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At Risk For Willfull & Material False Statement Tax Crime?

In a previous article titled Can You be Prosecuted for Perjury or False Statements in Your Tax Returns?, we described some of the elements of the False Statements tax crime. Here, we will go into greater detail about the two remaining elements of the offense, material matter and willfulness.

As previously noted, the perjury and false statements crime is separate from the tax evasion statute, and different elements must be present for the taxpayer to be charged with perjury and false statements.

Falsity and Material Matter

Under the perjury and false statements statute, there must be proof that the return, statement, or other document is false with respect to a material matter (1). Although the statute does not specifically mention the need to show falsity, the requirement is implied and has been stated by the Sixth Circuit as follows: “[T]he essence of the statute lies in the willful falsity of a statement . . . Although § 7206(1) is not invoked unless a taxpayer subscribes to a return ‘under the penalties of perjury,’ the criminal conduct sought to be proscribed—the gist of the offense—is the preparation and making of false statements . . . The tax return is the federal jurisdictional element. The false statement is the culpable act.” A taxpayer has violated the statute if he does not believe that the return, statement, or document is true and correct as to every material matter, where “true and correct” essentially means that the document is complete and accurate.

The materiality element of the offense is a question of law to be decided by the court. This element goes to whether the false statement relates to a “material matter” on the taxpayer’s return, statement, or document. Although the government is required to prove materiality, it does not need to demonstrate that the taxpayer was aware of the materiality of the statement. As far as what constitutes a material statement, it is well-settled that any item on an income tax return that must be included in the proper computation of tax is a material matter. A broader way to determine materiality is to ask whether the item has a natural tendency to influence or affect the ability of the IRS to verify the accuracy of the tax return. However, the IRS does not need to show that it actually relied upon false statement in order to establish materiality.

What are Some Examples of Material Matters Under the False Statements Statute?

Based on previous cases brought under IRC § 7206(1), the following types of false statements have been found to be material:

  1. Omitting gross receipts;
  2. Overstating LIFO inventory;
  3. Falsely reporting gross income;
  4. Falsely describing sources of income;
  5. Falsely stating purchases made;
  6. Falsely answering “no” to the Schedule B to Form 1040 question about foreign financial assets and accounts;
  7. Falsely including personal expenses as corporate expenses;
  8. Falsely stating that payments had already been made on estimated tax;
  9. Overstating the cost of goods sold on Schedule C of Form 1040;
  10. Omitting gambling wins and losses;
  11. Omitting the reporting of overtime wages paid to employees;
  12. Falsely reporting capital gains as ordinary income;
  13. And many other examples.

What Constitutes Willfulness Under the False Statements Statute?

The final element of the false statements statute is willfulness, which is generally defined in the same general fashion as other misdemeanor and felony provisions in the IRC as the “voluntary, intentional violation of a known legal duty.” The government’s attempts to prove willfulness in this type of case will be similar to the means used in a tax evasion case under IRC § 7201; in proving the willfulness of the taxpayer’s conduct, the government will attempt to show the taxpayer’s intent through skillful presentation of all the facts and circumstances.

In United States v. Pomponio, the Supreme Court held that the definition of willful requires “a voluntary, intentional violation of a known legal duty.” Later cases expanded on this concept, setting forth the elements that the prosecution must show in order to prove the willfulness of the taxpayer’s conduct. In Cheek v. United States, the court stated that willfulness requires showing (1) voluntary action; (2) intentional conduct; and (3) knowledge of what the law requires. Thus, there can be no willfulness on the part of the taxpayer where his or her actions were taken through inadvertence, carelessness, or an honest mistake as to the law.

The Relationship Between Tax Evasion and the False Statements Crime

Often, the taxpayer charged with tax evasion under IRC § 7201 is also charged with criminal false statements under IRC § 7206(1). These two offenses are separate charges with respect to the same tax return, but a taxpayer may be found to be guilty of only the lesser offense of criminal false statements. If there is no disputed factual element distinguishing the government’s case against the taxpayer under the two separate statutes, the taxpayer cannot be convicted of both under the lesser-include offense doctrine, because the lesser offense of false statements is included in the finding of tax evasion. In that case, the conviction under IRC § 7206(1) mergers with a conviction of tax evasion under IRC § 7201. In contrast, if there are factual differences, and the false statement was made but did not result in substantial tax consequences, then a jury could easily find that IRC § 7206(1) was violated but IRC § 7201 was not.

How a Tax Attorney Can Help

If you are under investigation by the IRS under the criminal false statement statute, then you must consult with an experienced tax attorney. The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with criminal tax issues since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Tax Law References
  1. IRC § 7206(1).

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.