Federal Tax Evasion Defense: IRS Criminal Prosecution.

Under 26 U.S.C. § 7201, it is a federal crime to willfully attempt to evade or defeat any tax or any part of a tax. However, the tax-evasion statute is broad, requiring the government to prove that the defendant (i) committed an affirmative act constituting an attempt to evade or defeat a tax or its payment, (ii) had an additional tax due and owing, and (iii) acted willfully, and a federal criminal tax defense team at Spodek Law Group has the opportunity to challenge the government’s evidence on these and other fronts.

To obtain a conviction for tax evasion under Section 7201, the government must prove that the defendant acted “willfully.” As a result, even if the defendant did not pay his or her federal tax obligation, that doesn’t make him or her liable for federal tax evasion. In fact, there are several scenarios in which the government will not be able to satisfy this burden of proof, from an honest mistake to reliance on advice from a CPA, making it possible to avoid liability in a criminal tax investigation.

IRS criminal investigations can lead to parallel civil consequences for federal tax liability as well. However, even in these circumstances, defending against the risk of federal tax evasion charges or facing an indictment involves a custom-tailored strategy designed to challenge the government’s legal and factual assertions at every stage of the process.

Federal Tax Evasion Trial Defense

Although it is rare for a § 7201 tax evasion prosecution to go to trial, federal criminal defense counsel will attack all aspects of the government’s case if necessary.

The central question at trial is whether the government’s evidence can prove the defendant’s guilt beyond a reasonable doubt. If the evidence does not meet this high burden, the defendant should not be convicted. The elements of tax evasion under 26 U.S.C. § 7201 are complex, and an honest mistake, missing record, or other excuse may make it hard to prove guilt at trial.

If the government cannot prove that the defendant committed a willful violation of § 7201, it cannot secure a conviction. There are many situations in which the government can prove that the defendant owed taxes, but cannot prove that his or her failure to pay constituted a criminal violation of federal law.

Relying on advice from a CPA or tax professional may make it more difficult to prove that the defendant willfully violated a known legal duty.

An honest mistake may also undermine the government’s effort to prove guilt beyond a reasonable doubt. The burden is on the government to prove all the elements of tax evasion, so even a small uncertainty may mean a lack of guilt.

What Happens When an IRS Audit Becomes a Criminal Tax Investigation?

Federal tax fraud investigations are conducted by the IRS Criminal Investigation (IRS CI) division. These investigations usually start after the IRS CI division receives a criminal tax referral. The source of the referral could be an IRS civil auditor, a criminal tax whistleblower, or the DOJ Tax Division.

For many cases, the IRS CI division forwards its findings to the DOJ Tax Division, which will review the evidence and then determine whether the case will be referred for prosecution. The DOJ Tax Division can then refer these cases to a local U.S. Attorney’s Office if warranted, and local U.S. Attorney’s Offices are the ones that typically prosecute federal criminal tax fraud charges.

Many criminal tax cases begin as IRS audits. When civil auditors discover evidence of potential criminal conduct, such as a deliberate attempt to understate income or overstate deductions, they may refer the file to the IRS CI Division. The investigation may also begin with a referral to the IRS CI from a taxpayer’s former spouse, a competitor, an aggrieved employee, or a whistleblower.

IRS CI agents frequently work alongside Assistant United States Attorneys (AUSAs), and IRS CI agents will work on various types of fraud, such as bank fraud, mortgage fraud, or wire fraud. While IRS CI agents may examine a taxpayer’s tax records to begin an investigation, they are often tasked with gathering evidence to prosecute the taxpayer for a federal criminal tax offense.

Investigations for federal criminal tax fraud are complex and protracted. The government will want to get as much information as possible to prove the taxpayer’s guilt. IRS CI agents, with assistance from the DOJ, will use audits, subpoenas, interviews, and analysis of the taxpayer’s financial records to build their case.

During federal criminal tax fraud investigations, federal agents may also execute search warrants. Taxpayers will need to hire a skilled federal criminal defense attorney to help them defend themselves against the government’s attempt to show guilt.

Spodek Law Group is transparent about its fees, and says so before a client signs anything.

Which People Face Separate Exposure Beyond Income-Tax Evasion?

