Recent arrests for alleged income tax crimes should be a good reminder to the public to file taxes on time and in accordance with the law. Seven Chicago area people, including tax return preparers, have been charged in separate cases this tax season. Those making false claims against the government may be required to pay restitution and may be sued civilly for an amount greater than the fraudulent claims.
Not even celebrities are immune to the strict enforcement of federal tax laws. After serving a three-year prison stint for tax evasion, actor Wesley Snipes has been released just in time for tax day. On April 2, he was transferred to the New York Community Corrections Office which will oversee his home confinement for the remainder of his sentence, which ends on July 19.
Mr. Snipes was convicted of three misdemeanor counts back in 2008 for failing to file tax returns. He lost an appeal for a retrial in 2010 which resulted in his being sentenced to 3 years at a Pennsylvania minimum security correctional institution, where he was housed with roughly 290 white-collar inmates.
Even if you properly file your return, however, auditors are trained to look for signs of tax fraud and tax evasion in those returns. Tax fraud is defined as a willful act done with the intent to defraud the IRS—as opposed to an honest mistake. Using a false Social Security number, keeping two sets of financial books, or claiming a blind spouse as a dependent when you are single are all blatant examples of tax fraud. While auditors look for fraud, however, they do not routinely suspect it. They know the tax law is complex and expect to find a few careless mistakes in every tax return. They will give you the benefit of the doubt most of the time. The line between negligence and fraud is not always clear, however, even to the IRS and the courts.
The auditor will not tell you if she has made a criminal fraud referral. One indication, however, may be an audit stopping midstream for no apparent reason. But never assume a fraud referral was made just because time passes and you do not hear from the auditor. With the amount of work they receive during tax season, auditors often get behind on their assigned cases.
Auditors are trained to detect common types of wrongdoing, called “badges of fraud.” Examples include a business with two sets of books or without any records at all, freshly made false receipts, and checks altered to increase deductions. Altered cancelled checks are easy to spot by comparing written numbers with computer coding on the check or bank statements.
The most common types of prosecuted tax crimes include failing to file income tax returns (as was the case with Wesley Snipes), filing false income tax returns, under-reporting income, submitting false documents, and making false statements or claims. The IRS aggressively prosecutes individual taxpayers involved in illegal activities, including avoiding the reporting of legal or illegal income from use of offshore tax shelters. To establish a tax crime, the IRS must prove “beyond a reasonable doubt” that a taxpayer willingly failed to report their correct tax liability and that additional tax is due and owing.
You should consult a tax attorney before addressing any criminal tax issues that may have arisen with the IRS or any taxing authority. Statements you make to a Special Agent can be used in a case against you. In addition, an accountant, CPA, Enrolled Agent, or other non-attorney, can be compelled to use anything you say to them against you. The first step in a criminal case is to avoid any criminal prosecution or punishment, such as imprisonment or fines, and that can only be achieved with the effective representation of an experienced criminal tax defense attorney.