Tax Fraud and Other Games of Chance

Not paying your taxes is a little bit like playing Russian roulette: You might get caught and face civil and/or criminal penalties, some of which are severe. Or, you may just get away with it—for a while, anyway.

When the IRS does come knocking, tax litigator Robert Fedor is the kind of guy to call. “People call me when they’re being audited,” he says. “This is what we see every day. There’s all sorts of fraud out there. I think it’s a win when my clients don’t have to go to jail.”

Fedor has seen a lot of tax evasion over the years, including some serious evaders. “I have clients that have never filed a tax return, and they make a half a million dollars a year,” he says. “They might be 45, 50 years old, so for a number of years they haven’t paid anything. I have clients who underreport their gross income by one or two million dollars a year. And what you find is, typically, if you’re proactive with the IRS—you admit the failures and say that you’re going to remedy it—that gets you a long way. My job is to keep things in the civil arena and to resolve it quietly without anybody knowing ab

“We have a number of cases that come out of a divorce, where one spouse is dumping on the other,” Fedor continues. “I have a case right now, a divorcing couple, he has a huge horticultural business. He’s never filed an income tax return—never filed either personal or corporate income tax, or a payroll return. He’s never heard anything from the IRS. But he’s worried that his wife is going to say something, use that against him. And I’m working behind the scenes, cleaning all that up.”

There can be some limitations to the IRS’s reach. For one thing, there’s a 10-year statute of limitations from the date of filing, and the IRS can only go back and collect for up to 10 years (with a couple of exceptions, such as filing for bankruptcy). Note that this only applies if you filed a return. “If you never file, there’s no statute of limitations,” Fedor says.

However, IRS capacity dictates that as a practical matter, they will only go back three to six years to collect, even where no returns were ever filed. In a typical audit, the IRS will look back at the last three years. “If there’s an understatement exceeding 25 percent, the IRS may go back six,” explains Fedor. “So my client who didn’t file for 25 years, we did returns for him for the last six, just to be safe. But for 19 years, he didn’t file. And he won’t. He’s coming out way ahead. But that’s the way you have to deal with these things.”

If the IRS comes up with a discrepancy in your audit, such as funds that were transferred into your bank account that you didn’t report as income or business revenue, this creates a rebuttable presumption of liability. Meaning, you may offer an alternate explanation than the IRS conclusion that you underreported income. “Maybe that money was a life insurance policy you cashed in, or maybe you borrowed it,” says Fedor.

In addition, even where you concede that you owe back taxes, you may be in a situation where you can present an Offer in Compromise, allowing you to pay a smaller amount of tax than the total you owe or in installments to tax authorities.

Whatever your circumstances, if you’re facing a tax audit with nonpayment or fraud issues, be sure to have an experienced tax litigator representing you.

If you want more information on this area of tax law, see our tax overview.