Introduction to Criminal Defense for Tax Evasion
Tax fraud or tax evasion is the act of intentionally avoiding paying taxes for an extended period of time. Although tax evasion is a “white collar crime,” the potential punishments for this crime are not lessened due to its non-violent nature. This article will discuss what constitutes tax evasion, some of the possible punishments of varying degrees of tax evasion, and some common defense tactics in the face of a tax evasion charge.
What is Tax Evasion?
First, it must be understood exactly how tax rates are determined. Americans are required to pay taxes based on a metric called the Adjusted Gross Income, or AGI. This number is calculated based on the family’s total income minus certain expenses. Often, the government will provide certain tax-saving incentives for various things, such as installing energy saving devices in your home. Additionally, there are ways to claim certain expenses as tax deductible, allowing you to lower tax payments on a wide array of everyday costs. A few common tax deductible costs are:
-Health Insurance Premiums
-Unusual Business Costs
-Learning Expenses (Past High School)
-Job search expenses
To pursue these sorts of savings is a healthy manipulation of the system, and provides some financial reprieve for those of us (like teachers and students) who may be struggling. Yet, tax evasion is an entirely different beast. Tax evasion requires the intentional avoidance of fully owed, non-deductible payments. It covers a broad spectrum of activities, including but not limited to:
-Filing a false return
-Not collecting employment taxes
-Filing false documents
-Not paying taxes
-Not filing a tax return
-concealing illegal activies
-Not cooperating with tax authorities
-Failure to make tax payments
The Internal Revenue Service (IRS) will audit you if they suspect tax fraud or tax evasion. An audit is an investigation of your taxes under suspicion of misconduct. The Internal Revenue Service recognizes that filing taxes is a complicated process and that mistakes will inevitably be made. If these mistakes are pronounced enough, you may still be audited and have to pay fines, but you will avoid a criminal trial if these mistakes are indeed mistakes- that is, unintentional.
Types of Tax Evasion with Corresponding Punishments:
Although there are technically almost a dozen types of tax evasion, there are three main categories. The first is general tax evasion. General tax evasion is the broad term including any cheating on taxes owed to the government. This is most commonly practiced as an outright omission of revenue. For instance, if a business hides or destroys five hundred thousand dollars worth of receipts and does not account for them in taxes, this is considered general tax evasion. General tax evasion is a felony charge, and carries with it a maximum punishment of five years in prison and fines of up to 250,000 dollars (500,000 for a corporation).
The second form of tax evasion is filing a false return. Instead of omission, a false return is predicated upon the person filing false or misleading information regarding their taxes. In practice, this is often the inverse of general tax evasion; instead of omitting certain revenues, a person filing a false return will often over-report expenses. For individuals, this will often manifest in the form of lying about the size of one’s family, or inflating one’s common expenses. Filing a false return is also a felony charge, and carries with it the same maximum five year prison sentence with fines up to 250,000 dollars.
The third form of tax evasion is the complete absence of a tax return. If you simply do not file a tax return, this is obviously still considered evasion, but not deemed as severe as intentional deception. At first, the I.R.S will appeal for the taxes owed, and will only pursue criminal prosecution if the tax return is still not filed after those warnings are issued. Not filing a tax return is considered a misdemeanor, and carries with it a maximum punishment of one year prison time and 100,000 dollars in fees.
Steps of a Tax Evasion Prosecution:
For the most part, an audit does not lead to an IRS criminal investigation. In most cases, the audit will take place, the amount of money owed will be determined, and that money will be paid. In fact, the I.R.S only carries out about 3,000 criminal prosecutions a year. These criminal prosecutions are generally limited to particularly damaging or abusive tax evasion schemes, including but not limited to:
-real estate fraud
Because most evasion tactics are committed stealthily under the protection of private record, prosecution is often only possible after being “ratted out” by someone you know. This could be a family member, neighbor, or begrudging business associate. In the modern age, officials can also find information of fishy tax practices over social media. For instance, someone may mention their three children over Facebook, while they claimed five children on their tax return.
