Chapter 17

What Is the Criminal Tax Fraud and False Statement?

There have been many stories written and reported about Donald Trump’s confidential tax returns and financial records. According to a NY Times article, there exists “a trove” of records showing that Mr. Trump helped his father sequester millions of dollars from the IRS. 

Trump declined to comment on this particular article, but one of his lawyers, Mr. Charles J. Harder, stated that Trump “had virtually no involvement whatsoever with these matters...the affairs were handled by other Trump family members who were not experts themselves and therefore relied entirely upon licensed professionals to ensure full compliance with the law.”

If you and/or your tax preparer have expertly or inexpertly taken false tax deductions or supplied fraudulent income statements and have now come to the attention of the IRS, you may be charged with the criminal tax act of fraud and false statement. If this is the case, it would be a very good idea to get in touch with me.

Understanding Fraud and False Statement

As you will come to more fully comprehend, fraud and false statements are two of the most commonly charged tax crimes. 26 U.S.C. § 7206 (1) and (2) makes it a crime to deliberately make or assist another person in making any IRS document that the maker does not believe to be true and correct. 

If the Trump case and point isn’t clear enough, here’s a more simple example: John Doe is filling out his tax return. John Doe makes $87,000.00 annually, but he doesn’t like the number seven, so decides to round down to $80,000.00. John Doe signs his return and mails it into the IRS using the $80,000.00 number. John Doe could be charged with making a false return under section 7206(1)

Say John Doe actually asked his friend in accounting school for help, and his friend tells him to round down to $80,000.00 (consequently putting John Doe in a new tax bracket) and send it in, his friend could be charged for assisting under section 7206(2)

The offense of aiding or assisting in the preparation or presentation of a false document is intended to target tax return preparers, but there is no requirement that the individual be a professional. 

Anyone who knowingly assists in any way in the preparation of an IRS document that is untruthful, can be found guilty of this crime. United States v. McCrane, 527 F.2d 906, 913 (3d Cir. 1975), vacated on other grounds, 427 U.S. 909, reaff’d in relevant part on remand, 547 F.2d 204 (3d Cir. 1976) (per curiam). 

The statute “has a broad sweep, making all forms of willful assistance in preparing a false return an offense.” United States v. Hooks, 848 F.2d 785, 791 (7th Cir. 1988).

In our example John Doe was filling out a tax return, and this is one of the most common false documents, offenses under these sections are not limited to only tax returns. 

Any document which is signed under the penalty of perjury can fall under section 7206. United States v. Marston, 517 F.3d 996, 1002 (8th Cir. 2008). This becomes important in a situation where the form doesn’t actually count as a return. If instead fake numbers, John Doe filed a form with all blanks or symbols, this may not be legally considered a tax return. However, the Government could still charge with John Doe with filing a false document. See e.g., United States v. Mosel, 738 F.2d 157, 158 (6th Cir. 1984); United States v. Rickman, 638 F.2d 182, 184 (10th Cir. 1980); United States v. Moore, 627 F.2d 830, 835 (7th Cir. 1980); United States v. Smith, 618 F.2d 280, 281 (5th Cir.1980), United States v. Long, 618 F.2d 74, 75 (9th Cir. 1980).

How Does the Government Prove Fraud and False Statement?

In order to successfully prove a crime of fraud and false statement, the Government must prove each of an essential set of facts, called elements, beyond a reasonable doubt. See supra. How are Charges Selected? United States v. Marashi, 913 F.2d 724, 735-36 (9th Cir. 1990); United States v. Williams, 875 F.2d 846, 849 (11th Cir. 1989). If the Government fails to prove any one of these elements, the defendant should not be found guilty.

 

The elements of fraud or false statement under section 7206(1) are:

  1. The making and singing of a false IRS document which states that the document is being signed under the “penalties of perjury”;
  2. The document was false as to a material matter;
  3. The taxpayer making the false IRS document did not believe it was true and correct as to every material matter; and
  4. Willfulness.

See United States v. Bishop, 412 U.S. 346, 350 (1973); United States v. Mathews, 761 F.3d 891, 893 (8th Cir. 2014); United States v. Hendrickson, 664 F.Supp.2d 793, 810-11 (E.D. Mich. 2009); United States v. Marabelles, 724 F.2d 1374 (9th Cir. 1984); United States v. Engle, 458 F.2d 1017 (8th Cir. 1972).

For the offense of aiding and assisting, the defendant does not actually need to make or sign the document. Section 7206(2) only has three elements:

  1. The defendant helped, assisted, or advised the preparation or presentation of an IRS document;
  2. The document was false as to a material matter; and
  3. Willfulness.

Like the omission crimes, there is no need here for the Government to show that there was a tax actually due. See United States v. Mathews, 761 F.3d 891, 894 (8th Cir. 2014). The focus of these offenses is not a tax deficiency, but providing known false information to the IRS.

