Signature Not Required on Tax Return for Criminal Liability – Houston Tax Attorneys

One of the requirements for a document to be a tax return is that it is signed by the taxpayer under penalties of perjury. Most tax forms that are intended to be tax returns include a declaration at the bottom that includes the penalty of perjury language.

But most tax returns today are filed electronically. Rather than signing with pen and ink, taxpayers sign online or authorize their tax preparers to use electronic signatures or PINs. The transmission or PIN is the signature.

This begs the question, what happens if the taxpayer goes to a tax preparer and there is no evidence that the taxpayer authorized the use of an electronic signature? Can the taxpayer be held liable for errors or omissions on this type of tax return? Can the taxpayer be charged criminally if the tax return is fraudulent? The recent United States v. Uvari, No. 2:18-cr-00253-APG-NJK-1 (9th Cir. Oct. 10, 2024), court case provides an opportunity to consider this question.

Facts & Procedural History

The taxpayer in this case was a professional gambler. He was charged with filing false tax returns. The court opinion does not say how the returns were fraudulent, but chances are good that there was either omitted income or inflated gambling losses.

The tax return at issue in this case was the taxpayer’s 2011 individual income tax return. The tax return was filed electronically by the taxpayer’s CPA. Rather than having the taxpayer’s physical signature, the return contained only a Personal Identification Number (“PIN”) and the CPA’s Electronic Return Originator (or “ERO”) PIN.

During the criminal tax trial, the government did not produce Form 8879, which is typically used to document a taxpayer’s authorization for electronic filing. The taxpayer was convicted and appealed, arguing in part that the government failed to prove he had verified the return under penalties of perjury.

Filing False Returns

Taxpayers are generally required to file income tax returns. If a return is required, it can be a crime to not file the tax return. But if the return is filed and it qualifies as a tax return, it can also be a crime if the tax return is false or fraudulent.

Section 7206 is the applicable criminal statute. It reads as follows:

Any person who: Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

To prove a criminal violation for filing a false tax return under Section 7206(1), the government has to establish several elements. This includes showing that:

The defendant made and subscribed a return that was incorrect as to a material matter,
The return contained a written declaration that it was made under penalties of perjury,
The defendant did not believe the return to be true and correct, and
The defendant acted willfully with intent to violate the law.

This leads to the question as to what counts as a signature on a tax return?

What Counts as a “Signed” Return?

The traditional physical signature has largely given way to electronic filing. As the IRS agent testified in this case, “the IRS won’t receive a pen and ink signature from you in most cases. It’s always signed by a PIN.”

This can happen in two ways: either the taxpayer inputs their own PIN, or they authorize their tax preparer to enter a PIN on their behalf. In either case, there must be a declaration that the return is being signed under penalties of perjury. Typically, when a tax preparer files electronically on behalf of a taxpayer, they should obtain a signed Form 8879, which documents the taxpayer’s authorization to file electronically and use an electronic signature.

On the civil tax side of it, the courts have previously said that signing the Form 8879 does not transfer the obligation to file to the tax preparer and that the taxpayer still has to verify that the e-Filed return was received by the IRS. Thus, taxpayers cannot avoid the late filing penalty when a tax return is not received due to e-Filing mishaps.

This raises an interesting question: what happens when there is no Form 8879? Was the tax return actually filed if the process required for e-Filing was not followed? In this case, the government did not produce this form. This suggests that the form was never signed by the taxpayer. The absence of Form 8879 might seem to support a defense that the taxpayer never authorized the filing.

The Ninth Circuit court did not agree with this. It concluded that the government need not produce Form 8879 if there is other evidence showing the taxpayer authorized the filing.

Other Evidence of Filing

While there wasn’t a Form 8879 in this case, there was other evidence that the taxpayer authorized the filing. The taxpayer wrote a letter to the IRS in 2017 regarding the 2011 tax return. It stated: “I e-filed the original Form 1040 for 2011 on or about February 1, 2012.” This letter was sent to the IRS by the taxpayer to get the IRS to process the tax return.

The government admitted the letter into evidence in the criminal trial. The court found that a reasonable jury could infer from this statement that the taxpayer either filed the return himself or authorized his accountant to file it. This after-the-fact acknowledgment of the filing was sufficient to establish that the taxpayer had verified the return under penalties of perjury.

