Senate Prohibits Tax Refunds on False Earnings

Last Thursday the Senate voted unanimously for an amendment to the tax-cut bill that would prohibit companies from seeking tax refunds on inflated earnings. The measure, which was introduced by Sen. Charles Grassley (R-IA), comes at a time when a number of high-profile companies are in the process of filing or collecting tax refunds on billions of dollars of earnings that were falsely overstated. As reported earlier this month, companies expecting large refunds include Enron, HealthSouth, MCI, and Qwest Communications.

The amendment would make the criminal penalty for overpayment or underpayment on misreported earnings the amount of tax at issue.

Last month, AccountingWEB reported that companies often pay taxes on bogus earnings so as not to make government officials or shareholders suspicious. Mr. Grassley expressed his concern about executives who engage in this type of behavior. "The con men pay a little tax to help hide their fraud, bump up the stock price and cash in their stock options," he said. "They basically have made the IRS an unwitting accomplice to their fraud."

The amendment is not retroactive, however, and will most likely not have an effect on previous actions. Mr. Grassley, who is the Senate Finance Committee Chairman, has asked the Department of Justice’s Corporate Fraud Task Force to investigate current cases where payment of taxes was, according to Mr. Grassley, "just part of a bag of tricks to fool shareholders." Existing law provides up to three years of jail for tax fraud.

In other action, the Senate gave unanimous approval to an amendment by Sen. Max Baucus (D-MT), which would update criminal tax laws for the Sarbanes-Oxley Act. Under the new law, jail time would be increased from three years to five.

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