Mr. Romney's Returns Not Claiming All of His Charitable Deductions (10/1/12)

I normally did not stoop to politics (at least overtly) in this blog.  (Outside this blog, I do have opinions and sometimes express them.)  However, where politics intersects the criminal tax law, well, I feel it appropriate to post something on this blog.

The political backdrop is that presidential candidate Mitt Romney apparently did not claim all of his tax deductions for charitable contributions.  For most of us, that would seem odd.  At the most basic level, many taxpayers cannot afford to forego deductions -- they need the tax savings.  But money is one thing Mr. Romney has in abundance, so he does not have the same level of need and, to put it another way, he can easily afford to pay more tax than the law says he owes.  Besides, he had the goal of claiming to the American public that he has paid tax at something like 14% (rather than something less) and thereby can empathize with the taxpaying public.

But that does raise an issue as to how he presents the forebearance on his returns.  By reporting his taxable income and tax liability without claiming the deductions, has Mr. Romney done something immoral or even illegal?

A noted tax commentator, Charles I. Kingson, published a letter to the editor of Tax Notes noting that the Form 1040 Mr. Romney signed contains the standard jurat declaring under penalty of perjury that "to the best of my knowledge it is true, correct, and complete."  See Charles I. Kingson, Did Romney Violate the Jurat?, 137 Tax Notes 107 (Oct. 1, 2012)
Mr. Kingson observes:

Not to claim the correct amount of charitable contributions, as Mitt Romney is alleged to have done (see Doc 2012-19796 , 2012 TNT 185-6 ), renders several entries (including taxable income and taxes payable) untrue, incorrect, and incomplete. The taxes said to be owed, for example, can be gotten back by filing a subsequent correct return. In a related but now obsolete context, the IRS has ruled that "it is not permissible . . . to take into account only a portion of the actual charitable contributions for the purpose of increasing the income tax liability thus computed." Rev. Rul. 67-460, 1967-2 C.B. 123. (The above ruling would have resulted in a tax advantage for that taxpayer in future years, as opposed to the purported political advantage Romney may be looking for.) 

But in either case, submitting incorrect numbers on a tax return violates the jurat; and this constitutes violating an oath to the federal government.

Now just for a quick review of the potentially applicable provisions:  Tax evasion (Section 7201) would not apply because there is no tax due and owing; Tax perjury (7206(1)) could apply, because all it requires is a willful false statement (see an  excerpt from my book below); Fraudulent or false returns (Section 7207) also might apply for the same reason.

Excerpt from my Federal Tax Crimes book:

So, § 7206(1) does not require a tax due and owing.  Hence § 7206(1) can apply when § 7201 cannot.  Indeed, § 7206(1) may apply to a false statement that fully pays the tax liability or even materially overstates the tax liability.  For this reason, it is sometimes said that evidence that there is no tax due and owing is irrelevant in a tax perjury case (see the quoted case above), but wouldn't the lack of a tax due and owing and intent to evade same be relevant to the issue of intent or motive to commit tax perjury?  Moreover, from a prosecutorial judgment call standpoint, is it likely that the Government will pursue someone for a false statement where that taxpayer has in fact correctly reported the tax liability or even over reported and overpaid the tax liability?  This is unlike a tax protestor scheme intending to disrupt the system beyond the individual taxpayer involved.  And, if the IRS really suffered no loss (or no material loss) in tax, you will find when we review the Sentencing Guidelines that sentencing will be minimal (almost certainly probation unless the taxpayer has a significant criminal history) and the ripple effect to other taxpayers will be almost minimal because there will be no significant publicity.  Accordingly, in virtually every § 7206(1) prosecution (but not all), the Government will believe that it can establish a material tax loss and will do so at the time of sentencing.

I won't do a cut and paste on Section 7207 which is a misdemeanor rarely charged by DOJ Tax except in unusual circumstances.  Suffice it to say it just requires a false return.

One final note, the Sentencing Guidelines in a case where tax is not underreported makes a sentence unlikely and hence disincentivizes DOJ Tax from using its limited prosecution resources in such a case.  I doubt that it would marshal prosecution resources in Mr. Romney's case where his public pronouncements, known to the IRS, made clear that the IRS was not mislead about the numbers reported on the return.

Still, even if one concludes the misstating the numbers on the return will not likely lead to prosecution, can one still be unconcerned about the ethics of stating under penalty of perjury that the return is "true, correct and complete."  Normally, regular perjury requires a material false statement and Section 7201 does also (except that the courts say that virtually everything on the return is material).  But, for normal perjury one would not think that there is license to tell a false statement just because it is not material and will not be prosecuted.  Even if one could not be convicted of perjury for telling an immaterial lie, is it ethical to do so?

Finally, of course, if there were criminal exposure, what about the return preparers?

Any thoughts?

Note:  I will do the same posting on my Federal Tax Procedure Blog, here, since readers of that blog are likely interested in this particular topic as well.  Readers interested in other readers' comments might want to also check that blog entry for its comments.

Addendum:  See James Edward Maule, No Thanks, Uncle Sam, You Can Keep Your Tax Break, 31 Seton Hall Legis. J. 81 (2006), posted on SSRN, here.  The abstract is:

Abstract:       

This article examines the question of whether a taxpayer is permitted to forego a deduction or credit for which the taxpayer otherwise qualifies. There are many reasons why taxpayers might choose to ignore a deduction. In some situations, the alternative minimum tax computations cause a deduction to increase, rather than decrease, tax liability. A taxpayer whose non-business deductions exceed income has no use for additional deductions. There are instances when the tax cost of giving up a deduction is less than the tax benefit thereby made available to another taxpayer, or less than a non-tax financial benefit available to another person if the taxpayer does not claim that person as a dependent. Taxpayers may disregard deductions or credits because the benefit of the deduction or credit is less than the anticipated cost of an audit, or because they wish to keep private the information supporting the claim.  

The question is important because the number of taxpayers facing it on account of the alternative minimum tax phenomenon is increasing rapidly. Similarly, Boeing's recent announcement that it would not deduct the amount it has agreed to pay in settlement of several charges brought by the Justice Department even though it considers it deductible has pushed the question into a brighter spotlight. \ 

The article explores the statutory language, the few IRS issuances and judicial opinions that address the question in specific, narrow instances, the small bit of applicable legislative history, and concludes that by answering the question one way or the other, they require a more finessed answer to the question than yes or no. The article then explores specific instances in which deductions have been ignored by taxpayers, and identifies those situations in which the IRS and the courts has sanctioned failure to claim a deduction and those in which they have not. Careful analyis of the practical challenges to requiring taxpayers to claim all allowable deductions suggests that an all deductions are mandatory paradigm would be unworkable because it could easily be circumvented with techniques of which the IRS is aware and which the IRS has not sanctioned, such as deliberate failure to maintain requisite substantiation and other records supporting the deduction. Finally, the article considers policy arguments for and against the proposition that all deductions are mandatory.  

The article concludes that deductions are not mandatory other than in the computation of self-employment tax, as to which the IRS and courts have concluded deductions cannot be ignored, and other than the earned income tax credit which incorporates the self-employment tax computation concept. This conclusion is based on ample statutory evidence that allowable deductions will go unclaimed, on the failure of courts, aside from the self-employment tax situation, to compel taxpayers to claim all allowable deductions, and on the explicit and implicit approval by the IRS of disregarded deductions. The article suggests that aside from the two situations in which specific authority requires taxpayers to claim deductions, there is no reason for taxpayers who wish to forego deductions to hesitate in doing so.