For most mistakes, minor infractions, or errors, the Internal Revenue Service (IRS) will assess a penalty with interest. If the IRS believes a tax crime was committed, the outcome could be different.
Civil or criminal allegations can be a byproduct of an IRS audit. The key differences lie in the level of proof required, the types of penalties imposed, and the potential outcomes. An examiner must prove a civil tax infraction with clear and convincing evidence. Given that, the examiner can assess additional tax along with a monetary penalty that usually involves interest.
During a civil audit, if an examiner suspects a serious tax crime, they may halt the review and refer the matter for a criminal tax investigation and eventual prosecution. Eggshell and reverse eggshell audits carry high stakes for taxpayers who know they have something to hide. Prosecutors must prove the taxpayer intended to subvert the tax code beyond a reasonable doubt. Consequences can include prison time, restitution, and other penalties
Criminal tax charges are more likely to be brought when the actions and the behavior of the taxpayer can be clearly shown as willful and intentional. Types of federal tax crimes frequently pursued by the IRS include:
- Fraudulent tax returns: If damages are substantial enough and behavior is egregious enough, the IRS can pursue federal tax charges against those who prepare and file fraudulent tax returns. The IRS frequently prosecutes tax preparers who file false returns—with or without the knowledge of the taxpayer. Types of intentional tax fraud include filing for ineligible tax credits, creating fake dependents, manipulating statements to create false deductions, and underreporting income.
- Tax evasion: Efforts by a taxpayer or business to willfully evade a tax liability often take form in offshore tax havens and assets in foreign bank accounts. Money laundering is a classic form of tax evasion, often involving a shell game of moving assets to obscure their origin and eliminate tax liability.
- Payroll tax fraud: Another common federal tax crime is the withholding of payroll taxes and failure to file accurate wage withholding reports to the IRS. We frequently discuss employment tax fraud. It is easy to pull off and hard to pay off.
Tax requirements can be confusing at times. If you have questions about an investment or activity that could be on the sketchy side of things, speak with a reputable tax attorney before you take the plunge.
Concerned about onshore and offshore compliance?
Whether you are keeping two sets of books or are too anxious to admit you have not filed a Report of Foreign Bank and Financial Accounts (FBAR), good legal advice is key. Our tax group can help you navigate offshore tax compliance, payroll tax, and tax returns that are not strictly accurate. When you are overwhelmed with fear of tax litigation, set up a consultation or call us at 440-250-9709. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
If you're interested in legally minimizing taxes through offshore accounts—without crossing into tax evasion, get a deeper understanding of the risks and rewards with our free eBook, Offshore Tax Matters Explained.
