Tax Fraud

Our firm represents individuals and corporations charged with tax fraud

40

Years of Legal Experience

Federal Income Tax

In society, the term tax fraud encompasses a broad scope of deceptive conduct relating to federal and state taxes.  Under the federal law, tax fraud defines the specific offense of filing a fraudulent return or making a false statement within a federal return.  This offense is codified under 26 U.S.C. § 7206.

This section makes it a criminal offense to willfully make or subscribe a federal return which the taxpayer does not believe to be true and correct as to every material matter.  Tax fraud is a felony offense that carries a maximum term of imprisonment of 3 years per count and a fine up to $100,000 for an individual and $500,000 for a corporation.  These fines are on top of any back taxes owed by the person or entity.

The statute of limitations for tax fraud is 6 years.  The statute of limitations generally begins to run from the date the tax return was filed.

Elements of Tax Fraud

The elements the government must prove under the tax fraud statute are as follows:

  • Willfulness with specific intent to violate the law
  • A false statement within the return
  • The false statement was material

The classic example of tax fraud includes a taxpayer that either underreports his income or overreports business deductions.  For example, let us assume a taxpayer had a real income of $1,000,000 in the taxable year.  If the taxpayer reports his income at $150,000, he will meet all the elements of tax fraud.  The taxpayer acted willfully in that he knew he was required to report his total income accurately and chose to underreport.  The statement would be false as it is an incorrect value for the gross income.  The statement would be material as the falsity impacted the total tax due and owing.

CID Investigation

Most criminal tax investigations begin with a civil audit, a whistleblower, or a suspicious activity report.  Suspicious activity reports are likely submitted by either a banking institution or other lender. Whistleblowers are often employees, partners, or family members of the taxpayer.

Once alerted, the criminal investigation division of the IRS (CID) will serve summonses on the taxpayer requesting various financial records.  Further, CID will reach out to the banks associated with the taxpayer for complete records.  CID’s goal is to create an accounting showing the true gross/taxable income.  This number will be used to show the reported income is false.  They will use business records to disprove deductions that are taken during the taxable years.

Our firm has written two blogs that dive deeper into this subject:

  1. This post discusses the strategies CID uses to reconstruct income and deductions
  2. This post outlines the CID process and guides taxpayers on how to approach the investigation

Willfulness is the Defense

The materiality and falsity elements of tax fraud are normally straight forward. If an entry in the tax return is inaccurate, and the inaccuracy changed the tax due and owing, both elements will be met.  The criminal defense to tax fraud will likely lie in the willfulness element.  The Supreme Court has provided that willfulness requires the government to prove the taxpayer knew the requirements of the tax code and deliberately chose to disregard the requirements.  Further, if the taxpayer honestly believed the challenged statement in the return was accurate/compliant, it is a complete defense regardless of how unreasonable that belief may be.

For instance, let us assume a business made $1,000,000 in the taxable year.  On the return, the filer states that the gross income is $500,000.  Under the rules, the business has underreported gross income by $500,000.  This would appear to be tax fraud through underreporting income.  However, what if the taxpayer stated the gross income was $500,000 because he honestly believed that ½ of the sales were repayment of loans (which are not taxable)?   Under those circumstances, the taxpayer has a defense under the willfulness element.  The taxpayer believed the Internal Revenue Code (IRC) excluded these payments from gross income.  The challenge to willfulness will remain intact even if the taxpayer’s interpretation of the code is factually incorrect and objectively unreasonable.  A person cannot commit tax fraud unless the government can prove he knew the legal duty and willfully chose to file the falsity.

The “ignorance of the law” defense is unique to criminal tax cases.  In most areas, a failure to understand the legal requirements is simply not a consideration.  In tax cases, it provides the foundation for most successful defenses.  The Supreme Court’s decision in United States v. Cheek (outlining this defense) makes tax fraud cases utterly unique in our justice system.

A more in-depth view of Cheek and the willfulness element can be found in a prior post from the firm.

Odom, Davis & Hobson

Our firm has represented many corporations and individuals under investigation for tax fraud.  Using our own accounting practices, and the willfulness element, we have had good success at stopping many criminal investigations before charges are filed.  A brief review of recent cases can be found here.

Our ultimate goal is to steer these investigations back into the civil division of the IRS.  This takes prison time and hefty fines off the table.  If charges are filed, our firm has a long history of trying federal cases and appealing any issues found therein.  While many firms handle tax investigations, few can represent clients from the day CID knocks on the door through the appeal of any adverse decision.

If you are under investigation by CID, or charges for tax fraud have been filed, contact our firm.  We are happy to set up a meeting and lay out your options.

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Criminal Tax Defense Articles

Anatomy of a Criminal Tax Case: Part Two

ANATOMY OF A CRIMINAL TAX CASE: PART TWO           Wendell Odom Before tackling a criminal tax case, one needs...

Anatomy of a Criminal Tax Case: Part One

  CIVIL TAX CASE VERSUS CRIMINAL TAX CASE   Tax Fraud vs. Tax Avoidance Tax avoidance generally describes...

Criminal Tax Defense – Ignorance of the Law and Cheek v. United States

Criminal Tax Defense - Ignorance of the Law and Cheek v. United States Brian T. Hobson In most...

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