What Constitutes Tax Fraud?
Tax fraud can take many forms and can have severe legal and financial consequences, as our Hanover, MD tax fraud lawyer can explain. Not all violations of tax laws are considered tax fraud. At its most basic, tax fraud consists of the knowing, intentional, or deliberate violation of one or more tax laws. The Internal Revenue Service (“IRS”) generally defines it as “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believing to be owed” and requires both “a tax due and owing” and “fraudulent intent.” Tax fraud is not the same as tax avoidance, which involves the legal right to reduce, avoid, or minimize taxes by legitimate means.
A taxpayer engaging in tax fraud can be faced with significant civil and criminal consequences as a result of their conduct. Some of these consequences include substantial civil tax penalties (e.g., civil fraud penalty of 75% under I.R.C. § 6663), orders of restitution, criminal financial penalties, and even incarceration. A criminal tax investigation can lead to other related white-collar criminal charges and can result in other individuals facing potential prosecution. If you have engaged in tax fraud, whether it relates to federal or state tax violations, you should immediately contact a lawyer experienced in tax fraud to understand your rights and the potential consequences of prior actions.
The Hanover, MD tax fraud lawyers at Crepeau Mourges have significant experience in defending taxpayers accused of violating tax laws and can help you to make the best of a bad situation, whether you have already been indicted, whether you were recently raided and/or interviewed by special agents from the Criminal Investigation Division of the Internal Revenue Service, whether you are faced with a potential fraud referral in the context of a civil tax examination, whether you want to proactively address prior tax violations, or in a host of other situations.
Indicators of Fraud
While the investigation of criminal tax fraud can arise in my contexts, the IRS and Department of Justice (“DOJ”) rely heavily on referrals from other government investigations, referrals made from civil examinations conducted by the Internal Revenue Service, whistleblower complaints, and coordinated investigations (e.g., Swiss Bank Program and promoter cases) in order to guide their enforcement resources. While the “tax gap” is considerable and many taxpayers engage in at least questionable tax practices, limited prosecutorial resources and the need to promote general deterrence force the government to focus on the most egregious cases with the most obvious indications of fraud with the biggest deterrent impact. In other words, most taxpayers with limited means engaging in questionable practices will not trigger a criminal investigation. That said, for those that are faced with an examination or investigation, the need for skilled advocacy – and to avoid becoming a public example – cannot be understated.
Regardless of the context of the case, the government typically tries to identify and develop indicators of fraud in order to inform its prosecution. According to the Internal Revenue Manual, some of the indicators (or “badges”) of fraud that may be identified include:
For Income
· Omitting specific items where similar items are included.
· Omitting entire sources of income.
· Failing to report or explain substantial amounts of income identified as received.
· Inability to explain substantial increases in net worth, especially over a period of years.
· Substantial personal expenditures exceeding reported resources.
· Inability to explain sources of bank deposits substantially exceeding reported income.
· Concealing bank accounts, brokerage accounts, and other property.
· Inadequately explaining dealings in large sums of currency, or the unexplained expenditure of currency.
· Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.
· Failing to deposit receipts in a business account, contrary to established practices.
· Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.
· Cashing checks, representing income, at check cashing services and at banks where the taxpayer does not maintain an account.
· Concealing sources of receipts by false description of the source(s) of disclosed income, and/or nontaxable receipts.
Expenses or Deductions
· Claiming fictitious or substantially overstated deductions.
· Claiming substantial business expense deductions for personal expenditures.
· Claiming dependency exemptions for nonexistent, deceased, or self-supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.
· Disguising trust fund loans as expenses or deductions
Books and Records
· Multiple sets of books or no records.
· Failure to keep adequate records, concealment of records, or refusal to make records available.
· False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices, false applications, false statements, or other false documents or applications.
· Invoices are irregularly numbered, unnumbered or altered.
· Checks made payable to third parties that are endorsed back to the taxpayer. Checks made payable to vendors and other business payees that are cashed by the taxpayer.
· Variances between treatment of questionable items as reflected on the tax return, and representations within the books.
· Intentional under- or over-footing of columns in journal or ledger.
· Amounts on tax return not in agreement with amounts in books.
· Amounts posted to ledger accounts not in agreement with source books or records.
· Journalizing questionable items out of correct account.
· Recording income items in suspense or asset accounts.
· False receipts to donors by exempt organizations.
Allocations of Income
· Distribution of profits to fictitious partners.
· Inclusion of income or deductions in the tax return of a related taxpayer, when tax rate differences are a factor.
