or property.96 In either case, materiality must be established.97 This has been defined by the courts to mean that the statement naturally tended to influence or was capable of influencing the government’s actions.98
The false statements provision also applies where a material fact is concealed. Concealment means a defendant took affirmative steps to hide information he or she was required to disclose.99Use of some sort of trick or scheme is required, as where a taxpayer deliberately structures a currency transaction to avoid reporting requirements applicable to cash transfers of $10,000 or more.100 Mere nondisclosure of information required to be reported does not constitute a violation of this provision.
Knowing and Willful Conduct
The false statement statute applies only where a defendant’s conduct in making a statement, concealing information, or another similar action was knowing and willful.101 Similar to Section 287, prohibiting false claims, the courts have defined the term “knowing” under Section 1001 to mean an action was done purposefully and voluntarily. In other words, it was not the result of a mistake or accident. An act is willful if done with the intent to do something the law forbids, or with a bad purpose to disobey legal requirements.102 In concealment cases, the government must show that the defendant had a specific intent to not do what the law required to be done.
Reliance on the advice of an expert is often raised to refute the government’s proof of the necessary intent. In order to use this argument, a defendant must show that she disclosed all relevant facts to the expert and relied in good faith on the advice received.103 In Smith,104 a defendant charged under Section 1001 in connection with a Medicare scheme claimed that he depended on his CPA when signing the documents at issue. However, the court found that the defendant knew the forms were inaccurate and therefore could not have relied in good faith on the accountant’s work. Claimed negligence on the part of the CPA in failing to discover the irregularities was not relevant to whether Smith acted willfully and with knowledge.
Jurisdiction of the Federal Government
Section 1001 applies only to matters involving the federal government. For example, a taxpayer who submits false information to a state in order to avoid paying a sales or use tax would not be prosecuted under this provision.105 Statements or documents provided to the IRS are considered to fall under federal jurisdiction.106 However, practitioners should bear in mind that false statements made to a state are generally punishable under state law.
Mail and Wire Fraud (18 USC Sections 1341, 1343)
Although property crimes often are thought of as involving state law, the federal government can prosecute persons who commit frauds using the mail, an interstate carrier, or interstate wires, such as the telephone system. Under 18 USC Section 1341, a person who receives or sends mail as part of a scheme to defraud or obtain assets by means of false statements and similar actions is guilty of a felony and subject to a fine and up to 20 years imprisonment.107 A similar rule applies to plans involving the use of interstate wire, radio, or television communication.108 Both mail and wire fraud can be raised in tax cases. For example, among other charges, the late Leona Helmsley was convicted of 10 counts of mail fraud for underreporting New York state tax liabilities.109 Helmsley’s troubles stemmed from a scheme devised to charge personal expenses to business entities she or her husband owned or controlled.110
Plan to defraud: Both mail and wire fraud require proof of a scheme to defraud through materially false statements. This has been defined as the use of a plan to obtain money or property through false or fraudulent pretenses.111 A false representation includes one that was known to be untrue when made,112 while a fraudulent statement is made falsely with intent to deceive.113 The failure to disclose information, where a defendant is under a legal or professional duty to speak, also can be treated as fraudulent.114 In all cases, the misrepresented information must be material, meaning something expected to be of concern to a reasonable and prudent person.115
Mail and wire fraud both are prem-ised on the intent to deprive the victim of property or money.116 In Czubinski,117 the defendant’s conviction on nine counts of wire fraud was reversed on appeal. Czubinski was an IRS employee who used his access to Treasury computers to investigate personal friends and acquaintances, including browsing the tax return of a woman he had dated.118 The court held that merely accessing confidential information, without more, did not deprive the IRS of property for purposes of wire fraud.119 However, governments do have a property interest in uncollected revenue, meaning that the mail and wire fraud statutes are applicable where federal or state taxes are unpaid because of fraudulent schemes.120
Intent under the mail and wire fraud provisions is defined in much the same way as in other criminal statutes. Courts require that a defendant act knowingly, meaning voluntarily and deliberately.121 In addition, the government must prove the defendant acted willfully, defined as purposely and with a bad intent to disobey or disregard the law. This does not mean that proof is required that the defendant intended to commit a crime. For example, in Porcelli,122 the defendant’s mail fraud convictions were premised on a scheme involving fraudulent state sales tax returns. The convictions were upheld even though the state imposed only civil and not criminal sanctions for the violations at issue.
