An Instructive Case: Non-Filer Charged and Tried for Tax Evasion

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An Instructive Case: Non-Filer Charged and Tried for Tax Evasion

Many taxpayers may be surprised that failure to file a Federal tax return by the April deadline is technically criminal, if it is intentionally not filed by that date with the intent of violating the known legal duty.  It is relatively unusual for the DOJ to prosecute taxpayers simply for filing late – such a charge is usually reserved for instances where there are other, more substantial charges.  If the DOJ can find overt acts of evasion of the assessment or collection of tax, it will usually opt to pursue the more broad charge of tax evasion rather than of failure to file a return.  One example of the latter was the subject of a recent press release from the DOJ Tax Division, announcing the guilty verdict obtained in District Court against an east San Francisco Bay area man.  The DOJ press release provided the following details:

According to evidence presented at trial, Grant, 64, of Point Richmond, Calif., was a partner in Grant Engineering & Manufacturing, an engineering company in Richmond.  Grant Engineering used a bookkeeper for monthly and annual bookkeeping who had access to Grant Engineering’s invoices, company checkbook, and monthly bank statements.  From at least 2005 to 2009, the bookkeeper provided the company’s records to a CPA to prepare Grant Engineering’s annual partnership returns.  From 2005 through 2009, Grant Engineering’s partnership income was $509,339, $566,741, $486,062, $598,977, and $604,706, respectively.  Although the defendant’s share was half of these amounts during each of these years, the IRS nevertheless has no record of receiving Grant’s personal tax returns from 2005 through at least 2009.  The evidence demonstrated Grant paid no federal income tax on his income from Grant Engineering during the years charged.

During 2005 and 2006, Grant took steps to conceal the income he received through Grant Engineering.  For example, in 2005 Grant significantly curbed the use of his two checking accounts and began moving his partnership distributions from Grant Engineering to a warehouse bank known as MyICIS in Berryville, Ariz.  Warehouse banks can be used to conceal ownership of funds in part by commingling such funds with those of other individuals.  In addition, between April 2005 and October 2006, Grant wrote hundreds of checks drawn on the MYICIS account and funded multiple prepaid debit cards.  Grant used the checks and debit cards to pay his mortgage and other personal expenses. 

Eventually, the federal government shut down MYICIS. Grant, however, took additional steps to prevent the IRS from discovering the income he received from Grant Engineering.  Specifically, Grant used another bank to convert his partnership distributions to cashier’s checks and cash, all the while avoiding depositing the vast majority of the funds into any one bank account.  He also used cash to purchase dozens of U.S. Postal Money Orders and then used the money orders to pay bills and expenses, including utilities, taxes, and expenses for his classic aircraft.   

With the above affirmative acts, the government pursued – and obtained a verdict from twelve citizens on – three counts of evasion charges.   There is no word yet on the sentencing, but assuming a 25% tax rate, there was potentially a tax loss of about $500,000, which equates to about 2 1/2 years of prison time (give or take about 3 months) assuming no mitigating factors or sentencing enhancements.

The author of this blog post is Daniel W. Layton, Esq., the principal of Tax Attorney OC.  He is a former Federal tax prosecutor and form IRS trial attorney.

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