Tax litigation and controversy matters can include both civil and criminal disputes. Unlike a civil tax dispute (which typically only involves money), criminal tax disputes can have much greater consequences.
McLaughlin Legal represents individual, businesses, tax preparers, and other tax practitioners who are the target of criminal tax investigations.
What are tax crimes?
Although most think of “tax fraud” as the one and only tax crime, there are in actuality a variety of different tax crimes. Each crime has its own unique elements, consequences, and other characteristics. Some of the more common include:
- Attempting to evade or defeat tax
- Willful failure to collect or pay over tax
- Failure to file, supply information, or pay tax
- Fraud and false statements
- Aid or assist false of fraudulent documents
- Fraudulent returns, statements, or other documents
- Aiding and abetting
- False statements
Attempting to evade or defeat tax:
Section 7201 of the Internal Revenue Code states that:
“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.”
Often called “tax evasion,” a charge of tax evasion under section 7201 encompasses two distinct actions:
- The willful attempt to evade or defeat the assessment of a tax
- The willful attempt to evade or defeat the payment of a tax
In order to establish the offense of tax evasion, whether of assessment or of payment, the government must prove that a taxpayer engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liabilities or assets. There are any number of ways in which a taxpayer can attempt to evade or defeat taxes or the payment thereof, and Section 7201 expressly says “attempts in any manner” to evade or defeat any tax or the payment thereof.
In evasion of payment cases, evading or defeating the correct assessment of the tax is not the issue. Evasion of payment usually occurs after the existence of a tax due and owing has been established, either by the taxpayer’s reporting the amount of tax due and owing, by the IRS’s examining the taxpayer and assessing the amount of tax deemed to be due and owing, or by operation of law on the date that the return is due, if the taxpayer fails to file a return and the government can prove that there was a tax deficiency on that date.
To establish the tax crime of attempt to evade or defeat tax, the government must generally prove each of the following elements beyond a reasonable doubt:
- An affirmative act constituting an attempt to evade or defeat a tax or the payment thereof. Sansone v. United States, 380 U.S. 343, 351 (1965); Spies v. United States, 317 U.S. 492, 497-99 (1943).
- An additional tax due and owing. Boulware v. United States, 552 U.S. 421, 424 (2008); Sansone v. United States, 380 U.S. 343, 351 (1965); Lawn v. United States, 355 U.S. 339, 361 (1958).
- Willfulness. Cheek v. United States, 498 U.S. 192, 193 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 358-59 (1973); Sansone v. United States, 380 U.S. 343, 351 (1965); Holland v. United States, 348 U.S. 121, 124, 139 (1954)
Willful failure to collect or pay over tax:
Section 7202 of the Internal Revenue Code states that:
“Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined . . . or imprisoned not more than five years, or both, together with the costs of prosecution.”
A crime of willfully failing to collect of pay over tax is typically used to prosecute a person who fails to comply with their obligations to collect, account for, and pay over withholding taxes. Prosecutors sometimes combine prosecution for willful failure to collect or pay over tax with a charge of mail or wire fraud, especially if the defendant embezzled funds that were held in trust.
Section 7202 can be violated in one of three ways: (1) a willful failure to collect; (2) a willful failure to truthfully account for; and (3) a willful failure to pay over.
To establish the tax crime of willful failure to collect or pay over tax, the government must generally prove beyond a reasonable doubt:
- Duty to collect, and/or to truthfully account for, and/or pay over a tax
- Failure to collect, or truthfully account for, and/or pay over the tax
Prosecutions for willful failure to collect or pay over tax under section 7202 usually involve FICA (Social Security and Medicare taxes) and federal income tax withheld from an employees wages. In many ways a violation of section 7202 is the criminal equivalent of a civil Trust Fund Recovery Penalty under Internal Revenue Code section 6672. An employer has a duty to collect, truthfully account for, and pay over trust fund taxes arises under Sections 3102(a) and 3402 of the Internal Revenue Code. Persons with the duty to collect, truthfully account for, and pay over could be criminally prosecuted when there is a failure to perform this duty. The term “person” is “construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.” 26 U.S.C. § 7701(a)(1). Section 7343 extends the definition of “person” to include “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
Failure to file, supply information, or pay tax:
Section 7203 of the Internal Revenue Code states that:
“Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined . . ., or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year.”
