IRS Evasion Penalties (2018) – 3 Examples of IRS Tax Evasion
IRS Evasion Penalties for unfiled or fraudulent tax returns can be bad. More specifically, if the IRS believes you acted with the intent to evade or avoid taxes (illegally) you may becomes subject of a criminal tax investigation.
Common issues with IRS Tax Evasion include:
- What is IRS Tax Evasion
- What is an example of IRS Tax Evasion?
- What are the IRS Tax Evasion Penalties?
- What other crimes may I be charged with?
- How can I avoid Fines, Penalties or even Jail?
Whether the IRS discovers the evasion through the filing of a Fraudulent Tax Return, IRS Audit or someone reporting the Evasion – it can have very serious consequences.
Tax Evasion (Generally)
There are many different types of penalties that the IRS can issue depending on the facts and circumstances of a person’s non-compliance.
While some IRS penalties are relatively minor and can be easily abated by using a reasonable cause submission, offshore disclosure, or domestic disclosure — other tax penalties are much more serious and may result in significant fines and penalties.
Summary of this article:
- What is Tax Evasion?
- Tax Evasion Penalties
- Tax Evasion Examples
- How to Protect Yourself?
Tax Evasion Definition
Tax Evasion is when a person intentionally artificially reduces their tax liability to the IRS. A person typically commits tax evasion when they:
- Do not submit a tax return when they know they should
- Artificially reduce or omitting Income
- Include false personal deductions on the tax return.
- Include false business deductions on the tax return.
Since the goal of the individual is to falsely reduce the tax liability, it is considered an attempt to “evade” taxes, and hence a potential criminal tax evasion charge.
IRS Tax Evasion Penalties – 26 USC 7201
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
IRS Tax Evasion Examples
There are many different ways a person can file a fraudulent tax return. For example, a person may underreport income (which is especially true in situations in which the income was cash (and not easily traceable), and/or the income was earned from overseas and no form-1099 or equivalent was issued.
Alternatively, a person may knowingly overreport deductions or claim business expenses that don’t really exist, in order to reduce tax liability.
3 Examples of IRS Tax Evasion
Omitting Income Example
Steven resides in the United States but has various investments overseas that earn income abroad. Steven knows he’s supposed to report the earnings to the IRS. But, Steven also knows that the IRS has not entered into a tax treaty with this particular country, and that the Foreign Financial Institutions (FFIs) of this country are not reporting Stevens financial information to the IRS on a U.S. equivalent form 1099.
Therefore, Steven intentionally excludes this income on his US tax return. This would be an example of intentionally falsifying a tax return in order to reduce the amount of income — and therefore reduce tax liability.
Falsifying Business Expenses
Falsifying business expenses comes in many different shapes and sizes. For example, Michelle has a foreign consulting business in which she travels around the country trying to retain clients to purchase her design services.
Michelle also likes to travel as a hobby, eat at fine restaurants, and drive fancy cars. Therefore, Michelle expenses certain pricey dinners and vacations as business expenses, when clearly Michelle was not engaging in any business at the time she claim these expenses.
Therefore, Michelle has falsified her tax return by including expenses which are false (aka not business expenses).
Taking Improper Tax Deductions
This is also very common scenario in which a person includes deductions on their tax return that are simply not true. For example, David does not have a home office which he uses specifically for business, but he claims a portion of a very large den in his home as a home office in order to reduce his taxes.
In addition, David also included medical expenses that he never really had in order to increase his schedule A itemized deductions, and there by reducing his tax liability.
Finally, David also has two rental properties, in which he falsified improvements to make it seem like they were expensive repairs (so he could deduct instead of amortize the expenses), and thereby reduce the net income that was generated from the rental properties. This also reduces income and thereby artificially reduces his tax liability – which is illegal
IRS Tax Evasion Penalties Can Be Very Serious
Unfortunately, Tax Evasion Penalties are some of the most serious penalties that the IRS can issue. While Civil tax Fraud penalties alone can reach upwards of 75% of the underpayment in tax, criminal tax evasion penalties may result in millions of dollars of the fines and penalties (when all the penalties are calculated) and along with a potential criminal investigation, indictment and prosecution.