Regardless of how the illegal activity was illuminated, the next step is generally a knock on the door from suit-clad I.R.S agents, who make it clear they will be auditing you with potential criminal repercussions pending. At this point, if you did intentionally evade taxes, the accepted logic is to come clean and plead guilty. Oftentimes, the I.R.S will allow a voluntary disclosure which allows payment without the possible criminal punishments of jail time, fees, and a black mark upon your record. However, if you believe the I.R.S is in the wrong, or if you think you can fight the charges, hire an experienced tax attorney immediately. There are several defenses which may protect you against the I.R.S claims. For more information on tax crimes see the Tax Crimes handbook by the IRS.
The most rudimentary form of defense against a tax evasion charge is to prove that the false filing was unintentional. The government will use several pieces of evidence against you to prove your intentionality, including but not limited to:
-clearly hiding assets or income sources
-placing assets in others names
-keeping two sets of books
-dealing primarily in non-cash currency, such as gold coins.
The government will also attempt to determine your level of knowledge on tax law. If your defense is to claim ignorance in understanding the ambiguities of the tax code, your character must mirror this. If it is shown that you had helped many people in filing taxes in the past, it is unlikely that lack of knowledge played a role in the false reports.
Current conduct also plays a role in a successful defense. For instance, if it has been shown that the same mistakes, and no others, were made over and over again, this could prove that it was truly a lack of understanding that led to the misreporting. In the same vein, if the tax fraud was reported from several years in the past and the mistake has not been repeated, then this could prove that the mistake was indeed a mistake, and not intentional.
Another possible defense is that the supposed taxes owed were actually not owed, perhaps because they were deductible. Although this defense could work in theory, it is very unlikely it would ever be relevant. The I.R.S are the foremost experts in tax law, and would not pursue a criminal prosecution without investigating this possibility.
Unfortunately, a defense against a tax evasion charge is considered an uphill battle. The court systems are generally skeptical of a defendant claiming: “it was an accident,” without proper documentation to back it up. If the supposed evasion was truly a mistake, it is possible to provide relevant documentation to your lawyer or an equivalent tax professional. However, the I.R.S will also have your information through their audit, and will wield it with full force to an already biased judge. As mentioned above, the best advice if you are audited is to simply pay the taxes through a voluntary disclosure. This is beneficial for both parties, and allows you to avoid the hefty punishments and legal fees associated with a criminal hearing.
A tax deficiency is defined as paying less in taxes than what is owed. For some courts, a tax deficiency is equivalent to tax evasion, whereas some courts require a higher tax deficiency to equate to tax evasion. For a tax deficiency charge, the prosecution must prove through circumstantial evidence that taxes owed are more than taxes paid. Although the I.R.S can audit your tax records, the evidence they glean is still circumstantial because it is based on the individual’s net worth; in other words, tax records only mean something when viewed in relation to one’s income, because it is income which determines one’s Adjusted Gross Income-the rate that you are taxed at. Thus, based on private knowledge of income, a defendant can claim that the taxes owed were non-taxable, or that the government computation is flawed based on the true income they are making.
However, a successful defense for tax deficiency is not usually achieved by lying or unfairly manipulating income or taxing metrics. It is, instead, based upon retroactively determining that fees owed have a precedent for being tax-deductible. For instance, say you are a teacher and have been paying for school supplies out of pocket for years. This has been very solidly established as a tax-deductible fee. Thus, in court, that teacher may claim that the deficiency in taxes is explained by this clearly tax-deductible cost, and should be dismissed accordingly. It must also be noted that if a tax deficiency is determined to have been intentional, the charge will almost always be elevated to a tax evasion charge, rendering defense nearly impossible.
Although the overwhelming evidence suggests you admit guilt to the I.R.S in expectation of a criminal hearing, there are examples of cases where the I.R.S does make mistakes. If you are aware of impending prosecution, you are allowed to meet with I.R.S agents to seek conference on why you are being prosecuted. Because the I.R.S prosecutes so few individuals each year, they are meticulous in their evidence gathering and will not hold back. Thus, if you believe you have a chance for a successful defense and decide not to voluntarily disclose, an experienced tax attorney is crucial. They will try to find holes in the jargon of the tax code to manipulate, and even if they fail, will be instrumental to negotiations with the I.R.S outside of criminal proceedings.
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