What Happens If You Commit Tax Fraud? Possible Prison and Fines

Summary

The punishment for tax fraud depends on the type of fraud committed and the specific law broken. Criminal tax fraud can lead to imprisonment of up to five years and fines of up to $250,000 for individuals and $500,000 for corporations. Civil tax fraud leads to civil penalties of 75% of the under-reported tax. Tax fraud involves willfulness, which includes knowledge, intent, and purpose. Accidental, careless, or negligent mistakes are not considered tax fraud. Real-world examples of tax fraud cases include individuals facing prison sentences and fines for filing false tax returns and orchestrating tax avoidance schemes. To avoid getting in trouble for tax fraud, it’s important to consult with a tax professional, maintain good records, and avoid actions that could be perceived as willful attempts to evade taxes.

What Is the Punishment for Tax Fraud?

The penalty for tax fraud depends on what kind of tax fraud you committed and what specific law you broke. Criminal tax fraud can lead to imprisonment of up to five years and fines of up to $250,000 for individuals and $500,000 for corporations. However, the penalties can be higher if you’re convicted of multiple counts. Civil tax fraud leads to civil penalties of 75% of the under-reported tax.

Because the potential penalties vary wildly, we need to first understand what tax fraud is and the types of fraud. Then, we’ll look at the punishments for breaking various tax fraud laws, and finally, we explain how a tax attorney can help. To get guidance and representation now, contact us at the Timothy S. Hart Law Group today.

The Definition of Tax Fraud

Tax fraud refers to an intentional and unlawful act by a taxpayer to avoid paying taxes or to receive a tax benefit (like a deduction or credit). The run-of-the-mill tax fraud case involves someone lying on their taxes or omitting important information from their taxes, such as a source of income. Other common examples of tax fraud include:

• Hiding assets that might reveal taxable income.
• Claiming tax deductions or credits that the taxpayer knows they’re not entitled to receive.
• Refusing to pay taxes owed.
• Underreporting income.
• Deliberately failing to keep and maintain required tax records.

One thing to keep in mind about tax fraud is that it can be either a civil or criminal offense. There’s civil tax fraud and criminal tax fraud. Criminal tax fraud (which includes tax evasion) differs from civil tax fraud in three main ways:

1. Criminal tax fraud imposes more severe penalties than civil tax fraud, most notably the possibility of jail time.
2. Proving criminal tax fraud is more difficult than proving civil tax fraud because of the higher burden of proof (“beyond a reasonable doubt” versus “clear and convincing evidence”).
3. The statute of limitations for criminal tax fraud is usually six years, but there’s no statute of limitations for civil tax fraud.

Proving That Someone Committed Criminal Tax Fraud

A key characteristic of tax fraud, whether civil or criminal, is that it involves willfulness. A taxpayer acts willfully if three elements are present. First, the taxpayer must have knowledge about the fraud. This means knowing that the information they provided was wrong, that what they were doing was illegal, or that they’re aware that the fraud occurred.

Second, there must be intent. Put another way, the taxpayer must deliberately attempt to evade a tax or improperly obtain a tax benefit.

Third, there must be a purpose in the taxpayer’s act. Purpose refers to the taxpayer’s goal of doing something they shouldn’t, such as understating their income. Purpose isn’t the same as motive, which would be their reason for committing the alleged fraud.

For example, a taxpayer might keep two sets of books documenting their income. The purpose of this act is to provide untruthful income information to the IRS. The motive for keeping two sets of books is to avoid paying more taxes to the IRS.

All of this means you can’t get in trouble for tax fraud because you accidentally, carelessly, or negligently make a mistake on your taxes. As long as you honestly believe you’re not breaking the law, you can’t be guilty of tax fraud, no matter how objectively unreasonable your belief is. Also, if you reasonably rely on the advice of a tax professional, then you can’t get in trouble for tax fraud if it turns out your tax professional is wrong.

Despite all this, you as the taxpayer are still responsible for tax mistakes or inaccuracies. However, your tax penalties will be less severe than if you acted willfully.

Penalties for Criminal Tax Fraud

If you get in trouble for tax fraud, you can expect to face some serious punishments, although they will be less severe for civil tax fraud. If you’re charged with criminal tax fraud, you can expect harsher punishments in the form of bigger monetary fines and the possibility of jail or prison time. Let’s take a look at a few statutes and what the potential penalties could be if you’re found to have violated them.

Title 26 USC § 6663

Many civil tax fraud cases will be brought under this federal statute. If found liable, a taxpayer can expect to pay a monetary penalty of 75% of any tax underpayment amount that’s the result of the fraud.

