Accounting Expert Witness Properly Allowed in Tax Fraud Case, 10th Circuit Concludes

Case:

United States v. Curtis L. Morris, No. 12–1474, 10th Circuit U.S. Court of Appeals; July 28, 2014

Background:

Defendant Curtis L. Morris is an accountant and bookkeeper accused of playing an integral part in a tax-fraud conspiracy. Morris would claim nonexistent tax withholdings by filing fabricated Forms 1099-OID with tax returns. The Internal Revenue Service (IRS) would then pay a refund when the tax withholdings were greater than the tax liability. He accusal is of fraudulently preparing tax returns. This led the IRS to pay out more than $2.2 million in undeserved tax refunds. Morris performed the service for 20 to 25 clients, and charged them a percentage of the refund.

Convicted of mail fraud, making false claims and conspiracy, he is sentenced to 120 months in prison. He appeals his conviction.

Accounting Expert Witness:

The government called Kenneth Chafin as an accounting expert witness. He served as a certified public accountant for 30 years. He also prepared Morris’ co-conspirator’s taxes for 20 years before the co-conspirator switched to Morris. Chafin testified regarding an email from the co-conspirator boasting about how he had used Form 1099–OID to recover $1.6 million from the IRS and urging Chafin to use the scheme. He said he explained that the scheme was illegal and carried criminal penalties.

Chafin also testified that he had found nothing supporting the legality of the use of Form 1099–OID in IRS publications. Hence, the IRS paying the refunds didn’t mean it thought the tax return was correct. Chafin testified that a tax preparer who knowingly files a false return acts criminally. When asked if being an accomplice to filing a false tax return would be a federal crime, he answered, “You bet.”

Admissibility of Accounting Expert Witness:

On appeal, Morris made several arguments. This included Chafin’s testimony as an accounting expert witness without being disclosed or certified as one. He also improperly testified that Morris was guilty of fraud.

A 10th Circuit U.S. Court of Appeals panel noted that Morris objected to some testimony offered by Chafin but failed to object to other testimony now challenged on appeal. The bulk of Morris’ argument depends on whether Chafin testified as an expert or as a lay witness.

Because the government didn’t list Chafin as an expert before trial, the district court had no reason to consider Chafin’s admissibility under Daubert v. Merrell Dow Pharmaceuticals, Inc. (509 U.S. 579, 592, 113 S.Ct. 2786, 125 L.Ed.2d 469 [1993]), the panel said. “Even so, the lack of notice was proper unless Morris first establishes that Chafin in fact testified not as a lay witness but as an expert.”

Morris doesn’t explain how Chafin’s testimony exceeded the scope of Federal Rule of Evidence 701. Nor does he precisely identify the opinions he challenges, the panel said. Reviewing those opinions, the panel found no abuse of discretion by the district court.

“Notably, Morris doesn’t challenge the admission of Chafin’s emails warning Armstrong that his use of Form 1099–OID was illegal,” the panel said. “From our perspective, the challenged testimony communicated little more than did the emails themselves. Moreover, we think the opinions Morris challenges were based on Chafin’s first-hand perceptions as Armstrong’s tax preparer of 20 years, not on his specialized accounting knowledge.”

The panel said Morris’ argument that the district court abused its discretion fail. Further, his challenges to the admission of testimony to which he didn’t object at trial also fail because he does not explain how he satisfies the four prongs of the plain-error standard.

Regarding Morris’ argument that Chafin testified on the ultimate issue, the appeals panel said he didn’t testify as to Morris’s guilt; he merely testified that he believed it was illegal to falsify tax documents.

“We think this testimony was helpful to the jury, even if it stated the obvious,” the panel said.

The panel said Chafin’s admission may be in error. However, it became harmless given the overwhelming evidence of Morris’ guilt.