Tax advisors are sometimes asked by a client for advice or assistance on what might sound like evasion of payment of taxes. What should CPAs do under such circumstances?

Thank you for reading this post, don't forget to subscribe!

The first place to start is with the professional ethics rules. Circular 230 clearly prohibits assisting clients in evading taxes or payment. It states that practitioners can be sanctioned for incompetent and disreputable conduct, including:

Willfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof. [31 CFR section 10.51(a)(7); emphasis added]

 

More generally, the AICPA Statements on Standards for Tax Services (SSTS) 4, Standards for Members Providing Tax Representation Services, provides: “If in connection with professional representation, a member becomes aware of taxpayer conduct that may be fraudulent or criminal in nature, the member should consider whether to continue a professional or employment relationship with the taxpayer. A member may also recommend a legal consultation.” (4.1.7)

There are also criminal statutes that may apply to a tax professional who assists a client in evading payment of taxes. Commonly charged crimes are tax evasion, conspiracy, and corrupt interference with the IRS.

Tax evasion is defined in IRC section 7201, which states that “any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof, shall … be guilty of a felony.” Notably, the statute refers to “any person,” not just the taxpayer, and thus may include CPAs and other tax preparers who participate in a scheme to evade tax.

Another common charge for tax professionals is conspiracy to commit an offense or to defraud the United States. This crime occurs when “two or more persons conspire either to commit any offense against the United States … or any agency thereof in any manner for any purpose, and one or more of such persons do any act to effect the object of the conspiracy.” (18 USC section 371)

Next, IRC section 7212 states that any “attempt to interfere with the administration of internal revenue law,” is a felony with respect to any person who “corruptly … endeavors to … impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly. … obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title.” The most well-known case against a tax professional under IRC section 7212 is United States v. Popkin [943 F.2d 1535, 1540 (11th Cir. 1991)]. In Popkin, an attorney was convicted under section 7212(a) based on his assistance to a client in creating a domestic corporation to disguise income earned from narcotics trafficking. The “client” was, in reality, working for the government in a sting operation against the attorney. The client told the attorney he had funds offshore from drug sales that he wanted to bring into the United States and needed to show a legal source on his tax returns, and the attorney formed a California corporation to create a purported legal source of income. The interesting aspect of Popkin was that the conduct that formed the basis of the IRC section 7212 conviction was forming a California corporation, an act that, in itself, is not a criminal act.

Common Problematic Questions

There are many unfortunate examples of lawyers and CPAs getting in trouble when trying to help their clients manage their tax liability. Below are some, unfortunately, common questions that tax professionals receive from clients who are facing IRS collection, followed by an example of a tax preparer who answered incorrectly.

Can you help me set up new entities to keep the IRS from finding my assets?

Even though there is nothing improper, in itself, in assisting a client with forming entities—a service that many CPAs and attorneys routinely provide—it can cross the line if the advisor knows that the client is planning to use these entities to evade payment. For example, in United States v. Wagdy A. Guirguis and Michael A. Higa, Higa was a CPA and controller for a closely held business (17-cr-00487, D. Haw.). When the IRS assessed unpaid tax on the businesses, Higa assisted the business owners in forming new entities, opening bank accounts for those entities, and then transferring company assets to those accounts to obstruct the IRS’s collection efforts. Higa also helped transfer property to the business owner’s spouse and instructed the company’s bookkeeper to alter the books and records to hide this transaction. Higa was convicted after trial of one count of conspiracy under 18 USC section 371 and one count of aiding and abetting the filing of a false return under IRC section 7206(2). He was sentenced to 40 months in prison and three years of supervised release, and ordered to pay more than $2 million in restitution to the IRS. After his conviction, Higa voluntarily surrendered his CPA license [“News Release: DCCA Disciplinary Actions (Through September 2021),” Hawaii Department of Commerce and Consumer Affairs, October 27, 2021].

Can you help me put my assets in someone else’s name?

This is also not a good idea. In a recent case, a CPA helped their client evade payment of tax by using this technique, in addition to other affirmative acts of tax evasion. Ronald DiPietro was a CPA who co-owned an illegal gambling business with his client and others. DiPietro prepared his client’s individual tax returns from 2009 through 2016 and helped him conceal his ownership of the business by paying an employee to be listed with Ohio as the owner of the business and by filing zoning permits and signing lease agreements in the employee’s name [United States v. Kachner, et al. (21-cr-00259, N.D. Ohio)]. DiPietro also assisted in negotiations with the IRS to settle the tax collection matter, and he helped the client evade the payment of tax by submitting a false Form 433 to the IRS that understated the client’s assets and omitted his ownership of the business. Moreover, on at least two occasions, DiPietro falsely told an IRS revenue officer that the client had no income or a limited ability to pay his tax debt. DiPietro also filed false income tax returns that underreported the client’s income and contained other false information.

On January 29, 2024, a jury found DiPietro guilty on one count of evasion of payment in violation of IRC section 7201. DiPietro was also convicted on four counts, and acquitted on one count, of aiding and assisting in the preparation and presentation of false and fraudulent income tax returns in violation of IRC section 7206(2), as well as two counts of conspiracy under 18 USC section 371 and one count of operation of an illegal gambling business in violation of 18 USC section 1955. DiPietro is currently awaiting sentencing.

Can’t you just tell the IRS that I don’t have any assets?

