Reliance on advice of a tax attorney or CPA is a defense to some tax crimes. But what if a taxpayer merely consults with a tax attorney or CPA and does not actually rely on their advice? The recent United States v. Wright, No. 18-4087 (6th Cir. 2019) case addresses whether this defense is available for the aiding and abetting tax crime.
Facts & Procedural History
The defendant in this case inherited a family business. After the business transferred to the defendant, he continued to have the business pay for his mother’s personal rent and utilities. These amounts were deducted by the business.
Before inheriting the family business, the defendant worked as an insurance consultant and had set up an S corporation. He apparently re-purposed the entity upon inheriting the family business.
The S corporation was used as a management company for the family business. He then paid himself and his children, who were away at college, through the management company. The payments to the children were deducted by the S corporation, which flowed through to the defendant’s personal tax returns.
The defendant also set up a foundation, which ended up paying for his children’s college educations. The defendant deducted the contributions to the private foundation.
‘At each step along the way, it appears that the defendant was talking with various CPAs and tax attorneys.
The IRS audited the family business’ tax returns. The IRS audit concluded with criminal indictments for filing, or aiding and assisting the filing of, false tax returns, in violation of 26 U.S.C. § 7206. The trial court refused to give the jury an instruction that reliance on CPAs and tax attorneys as a defense. The question in this case is whether the district court erred.
Aiding and Abetting
Section 7206 is the “aiding and abetting” provision. It is broad in scope. It can apply to tax preparers or to taxpayers themselves.
Section 7206 involves tax fraud and false statements. It imposes a maximum three years of imprisonment and $100,000 fine.
The statute is triggered by the following conduct:
- Declaration under penalties of perjury to a false document,
- Aid or assistance for a false tax return,
- Fraudulent bonds, permits, and entries,
- Removal or concealment of property with intent to defraud, and
- Concealing property or destroying records when settling a tax assessment or liability with the IRS
But there are defenses to the aiding and abetting charge.
Reliance on a Tax Attorney
One defense is that the defendant did not act willfully as he relied on advice of his tax attorney. The courts have recognized reliance on a tax attorney as a defense to prosecution under Sec. 7206.
The jury instruction for this defense is something like this:
If you find that the defendant had discussed this matter with competent tax counsel and that the tax return herein was prepared pursuant to that advice, then you must find that the defendant did not willfully file a false return or make a false statement, and you should bring in a verdict of not guilty.
To claim this defense, the defendant has to demonstrate that he or she provided full information to the tax attorney and then filed the return without having reason to believe it was incorrect.
Evidence of Reliance on a Tax Attorney
Given the transactions involved and the facts, it is likely that the defendant consluted with tax attorneys and CPAs. But did he rely on them?
In this case, the appeals court concluded there was no evidence that the defendant relied on his tax attorney or CPAs.
A tax attorney and several CPAs testified about the mother’s rent and utility deductions, the children’s pay and the deduction for the pay, and the foundation paying the children’s college tuition. In each case, the testimony was unclear and could have been interpreted to mean that no advice was actually provided.
For example, the CPA who prepared the family business’ tax returns did not know that the rent and utility payments were personal expenses for the owner’s mother. The CPA who prepared the foundation tax return did not know that the foundation was paying for the children’s college tuition. The tax attorney who established the foundation was not aware that the foundation was being used to pay for the children’s college tuition.
Given this evidence, the appeals court found that there was no basis for giving the jury instruction for this defense.