Federal Tax Fraud
What is Tax Fraud?
While in general the goal of the IRS is to get the money they are owed—usually with hefty penalties and interest. In addition, the IRS may impose fines for negligence or filing late. There are certain cases, however, when the IRS may believe you have deliberately been committing tax fraud. Depending on the level of fraud, a civil tax fraud penalty could be imposed, usually equal to ¾ths of the amount you owe plus interest. An IRS auditor can also refer the case to the Criminal Investigation Unit where it will be determined whether you will be criminally prosecuted.
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The most common types of federal tax fraud include the following:
- Deliberately filing a false tax return
- Deliberately evading paying taxes
- Filing documents that you know are false
- Failure to file your tax return
- Failure to collect employment taxes
- Failure to pay taxes you owe
- Underreporting income
- Overestimating deductions
- Falsifying deductions
- Claiming excessive business expenses
- Taking tax credits you are not entitled to take
- Failure to comply with employer withholding guidelines
- Using false information on your tax return, such as a false Social Security number
- Issuing false tax forms to your employees
Literally, nobody enjoys paying taxes, with some individuals turning to deception when filing their taxes in an effort to avoid paying the full amount owed. Since taxes can be very complex, the IRS does not file criminal charges very often unless they have proof you actually went out of your way to defraud the IRS. While you are usually responsible for your taxes, sometimes a professional tax preparer can be held responsible for facilitating fraud on your behalf or engaging in fraud. This could happen when a tax professional intentionally filed your taxes with omissions or false information.
Tax investigations can be quite extensive with large amounts of evidence gathered for the prosecution. If you have been charged with federal tax fraud it is extremely important that you have a highly experienced criminal defense attorney by your side who is knowledgeable about federal tax fraud. Remember—tax evasion is intentional conduct where a company or individuals deliberately and knowingly engages in tax fraud. Mistakes and carelessness are not considered evading your taxes. The IRS must be able to show that you were deliberate and intentional when you underpaid, avoided paying, took deductions you were not entitled to, or otherwise attempted to hide taxable assets.
Factors that Can Trigger an Investigation
Again—carelessness is not tax fraud, and neither is an honest mistake. Things the IRS will look for include underreporting your yearly income, failing to keep proper records for your taxes, concealing assets, conducting an all-cash business, failing to make estimated tax payments, taking tax deductions you are not entitled to take, claiming an excessive amount of business deductions, or failing to cooperate with the IRS. If you are flagged for a tax audit, the actions you take during that audit may well determine whether you will face prosecution for tax fraud. Never lie or provide obviously evasive answers to the IRS, or use stalling tactics. Usually, if you file an amended return on your own, the IRS will not press criminal charges.
What are the Potential Defenses When You Are Charged with Tax Fraud?
The specific circumstances surrounding your charges of tax fraud will determine what defense your criminal tax attorney will use on your behalf; below are some of the most commonly used tax fraud defenses.
- Lack of sufficient evidence—the prosecution must clearly show you willfully defrauded the IRS-rather than you were simply careless, made a mistake, or forgot something. Occasionally, the IRS makes mistakes when figuring the amount you owe, so it could be necessary for you to challenge the amount they say you owe.
- You simply made a mistake, with no knowledge or willfulness involved—This defense would only work if you were unclear about when your taxes needed to be filed, or you weren’t entirely sure what income needed to be reported or what expenses you could legally claim. In other words, if you truly made a mistake, with no intent to save yourself money, then you could potentially claim the error was simply a mistake.
- The IRS violated the statute of limitations. Every criminal and civil case has specific statutes of limitations—the window of time in which a case can be brought against you. Individual states set their own statutes of limitations, as does the federal government. See more about federal statutes of limitations for tax fraud below.
- Entrapment—When the government entices an individual to commit a crime he or she would not otherwise commit it is known as entrapment. Although television shows imply entrapment is a defense that is commonly used (and commonly successful), in fact, claiming entrapment rarely works unless the entrapment was very blatant.
- Insanity—This is another defense that is unlikely to work, particularly in a tax fraud case, but if circumstances supported this defense, then your attorney might choose to use the insanity defense. Under the insanity defense, you must either claim you were insane at the time you committed federal tax fraud, or that you are now insane (during the trial). The success rate of the insanity plea is low and likely to be ineffective for those charged with federal tax fraud.
- Misunderstanding of the law—As noted, tax laws are complex. Careless mistakes simply do not rise to the level of tax fraud, and neither does misunderstanding tax laws. However, it will be up to your attorney to prove that you misunderstood the law rather than attempted to circumvent it.
Statutes of Limitations for Federal Tax Fraud
As far as federal tax evasion and tax fraud go, the statutes of limitations vary, according to several factors. Some people say the ability of the IRS to pursue you for tax fraud is “never-ending.” To some extent, this is true, although it only applies to civil tax fraud, rather than criminal tax fraud. When it comes down to criminal tax fraud or tax evasion, the enforcement period usually expires after six years. The issue can come down to when the six-year statute begins or ends, which can be tricky because it may depend on when the fraud was first alleged or detected, rather than when it actually occurred.
Civil tax fraud is a different matter. The IRS is allowed to go back basically as many years as they want to enforce the tax laws against you. Some offenses, like failure to file a return, usually have a three-year statute, while willful failure to pay your taxes usually has a six-year statute of limitations. For blatant tax fraud, however, there are no statutes of limitations. While most people believe the IRS only has ten years to audit an individual, the ten-year rule is related to the collection of tax debt. If, however, the IRS reduces the debt to a judgment, it can potentially be renewed every ten years. Willfully attempting to evade paying taxes, filing a false return, or simply failing to file a return may all fall under the “forever” statutes.
Penalties for Federal Tax Fraud
If you are facing criminal tax fraud charges, the penalties can be extremely serious, with up to five years in prison, and fines as large as $500,000 for tax evasion (Usually up to $250,000 for individuals, and $500,000 for corporations). Other tax fraud crimes can have penalties as high as $100,000 for individuals, and $250,000 for corporations. The court may impose additional fines as well.
Convictions on multiple counts of the same offense or multiple violations of different tax offenses can increase a prison sentence significantly. You will also be responsible for the cost of the prosecution—you will pay for the federal government to prosecute you. If you deliberately fail to file your taxes, you could spend up to a year in jail, and could face fines as large as $25,00.
Federal tax fraud cases usually involve restitution, meaning you will be required to repay the amount of taxes you should have paid and did not to the federal and state governments. In some cases, you could be sentenced to probation if convicted of tax fraud. Probation in a situation like this usually lasts for one year but could potentially be three years or longer. If you are sentenced to probation, you must comply with every court order, or risk an extension of your probation, additional fines, a prison sentence, or other penalties.
If the IRS can prove you did not file as a means of deliberately evading taxes, it could possibly pursue a felony conviction. Even worse, once your criminal tax case has been concluded, the Criminal Investigation Unit can refer the case back to the Examination Division of the IRS where civil tax penalties will be added. In the end, tax fraud should never be taken lightly. If you have been contacted by the IRS or find yourself being charged with a tax fraud crime, you should immediately speak to a knowledgeable attorney who can ensure your rights are protected throughout the process.
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