What is the Punishment for Tax Fraud?
Fraud Consequences Explained
What Is the Punishment for Tax Fraud?
If the IRS concludes you broke the law to avoid paying or reporting your taxes, you could face significant monetary penalties and even prison time. Before getting into the specifics, we need to first outline what tax fraud is, including the different types and how it compares to tax evasion and tax avoidance.
The IRS allows you to take steps to try and reduce your tax liability – up to a point. As long as you use legal means to do so (tax avoidance), there’s no issue. However, the IRS has a serious problem if you use illegal means to avoid taxes. If you do this, they may go after you for tax fraud which can lead to significant consequences.
What Is Tax Fraud?
When researching tax fraud, you’ll come across terms like tax evasion, civil tax fraud, and criminal tax fraud. Tax fraud and tax evasion are technically different, although they’re often used interchangeably given their similarities. The typical tax fraud or evasion case involves lying on a tax return (whether it’s a misrepresentation of income or facts concerning a tax credit or deduction) and not reporting income.
All forms of tax fraud and evasion require the taxpayer to have acted intentionally, so there’s no such thing as accidental tax fraud/evasion. This isn’t to say being negligent or ignorant of the law absolves a taxpayer of any consequences, but punishments for non-intentional acts will be far less severe.
Tax fraud is an overarching term for an illegal intentional act a taxpayer commits to avoid paying a tax or to obtain a greater tax benefit than they’re legally entitled to receive. Tax fraud consists of either civil tax fraud or criminal tax fraud. Criminal tax fraud is, for the most part, the same thing as tax evasion. Put another way, tax fraud consists of civil and/or criminal acts, while tax evasion is always a criminal act.
Tax Fraud Vs. Tax Evasion
There are three main differences between civil tax fraud and criminal tax fraud (aka: tax evasion). First, the burden of proof the government must meet is different for each. In civil tax fraud cases, the government must prove with “clear and convincing evidence” that the taxpayer committed fraud. In a criminal tax fraud or evasion case, the government must prove the same things, but meet the “beyond a reasonable doubt” burden of proof, which is higher than the clear and convincing evidence standard.
A second difference is how much time the government has to bring their case against the taxpayer. If the government wants to charge a taxpayer with tax evasion, the statute of limitations is usually six years. In a civil tax fraud matter, there is no statute of limitations.
The final difference is the potential punishment the taxpayer faces. In a civil tax fraud case, the taxpayer only has to pay money. In a criminal tax fraud case, the taxpayer will need to pay money and could lose their liberty, namely getting sentenced by a judge to probation and/or imprisonment. The exact punishment depends on the applicable statute and whether the tax evasion charge is a felony or misdemeanor.
Types of Tax Fraud and Their Consequences
Because tax fraud encompasses both civil and criminal charges, there’s a wide range of potential punishments. The exact monetary fine amount and time in prison will vary based on the type of tax fraud, applicable statute, and whether the defendant taxpayer is an individual or corporation. Below is a list of major tax fraud crimes and their respective penalties.
Title 18 USC § 371: Conspiracy to Commit Offense or to Defraud United States
This is a catch-all type of statute in that it applies to almost any criminal conspiracy to try and defraud the United States. The key here is that it requires two or more people to be involved in the tax fraud conspiracy, those two (or more) people knowingly took part in the conspiracy, and the person charged with conspiracy completed an overt act in furtherance of that conspiracy.
There are two main types of tax-related conspiracies, although only one of them is largely related to tax fraud. A tax fraud conspiracy charge will commonly accompany one or more criminal charges for tax fraud involving any of the below-discussed statutes. Additionally, a taxpayer may be convicted of conspiracy, regardless of whether they’re convicted of the underlying criminal tax fraud charge. This means almost any tax fraud scheme that involves two or more individuals can include this conspiracy charge.
Being found guilty of this statute can result in a prison sentence of up to five years, a fine of up to $250,000 for individuals (corporations can be fined up to $500,000), or both.
Title 26 USC § 7201: Attempt to Evade or Defeat Tax
This is the classic income tax evasion statute and a taxpayer is guilty of violating this statute if they:
- Owed substantially more income than reported on their tax returns;
- Had the intent to evade or defeat the payment or assessment of taxes owed;
- Committed a willful act in furtherance of that intent; and
- Didn’t have a good faith belief that they were complying with their tax obligations.
If convicted, a taxpayer may pay a fine of up to $250,000 ($500,000 if the taxpayer is a corporation), spend up to five years in prison, or both. Additionally, the taxpayer may also have to pay prosecution costs.
Title 26 USC § 7202: Willful Failure to Collect or Pay Over Tax
The U.S. government uses this statute to prosecute taxpayers who intentionally refuse to comply with their legal duty to collect, account for, or pay any taxes imposed on someone else. This statute often arises in employment tax cases due to payroll taxes. A conviction under § 7202 can result in a fine of up to $10,000, five years in prison, or both. Prosecution costs may also be imposed on the taxpayer.
Title 26 USC § 7203: Willful Failure to File Return, Supply Information, or Pay Tax
This statute most often arises when prosecuting an individual for failing to file a required tax return (a misdemeanor). It’s usually used when a taxpayer tries to avoid paying taxes, but their actions don’t constitute tax evasion (a felony) because there was no deliberate act to do something, such as lie on a tax return or hide income (where § 7201 would come into play). Instead, there was a deliberate omission, or decision not to do something, like not filing a required tax return.
A person guilty of violating § 7203 can face up to one year in prison, a fine of up to $25,000 ($100,000 for corporations), or both. The defendant may also be required to pay prosecution costs.
