Title 26, United States Code, Section 7206(2), makes it a crime to willfully aid or assist in preparing or presenting a false return or document and provides as follows:
Any person who–…
(2) Aid or Assistance. –Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other documents, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document;
shall be guilty of a felony and, upon conviction thereof, shall be fined…or imprisoned not more than 3 years, or both, together with the costs of prosecution.
In order for the government to prove a case under § 7206(2), three elements must exist:
- An individual aided or assisted in, procured, counseled, or advised in the preparation or presentation of a document in connection with a matter arising under the internal revenue laws;
- The document was false as to a material matter; and
- The act of the individual was willful.
Aid or Assist
In a narrow interpretation of a violation of §7206(2), one would determine this statute relates to individuals who actually prepare a false tax return, such as tax consultants, accountants, bookkeepers, and the like. However, the statute is specifically more far reaching to include any form of willful assistance and knowing participation in the preparation and/or filing of a false tax return. The willful assistance can include providing a false document that the provider reasonably knows will be used to prepare and file a false tax return, or providing false or misleading advice resulting in the filing of a false tax return, or other action that caused the filing of a false tax return. The issue to be determined is whether the individual willfully acted in a manner to cause the filing of a false tax return.
Some examples of aiding and assisting in the preparation and/or filing of a false tax return are as follows:
- An individual providing an inflated receipt for a donated vehicle, knowing the inflated amount on the receipt was false, and knowing that the donor would use the false inflated receipt as a charitable deduction on his tax return, would constitute a crime under §7206(2).
- An employee knowingly and falsely characterizing personal expenses as business expenses in a company’s software program, knowing the program would be used to generate the records utilized by the company’s accountant in preparing the corporate returns, would constitute a crime under §7206(2).
- An employer knowingly paying employees bonuses in a manner where no tax was withheld and it was not recorded as salary, resulting in an understatement of their income, and the issuance of false Forms W-2, would constitute a crime under §7206(2).
Under §7206(2) prosecution, the tax return does not need to be signed by the individual charged with the crime, the individual merely has to aid or assist in the preparation or filing of the false return. Additionally, it is of no consequence whether the individual whose false tax return was filed, knew the tax return contained false information or was entirely unaware.
There is argument as to whether or not the statute contemplates the actual filing of the tax return with the IRS. However, argument to the contrary points to the statute’s language that ” preparation or presentation” (emphasis supplied), indicates that a crime under §7206(2) can be committed by simply advising an individual to file a false return or that a false return/information was provided to an individual obligated to file it, whether or not it was ultimately filed.
In a §7206(2) prosecution, it is not material whether or not a tax deficiency exists. Although, material matter in a §7206(2) prosecution is ultimately determined by the jury (see United States v. Gaudin , 515 U.S. 506(1995)), generally speaking an act is material when the net effect causes a false return to be filed. Even a document that is not required by statute or regulation to be filed with the IRS can be argued as material if such document is an integral part of/referenced in and/or utilized in the preparation of the statutorily required return.
Examples of non-statutorily required documents are schedules to tax returns, such as Schedules A, C, et cetera, which are not required by the IRS, but when utilized are an integral part of the tax return.
Another example is a tax exempt form. If an individual purchases supplies and/or equipment for personal use under a tax exempt number, the store is legally required to report the purchase to the IRS, which then makes the falsely utilized tax exemption a material act.
In a §7206(2) prosecution, the government must prove, beyond a reasonable doubt, that the defendant had the deliberate objective of causing a false return or document to be filed. The element of willfulness is not met simply by showing that an intentional act was performed that resulted in the filing of a false return. The government must show that the defendant specifically intended that a false return or document be filed.
Willfulness may not be met when, for example, an employee in charge of depositing daily cash receipts from a business embezzles funds from the deposits. Although the intentional act resulted in an understatement of business’s income on its tax return, because the tax return preparer utilized bank statements to calculate income, the employee did not intend or know that a false return would be filed as a result of their act.
Another example could be an individual who falsely prepares receipts to use as deductions against income, willfully aided in the preparation of a false tax return.
The venue, for purposes of §7206(2), will occur where the act of aiding or assisting in the preparation of a false return took place or where the return was filed.
Statute of Limitations
The statute of limitations for a §7206(2) prosecution is six years from the date of filing, or the statutory due date for filing. In the event the act of aiding in the filing of a false return predates the filing of the false return, the limitations period begins with the filing of the false return-not the date of the act.
If an individual sells an abusive tax shelter, which is then used by the purchaser to determine illegal deductions on their tax return within six years prior to indictment, a prosecution under §7206(2) against the individual seller is valid.