Tax Fraud

Larry encountered a complicated issue involving a deduction for his U.S. federal taxes and sought the advice of an attorney who was also a Certified Public Accountant. Larry provided the attorney with all of the relevant information and relied on his advice to take the deduction. Later, an IRS investigation led to Larry being charged with tax fraud. At trial, will Larry likely be successful in asserting reliance on an attorney or accountant as a defense to tax fraud? A. Yes, if the court determines that the expert was qualified based on the facts and circumstances. B. No, because the reliance on an attorney or accountant is not an available defense for criminal violations. C. No, unless Larry can prove that he was not knowledgeable about tax matters. D. Yes, because the expert whose advice was relied upon was a Certified Public Accountant.

A. A suspect or a criminal defendant might raise various defenses to accusations of tax fraud. One such defense involves the reliance on an attorney or accountant. If a taxpayer properly relied on expert advice for the conduct in question, the jurisdiction might find no criminal liability. But generally, for this type of defense to succeed, the defendant must establish all of the following conditions: The taxpayer specifically relied on the advice from an expert. The expert is qualified, which is determined by a facts and circumstances test. The taxpayer gave full disclosure of the facts to the expert. See pages 2.707-2.708 in the Fraud Examiner's Manual

If a taxpayer uses reliance on an attorney or accountant as a defense to a tax fraud charge, which of the following conditions must be met? I. The reliance must be specific. II. The relied-upon expert is qualified. III. The expert must be board certified in tax law (if an attorney) or be a CPA (if an accountant). IV. The taxpayer must have disclosed all the facts to the expert. A. I, II, and IV B. III and IV only C. I, II, III, and IV D. II and III only

A. A suspect or a criminal defendant might raise various defenses to accusations of tax fraud. One such defense involves the reliance on an attorney or accountant. If a taxpayer properly relied on expert advice for the conduct in question, the jurisdiction might find no criminal liability. But generally, for this type of defense to succeed, the defendant must establish all of the following conditions: The taxpayer specifically relied on the advice from an expert. The expert is qualified, which is determined by a facts and circumstances test. The taxpayer gave full disclosure of the facts to the expert. While being board certified in tax law or being a CPA could contribute to the expert's qualifications, such certification is not one of the essential requirements for this defense to succeed. See pages 2.707-2.708 in the Fraud Examiner's Manual

Which of the following is an appropriate defense to tax fraud accusations? A. Mental illness B. Bankruptcy C. Death of the taxpayer D. Amended return

A. Generally, some defenses will be ineffective against charges for tax crimes. The death of the taxpayer cannot be used as a defense because taxes owed as a result of tax evasion typically survive the taxpayer's death, meaning the deceased taxpayer's estate will still be liable. Also, liabilities owed as a result of tax evasion may not be discharged in bankruptcy proceedings. If a person commits a tax fraud offense, amending fraudulent information held by the government will not generally relieve the taxpayer of criminal liability. Mental illness, however, may be an appropriate defense. See pages 2.708-2.709 in the Fraud Examiner's Manual

If an individual in the United States steals money from his employer, he is required to report the stolen funds as taxable income on his federal income tax return. A. True B. False

A. In the United States, individuals are taxed on their taxable income, and income from illegal activities, such as money from illegal kickbacks, must be reported and taxed just like legitimate income. If, however, a criminal pays taxes on his illegal gains even though he is under a duty to repay the illegal funds, the taxpayer, upon repayment, gets a deduction for the repayment. For example, in Stephens v. Commissioner, 905 F.2d 667 (7th Cir. 1990), a taxpayer embezzled about $530,000 from his employer and recorded it on his tax return as "consulting income." The taxpayer was ordered to pay restitution to the employer, plus interest. But he was allowed deductions under IRS Code Section 165 (c)(2), relating to ordinary and necessary business expense, for the restitution amount in the year paid. The court, however, did not allow the taxpayer to take a deduction for the interest. See pages 2.710-2.711 in the Fraud Examiner's Manual

If an individual in the United States commits tax fraud, he may be subject to civil or criminal penalties. A. True B. False

A. In the United States, individuals who commit tax fraud may be subject to either civil or criminal penalties. The Internal Revenue Service (IRS) pursues civil violations, and it refers criminal tax cases to the Department of Justice (DOJ) for prosecution. See pages 2.702 in the Fraud Examiner's Manual

