Federal & IRS Tax Crimes
The Pappas Group represents taxpayers who are being investigated by the IRS criminal investigation division or have been charged with tax evasion by the U.S. government. The longer these investigations drag out the more serious they become because the government has invested more of its time and resources in the matter and wants to get a return on that investment. It is, therefore, absolutely critical that you get an experienced criminal tax defense attorney involved in the process as early as possible. Our first goal is to avoid the filing of criminal charges or, if criminal charges have already been brought, get them dropped.
There are a number of possible federal and IRS tax crimes with which the U.S. Department of Justice may charge a delinquent taxpayer. This section of our website discusses the most common charges.
Failure to File Tax Returns
26 U.S.C. § 7203 – Willful failure to file return, supply information, or pay tax
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* not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.
In the past, the U.S. rarely brought criminal charges against taxpayers for failing to file their tax returns. Typically, the IRS would send notices to these taxpayers requesting the filing of a return. If these notices were repeatedly ignored and if the IRS had significant income information (1099′s, K-1′s and other information reporting) about the taxpayer, it would prepare a return for the taxpayer and propose an assessment. This return is called a Substitute for Return or SFR.
The SFR procedure is still the preferred mechanism for pursuing non-filers, however, in the last 3 years we have seen an increasing number of failure to file cases referred to criminal investigation. This is especially true in cases of self-employed taxpayers who had not paid any tax during the year through wage withholdings or estimated tax payments.
Remember, it’s a crime to intentionally fail to file your income tax return. It is not a crime to be unable to pay your taxes.
Just ask Wesley Snipes.
File your returns before the IRS prepares an SFR and before the IRS begins a criminal investigation. Voluntary compliance, even at a late date, will usually forestall a criminal prosecution. Your case is likely to be referred to an IRS collection agent for payment negotiations rather than to a criminal investigator or government prosecutor for criminal prosecution.
Trust us, you’d rather deal with an IRS collection agent than a federal prosecutor.
False Tax Returns
26 U.S.C. § 7206(1) – Fraud and false statements
Any person who 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 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.
Violations of this statute involve the intentional failure to report income and/or the intentional claiming of a fraudulent deduction. In this case, the taxpayer files his tax return and signs it under penalties of perjury even though he knows that he has not reported all of his income or has claimed a bogus deduction.
In cases involving unreported income, an IRS criminal investigation is usually initiated in one of the following ways:
- Informant Tip (Whistleblower program)- the IRS has an aggressive and generous program of encouraging and rewarding American citizens to inform on one another. And it works. Over the last ten years a growing number of criminal tax prosecutions have been initiated by tips from informants. Informants usually, but not always, come from one or more of the following groups:
- disgruntled employees;
- ex-spouses; and
- business rivals.
- Audits – sometimes during the course of an examination of a taxpayer’s returns and books and records, an IRS auditor will stop the audit and refer the case to the criminal investigation division. This usually occurs in situations where the auditor finds significant unreported income and/or clearly fraudulent deductions.
- State Referral – All 50 states share information about delinquent and non-compliant taxpayers with the federal government. Often, especially in cases where a taxpayer failed to report all of his income on his state sales tax returns, a state auditor will notify the IRS of it’s findings. If the numbers are large enough, the matter will usually find it’s way into the hands of an IRS criminal investigator.
Obviously, the best way to avoid a criminal prosecution under this federal statute is to make sure you file an accurate return. The first step in doing this, is keeping good books and records. A second step would be to hire an experienced and qualified tax preparer to prepare your tax returns.
If you know that tax returns you filed in the past are materially wrong, you have a duty to amend those returns. Remember, while the IRS generally has only 3 years to audit a taxpayer’s tax return, that period is extended to 6 years in the case of omitted income.
Caveat: Non-compliant taxpayers often make the mistake of assuming that because they have not yet been notified by the IRS about their deficient returns that they have gotten away with whatever mistakes were made on them.
This is a very dangerous assumption to make because when a criminal investigator gets involved in a case he always begins by instructing the IRS to stop contacting the taxpayer. The reason he does this is because he doesn’t want to expend his time and the government’s resources to pursue a criminal conviction only to have the taxpayer voluntarily comply before the investigation is complete and the matter presented to a grand jury.
26 U.S.C. § 7201 - Attempt to evade or defeat tax
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.
This is one of the most serious criminal tax charges the government can bring against a taxpayer. Tax evasion cases usually involve the use of fraudulent tax schemes designed to defer or exclude income or accelerate or inflate deductible expenses. However, failure to file a tax return and the filing of a false statement also may give rise to a tax evasion charge.
The best advice we can give comes in the form of a cliche:
If it sounds too good to be true, it’s probably not true.
Get a second or even third opinion before you sign onto someone’s grand – and almost always too complex to fully understand – plan to help you avoid taxes.
Failure to Remit
26 U.S.C. § 7202 - Willful failure to collect or pay over tax
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 not more than $10,000, or imprisoned not more than five years, or both, together with the costs of prosecution
31 U.S.C § 5324 – Structuring transactions to evade reporting
No person shall, for the purpose of evading the reporting requirements of section 5313 (a) or 5325 or any regulation prescribed under any such section, the reporting or record keeping requirements imposed by any order issued under section 5326, or the record keeping requirements imposed by any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508— [...] (3) structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions.
Violations may be punished by a fine or up to five years in prison, or both.