The IRS criminal investigation division investigates and refers for prosecution some tax crimes more than others. Here are the three most frequently prosecuted tax crimes:
Failure to File Tax Returns
The Law: 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. However, in the last five years we have seen an increasing number of failure to file cases referred to criminal investigation. Most of these criminal referrals involve self-employed taxpayers who have 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 tax returns before the IRS prepares a return for you and before it begins a criminal investigation. Voluntary compliance, even at a late date, will usually forestall a criminal prosecution. Once you have filed your return, your case is more likely to be referred to an IRS collection agent for payment negotiations rather than to a criminal investigator or government prosecutor for criminal prosecution.
False Tax Returns
The Law: 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)
• State Referral
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 three years to audit a taxpayer’s tax return, that period is extended to six years in the case of omitted income.
The Law: 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 five years, or both, together with the costs of prosecution.
The best advice we can give comes in the form of a cliché: 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 understand – plan to help you avoid taxes.
Peter Pappas is a tax attorney and a CPA. He and his firm, The Pappas Group, have been helping federal and state taxpayers with their fax and business problems for more than 25 years. Call Peter at 407-648-2555; email him at email@example.com; or visit pappastax.com