In December of 2020, two CPAs pled guilty to tax fraud that resulted in over $1.2 billion in fraudulent charitable deductions and defrauded the IRS of more than $250 million in taxes. In this blog, our attorneys at Law Offices of Horwitz & Citro, P.A. consider the impact of this first criminal prosecution on the defendants, their co-conspirators, and others who claimed charitable deductions stemming from the Agee’s Syndicated Conservation Easements.
Two Georgia-Based CPAs Plead Guilty to SCE Fraud
S. Agee and C. Agee, both CPAs with offices in Atlanta, Georgia, were charged with conspiracy to defraud the IRS in separate 25-page criminal Informations. The Department of Justice filed the criminal Informations on December 16, 2020. This was the first-ever criminal case involving syndicated conservation easements (SCE). Five days later, both S. and C. Agee pled guilty.
The IRS and Department of Justice announced that there will be future criminal investigations and prosecutions of those who have illegally utilized syndicated conservation easements deductions to defraud the IRS.
What Are Syndicated Conservation Easement Deductions?
Congress created conservation easements tax deductions as a key tool for protecting environmentally and historically important land. Typically, a donated conservation easement restricts land use and development to protect and preserve its unique qualities. When they comply with IRS laws, legitimate conservation easements protect the environment and provide tax incentives for the donor. Like any other form of tax incentive, conservation easements can be abused. The IRS and the Department of Justice believe that syndication of conservation easements are a major source of tax fraud.
The criminal charges against S. and C. Agee, and their pleading guilty, will motivate both the IRS and the DOJ to vigorously prosecute fraudulent SCE deductions. The Department of Justice and the IRS believe that criminal prosecution for fraudulent SCE deductions is necessary to stop the fraud and loss of tax revenue.
The amount of the tax deduction available through legitimate conservation easement charitable donations is significant. A taxpayer may use the charitable deduction to offset up to 50% of taxable income for the year in which the conservation easement donation was made. If the amount of the donation deduction is not completely used in that year, the deduction may carry forward for up to 15 years. Because of this favorable provision, many refer to the conservation easement donation as a deduction for the rich.
More Criminal Investigations and Prosecutions Will Be Forthcoming and Will Not Be Limited to Those Who Dealt with the Agees
The DOJ and the IRS announced that more criminal investigations and prosecutions will be coming. While the Agee cases were the first criminal prosecutions, many civil cases in the United States Tax Court involve the disallowance of SCE deductions. The Tax Court cases stemmed from IRS audits that rejected the SCE deductions. The audits resulted in large increases in tax plus interest and monetary penalties. So many of these cases exist that the IRS Office of Chief Counsel offered a settlement option. The settlement option was announced on June 25, 2020, and is available only to those who had cases pending on that date. Anyone under IRS criminal investigation is excluded from the settlement.
A review of the settlement terms reveals that the IRS recognizes different levels of culpability.
Category one partners are the most culpable and include anyone who:
- Was involved in organizing or participating directly or indirectly, in the sale or promotion of any SCE;
- Received fees for organizing, selling, or promoting any SCE;
- Received fees for providing an appraisal of any SCE;
- Received fees for providing legal or tax advice and tax return preparation services for any SCE;
- Was a donor of a conservation easement in any SCE transaction;
- Was a material advisor with respect to any SCE transaction;
- Was a partner in that partnership or employee of any person that engaged in activities outlined above.
Category two partners are anyone not in category one. The civil penalties for category two partners are less than the civil penalties for category one partners.
The possibility of an IRS criminal investigation is real and presents a potential threat to anyone who utilized an SCE charitable deduction. Even those with cases in the U.S. Tax Court may face the possibility of a criminal tax investigation, especially if the case is not settled.
What Is the Difference Between a Civil IRS Case and a Criminal Case?
Many people do not understand the difference between a civil IRS dispute and a criminal prosecution.
Any taxpayers may be audited by the IRS which will result in one of the following:
- The IRS finds no errors in the tax return and the matter is closed;
- Errors on the tax return are identified, and result in increased tax and interest on the unpaid tax;
- Civil penalties may be imposed which can include accuracy penalties and civil fraud penalties that are in addition to the unpaid taxes and interest;
- If the audit shows that taxes were overpaid, the taxpayer will be entitled to a refund
If any part of the underpayment of tax is due to fraud, the 75% civil fraud penalty applies to the entire underpayment unless the taxpayer proves that a portion of the underpayment was not attributed to fraud; then that portion is not subject to the 75% penalty.
A civil case against the IRS can be filed in U.S. Tax Court without having to first pay the tax, penalties, and interest imposed as a result of the audit. Civil audits resulting in civil penalties can be harsh. While the increased tax and the fraud penalty are severe, they pale in comparison to a criminal case, which can result in years in prison.
The Informations filed against the Agees indicate that future criminal prosecutions will be filed against accountants, lawyers, appraisers, promoters, and individuals who falsely claimed charitable deductions as a result of the SCE's.
The IRS and the Department of Justice investigations and prosecutions will not be limited to those who dealt with the Agees. However, those who worked directly or indirectly with the Agees should realize that they are potential targets for prosecution.
