Yearly Archives: 2020

According to Law360, aNorth Carolina federal court wrongly applied an obstruction of justice enhancement to the 46-month sentence of a man convicted of tax fraud totaling more than $2.7 million, and he must be resentenced, the Fourth Circuit said Thursday.

The three-judge panel vacated Arthur Joseph Gerard's sentencing in a North Carolina district court for helping a holistic medicine business' conspiracy to hide more than $2.7 million from the Internal Revenue Service. 

The appellate court upheld Gerard's conviction, but found the lower court didn't fully explain how Gerard's testimony satisfied the three elements of perjury that would support the sentence enhancement for obstruction of justice, according to the per curiam opinion.

"While the court found that Gerard's testimony was contradictory and false, the court did not rule on whether the false testimony was material or given willfully," the court said.

Gerard was sentenced in November to 46 months in prison to be followed by three years of supervised release, and was ordered to pay nearly $568,000 in restitution, according to court documents.

On appeal, Gerard had argued that the lower court failed to detail an example where his testimony could be considered perjury that would warrant a sentence enhancement for obstruction of justice, according to court documents. In the lower court's opinion, there was inadequate discussion of why the sentence enhancement was warranted and a failure to "identify any explicit findings regarding perjury," Gerard said in his appeal brief.

Meanwhile, the U.S. government argued that the rationale for the sentence enhancement was properly laid out in the lower court's opinion, clearly identifying several of Gerard's statements as false, according to its brief.

The case is U.S. v. Arthur Joseph Gerard III, case number 19-4858, in the U.S. Court of Appeals for the Fourth Circuit.

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The court of claims In ALL STACKED UP MASONRY, INC. v. U.S., 26 AFTR 2d 2020-XXXX, (Ct Fed Cl), 10/22/2020 held that “Taxes are what we pay for civilized society.” Compania General De Tabacos de Filipinas v. Collector, 275 U.S. 87, 100 (1927) (Taft, C.J.). For good reason, there are few lawful justifications for failing to pay one's taxes. 

Plaintiff All Stacked Up Masonry, Inc. (“All Stacked Up”), a corporation, believes it has such an excuse. It brings this suit to challenge penalties and interest assessed by the Internal Revenue Service (“IRS”) following its failure to file the appropriate payroll tax documents and its failure to timely pay payroll tax liabilities for multiple tax periods.

All Stacked Up filed its Complaint seeking a refund of $95,590.67, the amount it previously paid to the IRS in tax penalties and interest for the periods ending December 31, 2013, through December 31, 2015. All Stacked Up asserts that its failure to comply with its tax obligations should be excused due to “reasonable cause” and thus, the penalties and interest it paid should be refunded. 

The basis of All Stacked Up's assertion of reasonable cause involves an injury suffered by the owner, Sean Spraungel. 

This Injury Caused All Stacked Up To Delegate Tax Preparation Responsibilities To An Employee, Who Could Not Properly Operate The Tax Preparation Software. 

The Employee's Failures Left All Stacked Up
Noncompliant With Its Tax Obligations.

Although Spraungel may have suffered significant injuries after falling on ice, and other employees of the corporation may have experienced user difficulties in operating tax preparation software, these excuses cannot establish “reasonable cause” necessary to abate tax penalties assessed by the IRS. 

Furthermore, even if All Stacked Up could show reasonable cause for failing to file a return or pay the taxes owed, part of All Stacked Up's claim would nevertheless be barred by the applicable three-year “look-back” period.

For the reasons set forth above, the Court hereby GRANTS the United States' motion to dismiss, (ECF No. 11), pursuant to RCFC 12(b)(6), and DISMISSES All Stacked Up's Complaint without prejudice. The Clerk is directed to enter judgment accordingly.

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On August 26, 2020 we posted IRS Is Not Sending Notices for Unpaid Taxes Until it Catches Up on Mail Backlog, where we discussed on August 21, 2020, the IRS announced that it has suspended the mailing of three notices – the CP501, the CP503 and the CP504 – that go to taxpayers who have a balance due on their taxes. 