The Internal Revenue Service may file a civil action against U.S. taxpayers accused of tax fraud, but it must refer criminal prosecutions to the Department of Justice. A. True B. False

A. In the United States, individuals with tax deficiencies may be subject to either civil or criminal penalties. The Internal Revenue Service (IRS) pursues civil violations, and it refers criminal tax cases to the Department of Justice (DOJ) for prosecution. See pages 2.702 in the Fraud Examiner's Manual

If the U.S. Internal Revenue Service (IRS) sends a deficiency notice to a taxpayer that includes an allegation of criminal tax fraud, there is a presumption that the IRS's allegations of fraud are correct and the taxpayer must prove there is no fraud in order to avoid criminal sanctions. A. True B. False

B. In the United States, if the IRS determines that a taxpayer has a deficiency and owes an additional amount of taxes, there is a presumption of correctness in favor of the IRS that requires the taxpayer to come forward with prima facie evidence to prove that the IRS's determination was erroneous. However, there is no presumption of correctness afforded the government when it alleges civil or criminal tax fraud. In such cases, the government bears the burden of proving tax fraud. See pages 2.703 in the Fraud Examiner's Manual

In the United States, the government enjoys a presumption of correctness for allegations of civil tax fraud. A. True B. False

B. In the United States, if the IRS determines that a taxpayer has a deficiency and owes an additional amount of taxes, there is a presumption of correctness in favor of the IRS that requires the taxpayer to come forward with prima facie evidence to prove that the IRS's determination was erroneous. However, there is no presumption of correctness afforded the government when it alleges civil or criminal tax fraud. In such cases, the government bears the burden of proving tax fraud. See pages 2.703 in the Fraud Examiner's Manual

___________ refers to any fraudulent actions a taxpayer commits to avoid reporting or paying his taxes. A. Tax reduction B. Tax evasion C. Tax avoidance D. None of the above

B. Tax evasion refers to any fraudulent actions that a taxpayer commits to avoid reporting or paying his taxes. To qualify as tax evasion, most jurisdictions require a willful attempt to evade or defeat the tax in an unlawful manner. Tax evasion, however, should not be confused with tax avoidance. Tax avoidance refers to a legal means of lowering one's tax bill through legitimate deductions, credits, and shelters. The intent of the taxpayer to wrongly file a tax return or provide other false tax information will determine the difference between tax evasion and tax avoidance. The primary distinguishing characteristic of tax evasion as compared to tax avoidance is that tax evasion is illegal, but tax avoidance is legal. See pages 2.701 in the Fraud Examiner's Manual

In most jurisdictions, a taxpayer will typically be guilty of conducting a criminal tax offense "willfully" even though he had a good faith or legitimate misunderstanding of the law's requirements. A. True B. False

B. To establish criminal liability for tax evasion, most jurisdictions require a willful attempt to evade or defeat taxes in an unlawful manner. For the purpose of tax law, a good faith or legitimate misunderstanding of the law based on the law's complexity typically negates willfulness (the voluntary, intentional violation of a known legal duty). That is, honest mistakes, in contrast to willful evasion, do not constitute tax evasion. However, courts might find that a person's misunderstanding of the law was unreasonable and still find willfulness. See pages 2.701-2.702 in the Fraud Examiner's Manual

Sandra, who has no accounting experience, personally filed her new business's tax return for the first year. The applicable tax return was more complicated than Sandra thought, and she improperly (although unintentionally) misreported her income. Which of the following is MOST ACCURATE? A. Sandra will not be subject to criminal penalties because new businesses have one year of immunity from criminal liability. B. Sandra will not be subject to criminal penalties because her misreporting was not willful. C. Sandra will be subject to criminal penalties because she misreported her income. D. Sandra will only be subject to criminal penalties if the government suffered an actual loss.

