Tax Fraud

What is Tax Fraud?

Federal tax fraud, or tax evasion, is the purposeful, illegal attempt of a taxpayer to evade assessment or payment of taxes imposed by federal law. Tax fraud is different from tax avoidance, which is the use of legal means to one’s own advantage to reduce one’s tax liability or tax burden. Tax avoidance uses legal means to reduce the amount of tax owed, while tax fraud uses illegal means to defraud the government.

Common Tax Charges

The two most common charges brought by federal authorities for tax crimes are tax evasion and willful failure to pay taxes.  Tax evasion is a felony while the willful failure to pay tax is a misdemeanor.

Tax Evasion

Under 26 U.S.C. § 7201, an attempt to evade or defeat payment of federal taxes is a crime.  Specifically, the statute provides “any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”  In layman’s terms, tax fraud is essentially cheating on your tax return in an attempt to avoid paying your entire tax obligation. Some of the common and most blatant forms of tax fraud, or tax evasion, are intentionally failing to file a tax return, refusing to pay taxes due, intentionally failing to report all income received, making fraudulent or false claims on a tax return, someone who prepares and file a false tax return, or falsely inflating donations to charity.

Willful Failure To Pay

Under 26 U.S.C. § 7203, the willful failure to file a tax return, supply information or pay a tax can be a misdemeanor crime (a crime carrying a penalty of less than one year in prison).  This is a lesser crime than tax evasion and this charge is often brought when the facts are not as egregious as tax evasion.  The statute provides for penalties of up to $25,000 in the case of an individual ($100,000 in the case of a corporation).  This type of charge is brought with frequency by the federal authorities and several years of unpaid taxes can add up to serious criminal consequences.   

Fraud vs. Negligence

It is the job of a tax auditor to determine if the discrepancies in a tax return constitute fraud or simple negligence. The U.S. tax code is broad and complex, and sometimes auditors recognize a discrepancy can be an honest mistake. However, some of the activities an auditor may consider fraudulent or suspicious are:

• Overstatements of deductions and exemptions,
• Falsification of documents,
• Concealment or transfer of income,
• Keeping two sets of books or ledgers,
• Falsely claiming personal expenses as business expenses,
• Using a fake social security number,
• Claiming a nonexistent dependent (such as a child), and
• Intentionally underreporting income.

In these situations, an auditor is more likely to consider the activity tax fraud or evasion, rather than simple negligence.

False Deductions, Dependents, and Social Security Numbers

When a person intentionally overinflates deductions, expenses or credits on their tax return, it can come with serious consequences. In order to deter this behavior, the Internal Revenue Service (IRS) will typically impose a 20% increase on the amount owed as a penalty. When a person knowingly claims a false dependent on their taxes, they can be subject to felony prosecution and other potentially serious criminal penalties.

If you are found to have claimed a false dependent on your taxes, you will also be required to pay back the full amount you should have originally paid, as well as a 20% civil penalty, in addition to a 5% late fee for each month that passed since the tax was due.

Using a false social security number on a tax return can not only subject a person to criminal tax charges, but charges for other federal crimes as well such as identity theft. Filing a return with a false social security number carries with it the same available penalties as any other tax fraud crime.

Investing Tax Fraud

Investigations into criminal tax fraud are conducted by the IRS Criminal Investigation (CI) unit, the law enforcement branch of the agency. There is a preliminary investigation done by one of the CI unit’s Special Agents. The findings of this preliminary investigation are submitted to the agent’s supervisor for review, who then makes the determination to either approve or decline further investigation.  If the supervisor approves further investigation, the matter then goes to the Special Agent in Charge (the head of the office, commonly referred to as the SAC) to initiate a “subject criminal investigation”.

Once an investigation is opened, the Special Agent in Charge begins collecting the evidence. This is done through various methods such as: interviewing witnesses, conducting surveillance of the subject, preparing and executing search warrants, subpoenaing bank records, and reviewing financial records. The Special Agent and the IRS criminal tax attorneys work closely together during the investigation phase in order to ensure all legal guidelines are properly followed.

Once all the evidence has been gathered and analyzed, the Special Agent will then make the determination that either there is not enough evidence to substantiate criminal activity, or there is enough evidence to recommend prosecution.  In the first instance, where there is not enough evidence, the investigation is “discontinued.”  In the second instance, where prosecution is recommended, the agent will then prepare a written report detailing the findings (“Special Agent report”). The agent then forwards the report and recommendation to the United States Department of Justice’s Tax Division for potential prosecution 

Penalties for Tax Fraud

The IRS can assess different levels and variations of penalties, both civil and criminal, depending up on the nature and severity of the crime. For example, filing a fraudulent return will typically carry a fine of up to $100,000 and/or three years in prison. More egregious acts, such as the use of illegal means to conceal or misrepresent financial details to the IRS in order to avoid tax assessment, can carry up to five years in prison and $100,000 in fines, if convicted. 

Meanwhile, simply failing to file a return at all is a misdemeanor, and typically is accompanied by civil penalties instead of criminal charges – but that is not always the case depending upon the facts.  Another serious violation is failing to disclose offshore accounts, which if done intentionally, can carry a fine in the amount of 50% of the offshore account balance, or $124,588 per violation, whichever is greater.

Failing to properly report your income or file tax returns is a serious crime, and one that the IRS does not take likely.  If you find yourself in a criminal tax liability situation, you should contact an attorney who is familiar with these types of cases immediately. Having an attorney to help you gather and put together all the proper documents, assess the situation, and advise you of your legal rights can make all the difference.

THE KEY TO A FIVE STAR DEFENSE

The law is very nuanced. Federal prosecutors have almost unlimited advantages and resources at their disposal. Having attorneys on your team that understand the law, keep abreast of legal developments in the law, have the experience dealing with the complexities of federal statutes and, finally, possess the skills to stand before a jury to make a compelling case on behalf of a client are not just important qualities, they’re critical. At The Federal Defenders. we pride ourselves on being advocates for our clients. With decades of experience with all variety and manner of federal criminal issues and defenses, we understand what it takes to put our clients in a winning position. For a free and confidential consultation, call us today at (800) 712-0000. Just like our toll-free number, we operate nationwide.