Fraud & False Statements

A. Fraud and False Statements Statute – IRC 7206

Any person who-

(1) DECLARATION UNDER PENALTIES OF PERJURY.–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) AID OR ASSISTANCE.–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;

(4) REMOVAL OR CONCEALMENT WITH INTENT TO DEFRAUD.-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 or any tax imposed by this title;

(5) COMPROMISES AND CLOSING AGREEMENTS.–In 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) Concealment of property. 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) Withholding, falsifying, and destroying records. Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, related to the estate or financial condition of the taxpayer or other person liable in respect of 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.

 

B. Interpretation of IRC 7206

This statute creates 4 crimes: (1) false statements under penalty of perjury; (2) aiding or abetting the preparation of a false or fraudulent document; (3) removal or concealment of property with intent to defraud; and (4) concealment of property or withholding, falsifying, or destroying records in connection with a civil or criminal compromise.

The most commonly committed crimes under this section are for false statements under penalty of perjury, and aiding or abetting the preparation of a false or fraudulent document. As the tax return itself is submitted under penalty of perjury, the most common of these violations are false inflation of deductions and under reporting of income.

A tax deficiency is irrelevant for a violation, but the existence and amount of tax deficiency can influence the probability of charges being brought and the sentence handed down.

1. Declarations Under Penalty of Perjury

a. Elements of the Crime

The elements of the crime are:

  1. Making and signing a return or other document which has material false statements;
  2. The return or other document contains a declaration that it was made under penalty of perjury;
  3. The maker did not believe the return or document to be completely true and correct as to every material matter; and
  4. The maker willfully signed the return or other document with the specific intent to violate the law.

The statute of limitations for this crime is 6 years.

b. Examples of Other Documents

In addition to returns, prosecutions based on other documents include:

  • Collection Information Statements in Forms 433-AB and 433-A
  • Financial information statements submitted for settlement purposes
  • Offer in Compromise Form 656
  • Application for extension of time to file a return
  • Schedule C
  • Schedule B
  • Form W-2

c. Willfulness

The maker of the document must have acted with knowledge that the conduct was unlawful. This is specific intent crime and this element is not met if the conduct was due to negligence, inadvertence, or mistake, or the result of a good faith misunderstanding. Willfulness must generally be inferred from circumstantial evidence.

Reliance on a qualified tax preparer is an affirmative defense if the taxpayer can show that they provided the preparer with complete information.

d. Materiality

There are a number of tests to determine whether the matter in the document is material, including:

  • Does the item need to be reported correctly to allow the taxpayer to correctly estimate and compute their tax liability?
  • Does the item have a tendency to influence the IRS in its processing of the return?
  • Omitted items could be material if they should have been reported on the return.
  • Are falsely reported items affirmative false entries that could have a direct bearing on income figures?
  • The Seventh and Third Circuits apply the literal truth doctrine which says that the falsely reported item must be found in a statement called for the tax form itself to be a violation of section 7206.

Materiality used to be a question of law to be decided by the court, but the Supreme Court reversed that precedent in US v. Gaudin, 515 U.S. 506 (1995) when it held that all elements of a crime must be submitted to the jury. There are several exceptions to Gaudin in prosecutions for this crime, including:

  • Non-Factual Determinations. The Second Circuit has adopted a non-factual determination exception to Gaudin, and held that whether itemized deductions and charitable contributions were false as to a material matter is a question of law. This holding has been criticized in the Ninth Circuit.
  • Plain Error Standard of Review. When the District Court fails to submit the materiality decision to the jury, the reviewing courts can find that the errors are harmless and do not constitute grounds for reversal if the error did not prejudice the rights of the complaining party, the complaining party would not have prevailed despite the error, or so long as the error did not affect the fairness, integrity or public perception of judicial proceedings. Evidence of overwhelming materiality or evidence that the defendant grossly understated income is generally sufficient for the IRS to prevail on the plain error standard of review. The First Circuit has not fully adopted this exception.

2. Aiding or Assisting the Preparation of a False or Fraudulent Document

a. Elements of the Crime

The elements of the crime are:

  1. Aiding or assisting, or counseling or advising the preparation of a return or other document; and
  2. The return or document was fraudulent or false as to a material matter.

The statute of limitations for this crime is 6 years.

b. Persons Liable

Persons liable for this crime can generally include:

  • Tax preparers
  • Corporate officers
  • Corporate tax form preparers
  • Tax shelter promoters
  • Promoters of not filing tax returns

c. Materiality and Willfulness

The requirements of materiality and willfulness are substantively similar to other crimes under this statute as described above. There are some other important considerations under willfulness, including:

  • A pattern of falsity can support an inference of willfulness.
  • A tax preparer can rely on good faith without verification of the information provided by clients, but the preparer must make reasonable inquiries if the information appears to be incorrect.

3. Removal or Concealment with Intent to Defraud

The elements of the crime are:

  1. Defendant removes deposits or conceals;
  2. Property where a tax is or shall be imposed, or any property upon which a levy is authorized; and
  3. Intends to evade or defeat the assessment or collection of any tax.

The statute of limitations for this crime is 3 years.

It should be noted that this crime does not use the word “willfully.” Instead, “intent to evade or defeat” is used. Therefore, the IRS must show that the defendant’s purpose in their actions was to evade or defeat the collection of assessment of tax.

4. Compromises and Closing Agreements

This crime prevents the willful concealment of property, or withholding, falsification, or destruction of records, or making of false statement in connection with a closing agreement or civil or criminal compromise.

The statute of limitations for this crime is 3 years.

C. Conclusion

Care must be exercised if you are or suspect you are being investigated by the IRS for one of these crimes. These crimes carry a three year sentence in federal prison, and they have elements that are very similar to the even more serious evasion charges. If you are or suspect you are being investigated by the IRS, then it is important that you have counsel to assist you in interrogations and investigation. Call our office at (408) 459-8427 for criminal legal representation.