Aiding and Abetting: When Can CPAs and Advisors Be Held Liable for Tax Crimes?
October 31, 2023
Aiding or abetting the understatement of tax liability is a federal crime. Certified public accountants (CPAs) and advisors accused of aiding and abetting fraudulent tax filings can face steep penalties under 26 U.S.C. Section 6701 and potentially under other federal criminal statutes as well.
This raises a crucial question: What does it mean to “aid” or “abet” a federal tax crime?
We can gain some insights from 26 U.S.C. Section 6701. Specifically, Section 6701(a) provides that “[a]ny 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,” is guilty of aiding and abetting. Section 6701(c) also provides that CPAs and accountants cannot escape personal culpability by having subordinates aid or abet tax fraud on their behalf.
Even so, the statute still leaves plenty of questions unanswered. As a result, CPAs and advisors can find themselves in a variety of legally precarious situations, oftentimes even when they believe they have done their due diligence. Recently, the Internal Revenue Service (IRS) has shown a particular interest in targeting aiding and abetting, particularly—though not exclusively—in relation to taxpayers’ Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) and Employee Retention Credit (ERC) claims.
The IRS (and DOJ) Target Taxpayers, Tax Preparers and Tax Advisors
In nearly all situations, taxpayers are ultimately responsible for the contents of their federal tax returns. While there are some exceptions (i.e., innocent spouse relief and the advice-of-counsel defense), the IRS generally holds taxpayers accountable for ensuring the accuracy of their returns. Thus, even if a taxpayer’s accountant makes a mistake despite having all the necessary information, the taxpayer can still face civil liability for back taxes, interest and penalties.
But, the IRS holds tax professionals accountable as well. The IRS imposes tax preparer penalties in various circumstances, and when it appears that a CPA or advisor’s conduct crosses the line from mistake to intentional misconduct, the IRS may work with the U.S. Department of Justice (DOJ) to pursue criminal charges under 26 U.S.C. Section 6701 and other pertinent federal statutes. For example, we have recently seen the IRS and DOJ pursue criminal charges against tax professionals in cases involving allegations of willfully:
- Assisting with the understatement of a taxpayer’s liability
- Promoting abusive tax shelters
- Preparing false returns and other fraudulent statements
- Altering, forging or falsifying books, records or other financial documents
- Assisting with the submission of fraudulent PPP loan applications and forgiveness certifications
- Assisting with the submission of fraudulent EIDL loan applications
- Assisting with the submission of fraudulent ERC claims
Again, these are just some recent examples. Accountants, tax advisors and other tax professionals can face aiding and abetting charges in numerous other situations as well—and, in all situations, avoiding unnecessary consequences is a matter of identifying viable defenses and asserting them effectively.
When Is (and Isn’t) Reliance on the Taxpayer a Defense to Aiding and Abetting?
For many CPAs and advisors, their first instinct when facing allegations of aiding or abetting is to blame the taxpayer. They relied on the information the taxpayer provided, and they are not responsible if their representations were accurate to the best of their knowledge.
However, this defense does not always work.
The IRS expects tax professionals to do more than just collect information in many circumstances. Treasury Department Circular No. 230 provides some key insights into how the federal government approaches aiding and abetting charges. For example:
- Knowledge of Client’s Omission – Under Section 10.21 of Circular No. 230, if a CPA or advisor “knows that [a] client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper . . . [the practitioner] must advise the client promptly of the fact of such noncompliance, error, or omission . . . [and its] consequences . . . .”
- Diligence as to Accuracy – Under Section 10.22 of Circular No. 230, CPAs and advisors “must exercise due diligence – (1) In preparing or assisting in the preparation of, approving, and filing tax returns, . . . and other papers . . . ; (2) In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and (3) In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the [IRS].”
Of course, if a CPA or advisor is directly responsible for a taxpayer’s violation (i.e., as a result of recommending an abusive tax shelter or advising on how to fraudulently obtain PPP, EIDL or ERC funds), the CPA or advisor can face aiding and abetting allegations regardless of any information the taxpayer may or may not have provided. But, even in these types of cases, the facts often are not as clear cut as federal agents or prosecutors may make them seem—and CPAs and advisors will typically have a variety of potential defenses available.
Even when CPAs and advisors have defenses to aiding and abetting allegations, asserting these defenses effectively is not easy. Avoiding unnecessary consequences requires a strategic and proactive approach that takes into account the IRS’s (and DOJ’s) investigative tactics and enforcement priorities. With the potential for significant penalties, CPAs and advisors targeted in aiding and abetting investigations need to engage experienced defense counsel promptly.
Contact Brown Tax, P.C. for More Information
Our firm represents CPAs, advisors and other tax professionals in select federal criminal cases. If you are under investigation or facing charges for aiding and abetting, we invite you to contact us for more information. To request an appointment at Brown Tax, P.C., please call 888-870-0025 or inquire online today.