The Blanch Law Firm has experience representing ‘white collar’ criminal defendants in complex matters of securities and tax evasion. One of the most common defendants in criminal tax fraud cases is that of the return preparer – often a certified public accountant or other professional person who is compensated for their expertise in filing a tax return. Many times, whether from pressure to deliver for a demanding client or for their own gain, the professional may err when filing these returns or computing taxes owed, to their detriment.
Under the law, this individual is defined as any person – including a partnership or corporation – who prepares, for compensation, all or a substantial part of a tax return or claim for refund under the provisions of the Internal Revenue Code or state tax provisions. Typically, a return preparer becomes abusive if they claim inflated expenses, create false deductions, or use excessive exemptions. Even worse, the clients may not have any knowledge about these actions.
I. FEDERAL
Statutes Affecting Tax Preparers
In addition to the more general tax fraud crimes discussed elsewhere on this site, tax preparers face heightened standards for which they can be held liable under the law.
26 USC 7206 – Fraud and False Statements: Any person who:
(1) Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or
(2) Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or
(3) Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or
(4) Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or
(5) connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully —
a. Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or
b. Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or another person liable in respect of the tax;
shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.
This statute contains global requirements under the law for the tax preparers. All elements have either an element of willfulness or intent, a crucial thing for the prosecution to have to prove.
The IRS also implements several specific provisions concerning the disclosure and signature requirements for a tax preparer under 26 USC § 6695. Each violation of these rules carries a $50 penalty, with the criminal penalties being capped at a total of $25,000 for each offense. Essentially, 6695 requires tax return preparers to sign their claims, comply with the rules for returning a refund to their paying clients, not endorse a taxpayer’s check without their permission, and conduct due diligence for various exemptions.
Obtaining a conviction can be difficult in tax fraud crimes, because the prosecutors must show that the tax preparer had the intent to wrongfully prepare a tax return. This difficulty is compounded when a tax preparer may simply have been relying on their client’s information, and therefore were not willfully aiding and abetting tax fraud. A one-time mistake or anomaly will probably not be enough for a conviction. However, if the prosecution can show that a tax preparer made the same claim on multiple tax returns over multiple years (such as the same amount of a charitable deduction), this would be a stronger case for intent.
In 1996, the IRS founded the Criminal Investigation Return Preparer Program (RPP) to identify, investigate and prosecute these abusive return preparers. Later, in 2010, the IRS created an oversight program aimed at regulating paid tax return preparers. Essentially, the program requires tax prepares to apply for a ‘Preparer Tax Identification Number’ (PTIN) every year. Anyone who assists or prepares a federal tax return for compensation is required to have a PTIN. This allows the IRS to track preparers more easily, meaning if there is anyone engaging in unscrupulous behavior, they will be found more efficiently. The IRS’s Criminal Investigations Division also investigates professional preparers. Plus, the IRS encourages members of the public to file an official complaint about their tax preparer if they acted improperly. Misconduct includes embezzling your refund, altering your tax documents, filing a return without your consent, using an incorrect filing status to get a larger refund, and creating false expenses or exemption for a larger refund.
Often, the investigators will interview former clients of the preparer to determine how the preparer worked, and clarify whether the preparer’s actions were intentional. They will ask about the process of filing the return, whether the client would meet with them and how often. Of course, this is also aimed at mitigating any defense the preparer would have if they assert that they were merely the conduits for their clients to the IRS. If the client tells the IRS early on something else entirely, this would seriously weaken any defense that could be presented, at least in this regard.
Tax preparers often develop creative schemes in order to avoid detection from the IRS. Daniel Bewley owned his own tax service in Illinois. He is alleged to have charged customers $100 to prepare their tax returns. He inflated their deductions, electronically filed them and had their tax refunds deposited in his own bank account rather than theirs. He then transferred the money to their individual accounts, allegedly paying himself in the process. He characterized the inflated portion of the funds as preparer fees at a whopping $999 return. He has been indicted on 25 counts, including filing false income tax returns, wire fraud, and false claims against the government.
One tax return preparer was indicted in late 2016 for aiding and assisting in the preparation of false income tax returns. Vanya Thompson ran a tax return business, operating under multiple names such as Lyn Services and Katie’s Multi-Service. She falsified items on her clients’ tax returns, including charitable deductions, business income, expenses, and losses, ultimately causing the IRS to be defrauded out of $250,000.