The charges against C. and S. Agee and the potential maximum sentence indicates that the Agees are cooperating with the DOJ and IRS against others involved in SCE false deductions
The Informations against S. and C. Agee reveal that there are numerous unnamed individuals, who the government calls co-conspirators. The chances of these people being criminally prosecuted are high. The Agees' plea agreements are sealed and therefore, not available to the public. The fact that the plea agreements are sealed indicates that the Agees are cooperating with the government and are providing evidence against the co-conspirators referenced in the Information as well as others.
The Agees are charged with one count of conspiracy to defraud the government in violation of Title 18 U.S.C. §371. The offense has a maximum term of imprisonment of five years.
The criminal charge sets forth that the conspiracy began as early as 2013, continued through December 2019, and involved more than $1.2 billion in false charitable deductions that defrauded the IRS of more than $250 million in taxes.
The significance of the Agees being charged with only one conspiracy is that the maximum punishment is five years in prison. This five-year maximum limits the time in prison that the court can impose. Allegations in the criminal Information reveal that the government could have charged many additional crimes.
In a federal criminal case, the judge must consider the U.S. Sentencing Guidelines when imposing the sentence. The requirement applies to all charges, including conspiracy to defraud the Internal Revenue Service. One of the major factors under the Sentencing Guidelines is the amount of loss. A tax loss of $250 million together with other related matters considered in the Sentencing Guidelines results in a recommended sentence of 15 to 19 years in prison.
In sentencing the Agees, the court is limited to five years in prison even though the Guideline range is 15 to 19 years.
The Agees could have been charged with other crimes, including:
- Money laundering,
- Aiding and abetting in tax evasion, and
- False statements for aiding and abetting those who filed tax returns utilizing the false SCE tax deductions.
If the Agees were charged with additional crimes, the court could impose a sentence of 15 to 19 years or longer depending on the additional crimes and number of additional charges.
The fact that the case against the Agees was brought by an Information rather than indictment is another indication that the Agees are cooperating. When a defendant is cooperating with the government, it is common for them to waive their constitutional right to be charged by a grand jury. The defendant can agree to be charged in an Information, which is filed by the prosecutor, not a grand jury.
In the Agee cases, cooperation means providing information against others, such as attorneys, real estate appraisers, accountants, and anyone recruiting taxpayers to get involved in SCEs. Individuals who took the SCE charitable tax deductions may also be charged with false statements on their tax returns and tax evasion if it can be proven that the individuals knew that the tax returns were false.
Realities of Cooperation By Defendants Facing Lengthy Prison Sentences
Defendants enter into plea agreements for various reasons – one of the most important is the hope of significantly reducing the prison sentence. The Agees have reduced the potential sentence from decades in prison to a maximum of five years. They likely hope to further reduce the prison sentence below five years by additional cooperation, which will include testifying for the government in prosecutions of co-conspirators.
Federal prosecutors recognize that defendants/cooperators have an interest in the successful prosecution of others. To ensure that cooperators do not fabricate stories to convict the innocent, the prosecutor's stress the necessity of cooperators telling the truth.
Any evidence from cooperators facing lengthy prison sentences may be false or exaggerated due to several reasons. The first is the government may expect the truth to conform to its theories of prosecution. The cooperator may testify falsely to curry favor with the government by telling the prosecutors what the cooperator thinks the government wants to hear. The second and related problem is that a cooperator may lie or fabricate evidence that incriminates additional people to make the cooperation more valuable to the government by obtaining more convictions.
Intent in a Criminal Tax Case
Criminal prosecutions for violation of income tax laws require the government to prove the defendant acted willfully. This means that the government must prove that the defendant knew the conduct was against the law. In complex tax matters, knowing that a deduction is false and therefore against the law is often the only disputed issue at trial.
The investigation by experienced IRS criminal agents will uncover all financial information, the proper taxes, and the amount of underpaid tax. Financial records are available from financial institutions and will be obtained by investigators and prosecutors during the investigation leading up to prosecution.
Whether the prosecution can prove that a taxpayer knew that the deductions generated by SCEs were fraudulent will depend on many factors, including:
- The taxpayer's knowledge of tax matters;
- Reliance of the taxpayer on professionals such as CPAs and tax lawyers;
- What insiders and co-conspirators say was told to the taxpayer;
- Statements made by the taxpayer to IRS criminal investigators and civil IRS auditors;
- Emails or other written communications which allow the government to argue that the taxpayer knew the tax return was false; and
- Trial testimony by cooperators.
In the cases against S. and C. Agee, the government contends that the SCE charitable deductions were known to be fraudulent. The government also charged that the Agees caused taxpayers to take SCE deductions in the years prior to when the easement donation was actually made. Those taxpayers who knew that the charitable deductions on the tax return did not occur in the year claimed to face an increased risk of criminal prosecution. Reliance on experts such as accountants and attorneys in preparing tax returns and giving tax advice may still be available as a defense to the tax payor.
Our Next Blog
Our next blog will discuss further criminal action by the Department of Justice and Internal Revenue Service in conformity with public announcements by both agencies. We will also consider what people who innocently filed tax returns taking fraudulent SCE charitable deductions can do to avoid criminal prosecution and reduce civil penalties.