- 1 Tax Fraud & the IRS
- 2 Tax Fraud Definition
- 3 Offshore Tax Fraud vs. FBAR Penalties
- 4 Understanding IRS Civil Tax Fraud
- 5 More than Negligence
- 6 Civil Code Section 6663 – Imposition of Fraud Penalty
- 7 Clear and Convincing Evidence
- 8 FBAR Willfulness – Lower Standard of Proof
- 9 FBAR Willful Penalties
- 10 Golding & Golding: About Our International Tax Law Firm
Tax Fraud & the IRS
Tax Fraud: IRS Tax Fraud is the act of committing a willful and intentional act against the U.S. Government, and specifically the IRS. In a common situation, the Taxpayer will intentionally avoid reporting income and/or underreport income or falsify deductions. Unlike other tax violations, the Internal Revenue Service strictly enforces tax fraud. It may result in significant monetary fines and penalties. It may also lead to and IRS Special Agent Investigation — which can then turn into a Criminal Indictment or Compliance being filed against the Taxpayer.
Tax Fraud Definition
The IRS summarizes the definition of Tax Fraud in the IRM (Internal Revenue Manual) Part 25.
220.127.116.11 -Definition of Fraud
- Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.
- Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:
- a tax due and owing; and
- fraudulent intent.
- The compliance employee must be familiar with the following legal terms to understand the requirements of proof:
- Burden of Proof – the obligation to offer evidence that a court (judge or jury) could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the Government.
- Evidence – data presented to a judge or jury in proof of the facts in issue and, which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof, in that, proof is the result or effect of evidence.
- Direct Evidence – evidence in the form of testimony from a witness who actually saw, heard, or touched the subject of questioning. Direct evidence, which is believed, proves existence of fact in issue without inference or presumption.
- Circumstantial Evidence – evidence based on inference and not personal observation.
- Presumption (of law) – a rule of law that a judge or jury will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.
- Inference – a logical conclusion from given facts.
- Preponderance of evidence – evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence, which is more convincing than the evidence offered in opposition.
- Reasonable doubt – a doubt that would cause a prudent person to hesitate before acting in matters of importance to themselves. Such a doubt will leave a juror’s mind uncertain after examination of the evidence.
- Willful Intent to Defraud – an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be owing.
- Clear and Convincing Evidence – evidence showing that the assertion made is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.
Tax fraud occurs when a person seeks to intentionally deceived the IRS by fraudulently filing tax returns, omitting income, intentionally reducing the amount of income, or falsifying deductions. This is different than negligently making a mistake, which is not tax fraud.
Offshore Tax Fraud vs. FBAR Penalties
Tax fraud comes in all different shapes and sizes, but when it involves foreign or offshore money, the stakes are even higher.
Because the IRS has a trick up its sleeve.
See, in order to prove tax fraud, the IRS has to show clear and convincing evidence. This is a higher standard of proof than preponderance of the evidence.
But preponderance of the evidence is all that is needed to enforce other penalties that can far exceed monetary penalties for other related foreign or offshore issues under civil tax fraud (such as FBAR Penalties).
Therefore, if the IRS is able to show clear and convincing evidence involving your civil tax fraud, then it will be much easier for them to meet the lower standard of proof required to enforce other international informational return penalties. They know this, and they use it as leverage against you to get what they want…as much of your money as they can, with the least amount of resistance from you. If the IRS suspects Fraud involving Offshore or Foreign Money, the IRS will devote more time and resources to proving its claim, because then it can use that evidence to easily proof related matter such as:
- FBAR Penalties
- FATCA Form 8938 Penalties
- Form 5471 Penalties
- Form 8865 Penalties
- Form 8865 Penalties
Understanding IRS Civil Tax Fraud
Civil tax fraud is a comprehensive subject. In order to make it palpable to you (while keeping you awake), will break it down into various topics as provided in the IRS IRM (Internal Revenue Manual)
When Does the IRS Issue Civil Tax Fraud Penalties?
As provided by the IRS:
“Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness.
In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c) . The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.”
Breaking Down the Elements of Civil Tax Fraud
It is important to understand the words being used to establish civil tax fraud. These are called “elements,” and the elements to civil tax fraud are as follows:
“Underpayment of Tax
Due to Fraud (aka the IRS must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing)
-Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness
In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c).
The fraud of one spouse cannot be used to impute fraud by the other spouse.
Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.”
More than Negligence
The IRS has a heavy burden when it comes to proving fraud. If the IRS can merely prove mistake or inadvertence, that alone is insufficient to find you liable for IRS Civil Tax Fraud.
Evidence of Fraud
As provided by the IRS:
Since direct proof of fraudulent intent is rarely available, fraud must be proven by circumstantial evidence and reasonable inferences. Fraud generally involves one or more of the following elements:
Misrepresentation of material facts
False or altered documents
Evasion (i.e., diversion or omission)
Badges of Fraud
As provided by the IRS:
- The courts focus on key badges of fraud in determining whether there was an “intent to evade” tax.
- A determination of fraud is based on the taxpayer’s entire course of conduct, with each badge of fraud given the weight appropriate to a particular case. An evaluation of fraud is based on the weight of the evidence rather than the quantity of the factors. Some of the common “first indicators (or badges) of fraud” include:
- Understatement of income (e.g., omissions of specific items or entire sources of income, failure to report substantial amounts of income received)
- Fictitious or improper deductions (e.g., overstatement of deductions, personal items deducted as business expenses)
- Accounting irregularities (e.g., two sets of books, false entries on documents)
- Obstructive actions of the taxpayer (e.g., false statements, destruction of records, transfer of assets, failure to cooperate with the examiner, concealment of assets)
- A consistent pattern over several years of underreporting taxable income
- Implausible or inconsistent explanations of behavior
- Engaging in illegal activities (e.g., drug dealing), or attempting to conceal illegal activities
- Inadequate records
- Dealing in cash
- Failure to file returns, and
- Education and experience
Civil Code Section 6663 – Imposition of Fraud Penalty
Internal Revenue Code Section 6663 can be broken down as follows:
(a) Imposition of penalty
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
(b) Determination of portion attributable to fraud
If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.
(c) Special rule for joint returns
Clear and Convincing Evidence
The IRS has summarized its take on Clear and Convincing Evidence as follows:
- “Evidence showing that the assertion made is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.”
FBAR Willfulness – Lower Standard of Proof
As we’ve written about recently in a blog post you can find here, in order for the IRS to prove FBAR willfulness penalties – which can be extreme and weigh higher than civil tax fraud penalties, the IRS only must show preponderance of the evidence.
The requirements to prove the preponderance of the evidence are significantly lower than the requirements to prove clear and convincing evidence. Therefore, if the IRS is able to show that you acted fraudulently with clear and convincing evidence, and they are using effective counsel, then chances are they will be able to make a play for willfulness penalties regarding any foreign accounts involved in any of the transactions involving the civil tax fraud.
FBAR Willful Penalties
FBAR Willful penalties can range as high as $100,000 or 50% of the Max balance of the account – whichever is higher. For individuals or businesses stuck in a multiyear audit in which the examiner believes a person acted willfully, chances are the IRS can issue a 100% penalty and a multiyear penalty computation.
**Previously, the IRS could issue 300% penalties according to 50% per year, for each of six years but this was reduced to 100%,
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.