Tax Fraud Flashcards
A tax preparer can face penalties?
In some instances, tax violations extend beyond the taxpayer and can result in penalties for those who help prepare tax returns and information. A tax preparer can face penalties if he:
Aids or assists in, procures, or advises with respect to the preparation of any portion of a false return, affidavit, claim, or other document
Knows, or has reason to believe, that the information will be used in connection with any material matter arising under internal revenue laws
Knows that the portion (if so used) would result in an understatement of tax liability for another person
Unless there is a reasonable cause for an understatement and the preparer acted in good faith, a penalty will be assessed against any person who is a preparer, who knew or reasonably should have known that a position taken on a return was:
Not realistically possible of being sustained on its merits
Not disclosed under Title 26, U.S.C., § 6662(d)(2)(B)(ii)
A frivolous position
What is a fraudulent tax return?
A tax return is considered fraudulent if the responsible party willfully attempts to defraud the government of owed tax dollars. A good faith or legitimate misunderstanding of the law based on the law’s complexity negates willfulness [U.S. v. Cheek, 111 U.S. 604 (1991)]. The case held, however, that the belief that taxes are in violation of the Constitution was not relevant to willfulness.
Defenses in a tax fraud?
There are several possible defenses to tax fraud. The taxpayer can assert the affirmative defense of reliance on an attorney or accountant if all of the following conditions are met:
The taxpayer specifically relied on the advice.
The expert is qualified, which is determined by a facts and circumstances test (board certification or a CPA are not strictly required).
The taxpayer gave full disclosure of the facts to the expert.
What is the government’s presumption of correctness in tax cases?
The general rule is that the taxpayer bears the burden of proof at trial in civil proceedings (e.g., refund claims and civil deficiency claims). The Statutory Notice of Deficiency (90-day letter) generally enjoys the presumption of correctness. This presumption in favor of the IRS requires the taxpayer to come forward with prima facie evidence to prove that the IRS’s determination was erroneous. After successfully rebutting the presumption of correctness, taxpayers have the burden of proving their case by at least a preponderance of the evidence.
The rule established under the Reform Act transferred the burden of proof to the IRS in civil court proceedings on income, gift, estate, or generation-skipping tax liability with respect to factual issues that are relevant to determining the taxpayer’s tax liability, provided the taxpayer: (i) provides credible evidence on the factual issue; (ii) keeps records and backs up items as presently required under the Code and regulations; and (iii) cooperates with the IRS in regard to reasonable requests for meetings, interviews, witnesses, information, and documents.
However, there is no presumption of correctness when the government alleges civil or criminal tax fraud; the burden is on the government in tax fraud cases.
