How Does the IRS Determine Tax Evasion?

Do I need a tax fraud attorney or was it a simple mistake?

By S.M. Oliva

Filing your federal income taxes is often not a simple task. Tax laws and forms change from year to year, leaving many honest people confused as to what income they need to declare, what deductions are allowable, and what tax credits they may be entitled to. Mistakes inevitably occur. But when does an honest mistake become criminal tax fraud?

“Willfully” Avoiding Assessment or Payment of Taxes

The federal tax code states it is a crime to “willfully” attempt to “evade or defeat any tax” required by law. Anyone who is charged, tried, and convicted of such tax evasion may be sent to prison for up to five years or fined up to $100,000. In the case of a corporation, the business can be fined up to $500,000.

The key word here is “willfully.” The government must prove the taxpayer intentionally tried to underpay or avoid a lawful tax. An honest mistake is therefore not criminal tax fraud. Of course, even a mistake must be corrected—that is, the taxpayer may need to file an amended return and pay any additional tax owed. But a taxpayer cannot be criminally convicted of fraud unless there is evidence of intent.

Here are some of the more common scenarios where a taxpayer may be guilty of criminal tax evasion:

  • The taxpayer deliberately fails to report or omits income from their tax return. This often occurs in businesses that deal heavily in cash. For example, a restaurant server may deliberately fail to report all of their cash tips.
  • The taxpayer claims ineligible or inaccurate deductions. For instance, if you falsely claim someone as a child or dependent to gain an additional deduction, that would be fraud.
  • Along similar lines, if the taxpayer is self-employed and required to file a Schedule C with his Form 1040, it would be fraudulent to claim personal expenses as business deductions.

Aside from fraudulent behavior with respect to the assessment of taxes, it is also a crime to evade payment of taxes. Again, it is critical to distinguish negligent behavior from criminal intent. If you simply fail to pay your taxes on-time—or are unable to pay your taxes due to financial hardship—that alone does not constitute fraud. But if the IRS can prove you deliberately hid or concealed assets to avoid paying what you owe, that is a different story.

Let's say Jane owes the IRS $50,000. She doesn't want the government to take her house, so she transfers the property to her brother. That would likely qualify as an “affirmative act” demonstrating fraudulent intent to evade payment of taxes.

Do Not Panic: Speak with a Lawyer

Many DC residents panic when they realize they made a mistake on their tax return or do not have enough money to pay their bill. But remember, the burden of proof is on the government to prove you committed criminal tax evasion. Nevertheless, if you are concerned about the possibility of criminal charges, you should speak with a qualified DC white collar criminal defense attorney right away.

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