False or Fraudulent Returns in Violation of Section 7206(1)
Title 26, United States Code, Section 7206(1) criminalizes the making of false or fraudulent statements on tax returns or other documents submitted under penalties of perjury, and provides as follows:
Any person who —
(1) Declaration under penalties of perjury —
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter;
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(1), four elements must exist:
1. An individual made and subscribed a return, statement, or other document which was false as to a material matter;
2. The return, statement, or other document contained a written declaration that it was made under the penalties of perjury;
3. The individual did not believe the return, statement, or other document to be true and correct as to every material matter; and
4. An individual falsely subscribed to the return, statement, or other document willfully, with the specific intent to violate the law.
Return, Statement or Document
A § 7206(1) felony prosecution is not limited to tax returns, it deliberately applies to “any return , statement , or other document ” (emphasis supplied) required by the Internal Revenue Code or applicable regulations thereunder.
Generally, for a document to be considered a return, it should state it is a return, be signed under penalties of perjury, contain enough information to calculate tax, and be an honest effort to comply with the tax laws.
Under those guidelines, it would seem an individual who signs and files a “zero return,” on which all lines of a tax return are crossed through or left blank, could not be prosecuted under § 7206(1) as the return does not contain enough information to calculate tax. However, the individual can be prosecuted under this statute, with the charging instrument referring to the tax return as a “document.”
Some circuit courts have determined that placing the digit 0 in all lines on a tax return is a proper return from which tax can be calculated, even if the information provided is inaccurate or untrue. Similarly, if an individual files a blank return, but attaches a W-2 or similar income statement document that provides all the information required on the return, a tax calculation can be made with the information provided.
The majority of § 7206(1) prosecutions involve income tax returns, however, there have been prosecutions that involve false or fraudulent statements on various documents submitted to the IRS, signed under penalty of perjury, including the following:
- Form 433-A, Financial Statement for Wage Earners,
- Form 433-A (OIC), Financial Statement for Wage Earners,
- Form 433-B, Financial Statement for Businesses,
- Form 433-B (OIC), Financial Statement,
- Form 433-F, Financial Statement, and
- Form 656, Offer in Compromise.
Additionally, although there is not a specific tax law obligation for the filing of schedules to the Form 1040, which is a required form, such schedules when attached to the Form 1040 become of a part of the return. Therefore, prosecution for false or fraudulent statements on a Schedule C, for example, is proper under §7206(1). Also, attachment of Form 114, Report of Foreign Bank and Financial Account, to a Form 1040 makes any fraudulent for false statement thereon prosecutable under § 7206(1).
The verbiage of § 7206(1), specifically “makes,” does not lead the reader to conclude that a return, statement, or document must be “filed” with the IRS for prosecution under this statute. However, courts have determined that an income tax return does not become a “return” until it is filed with the IRS.
Liable Person or Entity
Although seemingly incongruous, a corporation can be prosecuted for committing perjury, in violation of § 7206(1), because the statute references “any person” and § 7701(a)(1) defines “person” to include a corporation. Additionally, acts committed by individuals on behalf of the corporation can be attributed to the corporation.
An individual who does not actually “make” the return, but who provides false or fraudulent information to a return preparer for the preparation of their tax return can be prosecuted under § 7206(1), if all other elements are met.
The filing of a fraudulent, unsigned return does not meet one of the four elements required under § 7206(1), therefore it may not be sufficient to bring about a prosecution under this statute, however, it is prosecutable under § 7201, tax evasion.
Section 7206(1) does not require that an individual personally sign a return, so long as it is determined that the individual authorized it to be filed with their name subscribed to it. The statute does not require that an individual’s name be subscribed to the return to prosecute them under § 7206(1), it is sufficient if there is evidence to show the individual authorized the filing of the return.
To authenticate a signature, the government may use one of three methods provided by the Federal Rules of Evidence:
1. testimony of an expert,
2. a jury comparison of verified handwriting samples, or
3. testimony by a witness who is familiar with subject’s handwriting.
There is a statutory presumption, under § 6404, as follows:
The fact that an individual’s name is signed to a return, statement, or other document shall be prima facie evidence for all purposes that the return, statement, or other document was actually signed by him.
