Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa. On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization. The business was a bike sales and rental shop that focused on the beach cruiser market for tourists. Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in a sales tax loss of only $553,478.
The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS. Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.
The Newport Beach Tax Attorney blog is dedicated to tax issues serving Orange County and Southern California. Posts cover recent news and tax cases including audits, tax litigation, IRS, and cryptocurrency tax issues. For more on the Orange County Tax Attorney Joseph P. Wilson, visit https://www.wilsontaxlaw.com or 949.397.2292
Newport Beach Businessman Sentenced to Over 2 Years for Sales Tax Evasion and to Pay Restitution to Board of Equalization
Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa. On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization. The business was a bike sales and rental shop that focused on the beach cruiser market for tourists. Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in a sales tax loss of only $553,478.
The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS. Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.
The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS. Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.
IRS Suffers Defeat in Appeals Court as Jury's Finding of Return Preparer Penalty Reversed
The IRS suffered a major defeat last week in the Eleventh Circuit Court of Appeals, in Carlson v. United States, Case No. 12-13736 (June 13, 2014), as the appellate court reversed in part and vacated and remanded in part a decision from a Florida district court holding a tax preparer liable for penalties under Code Section 6701. The eleventh circuit held that the burden of proof was not the usual minimum of a "preponderance of the evidence" (sometimes described as "more likely than not") but the higher "clear and convincing evidence" usually applied in civil fraud cases. (Note: the clear/convincing standard is lower than the "beyond a reasonable doubt" standard.) Appellant, Frances Carlson, was a return preparer for Jackson Hewitt tax services.
Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:
Her boss at JH was arrested in 2006 for drug and money laundering charges. (Wow!) The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure. The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties). The DOJ saw fit to defend only 27 of those 40 in a jury trial.
As you can see, Carlson is actually fairly sympathetic in this case. The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one. There is a saying in litigation that "bad facts make bad law." If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.
Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed. Essentially, knowledge that a false item would make a false refund is fraud.
The case was remanded for a whole new trial. The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax. Thus, the instruction to the jury on the lower standard of proof was improper. In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard. There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.
Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.
In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared. A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.
This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government. However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice. Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.
The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.
Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:
(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.
Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012, and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy's three returns but only $1000 for the two filed for Jane.
In finding against the IRS, the Court noted several facts which implied that, even though Carlson prepared tax returns as her job for Jackson Hewitt, she was unsophisticated in tax matters and was not well educated or particularly well trained. Rather, she relied mainly on a software program. Nonetheless, she prepared 200-300 returns in her first year. In her second year, she was promoted to corporate returns! (Although the IRS is the loser in this case, it certainly doesn't reflect well on Jackson Hewitt either. It does serve as a valuable reminder that a big name is no guarantee that the individual preparing your returns is very qualified. The other big box preparation service, HR Block, on the other hand, if I recall right, spent a great deal of its advertising last year on how experienced some of its preparers were, perhaps trying to fight this perception.)
Her boss at JH was arrested in 2006 for drug and money laundering charges. (Wow!) The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure. The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties). The DOJ saw fit to defend only 27 of those 40 in a jury trial.
As you can see, Carlson is actually fairly sympathetic in this case. The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one. There is a saying in litigation that "bad facts make bad law." If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.
Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed. Essentially, knowledge that a false item would make a false refund is fraud.
The case was remanded for a whole new trial. The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax. Thus, the instruction to the jury on the lower standard of proof was improper. In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard. There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.
Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.
In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared. A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.
This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government. However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice. Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.
The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.
IRS Suffers Defeat in Appeals Court as Jury's Finding of Return Preparer Penalty Reversed
The IRS suffered a major defeat last week in the Eleventh Circuit Court of Appeals, in Carlson v. United States, Case No. 12-13736 (June 13, 2014), as the appellate court reversed in part and vacated and remanded in part a decision from a Florida district court holding a tax preparer liable for penalties under Code Section 6701. The eleventh circuit held that the burden of proof was not the usual minimum of a "preponderance of the evidence" (sometimes described as "more likely than not") but the higher "clear and convincing evidence" usually applied in civil fraud cases. (Note: the clear/convincing standard is lower than the "beyond a reasonable doubt" standard.) Appellant, Frances Carlson, was a return preparer for Jackson Hewitt tax services.
Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:
Her boss at JH was arrested in 2006 for drug and money laundering charges. (Wow!) The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure. The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties). The DOJ saw fit to defend only 27 of those 40 in a jury trial.
As you can see, Carlson is actually fairly sympathetic in this case. The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one. There is a saying in litigation that "bad facts make bad law." If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.
Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed. Essentially, knowledge that a false item would make a false refund is fraud.
The case was remanded for a whole new trial. The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax. Thus, the instruction to the jury on the lower standard of proof was improper. In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard. There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.
Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.
In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared. A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.
This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government. However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice. Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.
The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.
Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:
(1)
who aids or assists in, procures, or
advises with respect to, the preparation or presentation of any portion
of a return, affidavit, claim, or other document,
(2)
who knows (or has reason to believe)
that such portion will be used in connection with any material matter
arising under the internal revenue laws, and
(3)
who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.
Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012, and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy's three returns but only $1000 for the two filed for Jane.
In finding against the IRS, the Court noted several facts which implied that, even though Carlson prepared tax returns as her job for Jackson Hewitt, she was unsophisticated in tax matters and was not well educated or particularly well trained. Rather, she relied mainly on a software program. Nonetheless, she prepared 200-300 returns in her first year. In her second year, she was promoted to corporate returns! (Although the IRS is the loser in this case, it certainly doesn't reflect well on Jackson Hewitt either. It does serve as a valuable reminder that a big name is no guarantee that the individual preparing your returns is very qualified. The other big box preparation service, HR Block, on the other hand, if I recall right, spent a great deal of its advertising last year on how experienced some of its preparers were, perhaps trying to fight this perception.)
Her boss at JH was arrested in 2006 for drug and money laundering charges. (Wow!) The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure. The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties). The DOJ saw fit to defend only 27 of those 40 in a jury trial.
As you can see, Carlson is actually fairly sympathetic in this case. The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one. There is a saying in litigation that "bad facts make bad law." If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.
Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed. Essentially, knowledge that a false item would make a false refund is fraud.
The case was remanded for a whole new trial. The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax. Thus, the instruction to the jury on the lower standard of proof was improper. In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard. There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.
Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.
In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared. A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.
This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government. However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice. Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.
The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.
IRS Increases the FBAR Penalty for People with Offshore Accounts
In efforts to increase offshore tax compliance, the IRS just made brand new changes to its current offshore disclosure programs.
The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.
The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The changes include:
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
• Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
• Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
• Enabling taxpayers to submit voluminous records electronically rather than on paper;
I will add more in a later post. You can find the news release here. Please contact the Wilson Tax Law Group if you have questions about offshore bank account disclosures or FBAR matters under the July 1, 2014 or transitional procedures. We have handled numerous offshore cases.
Update: The IRS has published FAQ's for the Transition Rules drawing a clear line as to who can qualify for the pre-July 1, 2014 penalty rates.
Q: What if I made a request for OVDP pre-clearance before July 1, 2014, but not a full voluntary disclosure?
A: A taxpayer will not be considered to be currently participating in OVDP for purposes of receiving transitional treatment unless, as of July 1, 2014, he has mailed to IRS Criminal Investigation his voluntary disclosure letter and attachments as described in OVDP FAQ 24. Thus, a taxpayer who makes an offshore voluntary disclosure as outlined in FAQ 24 on or after July 1, 2014 will not be eligible for transitional treatment under OVDP, even though he may have made a request for OVDP pre-clearance before July 1, 2014.
These transitional FAQs can be found here.
The FAQ for the effective-July 1, 2014 OVDP can be found here.
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