For mail and wire fraud convictions, there must also be proof of specific intent to commit fraud. A defendant who acted in good faith, with an honest belief as to the truthfulness of the representations he or she made, cannot be convicted.123 Consulting an expert, such as a CPA in a tax case, can be viewed as evidence of good faith.124
Use of the Mails or Wires
In a mail fraud case, it must be shown that material was sent through the U.S. Postal Service or by a private or commercial interstate carrier in furtherance of the scheme. The mailed item does not itself have to be fraudulent as long as it advances the plan. In addition, the government need not show that one of the defendants involved in the scheme personally mailed the item at issue.125 For example, in Mangan,126 an IRS agent and his brother filed false income tax returns on behalf of other taxpayers as part of a plan to obtain improper refunds. The appellants challenged their convictions under 18 USC Section 1341, in part based on the lack of evidence at trial that they used the mails to file the tax forms in question. However, the court found sufficient evidence that the refund checks were mailed and that this mailing was caused by the fictitious returns the scheme generated. Mailings mandated by law also satisfy this element of the statute. In Helmsley,127 the appellate court rejected the argument that required tax mailings cannot serve as the basis of a mail fraud conviction.
Similar principles apply to wire fraud cases. However, Section 1343 expressly requires evidence that the wire communication passed between two states or between the United States and a foreign country. Wire communication can include telephone calls, a wire transfer of funds, or use of the internet. 128
Advice for the CPA
In almost all situations, CPAs themselves will not face prosecution under Title 18 in connection with tax services offered to clients.129 This is because most of the statutes require some showing of knowledge or a deliberate intent to commit wrongdoing. Where CPAs are following professional guidance in their tax services, such as by observing the principles contained in the SSTS, the required intent almost certainly will be lacking. For example, under SSTS No.1, Tax Return Positions, a CPA can recommend a position on a tax return if he or she has a good-faith belief that the position has a realistic possibility of being sustained on the merits. A position not meeting this standard can still be recommended if it is not frivolous and the CPA recommends appropriate disclosure. Adherence to these principles would preclude a finding that the accountant intended to use the mails in a tax fraud scheme—for example, as would be required for a prosecution for mail fraud.
Although conviction of the CPA may not be likely, involvement with clients who may be engaged in criminal matters is risky for many reasons. For example, federal investigators almost certainly will examine the CPA’s conduct, even where it ultimately is shown that the accountant was unaware of the illegal scheme a client used to avoid tax payments. This may mean that the CPA will be required to retain legal counsel and spend time responding to investigator requests. Prosecution of a client for criminal tax violations is likely to generate unfavorable publicity for the CPA’s practice and may mean that he or she will be required to testify in court, an experience most accountants would prefer to avoid. In addition, a criminal action may jeopardize a client’s ability to pay the CPA for services, as courts are authorized to impose fines under all the statutes discussed in this article and the client is likely to be incurring significant legal and other expenses.
CPAs should therefore be very careful when providing tax services to clients whose conduct raises doubts in the accountant’s mind. Warning signals that may indicate potential trouble include transactions that do not appear to make good business sense or situations in which the documentation does not support what the client is reporting to the accountant.130 Other signs include the use of cash where checks or other forms of payment that would create a paper trail would be expected or complex transactions that the accountant does not fully understand. In these cases, CPAs should observe all the guidance of the SSTS. It is extremely important for them to thoroughly document what they know regarding client transactions and the basis, including statutory and other authority, on which they give advice.
Finally, a CPA must consider withdrawal under SSTS Nos. 6, Knowledge of Error: Return Preparation, and 7, Knowledge of Error: Administrative Proceedings. Both of these statements require a CPA to consider withdrawing from an engagement in which a taxpayer who has been advised of the problem refuses to take corrective measures. Although the pressures of maintaining a practice may make it difficult to surrender a client, the decision to sever the relationship may ultimately be to the CPA’s advantage both professionally and financially.