Title 26 USC § 7206: Fraud and False Statements
This is another popular statute for criminal tax fraud criminal cases. There are several provisions here that can apply in tax fraud cases, but subsections (1) and (2) are among the most common.
Section 7206(1) usually comes up in cases where a taxpayer files an income tax return but knowingly includes false information despite swearing that the information is true and correct. Section 7206(2) is similar to 7206(1), except it applies to those who help others file a fraudulent tax return. This subsection can come up with prosecuting tax preparers and their involvement in preparing a fraudulent tax return.
An individual guilty of violating either of these subsections faces a fine of up to $100,00, three years in prison, or both. They may also be liable to pay prosecution costs as well.
Civil Tax Fraud
In many civil tax fraud cases, Title 26 USC § 6663 applies and states that the penalty is 75% of any underpayment of taxes. This is usually a far less severe penalty than criminal tax fraud, not just in potential monetary penalties, but also in the avoidance of any jail time.
Taxpayers may face civil tax fraud penalties when they intentionally try to avoid paying taxes they owe, but the government doesn’t have enough evidence to meet the “beyond a reasonable doubt” burden of proof concerning a specific element of the alleged fraud.
For example, the IRS might think a taxpayer with cryptocurrency income knew they needed to report it and pay taxes on it, but deliberately chose not to. However, the only evidence the IRS has is that the taxpayer’s tax preparer only specifically asked the taxpayer if they invested in bitcoin (and not cryptocurrency in general).
Because the taxpayer didn’t invest in bitcoin, it’s possible the taxpayer didn’t know they had to report their Ethereum cryptocurrency transactions and/or income. Therefore, the IRS may have trouble proving beyond a reasonable doubt that the taxpayer was aware of their tax reporting and payment obligations with their crypto investments.
One thing to keep in mind is that criminal punishments aim to punish bad behavior while the goal of civil penalties are less punitive and are mostly focused on recovering money and assets that belong to the U.S. government.
Real Life Tax Fraud Cases
Taxpayers are mostly honest, but lying and “fudging” information on a tax return or other document sent to the IRS still happens all the time. Despite this, civil or criminal tax fraud charges are pretty rare. This isn’t surprising because of the requirement that the IRS or criminal prosecutor prove intent to defraud. This is usually difficult to do, as many taxpayers can simply claim ignorance and that they didn’t know what they were doing was illegal (taxes are complicated, after all).
According to the United States Sentencing Commission, of the more than 61,000 cases reported to them in fiscal year 2022, only 401 involved tax fraud. That being said, criminal prosecutions do occur and when they do, a guilty verdict or guilty pleas are a common occurrence. Here are some recent criminal cases that resulted in a guilty verdict or guilty plea.
- On June 7, 2024, Jean Wesner Pierre Louis was found guilty of helping prepare tax returns where his clients would falsely claim tax credits or business losses. He was sentenced to 30 months in prison, followed by one year of supervised release. He was also ordered to pay more than $4 million in restitution.
- On June 17, 2024, Miguel Martinez pled guilty to conspiring to file $25 million fraudulent income tax returns with the IRS. His plan involved filing tax returns using false wage withholding information for individuals that worked for fake businesses, and then filing fraudulent returns for tax refund payments from the IRS. Mr. Martinez is scheduled for sentencing on September 23, 2024.
- On June 21, 2024, Danny Sing was sentenced to 27 months in prison for conspiring with others to fail to withhold and remit more than $1.3 million in federal employment taxes. Sing and his coconspirators created a plan where they would pay their employees and themselves in cash to conceal income from the IRS.
- On July 9. 2024, Saleem Hakim was sentenced to 48 months in prison for earning more than $2.8 million in commissions from 2009 to 2013 through his precious metals brokerage business. Despite these earnings, he did not file any tax returns for those years. At trial, there was also evidence that showed how, after being charged, Mr. Hakim and his wife tried to conceal their income by putting their money into a trust. In addition to his prison sentence, Mr. Hakim will serve three years of supervised release, pay $1.2 million in restitution to the IRS, and pay approximately $4,500 in prosecution costs.
- On July 10, 2024, 24 people were indicted for various financial crimes, including submitting fraudulent Paycheck Protection Program loan applications. Many of the individuals submitted these applications despite not having an operational business.
How to Avoid Tax Fraud
Because of the intentionality element of tax fraud, it’s fairly easy to avoid getting into trouble for it. If you believe what you’re doing with your taxes is probably illegal and you do it anyway, then there’s a chance you could be civilly or criminally liable for tax fraud. Where the grey area comes in is when what you want to do with your taxes blurs the line between tax evasion and tax avoidance.
In these cases, you should consult with a tax professional. Depending on the nature of your tax question, a CPA might be suitable, but a tax attorney would probably be ideal. This is because you’re dealing with the legality of what you want to do and the consequences you might face if you go through with it.
Even if you can successfully claim ignorance and avoid civil or criminal tax fraud charges, you could still face financial headaches when dealing with tax penalties, audits, liens, or even levies.
It also helps to keep good records. Documentation of income sources, payroll, receipts for deductions, business expenses, and so on can help substantiate the information on your tax filings. This may help avoid any allegations that you intentionally falsified information sent to the IRS or tried to evade your tax liabilities.
Facing a Possible Tax Fraud Charge?
If the IRS suspects you intentionally lied on your taxes or tried to avoid paying taxes you owe, you need to get in touch with the W Tax Group. If found liable, you could face hefty monetary fines and even prison time. We have a team of tax professionals, including three tax lawyers, who can help you deal with these allegations.
We can also help if you’re not yet in trouble, but want legal advice to stay out of trouble when making a tax decision. Either way, we offer free consultations where we can learn more about your situation and advise you on your best course of action.
