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Tax Shelter Convictions Reversed; Big Loss For DOJ & IRS


by Brian Mahany

The U.S. Department of Justice has suffered a number of defeats lately in white collar criminal cases. While the DOJ still boasts a conviction record that would make any prosecuting agency happy, going after tax cheats appears to be getting more difficult. It’s either that or the IRS is focusing on the wrong people.

Last week the federal 2nd Circuit Court of Appeals tossed convictions against two former Ernst & Young tax specialists. Both cases involved the sale of allegedly abusive tax shelters.

In a 2-1 decision, the appeals court tossed the convictions of Richard Shapiro, a former Ernst & Young attorney, and Martin Nissenbaum, an income tax specialist. Both men were convicted in 2009. The government says that the shelters they were promoting generated $2 billion of losses to the Treasury.

The burden of proof in a criminal case is much higher than in a civil case. While the decision clears the good name of both men, it does not validate the tax shelters they were promoting.

The appellate decision is certainly welcome news for Nissenbaum and Shapiro but won’t likely have much impact on tax shelter prosecutions. The willingness to prosecute accountants and lawyers has resulted in a chilling effect over the entire industry. Tax professionals don’t want to risk prison and pay hundreds of thousands of dollars to defend their liberty.

We hope the DOJ and IRS become a bit more circumspect in their criminal charging decisions. Tax evasion requires the government to prove one or more affirmative acts in order to secure a conviction. Merely selling an unproven shelter product is alone, not enough for a criminal conviction.

The reversals of the criminal charges also doesn’t mean that purchasers of the shelters are off the hook. The IRS can and routinely does assess huge civil penalties for engaging in an abusive shelter and for failing to report the transaction. The government considers these “listed transactions” that have to be disclosed on  special return. Failing to disclose many shelters can lead to penalties of $100,000 to $200,000 or more.

The tax lawyers at Mahany & Ertl represent folks accused of tax crimes and also help taxpayers under audit by the IRS for listed transactions and abusive tax shelters. We have helped many small businesses with bogus 419, 412 and fraudulent captive insurance plans get back their hard earned money from promoters and others associated with the transactions.

If you would like more information or a no cost telephone consultation, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. IRS tax services available worldwide.

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