Assuming the client actually has assets, the obvious answer is “no.” Nevertheless, there are examples of tax practitioners crossing the line when making representations to the IRS in collection cases. Marcus Dunn was a tax attorney who helped prepare false returns for a doctor and his business entities. Dunn also represented the client during the audit and supplied the IRS with false documents. The case settled in Tax Court, at which point Dunn may have been able to walk away without a criminal investigation, but Dunn made additional false statements to the revenue officer assigned to collect the assessment after the Tax Court settlement was final. As alleged in the indictment, Dunn told the revenue officer that the client’s businesses were closed and had no assets and that he did not know the names of the client’s banks. Dunn also submitted a Form 433-B for the business showing zero assets. Dunn, however, had assisted his client with merging his entities into a new entity, thereby transferring the assets to the new entity, which Dunn did not disclose to the revenue officer. Dunn pleaded guilty to one count of corruptly interfering with the IRS under IRC section 7212 and was sentenced to 18 months in prison and three years of supervised release [United States v. Dunn (18-cr-00232, S.D. Ohio)]. Dunn’s law license was initially suspended, but he later resigned from the bar and his resignation was accepted as “resignation with disciplinary action pending” (In re Resignation of Dunn, 156 Ohio St.3d 1306, 2019-Ohio-1633).

Do we have to mention the house?

Another example of a tax practitioner going too far to assist a client in avoiding collection is Robert Barger. Barger was a tax attorney who submitted an offer-in-compromise to the IRS for his clients. While the offer was pending, the clients sold their house and bought a new house. They had problems securing financing, and so they gave the proceeds of the sale to a friend, who obtained a mortgage for the remainder of the purchase price. The plan was for the clients to assume the mortgage after the tax issues were resolved. Barger was fully aware of this scheme, as he assisted in facilitating the purchase of the home. After these transactions, Barger amended the offer-in-compromise to claim that the clients had sold their house and were now renting, but he did not disclose the purchase of the new house nor the arrangement with the friend. Barger was convicted of one count of conspiracy under 18 USC section 371 and one count of making a false statement in violation of 18 USC section 1001 (making a false statement to government official); he was sentenced to 18 months in prison [USA v. Robert E. Barger, 97-CR-112, W.D. Tex.)]. Barger was also dis-barred [In re Robert E. Barger, Dkt. No. 16745, Supreme Court of Texas, Board of Disciplinary Appeals (Sept. 4, 2004)].

Can’t the business just pay a family member to avoid wage garnishment?

The answer to this question is also, unsurprisingly, “no”; an unenrolled preparer, Alton Louis Vaughn, was convicted of a felony for doing this. Vaughn’s friend owned a business, and the business received an IRS garnishment on the wages of one of his employees. Vaughn advised the business owner to circumvent the levy by issuing paychecks to the employee’s husband and daughter instead of the employee herself. Vaughn pleaded guilty to one count of conspiracy under 18 USC section 371 and was sentenced to 42 months in prison and three years of supervised release. He was ordered to pay $585,733 in restitution to the IRS and $3,595 to a private victim. Vaughn’s sentence was especially severe because he also provided false information to the IRS and engaged in obstructive conduct on behalf of his client, who claimed that he was exempt from tax as a “sovereign citizen” [United States v. Alton Louis Vaughn, Sr. (14-cr-03101, W.D. Mo.)].

Areas of Uncertainty

The cases above involved obvious intentional misconduct by tax practitioners, most of whom would never consider taking any of these actions. There are many situations where the line is far less clear. One common challenge is representing clients in collection and submitting Form 433-A (Collection Statement for Wage Earners and Self-Employed Individuals) and Form 433-B (Collection Statement for Businesses) on the clients’ behalf to the IRS and making other representations about a client’s’ assets.

How does a CPA ensure that the Forms 433-A or 433-B or other financial information submitted to the IRS is accurate? Circular 230 and the AICPA SSTS both require that a preparer exercise reasonable due diligence in ascertaining the accuracy and correctness of any information submitted to the IRS (Circular 230 10.22; SSTS 2.3.2-.9). A practitioner can rely on a client’s representations, but only if that reliance is reasonable. As explained in Circular 230 10.34(d):

A practitioner advising a client to take a position on a tax return, document, affidavit, or other paper submitted to the Internal Revenue Service or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

 

Accordingly, tax advisors should question clients’ claims about their assets or income if they are not consistent with what they know about the client’s situation. It is good practice for the client, and not the tax preparer, to sign the Form 433, after the preparer advises the client that the form is being signed under penalty of perjury, and there are criminal and civil penalties for submitting false information to the IRS. However, even if the client signs the form, the preparer is not relieved from responsibility because, as noted above, they still must make reasonable efforts to ascertain the correctness of the information before submitting it.

Another common question that clients ask is whether they can transfer assets to a relative or other person to avoid an IRS levy. If the taxpayers have unpaid tax assessment, or they are under audit and there is a reasonably foreseeable tax assessment, this could edge toward evasion of payment. One way to help clients avoid going down this path—and taking the professional with them—is to advise them that they will have to disclose the transfer to the IRS later on if they are not able to fully pay the tax assessment and seek an offer in compromise other collection alternative. The Form 433-A asks the taxpayer: “In the past 10 years, have you transferred any assets with a fair market value of more than $10,000 including real property, for less than their full value?” If the answer is “yes,” the taxpayer must provide additional information about the property and the transferee so that the IRS can investigate this. With this information, the IRS may seek to collect the tax against the transferee (IRC section 6901). When taxpayers understand this, they usually decide not to attempt to transfer the assets. If a client decides to go forward despite professional advice, that would be the time to withdraw from the representation.

Megan L. Brackney, JD is a partner at Kostelanetz LLP in New York, N.Y.
Vishan Chaudhary is a paralegal at Kostelanetz in the D.C. office of Kostelanetz LLP.