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Tax Crimes Tax Procedure

When Clients Testify Against Their Tax Preparer

The IRS has been focusing on examinations of tax return preparers. These examinations often result in the imposition of civil penalties under Section 6694 and 6695. But they can also result in criminal liability for the tax return preparer.

The criminal sentencing guidelines can be problematic for tax return preparers. The Keleta v. United States, No. 18-2896 (8th Cir. 2018) provides an example. It addresses whether a sentencing enhancement can be added for a tax return preparer based on the testimony of the preparer’s clients.

Facts & Procedural History

The defendant operated several tax-preparation businesses in the St. Louis metropolitan area.

The IRS forwarded information to its criminal investigation division. According to the court, the criminal investigation division investigators:

noted that a high percentage of tax returns prepared by Eriace claimed certain tax credits. They also found that much of the information used to seek these tax credits “was not verifiable by other information filed with the IRS” and that the unverifiable information was often combined with verifiable information in ways that made the taxpayer eligible for the maximum or near the maximum available tax credit. 

The IRS special agent then conducted an under cover operation of hiring the defendant to prepare her tax return. When the refund was low and the special agent asked why, the defendant told the special agent that she could produce a larger refund for a larger fee for herself. The defendant then prepared a tax return that reflected a larger refund.

The Criminal Charges & Trial

The special agent then obtained a warrant and seized the defendant’s books and records and computers and an indictment followed.

The defendant was indicted and went to trial on several charges, including (1) conspiring to defraud the United States in violation of 18 U.S.C. § 371 and (2) willfully aiding and assisting in the false and fraudulent preparation of two tax returns in violation of 26 U.S.C. § 7206(2).

At trial, five of the defendants customers testified that the defendant reported false information on their tax returns.

The defendant was found guilty and the court imposed a  four-level enhancement in his offense level at sentencing. 

The Sentencing Enhancement

The U.S. Probation Office’s Pre-Sentence Investigation Report applied a four-level role enhancement to the defendant’s base offense level under United States Sentencing Guidelines § 3B1.1(a).

This guideline provides a 4-level increase to the offense level if the defendant “was an organizer or leader of a criminal activity that
involved five or more participants or was otherwise extensive.”

This case did not address the “otherwise extensive” language. Rather, it focused on the “five or more participants” language.

The IRS’s attorneys argued that the five clients who testified against the defendant were participants. The defendant objected.

No Evidence for the Enhancement

The court noted that the guidelines say that a “‘participant’ is a person who is criminally responsible for the commission of the offense, but need not have been convicted.”

The government in this case didn’t put on evidence of five or more participants. It presented the defendant’s clients as testimony of wrongdoing. It did not charge the clients with wrongdoing.

According to the court, “[b]eing a customer of a business that prepares false tax returns does not, by itself, render a person criminally culpable. ” Thus, the defendant was not subject to the four-level increase to his sentence.

This provides an example of why it is important to control the evidence in tax litigation cases. It also sends a message to those who would testify against tax return preparers. The government may be inclined to prove wrongdoing by the clients, which could subject the clients to criminal liability.

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