Section 7203 covers four different situations
- failure to pay an estimated tax or tax
- failure to make or file a return
- failure to keep records
- failure to supply information
To establish the tax crime of failure to file a return, the government must generally prove three elements beyond a reasonable doubt:
- The defendant was a person required to file a return
- The defendant failed to file at the time required by law
- The failure to file was willful
To establish the tax crime of failing to pay a tax, the government must generally prove beyond a reasonable doubt that:
- The defendant had a duty to pay a tax
- The tax was not paid at the time required by law
- The failure to pay was willful
Fraud and false statements:
Section 7206 of the Internal Revenue Code in relevant part says that:
“Any person who –
(1) Declaration under penalties of perjury. –
Willfully 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 . . . or imprisoned not more than 3 years, or both, together with the costs of prosecution.”
For a defendant to be convicted under section 7206(1), the government must generally prove beyond a reasonable doubt:
The elements of a Section 7206(1) offense are as follows:
- The defendant made and subscribed a return, statement, or other document which was false as to a material matter
- The return, statement, or other document contained a written declaration that it was made under the penalties of perjury
- The defendant did not believe the return, statement, or other document to be true and correct as to every material matter
- The defendant falsely subscribed to the return, statement, or other document willfully, with the specific intent to violate the law
While most Section 7206(1) prosecutions involve income tax returns (i.e., Form 1040), there are some reported cases involving false documents other than tax returns. See, e.g., United States v. Droms, 566 F.2d 361, 362-63 (2d Cir. 1977) (per curiam) (financial information statement submitted to the IRS for settlement purposes); United States v. Cohen, 544 F.2d 781, 782-83 (5th Cir. 1977) (false statement made in an offer in compromise, Form 656); Jaben v. United States, 349 F.2d 913, 915-16 (8th Cir. 1965) (application for extension of time for filing).
Aid or assist false or fraudulent documents:
Section 7206 of the Internal Revenue Code also states that:
“Any person who — . . .
(2) Aid or assistance. — Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; . . . . . shall be guilty of a felony and, upon conviction thereof, shall be fined . . . or imprisoned not more than 3 years, or both, together with the costs of prosecution”
Prosecutions for aiding or assisting in false or fraudulent documents generally consist of persons who willfully prepare or in some way assist in preparing a materially false tax return or other document submitted to the IRS.
Fraudulent returns, statements, or other documents:
Section 7207 of the Internal Revenue Code provides that:
“Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined . . . or imprisoned not more than 1 year, or both.”
For the government to convict a person of this tax crime, they must prove beyond a reasonable doubt that:
- The defendant submitted a return, statement, or other document to the Internal Revenue Service;
- The return, statement, or other document was false or fraudulent as to a material matter
- The defendant acted willfully
Aiding and abetting:
The tax crime of aiding and abetting is not found in the Internal Revenue Code, but section 2 of Title 18, which states that:
“(a)Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.
(b)Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.”
18 U.S.C. section 2 covers two types of aiding and abetting. Subsection 2(a) of the statute is aimed at traditional aiding and abetting, which requires proof of an underlying substantive offense. Under subsection 2(a), the government must prove that someone committed a crime and that another person aided and abetted in the commission of that crime.
Under subsection 2(b), frequently referred to as “causing,” the government is not required to prove that someone other than the defendant was guilty of a substantive offense. This subsection is aimed at the person “who causes an intermediary to commit a criminal act, even though the intermediary who performed the act has no criminal intent and . . . is innocent of the substantive crime charged.” United States v. Tobon-Builes, 706 F.2d 1092, 1099 (11th Cir. 1983).
Another Title 18 crime is that of conspiracy to commit offeses or to defraud the United States. Section 371 states that:
“If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.
If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.”
Section 371 sets out two types of conspiracies: (1) conspiracies to commit a specific offense against the United States and (2) conspiracies to defraud the United States.
Section 1001 of Title 18 states in relevant part that:
“[W]hoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully –
(1) falsifies, conceals or covers up by any trick, scheme, or device a material fact;
(2) makes any materially false, fictitious, or fraudulent statements or representation; or
(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;
shall be fined under this title or imprisoned not more than 5 years . . .”
The purpose of Section 1001 is “to protect the authorized functions of governmental departments and agencies from the perversion which might result from” concealment of material facts and from false material representations. United States v. Gilliland, 312 U.S. 86, 93-94 (1941).
Why am I a target of a criminal tax investigation?
Generally the IRS Criminal Investigation Division initiates investigations as a result of one of the following:
- Fraud referrals from other divisions within IRS
- Information provided by other government agencies
- Information provided by private parties
- Matters or projects developed within the Criminal Investigation Division
During a civil examination an auditor might discover some indication of fraud. Some of the more common “badges of fraud” include:
Income related fraud indicators:
- Omitting specific items where similar items are included.
- Omitting entire sources of income.
- Failing to report or explain substantial amounts of income identified as received.
