On April 3rd of this year, the 9th Circuit in United States v. Jennings decided a case with sentencing implications for those accused of tax fraud. The defendants raised nearly $16 million through their primary business. They then opened a second business account where checks from their primary business were deposited. More than $2.5 million was deposited into this second account. The defendants then used those funds to pay for personal expenses such as a new home, cars, and to make payments to family members. None of this income was reported to the IRS.
The defendants were convicted on four counts for conspiring to defraud the United States. They were also convicted of four counts of submitting false tax returns and for failing to file tax returns in violation of 26 U.S.C. § 7206(1) and 7201. At sentencing, the probation office recommended an enhancement based on the defendants’ use of “sophisticated means” to accomplish their crime. The District Court applied the enhancement, concluding that the use of the accounts to conceal the tax fraud was more complex than the typical tax fraud case.
The defendants objected and later appealed the sentence. While the means used by the defendants to conceal their income was not previously included in the list provided by the sentencing guidelines, the Court found that the list was not exclusive. The court found that there was no need for a concealment scheme to be especially novel or brilliant. And even a failure to totally conceal the income was sufficient to find that sophisticated means were employed. In this case, the defendants had opened the second accounts under their own names. And while this might have made detection of the scheme easier, it was not enough to defeat a finding that sophisticated means were employed, resulting in the sentencing enhancement. Ultimately, it appears that a tax evasion scheme need not be that sophisticated to qualify for a sophisticated means sentencing assessment.