Tax Fraud is a Felony Offense Under Federal Law—Learn What You Need to Know if You Are at Risk for Prosecution
If you have concerns about facing prosecution for tax fraud, you are not alone. Lots of individuals and businesses underreport their federal tax liability, relying on the assumption that their false returns will not draw scrutiny from the Internal Revenue Service (IRS).
But, tax fraud allegations can also come as a surprise. Whether taxpayers inadvertently make mistakes or the IRS incorrectly assesses a taxpayer’s liability, it is not uncommon for accusations of tax fraud to seemingly come out of nowhere.
Regardless of the circumstances involved, facing accusations of tax fraud is a very serious matter. Tax fraud is a felony offense under federal law, and the consequences of a conviction can be severe. However, there are a variety of ways to defend against these accusations, and targeted taxpayers will often be able to avoid a conviction with the help of experienced defense counsel.
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Brian J. Kuester
Former U.S. Attorney
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Amanda Marshall
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Joe Brown
Former U.S. Attorney
& Former District Attorney
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John W. Sellers
Former Senior Trial Attorney
U.S. Department of Justice
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Linda Julin McNamara
Former Chief, DOJ Appeals
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Joanne Fine DeLena
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Aaron L. Wiley
Former Federal Prosecutor
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Roger Bach
Former Special Agent (OIG)
Timothy E. Allen
Former Senior Special Agent
Chris Quick
Former Special Agent (FBI & IRS-CI)
Kevin M. Sheridan
Former Special Agent (FBI)
Ray Yuen
Former Supervisory Special Agent (FBI)
Understanding the Felony Offense of Federal Tax Fraud
There are several anti-fraud provisions in the Internal Revenue Code (IRC). While some of these provisions establish misdemeanor offenses (i.e., failure to file a return under 26 U.S.C. Section 7203), most federal tax crimes are felonies.
For example, the two main anti-fraud provisions in the IRC are 26 U.S.C. Section 7201 and 26 U.S.C. Section 7206. Both of these are felony statutes. Depending on the circumstances involved, a conviction under Section 7201 or Section 7206 can potentially result in a three or five-year prison sentence, and the financial penalties can include a $100,000 fine ($500,000 for corporations) plus the government’s costs of prosecution.
“Defeating” Tax in Violation of 26 U.S.C. Section 7201
When pursuing tax fraud cases, IRS Criminal Investigation (IRS CI) and the U.S. Department of Justice (DOJ) will typically work to substantiate charges under Section 7201 of the IRC. While this is commonly referred to as the federal tax evasion statute, tax evasion is a form of tax fraud, and the statute also goes beyond tax evasion to cover any other effort to “defeat” tax owed to the federal government. Section 7201 states, in full:
“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.”
Despite its brevity, Section 7201 is a powerful tool that IRS CI and the DOJ routinely use to pursue felony tax fraud charges. Almost any willful attempt to avoid paying less than the full amount x an individual or business owes can lead to felony prosecution under Section 7201.
Tax Fraud and False Statements Under 26 U.S.C. Section 7206
Along with felony charges under Section 7201 of the IRC, IRS CI and the DOJ will often pursue felony charges under Section 7206. While Section 7206 has several provisions, it has one provision in particular that is of concern for taxpayers who may have submitted an inaccurate or incomplete return. Under Section 7206(1):
“Any person who . . . [w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter . . . shall 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 3 years, or both, together with the costs of prosecution.”
If you are thinking that Section 7201 and Section 7206(1) seem to overlap, you are right. In federal tax fraud cases, it is not unusual for taxpayers to face felony charges under both of these statutes. Federal laws such as the conspiracy and wire fraud statutes allow the DOJ to pursue additional felony charges in these cases as well; and, as a result, it is entirely possible for targeted taxpayers to face decades of imprisonment and millions of dollars in financial responsibility.