Conduct of Taxpayer
· False statement about a material fact pertaining to the examination.
· Attempt to hinder or obstruct the examination. For example, failure to answer questions; repeated cancelled or rescheduled appointments; refusal to provide records; threatening potential witnesses, including the examiner; or assaulting the examiner.
· Failure to follow the advice of accountant, attorney or return preparer.
· Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.
· The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.
· Testimony of employees concerning irregular business practices by the taxpayer.
· Destruction of books and records, especially if just after examination was started.
· Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.
· Pattern of consistent failure over several years to report income fully.
· Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
· Payment of improper expenses by or for officials or trustees.
· Willful and intentional failure to execute pension plan amendments.
· Backdated applications and related documents.
· False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.
· Use of false social security numbers.
· Submission of false Form W-4.
· Submission of a false affidavit.
· Attempt to bribe the examiner.
· Submission of tax returns with false claims of withholding (Form 1099-OID, Form W-2) or refundable credits (Form 4136, Form 2439) resulting in a substantial refund.
· Intentional submission of a bad check resulting in erroneous refunds and releases of liens.
· Submission of false Form W-7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.
Methods of Concealment
· Inadequacy of consideration.
· Insolvency of transferor.
· Asset ownership placed in other names.
· Transfer of all or nearly all of debtor’s property.
· Close relationship between parties to the transfer.
· Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
· Reservation of any interest in the property transferred.
· Transaction not in the usual course of business.
· Retention of possession or continued use of asset.
· Transactions surrounded by secrecy.
· False entries in books of transferor or transferee.
· Unusual disposition of the consideration received for the property.
· Use of secret bank accounts for income.
· Deposits into bank accounts under nominee names.
· Conduct of business transactions in false names.
While these are not all-inclusive factors, they illustrate the many ways in which the government can bolster a case relating to alleged tax fraud. And while many of these indicators can result from honest mistakes or oversights, consistent findings of any of these factors or the presence of multiple badges of fraud may lead to a criminal tax referral or prosecution. The Hanover, MD tax fraud lawyers at Crepeau Mourges have significant experience in dealing with examinations involving suspected fraud (sometimes referred to as “eggshell” audits) and can help to minimize the potentially significant consequences that may result.
Types of Criminal Tax Violations
Aside from a laundry list of potential factors that can lead to the suspicion of, or finding of, fraud, the IRS, DOJ, and other governmental agencies employ a number of criminal statutes to uphold the integrity of the nation’s tax system. Some of the more commonly applied criminal tax statutes and related statutes, along with some of the criminal consequences, are described below:
· I.R.C. § 7201 – attempt to evade or defeat tax (tax fraud) – “Any person who willfully attempts in any manner to evade or defeat any tax…shall…be guilty of a felony and…shall be fined not more than $100,000…or imprisoned not more than 5 years…”
· I.R.C. § 7202 – willful failure to collect or pay over tax – “Any person required…to collect, account for, and pay over any tax…who willfully fails to collect or truthfully account for and pay over such tax shall…be guilty of a felony and…shall be fined not more than $10,000, or imprisoned not more than 5 years…”
· I.R.C. § 7203 – willful failure to file return – “Any person required under this title to pay any estimated tax or tax, or…to make a return, keep any records, or supply any information, who willfully fails [to perform]…shall…be guilty of a misdemeanor and…shall be fined not more than $25,000…or imprisoned not more than 1 year…”
· I.R.C. § 7206 – fraud and false statements – covering a number of separate but related offenses, this statute imposes criminal liability for various acts and declarations that amount to fraud against the IRS, including subscribing to a false tax return, and can result in a felony with fines up to $100,000 and imprisonment of up to 3 years
· I.R.C. § 7207 – fraudulent returns and statements (misdemeanor) – “Any person who willfully deliver or discloses…any list, retuurn, account, statement, or other document, known…to be fraudulent or false as to any material matter, shall be fined no more than $10,000…or imprisoned not more than 1 year, or both…”
· 31 U.S.C. § 5322 – FBAR violations – “Any person willfully [failing to file a proper FBAR]…shall be fined not more than $250,000, or imprisoned for not more than five years, or both…”
· 18 U.S.C. § 1001 – false statements to federal government – “…whoever, in any matter within the jurisdiction of the…Government of the United States, knowingly and willfully…falsifies, conceal, or covers up by trick, scheme, or device a material fact…makes any materially false, fictitious, or fraudulent statement or representation…or…makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry…shall be…imprisoned not more than 5 years…”
· 18 U.S.C. § 1956 – money laundering – “Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity…with [unlawful] intent…[and] to conceal or disguise…or…to avoid a transaction reporting requirement…shall be sentenced to a fine of not more than $500,000 or twice the value of the property…or imprisonment of not more than twenty years, or both…”
· 18 U.S.C. § 1343 – wire fraud – “Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses…transmits or causes to be transmitted by means of wire…in interstate or foreign commerce, any writing [or other communication]…shall be fined…or imprisoned not more than 20 years, or both…”
In a similar vein, many states have corollary criminal statutes that provide for significant penalties and incarceration for willful violations of state tax laws. If you are faced with a potential investigation or prosecution related to any of these criminal offenses, it is important to immediately contact a lawyer with experience in criminal tax matters. The attorneys at Crepeau Mourges have decades of experience in this area and are prepared to provide necessary counsel.
