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Tax Evasion Penalties (2018) – IRS Criminal Penalties for Tax Evasion

Tax Evasion Penalties (2018) – IRS Criminal Penalties for Tax Evasion

Tax Evasion Penalties (2018) - IRS Criminal Penalties for Tax Evasion by Golding & Golding

Tax Evasion Penalties (2018) – IRS Criminal Penalties for Tax Evasion by Golding & Golding

Intentionally filing false tax returns, omitting income, keeping foreign accounts hidden, or embellishing expenses can lead to big trouble with the IRS in the form of Tax Evasion Penalties.

Tax Evasion Penalties and other IRS Penalties as well (depending on the facts and circumstances). Common issues include:

  • Civil Tax Fraud
  • Criminal Tax Evasion
  • Offshore Penalties
  • Willful Penalties
  • Special Agent Investigations
  • IRS Amnesty (Voluntary Disclosure)

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 Penalties

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?

What is IRS Tax Evasion – 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 reducing 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 for the expenses she claimed.

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.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. 

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

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.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

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.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.