Section 7206(2): When Helping With a Return Becomes a Crime

Section 7206(1) punishes the person who signs a false return. Section 7206(2) punishes the people who help make it false. That includes return preparers, but the statute is broader than that, and it reaches people who never touch the return itself.

This guide explains the statute and how the IRS approaches it. It is general information. It is written for preparers, advisors, and taxpayers who want to understand the law, not as advice for any situation.

The statute

IRC 7206(2) punishes any person who "willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document."

The penalty is the same as for 7206(1): a felony, with a fine of not more than $100,000 ($500,000 for a corporation), imprisonment of not more than 3 years, or both, plus costs of prosecution. Under 18 U.S.C. 3571, an individual felony fine can reach the greatest of the statutory amount, $250,000, or an alternative amount based on gain or loss.

The elements

The IRS summary in Exhibit 25.1.1-1 lists three elements:

1. Aiding or assisting in, procuring, counseling, or advising the preparation or presentation of a document in connection with matters arising under the internal revenue laws.
2. The document was false as to a material matter.
3. Willfulness.

The taxpayer does not have to be in on it

The most important phrase in the statute is the last one: "whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return." A preparer who inflates deductions without telling the client can be charged under 7206(2), even though the client signed in good faith.

The IRS fraud manual describes that pattern in IRM 25.1.2.9, on return preparer fraud. It describes preparers who inflate income, deductions, credits, or withholding without the taxpayer's knowledge to increase the refund, then divert some or all of the refund into their own account or a nominee's. Taxpayers who are victims of that kind of scheme file Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit, with supporting documentation.

It is not limited to preparers

IRM 25.1.2.5, on aiding and abetting, says an individual who willfully aids and assists with the understatement of a tax liability can be charged under section 7206(2), and that "the individual must be directly involved in the preparation or presentation of the false or fraudulent document." It adds that this "may include independent parties such as lawyers, accountants, return preparers, and appraisers who counsel on a course of action."

The same section says it is "possible for criminal referrals and/or civil penalties to apply to both the taxpayer and the person assisting the taxpayer." It also points to the civil counterpart: IRC 6701 imposes civil penalties on anyone who aids and abets an understatement of tax liability.

How the IRS refers preparer cases

Preparer cases have their own referral rules. Under IRM 25.1.3.7, potential criminal fraud referrals regarding a return preparer are discussed with the area return preparer coordinator and the Fraud Enforcement Advisor. If the scheme involves multiple clients, one Form 2797 is prepared, listing the most culpable party first, and it must include:

• the names of the clients,
• their taxpayer identification numbers,
• the tax form numbers,
• the amount of the adjustment for each client, and
• the resulting deficiencies for each client.

The examiner is told to keep each client's examination report and relevant workpapers so the civil return preparer penalty under IRC 6694 can be pursued after the criminal case is resolved. See when an audit turns criminal.

Searches of professional offices get extra review

When the person under investigation is an accountant or lawyer, the Justice Department adds a layer of approval. Under JM 6-4.130, a United States Attorney's Office must submit a written request and obtain the approval of the Justice Department's Tax Division for any search warrant where the target or subject is reasonably believed to be, among others, an accountant or a lawyer. The CI manual also has a dedicated subsection on executing searches of attorneys' offices, IRM 9.4.9.3.2.4.1, and describes the use of a privilege team of agents and attorneys not involved in the investigation to review potentially privileged material. See IRS-CI search warrants.

The privilege problem for preparers and their clients

When a preparer is under investigation, clients often want to know whether what they told the preparer is protected. Usually it is not, at least not in a criminal case. The federally authorized tax practitioner privilege in IRC 7525 applies only in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court.

The attorney-client privilege covers communications made in confidence to obtain legal advice from a lawyer. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Second Circuit recognized that the privilege can extend to an accountant who helps a lawyer give legal advice, but said that if what is sought is "only accounting service," or if "the advice sought is the accountant's rather than the lawyer's, no privilege exists." Ordinary return preparation is accounting service. See Kovel arrangements.

For preparers, the same point runs the other way. A preparer facing an investigation needs a lawyer of their own, and conversations about the investigation should happen with that lawyer, not with clients or staff who may become witnesses.

Statute of limitations

IRC 6531(3) applies a 6-year limitations period to willfully aiding or assisting in, procuring, counseling, or advising the preparation or presentation of a false or fraudulent return, affidavit, claim, or document. See the criminal tax statute of limitations.

Why taxpayers should care

If you are a taxpayer whose returns were prepared by someone now under investigation, two things are likely.

First, the IRS may examine your returns. A preparer referral lists clients and their adjustments by design.

Second, you may be a witness. Agents investigating a preparer interview clients. If the false items were the preparer's doing and you did not know, say so through counsel. If you were involved, you have exposure of your own under section 7206(1), and you should not walk into that interview alone. See your rights in an IRS criminal interview.

The enabler question in voluntary disclosures

The IRS Voluntary Disclosure Practice makes this explicit. Under IRM 9.5.11.9, a taxpayer making a voluntary disclosure must cooperate with the IRS "in investigating any professional enablers who aided in the noncompliance." IRM 9.5.11.9.1 requires the Part II narrative to identify all professional advisors who rendered services to the taxpayer from the inception of the noncompliance. Advisors whose clients come forward should expect to be named. See the Voluntary Disclosure Practice.

Why advisors should care

For preparers and advisors, the line is willfulness. A good-faith mistake, a reasonable position on an uncertain question, or reliance on information the client provided is not a willful act of making a return false. Knowingly creating false entries, coaching clients to report things the advisor knows are untrue, or inflating items to boost refunds is.

An advisor who learns that the IRS is looking at client returns, or who receives a summons or grand jury subpoena for client files, needs a lawyer of their own. The interests of an advisor and a client can diverge quickly in this kind of investigation.

Preparer referrals are coordinated inside the IRS. IRM 25.1.3.7 says that if the compliance group manager and Fraud Enforcement Advisor decide a return preparer is not involved in criminal fraud, the area return preparer coordinator should be contacted to consider a preparer action case. A declined criminal case can still become a civil preparer case.

General information only, not legal advice. Reading this page does not create an attorney-client relationship. Laws and IRS procedures change; the sources cited were reviewed on the date shown above.