Although perhaps not common, prosecutions under Title 18 can have serious consequences, including fines, prison, and, for a CPA, loss of license.131 Familiarity with the statutes discussed in this article is therefore important both for practitioners themselves and for their clients. Although adherence to SSTS guidance is extremely useful, a tax accountant also should be mindful of the Title 18 provisions. A criminal prosecution of a client, while not likely to be as devastating as an action against the CPA, can also be damaging to the practitioner.
For more information about this article, contact Ms. Hibschweiler at firstname.lastname@example.org.
Author’s note: The author gratefully acknowledges the contributions of Lindsay A. Rabitz to this article.
1 See “Statistical Data—General Tax Fraud” at www.irs.gov/compliance/enforcement/article/0,,id=106791,00.html.
2 See, e.g., Larson, 417 F3d 741 (7th Cir. 2005), cert. denied sub. nom. Palmer, 547 US 1005 (2006).
3 For example, a conspiracy charge allows prosecutors to target a mere agreement to evade tax, as long as it is supported by at least one overt act furthering the scheme. See the discussion below.
4 AICPA Tax Executive Committee, Statements on Standards for Tax Services (2000), available here. The standards are discussed in Hibschweiler, “Can Your Tax Client (or You) Go to Jail?” Part I, 37 The Tax Adviser (April 2006): 216; Part II, 37 The Tax Adviser (May 2006): 280.
5 Federal Sentencing Guideline Manual (2007), available at www.ussc.gov/2007guid/TABCON07.html. The guidelines were declared unconstitutional in Booker, 543 US 220 (2005). However, in Booker the Court ruled that while judges could not be mandated to follow the guideline results, they could continue to consult the guidelines when imposing sentences. Booker, 543 US at 245.
6 Kercher, 409 F2d 814 (8th Cir. 1969).
7 In Kercher, the defendant prepared income tax returns and provided clients with advances equivalent to anticipated tax refunds, at a discounted rate. Notwithstanding this arrangement, in several cases the actual refunds were sent to the taxpayers in whose names the returns had been filed, so they received a double payment. The following year Kercher filed Forms 1040A, U.S. Individual Income Tax Return, without authorization, in what the court concluded was an attempt to recoup the advances he had made previously (409 F2d 814).
8 See Tieger, 234 F2d 589, 591 (3d Cir.), cert. denied, 352 US 941 (1958) (defining “claim” for purposes of a statutory civil penalty under the False Claims Act).
9 Branker, 418 F2d 378 (2d Cir.), cert. denied, 393 US 1029 (1969).
10 See, e.g., Austin, 774 F2d 99 (5th Cir. 1985). In Austin, the defendant and others combined to file false tax returns. The returns were filed in Austin’s name as well as under the name of a codefendant. The scheme also involved the use of other individuals’ names and Social Security numbers without their permission.
11 Rappaport, 999 F2d 57 (2d Cir. 1993).
12 Sand et al., Modern Federal Jury Instructions, Inst. 18-5 (Matthew Bender 2007).
13 Tilford, 224 F3d 865 (6th Cir. 2000).
14 Miller, 545 F2d 1204, 1212 n.10 (9th Cir. 1976), cert. denied, 430 US 930 (1977).
15 In McBride, 362 F3d 360 (6th Cir. 2004), a defendant was convicted under Section 287 after sending an insufficient funds check to the IRS to pay his girlfriend’s delinquent taxes. On appeal, the Sixth Circuit reversed the conviction, finding that the defendant never received advance payments from the federal government to which he was not entitled. The court also noted that the action of sending the bad check to the IRS could not have elicited payment from the IRS. Therefore, it ruled that the defendant could not be convicted under 18 USC Section 287 as a matter of law.
16 Sand, Modern Federal Jury Instructions,at Inst. 18-7.
17 See, e.g., Milton, 602 F2d 231, 233 (9th Cir. 1979).
18 Precision Med. Labs., Inc., 593 F2d 434 (2d Cir. 1978). However, some courts have held that an intent to deceive also must be proven. See, e.g., Austin, 774 F2d 99 (5th Cir. 1985).
