The Federal Tax Crimes 101: Understanding the Basics

The Federal Tax Crimes 101: Understanding the Basics

Federal Tax Crimes

Each year, millions of US taxpayers make mistakes on their tax returns. Making a mistake on a tax return is usually no big deal — and can oftentimes be resolved by submitting a reasonable cause statement to the IRS statement and/or either appealing the unfair outcome, seeking a Collection Due Process Hearing, or pursuing the matter in Tax Court or Federal Court. These are typically civil tax violations with no criminal implication. On the other hand, with tax crimes  — the federal government may pursue both monetary penalties as well as incarceration — such as tax evasion and filing fraudulent returns. Let’s go through the basics of the IRS federal tax crime handbook to get an understanding of how tax crimes operate.

Anatomy of a Simple Tax Crime

Tax crimes come in all shapes and sizes, but let’s look at a very basic and more common example.

      • Peter has various sources of income.
      • One of his sources of income is a cash business that generates $200,000 a year.
      • Peter is fully aware that he is required to report the income from his cash business on his tax return.
      • But, instead of including this cash income on his tax return, Peter intentionally misrepresents his income on his tax return and excludes the $200,000 a year he earns from his cash business.
      • This could be considered filing a false tax return and even tax evasion –– which are tax crimes.

IRS Special Agent Investigation

Usually, the first step in a criminal tax investigation is when the matter is referred by an IRS agent or examiner to the IRS IRS Special Agents.  Expanding on the example above — the IRS believes Peter may be underreporting his income. He is called in for an IRS examination with an agent who has information showing that Peter underreported his income by nearly $200,000. During the tax audit, Peter doubles down and confirms that the amount of income he included on his original tax return was accurate. The IRS agent knows this to be false, but an IRS examiner does not have the authority to pursue a criminal investigation. Therefore, the matter is referred to the IRS Special Agents for a criminal investigation. Depending on how the IRS special agent investigation resolves itself if their investigation shows that the taxpayer clearly committed a tax crime, the chances are high that the Special Agents will refer them out for prosecution in which a criminal complaint or indictment it’s pursued against the taxpayer.

As provided by the IRS:

Prosecution Recommendations by the Special Agent

    • After all the evidence is gathered and analyzed, the special agent and his or her supervisor either make the determination that evidence does not substantiate criminal activity, in which case the investigation is ‘discontinued,’ or the evidence is sufficient to support the recommendation of prosecution, in which case the agent proceeds with the preparation of a written report detailing the findings of violation of the law and recommending prosecution. This report is called a “special agent report” and it is reviewed by numerous officials, including:
        • The agent’s front line supervisor, called the supervisory special agent;
        • A criminal investigation quality review team, Centralized Case Review;
        • CI assistant special agent in charge;
        • CI special agent in charge.
    • If CI determines the investigation should be criminally prosecuted, a prosecution recommendation is forwarded to:
        • The Department of Justice, Tax Division, (if it is a tax investigation) or
        • The United States Attorney for all other investigations.
      • Each level of review may determine that evidence does not substantiate criminal charges and the investigation should not be prosecuted.
      • Prosecution
        • If the Department of Justice or the United States Attorney accepts the investigation for prosecution, the IRS special agent will be asked by the prosecutors to assist in preparation for trial.
      • However, once a special agent report is referred to for prosecution, the investigation is managed by the prosecutors.
      • Conviction
        • The ultimate goal of an IRS Criminal Investigation prosecution recommendation is to obtain a conviction – either by a guilty verdict or plea. Approximately 3,000 criminal prosecutions per year provide a deterrent effect and signals to our compliant taxpayers that fraud will not be tolerated.

Common Tax Crimes

Here are some of the more common tax crimes:

Tax Evasion – I.R.C. § 7201

      • 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.

Willful Failure To Collect Or Pay Over Tax I.R.C. § 7202

      • Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Failure To File, Supply Information Or Pay Tax – I.R.C. § 7203

      • Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.

Fraudulent statement or failure to make statement to employees – – I.R.C. § 7204

      • In lieu of any other penalty provided by law (except the penalty provided by section 6674) any person required under the provisions of section 6051 to furnish a statement who willfully furnishes a false or fraudulent statement or who willfully fails to furnish a statement in the manner, at the time, and showing the information required under section 6051, or regulations prescribed thereunder, shall, for each such offense, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both.

Fraudulent Withholding Exemption Or Failure To Supply Information – I.R.C. § 7205

      • (a)Withholding on wages Any individual required to supply information to his employer under section 3402 who willfully supplies false or fraudulent information, or who willfully fails to supply information thereunder which would require an increase in the tax to be withheld under section 3402, shall, in addition to any other penalty provided by law, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both.
      • (b)Backup withholding on interest and dividends If any individual willfully makes a false certification under paragraph (1) or (2)(C) of section 3406(d), then such individual shall, in addition to any other penalty provided by law, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both.

Fraud And False Statements – I.R.C. § 7206

      • (1) Declaration under penalties of perjury Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or
      •  (2) Aid or assistance Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or
      • (3) Fraudulent bonds, permits, and entries Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or
      • (4) Removal or concealment with intent to defraud Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or
      •  (5) Compromises and closing agreements In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully— (A)Concealment of property Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or (B)Withholding, falsifying, and destroying rec­ords Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

Fraudulent Returns, Statements, Or Other Documents I.R.C. § 7207

      • Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047(b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

Golding & Golding: International Tax Lawyers 

Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure, including representation in VDP matters for Taxpayers who are willful.

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