Newland's Business Notes

Civil Tax Fraud + Interest = Triple Jeopardy? 

Volume 16 Issue 6 -- November/December 2012

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 Tedís 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 Tedís 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 ó a total of approximately 12 years ó 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 Tedís 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 Tedís 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.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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