Civil Tax Fraud + Interest = Triple Jeopardy?
Ted Tri-Over
(hereafter Ted) was done over three times by a combination of criminal
tax fraud, civil tax fraud, and interest. Few think of interest as
another significant burden for a tax litigant, but in tax fraud cases
it can be enormous and can actually exceed the amount of the fraud
penalty itself.
Ted operated a
flooring business that in a thriving real estate market after the year
2000 was able to make a lot of money. Ted had never made a lot of
money, so when his corporation started making large profits, he began
buying large numbers of rare cars and motorcycles, and registered all
of them in his name individually. Ted made no attempt to hide the
vehicles from the IRS or to be devious with regard to record keeping,
but his tax return preparer failed to provide any effective advice to
Ted.
It was a fairly
easy case for the IRS Agent to discover the large number of vehicles
involved, and determine that Ted’s tax return did not reflect enough
income to purchase that many vehicles. Ted unfortunately had an
extremely poor accountant who pleaded guilty to criminal tax fraud
charges unrelated to Ted. After some poor choices, including a poor
choice of tax return preparers, Ted faced charges of tax fraud.
Facing criminal charges, Ted had a very
difficult decision to make. Ted was not a hardened criminal, but he was
foolish.
Once charged, the
reality for most business people in Northern Virginia is to negotiate a
plea. If Ted had taken his chances, gone to trial and been convicted by
a jury, he would likely have received a jail sentence of five to six
years, and that would have been the end of his business.
Upon advice of
counsel, Ted pleaded guilty to filing a false tax return and was able
to get six months of jail time and maintain his business. In addition
to the jail time, Ted was ordered to pay restitution of the tax amount.
A guilty plea to
tax evasion automatically results in imposition of the 75% civil tax
fraud penalty, but a plea to filing a false return allowed Ted to
challenge imposition of the
civil fraud penalty.
Unfortunately, it
can take years to go from negotiating with the IRS to the sentencing by
a judge in a criminal case. In addition, it may take a year or more to
be assigned to jail. Even after being assigned to a particular jail,
Ted had to wait several months for a spot to open in the jail for him
so that he could begin serving his jail time.
After Ted finished
his jail time, there was then the negotiation with the IRS over the
civil fraud penalty, which again took over a year.
Eventually Ted
litigated the civil fraud penalty in Tax Court but he lost. It was an
additional year after the hearing until the Tax Court finally entered
the unfavorable decision. By then, many years had passed. Even though
the tax returns were for years prior to 2003, it took until 2011 to get
a decision on the civil tax fraud charge.
The civil tax fraud penalty is 75% of the tax
liability. In Ted’s case, this penalty was $247,090 for two years (and
these are actual figures from a recent case). Because of the length of
time between the beginning of the criminal proceeding and the
conclusion of the civil tax fraud matter — a total of approximately 12
years — the interest on the civil fraud penalty of $247,090 was
$362,380! This means that the total tax bill for the civil fraud alone
was $609,470, nearly twice the amount of actual tax due. In addition,
interest continues to accrue until this amount is paid.
In Ted’s case, the
combination of a desire to keep his business alive while serving a jail
sentence pursuant to a negotiated plea may have unwittingly subjected
him to the staggering burden of the civil fraud penalty combined with
the even larger interest charges.
Criminal tax
charges and the civil fraud penalty together are an onerous burden, but
with interest added to the penalty, the results can be crushing. As in
Ted’s case, the fraud penalty (with interest) nearly tripled over the
period of time in which the criminal and the civil proceedings were
finally concluded.
Ideally, there
should be some way to reduce the amount of time it takes to resolve
civil fraud penalty cases, but that is often not possible.
Theoretically the government could waive the interest charges on the
civil fraud penalty as they do for some other penalties, such as the
trust fund recovery penalty.
If you need help with a criminal or civil tax
fraud issue or other tax penalty issues, contact Newland &
Associates
Copyright 2012
Published by the law firm of Newland &
Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business
law and
tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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