Ultimate Resource: Criminal Tax Evasion

The possibility of being indicted for tax evasion is a fear that some people have if they don’t file or pay their taxes, or if they secret money away in foreign banks. Under Section 7201 of the Internal Revenue Code, it is a federal crime for anyone to willfully attempt to evade or defeat the payment of federal income taxes. By “attempt” the statute means that the individual knew or should have known that he had taxable income which he was required by law to report during the tax years involved, but failed to report the income. A conviction or guilty plea is likely to result in an arrest and prison sentence.

Many people manage to elude authorities by channeling money into banks located in offshore tax havens such as the Bahamas, where banking privacy laws make it extremely difficult for the IRS to get information. However, as has been well publicized in the media, the IRS has cracked open these secret bank accounts, and these “tax haven” jurisdictions are not likely to be very appealing to evaders anymore.

Most individuals who fail to file tax returns, or under-report income or take inflated tax deductions — if audited are usually assessed a “fraud” penalty, which enhances the tax liability but does not proceed into the criminal arena. Most of the criminal cases involve individuals who fail to report large amounts of cash income, taking unauthorized deductions for personal expenses, or hoard money in secret accounts or in the accounts of third parties.

In Switzerland and other countries, many acts that would be regarded as tax evasion in the U.S. are treated as civil matters.

Don’t Get Referred to the CID

If in the course of an audit an IRS revenue agent suspects fraud, he can impose penalties himself, or he can refer the case to the Criminal Investigation Division (CID). The CID is part of the enforcement mechanism for the IRS.

If your tax matter has been referred to CID, you are in serious trouble and it is essential to hire a tax attorney. However, sometimes you won’t even know that the matter has been referred. If you suspect that you are under scrutiny for fraud, there is a good chance that this might be referred to CID for investigation, and it is wise to hire a tax attorney without delay.

The CID has broad powers. The CID takes its task very seriously and conducts very thorough investigations. If you have an attorney representing you there is always an opportunity to compromise the case and agree to pay an agreed amount plus penalties. This is a far better result than a prison sentence.

You might be tipped off that you are the target of a CID investigation if CID agents contact any of your friends, your employer, co-workers, neighbors, bankers, credit card companies, or your spouse. CID agents are federal investigators who have been trained in law enforcement techniques, and they can obtain subpoenas of records.

The CID may monitor mail and may apply for a court order for a phone tap, or for subpoenas. For example, the IRS obtained a court order for a subpoena ordering American Express and MasterCard to provide credit and debit card information pertaining to U. S. taxpayers involving banks in Antigua, the Bahamas, and the Cayman Islands for specified years.

A number of tax evasion cases involve people who don’t inform the IRS of interest earned at offshore banks, which is supposed to be reported on Form 1040, Schedule B. One is required to complete TD F90-221 if the aggregate amount held in foreign accounts exceeds $10,000 at any time during the tax year. By subpoenaing records of U. S. credit card companies or other records, the CID can, in roundabout fashion, get effective means to investigate the existence of offshore bank accounts.

When CID completes an investigation, if there is a good case, it will end up in the U.S. Attorney’s office for prosecution.

Are You a Target for the IRS?

Often criminal tax cases are brought against high profile individuals because the publicity provides a major deterrent for others. The average amount of money owed in most criminal tax cases exceeds $70,000. Once an individual is indicted, the chances of obtaining a conviction are about 80 percent. Tax evasion is a felony and can result in arrest with a very high bail bond amount. A conviction for tax evasion can entail up to a five-year prison sentence and/or substantial fines on top of the tax liability asserted by the Government. About half of those convicted will be incarcerated, irrespective of any prior criminal record in their past.

If you are the target of a criminal investigation you might not know about it, but you may feel edgy or you may be tipped off if a subpoena is issued concerning any of your financial records. If that happens, you should immediately retain an attorney familiar with this area to work on averting an indictment. A skillful attorney can pursue several opportunities to derail a federal criminal case before it ever gets presented to a grand Jury.

Your lawyer can confer with the government’s lawyers and try to convince them not to prosecute the matter or, as mentioned, settle the case. Your lawyer might point out that the case involves mere misunderstandings that can be explained, or that other defenses are operative so that there really was no willful tax evasion.

In addition to charges of tax evasion, the indictment will often add the charge of filing a false return, also a felony, which alleges that the taxpayer has provided the Government with false or misleading information on tax returns. In such cases, the Government does not have to prove the taxpayer intended to evade tax laws. Rather, it merely must prove that the taxpayer filed a false return.

People who are targeted for failing to file any tax return usually can handle this at the IRS audit level by filing the returns in question, or by allowing the IRS agent to “reconstruct” the taxpayer’s income and deductions for years at issue. In the rare situations where failure to file becomes a criminal matter, it is a misdemeanor, being a less serious crime than tax evasion or filing a false return, but still can entail prison time as well as substantial fines.

There is a six-year statute of limitations for filing criminal charges based on failing to file a tax return, but there is no statute of limitations on how long the IRS can seek taxpayers and demand payment or taxes owed on non-filed returns.

The IRS tends to be more sympathetic in collecting taxes from taxpayers who volunteer their late returns than taxpayers the IRS had to investigate and “catch.”

It is crucial, if you are faced with an audit and have unreported income or other serious issues, to consult a tax attorney because proper handling of your case can mean the difference between a civil and criminal proceeding.