Owning undisclosed foreign accounts can create additional exposure for taxpayers in addition to income-tax evasion. As discussed, some taxpayers must report foreign financial accounts on an FBAR and, if applicable, specified foreign financial assets on Form 8938; these reporting obligations are separate from the obligation to report taxable income and pay any federal income tax due. As a result, the IRS CI division can conduct investigations for undisclosed foreign accounts in order to pursue both tax-evasion charges and charges for reporting violations.

As a result, during an investigation regarding an undisclosed foreign account, the DOJ’s Tax Division can work with the DOJ’s Office of International Affairs. While the DOJ’s Tax Division may address the taxpayer’s actions with respect to the Foreign Account Tax Compliance Act (FATCA), the DOJ’s Office of International Affairs may assist with international evidence gathering in a prosecution involving false foreign bank account reports (FBARs). As a result, foreign-account investigations can present multiple avenues for criminal prosecution in addition to income-tax evasion.

What Are the Risks of Failing to Withhold or Remit Payroll Taxes?

In addition to underreporting, underpaying, and failing to pay income tax, employers have various federal tax obligations. Notably, employers must:

• Withhold federal income taxes from their employees’ paychecks,
• Use their employees’ withheld wages to pay the employees’ share of Social Security and Medicare taxes, and,
• Remit their employees’ withheld wages to the IRS.

While the IRS can (and does) seek to recover withheld wages when employers fail to remit payroll taxes, employers may face criminal charges when the failure to remit appears to be a willful attempt to evade federal taxes. As a result, these investigations often overlap with investigations for income tax fraud and require careful navigation of both potential civil and criminal consequences.

Who Else May Face Federal Criminal Tax Exposure?

In addition to taxpayers, a tax preparer, accountant, auditor, business consultant, or attorney can potentially face federal criminal exposure if the individual assisted with the preparation of a false federal tax return.

Corporate tax fraud investigations can present unique risks as well. In addition to facing criminal liability for their corporation’s tax violations, responsible officers can also face criminal liability. This is particularly true in cases involving the non-payment of withheld employee taxes, which can create criminal exposure for the individual responsible for the withholding and remittance process.

When Can Charging Deadlines, Penalties, and Disclosure Choices Change the Case?

Are Penalties for Section 7201 Tax Evasion Serious?

A conviction for criminal tax evasion under 26 U.S.C. § 7201 can carry the potential of up to five years of federal imprisonment. It also carries criminal fines under 18 U.S.C. § 3571, which allows individual fines up to $250,000, business fines up to $500,000, and restitution to the harmed party or parties. As a result, Section 7201 tax evasion is considered a serious federal criminal offense, even if individuals arrested or indicted in connection with the IRS Criminal Investigation division do not typically face a prior record of criminal conduct.

Is There a Statutory Minimum Tax Amount for Prosecution Under 26 U.S.C. § 7201?

No, there is no statutory minimum tax amount required for prosecution under 26 U.S.C. § 7201. While cases that lead to criminal charges often involve substantial amounts of tax liability, particularly in cases that do not involve other charges, taxpayers that underpaid by $500 could still potentially be held liable under 26 U.S.C. § 7201 and other provisions of the Internal Revenue Code.

Do Criminal Tax Charges Have Deadlines?

Although there are generally a statute of limitations for the criminal tax cases, there are many exceptions to this general rule. The statute of limitations varies by offense, and as a result, there is no single answer to when federal tax charges must be brought to date. For most cases, the criminal tax limitations period will be six years, subject to certain exceptions.

As a result, if you have received a subpoena, have been contacted by a federal agency, or have been notified that a complaint has been filed against you, your first priority is to determine if the applicable statute of limitations has expired.

What Are the Consequences of a Civil Tax Fraud Judgment?

For most taxpayers, failing to qualify for a criminal tax exemption can have immediate consequences regardless of whether a tax fraud case can be brought in a federal court. The IRS is entitled to pursue the following civil consequences even if criminal charges are not warranted:

• Unpaid federal tax liabilities;
• Penalties for underpayment;
• Penalties for the provision of incorrect information to the IRS; and,
• Restitution for any amounts wrongfully received or withheld.

As a result, taxpayers may remain liable for back taxes, penalties, and interest even if it is clear that they are not likely to be criminally prosecuted in a federal tax fraud case.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 888 348 8028.