The backbone of tax administration is voluntary compliance whereby taxpayers are required to timely and accurately prepare, file, and pay their tax bills. To ensure compliance, the Internal Revenue Service (IRS) has broad and powerful powers to investigate taxpayers, ranging from an audit examination to a criminal investigation that could lead to a criminal prosecution and a prison sentence. Generally, tax investigations and related penalties are civil matters.
However, if a person or a business makes serious mistakes on their tax returns, fails to file tax returns, or fails to pay their taxes when due, they are at risk for both civil and criminal penalties. The IRS and the Department of Justice pursue criminal investigations and prosecutions to deter people from violating tax laws. A Washington DC tax fraud and tax evasion lawyer can evaluate your case to determine how to resolve these serious mistakes, as well unfiled or false returns, before IRS contact. Alternatively, if the IRS has already begun an investigation, an experienced tax lawyer may be able to resolve a dispute early in the process.
What is Tax Fraud?
Tax fraud is the intentional act to evade or avoid the proper taxation calculation and the payment of proper tax due. Generally, tax investigations begin as a civil matter. Most audits are triggered by errors on the tax returns. However, if a civil investigation discovers badges of fraud by the taxpayer, the case may be referred to the IRS Criminal Investigation Division (CID) and assigned to IRS Special Agents who will conduct the investigation.
They will come to the taxpayer’s home or business and attempt to conduct interviews and gather tax documents. The Special Agents will then prepare a report and recommendation. Based upon that recommendation the IRS will determine whether to recommend prosecution by the Department of Justice. At each level, a local tax fraud and tax evasion attorney can advocate to steer a criminal investigation back to a civil investigation.
What Are the Common Badges of Fraud?
The following are common badges of fraud: unfiled returns for several years with high income, two sets of books or no books at all, substantial unreported income or substantial overstated deductions, and suspicious taxpayer conduct. The IRS playbook can be found in the Internal Revenue Manual (IRM). A more exhaustive list of fraud indicators can be found at IRM Section 184.108.40.206.
When to Hire a Tax Attorney for Evasion and Fraud
A taxpayer selected for an IRS tax audit examination who has substantially underreported income or overstated deductions is in a sensitive or “eggshell” situation. This taxpayer should stop communications with his or her accountant and retain legal counsel because accountant-client privilege does not apply to criminal cases. Thus, an accountant could be forced to testify to everything said by the taxpayer. Attorney-client privilege prevents the government from compelling the attorney to disclose confidential communications related to legal advice.
It is best to resolve an eggshell tax investigation as a civil matter with legal representation. This can reduce the taxpayer’s exposure to a criminal investigation. A tax fraud and evasion attorney in DC can help resolve investigations before the matter gets more serious.
How to Know if a Civil Examination Has Become a Criminal Investigation
The following are three common red flags that a criminal investigation has begun:
- The Revenue Agent who has been auditing the tax return ends the investigation without issuing a final report.
- The Revenue Officer responsible for collecting tax debt stops pursuing the taxpayer.
- The taxpayer or a related party is contacted by an IRS Special Agent.
If any of these has occurred, the individual should inform their Washington DC tax evasion and fraud lawyer immediately.
What Are the Consequences of Tax Fraud and Tax Evasion?
Under 26 US. Code § 6663, if the underpayment of tax is due to fraud, the IRS can impose a civil fraud penalty of 75% of the underpayment that was based upon fraud.
The most common statute that prosecutors can use is 26 U.S.C. § 7201, which says that it is a felony to take any overt act with the intent to evade or defeat tax. This is commonly referred to as tax evasion and includes the underreporting of tax to avoid payment of tax. If the prosecutor can prove this intent, the court can sentence a taxpayer to a five-year prison sentence or to pay fines of up to $100,000.
Other instances of apparent fraud are less severe but still carry penalties, such as a simple failure to file a tax return or pay taxes when due. According to 26 U.S.C. § 7203, a failure to file a tax return or pay taxes when a person knew of the obligation to do so is a misdemeanor. Penalties may include up to one year in jail and a fine of up to $25,000.
Under 26 U.S.C. § 7206, a fraudulent or false statement to the IRS is a misdemeanor, punishable up to three years in prison and fined up to $100,000.
Receive Help from a Washington DC Tax Fraud and Tax Evasion Attorney
If you are under civil or criminal investigation by the IRS, you have the right to legal representation. Anything you say or do can be used against you by the IRS. A civil eggshell examination could be referred for a criminal investigation that could lead to a criminal prosecution for tax evasion, tax fraud, failure to file a tax return, failure to collect employment taxes, or failure to pay collected taxes to the IRS. The government has the burden of proof beyond a reasonable doubt to obtain a criminal conviction in a tax case.
Allegations of tax fraud and tax evasion are serious matters and could result in a multiple-year prison sentence and thousands of dollars in fines. Hiring a Washington DC tax fraud and evasion lawyer can be a powerful first step. A lawyer could analyze your tax history and identify the areas of the law where you have exposure. They could then formulate a plan for correcting the dispute in such a way that puts an end to any IRS inquiry. Contact one today to see how they could help you.