Title 26 USC § 7201

This is one of the most common statutes that apply to criminal tax fraud cases and basically applies when the taxpayer underreports their income. If found guilty, an individual taxpayer faces a fine of up to $250,000 and/or up to five years in prison. A corporate taxpayer faces a fine of up to $500,000.

Title 26 USC § 7203

Section 7201 often applies when the taxpayer willfully takes affirmative steps to avoid paying taxes. In contrast, Section 7203 often applies when the taxpayer willfully omits steps to avoid paying taxes. A classic example is a taxpayer who doesn’t file a required tax return. The penalty for violating Section 7203 is a fine of up to $25,000 for an individual taxpayer and $100,000 for corporations. The individual taxpayer may also face up to one year in prison.

Title 26 USC § 7206

This is the statute the U.S. government relies on when the taxpayer lies on their tax return. Section 7206(1) applies to taxpayers who lie on their returns while Section 7206(2) applies when someone else who is helping the taxpayer (like a tax preparer) lies on the taxpayer’s return. Individuals guilty of violating either of these subsections face monetary fines of up to $100,000 and/or up to three years in prison.

Title 18 USC § 371

This is what the government often relies on when there are two or more people involved in the tax fraud. Section 371 focuses on taxpayers who engage in a conspiracy to commit tax fraud and being found guilty of breaking this law can result in up to five years in prison and/or a fine of up to $250,000 for individual taxpayers. Corporate taxpayers face a fine of up to $500,000.

Real-World Examples of Tax Fraud

Getting charged with tax fraud is fairly rare because it requires a lot of time and money to prosecute a tax fraud case, especially criminal cases that go to trial. It can also be difficult for the U.S. government to prove someone acted intentionally and wasn’t just negligent or careless with the filing and paying of their taxes.

That being said, there are several hundred tax fraud cases prosecuted each year. Some of the more notable ones from this year include:

• David M. Anderson admitted to filing a false tax return and faces up to three years in prison.
• Lilian Giang was found guilty of orchestrating a payroll tax avoidance scheme that kept her from paying more than $800,000 in payroll taxes. She was sentenced to 18 months in prison, two years of supervised release, and ordered to pay $845,382 in restitution.
• Michelle Leach-Bard was sentenced to 366 days in prison for not paying employment taxes to the IRS and embezzling money from an employee benefit plan.
• Dennis Wayne Brite received a sentence of probation and has to pay more than $669,000 in back taxes and interest for his tax evasion scheme involving offshore bank accounts and foreign shell corporations.
• Jeremiah Johnson pled guilty to filing a false tax return and will spend 366 days in prison, pay a fine of $10,000, and pay restitution in the amount of $123,391.

How to Avoid Getting in Trouble for Tax Fraud

Being found liable for tax fraud is difficult. The moment you realize what you’re doing with your taxes is likely illegal, you should stop doing it. If you do this, getting charged with tax fraud is far less likely. This is simple in theory, but a little bit more difficult in practice. This is because there are situations where you could do everything right and still be accused of tax fraud. So how do you reduce the chances of this happening?

The most important thing to do is consult with a tax professional. You want someone who is not only well-versed in the financial aspect of the tax code but the legal aspects as well. A tax pro like a CPA can help, but they focus more on the financial advantages and disadvantages of a particular tax or financial strategy. In contrast, tax attorneys examine the legality of a given approach or activity.

Ideally, you want someone who is both a tax attorney and CPA, like Timothy S. Hart. By talking to a tax professional, you can take steps to avoid getting into trouble and catching the eye of the IRS or Department of Justice.

Another thing you can do to avoid tax fraud charges is to maintain good records. Having complete payroll, invoice, billing, and other financial records will help you show early during an investigation that you didn’t do anything wrong, or if you did, what you did wrong doesn’t amount or tax fraud. Not having the necessary documents to substantiate your claims makes you look careless at best. At worst, it makes you look like you took affirmative steps to destroy evidence that might incriminate you.

Trying to Avoid Punishment for Tax Fraud?

Whether you’ve already been charged with tax fraud or have an important tax decision to make that you think might lead to accusations of tax fraud, it’s important to talk to a tax professional. Timothy S. Hart of the Timothy S. Hart Law Group can help. Mr. Hart has the skills and experience to help you achieve the best outcome for your tax situation, whether you’re dealing with the IRS or the New York State Department of Taxation and Finance. You can reach him using the online contact form or by calling 518-213-3445 or 917-382-5142.