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Tax fraud charges and sufficiency of the evidence

The IRS doesn't always get it right - and neither do federal prosecutors who bring charges of tax fraud. Fortunately, taxpayers or tax professionals accused of wrongdoing have the right defend themselves against criminal tax evasion charges.

In a recent case, a federal appeals court overturned the convictions of two men who were former employees of Ernst & Young. The two men had been convicted in May 2009 of selling and setting up fraudulent tax shelters. Prosecutors had claimed that the two men had been part of a conspiracy to defraud the IRS by sheltering income in impermissible ways.

But the U.S. Court of Appeals for the Second Circuit reversed the convictions. The court said there was insufficient evidence to support them. The court also reduced the fine levied against a former investment adviser who was involved in the tax shelter transaction.

The tax fraud convictions of two others involved in the transaction were upheld. Each now faces a prison term, one for three years and the other for 20 months.

Overall, however, the Second Circuit's reversal of the convictions of the two former Ernst & Young employees suggests that federal authorities cannot make convictions stick in complicated tax shelter cases without strong supporting evidence. Showing criminal intent requires a stringent level of proof, not merely accusations.

This is not the only loss the government has suffered recently, either, in tax cases involving sophisticated shelters. In April 2012, the U.S. Supreme Court ruled against the IRS in a case involving the use of a tax shelter to avoid the payment of tax on a gain.

Source: "Two Convictions Tossed in Ernst Tax-Shelter Case," The Wall Street Journal, Chad Bray, 11-29-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our tax litigation page.

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