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“Making” and Signing a False Document

In order for a taxpayer to be found guilty of fraud or false statement under section 7206 (1), the taxpayer has to actually file the false IRS document. See, United States v. Boitano, 796 F.3d 1160 (9th Cir. 2015) (“Filing” is an element of a conviction under § 7206(1)). See United States v. Swanson, 112 F.3d 512 (Table), at * 1-2 (4th Cir. 1997); see also United States v. Gilkey, 362 F. Supp. 1069, 1071 (E.D. Pa. 1973); United States v. Horwitz, 247 F. Supp. 412, 413-14 (N.D. Ill. 1965)). 

If you fill out a false tax return, sign it, and leave it sitting on your desk, you have not technically “made” a false return as required under the statute. A tax return can be filed electronically, mailed to an IRS service center, or handed in person to an authorized agent of the IRS in order to meet this condition. §6091(b)(4) and Reg.§1.6091-2.

The Government also has to show that the defendant signed the document under penalty of perjury. The penalty of perjury part is fairly straightforward. The document simply needs to contain language stating that the signer declares the information to be true under penalty of perjury. 

The defendant doesn’t need to personally sign the document, if he gave permission for the return to filed with his signature. United States v. Ponder, 444 F.2d 816, 822 (5th Cir. 1971).

If you are being charged with the offense of aiding or assisting under section 7206 (2), there is no filing or signing requirement, because you do not actually need to make or prepare the false document. 

As long as the defendant willfully had a part in the preparation of a false document or caused a false document to be filed, he or she can be convicted. Therefore, the Government may bring charges under § 7206 (2) even if the false document was not actually filed. United States v. McLain, 646 F.3d 599, 604 (8th Cir. 2010). See also United States v. Cutler, 948 F.2d 691, 695 (10th Cir. 1991); United States v. Monteiro, 871 F.2d 204, 210 (1st Cir. 1989).

The courts have stated that the filing requirement would not make sense for the crime of aiding or assisting a false statement because results of an undercover operation would be useless. The undercover agent would never actually file the fake document, and the crime would not be completed. United States v. Borden, 2007 WL 1128969. 

 

False As To A Material Matter

Just because information on a IRS document is untrue, does not mean the government could support a false statement charge. The dishonest portion of the document must be material. 

False information is material if it has or likely could have an effect on the IRS carrying out its duties or calculating a tax. United States v. Griffin, 524 F.3d 71, 76 (1st Cir. 2008) (citations omitted) ; United States v. McBane, 433 F.3d 344 (3d Cir. 2005). 

Even if the IRS wasn’t actually influenced or affected by the fake information, the information is still material if it had the possibility of influencing or impacting the IRS in their duties, or if the taxpayer intended the false information to have that effect. Genstil v. United States, 326 F.2d 243, 245 (1st Cir. 1964); accord United States v. Romanow, 509 F.2d 26, 28 (1st Cir. 1975).

A false statement on an IRS document can still be material even if it is so ridiculous there is no reason that the IRS would assume it was serious. See United States v. Winchell, 129 F.3d 1093, 1098 (10th Cir. 1997). Omitting material information can also be considered false information. See United States v. Cohen, 544 F.2d 781, 783 (5th Cir. 1977)

Some examples of material information are the source of the income, total income, and improperly claimed deductibles. See e.g., United States v. Engle, 458 F.2d 1017, 1019-20 (8th Cir. 1972); United States v. Vario, 484 F.2d 1052, 1056 (2d Cir. 1973); United States v. DiVarco, 484 F.2d 670, 673 (7th Cir. 1973); United States v. Sun Myung Moon, 532 F. Supp. 1360, 1367 (S.D.N.Y. 1982). 

 

Belief and Willfulness 

If the taxpayer makes an inaccurate statement on an IRS form, it doesn’t automatically mean they are in violation of section 7206(1). Under this section, the Government has to prove that the taxpayer did not believe that the statements were true, and that he or she made them willfully. See United States v. Balistrieri, 346 F. Supp. 341 (E.D. Wis. 1972); United States v. Scarberry, 208 F.3d 228 (10th Cir. 2000); United States v. Jernigan, 411 F.2d 471 (5th Cir. 1969); Escobar v. United States, 388 F.2d 661 (5th Cir. 1967); Gaunt v. United States, 184 F.2d 284 (1st Cir. 1950)

The term willfulness has the same meaning here as it does in the previous sections. See supra. How Does the Government Prove Tax Evasion, Willfulness.

The taxpayer can file an amended return after filing a false return. The Government can’t use the fact that the taxpayer filed an amended return alone to show willfulness. United States v. Dyer, 922 F.2d 105, 108 (2d Cir. 1990).

The Government can use circumstantial evidence (evidence which doesn’t directly support a conclusion, but requires an inference to make a conclusion from a set of facts) to show that the taxpayer knew about the contents of the document. United States v. Lavoie, 433 F.3d 95, 98 (1st Cir. 2005); United States v. Boulerice, 325 F.3d 75, 80 (1st Cir. 2003); United States v. Ytem, 255 F.3d 394, 396-397 (7th Cir. 2001). 

