Avoiding 7206 felony

You will note from the language highlighted below, mere advice or assistance with a tax return, if false, is a section 7206 felony with jail time. The trap for the unwary tax return preparer is that they could have a wrong opinion on the tax law or use false facts, IN RELIANCE ON A CLIENT, and that can be viewed as a felony. Tax fraud is subjective due to the word "willful." However, the courts still determine "willfulness" by circumstantial evidence. This blog is another heads-up that a return preparar has the additional motivation to do the adequate tax research and analysis to avoid a criminal fraud conviction just as much as they need to avoid a 6694 penalty. Reade the language of the 7206 statute below very carefully.

7206(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

7206(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; or

7206(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 --

or

7206(5)(B) WITHHOLDING, FALSIFYING, AND DESTROYING RECORDS. --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 other person liable in respect of the tax.

The following recent case involved a 7206 issue for an individual. The facts could also apply to a tax return preparer. What I find interesting in this case is that the conviction was upheld because the taxpayer kept careful records and, therefore, should have known that he was using false data. For those of you who file competent tax returns and keept great records, the implication is that if there is an omitted item of income or a distortion of expenses or deductions, you should have known about that erroneous item. This case is another warning that return preparers need to verify facts, research the applicable law, and reach reasonable conclusions. Do not lose sight of the fact that the DOJ loves to prosecute return preparers and the IRS Criminal Division does carefully track distortions in tax returns.

What you think is "negligence" may be facts that the IRS or the DOJ think is "willful." In many cases, "negligenc" and the 6694(b) penalty is closely related dto 7606 fraud. Section 6694(b) applies to willful and reckless conduct. It is my personal opinion that all 6694(b) cases place into issue the 7206 felony statute.




United States v. Scott Francis Creasia, U.S. Court of Appeals, 9th Circuit; 07-10265, November 18, 2008.


An individual was properly convicted of filing a false income tax return because the evidence was sufficient to find that the individual willfully filed tax returns that he did not believe were true and correct as to every material matter. Since the individual was a successful small business owner who kept careful records and reviewed his tax returns, the jury could reasonably infer that the individual had knowledge of the documents that he signed in furtherance of his stated intent to reduce tax liability.

The evidence was adequate to show that Creasia acted willfully: (1) Creasia signed documents creating a joint venture where he was a 25% member and only claimed 25% of income from the business on his tax return, even though he continued to receive all of the income from his business and operate and insure the business as a sole proprietorship; and (2) Creasia entered into a loan for $675,000 which was expensed on the tax return as a business loss, even though Creasia later stated that he had forgotten about such a substantial loan because he did not have to repay it. Further, the jury's determination that Creasia acted willfully in filing false tax returns negates his argument that he relied in good faith on the advice of a tax professional. See, e.g., United States v. Claiborne, 765 F.2d 784, 798 (9th Cir. 1985) (reliance on a qualified tax accountant must be in good faith), abrogated on other grounds by Ross v. Oklahoma, 487 U.S. 81 (1988).

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The moral of the story is for return preparers to be aware of distortions of net taxable income. If you are uncomfortable with the facts you are looking at, do not prepare the tax return. If you are unsure of the correct analysis or applicable law, have your client contact a competent tax attorney.

Even though the proposed 6694 regulations indicate that you can generally rely on data received from a client, you are the person who could be subject to civil and criminal penalties if the data you rely on is false. How would you you know it is false data? Obviously, carefully check out the source data and substantiation. Do not prepare tax returns dealing with issues when you are uncertain about the tax law.

For any matters that appear to be false or questionable, contact ab@irstaxattorney.com. Alvin Brown & Associates represents taxpayers in civl and criminal tax matters. A tax attorney can also about transactions that may be wrong in previously filed tax returns.

If the data and law pertain to a prior tax return, make sure your client amends the erroneous tax return. The DOJ will not prosecute anyone who willfully wants to prefect previous errors in tax returns because it is a compliance effort and not tax evasion conduct.