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What are the Basics of Federal Tax Crimes?

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    The federal tax code is a complex and contains an ever-changing set of traps and pitfalls that many taxpayers find themselves tripping over every year. With the recent increase in IRS activity during the Biden administration, it is in your best interest to familiarize yourself with the criminal tax consequences of intentional tax noncompliance.

    Below, we will cover some of the most commonly charged criminal tax offenses, such as tax evasion, filing or assisting in the filing of false returns, failing to file a return, impeding administrative efforts, and Foreign Bank Account Reporting (FBAR) violations. If you are concerned about whether your past filings may have contained inconsistencies that could create life altering trouble down the road, (criminal tax charges, jail time, damaged net worth and loss of licensure) you may have the ability to correct them now, but only if you are willing to knock on the taxing authority’s door before, they bang down yours.

    If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

    Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

    Discuss your questions and concerns with a seasoned Criminal Tax Defense Lawyer by calling the Tax Law Offices of David W. Klasing today at (800) 681-1295 or scheduling online HERE.

    Tax Evasion

    The phrase “tax evasion” is used broadly to describe tax offenses in general discourse. However, actual tax evasion is described in 26 U.S.C. § 7201 as any willful attempt to evade or defeat a federal tax.

    The government typically pursues tax evasion charges against taxpayers if they file a return with inaccurate or incomplete information. However, other circumstances may qualify under the language of the statute. Tax evasion can occur in the evasion of tax assessment and the evasion of payment itself.

    The elements of tax evasion are as follows:

    • A substantial tax has been evaded or attempts have been made to evade the tax
    • The attempt or attempts were made willfully
    • There was some affirmative act in furtherance of the intent to evade taxes

    The most important of these elements is the one that involves willfulness. This is because the difference between willful and nonwillful evasion is the difference between a felony and a misdemeanor. Using the Supreme Court’s definition in Cheek, willfulness means a “voluntary, intentional violation of a known legal duty.”

    Courts will often use the “affirmative act” element to demonstrate willfulness. An example of an affirmative act that would indicate the willfulness element has been satisfied would be the taxpayer’s keeping of double books or fraudulent records. In these instances, the affirmative act that was motivated by an attempt to mislead or conceal would likely be enough for the court to determine that the defendant willfully committed tax evasion.

    Tax evasion carries the most significant potential sentence of any federal tax crime, at least in terms of prison time. Each charge of tax evasion comes with a maximum prison sentence of five years, with additional monetary fines of up to $100,000 for individuals and $500,000 for corporate entities.

    Filing a False Return

    Filing a false return is a felony punishable under 26 U.S.C. § 7206(1). To impose a penalty under this statute, the government must demonstrate that the defendant willfully made a materially false statement on a return or other document filed with the IRS. Filing a false return is also known as “tax perjury,” as federal tax filings are signed under the penalty of perjury.

    A materially false statement is basically any statement that could mislead the IRS as to whether it should audit or mislead the IRS as to your proper tax liability in the event it did audit. This is basically lying on any material statement required by the return. For example, a taxpayer improperly answering the question on Schedule B of Form 1040 (individual tax return) as to signatory authority over foreign bank accounts can be found guilty for that reason alone, even though no additional tax is due.

    The penalties for a felony conviction of filing a false tax return may include a maximum prison sentence of up to three years. Additional monetary fines of $100,000 for individuals and $500,000 for corporate entities may apply.

    Aiding or Assisting with a False Filing

    Any part that a person or entity plays in assisting with a false return or other filings with the IRS is punishable by law. Specifically, 26 U.S.C. § 7206(2) makes it a crime to willfully aid or assist in preparing or presenting such deceiving communications.

    It is important to distinguish § 7206(2) from the more well-known offense of “aiding and abetting” in the commission of a felony, which is criminalized under 18 U.S.C. § 2(a). In order to find a defendant guilty of aiding and abetting, there is a precondition that the person whom the defendant assisted in committing the crime is actually guilty of the crime of which they have been accused. In contrast, § 7206(2) can be used to prosecute a defendant even if no one else is charged with a crime for the conduct.

    The reason for this is to hold tax preparers accountable for their willfully criminal behavior even where the taxpayer is not aware of their preparer’s actions. However, you should be aware that, as the taxpayer, your signature at the bottom of your return is the one that matters. Even if you escape criminal charges for the actions of the person you entrusted to prepare your filings, you will still likely face civil consequences for any unpaid tax debt that you have incurred, plus additional penalties.

    The sentencing guidelines for aiding or assisting under § 7206(2) are the same as those for filing a false return: a maximum jail sentence of up to three years, with an additional $100,000 fine for individuals and $500,000 for corporations.

    Failure to File a Return

    Under 26 U.S.C. § 7203, anyone who fails to file a return where they owe one to the federal government may be convicted of failure to file a return. Even if the defendant willfully failed to file their return, this statute only creates a misdemeanor criminal penalty, which is a less severe offense than the felonies outlined above.

