Can major accounting errors result in criminal tax charges?

An accounting error might lead not only to a tax dispute, but charges of fraud. In a recent example, a corporation offered $1.5 million to settle charges of accounting fraud brought by the U.S. Securities and Exchange Commission. 

The SEC became involved because of the effect the accounting error had on the corporation’s shareholders. According to the SEC’s allegations, the company’s executives failed to implement adequate internal accounting controls, resulting in grossly erroneous bookkeeping. 

Between 2010 and 2012, the corporation misstated its loan and lease losses in various quarterly and annual filings with the SEC. The understatement of net loss available to common shareholders was estimated to be about $30.5 million.

As readers may know, a shareholder may have to pay taxes known as capital gain when he or she sells a security. The Internal Revenue Service regulates this type of tax. However, the company’s fraudulent records can affect the value of a security. Of course, the corporation’s own fraudulent accounting records may also impact corporate tax liabilities. 

In this example, shareholders likely wouldn’t incur liability for relying on data that the corporation publicly released in SEC filings. However, the corporation’s actions are a different matter. Substantial understatements of income or gross overstatements of deductions might create a presumption of fraud. Civil IRS agents have some discretion in determining when clear indications of fraud are present, but errors too large to be an innocent mistake could likely result in criminal tax charges.

Source: Accounting Today, “Bank to Pay $1.5 Million for Accounting Fraud,” Daniel Hood, Sept. 29, 2015

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