Defending Against Felony Tax Fraud Charges Under Sections 7201 and 7206 of the IRC
Given the stakes, taxpayers targeted in federal tax fraud investigations need to defend themselves by all means available. This starts with hiring experienced defense counsel. While IRS CI and the DOJ have a variety of ways to prove felony tax fraud, there are a variety of potential defenses to charges under Section 7201 and Section 7206(1) as well. Some examples of these defenses include:
1. No Evidence of Willfulness
Under both Section 7201 and Section 7206(1), “willfulness” is a key element of the federal government’s case. If the DOJ’s prosecutors cannot prove that you willfully attempted to avoid federal tax liability, they should not be able to secure a conviction.
2. No Attempt to Evade or Defeat Tax
In tax fraud cases under Section 7201, the DOJ’s prosecutors must also be able to prove that you attempted to evade or defeat tax. If you had no intention of paying less than you or your company owed, then you did not violate Section 7201. Keep in mind, however, that you or your company could still be civilly liable for underreporting or underpayment—and you will need to work closely with your defense counsel to structure a defense strategy that does not create unnecessary exposure to criminal or civil liability.
3. Belief if the Truth and Accuracy of the Returns or Documents at Issue
Under Section 7206(1), the DOJ must be able to prove that you filed a return, statement, or other document that you “[did] not believe to be true and correct as to every material matter.” If you thought that you were accurately reporting your federal tax liability, a mistake may justify civil liability, but it does not warrant felony prosecution.
Again, these are just examples. When you engage The Criminal Defense Firm to represent you or your company, our former DOJ prosecutors and IRS CI Special Agents will thoroughly examine the government’s case and identify all viable defenses. We will then build a comprehensive and cohesive defense strategy that is custom-tailored to the facts at hand, and we will work to favorably resolve your (or your company’s) federal felony tax fraud case as quickly and quietly as possible.
FAQs: Defending Against Felony Tax Fraud Charges from IRS CI and the DOJ
What Should I Do if I Have Concerns About Facing Prosecution for Tax Fraud?
If you have concerns about facing prosecution for tax fraud, you should consult with a lawyer promptly. In these scenarios, taking a proactive approach can significantly mitigate the risks involved. If you are able to work with your lawyer to correct the issue before the IRS initiates an audit or investigation, you can move the possibility of facing felony charges off of the table.
What Should I Do if IRS CI is Investigating Me or My Company for Felony Tax Fraud?
If you are dealing with IRS CI in any capacity, you need to talk to a defense lawyer right away. This is a very dangerous situation, and you need to ensure that you are making informed decisions based on the advice of experienced tax fraud defense counsel.
What are the Penalties for Felony Tax Fraud Under the Internal Revenue Code?
The penalties for felony tax fraud under the Internal Revenue Code depend on the specific section (or sections) of the Code at issue. Generally speaking, however, felony tax fraud charges present the risk for both substantial fines and long-term federal imprisonment.
Should You Cooperate During a Federal Tax Fraud Investigation?
Cooperating with IRS CI during a federal tax fraud investigation can be an effective defense strategy in some cases. But, it can also be very risky. When we represent individuals and companies in federal tax fraud cases, we thoroughly assess all of the facts and circumstances involved in order to identify what we believe to be the most advantageous path forward. In some cases this will involve cooperating, in others it will involve executing a staunch and unrelenting defense.
Can (and Should) You Settle Federal Tax Fraud Charges?
Settling federal tax fraud charges is an option in many cases. But, here too, individual and corporate taxpayers need to be very careful. Negotiating a settlement with the IRS or with federal prosecutors requires a skilled and strategic approach, and ineffective efforts to negotiate have the potential to increase targeted taxpayers’ risk exposure.
Discuss Your Felony Tax Fraud Case with a Senior Lawyer at The Criminal Defense Firm
If you need to know more about how to protect yourself (or your company) against allegations of felony tax fraud, we encourage you to contact us promptly for a confidential consultation. to speak with a senior tax fraud defense lawyer at The Criminal Defense Firm as soon as possible, call 866-603-4540 or tell us how we can reach you online now.