Filing false and fraudulent tax returns is both a state and federal crime. Taxpayers who are caught and convicted could face jail, substantial criminal fines and penalties, and then the assessment of the taxes–along with additional civil tax penalties and interest.
What is Tax Fraud?
Tax fraud is best described in the negative. It is a tax return that was not made in an attempt to honestly and reasonably satisfy the requirements of our tax laws. Thus, there must first be a tax return.
Civil and criminal penalties can only be applied if there is an underreported tax. So there must be something on the tax return that leads to an understatement of tax–be it omitted income or inflated or false deductions or tax credits.
Omitted income results in less income tax. The desire of paying less income tax no doubt leads to underreported income. But there are non-tax reasons that also leads to underreported income. Examples include those who do not want the government to learn of profits from illegal ventures or criminal acts, spouses who are contemplating divorce and intend to minimize alimony and child support payments, or business partners or inheritors who want to keep more than their share.
The IRS has a number of methods for detecting tax fraud. This includes third-party reporting mechanisms, computer matching systems, its whistleblower program and its audit function. It also receives referrals from local law enforcement and state officials.
Once detected, the IRS will typically investigate further. This may include an IRS audit or even a criminal investigation.
The IRS has an unlimited amount of time to audit a fraudulent tax return, as the statute of limitations for auditing tax returns does not apply to fraudulent tax returns. The IRS generally has a six-year period for a criminal tax fraud investigation.
In many cases, a taxpayer can avoid criminal prosecution by filing correct amended tax returns. But this puts the taxpayer at the mercy of the government, as the government can still prosecute the taxpayer for the original returns and it may use the amended tax returns as evidence.
In most cases, the IRS uses its prosecutorial discretion not to pursue these voluntary disclosures. But in more high-profile or serious tax fraud cases, it may be necessary to make a proffer to the IRS and secure an agreement for the government to not prosecute or to limit the charges in advance.
The IRS’s Civil Fraud Penalty
It is more common for the IRS to handle fraudulent tax returns as a civil matter only. In these cases, the IRS will often assess civil fraud penalties. These penalties can even be assessed if the court finds you not guilty of criminal tax fraud.
Civil fraud penalties are severe. They are 75 percent of the understatement attributable to fraud.
To the extent the IRS determines that any portion of an understatement is attributable to fraud, the IRS can assess the penalty against the full understatement. This penalty is in addition to the understated tax. The size of this penalty can result in significant tax balances.
The Government Has to Prove its Case
Generally, the government has the burden to prove the taxpayer made material misstatements involving their tax liability on their tax return in order to secure a criminal tax fraud conviction. The courts make the ultimate determination as to whether a taxpayer made a material misstatement.
If the government is not confident that the court will find that the taxpayer made a material misstatement, then the government may prosecute the taxpayer under the state or federal perjury criminal statute. This is especially true where it is apparent or there is at least some evidence indicating that the taxpayer’s misstatement was inadvertent. For example, for accountants, this evidence may even include accounting board orders imposing professional ethics sanctions.
There are a number of defenses that may be available. For example, reliance on a tax attorney can be a defense.
If the government is successful in a criminal prosecution, it is likely that there will be an award of restitution and, if there were profits earned in the process, disgorgement of profits.
Get Help With Your Tax Return
We are tax attorneys in Houston, Texas. We help with false and fraudulent tax returns.
Please call us at (713) 909-4906 or schedule an appointment to discuss your questions about fraudulent tax returns with our tax attorneys.
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