19 Sand, Modern Federal Jury Instructions,at Inst. 18-7.
20 Strong, 114 F3d 1192 (7th Cir.), cert. denied, 522 US 984 (1997).
21 Sand, Modern Federal Jury Instructions,at Inst. 18-7. Some courts require proof of intent to deceive for any prosecution under Section 287; id.
22 See White, 765 F2d 1469 (11th Cir. 1985).
23 For example, the Tenth Circuit does not require materiality but the Eighth does. See, e.g., Allen,116 FedAppx 210 (10th Cir. 2004); Pruitt, 702 F2d 152 (8th Cir. 1983).
24 Sand, Modern Federal Jury Instructions,at Inst. 18-7.
25 See, e.g., Browning and Moynihan, “A Surprise in Tax Case on KPMG,” New York Times, p. C1, March 28, 2006; McGowan, “CPAs at Risk as Government Continues to Attack Abusive Tax Shelters,” 39 The Tax Adviser (March 2008): 162.
26 18 USC Section 371.
27 Some courts have held the five-year limitation period of 18 USC Section 3282 generally applicable to federal crimes. See, e.g., Klein, 247 F2d 908, 919 (2d Cir. 1957), cert. denied, 355 US 924 (1958). However, Sec. 6531(8) provides for a six-year limitation period for conspiracies to defeat or evade any tax.
28 See Pinkerton, 328 US 640, 644 (1946).
29 18 USC Section 371.
30 Johnson, 84 F2d 114 (5th Cir.), cert. denied, 299 US 574 (1936).
31 Larson, 417 F3d 741, cert. denied, 547 US 1005 (2006).
32 In a conspiracy-to-defraud case, it is not necessary to show that an object of the agreement was to cause the government to lose money or property. It is sufficient to show that the plan was designed to obstruct or impair legitimate government functions. Sand, Modern Federal Jury Instructions,Inst. 19-12. However, evidence of “deceitful or dishonest means” is required. See Caldwell, 989 F2d 1056, 1059 (9th Cir. 1993).
33 Sand, Modern Federal Jury Instructions,Inst. 19-3.
34 See Nims, 524 F2d 123 (5th Cir. 1975), cert. denied, 426 US 934 (1976). However, to obtain a conspiracy conviction, the degree of intent to be proven by the prosecution must at least equal the level required for the substantive offense itself. Ingram, 360 US 672, 678 (1959).
35 See, e.g., Stevens, 909 F2d 431 (11th Cir. 1990).
36 Klein, 247 F2d 908 (2d Cir. 1957).
Klein has stretched the reach of prosecutors, since
it allows criminal charges to be filed in cases involving
conspiracies to impede the lawful functioning of the IRS,
whether or not a substantive crime is proven (id. at 909).
However, there are limits to this doctrine. See
Vogt, 910 F2d 1184 (4th Cir. 1990), cert.
denied, 498 US 1083 (1991) (“… Klein applies
only when an agreed upon objective of the criminal
conspiracy is to thwart the IRS’s efforts to determine and
collect income taxes”).
37 Sand, Modern Federal Jury Instructions,at Inst. 19-4.
38 Lewis, 53 F3d 29, 34–35 (4th Cir. 1995).
39 Ames Sintering Co., 927 F2d 232 (6th Cir. 1990).
40 Harris, 733 F2d 994 (2d Cir. 1984).
41 See, e.g., Lozano, 511 F2d 1 (7th Cir.), cert. denied, 423 US 850 (1975).
42 Sand, Modern Federal Jury Instructions,at Inst. 19-6.
43 Id. See also Martin, 790 F2d 1215 (5th Cir.), cert. denied,479 US 868 (1986), upholding the conviction of a defendant who led a tax avoidance organization.
44 Sabari, 333 F2d 1019 (9th Cir. 1964).
45 Mere presence or association with conspirators is also insufficient. Sand, Modern Federal Jury Instructions,at Inst. 19-6.
