Friday, October 10, 2014

Court Holds that a False Claim Crime Can Be Committed by Unsigned Claim for Refund on 1040 (10/10/14)

In United States v. Sroufe, 2014 U.S. App. LEXIS 18078 (11th Cir. 2014), here, unpublished, the Eleventh Circuit held that a claim for refund filed on a Form 1040 can be a false claim prosecutable as a false claim under 18 U.S.C. section 287, here.  

The unsigned 1040 would not be a return under the traditional Beard test.  Beard v. Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th Cir. 1986).  In relevant part, Beard held that a "return" for purposes of the penalty sections based on a return filing requires the following elements:
First, there must be sufficient data to calculate [the] tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. 
All of these elements are subject to interpretation, but the requirement that the taxpayer execute the return under penalty of perjury is fairly straight-forward.  If the taxpayer sends in an unsigned return claiming a refund (or even just misreporting the tax due), he cannot be prosecuted for penalties requiring a return, such as the accuracy related penalty (Section 6662, here), the civil fraud penalty (Section 6663, here), or tax perjury, Section 7206(1), here (which has its own penalty of perjury requirement).  Nor, from the sole act of filing an unsigned return, can he be tried for tax tax evasion, Section 7201, here.  The IRS could charge failure to file (Section 7203, here).  I suppose at the stretches, the IRS might be able to prosecute the filing of an unsigned return in egregious cases (Sroufe was one) under the tax obstruction provision, Section 7212(a), here; Sroufe was charged and convicted for tax obstruction but not failure to file..

But Sroufe was charged and convicted for making a false claim via the unsigned 1040.  That is troubling because an unsigned 1040 simply is not a valid claim via a return under the Beard test.

I wonder whether, if the defendant here had encountered the Commissioner on the street and asked for a refund in the amount claimed, that would be sufficient to make a false claim case?  There is no textual requirement in the statute that the claim be made in writing.  Or what if during an audit of why a taxpayer had not filed a return, the taxpayer asked the agent for the same amount as a refund.  Or what if the defendant encountered an IRS mail room clerk and requested the refund?  Or what if all of those requests were made by unsigned letter.  Could any of the instances be prosecuted as a false claim case.  Perhaps -- if this case and the Snipes lower court decision discussed below are correct.

As cited in the DOJ CTM, the false claim crime can be charged with a signed return claiming a refund.  See DOJ CTM 22.04 (2012 ed.), here, citing "United States v. Drape, 668 F.2d 22, 26 (1st Cir. 1982) (holding that the signing and filing of a false tax return claiming a refund constituted a false claim under 18 U.S.C. § 287)."  DOJ says that a refund claim must be made, but in the context of a Form 1040, the unsigned return is not a refund claim for the reasons noted above.

It is true that the statute does not have a penalty of perjury requirement.  But, if the claim is that it is a false claim for refund, the law requires that claims for a tax refund be filed under penalty of perjury.

I cut and paste the Sroufe Court's reasoning:
B. Jury Instruction Regarding an Unsigned Tax Return 
Sroufe argues the jury instruction that "[a] tax return seeking a refund is a claim against the United States whether or not the tax return is signed," was improper. Appellant's Brief at 11. Sroufe contends the instruction does not accurately state the law, is not supported by our precedent, and undermined his mens rea defense. 
We review de novo jury instructions challenged in the district court, in order "to determine whether the instructions misstated the law or misled the jury to the prejudice of the objecting party." United States v. Gibson, 708 F.3d 1256, 1275 (11th Cir.) (internal quotation marks omitted), cert. denied, 134 S. Ct. 342, 187 L. Ed. 2d 238 (2013). We will not reverse a defendant's conviction based on a challenge to the jury charge unless we are "left with a substantial and ineradicable doubt as to whether the jury was properly guided in its deliberations." Id. (internal quotation marks omitted).  
The criminal False Claims Act ("the Act") provides: "Whoever makes or presents . . . any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title." 18 U.S.C. § 287. The Act does not define the term "claim," but the Supreme Court has determined it should not be given a narrow reading. See United States v. Neifert-White Co., 390 U.S. 228, 233, 88 S.Ct. 959, 962, 19 L. Ed. 2d 1061 (1968) (deciding this issue in an action to recover statutory forfeitures under a previous version and separate provision of the Act). In Neifert-White, the Supreme Court held that the Act "reaches beyond 'claims' which might be legally enforced, to all fraudulent attempts to cause the Government to pay out sums of money." Id. at 233, 88 S.Ct. at 962. 
Filing a federal income tax return to the IRS constitutes a "claim" under 18 U.S.C. § 287. See United States v. Haynie, 568 F.2d 1091, 1091-92 (5th Cir. 1978) (affirming defendant's conviction for filing false tax returns without discussing whether the returns were signed). We have not considered specifically, however, whether the submission of an unsigned federal income tax return to the IRS constitutes a "claim" under 18 U.S.C. § 287. 
In a related context, we held that an unsigned Form 1040, marked "NOT A TAX return—SEE ATTACHED LETTER;" a W-2 form marked "INCORRECT (CONCLUSORY);" and other IRS forms, combined with a letter requesting a refund of taxes, constituted a frivolous income tax return for the purpose of upholding a fine. Madison v. United States, 752 F.2d 607, 608-09 (11th Cir. 1985) (internal quotation marks omitted). In Madison, the IRS fined a taxpayer for filing a frivolous income tax return under I.R.C. § 6702(a). Id. at 608. The taxpayer sued the IRS under I.R.C. § 6703(c) for a refund of the penalty assessed. Id. The taxpayer argued he could not be penalized under § 6702, because the documents he filed merely constituted a request for a refund of erroneously collected taxes and did not purport to be a tax return. Id. at 609. We held that because the documents filed were official tax forms and were completed in detail, it was proper to treat the forms as a "purported return" for § 6702 purposes, notwithstanding the taxpayer's disclaimer. Id.
The district judge did not err by including a jury charge stating: "A tax return seeking a refund is a claim against the United States whether or not the tax return is signed." ROA at 1516. An unsigned Form 1040 may constitute a tax return or a purported return, if the form is an official IRS tax form and was completed in detail. Madison, 752 F.2d at 609. Sroufe submitted an official, completed, IRS Form 1040. He also submitted several other completed and signed IRS forms. Like the defendant in Madison, Sroufe submitted a letter requesting the Treasury Secretary file his tax return. Under those circumstances, the IRS was justified in treating the submissions as a tax return, though a frivolous one. Tax returns submitted to the IRS constitute claims under § 287. Haynie, 568 F.2d at 1091. 
Furthermore, the jury instruction did not undermine Sroufe's mens rea defense that he did not know he was filing a claim or that his tax return was fraudulent. Even with the given instruction, the jury was free to accept Sroufe's argument that he honestly believed his tax returns were accurate. The jury also was free to believe Sroufe truly thought he had not filed a tax return, but merely had requested guidance or information about his tax return. Therefore, the instruction did not mislead the jury. Id.
Presumably, under this reason, the IRS can treat a filing as a return or not a return, depending upon which penalty it desires to apply.

