Awards & Recognition
Tax fraud defense lawyers do not simply react after an indictment. They endeavor to stop a civil audit, collection case, or return-review problem from hardening into an IRS criminal tax investigation or a California criminal tax case in the first place. That distinction matters because not every bad return position is fraud. The IRS’s own fraud guidance distinguishes fraud from inadvertence, negligence, carelessness, reliance on incorrect technical advice, or a sincerely held difference of opinion. But once the government believes a taxpayer acted with intent to evade tax, the consequences can quickly become far more severe. Under federal law, the civil fraud penalty is 75 percent of the portion of the underpayment attributable to fraud. However, if the IRS has the evidence it needs to asset the civil fraud penalty it also has the evidence it needs to criminally prosecute. Criminally, tax evasion under 26 U.S.C. § 7201 is a felony punishable by up to five years in prison per count, plus the possibility of substantial fines, restitution and prosecution costs.
California state imposes its own serious criminal tax exposure. The Franchise Tax Board’s Criminal Investigation Bureau investigates violations of the California Revenue and Taxation Code, including state income tax evasion, state income tax fraud, asset concealment, and preparer fraud. California Revenue and Taxation Code section 19705 makes several forms of willful tax fraud felonies, including signing a materially false return under penalty of perjury and aiding or advising the preparation of a materially false return. Section 19706 separately criminalizes willfully failing to file or supply information with intent to evade California income or franchise tax and willfully making or verifying a false or fraudulent return or statement with like intent.
If the IRS places you under criminal investigation for tax fraud, you risk being federally prosecuted by the United States Department of Justice – whose attorneys have a 90% conviction rate and routinely mandate prison sentences for tax offenders. If you are concerned that you may have committed tax fraud in the past, or if you are worried about an upcoming tax audit, it is critical to get ahead of the situation now by contacting an experienced Orange County tax attorney from the Tax Law Office of David W. Klasing. We can fight to minimize your exposure to criminal liability, protecting your constitutional rights and guiding you through the justice system while seeking the greatest possible reduction of penalties and other unwanted consequences including the potential loss of professional licensure.
What is the Definition of Tax Fraud?
The basic definition of tax fraud is an action committed or attempted, in violation of the Internal Revenue Code (IRC), for the purpose of enabling the taxpayer to avoid his or her full tax liabilities. Fraud occurs when the taxpayer acts intentionally, or “willfully,” to deceive government agents or disregard tax laws. This stands in contrast to tax errors that arise from carelessness, or negligence. However, even if no fraud has occurred, negligent conduct can still lead to serious penalties, making strict tax compliance essential.
The phrase “tax fraud” is often used to indicate tax evasion, which is a specific crime defined by federal law at 26 U.S. Code § 7201. Under the definition provided, a person commits tax evasion when he or she “willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof,” such as income taxes.
How Does the IRS Discover Fraud?
If the IRS (or one of its corresponding state agencies, such as the California Franchise Tax Board) detects suspicious information on a tax return, or determines that one or more tax returns have not been timely filed by the taxpayer, the result may be an audit – which is almost certain to turn up signs of any tax fraud that has occurred. The IRS trains agents to be on the lookout for numerous “badges” (indicators) of tax fraud – which, if detected, may result in referral of the case to the IRS’ Criminal Investigation Division (IRS-CI).
There are dozens of different badges of fraud, the full list of which is available in Internal Revenue Manual (IRM) 25.1.2 (Recognizing and Developing Fraud), specifically 25.1.2.3 (Indicators of Fraud). To provide just a few examples from this extensive list, some of the “red flags” that will warn the IRS of potential tax fraud include:
- “Claiming substantial business expense deductions for personal expenditures.”
- “Concealing bank accounts… and other property,” regardless of whether physically located offshore or within the United States.
- “Failing to file a tax return, especially for a period of several years, despite evidence of… substantial amounts of taxable income.”
- “Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer” (such as failing to acknowledge the existence of a foreign bank account).
- “Omitting entire sources of income.”
How IRS and California Tax Fraud Cases Usually Begin
Most tax fraud cases do not start with dramatic arrests. They often begin in a much quieter way, through a civil audit, a collection investigation, inconsistent records, unexplained deposits, repeated losses, false deductions, or a preparer whose work begins to unravel under examination. IRS Criminal Investigation explains that it investigates potential criminal tax violations of the Internal Revenue Code and related financial crimes, and the IRS fraud-development materials explain that civil personnel look for badges of fraud and then develop those facts further if they see firm indications of fraud. The IRS also makes clear that a single suspicious fact is not always enough. The government typically evaluates the taxpayer’s overall course of conduct.
The IRS identifies recurring fraud indicators that tax fraud defense lawyers see again and again: false or altered documents, double sets of books or false entries, concealment of assets or income, false invoices, backdated records, destruction of documents, inconsistent explanations, and handling transactions in ways designed to avoid the normal paper trail. California state sees many of the same patterns. FTB describes tax fraud as intentionally underreporting or failing to report income and specifically flags conduct such as false refund claims, suspicious preparer activity, false residency claims, falsified business records, and closing and reopening a business to evade taxes. These are the kinds of facts that can move a case from a high-risk civil matter toward a criminal one.
