WASHINGTON, D.C. – The Department of Justice and the Internal Revenue Service have continued their vigorous criminal tax enforcement and civil injunction efforts against people who engage in tax fraud and other forms of non-compliance with federal tax laws.
Since 2001, the government has successfully prosecuted hundreds of tax cheats and promoters of abusive tax schemes; it has sought and obtained civil injunctions to stop the promotion of tax scams and the preparation of false and fraudulent tax returns; and it has continued to identify and pursue any company or individual who used an abusive tax shelter, while, at the same time, pursuing the professionals who designed, facilitated, or accommodated the underlying tax shelter transactions. These efforts have continued during 2005 and 2006.
“The Department of Justice is committed to using all available law enforcement tools to recover tax revenue, punish tax offenders, and to prevent future misconduct,” said Eileen J. O’Connor, Assistant Attorney General for the Tax Division. “People who promote, facilitate, or engage in plans or schemes to avoid reporting their income or another person’s income are risking penalties and, where appropriate, criminal prosecution.”
“The vast majority of Americans pay their taxes honestly and accurately,” said IRS Commissioner Mark W. Everson. “With the help of the Justice Department, the IRS holds those who don’t accountable.”
Tax Shelter Enforcement
During the past year, the Justice Department and the IRS have significantly increased their enforcement efforts against the promoters and facilitators of abusive tax shelters. Abusive shelters for large corporations and high-income individuals have cost the federal treasury more than $10 billion annually, according to Treasury Department estimates. The Tax Division also had notable successes in federal court defending the federal Treasury against tax shelter-related claims of large companies and individual investors. Among the successes in this area are the following:
-KPMG, one of the world’s largest accounting firms, entered a deferred prosecution agreement for conspiracy to commit tax fraud. The agreement calls for KPMG to cease marketing and promoting abusive tax shelters and to pay $456 in fines, restitution and penalties;
-HVB, Germany’s second largest bank, entered a deferred prosecution agreement for its role in facilitating tax shelters marketed by KPMG. The agreement requires HVB to implement substantial changes in its operations and pay nearly $30 million to the United States in fines, penalties and restitution;
-Donald Rivkin, a former senior KPMG partner, pleaded guilty to income tax evasion and conspiracy to commit tax fraud;
-Dominick DeGeorgio, an HVB principal, pleaded guilty to conspiracy and tax evasion charges;
-In September 2005, the United States Court of Appeals for the Second Circuit upheld a 40% penalty with respect to a “lease stripping” tax shelter;
-In January 2006, the Tax Division won a significant appellate victory in defense of the IRS’s position on the Corporate Owned Life Insurance (COLI) tax shelter;
-In February 2006, the Tax Division largely prevailed before the United States Court of Appeals for the Fourth Circuit in a tax shelter case involving the contingent liability tax shelter; and
-In March 2006, following a trial in the United States District Court for the Western District of Texas, the Tax Division prevailed in a major tax shelter case involving the so-called “lease stripping” tax shelter.
Criminal Prosecution of Tax Violations
During 2005, the Justice Department’s Tax Division authorized prosecutions against 1,256 defendants for tax crimes, an increase of more than 43 percent over the 877 defendants authorized for prosecution in 2001. The Tax Division’s criminal enforcement priorities include investigating and prosecuting schemes that involve:
-Using trusts or other entities to conceal control over income and assets;
-Shifting assets and income to hidden offshore accounts;
-Claiming fictitious deductions;
-Using frivolous justifications for not filing truthful tax returns;
-Failing to withhold, report and pay payroll and income taxes;
-Failing to report income; and
-Failing to file tax returns.
Civil Injunctions
The Tax Division continues to bring civil injunction suits to stop illegal tax fraud schemes and tax preparers who habitually prepare bogus tax returns. In response to the government’s suits, courts across the country have barred tax preparers from preparing inaccurate returns and promoters of tax fraud scams from selling tax-evasion schemes on the Internet, at seminars, or though other means.
Since January 2001, the Justice Department has sought and obtained injunctions against more 170 tax return preparers and promoters, including 66 since January 2005. It expects to obtain many more throughout the year. The United States recently has obtained injunctions that barred the following schemes:
-Filing tax returns that falsely report “zero income”;
-Failing to withhold, report and pay payroll and income taxes;
-Claiming personal living expenses as business expenses;
-Purporting to pay employees in commodities such as milk;
-Using trusts to conceal ownership or control of assets;
-Claiming that only income from foreign source is taxable; and
-Forming a “corporation sole” for the improper purpose of avoiding tax.
The Department of Justice also has obtained injunctions against employers who fail to withhold, account for and pay over employment and withholding taxes and against return preparers who prepare false returns.
“Our injunctions suits enable us to stop the harm caused by the promotion of tax fraud schemes and the preparation of false tax returns,” said Assistant Attorney General O’Connor. “By taking action, we minimize the number of people who get caught up in these schemes and help to assure that everyone abides by this essential duty of citizenship—the duty to pay tax.”
Coordinated Civil and Criminal Proceedings
The government brings both its civil and its criminal tools to bear in the fight against tax fraud. An ongoing tax scam causes continuing harm to the federal Treasury and it leaves participants owing taxes, interest and, often, penalties as well. The government does not wait until a criminal case has been developed to take action to stop the scam. Rather, the Justice Department brings civil injunction suits to stop both the promotion of tax scams and the preparation of false or fraudulent returns. Additionally, in appropriate cases, the Justice Department brings criminal charges against the promoters, preparers, and scam participants to punish them for their unlawful conduct.
Further details about these and other tax enforcement cases are available on the Tax Division’s website http://www.usdoj.gov/tax/, on the IRS’s website http://www.irs.gov, and on the IRS Criminal Division’s website http://www.ustreas.gov/irs/ci/.
The Department of Justice encourages anyone who has information about suspected tax fraud to report it to the IRS tip line at 1-800-829-0433.
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