Federal Tax Charges
There is nothing wrong with taking legal steps to pay as little tax as possible. However, it is a serious crime to take steps to evade paying taxes. It is also a crime to manipulate the tax system for your own financial gain or the financial gain of others. Let’s take a look at why you may be charged with a tax crime, what the penalties may be and how legal counsel may help in your case.
What Types of Tax Crimes Could You Be Charged With?
There are two common activities that the IRS tends to charge taxpayers with. The first is failing to file an income tax return in a timely manner, and the second is failure to report all of your income. Other potentially criminal activities include taking deductions that you didn’t have a sound basis to claim or using someone else’s identity to file a tax return.
Common Tax Crimes
| Tax Crime | Description |
|---|---|
| Failing to File Tax Return | Not filing an income tax return in a timely manner |
| Failure to Report Income | Not reporting all taxable income on your return |
| Improper Deductions | Taking deductions without sound basis or justification |
| Identity Theft/Fraud | Using someone else’s identity to file a tax return |
| Tax Evasion | Willfully attempting to evade or defeat paying taxes |
How the IRS Detects Tax Crimes
The IRS will get copies of any tax forms that you receive from an employer or company that you contracted with in the past year. Your bank, broker or online payment portal may also send paperwork to the government outlining your potentially taxable transactions during the year. This is how it can tell if you are failing to report income or are otherwise making questionable declarations on a tax return.
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(212) 300-5196Sources of Information the IRS Receives
- W-2 forms from employers
- 1099 forms from companies you contracted with
- Bank statements and financial institution records
- Broker statements showing investment income
- Online payment portal transaction records (PayPal, Venmo, etc.)
What Are the Potential Penalties in a Tax Case?
A tax case is either labeled a criminal matter or a civil matter. If the matter is considered a civil case, the government will likely levy financial penalties. These penalties may include the actual balance owed plus interest and a fine. In a criminal tax evasion case, an individual may face a fine of up to $250,000 per count as well as a prison sentence of up to five years per count.
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You received a letter from the IRS stating they are conducting a criminal investigation into your tax returns from the past three years, alleging you underreported income by over $200,000 through unreported cash payments from freelance consulting work. An IRS Criminal Investigation agent has already contacted your employer and bank, and now wants to schedule an interview with you.
Should I cooperate with the IRS criminal investigation and agree to the interview, or will anything I say be used against me?
Do not agree to an interview with IRS Criminal Investigation without an experienced tax defense attorney present — anything you say can and will be used to build a criminal case against you. Under 26 U.S.C. § 7201, tax evasion carries up to 5 years in federal prison and fines up to $250,000 for each year you are found to have willfully attempted to evade taxes. The government must prove beyond a reasonable doubt that you had a "willful" intent to defraud, meaning an attorney can challenge whether the underreporting was an honest mistake versus deliberate evasion. Early intervention by counsel can sometimes resolve the matter through a voluntary disclosure or negotiate with prosecutors to reduce charges to a lesser offense like filing a false return under § 7206, which carries a maximum of 3 years per count.
This is general information only. Contact us for advice specific to your situation.
It is also possible that a taxpayer will be required to pay court costs and other fees if convicted. The IRS determines if a case is a criminal or civil matter based on your pattern of behavior. If the government believes that you tried to willfully evade paying taxes, it will likely pursue criminal charges.
Criminal vs. Civil Tax Cases: Penalties Comparison
| Case Type | Penalties | When Charged |
|---|---|---|
| Civil Tax Case |
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