Summary:
Can overstating income on a tax return create a problem?

Many big companies such as Enron Corp. and MCI (formerly WorldCom Inc.) overstated income to keep stock values high. To prevent detection, they reported the high income on tax returns. Now that the books are being corrected, they want the overpaid taxes returned.

This could be a problem.

The following cases give opinions of two courts on purposeful overstated income:

The state of Florida told Louis Donald Lamberti to find a job as a condition of parole. He lied to his parole officer, saying he would operate the Donald Duck Car Wash.

The officer frequently drove by the car wash, but he never saw any cars. He wanted to be certain Lamberti, who had 24 convictions and spent 15 years in prison, was clean.

The officer requested the exBcon to furnish business records and a tax return showing car wash profits. To keep up the facade, Lamberti filed a tax return showing car wash income.

The Parole Commission reviewed Lamberti's information, investigated his other activities and revoked his parole for failing to work regularly, associating with convicted criminals and submitting false reports.

A tax fraud indictment followed. This shocked Lamberti: How could the government be upset about a taxpayer overstating income, which that could lead only to paying more taxes?

The court ruled against him. Even if the return overstated taxes, its filing had a fraudulent purpose--to mislead the Parole Commission.

In another overstating income case, Louis Marin challenged his indictment for helping Peter Bouzanis prepare a return with inflated income of $52,000. Marin, an Illinois financial broker, hoped the higher income would help Bouzanis get a loan.

Bouzanis filed the return and gave a copy to The Money Store Investment Corp.

Marin, in his suit, argued the return wasn't fraudulent because it overstated income.

The court rejected Marin's request to dismiss the indictment. If convicted, he could face a fine or up to three years in prison or both. The court said if a return overstates income, it might hinder IRS efforts to verify the tax, thus it violates the law. The "IRS is entitled to accurate information."

Like in the Marin case, officers in the big companies that helped prepare fraudulent corporate returns could be fined or given jail time or both. The corporations could be fined up to $500,000 per return.

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