How the IRS Proves Tax Fraud in California Federal Court
Contents
How the IRS Proves Tax Fraud in California Federal Court
Paying taxes is a necessary part of life – but some people try to avoid doing so through illegal means. Tax fraud refers to intentional wrongdoing on a tax return in order to limit the amount of money owed to the government. This could involve hiding income, inflating deductions, lying about business expenses, and more. The Internal Revenue Service (IRS) takes tax fraud very seriously, and prosecutes offenders in federal court when substantial amounts of tax revenue are at stake.
In this article, we’ll look at how the IRS builds tax fraud cases and proves them in court, with a focus on California. The Golden State has seen its fair share of high-profile tax evasion cases over the years. Understanding the IRS’s investigative and legal procedures can help honest taxpayers stay compliant, while deterring would-be cheats. Let’s dive in!
Common Types of Tax Fraud
The IRS broadly groups tax fraud into two categories – legal source income fraud and illegal source income fraud. Legal source fraud involves falsifying information and deductions around legal income like salaries, investments, and business proceeds. Illegal source fraud hides money obtained through criminal activities like drug trafficking or embezzlement.
Some common legal source tax fraud tactics include:
- Claiming personal expenses as business deductions
- Failing to report cash income
- Exaggerating charitable contributions
- Lying about residence to file taxes in a lower-tax state
- Abusing tax shelters and retirement plans
On the illegal side, tax fraud often involves:
- Not reporting income from illegal activities
- Funneling embezzled or stolen money through shell companies
- Using complex schemes to hide assets offshore
These tactics rob the government of billions in owed taxes every year. The IRS takes an aggressive stance to identify and prosecute the worst offenders. Many cases originate from suspicious activity and whistleblower reports.
How the IRS Investigates Tax Fraud
The IRS has teams of experienced criminal investigators who build tax fraud cases. They utilize both civil audits and criminal investigations to uncover wrongdoing.
In a civil audit, the IRS reviews tax returns and requests documentation to verify income, deductions, credits, etc. If they find evidence of intentional misrepresentation, they can refer the case for criminal investigation. The audit helps provide a paper trail for prosecution.
Criminal investigations go much further. IRS agents can:
- Issue subpoenas to access financial records
- Interview witnesses and suspects
- Conduct surveillance operations
- Work undercover to infiltrate criminal operations
They build an extensive body of evidence tracing how the defendant actively concealed taxable income and assets. This involves tracking paper trails through banks, businesses, offshore accounts, etc. The IRS collaborates closely with the Department of Justice prosecutors who ultimately try the case.
Prosecuting Tax Fraud in Federal Court
After a thorough criminal investigation, the IRS formally charges tax fraud suspects and hands the case to the Department of Justice (DOJ) for prosecution. The DOJ Tax Division handles federal tax prosecutions across the country.
In California, the IRS and DOJ rely on federal prosecutors in the state’s four federal judicial districts – Northern, Eastern, Central, and Southern. Each district has dedicated Assistant U.S. Attorneys experienced in tax cases.
Prosecutors present the evidence gathered by IRS criminal investigators to prove the defendant knowingly and willfully attempted to evade taxes. This often includes:
- Tax returns from multiple years showing a pattern of falsehoods
- Financial records revealing unreported income
- Documentation of complex offshore asset hiding schemes
- Witness testimony on shady accounting requests
Defendants may argue the false tax returns were accidental or negligent errors, not intentional fraud. But the volume of evidence usually undercuts these claims. Prosecutors emphasize the defendant’s conduct over multiple years – a single mistake is believable, five years of “errors” is tax fraud.
If convicted, penalties are severe. Tax fraud involving over $100,000 in unpaid taxes is a felony with up to 5 years in prison and substantial monetary fines. Most cases prosecuted federally involve far greater sums.
Notable California Tax Fraud Cases
California has seen many high-profile tax fraud prosecutions over the past decade. Here are a few that show how these complex cases come together:
Snipes – Failure to File
Famed actor Wesley Snipes received a 3-year sentence for willfully failing to file tax returns from 1999-2001. Prosecutors used IRS records showing he had not filed returns or paid any taxes, despite earning millions from film salaries. Snipes argued he was targeted for his political views. But the jury found him guilty of deliberate failure to file. His conviction was a warning that even celebrities are not above the law.
Ty Warner – Offshore Accounts
Beanie Babies billionaire Ty Warner was prosecuted for hiding over $100 million in Swiss bank accounts. IRS investigators proved he had invested extensively in offshore accounts and shell companies to avoid U.S. taxes for over a decade. Despite his lawyers arguing it was not intentional, he received 2 years probation and a $53 million civil penalty in 2013. Offshore tax evasion schemes are a prime target for the IRS.
Bilzerian – Securities Fraud
Businessman Paul Bilzerian spent over a decade contesting tax fraud charges for concealing assets to avoid $62 million in taxes. He was convicted on multiple securities fraud charges in the 1990s. In 2008, he was convicted again by a federal jury on nine counts of tax fraud. Prosecutors showed he had used offshore trusts and shell companies to hide assets and pay no taxes. He received a four-year sentence.
Defenses Against Tax Fraud Charges
For most taxpayers caught up in IRS tax fraud investigations, the best option is to cooperate fully rather than take an adversarial stance. Honest mistakes or negligence can often be corrected through good faith efforts to pay back taxes.
For those who choose to fight criminal tax charges, common defenses include:
- Lack of intent – Arguing deficiencies were accidental errors, not willful deception.
- Reliance on professionals – Claiming accountants or attorneys provided bad advice.
- Duress – Asserting the defendant failed to pay taxes under threat or coercion.
However, these defenses face an uphill battle given the IRS’s thorough evidence gathering. Prosecutors often anticipate and counter these arguments. Ultimately, most fraud trials come down to whether the defendant’s actions show intentional deceit.
The Bottom Line
Tax fraud is a serious matter, and the IRS and DOJ undertake rigorous investigations and prosecutions to protect government revenue. Typical tax fraud schemes involve hiding income, exaggerating deductions, concealing assets offshore, and abusing tax shelters. Defendants often claim innocence and ignorance, but skilled federal prosecutors defeat these arguments by proving a pattern of willful wrongdoing.
The vast majority of Americans pay their taxes honestly and accurately. But for those who consider elaborate tax evasion, hopefully this overview gives a sense of how vigorously the IRS and federal prosecutors will work to root out fraud and seek justice.
Sources:
[1] IRS: When it Comes to Tax Scams, Knowledge is Power
[2] IRS: “Ghost Preparer” charged with tax fraud appears in federal court
[3] IRS: IRS unveils “Dirty Dozen” list of tax scams for 2020
[4] POLITICO Pro: Hatch, Wyden ask Koskinen for ‘concerted action’ on fraud