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Is Professional Advice a Valid Defense to a Tax Crime Offense?

If you are being investigated for a criminal tax offense, you might wonder what tax crime defense strategies you can assert to avoid prosecution or severe penalties. The defense you assert must be specifically tailored to the criminal charge being brought against you. Because the IRS must prove each element of your crime beyond a reasonable doubt, your goal in coming up with a winning defense should be to negate at least one of the elements of the offense. For example, a taxpayer being prosecuted for tax evasion may attempt to show that there was no additional tax due and owing, or that the unreported income was offset by unclaimed deductions or constituted a gift or nontaxable receipt. A taxpayer prosecuted under IRC § 7206(1) may mount a defense by arguing that the false statement was not material.

One of the most common defenses in tax cases is that the taxpayer relied upon the advice of a tax attorney or other tax professional. In this article, we will examine this defense and discuss the ways in which is can be used. We will also look into other defenses to tax crimes, including the shift of responsibility defense.

Advice of Counsel or Tax Adviser

When mounting a defense of advice of counsel or tax adviser defense, the taxpayer argues that he or she relied on erroneous advice of a tax professional. This defense is closely related to the mistake or ignorance of law defense. Under this principle, a taxpayer who honestly and in good faith seeks the advice or a tax attorney or tax professional and honestly and in good faith follows the advice of the tax professional, cannot be convicted of a crime involving willful intent. The definition of “willful” as “voluntary and intentionally with the purpose of avoiding a known legal duty” encompasses the taxpayer’s theory of good faith reliance on the attorney’s advice (1). In order for the defense to be valid, the taxpayer must have given full disclosure of the material facts to the tax professional. The full disclosure of all material facts is an element of the defense, so this means that if the taxpayer has failed to give his tax professional all the facts of the tax situation, he cannot then try to rely on the tax professional’s advice as a defense. If the taxpayer has withheld materials facts from the tax preparer, then the reliance defense will fail as a matter of law (2).

Proving good faith reliance on the advice of a tax attorney or other tax professional can sometimes be very difficult. In one case, a tax shelter promoter attempted to use the good faith reliance defense when he argued that he had relied upon the advice of a tax attorney in formulating statements made to his tax shelter clients. This tactic ultimately failed, and his conviction was upheld (3). In another case, a bookkeeper who failed to file tax returns attempted to claim reliance on his tax attorney, who supposedly told him that he was not required to file tax returns for his bookkeeping business. The reliance defense did not help him escape conviction, as he was a sophisticated businessman and his reliance on the statements of his tax attorney was not reasonable or believable (4). However, the defense has been successful in cases in which the taxpayer actually provides all material information to the tax professional, but simply receives erroneous advice. Similarly, where a taxpayer relies on a competent tax preparer or accountant to file his or her tax return, but the tax professional fails to do so, a valid defense may exist.

Shift of Responsibility Defense

A taxpayer may be able to negate the willfulness element of tax crimes by asserting that any deficiencies, omissions, or erroneous entries were made the person responsible for keeping the books or preparing the tax return. In Pechenik v. United States, the taxpayer was found to not exhibit willful behavior in the context of a tax evasion charge. The evidence presented to the court demonstrated that a corporation’s bookkeeper was in charge of determining how various expenses were to be treated for tax purposes. The evidence also showed that the taxpayer defendant was not involved in keeping the corporation’s books of account, which erroneously expended capital expenditures (5). Because the responsibility for expending capital expenditures fell to the bookkeeper instead of the taxpayer defendant, there was no evidence of willfulness on the part of the taxpayer and the “shift of responsibility” defense was successful. In contrast, if the defendant intentionally withholds information from the bookkeeper or other tax professional, or takes action to mislead them, then the shift of responsibility defense will likely fail. In that case, the defendant is the cause of the deficiency or error, not the tax professional.

How a Tax Attorney Can Help

If you are under investigation by the IRS for criminal tax crimes then you must consult with an experienced tax attorney. The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with criminal tax issues since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Tax Law References:

  1. Kelley, William v. U.S., (1989, CA7) 63 AFTR 2d 89-616, 864 F2d 569, 89-1 USTC ¶9132, cert den (1989, S Ct) 493 US 811, 107 L Ed 2d 23.
  2. United States v. McCormick, 67 F2d 867 (2d Cir.), cert. denied, 291 US 662 (1933).
  3. Kelley, William v. U.S., (1989, CA7) 63 AFTR 2d 89-616, 864 F2d 569, 89-1 USTC ¶9132, cert den (1989, S Ct) 493 US 811, 107 L Ed 2d 23.
  4. Segal, Randahl v. U.S., (1989, CA8) 64 AFTR 2d 89-5187, 867 F2d 1173, 89-2 USTC ¶9651.
  5. Pechenik v. United States, 236 F2d 844 (3d Cir. 1956).

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.