Civil Tax Examinations: Avoiding Fraud Referrals
Not all matters involving tax fraud are elevated to a criminal prosecution. The government simply does not have the resources to criminally pursue all violations of the tax laws. Moreover, the DOJ is sensitive to keeping its near-perfect conviction rate in tax prosecutions. Accordingly, if there is not clear evidence that a prosecutor can prove each and every element of a criminal tax violation beyond a reasonable doubt, the DOJ will typically not want to take the case. In addition, unless there is a general deterrent value associated with a violation or unless the conduct is particularly egregious, the DOJ may not be inclined to pursue the matter. This is because the DOJ is also sensitive to taxpayer-friendly sentencing outcomes that can result if there are substantial mitigating circumstances. In those cases, even if a conviction is obtained, a non-incarcerative sentence might be thought to embolden future tax cheats.
Accordingly, there are many cases that could have indications of fraud that do not lead to a criminal referral. With proper guidance, the chances of a case being referred to a Fraud Technical Advisor or the Criminal Investigation Division of the IRS can potentially be diminished. Again, knowledge of taxpayer rights and the procedures applicable to tax examinations is of paramount importance. Veteran counsel will identify and explain problem areas in an audit. Keeping one step ahead and evaluating the potential progress of an audit cannot be understated. After identification and with proper planning, tax counsel can help to limit the scope of an audit, guide an audit away from problem areas, or can provide plausible explanations that might explain away perceived fraudulent behavior.
Skilled tax counsel will also understand when the audit is turning in a bad direction and can limit the flow of damning information. In certain circumstances, this may include limiting the ability of the IRS to conduct interviews of taxpayers and related persons. It may also include opposing informal or formal requests for information. And, if the examining agent ceases activity or engages in other atypical behavior, a Hanover tax fraud lawyer may be able to determine that a fraud referral is occurring or is imminent. Since the DOJ generally has discretion over the selection of its criminal tax cases and does not take all potential cases, careful preparation and documentation of a case may result in the matter remaining civil.
The tax attorneys at Crepeau Mourges have significant experience dealing with “eggshell” audits and matters where the chance of a criminal tax referral is high. Our understanding of procedural and substantive civil and criminal tax laws, along with our deep understanding of forensics, tax accounting, and business practices, helps to set us apart from other practitioners. Crepeau Mourges is here for you and we will advocate on your behalf to keep the matter from turning criminal.
Criminal Tax Investigations and Prosecutions
Even if a matter has been selected for criminal tax prosecution, all is not lost. Cases without a significant number of badges of fraud can still be difficult to prosecute, particularly if the alleged fraudulent conduct involves sophisticated financial activity. The DOJ understands that these types of cases are difficult to explain to the jury and may have non-criminal explanations. And again, the DOJ and IRS are always mindful of their conviction rate and sentencing outcomes.
With the assistance of counsel, a criminal tax defendant may be able to establish a plausible explanation and/or affirmative defense. These tactics may be useful to dissuade a prosecutor from pursuing a criminal matter or at least some of the charges involved. In other cases, it may be possible to convince the government that particular elements required to prove the most serious criminal tax offenses cannot be satisfied. Again, given limited governmental resources, some prosecutors will not pursue a criminal tax matter if only lesser charges can be proven or if they will be required to prove a difficult case in court. For instance, if a questionable position on a tax return does not cause a substantial tax deficiency, the government may have a difficult time proving every element of the offense under I.R.C. § 7201.