    The elements of the crime are as follows:

    • The defendant was required to file a return
    • The defendant failed to file the return (regardless of whether the filing was not made or was delinquent)
    • The defendant acted willfully with the intent to violate a known legal duty

    If all of these elements are proven, the defendant faces a potential sentence of up to one year in prison and a fine of up to $25,000 (or $100,000 for corporate offenders) per charge. However, other consequences of failing to file a return could wind up causing even more damage. A taxpayer’s failure to file a return for a given year or even multiple years is a blatant red flag that is likely to garner the attention of IRS auditors and criminal investigators.

    There is one critical deviation in the misdemeanor status for failure to file. Section 6050I requires trades or businesses receiving more than $10,000 in one or a series of related cash transactions to report the transaction to the IRS on a currency transaction report (“CTR”). The reporting requirement applies to cash and certain types of cash equivalents, such as foreign currency and certain monetary instruments. Willful failure to file the § 6050I return is a felony punishable by 5 years’ incarceration.

    FBAR Violations

    Any U.S. person with a financial interest in or material control over assets held in foreign bank accounts or investment vehicles should consider whether the value of these assets meets the reporting threshold of $10,000. If, at any time during the taxable year, the taxpayer’s foreign accounts collectively total $10,000 or more, they must file a Report of Foreign Bank and Financial Accounts (or FBAR) with the U.S. government.

    Many people who meet the reporting criteria do not realize that they owe the government a disclosure, leading to a litany of nonwillful violations of the FBAR requirements every year. These violations could arise through failure to file an FBAR, filing an FBAR with inaccuracies or insufficient information, or simply filing too late. The penalties for non willful FBAR violations are substantial but are ultimately civil and limited to fines. In contrast, a willful FBAR reporting violation is a criminal offense. It opens the defendant up to potential jail time and fines of up to half of the total balance of assets held overseas.

    Courts have not entirely settled how willfulness is demonstrated, but it is clear that there are some differences between the standard created by Cheek and what is used practically in the context of an FBAR offense prosecution. With so much at stake, it is important that you identify whether you owe the government a disclosure of your foreign bank accounts, as claiming that you didn’t know may not save you from the harshest consequences.

    Impeding or Impairing an Administrative Effort

    Unfortunately, a panicked criminal tax defendant, particularly one that does not enjoy the competent representation provided by a seasoned Criminal Tax Defense Attorney, may make their situation worse by attempting to hinder the IRS’ investigative efforts. This type of behavior is criminalized under two statutes: 26 U.S.C. § 7212 and 18 U.S.C. § 371.

    The Omnibus Clause

    Felony charges are created by § 7212, also known as the “Omnibus Clause,” for anyone who obstructs or impedes the administration of tax laws. This obstruction could come through corrupt activity, force, or threat of force.

    The mere annoyance of an IRS agent will not be enough to satisfy the elements of the Omnibus Clause. However, suppose the bothersome actions are taken with the intent to gain an actual advantage over the agent in question and the IRS as a whole, rather than just for the satisfaction of bothering the agent. In that case, the defendant may find additional charges tacked on to what they were already facing.

    Klein Conspiracy

    The second statute that criminalizes obstructive efforts, § 371, is based more closely on conspiratorial conduct. § 371 focuses on two types of conspiracies: conspiracy to commit the offense and conspiracy to impair or impede the lawful functioning of a government agency. The one that concerns us here is the latter, which, when dealing with a tax fraud case, is commonly referred to as a “Klein conspiracy.”

    The key difference between a Klein conspiracy and the Omnibus Clause is that a Klein conspiracy requires more than one culpable actor and can apply in more circumstances than just an administrative proceeding.

    Klein conspiracies may be charged in criminal felony cases that do not involve tax violations. However, they are most frequently seen when taxes are involved. There are two reasons for this. First, the proof requirement that comes with Klein conspiracies for the government is lower for tax crime situations than others. Second, alleging a Klein conspiracy allows the prosecution to bring in all sorts of damning evidence of conduct that could be considered “overt acts,” which can damage a defendant’s reputation, both inside and outside of the courtroom.

    How Can You Prevent Criminal Tax Charges?

    If a taxpayer believes or is aware that they have existing intentional noncompliance (cheating) in their past tax returns and other filings, they may be able to make use of the voluntary disclosure process. Voluntary disclosure is an avenue by which noncompliant taxpayers may submit amended returns and supplemental documentation and receive a nearly guaranteed pass on criminal tax prosecution if the terms of the program are strictly met. The government will ordinarily reward the taxpayer for coming forward without having to be criminally investigated or audited by reducing civil penalties and declining to pursue criminal action.

    Voluntary disclosure will not cure every issue, and it is important that you assess its effectiveness before taking this path. Voluntarily disclosing information that the government has already discovered will likely provide no benefit to the disclosing party. Some types of information that may indicate willful criminal conduct may not be subject to the benefits of reduced fines provided through voluntary disclosure. In any case, you will want to discuss your options with your Criminal Tax Defense Attorney as soon as possible to determine the best path forward.

    Get Effective Criminal Tax Defense Assistance from the Tax Law Offices of David W. Klasing Today

    Our dedicated Criminal Tax Defense Attorneys have the experience and resources to protect our clients, no matter what they may be facing. Find out more about how we can help you by calling us right now at (800) 681-1295 or click here to schedule a reduced initial consultation online.

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