46 Gurary, 860 F2d 521 (2d Cir. 1988).
47 Id. at 527.
48 Poludniak, 657 F2d 948, 958–59 (8th Cir. 1981), cert. denied,455 US 940 (1982).
49 In order to raise this argument, a defendant must show that she consulted an attorney she believed to be competent, acted in good faith, made a complete disclosure to her adviser, and acted in a manner strictly consistent with the advice she received. See Poludniak, 657 F2d 948 (8th Cir. 1981).
50 Meneilly, 28 FedAppx 26 (2d Cir. 2001), cert. denied, 535 US 989 (2002).
51 Id. at 30.
52 Pinkerton, 328 US 640 (1946).
53 In some circumstances, a defendant found to have belonged to a conspiracy can be held guilty of a substantive crime committed by a fellow conspirator pursuant to the illegal agreement. See Pinkerton,328 US 640 (1946).
54 Co-conspirators are responsible for “reasonably foreseeable acts” committed in furtherance of the illegal plan. Sand, Modern Federal Jury Instructions, at Inst. 19-9.
55 See Covelli, 738 F2d 847, 858–59 (7th Cir.), cert. denied, 469 US 867 (1984).
56 See Sacco, 436 F2d 780, 783 (2d Cir.), cert. denied,404 US 834 (1971).
57 See Braverman, 317 US 49 (1942).
58 Sand, Modern Federal Jury Instructions,at Inst. 19-8.
59 See Tuohey, 867 F2d 534 (9th Cir. 1989). Tuohey involved a conspiracy to defraud the federal government. Tuohey and others conspired to avoid an FDIC reporting requirement. The court upheld the conviction even though violation of the banking law at issue was only a civil offense.
60 In Jimenez Recio, 537 US 270 (2003), the Supreme Court overturned a lower court ruling that a conspiracy ends once government intervention makes the plan’s goals impossible to achieve. The Court wrote, “A conspiracy does not automatically terminate simply because the Government, unbeknownst to some of the conspirators, has ‘defeat[ed]’ the conspiracy’s ‘object.’”
61 Withdrawal can be accomplished by giving timely warnings to the IRS, by acting to make previous efforts in the commission of the crime ineffective, or by taking appropriate steps to prevent the commission of the crime (Sand, Modern Federal Jury Instructions,at Inst. 19-10). In a tax case this might occur where a defendant who initially agreed to pay a portion of an employee’s compensation “under the table” later has a change of heart and issues a Form W-2 accurately reporting all of the employee’s income.
62 Nowak, 448 F2d 134 (7th Cir. 1971), cert. denied, 404 US 1039 (1972).
63 See Piva, 870 F2d 753, 757 (1st Cir. 1989).
64 See Nowak, 448 F2d 134, 139 (7th Cir. 1971), cert. denied, 404 US 1039 (1972) (holding that a defendant attorney’s resignation was not sufficient to constitute a withdrawal from the plan).
65 Ingredient Tech. Corp., 698 F2d 88, 98 (2d Cir.), cert. denied, 462 US 1131 (1983).
66 18 USC Section 1621. Persons who give false testimony under oath before a grand jury or court could be prosecuted under 18 USC Section 1623 instead of Section 1621. The latter is a broader statute, permitting prosecutions where the false statement is made in nonjudicial proceedings, such as an administrative hearing or during an investigation. See Sand, Modern Federal Jury Instructions,Inst. 48-1, Comment at 48-4. Regardless of whether the charge is levied under Section 1621 or Section 1623, the offenses are punishable by a fine and up to five years in prison (18 USC Section 1623(a)).
67 See the discussion of the “two-witness” rule below.
68 18 USC Section 1621.
69 Apfelbaum, 445 US 115, 117 (1980).
70 Sec. 6065.
71 18 USC Section 1621.
72 Smith, 169 F2d 118 (6th Cir. 1948).
73 Fawley, 137 F3d 458 (7th Cir. 1998).
74 Sand, Modern Federal Jury Instructions,Inst. 48-21.
75 See Bronston, 409 US 352 (1973).
76 See Weiler, 323 US 606 (1945).
77 Chaplin, 25 F3d 1373, 1378 (7th Cir. 1994). The two-witness rule also does not apply to prosecutions under 18 USC Section 1623 (18 USC Section 1623(e)).
78 18 USC Section 1621.
