Tax Day Brings Barrage of Criminal Tax Charges and Warnings

With “Tax Day” upon us, the Justice Department’s Tax Division and U.S. Attorney’s Offices around the country have unleashed an avalanche of press releases warning would-be tax cheats of the severe criminal and civil consequences they may face.

From the U.S. Attorney’s Office for the Northern District of Illinois comes a press release entitled “Federal Prosecutions Serve as Reminder to Comply with Tax Obligations as Filing Deadline Approaches” announcing criminal charges against four Chicago-area residents for a variety of alleged income tax frauds.  Two Chicago-area tax preparers were charged with assisting clients in obtaining hundreds of thousands of dollars in fraudulent refunds.  The preparers fraudulently reduced their clients’ tax liabilities by misrepresenting their eligibility to claim tax credits, such as dependent exemptions, education and child credits.  In addition, two individuals were indicted for filing hundreds of fraudulent income tax returns that claimed refunds totaling more than $2.1 million.

The U.S. Attorney’s Office for the Eastern District of California has issued a similar press release entitled “Federal Tax Enforcement Is a Focus of Prosecutions in the First Quarter of 2016.”  This release catalogues five new tax indictments so far in 2016, five convictions so far in 2016, and the sentences handed down in tax cases to date this year.  The press release concludes with this statement:  “More criminal tax investigations are underway.”

The U.S. Attorney’s Office for the Middle District of Pennsylvania has issued a lengthy press release entitled “U.S. Attorney And IRS Announce Message To Potential Tax Cheats That Tax Crimes Result In Criminal Prosecution And Lengthy Prison Sentences And Fines And Issue a Fraud Notice To Taxpayers.”  This announcement summarizes recent prosecutions of taxpayers for tax evasion and tax fraud and stolen identity refund fraud.  The release concludes with a “Tax Scam Warning” urging taxpayers to exercise caution during tax season to protect themselves against tax scams.  In particular, taxpayers are warned to avoid the following common tax schemes:

•           Identity Theft

•           Phone Scams

•           Phishing

•           Return Preparer Fraud

•           Offshore Tax Avoidance

•           Inflated Refund Claims

•           Fake Charities

•           Falsely Padding Deductions on Returns

•           Excessive Claims for Business Credits

•           Falsifying Income To Claim Credits

•           Abusive Tax Shelters

•           Frivolous Tax Arguments

In Sacramento, California, the U.S. Attorney announced on April 15 that four individuals, including two current IRS employees, were criminally charged in tax cases.  The two IRS employees, who are married to each other, were arrested when they came to work and were charged with aiding others in the preparation of false tax returns and filing false tax returns themselves.  Separately, an individual was charged with two counts of tax evasion for tax years 2009 and 2010.  Finally, an individual was criminally charged with failing to file tax returns for 2009 through 2012.  In addition to these cases, so far in 2016, eight individuals have been indicted, five have been convicted and 14 were sentenced for either submitting false claims for refunds or evading taxes.

In Alaska, the U.S. Attorney’s Office announced that a criminal defense attorney, who operated a law practice in Anchorage, was sentenced to 14 months in prison following his guilty plea in June 2014 to three counts of willful failure to file income tax returns.  The defendant in that case admitted that he failed to file federal income tax returns with the Internal Revenue Service for the years 2006, 2008, and 2009, causing a tax loss to the government of $886,058.  According to a sentencing memorandum filed by the government, the defendant still has not paid the more than $800,000 in income taxes that he owed for the years 2006, 2008 and 2009.  At the same time that he failed to file his tax returns and pay the taxes due, the defendant made personal expenditures for gambling, cars, and property.  The defendant also failed to file timely income tax returns for the years 2000 through 2004, 2007, 2010 and 2011, failed to file employment tax returns during the years 2004 through 2008, and failed to pay employment taxes to the IRS.  According to documents filed with the court, the defendant also submitted a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to the IRS in 2009.  A Form 433-A is used by the IRS to obtain financial information from a taxpayer to determine his ability to pay an outstanding tax liability.  On the Form 433-A, which he signed under the penalties of perjury, the defendant failed to disclose certain retirement assets.  In a press release announcing the sentencing, the Tax Division’s Acting Assistant Attorney General made the following statement:

“This case is a reminder that no one is above the law,” said Acting Assistant Attorney General Ciraolo.  “Indeed, as an attorney who has defended individuals charged with financial crimes, Mr. Stockler was particularly aware of his obligations under the tax laws and the consequences of violating them.  Taxpayers who willfully disregard their legal responsibilities will be held to account.”

In the Northern District of Ohio, the U.S. Attorney announced today that a businessman was charged with four counts of tax evasion, based upon taking improper tax write-offs and not reporting more than $2 million in taxable income. The defendant is alleged to have diverted corporate funds for his own use to benefit his personal lifestyle, such as to construct a waterfront residence, maintain his yacht, and pay for luxury travel. It was further alleged that the defendant falsely described these expenses as business-related, and provided false information to his accountants about the nature of these expenses. The government alleges that the defendant underreported his taxable income by more than $2 million during tax years 2007, 2008, 2009 and 2010, and owes at least an additional $611,000 in taxes for those periods. According to the IRS Special Agent in Charge, “[a]s this tax filling season comes to a close, we are reminded of our collective duty to accurately file and pay our taxes. Those who willfully abscond from this duty will be pursued and brought to justice.”

Finally, as part of its ongoing efforts to combat return preparer fraud, the Justice Department filed a federal court lawsuit today seeking to shut down a tax return preparer in South Florida.  The civil complaint alleges that the preparer prepares income tax returns that fraudulently understate his customers’ tax liabilities by falsely claiming deductions for business expenses his customers never incurred, fraudulently overstating his customers’ claims for refunds by falsely claiming education or fuel tax credits to which his customers are not entitled, or both.  According to the complaint, the Internal Revenue Service IRS audited 340 of the more than 3,132 returns he prepared since 2009 and found that the preparer understated the tax owed on all but five of the 340 returns—a total of more than $1.8 million in understatements.  As a result of these fraudulent activities, many of the preparer’s customers are now liable for significant tax deficiencies, penalties and interest.

All of these announcements should serve as a reminder, and a stern warning, that taxpayers should take care to ensure that their tax returns are accurate, complete, and filed on time.  Each of the cases described above demonstrate that taxpayers who deliberately understate their income, overstate their deductions,  or otherwise file inaccurate tax returns may subject themselves to criminal liability.  Taxpayers who are unable to file on time today should file for an automatic six month extension of the deadline.

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