- Inability to explain substantial increases in net worth, especially over a period of years.
- Substantial personal expenditures exceeding reported resources.
- Inability to explain sources of bank deposits substantially exceeding reported income.
- Concealing bank accounts, brokerage accounts, and other property.
- Inadequately explaining dealings in large sums of currency, or the unexplained expenditure of currency.
- Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.
- Failing to deposit receipts in a business account, contrary to established practices.
- Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.
- Cashing checks, representing income, at check cashing services and at banks where the taxpayer does not maintain an account.
- Concealing sources of receipts by false description of the source(s) of disclosed income, and/or nontaxable receipts.
Expense or deduction related fraud indicators:
- Claiming fictitious or substantially overstated deductions.
- Claiming substantial business expense deductions for personal expenditures.
- Claiming dependency exemptions for nonexistent, deceased, or self-supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.
- Disguising trust fund loans as expenses or deductions.
Taxpayer conduct related fraud indicators:
- False statement about a material fact pertaining to the examination.
- Attempt to hinder or obstruct the examination. For example, failure to answer questions; repeated cancelled or rescheduled appointments; refusal to provide records; threatening potential witnesses, including the examiner; or assaulting the examiner.
- Failure to follow the advice of accountant, attorney or return preparer.
- Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.
- The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.
- Testimony of employees concerning irregular business practices by the taxpayer.
- Destruction of books and records, especially if just after examination was started.
- Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.
- Pattern of consistent failure over several years to report income fully.
- Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
- Payment of improper expenses by or for officials or trustees.
- Willful and intentional failure to execute pension plan amendments
- Backdated applications and related documents.
- False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.
- Use of false social security numbers.
- Submission of false Form W–4.
- Submission of a false affidavit.
- Attempt to bribe the examiner.
- Legal sourced income tax crimes – legal sourced income tax crimes are generally those where the source of the income being underreported or avoided is from a legal source, for example, gross receipts from a restaurant.
- Illegal sourced financial crimes – illegal sourced criminal tax matters involve cases where the money in question stems from an illegal source like illegal gambling.
- Narcotics-related financial crimes – IRS Special Agents are exceptional financial investigators, and as such are called upon to assist in narcotics related financial crimes.
Because of various overlaps between IRS and other agency responsibilities, the IRS can help narcotics related financial crimes by reviewing Forms 4789, TD F 90-22.1 (“FBAR”), 8300, etc.
- Counterterrorism financing – the IRS also assists other Federal agencies (like the FBI, NJTTF, JTTF, TFOS, OFAC, and others) to fight terrorism based on its expertise in financial investigations.
The Agent might then refer the matter to the IRS Criminal Investigation Division for a Special Agent to investigate the matter. After a Special Agent and the IRS Criminal Investigation Division concludes it investigation, it can choose to forward the case to the Department of Justice with a recommendation for criminal prosecution. The Special Agent’s Report and Criminal Reference Letter are usually required for a referral for prosecution, which outline various topics including venue, the taxpayer’s background, a theory of the case, possible criminal offenses committed, principle evidence, and other items. The Department of Justice can then choose to approve criminal tax prosecutions.
What some also don’t understand are the various types of investigations that can arise. Generally, the IRS breaks down its criminal tax law investigations into one of court independent categories:
What are the consequences for violating a criminal tax law?
In short: severe. A criminal tax law violation can be punishable by monetary restitution and/or imprisonment in federal prison – for multiple years. Because of these severe consequences, it is critical that anyone who is the subject of a criminal tax investigation speak with an attorney immediately. In many cases, by the time an IRS CID Special Agent makes contact with a target, they already have sufficient evidence to prosecute them for committing a tax crime, and are looking for additional information and/or criminal tax charges.
Why McLaughlin Legal?
McLaughlin Legal is a San Diego tax law firm, with tax attorneys who are qualified and experiences in all types of civil and criminal tax law matters. Because a tax crime is unique (and not like a DUI, domestic violence, narcotics, or other common type of crime), it is important to have a defense attorney who understands the intricacies of the Internal Revenue Code, the IRS, and other tax rules.
McLaughlin Legal is not all things to all clients, nor are we a billboard, bus-stop, or “late night TV ad” type firm. McLaughlin Legal is a specialized law firm that defends taxpayers and resolves all types of civil and criminal tax disputes. Whether defending your rights in a civil audit, or in a criminal tax investigation, our concentrated practice, specialized knowledge and experience, personalized service, and commitment to reach client sets us apart from the rest.
If you are interested in learning more about McLaughlin Legal’s criminal tax defense practice, please feel free to contact us today for a free consultation.