CIVIL TAX FRAUD DEFENSE & TAX RESOLUTION

• Louis L.B. Carpenter  (pictured)  is a seasoned Tax Litigation Counsel and a specialist who has extensive experience in wealth management, federal tax litigation, and U.S. Tax Court trial practice. He is a member of the TLI Litigation Services Group that specializes in forensic analysis and fraud detection. and civil tax fraud defense. If the IRS alleges that you may have committed civil tax fraud, read the following and contact us.

THE ABC's OF TAX FRAUD

Tax fraud is the deliberate use of wrong information in filing tax returns. It is an illegal act where an entity willfully tries to evade tax liability. Defaulters exploit the tax system and break the law. 

This unlawful act causes significant loss to the government's income. The U.S. reports a $1 trillion loss owing to tax fraud every year. Most defaulters are large businesses or wealthy individuals. Unlike tax evasion, there are legitimate ways of minimizing the tax burden within the law. This is referred to as tax avoidance

• Tax fraud is an illicit practice. Individuals and corporations evade tax obligations by hiding their actual income or financial records from the tax authorities. Alternatively, they deliberately claim incorrect exemptions and deductions.
• If a tax preparer willingly deceives or misleads the tax authorities by submitting false statements and returns for their client, they are considered a tax defaulter.
• It is a punishable offense in many countries; however, the severity of punishment relies upon the category of misconduct. The severity of the crime varies between civil and criminal frauds. Therefore, the penalties range from hefty fines to imprisonment.

Tax fraud is the deliberate provision of false information by the taxpayer. Defaulters commit this crime to dodge their tax liabilities. Thus, it can be defined as any false representation of income or wealth with the intention of cheating on the tax sum owed. However, there is a legitimate way of minimizing the tax burden within the law. This is called tax avoidance. Here, a tax consultant can suggest acceptable tax-planning methods and income allocation to lessen the taxable income.

The Internal Revenue Service (IRS) treats such fraud in two different ways. For civil fraud, the tax liability is reassessed, and the defaulter is charged civil penalties along with the due tax amount. In contrast, for criminal fraud, the defaulter faces prosecution and monetary fines. This could potentially lead to imprisonment.

Intentional non-disclosure, manipulation of income-related financial records, false claims, false deductions, incorrect exemptions, and asset concealment are all considered tax fraud. People often engage in this misconduct to save taxes and pay as little as possible. Defaulting on taxes is considered a punishable offense in most countries. Like the Internal Revenue Service (IRS), governments set regulations and take measures to control tax evasion by strengthening the system.

 The following are the different kinds of unethical tax practices: 

1. Tax Evasion: In this form of criminal tax fraud, an individual knowingly presents false income information to the tax authorities.  Alternatively, some report less income than they actually earn when filing taxes.
2. Claiming Unqualified Credits and Deductions: Many defaulters apply for deductions or credits that they are not eligible for.
3. Willful Non-filing of Tax Return: If an individual premeditatedly fails to file tax returns, it is seen as an act of civil tax fraud.
4. Intentional Non-payment of Tax: When taxpayers deliberately evade tax obligations or hide evidence of their income, it is considered criminal tax fraud.
5. Stating Wrong Numbers or Presenting Fake Documents: Taxpayers who submit false documents or provide incorrect statements pertaining to their income are also considered defaulters.
6. Tax Evasion by Tax Preparer: Tax preparers who aid their clients by facilitating and or all types of offenses mentioned above are also prosecuted for tax evasion. These accountants give their clients an unfair advantage.

,The penalty for civil fraud is mostly limited to fines. For instance, deliberate non-filing of tax returns carries a 15% penalty of the due monthly tax amount, not exceeding five months. The maximum fine is up to 75% of the unpaid tax amount. Further, on filing a misleading tax return, the defaulter is liable to pay a fine of 75% of the underpaid tax amount.

In the US, the IRS has set up criminal tax fraud regulations under Section 7201 of the Internal Revenue Code (IRC) for intentional falsification of tax assessment and payment. It provides for penalties and incarceration if a person is found guilty of a felony. The monetary fine imposed on an individual offender can be as high as $250,000. The penalty for a business entity can go up to $500,000. In addition, the law provides for imprisonment of up to 5 years, with or without a fine. For example, if a defaulter deliberately fails to file taxes or maintain records, the individual can be charged up to $25,000, and the entity can be fined up to $100,000 and/or imprisoned for up to one year.

Instead of breaking the law, Individuals or companies can use legal tax avoidance methods to reduce their tax obligations. Advisory firms and tax preparers can suggest lawful ways to claim tax deductions. 

One practice is to establish a robust tax-planning structure. In addition, firms should inform their employees about tax procedures, tax evasion regulations, and compliance.  Firms can regularly monitor and flag defaulters. Moreover, businesses should not associate with suppliers or customers who are on trial for defaulting.

It is equally important to choose an ethical business for tax preparation.  Furthermore, tax preparers should follow a code of conduct and avoid illegal means to give their clients an unfair advantage. Lastly, if a company suspects tax evasion, it must report the crime immediately. 

FAQ

What is tax fraud?

Tax evasion is a crime where an individual or business entity intentionally submits incorrect income details to the tax authorities. Any other misconduct for dodging tax obligations is also considered tax evasion.

Do you go to jail for tax fraud?

Yes, a person found guilty of tax evasion may face imprisonment. According to the Internal Revenue Code’s Section 7201, defaulters in the US face a maximum penalty of five years' imprisonment. But jail sentences are usually not imposed for civil tax fraud violations in U.S. Tax Court.

Sometimes, a taxpayer negligently commits tax fraud; these cases arise when the individual or business organization files incorrect or incomplete details or mistakenly claims excessive or false deductions. If a deceitful tax consultant, the taxpayer bears the legal consequences.

Are tax fraud and tax evasion the same thing?

Tax evasion is a crime where an individual or business entity intentionally submits incorrect income details to the tax authorities. Any other misconduct or attempt to dodge tax obligations to take advantage of the tax system or reduce tax liability is also considered tax evasion.

Contact

The Tax Law Institute

Litigation Services Group

1717 N Street NW

Washington DC 20036

+1-202-800-9230

Courtesy of Collins Enash