tax evasion

Tax Evasion: Prosecution and Defense

While cinema attached a certain poetic justice to criminal enforcement of tax crimes through dramatic depictions of Elliot Ness taking down Al Capone, there is nothing fictional or ceremonial about DOJ efforts to prosecute tax evasion. Unlike the film Untouchables where tax evasion was some sort of a consolation prize for law enforcement officials who, according to the film, couldn’t catch Capone for his “real crimes,” in real life tax prosecutions are serious matters that have the potential cripple individuals and companies.

In fact, tax evasion prosecutions are so serious that the DOJ has a special unit in Washington, D.C. called the Department of Justice Tax Division. This unit has the final say so whether tax evasion prosecutions go forward.

It is also important to realize that in addition to criminal prosecution authority, separate IRS tax collection personnel have other collection powers that would rival, or even surpass, the collection powers of bankruptcy courts.

Tax Evasion Prosecution

In terms of tax evasion prosecution, U.S. Attorney’s generally proceed under one of three statutes. 26 USC 7206 criminalizes the willful submission of a return or any other tax document under the penalty of perjury that the filer “does not believe to be true and correct as to every material matter.” This offense carries a fine of up to $100,000 (or $500,000 for a corporation) and imprisonment up to 3 years.

A second option for prosecutors is 26 USC 7201, which criminalizes the attempt to evade or defeat tax. Specifically, “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.”

Another option for prosecutors criminalizes the willful failure to file a return. Individuals who fail to pay an estimated tax or file a return are subject to a penalty of up to one-year imprisonment and a fine up to $25,000 (or $100,000 for a corporation). It is also worth noting that for businesses who receive large cash transactions, such a failure to keep documentation and/or file returns can carry up to 5 years imprisonment.

For persons or companies concerned about tax problems or that receive indication that the IRS is looking into their tax status, it is important to recognize that time may be a powerful weapon in defending such an accusation. It is incumbent upon people in this situation to try to make a case that either exonerates them or try to convince the government any infraction is minimal.

Hiring the Right Defense Firm for Tax Evasion

It is important to employ experienced defense professionals who are familiar with the Tax Code as well as with agents and prosecutors.  They can take proactive steps to demonstrate that a taxpayer’s actions were not mistaken, or if mistakes exist, that they were not ‘willful’ mistakes. Further, steps to try to correct mistakes, if taken at the wrong time could actually be seen as admissions of guilt. It is important for professionals to take steps that are designed to dissuade the government from proceeding with a prosecution, or at the very least, to try to convince the government that less draconian alternatives are warranted.

There are other provisions relating to employment taxes and the like. If the IRS indicates that it is contemplating a criminal investigation, it is important to take proactive steps quickly.

Sentencing Guidelines for Tax Evasion

In terms of the Sentencing Guidelines, section 2T1.1 typically applies. In some circumstances 2S1.1 and 2T1.4 may apply.

Usually the largest driver of the applicable guideline will be as a result of the calculated “tax loss.” This simply means that the actual taxes that the district judge determines should have been paid will be the yardstick. Depending upon the loss, sentences can start out, even before the application of any sentencing enhancements, between a Level 6 to 36 depending upon whether the loss is between $2,500 and $550,000,000. As a simple example, a person who fails to declare $150,000 in income may have a resulting tax loss of $40,000 or more depending upon the number of credits and other tax provisions deemed to have been violated. Usually, for individuals 28% is the benchmark; however, any added false credits are added into the loss at 100%. This would create a starting offense level, also known as a Base Offense Level’ of between 14 and 16.

It is also important to understand that persons who are convicted for these offenses for conduct that took place in multiple tax years could face aggregated counts and aggregated relevant conduct.

There can also be enhancements for persons who use sophisticated means or who fail to report criminally derived income.

It is very important that someone who is convicted of a tax crime try to take steps to ensure that the tax loss, which is usually calculated by the government and probation officers, is accurate. Experienced criminal defense attorneys work closely with CPAs to calculate an accurate tax return and provide evidence of a different loss amount to the judge. This can seriously affect the length of imprisonment. Further, it is critical that this is done in a manner that it does not offend the judge thereby avoiding the risk of losing credit for any applicable acceptance or responsibility in cases where a defendant may receive a reduction for such acceptance.

It is important to recognize that not all offenses that involve a tax return are ‘tax offenses’ as the term will be used here. There are some offenses that involve filing wholly false tax returns that are prosecuted as wire fraud and mail fraud, or even identity theft. The real distinction lies in the underlying acts within the crime. That is, persons who try to supposedly cheat the Tax Code by failing to report taxes or inflating certain deductions commit tax crimes. On the other hand, people who steal a person’s name and social security number to file a false overall return and create a fictitious refund are thought to be fraudsters. This distinction may seem small to most people but it can be massive in terms of what types of unilateral control individual U.S. Attorney’s Offices have over a prosecution and which pressure points may be important for defense attorneys to employ.

Before becoming a partner at Varghese Summersett, Steve Jumes was an Assistant United States Attorney. He has prosecuted and defended serious tax fraud and tax evasion cases throughout the United States.

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Benson Varghese

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Benson Varghese is the Managing Partner of Varghese Summersett PLLC. He is a state and federal practitioner who has handled thousands criminal cases and taken over 100 cases to trial by jury. Benson is frequently called upon to handle cases that require a high degree of knowledge in technology, scientific evidence, forensic evidence, as well as serious intoxication cases. The lawyers at Varghese Summersett PLLC exclusively handle criminal defense matters.