79 Sand, Modern Federal Jury Instructions,at Inst. 48-10.
80 Eckhardt, 843 F2d 989 (7th Cir.), cert. denied, 488 US 839 (1988).
81 18 USC Section 1621.
82 Fawley, 137 F3d 458, 469 (7th Cir. 1998).
83 Dunnigan, 507 US 87, 94 (1993).
84 Sand, Modern Federal Jury Instructions,at Inst. 48-12.
85 See, e.g., Edelman, 1993 U.S. App. LEXIS 4898 (9th Cir.).
86 See Brogan,522 US 398 (1998).
87 Id. at 401. A similar rule applies in perjury cases (Apfelbaum, 445 US 115 (1980)).
88 Brogan, 522 US at 401.
89 Secor, 73 FedAppx 554 (4th Cir. 2003).
90 See, e.g., Payner, 447 US 727 (1980).
91 In general, the maximum sentence under Section 1001 is a fine plus up to five years in prison. Sec. 7206(1) provides for three years plus a fine.
92 18 USC Section 3282.
93 Sec. 6531.
94 Ratner, 464 F2d 101 (9th Cir. 1972). The false statements statute also can apply where a writing or document that contains materially false or fraudulent information is submitted to the federal government (18 USC Section 1001). The writing need not have been personally prepared by the defendant as long as he caused it to be used (Sand, Modern Federal Jury Instructions, at Inst. 36-16).
95 Shah, 44 F3d 285 (5th Cir. 1995).
96 Corsino, 812 F2d 26 (1st Cir. 1987).
97 18 USC Section 1001(a)(2).
98 Gaudin, 515 US 506 (1995). Actual reliance by the government on the false statement is not required. See Rogers, 118 F3d 466 (6th Cir. 1997). Similar principles are used in perjury cases. See text accompanying note 79, above.
99 Rigdon, 874 F2d 774 (11th Cir.), cert. denied, 493 US 958 (1989).
101 18 USC Section 1001.
102 See, e.g., West,666 F2d 16 (2d Cir. 1981).
103 Johnson, 730 F2d 683 (11th Cir.), cert. denied, 469 US 867 (1984).
104 Smith, 523 F2d 771 (5th Cir. 1975), cert. denied, 429 US 817 (1976).
105 It is generally not necessary to show a defendant actually knew the false statement was to be used in a matter under federal jurisdiction (Sand, Modern Federal Jury Instructions,at Inst. 36-8). In some cases, however, IRS materials make explicit reference to the possibility of prosecution under Section 1001 where false statements are made. See, e.g., IRS Circular 230, Section 10.64, under which an answer to a complaint seeking censure, suspension, or disbarment of a practitioner in IRS practice must be signed with an acknowledgment of the false statements statute.
106 Edelman, 1993 U.S. App. LEXIS 4898 (9th Cir.).
107 Section 903 of the Sarbanes-Oxley Act, P.L. 107-204, increased the maximum jail sentence for mail fraud from 5 to 20 years (18 USC Section 1341).
108 18 USC Section 1343.
109 Helmsley, 941 F2d 71 (2d Cir. 1991), cert. denied, 502 US 1091 (1992).
110 Id. at 77. See also Pasquantino, 544 US 349 (2005) (tax case involving wire fraud).
111 Sand, Modern Federal Jury Instructions,at Inst. 44-4. Mail or wire fraud can also be prosecuted in cases involving a plan to deprive a victim of the intangible right to honest services (18 USC Section 1346). However, courts have held that a false or fraudulent statement required for a fraud conviction must involve a factual assertion that can be true or false. See, e.g., Williams, 458 US 279 (1982), where the Supreme Court ruled that a defendant who passed a negotiable instrument in a check-kiting scheme could not be treated as making a false statement under federal law applicable to financial institutions.
112 Stull, 743 F2d 439, 446 n.7 (6th Cir. 1984), cert. denied, 470 US 1062 (1985) (statements made without a reasonable basis, or with reckless indifference, also may be treated as false for mail and wire fraud purposes).