If the taxpayer signed their name to the document, this could show that he or she was aware of the information in it. United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991), United States v. White, 879 F.2d 1509, 1511 (7th Cir. 1989); United States v. Gaines, 690 F.2d 849, 854 (11th Cir. 1982); Paschen v. United States, 70 F.2d 491, 499 (7th Cir. 1934).

However, if the taxpayer relied on a professional, and can show that he or she provided the professional preparer with complete information, this is an affirmative defense to the crime of fraud or false statement under section 7206(1). See United States v. Tandon, 111 F.3d 482, 490 (6th Cir. 1997).

For the offense of aiding or assisting under section 7206(2), a defendant can be found guilty of this charge whether or not the preparer assisting was aware of the false information. United States v. Jennings, 51 Fed. Appx. 98, 99-100 (4th Cir. 2002) (per curiam) (citations omitted). Even if the taxpayer knew the information on the document was false and chose to submit it, this fact does not absolve the preparer of liability.

Similar to the defenses under 7206(1) of reliance on a professional, a tax preparer could defeat a charge of aiding or assisting if they can show they relied in good faith on the information provided by a client. 

However, if the information the client provided appears to be fake, the preparer must make reasonable inquiries to confirm this information. United States v. Akaoula, 1999 WL 61393, *1 (10th Cir. Feb. 10, 1999) (unpublished).

For the actions of the defendant to be willful under 7206(2), the defendant had to know that the actions likely would result in the filing of a false document, or intend for his actions to result in the filing of a false document. See e,g., United States v. Greer, 607 F.2d 1251, 1252 (9th Cir. 1979) (“section 7206(2) requires that the accused must know or believe that his actions will likely lead to the filing of a false return”); United States v. Salerno, 902 F.2d 1429, 1433 (9th Cir. 1990) (casino worker’s conviction reversed because he did not know that his embezzlement scheme would influence false filing); United States v. Aracri, 968 F.2d 1512, 1523 (2d Cir. 1992) cf. United States v. Gurary, 860 F.2d 521, 523-24 (2d Cir. 1988).

Going back to the John Doe example, the Government may not be able to show willfulness if instead of giving John Doe specific advice to round down on his tax return, John Doe’s friend was just telling an unprompted cocktail party story about a guy who rounded down on his tax returns. 

John Doe’s friend could argue he had no intention of causing John Doe to file a false tax return and no idea that this offhand story would influence John Doe to do so. 

 

Venue

The Government can properly bring a charge under §7206, in any district where

the document was signed, filed, or the acts of aiding and assisting took place. See e.g., United States v. Rooney, 866 F.2d 28, 31 (2d Cir. 1989); United States v. Hirshfield, 964 F.2d 318, 321 (4th Cir. 1992); United States v. Newton, 68 F. Supp. 952 (W.D. Va. 1946), aff'd, 162 F.2d 795 (4th Cir. 1947). 

 

Statute of Limitations 

The statute of limitations for the crime of fraud and false statement under 26 U.S.C. § 7206 (1) and (2) is six years.

For a false tax return, the Government has six years to bring charges from the date of filing. However, if the tax return was filed early, the Government has the full six years from the statutory due date (i.e. April 15th) for filing. 26 U.S.C. § 6531(5); United States v. Habig, 390 U.S. 222, 225 (1968); United States v. Marrinson, 832 F.2d 1465, 1475-76;.

For section 7206(2) the six years begins at the time the false document was filed. United States v. Kelly, 864 F.2d 569, 74-75 (7th Cir. 1989); United States v. Nuth, 605 F.2d 229, 235 (6th Cir. 1979); United States v. Kassouf, 959 F. Supp. 450, 452 (N.D. Ohio 1997).

 

What is the Punishment for Fraud and False Statement?

Punishment for a crime varies based on the specific facts of the case as well as the Defendant’s criminal history. However, if you are convicted of a false and fraudulent statement, you could be facing some serious penalties.

Offenses under 26 U.S.C. § 7206 (1) and (2) can be punished by up to three years in prison or five years of probation (you can also have a split sentence of some prison time and some probation time), and a fine of up to $100,000 (or $500,000 for a company), plus the costs to the Government for prosecuting the crime.

 

Conclusion

A fine of $500,000 might be a slap on the wrist for a man or woman of Donald Trump’s wealth. Prison and probation might be a different story, however, and in a case like this, a few months or a couple of years in a cell might grind home a point. Losing one’s freedom and privileges could be said to be a priceless lesson.

If you have tried to save yourself a few bucks cheating on your taxes – let’s call it what it is – as many people do, and you’ve had the “misfortune” to have the IRS get wind of it, give me a call and we’ll work out a plan to keep you out of jail and get you back on the straight and narrow path that, for a short time, you veered from.

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