CIVIL TAX FRAUD defense & Tax Resolution

Ludmila Moraru, J.D. LL.M.  (pictured right)  is seasoned tax resolution specialist who has extensive experience in tax planning and attestation services. She is an expert in forensic analysis, fraud detection and civil tax fraud defense. If the IRS alleges that you may have committed civil tax fraud then you should 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 take advantage of the tax system and violate laws. 

This unlawful act causes significant loss to the governments’ income. The US reports a $1 trillion loss owing to tax frauds every year. Most defaulters are either huge business entities or affluent 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 of their client, they are considered a tax defaulter.
• It is a punishable offense in many countries; however, the intensity of punishment relies upon the category of misconduct. The severity of the crime varies between civil and criminal frauds. Therefore, the penalty for the crime also ranges from hefty fines to imprisonment.

Tax fraud is the deliberate supply of misinformation by the taxpayer. Defaulters commit this crime to dodge their tax liabilities. Thus, it can be defined as any false representation of the income or wealth with the intention to cheat on the tax sum owed. However, there is a legitimate way of minimizing the tax burden within the law. This is referred to as 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 frauds in two different ways. For civil frauds, the tax liability is reassessed, and civil penalties are imposed on the defaulter along with the due tax amount. In contrast, for criminal frauds along with the monetary fines, the defaulter also faces prosecution. This could potentially lead to imprisonment.

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

 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 an income lower than the actual income while filing for tax.
2. Claiming Unqualified Credit and Deductions: Many defaulters apply for deductions or credit 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 pertaining to their income, it is seen as an act of criminal tax fraud.
5. Stating Wrong Numbers or Presenting Fake Documents: The taxpayers who furnish 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 any or multiple 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, the deliberate non-filing of tax returns bears 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 has a provision of penalty and incarceration if a person is found guilty of a felony. The monetary fine imposed on an individual offender can be as high as $250000. The penalty for a business entity can go up to $500000. In addition, the period of imprisonment for such defaulters is stated as up to 5 years accompanied with or without the fine. Also, the prosecution charges are to be borne by the defaulter. For example, if a defaulter deliberately fails tax filing or maintenance of records, the individual is charged a maximum of $25000, and such an entity is fined up to $100000 and/or imprisonment up to one year.

Instead of breaking the law, Individuals or companies can use the legal means of tax avoidance to reduce their tax obligations. The advisory firms and tax preparers can suggest various lawful methods of claiming tax deductions. 

One of the most common ways to refrain from fraudulent tax practices is to set a robust tax planning structure. In addition, firms should inform their employees about the tax procedures, tax evasion regulations, and compliance.  Firms can monitor and flag defaulters regularly. Moreover, businesses should not associate with any suppliers or customers who are on trial for defaulting.

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

FAQ

What is tax fraud?

Defaulting is a crime where an individual or business entity intentionally submits incorrect income details to the tax authorities. Additionally, any other misconduct for dodging the tax obligations is also considered as default.

Do you go to jail for tax fraud?

Yes, a person found guilty of defaulting tax may face imprisonment. According to the Internal Revenue Code’s Section 7201, defaulters in the US face a maximum penalty of five-year 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; such cases are reported when the individual or business organization files incorrect or incomplete details or mistakenly claims excessive or false deductions. Even If a deliberate crime is committed by a deceitful tax consultant, the taxpayer bears the legal consequences.

Are tax fraud and tax evasion the same thing?

Tax fraud is a holistic term that includes all the different manipulation and illegal practices adopted by the defaulting taxpayers. Tax evasion is one of the ways of conducting tax fraud; it is concerned with declaring a fake taxable income to take tax advantage or reduce the tax liability.

Tax fraud is a holistic term that includes the different manipulation and illegal practices adopted by the defaulting taxpayers. Tax evasion is one of the ways of conducting tax fraud; it is conerned with declaring a fake taxable income to take tax advantage or reduce the tax liability.

Others working on the Tax Fraud Defense Team at the Tax Law Institute are:

Louis B. 'LB' Carpenter III  CPA CFA USTCP 

Chief Tax Counsel 

James H. Chapman E.A. MPA M.A.

Auditor and Fraud Examiner

Jeffrey Thompson E.A. USTCP MBA M.A.

Tax Counsel

Kathryn Franklin

Legal Researcher

Courtesy of Collins Enash