Tax Fraud and Tax Evasion
In most tax audits the IRS is only interested in collecting the taxes owed, plus interest along with a few penalties. Perhaps the IRS might impose a negligence penalty or a late filing penalty. However, if during the tax audit the IRS suspects that you have committed tax fraud they can impose a civil tax fraud penalty. The civil tax fraud penalty is equal to 75% of the tax owed, plus interest on the penalty. Worse yet the IRS tax auditor might ask the tax fraud referral specialist to look at your case to see if it should be sent to the IRS Criminal Investigation unit for criminal tax prosecution. The IRS tax fraud referral specialist is usually not a tax lawyer, however, he has experience in tax fraud cases, and will seek the advice of the IRS' own tax fraud lawyers for help if it seems necessary.
Tax crimes include filing a false tax return, tax evasion, filing false documents, failure to collect employment taxes, failure to pay taxes, and failing to file a tax return. Tax evasion includes not just the failure to report all income, but also overstating the amount of tax deductions. The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed the IRS Criminal Investigation unit will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines. It’s worth knowing that unlike some other types of tax debts, tax bills which are incurred because of civil or criminal tax fraud cannot be discharged in bankruptcy. On the other hand the actual civil fraud penalty is itself dischargeable in a Chapter 7 bankruptcy.
Clients sometimes ask, "What is the difference between tax fraud, and a simple mistake?" Generally tax fraud or tax evasion involves an intentional wrongdoing. It has sometimes been described as an intentional violation of a known legal duty. Mere carelessness is not tax fraud. The IRS decides whether tax fraud has been committed by looking for badges of tax fraud. These badges include:
- understatements of income;
- inadequate records;
- failure to file tax returns;
- implausible or inconsistent explanations of behavior;
- concealment of assets;
- failure to cooperate with tax authorities;
- engaging in illegal activities;
- attempting to conceal illegal activities;
- dealing in cash; and
- failure to make estimated tax payments.
If you have any of these tax problems and you are audited by the IRS you may need to engage a tax fraud attorney. Actions you take during the course of a tax audit can turn a run of the mill tax controversy into a tax fraud case. For example, lying or giving evasive answers to IRS investigators, delaying tactics, and other actions designed to mislead IRS agents are all indicia of tax fraud.
A recent example from one of our tax audits was a case that was initially being handled by the taxpayer’s CPA. The same CPA that prepared the original tax return. Of course the CPA did not have an attorney-client privilege with the taxpayer, and so any communications were potentially exposed to the IRS. On the tax return the CPA, on the instruction of the taxpayer, had deducted several hundred thousand dollars of expenses mostly for various production expenses. During the tax audit the IRS revenue agent asked the CPA to supply proof that these expenses had actually been incurred. This is a fairly typical request during the audit of tax return. The CPA then went back to the taxpayer to request proof that the expenses had indeed been incurred. After stalling for several weeks the taxpayer gave invoices to the CPA showing that the expenses had been incurred.
The CPA in turn passed the invoices along to the IRS revenue agent. For some unknown reason the IRS revenue agent became suspicious, and contacted each of the vendors whose names were listed on the invoices. The vendors told the IRS agent that, although the taxpayer was a customer of theirs, the amounts listed were not accurate. In fact they were wildly overstated. It turned out that the taxpayer used a computer program to alter the invoices so that, for example, an invoice that was actually issued for $15,000 was changed to reflect that it was for $115,000. The revenue agent then confronted the CPA, and asked for an explanation of why there was a discrepancy between the invoices, and the information supplied by the vendors. It was at that point that the CPA wisely told the taxpayer he needed to speak to a tax fraud lawyer.
Our firm then took-over the tax audit. While it took a good deal of time we ultimately were able to persuade the IRS to agree not to pursue a criminal tax case. A lot of this could have been avoided if the taxpayer had consulted with us much earlier in the audit process.
In another recent case handled by tax attorney Dennis Brager, the IRS alleged that our client had failed to report over $600,000 in income and didn't file tax returns for more than 6 years. Nevertheless we ultimately settled the case for much less than the IRS first demanded, and without paying any tax fraud penalties.
An experienced tax fraud lawyer can help you navigate the treacherous waters of an IRS tax audit, and help formulate an effective strategy. Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial wellbeing, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty you owe it to yourself to arrange for an appointment with tax attorney Dennis Brager.
Call us today at 800.380.TAX LITIGATOR or contact us online.