Are You at Risk of a Tax Fraud Investigation by the IRS or DOJ?

Are You at Risk of a Tax Fraud Investigation by the IRS or DOJ?

Are You at Risk of Committing Tax Fraud

While there are many different types of tax rules, laws, and statutes a person can violate, tax fraud is one of the most common types of violations. That is because tax fraud can involve many different types of violations — such as filing a fraudulent return, submitting false documents, and making false statements. In addition, taxpayers can be investigated for both civil and criminal tax fraud, with the latter possibly resulting in both monetary fines and incarceration. It is important to note that it does not take much for a taxpayer to cross the line from gray area tax planning/avoidance to tax fraud — sometimes it is as simple as knowingly including false information on your tax return. Oftentimes tax fraud boils down to timing and what the mental state of the taxpayer was at the time they submitted the allegedly false information to the IRS. Let’s walk through some of the common examples of tax fraud when it involves foreign accounts and income, as well as some recent cases involving tax fraud and/or tax evasion.

Is Tax Fraud a Crime?

Is Tax Fraud a crime? The answer is, it depends. That is because unlike tax evasion (which is a crime), tax fraud may be a civil violation and/or a criminal violation — and many different types of violations can qualify as tax fraud. Let’s look at two of the more common tax fraud statutes:

Fraud And False Statements – I.R.C. 7206 (1)

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 it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

    • (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; or

    • (3) Fraudulent bonds, permits, and entries Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or

    • (4) Removal or concealment with intent to defraud Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

    • (5) Compromises and closing agreements In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully—

      • (A) Concealment of property Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

      • (B) Withholding, falsifying, and destroying rec­ords Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

        • shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

Fraudulent Returns, Statements, or Other Documents I.R.C. 7207

• • • Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047(b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

Will I go To Jail for Tax Fraud?

Unlike tax evasion in which many offenders do end up serving time, it is not the same case with tax fraud. Oftentimes, Taxpayers who commit tax fraud — especially if it is their first offense — may be able to reduce the violation and avoid incarceration. That is not to say that all individuals will be able to avoid being incarcerated if they are convicted of tax fraud, but it is easier to try to negotiate a sentence that does not include incarceration than it would be for tax evasion.

Examples of Tax Fraud or Evasion

Here are some common examples of Tax Fraud or Evasion.

Construction

• • • Ralph runs a construction business.  He earns significant income, with some of the clients paying him in cash. When times were tough – or Ralph just wanted to go out and spend some money — Ralph did not report the income to the IRS. In addition, Ralph failed to withhold employment tax on certain staff members who are employees instead of independent contractors and also knowingly embellished his expenses.

Entrepreneur

• • • Victor is your typical entrepreneur.  Victor put his nose to the grind for 80-to-100+ hour work weeks trying to build up a small Record label.  One of Victor’s musicians hit it big, and Victor took it upon himself to spend a lot of money, without reporting it.  As his record company grows, Victor still fails to fix any of the issues, while still skimming off the top. This is an example of tax fraud.

Consultant

• • • Andre works as a consultant in United States.   He formed his own LLC and became very successful. Unfortunately, Andre is a little too smart for his own good and failed to pay income tax on some of his earnings. He had U.S. and foreign clients divert some of the domestic and foreign income, which he used to purchase rental properties overseas, to accounts overseas. He did not report the income and claimed a deduction for fringe benefits that he knew he should have included as income. Andre intentionally underreported his US earnings and then shifted them into a couple of Swiss banking “numbered accounts,” thinking he could keep the money hidden.

How are Tax Fraud and Tax Evasion Investigated?

Let’s go through the basics of how the Internal Revenue Service Criminal Investigation process works by identifying excerpts from the Internal Revenue Service website — 

Sources of Criminal Investigations for IRS Special Agents

• • • Criminal Investigations can be initiated from information obtained from within the IRS when a revenue agent (auditor) or revenue officer (collection) detects possible fraud. Information is also routinely received from the public as well as from ongoing investigations underway by other law enforcement agencies or by United States Attorneys offices across the country.

Preliminary Analysis and Investigation Approvals

• • • Special agents analyze information to determine if criminal tax fraud or some other financial crime may have occurred. Relevant information is evaluated. This preliminary process is called a “primary investigation.”

    • The special agent’s front line supervisor reviews the preliminary information and makes the determination to approve or decline the further development of the information.

    • If the supervisor approves, approval is obtained from the head of the office, the special agent in charge, to initiate a “subject criminal investigation.” At this point, at least two layers of CI management have reviewed the ‘primary investigation’ material and determined there is sufficient evidence to initiate a subject criminal investigation.

Conducting Internal Revenue Service Criminal Investigations

• • • Once an investigation is opened, the special agent obtains the facts and evidence needed to establish the elements of criminal activity. Various investigative techniques are used to obtain evidence, including interviews of third party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data.

    • The special agent works closely with IRS Chief Counsel Criminal Tax Attorneys during the course of the criminal investigation. This process ensures all legal aspects of the investigation and prosecution recommendation are correctly addressed.

Prosecution Recommendations by the Special Agent

After all the evidence is gathered and analyzed, the special agent and his or her supervisor either make the determination that evidence does not substantiate criminal activity, in which case the investigation is ‘discontinued,’ or the evidence is sufficient to support the recommendation of the prosecution, in which case the agent proceeds with the preparation of a written report detailing the findings of a violation of the law and recommending prosecution. This report is called a “special agent report” and it is reviewed by numerous officials, including:

1. 1. 1. The agent’s front line supervisor, called the supervisory special agent;

      2. A criminal a quality review team, Centralized Case Review;

      3. CI assistant special agent in charge;

      4. CI special agent in charge.

If CI determines the investigation should be criminally prosecuted, a prosecution recommendation is forwarded to:

1. 1. 1. The Department of Justice, Tax Division, (if it is a tax investigation) or

      2. The United States Attorney for all other investigations.

Each level of review may determine that evidence does not substantiate criminal charges and the investigation should not be prosecuted.

Prosecution Recommendation from an Internal Revenue Service Criminal Investigation

• • • If the Department of Justice or the United States Attorney accepts the investigation for prosecution, the IRS special agent will be asked by the prosecutors to assist in preparation for trial. However, once a special agent report is referred to for prosecution, the investigation is managed by the prosecutors.

Conviction

• • • The ultimate goal of an IRS Criminal Investigation prosecution recommendation is to obtain a conviction – either by a guilty verdict or plea. Approximately 3,000 criminal prosecutions per year provide a deterrent effect and signals to our compliant taxpayers that fraud will not be tolerated

Sentencing Guidelines

There are federal sentencing guidelines that are generally followed, although it is not mandatory after Booker (2005 Sup Ct) but are still used.

As provided by the United States Sentencing Commission:

How the Sentencing Guidelines Work

• • • “The sentencing guidelines take into account both the seriousness of the offense and the offender’s criminal history. Offense Seriousness The sentencing guidelines provide 43 levels of offense seriousness — the more serious the crime, the higher the offense level.”

Base Offense Level Each

• • • “As provided by the type of crime is assigned a base offense level, which is the starting point for determining the seriousness of a particular offense. More serious types of crime have higher base offense levels (for example, a trespass has a base offense level of 4, while kidnapping has a base offense level of 32). Specific Offense Characteristics In addition to base offense levels, each offense type typically carries with it a number of specific offense characteristics. These are factors that vary from offense to offense, but that can increase or decrease the base offense level and, ultimately, the sentence an offender receives.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who are most concerned about international tax and reporting non-compliance and did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.