Last week, the U.S. Department of Justice (DOJ) announced a “nationwide series of enforcement actions targeting tax fraud.” In its press release, DOJ touted “prosecutorial actions against 76 defendants” who they claim, “intended an estimated loss in revenue to the federal government of more than $490,000,000.” The actions comprised the National Fraud Enforcement Division’s “first ever National Tax Enforcement Surge.”
The surge aligns with the recently disseminated Directive 26-12, a memorandum setting out Fraud Division priorities. In that memorandum, Assistant Attorney General Colin M. McDonald highlighted the need for “an aggressive, all-tools approach to investigating and prosecuting” the Fraud Division’s “tax . . . fraud priorities.” IRS Criminal Investigation Chief Jarod Koopman emphasized the focus on tax fraud, stating “[i]f there was ever any question whether criminal tax enforcement remains a priority,” these enforcement actions “should dispel all doubt.”
Link to Breakdown of Enforcement Actions Breakdown of Enforcement Actions
DOJ brought prosecutions against over 70 defendants in 35 federal districts from coast to coast. The targeted conduct was wide-ranging.
Abuse of COVID-era credits and incentives was a common theme. Five actions targeted fraud against federal programs designed to ease the burden of the pandemic. In the Eastern District of North Carolina, the owner of a tax preparation business was sentenced to 60 months in prison for “conspiring to prepare false returns claiming fraudulent refunds based on COVID-19 tax credits.” In Phoenix, a tax preparer was convicted at trial for aiding and assisting in the filing of false tax returns. Those returns included false COVID-19 tax credits on behalf of clients.
Employment tax misconduct was another focus, targeting business owners who collected payroll taxes from employees but failed to remit the collected taxes to the IRS. For example, a defendant in the District of Kansas was sentenced to 51 months for failing to pay employment taxes from his credit-card processing company. At the same time, he spent over $200,000 in loans for luxury vehicles. In another case, a trucking company owner in the Western District of Arkansas pleaded guilty to willful failure to account for and pay over trust fund taxes. He was sentenced to 20 months in prison and ordered to pay $3.8 million in restitution.
Another common theme was the use of sham trusts and tax shelter schemes. In the District of New Jersey, two men pleaded guilty to filing false Forms 1041 for their trusts, falsely claiming tax payments.
Link to Key Takeaways Key Takeaways
- Payroll/trust-fund tax compliance is a top enforcement priority, and personal liability attaches to owners. Liability can also attach to any person in the business with the duty to collect and pay taxes. Businesses should treat withheld payroll taxes as funds held in trust for the government and ensure timely deposits and filings.
- Sophisticated tax-avoidance structures marketed by third parties, such as trust-based shelters, carry risk of prosecution. Businesses and individuals approached with aggressive trust or shelter structures warrant independent legal and tax review.
- COVID-era and other refundable tax credits remain a major enforcement focus, even years after the programs ended. Businesses that claimed these credits should be prepared to substantiate eligibility.
- Tax preparation businesses remain a focus for the IRS. Keep in mind, tax preparers face direct criminal liability for client returns, separate from their clients’ liability.