Procedure & Administration
Tax Practice and the Federal Criminal Code
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 at www.aicpa.org/download/tax/sstsfinal.pdf. 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).
100 Id.
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. 1997).
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)).