Among the risks that you run as a partner in a large regional CPA firm, prison is not near the top of the list . So I imagine that former CPA Marc Howard Berger is stunned by his conviction in June on three counts of aiding and abetting the filing of a false tax return. In November, I covered the appeal of his conviction .
In what is probably a first for me, the defense included a reference to my piece in its sentencing memo.
And while the alarm bells are already sounding the CPA community, even Mr. Berger’s tax preparer peers are left without clear guidance on what to avoid besides crooked clients. Perusing the public docket for lessons, Reilly, himself a long-time CPA writes that it is still not clear to him what the right tax answer was on the Burrill returns in the first instance.
Actually, besides my post, not many alarm bells have been sounding. Tax partners in regional firms are unlikely to openly admit that what happened to Mr. Berger could have happened to them.
I haven’t been a tax partner in a regional firm for seven years and, blessedly since November 30 not a tax preparer either. I’m toying with calling myself a journalist as my covivant and I tour the warmer parts of the United States in our RV. Retired sounds OK too. Still, I feel an affinity with Mr. Berger that may be biasing me just a bit. I wore the tax partner shoes for about twenty years.
Mr. Berger was sentenced to eight months confinement, a year of supervised release and a $20,000 fine. The sentence is way below guidelines. So that’s good. As I wrote in November I thought he got a raw deal and after looking into it further, I still think that, but I do have a competing view on the subject which I will share. First here is the story in a nutshell.
Mark Howard Berger (You really need the middle name. There are quite a few CPAs named Marc Berger) supervised the preparation of the individual tax return of Steve Burrill. Steve Burrill, who had had a career in public accounting, managed venture capital funds. His management entities were wholly owned disregarded entities that went straight to his individual return. The fund around which the criminal charges circled was Burrill Life Sciences Capital Fund III LLC.
Burrill took more than he was entitled to in management fees from Fund III. This continued even after more was taken than the total that could be earned during the Fund’s scheduled ten year life. There were not audited financial statements for the management companies.
The accountants for the management companies recorded as income management fees actually earned with the excess going to a deferred revenue account. That is the big tax issue, because service income is generally taxable when received. Over at Fund III though the corresponding amount was recorded as a receivable. Fund III was audited by PwC.
Berger’s team identified the potential issue of revenue recognition when working on Burrill’s 2011 return. The practice went back to 2007, but it was growing. Berger sought out opinions and did research and concluded that the loan treatment was most correct. He encouraged Burrill to better document the transaction by drafting a note. That was done, but the note was torn up to avoid financial statement disclosure.
In 2013, the Investment Committee of Fund III realized what was going on and notified the investors. Things got ugly from there. Ultimately after investigation in which several of the involved accountants , including the ones who were directly implicated in the excess fees, were granted immunity, Burrill and Berger were indicted. Burrill on over thirty various counts and Berger on three counts of Aiding and Assisting in the Preparation of a False Tax Return (Code section 7206(2)).
The Other Hand
As I noted I wrote last time that I thought Berger got a raw deal and further study has confirmed that opinion, but I have to sound a cautionary note. A couple of attorneys who know about these things told me that when IRS CI goes after somebody, they are worth going after. And actually, in all the cases I have studied I have never found one that did not look like the person really had done something wrong – even Kent Hovind, surprising as that might see.
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.
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.
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. Kenyon 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 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.