In United States v. Crandell, 2023 PTC 178 (5th Cir. 2023), the Fifth Circuit held that a district court did not abuse its discretion by denying a taxpayer’s motion for mistrial after a jury convicted him of tax evasion under Code Section 7201 for submitting a fraudulent Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals- which understated his income and did not accurately list his personal assets. The court rejected the taxpayer’s argument that a false Form 433-A alone is insufficient evidence that a taxpayer has violated Code Section 7201 because, although understating one’s income on a Form 433-A does not change one’s tax liability, it reduces the payments due on that debt, constituting an attempt to evade or defeat the payment of taxes.
Kevin Crandell is a medical doctor. He contracted with two hospitals, one in Mississippi and one in Alabama. He usually made $30,000 to $40,000 per month. Because he was a contractor, the hospitals did not withhold any wages for tax purposes – Crandell was solely responsible for satisfying his federal tax obligations. From 2006 through 2012, Crandell did not pay any income taxes or file any timely tax returns. He racked up $943,493 in owed taxes, interest, and penalties as a result. Although Crandell said that he briefly visited a certified public accountant in 2008, he took no substantive steps towards addressing his tax debt until 2010, right after the IRS began garnishing his bank accounts. Around the same time, Crandell created two corporations: a Mississippi corporation called “Kevin Crandell, M.D., Inc.” and a Wyoming corporation called “CHBK, Inc.” He used Kevin Crandell, M.D., Inc. to receive the money he earned as a contractor, and then paid himself a salary through the corporation. He created CHBK, Inc. to shield various assets he owned from liability lawsuits. Crandell exercised complete control over both entities.
In 2010, Crandell hired Blue Tax to help him sort out his tax situation. Yet his tax returns were not filed for another four years. Part of the delay was due to Crandell’s failure to send Blue Tax his information in a timely manner, and part was due to Blue Tax misplacing Crandell’s finalized returns. Even when his returns had been filed, Crandell did not pay off the tax liability he had accumulated. Crandell worked with Blue Tax to submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to the IRS. This form is used by the IRS to craft a financially viable payment plan for people who are behind on their taxes. To help Blue Tax draft the form, Crandell submitted payroll stubs from Kevin Crandell M.D., Inc. indicating that he made about $17,000 per month. But when Blue Tax sent him a preliminary draft of the Form 433-A, Crandell told them that his income had declined and that the draft was inaccurate. He provided new pay stubs indicating that he made $11,783 per month. This income was $350 lower than his estimated living expenses. Blue Tax submitted the form using this new information.
The submitted Form 433-A downplayed Crandell’s income and omitted key assets. Although different documents stated or implied a large range of incomes ($17,000-$30,000 per month) on Crandell’s part, the $11,783 per month figure was well below all other contemporaneous evidence of his income. Moreover, Crandell wrote himself two checks from Kevin Crandell M.D., Inc. for a total of $40,000 shortly after submitting the Form 433-A, providing a substantial financial boost. The form did not accurately list his personal assets, including a $50,000 gun collection. And it did not list the bank accounts associated with Crandell’s corporations, even though he often used the accounts to pay for personal expenses.
Crandell was indicted and tried for submitting a fraudulent Form 433-A, which the government characterized as tax evasion under Code Section 7201. That Code section penalizes any person who “willfully attempts in any manner to evade or defeat a tax imposed by this title or the payment thereof.” In U.S. v. Nolen, 472 F.3d 362 (5th Cir. 2006), the Fifth Circuit held that Code Sec. 7201 has three elements: (1) willfulness, (2) existence of a tax deficiency, and (3) an affirmative act constituting an evasion or attempted evasion of tax.
A jury convicted Crandell, and the district court sentenced him to 33 months’ imprisonment and $972,493 of restitution. Crandell appealed to the Fifth Circuit, arguing that the evidence at trial was insufficient to support a conviction under Code Sec. 7201. Crandell argued that submitting a false Form 433-A cannot support a conviction for tax evasion as matter of law. Crandell reasoned that even if his Form 433-A was intentionally falsified, it would not “evade or defeat any tax imposed,” but merely change the timetable for repayment. He contrasted soliciting a payment plan with submitting an offer in compromise (OIC), which is a settlement offer submitted by a debtor that can reduce the amount owed.
Further, Crandell argued that the evidence did not show that he willfully evaded his tax obligations. He contended that IRS garnishments accounted for why his salary was lower when he submitted the Form 433-A, citing an October 2014 garnishment that accounted for his entire pay for the month. He also asserted that he supplied other documents to the IRS and Blue Tax that reflected a much higher income around the same time. The existence of such documents, according to Crandell, proved he was not willfully attempting to hide his income from the IRS. Crandell also argued that Blue Tax had access to all his financial information and thus bore the responsibility for any errors in the Form 433-A.
The Court Analysis and Conclusion
The Fifth Circuit affirmed Crandell’s conviction and sentence. The court noted that it has not previously ruled on the issue of whether the intentional filing of a false Form 433-A violates Code Section 7201, and there is little precedent from other courts. The Fifth Circuit observed that the text of Code Section 7201 proscribes evading a tax “or the payment thereof.” Understating one’s financial status on a Form 433-A, the court reasoned, does not change one’s tax liability in the abstract, but it does reduce the payments due on that debt. In the court’s view that would be an attempt to evade or defeat the payment of taxes. Therefore, the court concluded that Crandell’s conduct – the intentional filing of a false Form 433-A – violates Code Section 7201.
Regarding Crandell’s argument that the October 2014 garnishment was the reason his salary was lower on his Form 433-A, the court found that a reasonable juror could disagree with that assertion. Even if Crandell legitimately deducted IRS garnishments from his income, the court found, that did not explain why he neglected to mention key assets on the form, such as the $50,000 gun collection and the corporate bank accounts that he used to pay personal expenses. The court also pointed out that a month after submission, Crandell paid himself a $40,000 “bonus,” increasing his income considerably. Further, the court found that a credit application that Crandell prepared around this time stated that his monthly income was $22,000, roughly double what he claimed on the Form 433-A. Based on this evidence, the court concluded that a rational juror could find that Crandell knew his true income was considerably higher than that listed on the form and misled the IRS about his ability to pay.
Crandell’s reliance on Blue Tax, in the court’s view, also did not constitute a sufficient defense because Crandell did not fully rely on Blue or disclose all the relevant facts. The court found that when Blue Tax drafted a Form 433-A that reflected an income about $5,000 higher than his living expenses, Crandell submitted new pay stubs that suggested, contrary to all other documentation, that his income was slightly lower than his living expenses. In the court’s view, Crandell’s intervention was incompatible with the reliance defense.
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