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.
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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 188.8.131.52 (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 [taxpayer’s] accountant, attorney or return preparer” (such as failing to acknowledge the existence of a foreign bank account).
- “Omitting entire sources of income.”
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.
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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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