I heard in a more detailed way from Salvatore LaScala Managing Director Practice Leader Global Investigations and Compliance of Navigant and Robert Beranger Associate Director Risk and Compliance of Navigant.  They are both IRS CI veterans.

I asked them why given that Berger was not involved in actually taking the excess fees from the Fund, he was the one of five or so accountants prosecuted.  They responded:

The income tax returns Berger prepared and signed were false regarding material factors. The returns did not report the money Burrill transferred from the Fund, in excess of the management fee, as income. The government proved this was done willfully and was not a mistake. Moreover, based on the facts reviewed, it appears that Berger also caused false entries to be made in the books and records of the Burrill entities. These false entries included listing the funds transferred in excess of the management fee due and advising changing the name of the Deferred Revenue account to Note Payable. The entries also suggested creating a promissory note and other false documentation.

I asked how the matter went criminal given that, in my view, there was at least a reasonable position that the money was a loan.  They responded:

Defendants in schemes such as this often try to hide the transactions by either disguising them as expenses or keeping them in the balance sheet of the entity they took the funds from, as well as the entity to which they sent the funds. The funds are also recorded in the balance sheet.  This is done to avoid picking up the funds received as income. Defendants may do this under the assumption that they may be able to pay it back, or that it will go unnoticed. However, this is often not the case.  In this instance, the funds were recorded as Deferred Revenues in the Burrill entity when in fact they were not deferred revenues. Berger knew Burrill was having the funds indicated as income, not a loan. The fact that Berger knew Burrill was misusing investor funds, suggested changing the name on the account from Deferred Revenue to Note Payable, and created documents well after the transactions occurred shows his intent to prepare income tax returns that contained a material misstatement.

Back to my hand.

A Movie

Serious as this matter is, it reminds me of a rather funny movie – The Producers – which ends with an accountant in prison with his client as the result of a wild scheme that they cooked up.  The theater producer raises more money than required to produce the play (by a substantial multiple) expecting it will be a flop.  The plan breaks down when the worst possible script, director and cast produce a hit.

In the Producers the exuberant Max Bialystock (Zero Mostel) and the timid Leo Bloom(Gene Wilder) are practically joined at the hip as they execute elements of the scheme.

In some ways, the Government tried a redo of the Producers as they prosecuted Mr. Berger.  They focused a lot of energy on documenting the excess fees that were taken from the fund letting the jury know that among the investors were public pension funds.  But Berger and Burrill rarely communicated directly and Berger had no idea that anything illegal was going on.  The Fund had audited  financial statements from PwC with language consistent with the position that was taken on the returns that Berger signed as preparer.

Key Witness

The defense put on a witness that I thought should have carried the day for them.  Karen L Hawkins was Director of the Office of Professional Responsibility for the Internal Revenue Service for six years. Her testimony was about whether Berger had failed in his professional responsibility regardless of whether the returns were right.

Defense Attorney Kane took Ms. Hawkins through a long discussion of Circular 230 and related AICPA standards of tax practice.  I have noticed that a lot of CPAs don’t pay as much attention to those documents as they really should.

Ms. Hawkins followed along with the various steps that Mr. Berger took to determine that loan treatment was appropriate to the payments.  She noted that under Circular 230 standards it was permissible for him to rely on the work of others in the three-tier review system and the financial statements audited by PwC.

And the reliance on the language of receivable to support the other side of the transactions, which were transfers going from fund to Burrill, would just support any conclusions that might ultimately have been made that these were liabilities for repayment from Burrill back to the fund and the fund was expecting that.

As she considers later returns we have:

Stever Burrill is still representing and in this period of time behaving like he owes money that has to be paid back.

And in the end

I think within the spectrum of due diligence that’s required of return preparers under Circular 230, Mr. Berger met those criteria in all three years.

The government’s cross-examination of Ms. Hawkins struck me as painfully lame.  She makes more money per hour as an expert witness than she did working for the IRS.  Most of her career she was working for taxpayers rather than the IRS.  The horror.

They did get into the definition of a loan, which is weak in this case, because Burrill didn’t follow Berger’s advice to properly document it.  So there is that

The Lesson

The more I look at this case, the more it seems like an Act of God rather than the result of any mistake that Marc Berger made.  At first I thought that the mistake was having Steve Burrill as a client, but really that’s not it.  Burrill was well respected and had retired from EY as a partner before becoming a venture capitalist.

Burrill flat out was not supposed to be taking his management fee in advance.  Arguably Berger’s team should have picked up the revenue recognition issue earlier.  In order to do a corporate or partnership return you need to do a balance sheet, but not for a Schedule C, so you might not spend a lot of time on the balance sheet accounts, particularly when the client is himself a CPA and he has CPAs on his staff giving you the numbers.

And how could it cross your mind that your client is, to be harsh, stealing from an investment fund that has a clean audit opinion from PwC?

The defense sentencing memo sums up the odd nature of the case.

This case is an anomaly and lacks the typical hallmarks of criminal prosecutions brought against tax preparers. Mr. Berger is not a rogue tax preparers at a fly-by-night business who courted customers by offering knowingly false deductions that would yield bogus refunds

The Court will be hard-pressed to find another example of a CPA at a reputable regional firm with a three-tiered review structure charged in a stand-alone criminal tax case.  Berger and Burrill rarely communicated with one another and Berger had audited financial statements on the fund that were prepared by PWC, which were consistent with the loan position that was taken on the returns that he filed.

But really if you are in the tax business, you should pay attention to this case.  Required reading is Treasury Circular 230 – Regulation Governing Practice Before the Internal Revenue Service and AICPA Statements on Standards for Tax Practice. In my experience tax, people are not as familiar with those documents as they should be.

I hope somebody at AICPA takes a look at this case.  Maybe they can do an amicus brief for the appeal.