Comparison to the Non-Criminal Tax Return Rules

The standards to impose criminal liability are generally higher than those on the civil side. This ruling by the court is consistent with the various court’s holdings as to the non-criminal tax return filing rules, but the court cases are varied based on whether the taxpayer benefits or does not benefit from there being a signature on the tax return.

The tacit consent cases provide an example. These cases involve joint tax returns filed by spouses. The cases generally stand for the proposition that one spouse can bind another spouse by signing their name on a tax return. These cases usually involve situations that benefit the IRS as they are cases where the IRS has more than one taxpayer on the hook if the signature is valid.

The signature requirement in cases involving disputes over civil penalties is similar. Signatures are not always required for liability to attach when it comes to civil penalties. For example, the courts have generally concluded that even the tax preparer’s fraud or bookkeeper’s fraud can in some cases be imputed to the taxpayer. Thus, a taxpayer can even be liable for civil penalties even if they did not have any fraudulent intent. This is apparently true even if the return is e-Filed and not formally signed by the taxpayer.

Compare this to the signature requirements for tax refunds. While a spouse can sign a joint tax return for the other spouse, a tax attorney acting under a valid power of attorney cannot sign a Form 843 refund claim for the taxpayer-client. The rules are a little more nuanced than this for refund cases, however. At least one court has said that if the IRS audits a refund claim and does not require a signature on the return, the IRS can waive the requirement that the taxpayer sign the return by processing the return without a signature. While these refund cases usually benefit taxpayers as if the signature is valid the tax refund can be processed and refunds issued, there are exceptions.

The Takeaway

Signature issues abound when it comes to tax returns. The general rule is that signatures are less important when the facts and circumstances are that not having a signature benefits the taxpayer. When the taxpayer needs a signature to obtain some advantage or benefit, the rules are more strict. That lesson is presented again in this case. As explained by this case, taxpayers cannot always escape criminal liability for false returns if they did not physically sign the tax return. This is true even if the tax preparer failed to obtain Form 8879 signed by the taxpayer. The taxpayer’s own subsequent acknowledgment of the filing can supply the requisite authorization and count as a signature under penalties of perjury.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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What is a Bona Fide Loan for Tax Purposes? – Houston Tax Attorneys

It is often said that a taxpayer is free to structure their affairs as they see fit and can even do so in a way to minimize or avoid paying taxes. While this is true, it is equally true that the IRS is not bound by the taxpayer’s characterization of transactions. The IRS has a number of theories, arguments, and legal tools that it can use to recharacterize and, in some cases, even reverse the taxpayer’s characterization of transactions or even ignore the legal entity altogether.

There are several different recurring fact patterns where we see this. Intercompany transactions are prime examples. Loans are particularly suspect in terms of intercompany transactions and are frequently at the heart of tax disputes with the IRS.

This begs the question: what constitutes a bona fide loan for federal income tax purposes? The recent Feathers v. Commissioner, T.C. Memo. 2024-88, provides an opportunity to consider this question.

Facts & Procedural History

This case involves an S corporation that was organized to find and secure loans. The S corporation, in turn, owned other legal entities that were tasked with making the loans. The lower-level entities were to pay fees to the S corporation for finding loans that were funded.

The individual owner of the S corporation is the taxpayer in this court case. He caused the funds to transfer money to the S corporation and then took out some of the funds from the S corporation for his personal use.

The taxpayer took steps to document that these transfers were loans from the lower-level entities to the S corporation.

The SEC conducted an investigation, which led to criminal charges for financial crimes. After the taxpayer served time in prison, the IRS resumed its audit. It conducted a bank deposit analysis and determined that the loans from the lower-level entities to the S corporation were not loans, but rather commissions.

The IRS issued a statutory notice of deficiency on this basis and closed its audit. The case then ended up in the U.S. Tax Court.

About S Corporations & Flow-Through Taxation

An S corporation is a corporation or LLC that files a Form 2553 to make an election.

Once the S corporation election is made, the S corporation files a Form 1120S to compute the flow-through items, but those items are then picked up on individual shareholder returns and subject to tax on personal shareholder returns. This is done by issuing a Schedule K-1 from the S corporation to the shareholders of the S corporation. As explained below, the income flows through even if distributions are not made to the shareholder.

