Tax Fraud Examination and How Violations Lead to Fines & Penalties

Tax Fraud Examination and How Violations Lead to Fines & Penalties

How Tax Fraud Violations Leads to Penalties

Tax Fraud Examinations: In general, not all Tax Examinations by the IRS are bad. Some are paper correspondence audits, and other are simply CP2000 letters. But, the Tax Fraud Examination and eggshell audits are tough.

Tax Fraud is essentially, when a person willfully attempts to avoid paying taxes by either:

  • Underreporting income
  • Intentionally not filing tax returns; and/or
  • Falsifying deductions

There are factors or considerations, which are called “Badges of Fraud,” but at its core, if you knowingly fail to file a tax return, reporting income, or falsify deductions it is tax fraud.

We will summarize Tax Fraud Examination

Understanding Tax Fraud Examinations

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, which is why Tax Fraud Examinations are tough.

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:

– Deception

– 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

In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

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.”

Criminal Tax

When it comes to criminal tax fraud, it can come in many different categories, for example:

  • Tax Fraud
  • Tax Evasion
  • Money Laundering
  • Making False Statements
  • Smurfing
  • Structuring

Some common examples of Tax Crimes may include:

26 U.S.C. 7201 (Attempt to Evade or Defeat Tax)

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.

26 U.S.C. 7203 (Willful Failure to File a Return)

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”.

26 U.S.C. 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 agreementsIn 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 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 3 years, or both, together with the costs of prosecution.

How To Avoid Tax Fraud Examination Penalties

In order to avoid Tax Fraud Penalties, you may qualify to submit to the IRS Voluntary Disclosure program and seek a reduction of potentially devastating taxes.

IRS Voluntary Disclosure Program – What is it?

The IRS Voluntary Disclosure is a method for getting into compliance with the IRS if you have unreported Income — as long as the money is not from Illegal Sources. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Foreign Accounts Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.

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