Although the IRS continues to make significant reductions in the backlog of unopened mail that developed while most IRS operations were closed due to COVID-19, this temporary adjustment to processing is intended to lessen any possible confusion that might be associated with delays in processing correspondence received from taxpayers.

Now the IRS will resume issuing the 500 series balance due notices to taxpayers later this month. These notices were paused on May 9 due to COVID-19.

Although the IRS continued to issue most agency notices, the 500 series were suspended temporarily because of a backlog of mail at the IRS due to COVID-19. 

In late October or early November some taxpayers will begin seeing the updated 500 series notices with current issuance and payment dates.

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According to DoJ, on October 14, 2020, a Federal Grand Jury in the District of Puerto Rico returned an indictment charging Gabriel F. Hernández, with ten counts of wire fraud, in violation of Title 18, United States Code, Section 1343.  The indictment was unsealed after the arrest of the defendant by federal law enforcement officers from IRS-CI.

“As I have said in the past, persons who are involved in committing fraud are encouraged to come forward to authorities – that includes individuals that are fraudulently using Puerto Rico’s tax laws to evade federal taxes,” said U.S. Attorney Muldrow. 

“This Case Should Also Serve As A Warning To Anyone Considering Seeking To Evade Taxes By Illegally Exploiting Federal And Puerto Rico Tax Laws.”

“Federal and Puerto Rican tax laws have been put in place to invigorate the economy and provide financial relief to Puerto Rico.  IRS Criminal Investigation will vigorously pursue any individuals and professionals that fraudulently enrich themselves by abusing government tax incentive programs,” said Tyler R. Hatcher, Special Agent in Charge of the IRS-CI Miami Field Office.

According to allegations in the indictment, Hernández, a CPA who served as Tax Manager and Partner-in-Charge of the Tax Division of a large public accounting, tax, consulting and business advisory firm (BDO), devised a scheme to defraud the Internal Revenue Service of the United States Department of the Treasury. The scheme involved the submission of false information to the government of Puerto Rico in an attempt to fraudulently provide Company A with federal tax relief via the provisions of Act 20.

Act 20, also known as the Export Services Act, offers tax incentives for Puerto Rican companies to export services to other jurisdictions. The tax benefits on income derived from customers outside Puerto Rico in relation to services rendered from Puerto Rico included a fixed income tax rate of 4% for eligible export services, a 100% tax-exemption on dividends from earning and profits, and a 60% tax-exemption on local municipal taxes.

In December 2018, Hernández formed Company A under Puerto Rico law for an undercover special agent of the IRS-CI posing  as a wealthy United States taxpayer from Arizona. 

In December 2019, Hernández caused to be prepared and filed a fraudulent tax-exemption application with the Office of Industrial Development and fraudulently obtained Act 20 tax exemption status
for Company A.

In December 2019, Hernández also determined that Company A would report $500,000 in business earned income in Puerto Rico, which would reduce Company A’s federal taxes. Then in July 2020, Hernández caused a Puerto Rico corporate tax return for Company to be prepared and filed with the Puerto Rico Department of Treasury (Hacienda), falsely claiming that $500,000 was earned in Puerto Rico by Company A.

Hernández also caused the preparation and filing of false 2020-2021 Business Volume Declarations with the Municipality of San Juan based on the false earnings. The defendant unjustly enriched himself and others by receiving fees in exchange for these false and fraudulent acts.

The indictment further alleges that, as part of the scheme, the defendant defrauded the IRS, and unlawfully evaded the assessment and payment of taxes, by engaging in financial transactions devoid of any economic substance (sham transactions). 

The Transactions Were Intended to Create The Illusion of A Consulting Business Earning Income From Services Performed Within Puerto Rico, Rather Than Within
The Mainland United States.

The defendant and others communicated by e-mail and telephone with undercover special agents of the IRS-CI in interstate and foreign commerce as part of the scheme. The defendant and others misrepresented, concealed, and hid, acts done in furtherance of the scheme.

If found guilty, the defendant faces a maximum statutory sentence of up to 20 years in prison and a fine up to $250,000 for charges relating to wire fraud. 

• An indictment is a charging document containing allegations. 
• All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

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