113 DiNome, 86 F3d 277 (2d Cir. 1996).
114 In Weiss, 752 F2d 777 (2d Cir.), cert. denied, 474 US 944 (1985), a corporate officer was convicted of mail fraud, among other charges, in connection with a plan involving cash rebates from various stock purchases and forged invoices. On appeal, the conviction was upheld. The court ruled that where a fiduciary is under a duty to disclose material information and fails to do so, mail fraud can be charged, assuming the nondisclosure could or does result in harm to another. But see Cassiere, 4 F3d 1006, 1022 (1st Cir. 1993) (breach of fiduciary duty, by itself, is not criminal under these statutes).
115 DiNome,86 F3d 277 (2d Cir. 1996).
116 The government is not required to show that the victim suffered an actual loss. See Deters, 184 F3d 1253, 1258 (10th Cir. 1999).
117 Czubinski, 106 F3d 1069 (1st Cir.
118 Id. at 1072.
119 Id. at 1075–76.
120 For federal taxes, see Jones, 938 F2d 737, 741 (7th Cir. 1991). For a similar holding regarding state tax obligations, see Helmsley, 941 F2d 71 (2d Cir. 1991).
121 The defendant’s actions cannot have been the result of mistake or accident (Sand, Modern Federal Jury Instructions, at Inst. 44-5). The intent element also is read as requiring a sufficient degree of participation, in addition to the intent required to participate (Maxwell, 920 F2d 1028, 1036 (D.C. Cir. 1990)). This is an issue where a defendant played only a minor role in the plan (Sand, Modern Federal Jury Instructions,Inst. 44-5, Comment).
122 Porcelli, 865 F2d 1352 (2d Cir.), cert. denied, 493 US 810 (1989). In Porcelli, the defendant offered his accountant a bribe of $20,000 to plead guilty and take sole responsibility for the tax fraud scheme (865 F2d at 1357).
123 Alkins, 925 F2d 541 (2d Cir. 1991). A genuine belief that the scheme ultimately will work out does not excuse fraudulent misrepresentations (Sand, Modern Federal Jury Instructions,Inst. 44-5, Comment). However, in Rossomando, 144 F3d 197 (2d Cir. 1998), a defendant received a disability pension, the amount of which depended in part on the outside income he earned. On several yearly statements, the defendant underreported his finances but apparently believed the misstatements would not affect the moneys paid to him. Rossomando’s conviction for mail fraud was reversed on appeal. The court held that a defendant who believed his actions would never result in financial loss to the victim lacked the intent required by the statute.
124 See Moran, 493 F3d 1002 (9th Cir. 2007).
125 The statute requires that the defendant “caused” the use of the mails. This means the defendant actually mailed the material, knew that the use of the mails would occur, or should reasonably have foreseen the use of the mails, even where a mailing was not actually intended (Sand, Modern Federal Jury Instructions,Inst. 44-6, Comment).
126 Mangan, 575 F2d 32 (2d Cir.), cert. denied, 439 US 931 (1978).
127 Helmsley, 941 F2d 71, 95 (2d Cir. 1991), cert. denied, 502 US 1091 (1992).
128 Sand, Modern Federal Jury Instructions,Inst. 44-7.
129 Of course, there are cases involving accountants who were affirmatively involved in wrongdoing. See, e.g., Meeker, where a CPA who offered investment services as part of his tax practice pled guilty to mail fraud as a result of a scheme in which he bilked 76 persons and two small businesses out of nearly $3.8 million over eight years (411 F3d 736 (6th Cir. 2005)). See also Ross, where an accountant was convicted of wire fraud and other counts in connection with a plan to submit false tax returns and other fraudulent documents as part of applications for clients to obtain bank loans (245 F3d 577 (6th Cir. 2001)).
130 In Porcelli, the accountant realized that printed summaries provided by oil companies supplying the defendant with gasoline for sale at his stations did not support the results reported to New York State for sales tax purposes (865 F2d 1352 (2d Cir. 1989), cert. denied, 493 U.S. 810 (1989)).
131 For example, in New York State, the Board of Regents of the state education department has the authority to punish unprofessional conduct by public accountants by suspending or revoking their licenses, and public accountants are required to report to the department conviction of any crime within 45 days (Rules of the New York Board of Regents §29.10(e)).