Use The Internet Or Strayer Library To Research Civil Fraud

Use The Internet Or Strayer Library To Research Civil Fraud Tax Cases

Use the Internet or Strayer Library to research civil fraud tax cases and criminal fraud prosecutions by the IRS. Imagine a situation in which a client under audit by the IRS omitted $100,000 in income. Examine the significant factors relative to the omission by the client that would result in a criminal investigation rather than a civil fraud proposal by the IRS. Based on the guidance in Circular 230, speculate as to which provision the CPA violated and the extent of any sanctions for CPA for not detecting the omission.

Paper For Above instruction

The distinction between civil fraud and criminal tax fraud within the context of IRS enforcement is crucial for understanding the potential legal and professional consequences for taxpayers and their accountants. When an individual omits significant income, such as $100,000, the IRS's response can range from civil sanctions to criminal prosecution, depending on several key factors that indicate the intent and circumstances surrounding the omission. This paper explores these factors, the applicable provisions of Circular 230 relating to CPAs, and the potential sanctions involved.

Civil Fraud Versus Criminal Fraud in Tax Cases

Civil fraud cases typically involve the IRS proposing adjustments to a taxpayer’s return due to inaccuracies, omissions, or misrepresentations, which are deemed to be non-willful or due to negligence. Civil penalties often include monetary fines and interest, and in some cases, the taxpayer may face additional penalties for underpayment of taxes. The determination hinges largely on the taxpayer’s intent or knowledge regarding the omission.

In contrast, criminal fraud involves intent to evade taxes and is pursued when the IRS finds evidence of willful misconduct or fraudulent behavior. Factors pointing toward criminal fraud include deliberate concealment of income, provision of false documentation, or repeated violations over extended periods (Internal Revenue Service, 2015). Criminal charges are pursued with the aim of criminal prosecution, possibly resulting in fines and imprisonment.

Factors Suggesting Criminal Investigation

In the scenario where a client omits $100,000 in income, several factors would influence whether the IRS pursues criminal investigation rather than civil penalties:

1. Intentional Omission: Evidence that the client knowingly failed to report income suggests criminal intent. If the omission was deliberate and aimed at evading taxes, it is more likely to escalate to a criminal investigation.

2. Pattern of Past Conduct: Prior instances of tax evasion or similar omissions increase the likelihood of criminal charges.

3. Documentation and Evidence: The presence of falsified documents, manipulated records, or obstruction of the IRS audit process supports criminal proceedings.

4. Magnitude of Omission: An omission of $100,000 often exceeds the threshold typically associated with civil penalties, especially if coupled with evidence of willful concealment.

5. Client Behavior During Audit: Attempts to conceal or destroy evidence, resist cooperation, or provide false statements tend to favor a criminal investigation.

The IRS generally considers the above factors collectively. The presence of intent to evade taxes, combined with deliberate concealment, can elevate the case from civil to criminal.

Circular 230 and CPA Violations

Circular 230 establishes rules governing practice before the IRS, including duties of CPAs in tax practice. Notably, Section 10.22 of Circular 230 prohibits practitioners from knowingly assisting or advising clients in conduct that violates tax laws or IRS regulations. Moreover, Section 10.33 addresses the requirement of competence, requiring practitioners to exercise due diligence and professional judgment.

In this context, a CPA may violate Circular 230 if they:

- Fail to exercise due diligence in reviewing the client’s financial records, thereby missing the omission.

- Neglect to advise the client on the legal implications of income omission, especially if they are aware of the client's intent.

- Assist or enable intentional concealment or fraudulent reporting.

If the CPA knew about the omission and failed to take appropriate steps to discover or report it, they could be considered complicit in the fraudulent activity, violating Circular 230 provisions regarding due diligence and responsible conduct (IRS, 2010).

Sanctions for the CPA

The severity of sanctions against the CPA depends on the nature of the violation. Possible sanctions include:

- Reprimand or censure for minor violations.

- Suspension of practicing privileges temporarily.

- Disbarment or disqualification from practicing before the IRS in severe cases of misconduct.

When a CPA fails to detect or report an obvious omission, especially if negligent or reckless behavior is involved, disciplinary action can be significant. The IRS Office of Professional Responsibility (OPR) investigates such violations, and sanctions are based on the gravity of the misconduct (IRS, 2010).

Conclusion

In summary, the decision to pursue criminal investigation over civil fraud hinges on the presence of willful misconduct, deliberate concealment, and intent to evade taxes. Factors such as prior history, evidence of deception, and the amount involved influence this determination. Under Circular 230, CPAs have a duty to exercise due diligence and avoid assisting in fraudulent schemes. Failure to detect or report significant omissions like the $100,000 income gap can result in disciplinary actions ranging from reprimands to disbarment, depending on the breach's severity. Ensuring professional integrity and thorough review processes is critical for CPAs to comply with legal standards and uphold public trust.

References

  • Internal Revenue Service. (2010). Circular 230: Regulations Governing Practice Before the Internal Revenue Service. IRS Publications.
  • Internal Revenue Service. (2015). Criminal Investigations: Frequently Asked Questions. IRS.
  • United States Department of Justice. (2014). Tax Fraud and Evasion. DOJ Publications.
  • Greenstein, M. (2017). “Civil and Criminal Tax Fraud: Differences and Key Factors.” Journal of Tax Practice & Procedure, 34(2), 45-59.
  • Chaiken, J. (2011). The IRS and Criminal Investigations, 1990-2010: A Review. Tax Law Review, 64, 123-147.
  • Roth, E. P. (2018). Ethical responsibilities of Certified Public Accountants in Tax Practice. Journal of Accountancy, 226(2), 56-60.
  • United States v. Kuper, 19 F.3d 912 (9th Cir. 1994).
  • Mitchell, S. (2019). The Role of Due Diligence in Tax Practice: A Circular 230 Perspective. Tax Adviser, 50(4), 174-180.
  • Johnson, D. (2020). Tax Evasion: Legal and Ethical Considerations. Harvard Law Review, 133(3), 1235-1254.
  • Association of International Certified Professional Accountants. (2021). Professional Ethics in Tax Practice. AICPA Publication.

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