With the increasing use of e-filing tax returns, the validity of electronic signatures is discussed under § 6061(b)(2):
[A]ny return, declaration, statement, or other document filed and verified, signed, or subscribed under any method adopted under paragraph [§ 6061(b)(1)(B)] shall be treated for all purposes (both civil and criminal, including penalties for perjury) in the same manner as though signed or subscribed.
Made Under Penalties of Perjury
One of the required elements of this statute is that the document is subscribed under penalties of perjury.
For example, the jurat on Form 1040, U.S. Individual Income Tax Return, is as follows:
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
If the jurat is crossed out or otherwise stricken on a false return, thereby avoiding the made under penalty of perjury element of §7206(1), prosecution can be made under § 7201, tax evasion, or 18 U.S.C. § 1001, false statement.
Although sometimes referred to as the tax perjury statute, § 7206(1) should not be confused with 18 U.S.C. § 1621, perjury generally. Unlike § 1621, no witness testimony is required to support the element of being “made under the penalties of perjury.”
False Material Matter
Black’s Law dictionary defines “material” as follows:
Important; more or less necessary; having influence or effect; going to the merits; having to do with matter, as distinguished from form. An allegation is said to be material when it forms a substantive part of the case presented by the pleading. Evidence offered in a cause, or a question propounded, is material when it is relevant and goes to the substantial matters in dispute, or has a legitimate and effective influence or bearing on the decision of the case.
Although material matter in a § 7206(1) prosecution is ultimately determined by the jury (see United States v. Gaudin , 515 U.S. 506 (1995)), generally speaking a matter is material in this statute if it affects or impacts the legal duties of the IRS and/or is likely to affect the accurate calculation of tax due and payable. Furthermore, in the context of this statute, argument is made that materiality is evaluated by a statement’s possible rather than its real impact. Also, it is of no consequence if a statement is so outlandish and blatant it would not have been acted upon by the IRS, the mere fact that it is false is sufficient for prosecution under § 7206(1).
Literal truth is a method utilized to defend against the element of material matter in a charge of § 7206(1). The defense basis is that the material matter is in fact literally true.
For example , on line 7 of Form 1040EZ, it requests an individual to list “Federal income tax withheld from Form(s) W-2 and 1099.” If an individual withholds the proper amount of tax from his Form 1099 and lists it on line 7, but does not pay over the tax withheld to the IRS, the literal truth defense would hold that the entry on line 7 is truthful.
While the government is not required to prove a tax deficiency in a § 7206(1) prosecution, whether or not a tax deficiency exists, may be significant to a jury’s consideration of materiality. However, argument exists that this statute imposes a penalty for a “false statement,” whether significant or insignificant, not that the false statement resulted in an understated amount of tax due.
Examples of items considered material, and having a direct bearing on the tax calculation, are:
- improper deductions,
- understated income, whether from legal or illegal sources,
- false statement, such as on source of income,
- false schedules utilized to reduce the tax owed,
- omission of items required to calculate proper tax, and
- false statement, one that is not accurate or complete.
In order to prove the willfulness element in a § 7206(1) prosecution, the government must show that the false statement(s) alleged were made intentionally. Individuals who make false statements by accident or believing said statements are true, should not be charged under § 7206(1).
Some thoughts to consider relating to willfulness:
- Argument can be made that the individual relied upon the advice of others, in order to negate willfulness.
- Argument can be made the individual relied upon their tax professional to prepare a proper return to negate willfulness.
- A prosecution under § 7206(1) does not need to show intent to evade tax.
- Circumstantial evidence is sufficient to support willfulness.
- An individual’s signature can be considered prima facie knowledge of a false statement.
- An argument can be made that an individual acted on good faith that they complied with the law, even if their understanding of the law was inaccurate or arbitrary.
- A corporation can be held liable under this statute when its agent intentionally causes a violation.
- Amended return is not in and of itself proof of that a prior year return was false at the time it was filed.
Venue represents the district in which an action or prosecution is brought for trial.
The venue, for purposes of § 7206(1), will occur in any district where the false return was made, subscribed or filed.
Statute of Limitations
The statute of limitations for a § 7206(1) prosecution is six years from the date of filing, or the statutory due date for filing.