Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. As noted by Judge Learned Hand “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
But when a taxpayer willfully works to defeat a tax believed to be owing, he or she may have committed fraud in doing so. Tax fraud is an intentional wrongdoing on the part of a taxpayer with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires a tax due and owing, fraudulent intent, and some affirmative act to evade or defeat the tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are. Common evasion schemes include intentional understatement or omission of income, claiming fictitious or improper deductions, false allocation of income, improper claims, credits, or exemptions, and/or concealment of assets.
Civil tax fraud results in a remedial action taken by the Government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.
Criminal tax fraud results in a punitive action with penalties consisting of fines and/or imprisonment. Criminal penalties are enforced only by prosecution, are provided to punish the taxpayer for wrongdoings, and serve as a deterrent to other taxpayers. A tax fraud offense may result in both civil and criminal penalties. Restitution may be ordered in criminal tax cases pursuant to a plea agreement or a conviction under Title 18 U.S.C. and may be required as a condition of probation.
If it is determined during a civil audit or collection activity, that criminal elements have been met, the civil audit or collection activity must cease, and the case must be referred to IRS Fraud Technical Advisor (FTA) who reviews and approves/disapproves the initial decision that criminal elements have been satisfied. If the FTA approves the determination the case is then referred to the Criminal Investigation Division (CID). This is a critical junction in the investigation, and our Law Office recognizes the benefits of convincing the IRS that the case lacks criminal elements, and should be retained in the civil division.
In all criminal and civil tax fraud cases, the burden of proof is on the Government. In civil fraud cases, the Government must prove fraud by clear and convincing evidence. In criminal cases, the Government must present sufficient evidence to prove guilt beyond a reasonable doubt.