B. To establish criminal liability for tax evasion, most jurisdictions require a willful attempt to evade or defeat taxes in an unlawful manner. For the purpose of tax law, a good faith or legitimate misunderstanding of the law based on the law's complexity typically negates willfulness (the voluntary, intentional violation of a known legal duty). That is, honest mistakes, in contrast to willful evasion, do not constitute tax evasion. However, courts might find that a person's misunderstanding of the law was unreasonable and still find willfulness. See pages 2.701-2.702 in the Fraud Examiner's Manual

If a U.S. taxpayer receives a tax deficiency notice from the Internal Revenue Service, which of the following is the best defense against the notice, assuming the facts will support the defense? A. Reliance on an accountant B. Ignorance of the law C. There is no deficiency D. Reliance on an attorney

C. A suspect or a criminal defendant might raise various defenses to accusations of tax fraud. For example, the defendant can establish that there is no deficiency. If there is no deficiency, there is no tax liability. This is generally the best defense, if available, because several other defenses might negate willfulness, but do not necessarily eliminate a tax liability with interest and penalties. See pages 2.707 in the Fraud Examiner's Manual

All of the following are possible defenses to tax fraud allegations EXCEPT: A. The taxpayer establishes that an objectively reasonable position was taken B. The taxpayer establishes that he did not have an unrestricted right to the income C. Death of the taxpayer D. There is no deficiency

C. Generally, some defenses will be ineffective against charges for tax crimes. The death of the taxpayer cannot be used as a defense because taxes owed as a result of tax evasion typically survive the taxpayer's death, meaning the deceased taxpayer's estate will still be liable. See pages 2.709 in the Fraud Examiner's Manual

If a U.S. taxpayer embezzles money from his employer, reports the illicit income on his federal income tax return, and later pays the embezzled money back, what might the taxpayer be able to deduct on his tax return? A. Nothing B. The amount stolen and paid back as a theft loss C. The amount stolen and paid back as an ordinary and necessary business expense D. Any interest paid on the original amount embezzled

C. In the United States, individuals are taxed on their taxable income, and income from illegal activities, such as money from illegal kickbacks, must be reported and taxed just like legitimate income. If, however, a criminal pays taxes on his illegal gains even though he is under a duty to repay the illegal funds, the taxpayer, upon repayment, gets a deduction for the repayment. For example, in Stephens v. Commissioner, 905 F.2d 667 (7th Cir. 1990), a taxpayer embezzled about $530,000 from his employer and recorded it on his tax return as "consulting income." The taxpayer was ordered to pay restitution to the employer, plus interest. But he was allowed deductions under IRS Code Section 165 (c) (2), relating to ordinary and necessary business expense, for the restitution amount in the year paid. The court, however, did not allow the taxpayer to take a deduction for the interest. See pages 2.710-2.711 in the Fraud Examiner's Manual

Which of the following statements is FALSE with regard to tax fraud in the United States? A. Taxpayers who commit tax fraud may be subject to civil or criminal penalties. B. The Internal Revenue Service may only file civil actions in tax fraud cases. C. Taxpayers who commit tax fraud are subject to civil but not criminal penalties. D. The Internal Revenue Service may refer a case for criminal prosecution to the Department of Justice.

C. In the United States, individuals who commit tax fraud may be subject to either civil or criminal penalties. The Internal Revenue Service (IRS) pursues civil violations, and it refers criminal tax cases to the Department of Justice (DOJ) for prosecution. See pages 2.702 in the Fraud Examiner's Manual

Which of the following statements is CORRECT? A. Both tax evasion and tax avoidance are illegal. B. Neither tax evasion nor tax avoidance is illegal. C. Tax evasion is illegal, but tax avoidance is not. D. Tax avoidance is illegal, but tax evasion is not.

C. Tax evasion refers to any fraudulent actions that a taxpayer commits to avoid reporting or paying his taxes. To qualify as tax evasion, most jurisdictions require a willful attempt to evade or defeat the tax in an unlawful manner. Tax evasion, however, should not be confused with tax avoidance. Tax avoidance refers to a legal means of lowering one's tax bill through legitimate deductions, credits, and shelters. The intent of the taxpayer to wrongly file a tax return or provide other false tax information will determine the difference between tax evasion and tax avoidance. The primary distinguishing characteristic of tax evasion as compared to tax avoidance is that tax evasion is illegal, but tax avoidance is legal. See pages 2.701 in the Fraud Examiner's Manual

In tax fraud cases, willfulness to commit the offense can be inferred from all of the following types of conduct EXCEPT: A. Covering up sources of income B. Destroying books or records C. Keeping a single set of books D. Concealing assets

C. Willfulness can be inferred from conduct such as: Keeping a double set of books (not to be confused with keeping separate books and tax records, which might require different recording techniques) Making false entries or alterations or creating false invoices or documents Destroying books or records Concealing assets Covering up sources of income Avoiding making records that are typical in transactions of the kind Engaging in conduct designed to mislead or conceal See pages 2.702 in the Fraud Examiner's Manual