The State of New York has fairly strict codes applicable to professional tax preparers, found in 20 New York Code, Rules and Regulations 2600. However, these provisions are generally civil in nature, although there is some interplay, as in Section 2600-5.1, which mandates sanctions upon a criminal conviction associated with that person’s role as a tax preparer. Any good defense attorney should always consider the collateral consequences associated with pleading guilty to a crime. Tax preparers are no exception.
The criminal statutes listed out here also apply to tax preparers in New York (specifically, New York Tax Law 1801). New York also has similar laws for disclosure and preparation. New York Tax Law 1833 makes it a crime for any commercial tax preparer who fails to sign his or her name to a tax return that requires a signature, as well as failing to register as a tax preparer. This failure is a class A misdemeanor.
Like the IRS, New York has created a program requiring tax preparers to register. Across the country, there are a large number of independent paid preparers who are – for the most part – unregulated and do not have to show they have any particular expertise in handling taxes. New York is one state that requires paid preparers to meet minimum education and competency standards.
The rules for these preparers are based on the IRS’s Circular 230. The New York Department of Taxation and Finance developed the program in response to problems within the tax preparer industry and the impact of said problems on consumers of their services. In 2014, New York issued regulations concerning the eligibility for someone to prepare taxes in New York and is one of the most comprehensive programs in the country. This program obliges preparers to follow certain rules and procedures, including cooperating with the Tax Department, responding promptly to any request for records related to a return prepared by the individual, and not interfere with any investigation.
To that end, tax preparers can expect to get served with a subpoena if there is an investigation around any of the returns they prepared. Failure to obey the subpoena could result in contempt of court – a criminal charge. If you are served with a subpoena, seek out the advice of an experienced attorney as soon as possible. There may be defenses or objections on the subpoena that could either reduce the amount of documents you must produce or prevent you from having to produce anything entirely.
The same division in New York that prosecutes individual tax fraud crimes also prosecutes preparer crimes: the office of the Attorney General and various District Attorney’s offices across the state. With the help of investigative agencies such as the Criminal Investigation Division of the New York Department of Taxation and Finance, the prosecution often has the advantage over the defense – at least at first. Their investigative agencies have probably done months and months of research and case building against their targets before they actually arrest them for anything. Prosecutors will usually not bring a case to trial unless they are reasonably confident of obtaining a conviction based on the evidence. However, a good criminal defense attorney can mitigate and combat what the prosecution finds.
First, the prosecution has a heavy burden to prove that the defendant acted willfully, rather than merely taking orders from his or her clients. This means that the prosecution would need to gather enough evidence to show a jury or a judge someone’s subjective state of mind at the time of their act – which is not easy to do. Next, if it appears that the state has a good chance of being able to do that, a defense attorney may be able to negotiate a reasonable plea bargain, meaning their clients avoid jail time or serious fines by agreeing to plead guilty to a certain crime. Of course, as mentioned, there are collateral consequences to this, including loss of professional license, sanctions from private governing bodies, and a loss of reputation. If your defense attorney comes to you with a plea deal, you need to be sure you understand all of the potential ramifications of accepting one.
Three people arrested in April 2017 for their role in fraudulently filing New York State tax returns. Three individuals worked at Gold Mind Taxes in the Bronx, and are accused of claiming a large number of dependents on New York State returns to maximize refunds for their clients. All of the dependents had social security numbers associated with residents in Puerto Rico.
Earlier that same month, two individuals in Staten Island were charged with 49 counts of criminal tax fraud and offering a false instrument for filing. Since 2011, the individual allegedly prepared several thousand returns with almost half of them claiming unsubstantiated and unusually high job expenses.
These two arrests were the result of “Operation Breaking Bad Preparers,” a scheme aimed at cracking down on tax preparers filing fraudulent returns, developed by the New York State Department of Taxation and Finance.
Both state and federal agencies are making tax fraud investigations one of their top priorities because of how lucrative and successful it can be. It is crucial to obtain the knowledge and skills of a criminal defense attorney if you are the target of a tax fraud investigation.
