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What happens if the IRS thinks I committed tax crimes?

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    Boston, Massachusetts, USA skyline at the public garden.

    The short answer to this question is that you could be criminally prosecuted. There are all sorts of ways to actually commit one of these crimes:

    Related to the conviction is the sentence or consequence of being found guilty. The Internal Revenue Code defines the various tax crimes, the maximum time a person may be imprisoned, and the fines he or she must pay. However, often a maximum fine that is set by the Internal Revenue Code can be increased by a different statute, found in the Criminal Fine Enforcement Act of 1984, which increases the fines for both misdemeanors and felonies. On the other hand, in actual practice, a convicted taxpayer’s sentence will often be less than the maximum fine allowed under the Internal Revenue Code. A judge’s sentencing discretion will ordinarily be influenced by the Federal Sentencing Guidelines Manual, accessible here:

    The purpose of the criminal tax system, as described in the United States Attorney’s Manual follows:

    The Government helps to preserve the integrity of this Nation’s self-assessment tax system through vigorous and uniform criminal enforcement of the internal revenue laws. Criminal prosecutions punish tax law violators and deter other persons who would violate those laws. To achieve maximum deterrence, the Government must pursue broad, balanced, and uniform criminal tax enforcement.

    The above describes the policy reasons given for why the government has chosen to criminalize certain tax offenses. Looking carefully at the above quote, we see that the government seeks to achieve three main goals: (1) to uphold the integrity of the tax system because it is based on “self-assessment” (essentially, relying on the “honor system”—until one is audited or criminally investigated); (2) to punish tax violators; and thus (3) to deter others from doing the same. The Manual goes on to explain the importance of having uniformity in the tax laws because more individuals fall within its gambit than any other criminal statute:

    Uniformity in tax cases is necessary because tax enforcement potentially affects more individuals than any other area of criminal enforcement. Broad and balanced enforcement is essential to effectively deter persons of varying economic and vocational status, violators in different geographic areas, and different types of tax law violations.

    For many tax evaders, it is not the penalties, additional income tax and interest or even spending some time behind bars that is the worst part of a criminal prosecution. Rather, it is the ensuing shame, public humiliation and social ostracism that is associated with a prosecution that haunts them. Many taxpayers do not realize, until it is too late, that the government publicizes a person’s criminal tax convictions in an attempt to achieve maximum deterrence effect on the rest of society. Historically, people were hung, beheaded, or even burned at the stake publicly to warn citizens who contemplated committing the same crimes as the convicted. Today we do not hang, behead, or burn individuals at the stake. Instead, the government publicizes and broadcasts one’s criminal conviction.

    High profiles taxpayers like sports figures, celebrities, and even well-known religious leaders are those that might fall the “hardest” as the result of their publicized tax crime conviction. For example, the tax fraud convictions of Wesley Snipes, Duke Cunningham, Darryl Strawberry, Lauryn Hill, and Al Capone—to name a few are widely known by the public. Even one of the former IRS Commissioners, Joseph D. Nunan, was found guilty of tax fraud.

    Are there any good arguments against our tax system?

    As a criminal tax law firm, we have the opportunity to hear about all sorts of clever augments for why the tax system is unjust, inaccurate, or unconstitutional. Unfortunately for taxpayers, historically the courts have not been persuaded by any of these arguments. One taxpayer who was not so keen on the United States’ tax system brought four different lawsuits, all challenging some aspect of tax law.

    The man argued various things, like (1) that he was not a taxpayer within the meaning of the Sixteenth Amendment, (2) that wages were not income, (3) that the Sixteenth Amendment does not authorize the imposition of any income tax on individuals, and (4) that the Sixteenth Amendment was unenforceable. The various courts rejected each of these arguments, calling them frivolous. Later, the taxpayer brought a fifth lawsuit, this time making it all the way to the Supreme Court. The Supreme Court summarized the challenges he brought in his prior lawsuits thus:

    In March, 1982, Cheek and another employee of the company sued American Airlines to challenge the withholding of federal income taxes. In April, 1982, Cheek sued the IRS in the United States Tax Court, asserting that he was not a taxpayer or a person for purposes of the Internal Revenue Code, that his wages were not income, and making several other related claims. Cheek and four others also filed an action against the United States in Federal District Court, claiming that withholding taxes from their wages violated the Sixteenth Amendment. Finally, in 1985, Cheek filed claims with the IRS seeking to have refunded the taxes withheld from his wages in 1983 and 1984. When these claims were not allowed, he brought suit in the District Court claiming that the withholding was an unconstitutional taking of his property and that his wages were not income.

    As mentioned, the fifth, and last, suit the taxpayer brought was heard by the Supreme Court. The case was Cheek v. United States, 498 U.S. 192 (1991), where the Court held that a taxpayer’s actual good-faith belief that one is not violating tax law, based on a misunderstanding caused by the complexity of the tax law, negates the willfulness element (one of the requirements for finding tax fraud), even if that belief is irrational or unreasonable. However, the Court was quick to point out that one’s actual believe that tax is invalid or unconstitutional is not a “good faith belief” that is based on a misunderstanding of the tax laws, and thus would not be helpful to a taxpayer’s defense against tax fraud; such a belief would not result in denying the willfulness mental state element.

    At this point you might be asking, “But I thought ignorance of the law is not an excuse? It did not work for me in traffic court when I told the judge I did not know the speed limit.” There is something right about this reply—but more needs to be said.

    In criminal law, the general rule is that ignorance of the law is not a valid defense. However, there are some exceptions where ignorance is such a defense. Some crimes are known as “specific intent” crimes. One’s “intent” refers to the defendant/taxpayer’s mindset when he commits the crime. A conviction of a specific intent crime requires that the prosecutor prove that the defendant had a particular purpose (intention) when he or she committed the crime. A shorthand way of thinking about this is that a “general intent” crime is one where the defendant intended to do the conduct in question (but maybe not the actual result), whereas with a “specific intent” crime, the defendant intended both the conduct and the result. This distinction is relevant to tax crimes. Federal tax crimes are specific intent crimes, so one’s actual ignorance of the law might be a valid defense. By contrast, a vehicular traffic offense is not a specific intent crime (it is actually a strict liability tort where one’s knowledge or ignorance of the law is irrelevant), so one’s ignorance of the speed limit is no defense.

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