Third Party Liability for Tax Evasion
Those accused of tax evasion are typically prosecuted under at least one of three statutes in the Internal Revenue Code: 26 USC § 7201 which criminalizes any attempt to evade taxes, 26 USC § 7206, which prohibits making false statements to the IRS and 26 USC § 7212, the law against obstruction of the internal revenue laws. None of these laws requires that the offender evade their own taxes. Assisting or encouraging others to evade income taxes is just as much of a crime as evading your own taxes. In fact, sometimes the IRS has an incentive to target the promoters or aiders of tax fraud than the taxpayers themselves.
This year, at least two forms of preparer and promotion of fraud topped the IRS’ dirty dozen list of tax crimes. And the agency has sent out numerous warnings about preparer fraud. The IRS is primarily concerned with two types of preparer fraud. One victimizes the taxpayer, either by stealing personal information or by deceiving the taxpayer about illegitimate refund schemes and absconding with the taxpayer’s money before he can learn of the deception. The other type of preparer fraud that concerns the IRS are those that assist taxpayers in knowingly evade income taxes.
Often, the IRS will begin an investigation into a taxpayer’s affairs after learning of an abusive scheme that is being promoted. After investigating the promoter and determining that the tax avoidance scheme is abusive, the IRS will begin to look at those that purchased the scheme. Sometimes, they will begin the investigation by first informing the taxpayer that they were involved in an abusive scheme and provide the taxpayer an opportunity to come clean and make restitution. By starting with the promoter and preparers, the IRS can use their client lists to find new targets for prosecution.
The existence of promoters and preparers also have varying implications for the criminal guilt of the taxpayers involved in these schemes. Because all convictions require that the conduct be willful, those that are duped by preparers and promoters are likely to have less criminal culpability than the preparers and promoters themselves. But because many tax evasion promoters vocally promote how their schemes can aid taxpayers in avoiding income taxes, working with a known promoter of tax fraud and tax evasion is likely to only make things easier for the IRS and harder for the taxpayer.