The Government has a variety of both felony and misdemeanor tax crimes, including attempted tax evasion, failure to file a return or pay tax, filing a false return, and aiding and abetting the filing of a false return at its disposal under the internal revenue code. The Government may also prosecute taxpayers under the Federal Criminal Code on charges of presenting false claims to the government, conspiracy, aiding and abetting the commission of an offense, and making false statements. However, in order to prevail, the government must prove each element of an accused tax crime beyond a reasonable doubt. Moreover, the Government must bring the action within the appropriate statute of limitations for prosecution which range from three years to six years under the internal revenue code and within five years for crimes prosecuted under the Federal Criminal Code.
To complicate matters further, individuals can be convicted of committing a tax crime with regards to another person’s or entities tax liability, like for example, where a corporate officer falsifies the associated corporate returns. Corporations and other legal entities such as Estates, LLC and Partnerships may also be prosecuted.
A taxpayer can be simultaneously charged with a main offense (greater offense) and with a lesser included offense within the legal definition of the greater offense (which often carries a lower burden of proof), and can be convicted of either individual charge, or both charges, although the law does not allow for consecutive sentences where a defendant is convicted of both the greater and the lesser included offenses. A single action on the part of a taxpayer may constitute a violation of several criminal tax statutes. When both criminal and civil remedies are available to the government, it has the discretion to pursue either criminal remedies, civil remedies or both under the law. The IRS will not rule in advance (private letter ruling) on whether a proposed transaction would subject a taxpayer to a criminal penalty.
Any person who is required to keep any records or supply information and who willfully fails to do so can be convicted of a misdemeanor.
A person who willfully delivers or discloses to the Treasury Secretary (or his or her delegate) a list, return, account, statement, or other document that the person knows to be fraudulent or false as to any material matter can be convicted of a misdemeanor.
Willfulness is defined under law as a voluntary and intentional violation of a known legal duty and several defenses focus on preventing the government from being able to establish this element. Defenses available to defeat the element of willfulness include inadvertence, negligence, mistake, uncertain legal duty, reliance on others and diminished mental capacity.
Defenses commonly used in defending tax crimes include the First Amendment guarantee of free speech, the Fifth Amendment guarantee against double jeopardy and self incrimination (right to remain silent), collateral estoppel and entrapment.
A Taxpayer’s disagreement with the law, inability to pay and personal difficulties such as health or family problems generally are not considered defenses per se but may be used to discourage prosecution as they might make it harder to convince a jury to convict by creating sympathy for the defendant.
A single action by a taxpayer or other person may constitute a violation of several criminal statutes. For example, the single action of filing of a false and fraudulent income tax return may constitute the felonies of; Willful attempt to evade taxes, Willful submission of a fraudulent return subscribed under penalties of perjury, and the misdemeanor of a willful delivery or disclosure of a false and fraudulent document. Where a single action by a taxpayer constitutes a simultaneous violation of several criminal statutes, the government prosecutor has the discretion to selecting among all of the applicable charges and the luxury of choosing one or more of them as he deems appropriate to charge against the defendant.
Although most tax crimes involve a taxpayer’s own tax liability, a defendant may have vicarious criminal liability concerning actions he or she has taken regarding another person or entity’s tax liability in a multitude of ways. Through the legal concept of vicarious liability, a corporate officer, director or employee could possibly be accused and convicted of attempted evasion of the related corporation’s taxes. A corporations’ attorney or CPA could possibly be convicted of attempted evasion of their client’s taxes through vicarious liability as well. Similarly through the doctrine of vicarious liability, it is a crime to willfully subscribe false documents and accordingly, third party individuals are occasionally convicted for signing false documents relating to the tax liability of others, for example where an tax preparer knowingly signs a false return prepared for his or her client.
Another source of vicarious liability for third parties is the general federal aiding and abetting statute. This statute makes any person who aids or abets another person or entity in the commission of a federal offense subject to punishment as a principal. For the Government to impose aiding and abetting liability on a third party, it will be required to prove that third party defendant affirmatively assisted another person or entity to commit a federal crime and that they shared the criminal intent with the person or entity they acted on behalf of to commit the criminal offense. For example, a corporate officer may be criminally convicted of a corporation’s willful failure to pay trust fund taxes. In many of the situations where a charge of aiding and abetting is appropriate, the government can also charge third parties with the general federal conspiracy statute, for entering into an agreement with another person or entity to commit a federal crime.
Under Federal Law, the term “person”, which is used to describe corporations and other legal entities, is deemed to include corporate officers, partners, members and employees who have a duty to perform an act for their related corporation or entity for which a criminal violation occurs because the act does not occur. The government typically uses this definition of “person” in charging crimes involving a failure to act against third parties. For example, the president and sole operating officer of a corporation is held to be under an a legal duty to file the related corporation’s tax returns and thus may be criminally prosecuted for failing to file those returns. In summary, a “person” includes an individual, a trust, an estate, a partnership, an association, a company or a corporation.
Of course, corporations and other legal entities may themselves be subject to prosecution for tax crimes. Corporation’s or other entities are held liable for the criminal acts of its employees and owners if the criminal act is done on its behalf and the criminal act was within the scope of the employee’s or owner’s authority. For example, a corporation can be convicted of filing a false return where its president and majority owner deliberately caused it to file a false return, even though the individual employee who signed the return was unaware of the return’s falsity. Moreover, even thought a partnership is not subject to income tax at the entity level, it can still be subject to criminal prosecution at the entity level for crimes committed on its behalf by its owner’s and employee’s such as attempted evasion or failure to file.
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