Criminal exposure isn’t limited to personal returns

Penalties of perjury language appears at the bottom of every tax return you file with the IRS. The same with tax returns you file with the California Franchise Tax Board. Personal or business, the same standards apply. Even when you delegate the task of tax return preparation to someone else, the IRS and FTB say you have a responsibility to know that your return is complete and accurate.

Most taxpayers used paid preparers. Even lawmakers who pass the tax laws generally do not -- or cannot -- prepare their own tax returns. With over half our returns being prepared by someone else, it is no wonder that many taxpayers may feel tempted not to even look at their tax returns.

Even if you do not prepare your own return, you should read and understand the return to the best of your ability. You must sign it under penalties of perjury. You should review it before signing, and alert the return preparer to any mistakes you discover. With electronic filing, it is easier today for taxpayers and their preparers to have almost no interaction. That can lead to mistakes.

With a traditional paper filing, at least the taxpayer had to actually sign the return before mailing. That imported a certain amount of due diligence. Sure, you can say you just signed without reading. But that doesn't get you off the hook for penalties. The e-filing authorization still puts you on the hook, and still requires the same penalties of perjury standard.

In criminal tax cases, and sometimes even in civil ones, the government may ask what materials you gave to your tax preparer. If it appears that you cherry-picked what to provided, and were hiding something, it is can be costly. It might even subject you to potential criminal liability.

You might think of criminal exposure for tax returns primarily with personal returns, not business. But here's a reminder about business tax returns too. A Dublin, California, man was recently sentenced to prison for filing a false corporate tax return. Shiv D. Kumar, 60, was sentenced to serve 30 months in prison, after previously pleading guilty.

According to documents filed with the court, Kumar was the sole shareholder and president of A-Paratransit Inc. (API), a company that provided transportation services to disabled individuals. Kumar filed false corporate returns with the IRS for tax years 2009 and 2010, which underreported API's gross receipts by $2,229,216 and $2,412,435, causing a tax loss of $1,584,055. Kumar deposited API's receipts into three separate bank accounts held at different banks.

To conceal API's true income, Kumar provided his accountant with false books and records from which he had omitted gross receipts relating to two of API's accounts. Kumar used the unreported funds for personal expenditures, including purchasing property near Vallejo, California. In addition to the term of prison, Kumar was sentenced to serve one year of supervised release. Restitution will be decided at a later date.

These facts may sound extreme, and in some ways, they are. But they also involve a guilty plea, something the government frequently is able to get in tax cases. Often, the evidence the government has collected is pretty damning. A guilty plea may be advisable as a way to minimize the damage.

In another case this year, a mother son duo were sentenced to prison over corporate tax returns. The defendants were San Francisco residents, Howard Hsu and his mother, Tracy Chang. They were sentenced to prison after being convicted of tax fraud charges.

Hsu was ordered to serve 33 months in prison. Chang was ordered to serve 12 months and one day in prison. Hsu and Chang were found guilty by a jury of conspiring to file fraudulent corporate income tax returns, filing false tax returns, and aiding the preparation of false tax returns.

These are useful reminders that what goes in your tax return matters, and you must sign under penalties of perjury. There is not always simply a tax bill to pay if something goes wrong. You may never be audited, but you might be. The vast majority of tax audits are civil, and have little risk of criminal liability.

Still, a majority of criminal tax cases start with a civil audit. A claim that you do not know what is in the return may not work. In fact, the courts have consistently ruled that taxpayers have a duty to read their tax returns, to ensure that all income items are included.

Since as early as 1928, courts have held that even if all data is furnished to the return preparer, the taxpayer still has a duty to read the return and make sure all income items are included. See Mackay v. Commissioner, 11 B.T.A. 569 (1928). The feds take payroll taxes seriously too.

Although most payroll tax cases do not turn criminal, the IRS views using tax money withheld from employees as stealing from the U.S. Treasury. Being an officer or director usually means you are a responsible person, so the IRS can pursue you personally for payroll taxes if the company fails to pay. When a tax shortfall occurs, the IRS can make personal assessments against all responsible persons with ownership in or signature authority over the company.

The IRS can assess a Trust Fund Recovery Assessment against every responsible person under Section 6672(a). You can be liable even if have no knowledge the IRS is not being paid. The penalty can be assessed against multiple responsible persons, allowing IRS to pursue them all to see who coughs up the money first.

The IRS also wants to make sure this kind of bad tax situation does not occur again. The government can move to shut down the business so the situation does not get worse. In extreme cases, the government may seek criminal penalties. More commonly, if the government thinks the situation is getting worse, it can seek an injunction.

Do your best to take all of these things seriously. The government sure does.