The 2019 tax season is well underway, which seems like a perfect time for a primer on tax crimes. Lying on your tax return, cooking the books, or failing to file can land you in trouble with the law, but how much trouble? Here’s a look at common tax crimes, how the federal government prosecutes these cases, and what kind of penalties they carry.
Types of Tax Crimes
The tax code is chock-full of complex regulations and rules that are difficult for a lot of people to understand. Many people make simple mistakes on their taxes, while others willfully violate tax laws in an effort to try and get a bigger return, owe less, or perhaps, dodge them altogether.
Tax Perjury/False Statements
Intentionally lying on a tax return, even if it’s a white lie, is a federal crime. It’s called tax perjury and it occurs one of two ways: when individuals intentionally file fraudulent documents or assist someone else in doing the same.
In other words, if either a tax payer or a tax preparer knowingly fudges a tax return, both could face charges under federal law. This could include misidentifying a main source of income, claiming non-qualified dependents, or fabricating deductions.
Under 26 USC 7206 (1), in order to prove its case against a person for making a false tax return, the government must show that the defendant:
- made and signed a return, statement or document under the penalties of perjury
- knew that the information was not true and correct as to a material matter; and
- acted willfully.
Under 26 USC 7206 (2), in order to prove its case against a tax preparer or someone who “aided and abetted” in the preparation of a false tax return, the government must show that the defendant:
- aided or assisted in, or procured, counseled, or advised the preparation of presentation of a return, affidavit, claim, or other document which involved a matter arising under the Internal Revenue Laws.
- knew that the return, affidavit, claim or other document was not true and correct as to a material mater; and
- acted willfully.
It’s important to point out tax filers or preparers are not liable for honest mistakes.
In general, tax evasion is a legitimate attempt to get out of paying taxes. Under 26 USC 7201, tax evasion is defined as “any person who willfully attempts in any manner to evade or defeat” the assessment or payment of any tax. In order for the government to prove its case, they must show that the defendant:
- attempted in any manner to evade or defeat any tax
- owed more tax than he or she reported
- acted willfully.
Examples of tax evasion could include hiding assets, keeping a double set of books, generating false invoices or receipts, or destroying records, among other things.
Failure to File a Return, Supply Information or Pay Tax
People fail to file their taxes for various reasons. Some may not have the information to complete their return, while others may not have enough money to pay their taxes. Many don’t file returns or pay taxes out or principle. Regardless of the reason, tax evaders can face criminal and civil penalties.
Under 26 USC 7203, it’s a federal crime to:
- Fail to pay an estimated tax;
- Fail to make (file) a return;
- Fail to keep records; and
- Fail to supply information
In order for the government to prove its case against an individual for failing to file a return, it most show that the defendant:
- was a person required by law to pay taxes
- failed to file at the time required by law, and
- acted willfully.
How Tax Crimes are Investigated and Prosecuted
The federal government takes tax fraud very seriously. Tax crimes are most likely to be first uncovered during a routine audit, but the IRS also field complaints from the public. Once an investigation is opened, IRS agents use various techniques to obtain evidence, including executing search warrants, subpoenaing bank records, reviewing financial data or even conducting surveillance. If the evidence supports a criminal offense, the special agent prepares a report and forwards it to a Criminal Investigation (CI) review team. If the CI team agrees the case appears to willfully violate tax laws, it will be forwarded to a special unit called the United States Department of Justice Tax Division for prosecution.
Penalties for Tax Crimes
Failure to file, the willful decision not to pay taxes or file a tax return, is punishable by up to a year in prison and a $25,000 fine (or $100,000 for a corporation.)
Tax perjury, making fraudulent statements on your tax return, is a felony punishable by up to three years in prison and a fine of up to $100,000 (or $500,000 for a corporation.)
Tax evasion, the willful attempt to evade or defeat taxes, is a felony and offenders can face up to five years in prison and a $100,000 fine. Corporations involved in tax evasion can be fined up to $500,000.
In addition to criminal penalties, individuals can get hit with civil penalties as well, which can really put a dent in your pocketbook. Fines vary. If your income tax was filed late, for example, you may be required to pay up to a 25 percent penalty. If the IRS believes you committed tax fraud, you could pay a civil penalty of up to 75 percent of what you owe.
The takeaway is this: Lying on your tax return can cost you.
Seeking legal help for lying on your tax return and other tax crimes.
If you or a loved one is being investigated or facing prosecution for a tax crime, it’s important to seek legal help as soon as possible. There are defenses that can be raised and a skilled tax attorney will know how to proceed.
Also published on Medium.