In addition to having tax at the shareholder level and not the entity level, the S corporation is also used to avoid self-employment taxes. That is beyond the scope of this article, but you can read about self-employment taxes for S corporations here.

Flow-through entities owned by an S corporation are reported on the Form 1120S. They add to the items of income and expense that get reported on the Schedule K-1 that is issued by the lower-level entities to the S corporation. The combined amounts from these lower-level entities and the S corporation itself all end up on the individual S corporation shareholder’s personal income tax return.

Tax Treatment of Intercompany Loans

An intercompany loan between flow-through entities generally doesn’t trigger income tax at the federal level. The entity that receives the loan pays interest back to the entity that made the loan and may get an interest deduction for tax purposes. The entity that made the loan picks up the interest income when payments are received. While it does not appear to be at issue in this case, taxpayers do often structure loans with S corporations to increase their basis to allow tax losses from the entity to flow through to the shareholder’s individual income tax return. You can read about S corp loans for losses, here.

Absent being a loan, in a situation like this where a subsidiary lends money to a parent entity, the amounts may also be taxed as distributions of earnings and profits. This too would normally not trigger income taxes. The earnings and profits of flow-through entities are picked up as income for the parent entity regardless of whether distributions are made from the subsidiary. If distributions happen to be made, they are usually tax-free to the extent of the parent’s investment (i.e., tax basis) in the subsidiary. Amounts in excess of this are often treated as capital gain on the sale of the parent’s interest in the subsidiary. Note, there is an exception for distributions of appreciated property, which can trigger a tax.

Alternatively, as argued by the IRS in this case, the transfers could also be compensation or commissions for services rendered by the parent for the subsidiaries. With this scenario, the commissions would be picked up as taxable income by the S corporation parent and that income would flow through to the S corporation shareholders. However, the subsidiaries would also get a corresponding tax deduction for the amount of the commissions made. The tax deduction would also flow through to the S corporation return and eventually to the shareholder’s individual income tax returns.

It is not clear from the court opinion, but it appears that the reason why the taxpayer was taking the amounts as loans was (1) to be consistent with his original treatment with the SEC and (2) that he did not own 100% of the S corporation or the lower-level entities. Thus, if the payments were commissions as the IRS argued, and not loans, the S corporation would pick up 100% of the amounts the S corporation received, but it would only get a portion of the offsetting tax deduction that also flowed through from the S corporations for the payment of the commissions. It seems that the lower-level entities may have had outside investors who owned those entities, which would produce a tax deduction for those other investors.

What is a Bona Fide Loan?

This brings us to the central question in this case: What exactly is a bona fide loan? The factors that the courts consider vary based on the leading court cases in the various circuit courts. The U.S. Tax Court sets out the factors in this court case as stated by the Ninth Circuit Court of Appeals.

The Ninth Circuit Court has said that whether a transaction was a bona fide loan is determined by considering these factors:

whether the promise to repay is evidenced by a note or other instrument;
whether interest was charged;
whether a fixed schedule for repayments was established;
whether collateral was given to secure payment;
whether repayments were made;
whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and
whether the parties conducted themselves as if the transaction were a loan.

In this case, the tax court determined that the transfers were not loans. Given the documentation and evidence, the tax court found that most of these factors were not satisfied. According to the court, the notes were executed after the transfers occurred, there was no evidence of interest being charged or paid, no fixed repayment schedule was established, and there was no collateral. Furthermore, the tax court found that the borrower entity did not have a reasonable prospect of repaying the purported loans given its financial condition. The court did not say whether there was a personal guarantee for the loan by the shareholder, which might have helped with this last factor.

For those seeking to have an intercompany transaction characterized as a loan, these are the exact findings that one would want to try to avoid.

The Takeaway

This case demonstrates the importance of carefully documenting intercompany transactions–particularly if the parties want the transaction to be respected as a bona fide loan. This is true even if the transactions are with flow-through entities and the amounts may seem like they net out on the shareholder’s individual income tax return. There are common fact patterns, like this one, where not all of the offsetting tax deductions land on the same shareholder’s income tax returns. This can trigger tax for the shareholder if the IRS were to recharacterize the loan as a commission payment, as it did in this case.