What is the Penalty for Tax Evasion?
Tax evasion is a felony offense. Under federal law, the maximum prison sentence for tax evasion is five years per count, which may be accompanied by a fine of up to $100,000 (or, if the defendant is a corporation, $500,000).
To reiterate, tax evasion is merely one example of a crime within the broader “tax fraud” category. For instance, it is also a felony to willfully fail to collect or pay over tax (26 U.S. Code § 7202), commonly known as “payroll tax fraud.” The maximum sentence for this crime is five years in prison, with a maximum fine of $10,000.
The willful failure to file a return, supply information, or pay taxes is yet another example of tax fraud, in violation of 26 U.S. Code § 7203. This statute generally makes this offense a misdemeanor, subject to a maximum fine of $25,000 (or $100,000 for corporations) and/or jail sentence of one year.
Another statute widely violated is 26 U.S. Code § 7206, pertaining to fraud and false statements. Under 26 U.S. Code § 7206(1), it is a crime to willfully make and subscribe a false return, while 26 U.S. Code § 7206(2) makes it illegal to assist a taxpayer in doing so. Both of these offenses are felonies, subject to maximum fines of $100,000 (or $500,000 for corporations) and/or maximum prison sentences of three years per count. These are all different forms of tax fraud: intentional efforts to avoid properly filing and paying taxes.
What You Should Do Immediately if You Suspect Tax Fraud Exposure
If you suspect tax fraud exposure, the first priority is damage control, not explanation. Do not try to fix the problem by rewriting books, inventing support, changing electronic records, or coaching witnesses. Those steps often become additional evidence of willfulness. Do not assume that your original preparer can safely manage the problem either. FTB’s own Criminal Investigation Bureau warns preparers that if their client is under criminal tax investigation, special agents may request or seize tax returns, ledgers, work papers, communications, and other supporting records, and preparers may be interviewed as witnesses about the client’s income, deductions, recordkeeping, and communications.
That is one reason attorney-led defense matters so much. Communications with non-attorney tax preparers generally do not carry the same protection as attorney-client communications, and the federal tax-practitioner confidentiality rule in 26 U.S.C. § 7525 applies only to noncriminal tax matters before the IRS and noncriminal federal tax proceedings. It does not create a broad criminal-defense privilege. In a high-risk case, taxpayers need counsel who can evaluate whether the matter still looks civil, whether silence or limited cooperation is strategically necessary, whether amended returns would help or hurt, and whether the facts call for a more structured resolution strategy.
In the right federal case, voluntary disclosure may still be a critical option if the government has not already contacted the taxpayer and the disclosure is timely, truthful, and complete. IRS Criminal Investigation states that the Voluntary Disclosure Practice gives taxpayers with criminal exposure a means to come into tax compliance and potentially avoid criminal tax prosecution. That is not automatic immunity, and it is not a casual self-help exercise. It is a high-stakes strategic process that must be handled correctly from the outset.
Why Early Tax Fraud Defense Can Change the Outcome
Timing often decides whether a case remains a civil controversy or becomes a criminal tax prosecution. Once CI opens a subject criminal tax investigation, special agents can use powerful investigative tools. IRS and FTB materials both make clear that criminal tax investigators interview witnesses, analyze books and records, review communications, and, in California state, may execute search warrants through sworn special agents. A late defense strategy can still matter, but the best tax fraud defense often happens before the government fully defines the narrative.
Early defense also matters because civil and criminal tax consequences can move on separate tracks. The IRS specifically notes that a tax fraud offense may result in both civil and criminal penalties, and its criminal-tax materials explain that an acquittal in a criminal case does not automatically defeat the civil fraud issue. In other words, a taxpayer can face prosecution risk, a 75 percent federal civil fraud penalty, large assessed tax liabilities, interest, restitution, and California state consequences arising from the same basic conduct. That is why tax fraud defense lawyers must think beyond the next interview or the next IDR and instead manage the full exposure profile.
Orange County, CA Federal Tax Fraud Defense Lawyers and CPAs
The IRS works with other government agencies to detect, investigate, and prosecute tax fraud – and in most cases, offenders are punished harshly. The civil fraud penalty is 75% of the underpayment in question, while criminal penalties for tax fraud can include substantial additional fines and restitution. Prison time, supervised release, and in some cases, professional sanctions are also potential outcomes of an IRS fraud case.
If you are dealing with criminal tax allegations, you need to discuss the situation confidentially with an experienced, proven Orange County tax evasion attorney as soon as possible. The tax defense lawyers and CPAs at the Tax Law Office of David W. Klasing are available to help 24 hours a day. Contact us online to arrange a consultation, call our main office at (800) 681-1295, or call our Orange County tax office in Irvine at (949) 681-3502.
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