Never Filed a Return – Non-Willful/Negligence
If you never filed a tax return or stopped filing returns in any year in which you had received income, you may be setting yourself up for disaster down the line.
If you are a W-2 employee and taxes are being withheld (or estimated taxes were paid), then at least you have that fact in your favor. Likewise, if you didn’t file a tax return because you did not have any income that was generated, that too may not result in any significant fines and penalties, since the main failure-to-file and failure-to-pay penalties are based upon the value of the un-paid tax.
Criminal Violations for Evasion, Fraud or Unfiled Returns
If you did not file a tax return because you knew you had a substantial amount of income and not want to report it…that begins your trek into criminal violations.
Typically, what will happen is if you are found to either have filed a return that is fraudulent and/or not filed the return, and the IRS determines there is substantial income that should have been reported, there is a higher likelihood that you will be audited.
This is considered a reverse eggshell audit, because the IRS has information that could incriminate you, and typically they will not share that information with you. Rather, they sit back and let you incriminate yourself.
IRS Special Agents – Criminal Investigation
When this happens, you will be referred to the IRS Special Agents for a criminal investigation.
Please note, the IRS does not tell you that they have referred your case to the special agents. Rather, you typically meet the Special Agents assigned to your case when you least expected it.
The IRS Special Agents travel in pairs, and show up to your house, work, club, event unannounced hoping to interview you
Do not speak with them, and kindly tell them that you have an attorney, or that you will be obtaining an attorney and that the attorney will contact the agents.
Relevant Criminal Tax Code Sections
26 USC 7201 – Tax Evasion
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
7206. Fraud and false statements
Any person who—
(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or
(2) Aid or assistance
Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or
(3) Fraudulent bonds, permits, and entries
Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or
(4) Removal or concealment with intent to defraud
Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or
(5) Compromises and closing agreements
In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully—
(A) Concealment of property
Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or
(B) Withholding, falsifying, and destroying records
Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax shall be guilty of a felony
7203. Willful failure to File Return, Supply Information, or Pay Tax
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than 25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.
**In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.
Willfully failing to file an FBAR or False FBAR — 31 U.S.C. § 5322
(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.
(b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.
(c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues. (d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.
Avoid Penalties with IRS Offshore or Domestic Disclosure
If your noncompliance was related to domestic related activities, you may consider making a Domestic Voluntary Disclosure, what is detailed extensively in the Internal Revenue Manual (IRM).
If your failure was due entirely to offshore related matters or a hybrid of money abroad and domestic related issues, then you may consider doing the traditional OVDP (if you were a willful or acted with intent or reckless disregard, then you would not qualify for the streamline program), noting that OVDP closes on September 28, 2018.
Resource: Domestic Voluntary Disclosure
If I was Only Willful for a Few Years, Do I Need OVDP?
The IRS is clear: If you were willful at all, then you cannot qualify for the IRS Streamlined Program or Reasonable Cause submission. There are no exceptions for people who were only willful for a year or two, and no exceptions for people who only failed to report “small” amounts of income. We find it abhorrent that there are other attorneys putting potential clients in serious financial risk, as well as harm’s way for a potential IRS Criminal Investigation, by pushing them into Streamlined when they know the client was willful.
On multiple occasions, we have had clients come to us after retaining one of these dreadful firms, who were now terrified because they realized that they paid an inexperienced Voluntary Disclosure Attorney a “small fee” to go Streamlined or Reasonable Cause when they admitted to the Attorney they were willful. Click Here for a Case Study Example of what can occur when you go Streamlined when you were willful.
Remember, it is not their money or their freedom on the line – it is yours, so be careful…
IRS Voluntary Disclosure Attorney Fees – How Much?
If you receive an IRS Voluntary Disclosure Fee Quote from a CPA or Attorney that seems too Low…you should be careful.
That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”
Golding & Golding, A PLC
At Golding & Golding, we have successfully handled numerous IRS Voluntary Disclosure Applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.
We Take IRS Voluntary Disclosure Representation Very Seriously
We are passionate about representing individuals in voluntary disclosure matters, and feel horrible when a client calls us after having hired an inexperienced Attorney or CPA who either did a sloppy job, charged them more money than they agreed upon, and/or is overall not providing the level of representation a person deserves.
We Can Help You.