Tax Investigations & Tax Crimes – Federal Roundup of Recent Cases

The U.S. Department of Justice (“DOJ”), charged Mohammad Jafar Nikbakht, a used car wholesaler, who operated several lots in the San Diego, CA, with tax evasion, subscribing to a false income tax return, and failure to file income tax returns. In March 2011, Nikbaht pleaded guilty and admitted that he had concealed a substantial amount of the earnings he made through his auto dealerships and small businesses. As part of his plea he admitted guilt to additional tax crimes of failing to file tax returns and tax perjury and admitted to various aggregating circumstances such as, operating under another’s name/license to conceal income from the Internal Revenue Service, and directing payment methods.

The end result, presiding Southern California U.S. District Court Judge John Houston found that taxpayer Nikbaht failed to pay an estimated $200,000 in back taxes. In addition to ordering $124,454 in restitution, the taxpayer was also sentenced to 15 months in prison.

This is just the criminal side of the case. The civil tax case comes next. Besides the federal and state income tax assessments for the under-reported income being assessed, there will likely be additions of civil fraud penalties (IRC 6663) of 75% of the underpayment. Here, the taxpayer has pled to tax evasion, therefore, he is barred from re-litigating the amount of income unreported that would be taxable because the government has already established the amount in the criminal tax case.

If for some reason the civil fraud penalty is not assessed, the government has another opportunity with the civil failure to file tax return penalty, under IRC 6651. We have not read the underlying plea agreement but according to the Department of Justice (DOJ) Press Release, the taxpayer “further admitted that he willfully failed to file his personal tax return.” This may indicate that the failure to file the tax return will fall under the fraud umbrella which will increase its penalty from a maximum of 25% of the tax due to 75% of the tax due.

From a tax attorney’s perspective, the above description of the potential civil penalties is oversimplified and there are nuances not explained here that only an experienced tax attorney can navigate. For instance, there may be potential advantages for advocating for one penalty over the other during the civil tax matter that will follow this criminal tax matter. Simply put, there may be some opportunity, albeit slight given these facts (and it is unknown if the criminal attorney was anticipating civil tax ramifications of the case when negotiating the plea), for this taxpayer that could provide an opportunity to minimize the overall tax and penalty liability, or otherwise gain some benefit.

If you have found yourself the subject of a criminal tax investigation or if you are worried about such problem for under-reporting income, failing to file tax returns, tax crimes resulting from illegal behavior, submitting false tax documents to the government, or failing to report an off-shore bank account, we can help. Further, you should be aware that criminal and government investigations generally do not appear in isolation; they are often accompanied by other government investigations of the target individual and related individuals.

Moskowitz LLP has over thirty years of experience defending its clients against the government in criminal tax and civil tax cases. This means that our law firm’s broad range of substantive experience permits us to offer an integrated approach to a full range of tax, criminal and civil matters. Our team of tax attorneys, criminal tax attorneys, CPAs and other tax professionals enables us to assemble a comprehensive team to defend you, and strategize for what we believe is the best outcome for you.
Please call us for assistance.

Disclaimer: Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.