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What are the Potential Consequences of Tax Fraud or Evasion Charges?

Tax Law

What is Tax Evasion?

Tax evasion is a felony for the willful attempt to evade or defeat the assessment or payment of taxes, which could include intentionally misleading the Internal Revenue Service (IRS). The crime generally involves overt or hidden illegal actions to avoid paying the taxes you owe, like, for example, transferring money to a secret bank account or location without informing the IRS of its existence when requested in collections or intentionally underreporting income by a significant amount on a tax return. Tax evasion is a serious crime that can lead to significant penalties and punishments, including time in federal prison.

If you have mistakenly committed tax evasion or believe you may have intentionally done so and fear legal action and seek to reverse course, seek legal guidance immediately to get ahead of the legal issues you may be facing.

Examples of Tax Evasion

Attempting to Evade a tax typically involves some of the following common themes, some of which may not be illegal per se (like conducting business only in cash) but do align as ‘red flags’ with investigators:

  • concealing assets in bank accounts of family members;
  • placing assets in the name of other people to avoid paying or reporting tax;
  • Keeping a double set of books for the purpose of one book being a falsified set of records for reporting to the IRS and another for internal recordkeeping;
  • cash expenditures;
  • false statements to an IRS employee;
  • conducting business purely in cash;
  • fraud during a bankruptcy;
  • destroying or throwing away books and records;
  • the use of large amounts of cash that cannot be accounted for;
  • structuring activities to avoid making records;
  • claiming that tax laws are not constitutional and
  • using cryptocurrency

Consider an example where you own a company and report that your net earnings are $50,000 for the year rather than the accurate net earnings of $250,000 and do so by creating fictitious expenses. By reporting less, you can escape paying taxes on the higher amount, but if audited or otherwise discovered, you could face significant penalties, investigation by the IRS Criminal Investigation Division, in addition to paying the rest of the actual taxes that you owe on your earnings.

Another typical example of tax evasion is exaggerating tax deductions. Those who take advantage of write-offs for their business may choose to inflate the amounts spent on certain items to offset the income they earned and lessen the amount of taxes they owe.

Hiding sources of or underreporting income or assets or holding property in someone else’s name for the principal purpose of avoiding tax reporting and payment may also be examples of tax evasion.

Failing to file a tax return may be considered a form of “tax evasion” among the general public and may effectively achieve the same outcome of paying less tax illegally, but it is actually a different enumerated federal crime from tax evasion and is a misdemeanor instead of a felony. Most individuals are better off by simply filing the federal tax return accurately, even if they cannot pay to avoid the failure-to-file penalty.

Potential Consequences of Tax Evasion

The IRS comes across tax evasion in different ways; sometimes, it’s discovered through a routine audit; sometimes, it’s a referral from another federal or state government agency, and sometimes it’s a direct referral from a known acquaintance. The IRS may choose to perform an audit at random or if they suspect you may be evading taxes. If the IRS suspects any strong red flags for tax evasion or fraud, it may refer your case to its Criminal Investigation Division (“CI-D”) for a stressful, long, and thorough investigation. If CI-D believes you are guilty of tax evasion, it may, from there, refer your case to the Department of Justice (“DOJ”) for prosecution, after which you could face felony-level charges. Prison time of up to five years per count may be involved and fines of up to $250,000 for personal taxes and up to $500,000 for business tax evasion.

It’s important to understand that if allegations of tax evasion are made against you, just coming to an agreement with CI-D and agreeing to pay whatever taxes may be owed does NOT make everything better, and the case goes away. CI-D is not interested in recovering lost money on taxes you may have owed. CI-D and DOJ are interested in uncovering and investigating unlawful acts and punishing wrongdoers. Fines or penalties are not necessarily relative to the offender. The IRS may choose not to refer certain cases to IRS CI-D or thereafter to the DOJ to recommend imposition of prison time on a small business owner who has decided to include write-offs that they knew they shouldn’t, but in other cases, it may also choose to make an example out of a different individual in a similar circumstance who also made poor choices. Many taxpayers in danger of allegations and under investigation by the CI-D are best off hiring an experienced attorney to “kill” the investigation at the CI-D before referral to the DOJ. If your case is referred to the DOJ and goes to trial, you will highly likely be convicted; the DOJ Tax Division had an 88.40% conviction rate on tax crimes prosecuted in 2023.

What is Tax Fraud?

Tax fraud typically involves individuals or businesses intentionally falsifying information on a tax return to benefit themselves. Cheating on a tax return is tax fraud, and the punishments are severe.

Common examples of tax fraud are willfully failing to file a federal income tax return, intentionally failing to pay past taxes owed, making fraudulent claims on your taxes, underreporting income, and more.

Other common examples of tax fraud are employment or payroll tax fraud. Employers may sometimes pay their employees in cash “under the table,” which can result in significant punishments. Other forms of employment tax fraud are employers who withhold taxes from their employees but refuse to pay the government the funds they have withheld. This action is also called “Pyramiding,” and employers can face severe charges for this behavior. Many individuals and businesses we’ve represented unintentionally do this when they come upon hard times and withhold money from the government to try to make other current expenses and think they will later get ahead, only to find themselves getting further and further behind and not realize they are committing a federal crime.

Tax preparers can also be subject to fraud charges. If your tax preparer chooses to inflate expenses, create false deductions, or claim credits that weren’t accurate, they may face the same severe consequences mentioned above. In some cases, you may be unaware of these actions, as some malicious tax preparers will inflate an expected refund and pocket some of the difference rather than paying the total amount to you. To avoid tax fraud on all levels, it’s essential to be vigilant when working with your CPA or tax preparer. Ensure your tax preparer signs and dates your return, has a PTIN number, and appropriate qualifications.

Potential Consequence of Committing Tax Fraud

The potential consequences for tax fraud vary based on the offenses committed. If you are found to have wilfully failed to file a tax return or provide the required information, you may be charged with a misdemeanor offense, which can lead to up to one year in jail and significant fines. Individuals could face up to $100,000, and business entities could face up to $200,000.

Making false or fraudulent statements resulting in tax fraud could lead to a felony charge, which may result in up to three years in prison. Fines for this charge level may include up to $250,000 for individuals and up to $500,000 for business entities.

The above penalties may also be increased due to the costs of prosecuting fraud.

Act Immediately

You must act immediately if you face tax evasion or tax fraud charges. The punishments are severe, and additional charges may be added if you ignore them. Prompt strategies should be put together with your experienced tax attorney to ensure you are compliant and understand the consequences you may face.

Contact your attorney today if you haven’t been charged but are concerned that you may have inadvertently committed tax evasion or fraud. You may have options and will want to ensure that you are abiding by the strict laws in place by the IRS and potentially avoid serious charges.

Our team has vast collective experience helping clients with legal tax issues for decades. As far back as 2006, our clients have benefitted from our thorough knowledge of settling business or individual disputes with the IRS.

Each client’s situation will vary, and each one will have a unique solution. Our team is dedicated to formulating a winning strategy with our clients and aggressively pursuing any defense they may require to move past this chapter in their lives.

If you are facing charges or concerns regarding tax evasion or fraud issues, contact our office at (573) 883-3056. We offer free initial consultations to learn more about your situation and how we can best assist you.

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