In still other matters, even where criminal liability may be clear, a criminal tax attorney might limit the impact of a criminal matter by raising other issues. For example, if the “tax loss” to the government is not easily capable of proof or if it is substantially less than what the government initially believed, the likely sentencing outcome will be more favorable to the defendant. If the tax loss is under certain thresholds, sentencing guidelines may even dictate that a non-incarcerative sentence is appropriate. The federal government may not wish to pursue a criminal matter with such a light sentence. Furthermore, if other mitigating factors exist – such as if the taxpayer has a terminal illness, is elderly, or has been a benefit to the community at large – the sentencing outcomes again may be more friendly to a taxpayer. In those circumstances too, the federal government may not wish to pursue a case.
Even if the federal government pursues the matter, skilled legal representation will advocate for one accused of tax fraud through plea negotiation, trial, and sentencing. While the strategies for each case vary, it is important that the accused retain a tax lawyer experienced in substantive criminal tax laws, the practices of the DOJ, and litigation in the federal and state courts. Crepeau Mourges has a large breadth of experience representing individuals and businesses in all phases of criminal tax matters. Our knowledge has helped to persuade prosecutors from pursuing significant criminal charges and has helped to limit the extent of criminal tax sentences for our clients.
How a Lawyer Can Prepare a Tax Fraud Defense
There are many different types of criminal tax problems and there is no one-size-fits-all solution for these problems. Accordingly, is it important to have an experienced and knowledgeable criminal tax attorney on your side when faced with these issues.
Depending upon the stage of a matter involving tax fraud, there may be many options available to taxpayers. With proper counsel, a taxpayer can be made aware of their potential exposure and can properly evaluate their options. For instance, if a taxpayer has not yet been contacted by a civil or criminal tax investigator, they may be eligible for amnesty programs, such as the Voluntary Disclosure Practice and state counterparts. In general, these mechanisms allow taxpayers to substantially reduce and potentially eliminate any criminal tax exposure. However, as a consequence, taxpayers may be subjected to an extensive civil tax examination and may be required to pay substantial civil tax penalties. Without proper consultation, taxpayers without much (or any) criminal risk may be required to unwittingly suffer from the financial consequences associated with these programs.
Aside from voluntarily coming forward to the IRS or state tax authorities, other situations may dictate that no immediate remedial action be taken. In some cases, waiting and hoping for the expiration of the statute of limitations may be a viable option. Other times, waiting may simply reduce the desire to bring a criminal action and/or may cause evidentiary problems for a government prosecution. If this strategy is employed, ongoing compliance is a must. An attorney should also counsel you on the potential risks of such an approach and should prepare you for a civil examination or criminal investigation, should that occur. Again, with proper planning for these matters, it may be possible to get ahead of the situation, limit the scope of an audit, and be prepared to promptly present counterevidence and counterarguments. Such a strategy might include casting doubt on the reason for a certain transaction, explaining that the mistake was not knowing or intentional, and/or by shifting blame to a third party or accountant. Criminal tax lawyers will also preserve much-needed attorney-client privilege and work product protections, which will not apply to the communications and advice of other types of practitioners. Whatever the situation might dictate, mounting a defense to potential criminal tax charges requires a great understanding of tax accounting and forensic techniques.
Finally, for those faced with a criminal tax prosecution, aside from typical criminal defense skills, a deep understanding of substantive and procedural tax laws is required. Many prosecutors are generalists when it comes to criminal matters. Demonstrating particularized knowledge in tax and explaining certain suspicious transactions can make them uneasy. This may make them less likely to want to pursue a criminal tax matter in court.
Aside from planning to present a case in court, it is perhaps even more important to focus on plea negotiations and sentencing outcomes. Skilled tax attorneys will advocate for significant reductions in, variances to, and departures from the sentencing guidelines, whether based on legal arguments or particular traits of the defendant, which may limit the impact of a prosecution – even if the defendant is convicted of an offense relating to tax fraud. Once the criminal matter is concluded, a tax attorney should also prepare you for the impending civil tax examination that follows. When looking at a situation from start to finish, an attorney with practical experience can help limit the often-crushing civil tax consequences that follow a criminal prosecution, which sometimes can be more significant than the associated criminal penalties.
The advisors at Crepeau Mourges have helped many taxpayers in different phases of tax fraud matters. Whether your case is well-suited for voluntary disclosure, you are faced with a problematic civil examination involving alleged tax fraud, or you are being prosecuted for criminal tax fraud, Crepeau Mourges is here for you, will explain your options, and will advocate for your best interests. Call a tax fraud lawyer in Hanover, MD from our firm today.
