The Tax Fraud Law
What Does the Law Say?
The government enforces the tax laws using both civil and criminal penalties.
Civil Fraud
Section 6663 of the Internal Revenue Code establishes that where a company is found to have acted fraudulently in the filing or paying of its taxes, a penalty of 75% can be assessed.
In assessing the civil fraud penalty, the government has the burden of proving fraud by clear and convincing evidence. In other words, the government must clearly show that the taxpayer intended to evade taxes using deception or concealment. Courts have often described this intent as “willfulness,” which is defined in civil matters as “an intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing.”
Criminal Penalties
The following is a list of statutes used in assessing and enforcing criminal penalties in cases of tax fraud. The list should not be considered all-inclusive.11
| Title and Section | Definition |
| Title 26 USC §7201
Attempt to evade or defeat tax |
Any person who willfully attempts to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof:?
-Shall be imprisoned not more than 5 years |
| Title 26 USC §7202
Willful failure to collect or pay over tax |
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to penalties provide by the law, be guilty of a felony?
-Shall be imprisoned not more than 5 years |
| Title 26 USC §7203
Willful failure to file return, supply information, or pay tax |
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof:?
-Shall be imprisoned not more than 1 years |
| Title 26 USC §7206(1)
Fraud and false statements |
Any Person who* (1) Declaration under penalties of perjury - Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof;?
-Shall be imprisoned not more than 3 years |
| Title 26 USC §7206(2)
Fraud and false statements |
Any person who*(2) Aid or assistance - Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; shall be guilty of a felony and, upon conviction thereof:?
-Shall be imprisoned not more than 3 years |
| Title 26 USC §7212(A)
Attempts to interfere with administration of Internal Revenue laws |
Whoever corruptly or by force endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, upon conviction:?
-Shall be imprisoned not more than 5 years |
| Title 18 USC §371
Conspiracy to commit offense or to defraud the United States |
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each:?
-Shall be imprisoned not more than 5 years |
Criminal Prosecution vs. Civil Penalties
The following are many of the facts and issues that the Government looks at in deciding whether to pursue an IRS matter civilly or criminally.
1) Voluntary Disclosure
Once upon a time, the IRS had a formal policy against prosecuting taxpayers who took it upon themselves to confess their violations. Although that policy is no longer in effect, whether or not a taxpayer voluntarily discloses a deficiency or fraud is still considered when deciding whether or not to initiate a criminal prosecution. Obviously, such disclosure shall occur prior to the beginning of any criminal investigation on the part of the IRS.
Obviously, such disclosure must occur prior to the beginning of any investigation on the part of the IRS.
2) Amount of Money Involved
3) Evidence of Willfulness
Just as willfulness is useful in determining whether or not to charge the taxpayer with a felony or a misdemeanor, it is also used in deciding whether or not to charge a taxpayer with a criminal act at all. Since all tax crimes require the government to prove willfulness beyond a reasonable doubt, lack of evidence in this regard strongly discourages criminal prosecutions.
4) Chances of Success
Like any other litigant, the government is reluctant to bring suit in a case that it is unlikely to win. Whether or not the government has a ’strong’ case (i.e. - direct or circumstantial evidence, witnesses, etc.) will determine whether or not the government is willing to allocate valuable resources in pursuing convictions or civil judgments for tax fraud.
5) Whether an Example Can Be Made
Government resources are finite, and tax crime prosecutions are largely intended to make an example. In other words, the larger the prey, the more hungry the hunter. In cases that involve large corporations, entertainers, politicians, and other celebrities, the government is more likely to pursue criminal charges so as to make an example that is virtually guaranteed to grab headlines.
In addition to these traditional guidelines, the Corporate Fraud Task Force, established by the Bush Administration, has adopted a number of factors originally articulated by the Department of Justice for use in determining whether or not to proceed with criminal prosecution.
No Tags“Where the corporate culture has been corrupted, Task Force members recognized it may be impossible to excise this problem simply by addressing individuals’ bad conduct, without taking direct measures against the company itself. As a result, Task Force members have communicated to investigators and prosecutors that the government is prepared to prosecute both the guilty individuals and guilty companies if the circumstances warrant it. The Justice Department issued revised guidelines on corporate prosecutions which emphasized factors prosecutors should consider in making decisions regarding charging corporations with criminal conduct. These factors are:
1. The nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime;
2. The pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management;
3. The corporation’s history of similar conduct, including prior criminal, civil, and regulatory enforcement actions against it;
4. The corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection;
5. The existence and adequacy of the corporation’s compliance program;
6. The corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies;
7. Collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable and impact on the public arising from the prosecution;
8. The adequacy of the prosecution of individuals responsible for the corporation’s malfeasance;
9. The adequacy of remedies such as civil or regulatory enforcement actions.