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Taxpayers in Southern California and Elsewhere Can Face Criminal Penalties for Willful Tax Evasion

Taxpayers in Southern California and Elsewhere Can Face Criminal Penalties for Willful Tax Evasion

The United States Court of Appeals for the Third Circuit has affirmed a district court’s prison sentence and restitution order in connection with a couple’s willful tax evasion. In United States v. Basile, a husband and wife opened a chiropractic practice together in Pennsylvania and timely filed an income tax return that included the income they earned from the business each year for nearly a decade. In the 1990s, however, the couple contracted with a company that established offshore corporations and financial accounts used to conceal their business income. This resulted in significant under-reporting of the couple’s annual income.

 

Later, the Internal Revenue Service audited the couple’s tax returns for 1995 through 2001 and opened an investigation. The couple reportedly refused to cooperate with the Agency’s investigation requests regarding their income tax returns. Ultimately, the IRS determined that the couple had a significant unpaid tax liability for each tax year between 1995 and 2001. The couple challenged a portion of this liability determination in a U.S. Tax Court, but the case was later dismissed because they failed to participate. In addition, the husband apparently submitted fraudulent checks and “foreign bills of exchange” to the IRS in response to the Agency’s collection efforts.

 

In 2003, the couple apparently took additional steps to hide their income and removed themselves from the chiropractic office’s payroll. Although neither member of the couple received a W-2 or 1099 form, each employee at the chiropractic business was paid using a payroll service. The couple continued to under-report their income tax liability and hide income using a variety of methods until criminal charges were eventually filed against them in 2011. Following a jury trial, both individuals were convicted of tax evasion, willful failure to file a tax return, filing false income tax returns, and conspiracy to defraud the government. The district court ordered each member of the couple to serve time in prison and pay restitution.  The couple then appealed their sentence to the Third Circuit.

 

 

On appeal, the couple argued that instructions provided to the jury mistakenly allowed jurors to consider the reasonableness of their allegedly good faith belief that they were not required to pay income taxes on their business income. According to the court, U.S. Supreme Court precedent states a jury’s role as the finder of fact allows jurors to consider reasonableness when determining whether a tax evasion defendant acted in good faith or simply disagreed with the nation’s tax laws. Additionally, the couple argued that jury instructions regarding the use of the couple’s false statements in determining willfulness in the tax evasion context was overbroad. The appellate court agreed, but stated the error was harmless because there was no indication it had an effect on the couple’s good faith defense or contributed to the jury’s verdict.

 

Next, the court addressed the wife’s claim that her sentence was unreasonable because her husband’s conduct was not foreseeable to her. The Third Circuit Court of Appeals said the district court did not abuse its discretion in sentencing her because she was convicted of conspiring to defraud the government. The court held that his behavior was foreseeable because it was committed in furtherance of this conspiracy. The woman also claimed that her prison sentence was disproportionately long when compared to both her husband’s penalty and the average tax fraud sentence.  The court stated her sentence was not unreasonable when compared to her husband’s because it was 15 months shorter. In addition, the appeals court said comparing her sentence to the penalties imposed in other tax fraud cases was not reasonable without sufficient context because it was impossible to know if the other cases were substantially similar.

 

Lastly, the Court of Appeals dismissed the couple’s claim that the question of restitution should have been submitted to the jury. According to the Third Circuit, the district court did not commit plain error in determining restitution. The court also pointed to its own precedent in stating such a judicial order does not violate a defendant’s rights under the Sixth Amendment to the Constitution. This amendment requires that a jury must review any facts that would increase a criminal defendant’s punishment beyond the statutory minimum sentence.

 

Although the penalty for failing to abide by our nation’s income tax laws is often financial, criminal charges may also result. If you were charged with tax evasion, tax lawyer William Hartsock may be able to help. Mr. Hartsock has decades of experience advising clients in Southern California about a variety of tax law matters. To speak with a seasoned tax attorney about your situation, please call Mr. Hartsock at (858) 481-4844 or contact him through his website.

 

Additional Resources:

United States v. Basile, Court of Appeals, 3rd Circuit 2014

 

 

Photo Credit: LilJoel, MorgueFile

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