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Tax Preparer's Obstruction Conviction Upheld, but Restitution Order Modified

(Parker Tax Publishing June 2017)

The Fifth Circuit upheld the conviction of a taxpayer, who operated two tax preparation businesses, for filing fraudulent tax returns that grossly inflated amounts paid for wages. While the court also upheld the amount of the restitution award, it modified the judgment so that the restitution obligation is limited to the supervised release term, which is the only period during which restitution can be imposed for a tax offense. U.S. v. Westbrooks, 2017 PTC 255 (5th Cir. 2017).

Tammy Westbrooks operated a tax preparation business called JATS Tax Service in Charlotte, North Carolina. JATS was owned by Tonya Robbins but Westbrooks managed day-to-day operations and had signature authority for JATS's checking account. At the same time, Westbrooks co-operated another tax preparation business, CF&W Financial Services, in Houston. Westbrooks allegedly misrepresented the profits of JATS by inflating amounts paid for wages and obscured the amount workers were actually paid.

In 2009, the IRS executed a search warrant of JATS and a grand jury issued a subpoena to produce records. Westbrooks provided only a packet of materials containing primarily unopened mail and refund checks for JATS clients. At a subsequent court hearing, Westbrooks testified that (1) from 2005 to 2009 no Forms W-2 or 1099 were prepared or filed for JATS workers; (2) she kept no records identifying JATS employees; and (3) she did not keep track of employees' wages or the hours they worked. She also claimed that JATS's owner had already handed over all bank records responsive to the subpoena, which supported the amounts reflected as wages in the tax returns. Westbrooks was convicted for criminal contempt for failure to comply with the grand jury subpoena.

Westbrooks was later indicted for corruptly endeavoring to obstruct the due administration of internal revenue laws and for willfully filing false tax returns for 2007-2009. Specifically, she was charged with violating Code Sec. 7212(a) which makes it a crime to "in any ... way corruptly or by force or threats of force ... obstruct[] or impede[], or endeavor[] to obstruct or impede, the due administration" of internal revenue laws. The obstruction count was based on conduct occurring from 2004 through 2009, including submitting tax returns that falsely stated JATS's income. The indictment alleged that although annual compensation for all JATS workers never exceeded $30,000, the returns listed wages or subcontractor expenses ranging from approximately $87,000 to $248,000 during the years at issue. Further, Westbrooks allegedly did not properly file IRS and social security forms documenting employee compensation and paid JATS employees in cash. The indictment was also based on Westbrooks' providing false and misleading testimony at the earlier hearing.

After a jury trial, Westbrooks was convicted on all counts. The district court imposed a sentence of 40 months and ordered her to pay approximately $273,000 in restitution to the IRS, with the payments to begin while Westbrooks was serving her sentence and to continue during her term of supervised release.

Westbrooks appealed, arguing that the Code Sec. 7212(a) tax obstruction provision requires a pending IRS action such as an investigation or proceeding, and that the government had failed to allege such an investigation or proceeding during the obstructive conduct. She also argued that Code Sec. 7212(a) is unconstitutionally vague, and that prosecuting her for both criminal contempt and tax obstruction amounted to double jeopardy. With regard to the restitution order, Westbrooks argued that the order to pay restitution while Westbrooks was serving her sentence exceeded statutory authority. She also challenged the restitution amount.

The Fifth Circuit upheld the tax obstruction conviction under Code Sec. 7212(a), but modified the restitution order to provide that payments would begin only after Westbrooks served her sentence.

With respect to Westbrooks contention that the indictment did not allege an essential element of the tax obstruction statute because it did not assert that she acted with knowledge of a pending IRS action such as an investigation or proceeding, the Fifth Circuit joined a majority of the circuits to have considered the issue in holding that Code Sec. 7212(a) does not require an ongoing IRS action. The court reviewed the Sixth Circuit's decision in U.S. v. Kassouf, 144 F.3d 952 (6th Cir. 1998), the only circuit to hold that Code Sec. 7212(a) requires an ongoing IRS action, and concluded that the court incorrectly interpreted the statute. The Fifth Circuit noted that Kassouf relied on U.S. v. Aguilar, 515 U.S. 593 (1995) which held that a conviction under the obstruction statute in 18 U.S.C. Sec. 1503 requires a nexus between the underlying conduct and judicial proceedings. However, there were three key differences between that statute and Code Sec. 7212(a). First, the court found that Code Sec. 7212(a) criminalizes a broader range of conduct than 18 U.S.C. Sec. 1503, which is limited to obstruction of grand jury or judicial proceedings. Second, the court noted that the history of the provisions is different. The predecessor of 18 U.S.C. Sec. 1503, the court said, referred specifically to acts that obstructed or impeded the administration of justice in a court, while Code Sec. 7212(a) has no similar predecessor tying it to a proceeding. Finally, the court reasoned that the purpose of Code Sec. 7212(a) supports the broader reading that most courts have embraced. The breadth of the statutory language, the court said, shows a purpose to prevent the frustration of tax collection efforts. That purpose, according to the court, would be thwarted by the narrower reading in Kassouf.

The Fifth Circuit also rejected Westbrooks's argument that Code Sec. 7212(a) is unconstitutionally vague and that she had been exposed to double jeopardy. According to the court, even if Code Sec. 7212(a) was vague as applied to some conduct, it was clear that it applied to Westbrooks, who fabricated compensation amounts and engaged in deceptive practices. Because Westbrooks's conduct was clearly prohibited, she could not challenge the statute on grounds that it was vague. Westbrooks's argument that her prosecution violated the Constitution's prohibition on double jeopardy also failed because criminal contempt and the tax obstruction statute are separate offenses that applied to different conduct.

Regarding Westbrooks's restitution challenges, the Fifth Circuit first determined that although mandatory restitution is not applicable to an internal revenue offense, the district court properly ordered restitution as a condition of Westbrooks's supervised release term. The court modified the judgment so that Westbrooks did not owe restitution until her term of supervised release began.

The amount of the restitution order was upheld. The Fifth Circuit held that the district court correctly calculated restitution for the three counts of filing false returns for 2007-2009 as well as for the obstruction conviction which included the three additional years from 2004-2006. The Fifth Circuit rejected Westbrooks's argument that there was insufficient testimony regarding JATS employees' wages to support the restitution amount, holding that in-court testimony is not necessary to support a restitution award or loss calculation.

For a discussion of criminal and forfeiture penalties for interfering with the administration of internal revenue laws, see Parker Tax ¶265,148.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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