As a resident of the United States, a US citizen living abroad, or the owner of a business or health care practice located in the US, you owe annual obligations to the Internal Revenue Service (IRS). If you fail to meet these obligations, not only could you incur interest and penalties, but you could also potentially be charged with criminal tax fraud under the Internal Revenue Code.
When can an incorrect (or omitted) tax filing trigger criminal charges? The primary federal tax fraud statute, 26 U.S.C. 7201, states:
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
While this doesn’t give too much to go on, they key word in 26 U.S.C. 7201 is “willfully.” Accidentally underreporting income or incorrectly calculating a deduction is not a criminal offense (although it could still trigger an IRS audit or investigation). However, IRS investigators and Department of Justice (DOJ) prosecutors can infer willfulness from a variety of circumstances. Even if you did not set out to defraud the IRS, this does not necessarily mean that you are immune from criminal prosecution.
5 Examples of Tax Violations Prosecuted as Fraud under 26 U.S.C. 7201
While tax fraud allegations can take a variety of different forms, five of the most-common tax fraud allegations under 26 U.S.C. 7201 include the following:
1. Not Filing a Tax Return
Under the Internal Revenue Code and IRS regulations, most US citizens and businesses must file tax returns every year. Businesses must also typically file estimated tax returns on a quarterly basis, and not filing an annual or quarterly tax return is one of the surest ways to garner IRS scrutiny. From Social Security numbers to corporate and partnership filings and from online advertisements to vendors’ tax filings, there are a number of ways that the IRS can identify individuals and businesses that have not filed tax returns and it will often take aggressive action against willful non-filers.
2. Filing a False Tax Return
Filing a “false” tax return is the next most common way to face a criminal tax fraud investigation. In this context, a tax return is considered “false” if it contains inaccurate or misleading information or if it omits information necessary to accurately calculate the filer’s tax liability. From fraudulently claiming travel and home office deductions to underreporting business income, all types of false statements have the potential to support federal criminal charges.
3. Filing False Supporting Documents
Filing false supporting documents is closely akin to filing a false tax return, and the IRS and DOJ treat both types of tax fraud similarly. Supporting documents can include receipts for business expenses, vendor 1099s, and other evidence of income and expenses. And individuals and companies can get into legal trouble for altering, falsifying, or omitting supporting documents.
4. Failing to Pay Taxes
Regardless of whether you file a return and regardless of whether your return and supporting documents are accurate, you have a legal obligation to pay what you owe to the IRS. In criminal law terms, failing to pay taxes is referred to as “tax evasion” and it carries the potential for severe criminal penalties and other consequences.
5. Failing to Report Foreign Assets
Even if you do not owe federal tax on foreign assets, as a general rule, you must still report these assets to the IRS. Failing to report foreign assets is a common mistake for businesses and high-net-worth individuals. And relying on bad tax advice is not an excuse for falling short of your reporting obligations.
Tax Fraud Allegations Resulting from Broader Federal Investigations
Although the IRS is involved in a staggering number of tax audits and fraud investigations at any given time, it simply cannot keep up with the rate at which individuals and businesses underreport income and underpay federal taxes. For this reason, it relies heavily on other federal agencies such as the Federal Bureau of Investigation (FBI) and Drug Enforcement Administration (DEA) to identify targets for potential tax fraud investigations. As a result, in addition to facing charges for substantive federal offenses (such as health care fraud or public corruption, licensed professionals, company executives, board members, and other individuals targeted by these agencies will often face charges for tax fraud as well.
Are You Guilty of Tax Fraud?
If you are being targeted by the DEA, FBI, or IRS and you are concerned that you could be at risk for charges of tax fraud, it is important to get out in front of the government’s investigation as much as possible. This means:
- Taking a proactive approach to intervening in the investigation (this means not simply assuming that you must hand over everything or that federal agents are acting within the scope of their authority);
- Conducting a confidential internal assessment to determine whether any fraudulent filings have been made (this should be done without creating more evidence that can be seized by the government);
- Determining whether you are at risk for prosecution for underpayment of federal income tax (i.e., tax evasion); and
- Deciding on the best strategy for defending yourself and your business or practice against criminal prosecution in federal district court.
Due to the complexities of the Internal Revenue Code and the unique (and high-risk) challenges involved in dealing with federal agents and prosecutors, these are all tasks that are best handled by experienced legal counsel. At The Criminal Defense Firm, we have significant experience representing individuals and businesses in federal tax fraud investigations and we can take action immediately if necessary in order to protect you.
Request a Free Tax Fraud Case Assessment at The Criminal Defense Firm
To discuss your case with a federal law defense attorney, please contact us to schedule a free and confidential consultation. You can reach us 24/7. So call 214-251-4238 or request an appointment online now.
Dr. Nick Oberheiden is a national litigation and trial criminal defense attorney who practices exclusively in the area of federal law.