Question # 4: What affirmative defenses might Jack and Janet assert?

See Part I, Part II, Part III, and Part V

a. Cash hoard defense: Jack and Janet had $ 16,000 lying around, which presumably funded some of their expenditures.

i. The government would counter that by asking, “When did you acquire that $ 16,000? Did you have such great years prior to 2004 that you wound up saving $ 16,000?”

ii. The government would want to look at what was going on with Jack and Janet financially. Did they have unpaid debts or did they file for bankruptcy? Both are inconsistent with having additional money lying around. Therefore, either one would defeat the cash hoard defense.

iii. Jack and Janet’s argument: We had a cash hoard because we don’t trust banks.

iv. Government’s rebuttal: The government could easily refute that argument. It has already identified five bank accounts that the couple had. When all of the money from those accounts is added up, there is a lot more than $ 16,000. If Jack and Janet didn’t trust banks, why did they have five bank accounts with an aggregate balance that far exceeded their cash hoard?

b. Jack and Janet might assert non-taxable sources like loans, gifts, or capital invested in the business by others. Or they might have sold other assets before 2004 or during 2004 without generating any gain. That might account for some expenditures.

c. Reliance defense: “We relied on Mr. Dewey. It’s all Mr. Dewey’s fault. Don’t send us to jail.” This is a high risk strategy. To successfully make this argument, the defense must show that Jack and Janet turned over all of the information to Mr. Dewey. If they didn’t, that turns from a defense into a liability because it is yet another affirmative act, which is a strong indication of willfulness.

d. Moreover, consider the dynamics. How is Mr. Dewey going to feel? He’s liable to react in one or more of the following ways: (a) “They’re besmirching my professional reputation”; (b) “They’re setting up a malpractice action against me”; and/or (c) “now the government is going to come after me for return preparer penalties.” Needless to say, Mr. Dewey doesn’t like any of those outcomes. Therefore, Jack and Janet would not be endearing themselves to Mr. Dewey by putting him into that position in the first place. So Mr. Dewey, who once was an ally, might turn into an enemy.

e. When all of the Schedule C expenses that Jack and Janet claimed on their return is tallied, the total comes up to $ 18,000. However, the actual amount claimed on Schedule C is $ 22,000. This $ 4,000 discrepancy doesn’t help the government. First, the amount is negligible. And second, what kind of deceit is this? After all, Schedule C identifies everything – it is merely a math error. The government doesn’t send people to jail for math errors. In fact, to the extent this even gets into the case, it should be introduced by the defense, and not the prosecution.

f. How could the defense use this to their benefit? First, this is part of blaming it on the return preparer. What kind of return preparer makes a $ 4,000 error when adding up items on Schedule C? Second, if Jack and Janet didn’t notice this $ 4,000 discrepancy, that might suggest that they merely glanced over the return making what amounted to a cursory review of it. The sloppy review of a tax return is a potential problem for civil penalty purposes because it proves negligence. However, a 20% civil penalty is far and away better than a prison sentence followed by a 75% civil fraud penalty. So, whichever way you look at it, being sloppy on the return is a helpful argument for the defense.

In accordance with Circular 230 Disclosure