The same argument was made in United States v. Snipes, 2007 U.S. Dist. LEXIS 65432, 5-7 (M.D. Fla. 2007)
II. Count Two - The False Claim Offense 
The argument here is that Count Two cannot stand since the focus of the charge -- Defendant Snipes' amended income tax return for 1997 -- did not purport to be a valid claim because it was not signed under penalty of perjury. In fact, he says, the return was altered to state that it was signed "under no penalties of perjury." 
Apart from the fact that this argument also anticipates the evidence and would require the Court to improperly look beyond the face of the Superseding Indictment, there is no persuasive authority for the Defendant's position. n3 To the contrary, the law weighs in favor of permitting this charge to stand. See United States v. Neifert-White Co., 390 U.S. 228, 233, 88 S. Ct. 959, 19 L. Ed. 2d 1061 (1968) ("This remedial statute [the False Claims Act] reaches beyond 'claims' which might be legally enforced, to all fraudulent attempts to cause the government to pay out sums of money."); quoted in United States v. Killough, 848 F.2d 1523, 1533 (11th Cir. 1988). At least one other Circuit Court of Appeals has affirmed a § 287 conviction under strikingly similar circumstances. See United States v. Nash, 175 F.3d 429 (6th Cir. 1999) (affirming conviction under § 287 for filing Nonresident Alien Income Tax Returns signed "with all rights reserved, without prejudice" and labeled as "Revocation of Election/Claim of Refund")
   n3 Defendant Snipes cites to an IRS Revenue Ruling and an unpublished decision from another jurisdiction in support of his position that the Form 1040X in this case cannot form the basis of a false or fraudulent claim under § 287. See Rev. Rul. 2005-18; Letscher v. United States, No. 99 Civ. 2602(NRB), 2000 U.S. Dist. LEXIS 13061, 2000 WL 1290864 (S.D.N.Y. Sept. 11, 2000). Both address the validity of tax returns for purposes of obtaining an income tax refund under the Internal Revenue Code. Neither the Revenue Ruling nor the unpublished decision involve any criminal charges under 18 U.S.C. § 287, and they do not construe or apply that statute in any way.

Defendant Snipes' motion to dismiss Count Two will be Denied. n4
    n4 The Defendant also uses this same theory to argue that Count Two of the Superseding Indictment does not allege the existence of a valid claim, and therefore must be dismissed for failure to allege all elements of the charge. This argument fails for the same reason as the first theory. There is no requirement that any claims which form the basis of a criminal charge under 18 U.S.C. § 287 must be valid and enforceable.
Snipes is really different than Sroufe, because an altered jurat is hard to catch at the service center and may be processed as a return.

I question whether the Government should be charging cases that are not clearly covered by the statute.  As noted above, the Government has plenty of clearly applicable prosecution charges (failure to file, tax obstruction and, I am sure, others) to get a conviction and an appropriate sentence for the misconduct in question.

Note that a related issue could be presented in the aiding and assisting crime, Section 7206(2), here. for presentation of false documents.  In United States v. Davis, 603 F.3d 303 (5th Cir. 2010), a criminal case, where the taxpayer “added the phrase ‘without prejudice’ near his signature on the jurats.”  The preparer who was also convicted of aiding and assisting in the preparation of false returns claimed that the addition prevented the 1040 from being a return and hence from supporting the conviction.  The Court that the added language did not defeat return status, giving the IRS considerable leeway as to characterization where the language is ambivalent.  But, aiding and assisting merely requires a false document, without any requirement of perjury.  Arguably, the false claim statute is the same, except I would argue, where the false claim is made by a return that does require that it be signed under penalty of perjury.

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