Friday, February 19, 2010

Voluntary Disclosure Requires Good Amended Returns

One of the cardinal rules of filing an amended return to fix a criminal problem in the original return is to file a nonfraudulent amended return -- better still, an amended return foregoing even really aggressive, even if arguably, nonfraudulent positions. This rule applies to quiet and noisy voluntary disclosures. The reasons should be apparent: (1) if the amended return is fraudulent, the taxpayer has done nothing more than compounded the problem, has refreshed the statute of limitations and potentially has done a separate obstructive act (i.e., the amended return is intended to give the false appearance that he has cleaned up the problem); or (2) even if the amended return is nonfraudulent, but very aggressive positions that arguably do not cross the line could still poison the atmosphere should the IRS choose to focus on the amended returns to test whether the taxpayer has met the condition for voluntary disclosure that he or she fully cooperate.

In United States v. Salisbury (6th Cir. 2/16/10), an unpublished opinion, the taxpayer flunked this cardinal rule. The taxpayer there was helping in the collection of antique arms and helping himself to some of the cash that supposedly was going for purchases. This potentially violated a number of nontax criminal state and federal statutes.  As is typical, the taxpayer did not report all of the ill-gottent gain. The court described the situation thusly (omissions for readability):
Salisbury made large profits from these transactions but failed to pay all of the taxes on them. In the years for which he was convicted, 2000 and 2002, he reported no relevant income in the first year, and $ 247,888 in the second. After the controversy [about his allegedly illegal activities], Salisbury filed amended tax returns to account for some, though not all, of the additional income. In those amended returns he included an additional $ 16,500 in income in 2000 and $ 71,036 in 2002, both accompanied by the explanation that "Taxpayer thought items were not to be reported as income until sold."

According to the government, even after Salisbury amended his returns he still had understated his income by $ 298,749 in 2000 and by $ 622,372 in 2002, meaning that he should have paid an additional $ 119,896 and $ 241,581, respectively. Salisbury's expert, William Jessee, used a different accounting method in concluding that Salisbury understated his income by just $ 12,574 in 2000 and by $ 813,109 in 2002, corresponding to tax liabilities of $ 3,787 and $ 399,129.
I have no comment that the reader has not already figured out by just reading the quoted information.

The Government charged wire fraud, conspiracy to commit wire fraud, money laundering, and four counts of tax evasion related to the taxpayer's profits from these activites. The jury acquitted the taxpayer of all counts except "found him guilty of two lesser-included counts of willful failure to pay taxes for 2000 and 2002." The taxpayer received a 24 month sentence (the maximum permitted by the two misdemeanor convictions), although the tax loss produced a guidelines calculation indicating a much higher sentence. (This is a case where, in a sense, the lesser included offense really did save the defendant's bacon; maybe I'll state more about lesser included offese in a later blog.)

The key point for purposes of this blog is to reinforce the verity that amended returns to qualify for the voluntary disclosure practice must be good returns -- i.e., must themselves be nonfraudulent and the better part of wisdom is to forego the really aggressive positions.

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