Tax Preparer Fraud
Those who do daily or seasonal work as preparers of tax returns and claims for refunds are held to a high standard of conduct in the course of their duties involving tax documents. The relevant legislation exacts penalties when those standards get violated. They put accounting professions at risk for tax preparer fraud.
If we look at the statute in 26 U.S.C. § 6694, we find that it imposes standards of return preparation. Then § 6695 outlines disclosure and signature requirements with respect to returns; § 7206(2) provides that a preparer who willfully aids and assists in the preparation of a false return could face felony charges. Preparers are also under a legal obligation to comply with IRS Circular 230.
What Can be Considered Tax Preparer Fraud?
In a criminal tax evasion case, generally the taxpayer inflates his expenses or conceals income. In contrast, preparer fraud takes place when the tax preparer is the one who commits the fraud. This is often a professional, such as a CPA, but it need not be. The legal definition of “tax preparer” is maximally broad. According to 26 U.S.C. 7701(a)(36), it includes “any person who prepares for compensation… any return.”
Tax preparers can be subject to criminal or civil liability for helping another person to commit tax fraud or evasion. If certain conditions are met, it could even result in a felony, the imputation of liability to the preparer’s firm, and/or the permanent revocation of one’s license to practice as a preparer. Frequently, a preparer’s existing clients are notified of the charges against the preparer. Indeed, this could spell financial and social ruin for the accused tax preparer.
In fact, any misstatement of a material fact is enough to constitute a violation of 26 U.S.C. § 7206(2), even if it does not result in a loss of revenue to the government. (See Edwards v United States, 375 F.2d 862 (9th Cir. 1967))
To convict a preparer for tax preparer fraud, it must be demonstrated that they willfully made a false material statement on a return. Further, the government must show each of the following beyond a reasonable doubt.
That the preparer signed a return that contained a declaration that it was made under penalties of perjury;
That the return contains any false statements;
That the preparer was aware the statement was false;
That the statement was material; and
That the preparer made the statement “willfully”, that is with intent to violate a legal duty
Competent counsel will make it as hard as possible for the government to prove its case against you. Indeed, a violation of 26 U.S.C. §7206(1) can result in a fine of $100,000 on conviction (or $500,000 for a corporation), and up to 3 years in prison.
Whether a false statement is “material” is not determined by a simple rule. On the other hand, it is determined on a facts-and-circumstances basis. Competent legal counsel will have the experience to properly inform you whether your misstatement is material. Also, they can help you decide, in effort to avoid more severe penalties, whether it would be advisable to disclose to the IRS the misstatement before it is discovered by them.
In addition to being liable for a violation of 26 U.S.C. §7206(1), a tax preparer and his or her firm may be liable for other numerous acts or omissions.
More Scrutiny on the Actions of Tax Preparers and Professionals
In recent years, signs from the IRS indicate that we are entering a period of heightened scrutiny for taxpayers as well as tax preparers and professionals who have previously stayed under the agency’s radar. This is particularly the case as the Covid-19 pandemic begins to subside and IRS operations return to normal. The traditional weapons the IRS has used against preparers have included return penalties and injunctions against preparers and promoters, OPR sanctions, and, at times, criminal tax charges, typically under conspiracy and aiding and abetting laws. Moreover, there are multiple sections of the code that impose reporting and other requirements on “material advisers” such as tax preparers, EAs, CTEC certified preparers, Tax Lawyers or Accountants / CPAs. Specifically, the agency has made it clear to the public that they plan on going after more cases against tax preparers for fraud related to micro-captive insurance and conservative easement cases. Before this time, these types of cases may have attracted only civil scrutiny, but they are presently being referred to the IRS criminal investigation unit.
The implications of this modern focus on criminal enforcement against tax preparers are likely to end up being far-reaching. For tax preparers and professionals, you will need to conduct more due diligence than ever before regarding potential fraudulent schemes by taxpayers which. Unlike tax attorneys, accountants and other tax preparers have no form of privilege that prevents them for being called as a witness in a criminal tax matter against their client. Tax preparers also need to be sure to comply with all AICPA & local tax ethics rules and Circular 230, including getting conflict waivers where appropriate.
If you find out that one of your clients has been referred for federal of state criminal tax investigation, or if you have any other suspicion that you may face criminal or civil tax penalties for your conduct, you should reach out to an well informed and seasoned dual licensed Tax Law Attorney & CPA like those at our firm right away. We will do our best to address whatever problem exists in its early stages before any criminal tax charges can be filed against you. We will work hard to abate or avoid preparer penalties wherever possible.
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