August 1, 2006
Senate Report on Tax Cheats: Lawyers and Plausible Denial
A Senate investigation of tax fraud has concluded that tax cheating is rampant and that lawyers and accountants facilitate the fraud. As with options backdating, lawyers are in an era of "plausible denial." Here is how it works. A lawyer is asked for an option on a scam, for draft documents on a scam, or for disclosure documents on a scam. The lawyer does the work under an "assumption" of facts that give an argument for legality; the assumptions are provided by a well-educated (and often well-schooled) client. In a tax scam, for example, the lawyer issues an opinion on legality assuming that offshore transactions had "real economic" substance when in fact the transactions are shams. The assumptions are carefully articulated and formalized in a written record. But the assumptions are false and ignores substantial suspicions that they are false (deliberate ignorance). Offshore transcations between multiple entities in tax havens, for example, are rarely legit, but the lawyer assumes that they are. When the assumptions prove to be false the lawyer says, very simply, I gave services based on assumptions that I was given. I did not participate in the scam. This should no longer be a defense because lawyers have abused it. Lawyers should have a "red flag" duty to investigate their "assumptions," just as accountants do when a deal smells. The failure to investigate should be an ethics violation. A part of the Senate Report's recommendations may make this a legal rule; the Report recommends that aiding and abetting statutes apply to lawyers in tax scams. The definition of aiding and abetting may, and ought to, include a definition of deliberate ignorance.
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Could you post the link to the Senate Report, it sounds interesting.
Posted by: Michael Webster | Aug 1, 2006 1:48:00 PM