Tax Fraud. It is more than just a simple error in judgement. There are many kinds, all with penalties, and without proper advice and guidance, it’s easy for a small matter to spiral out of control. Filing a false tax return or other document is treated seriously by the Internal Revenue Service. If its investigation turns up substantive information, civil cases can be referred for criminal tax investigation. Arrests and tax-related criminal charges could follow.
So it’s important to not take a tax fraud charge lightly, and hopefully this document can help you understand it better. However, the attorneys at Robert J. Fedor, Esq., L.L.C. are knowledgeable when it comes to providing representation for those facing life changing criminal charges involving tax fraud. An experienced tax attorney with knowledge of IRS investigations and tax law is vital in cases involving fraud charges. For immediate representation, contact Robert J. Fedor, Esq., L.L.C. at 800-579-0997.
Tax fraud is more than just a mistake; it is a willful attempt to get out of tax obligations. The key to a tax fraud claim is that the person accused of the crime willfully or intentionally committed acts to avoid paying taxes. Examples include failing to file an income tax return or preparing a false return.
Although the penalty for a simple mistake may seem severe, those that apply in cases of a tax fraud conviction are even more severe. A failure to file can come with up to one-year imprisonment and a monetary penalty of $100,000, while an attempt to evade taxes can come with up to five-years imprisonment and a $250,000 fine.
The IRS defines tax fraud as "the willful and material submission of false statements or false documents in connection with an application and/or return." To make this determination, investigators will look for any indicators of fraud such as, but not limited to:
If these common indicators are absent, the IRS typically assumes that an unintentional mistake has occurred due to negligence. Though this typically does not lead to criminal charges for tax fraud, mistakes with your taxes can lead to an accuracy-related penalty that equates to 20 percent of the underpayment.
Anyone could be caught off guard when they are assessed this penalty, which is why it's important to make sure all tax information is accurate and truthful before submitting it to the IRS. It's also important to remember your right to an attorney as well, especially if you believe a tax fraud charge has been levied against you in error.
Few people enjoy paying taxes, but some taxpayers avoid taxes, while others evade them—what’s the real difference?
The Internal Revenue Service (IRS) notes the income tax system in the US is based on voluntary compliance. It is a volunteer action right up to the point that you do not volunteer to pay the taxes that are required of you. Failure to file your income tax return or filing a fraudulent tax return could earn you a criminal tax charge at some point.
We talk a lot about types of tax fraud, how it occurs, and the consequences of conviction in a criminal tax matter brought by the IRS. As noted, tax fraud is one way that people evade their taxes. Before they took a criminal turn, the idea was to avoid paying taxes altogether.
Avoiding your tax burden is perfectly legal. In the US, there are a number of ways that assets can be held, taxes can be paid, and deductions can be used to reduce the amount of tax you pay on a quarterly or annual basis. Deferred tax plans are often used around retirement planning to shield savings and maximize wealth.
Tax evasion is big business
On a global scale, tax evasion is big business. The use of offshore tax havens and other secrecy jurisdictions can skirt dangerously close to tax evasion. In recent years, the IRS has offered programs to prompt taxpayers into compliance who were on the wrong side of the tax evasion/tax avoidance question.
While it is legal to hold money in foreign bank accounts, taxpayers and institutions must file reports like the FBAR and FATCA to ensure their wealth is reported and appropriate taxes paid.
The bottom line is that the US requires qualified citizens to pay appropriate taxes. That doesn’t mean you should pay more than you owe—or more than you might owe if you took advantage of appropriate tax avoidance strategies. When you are concerned about what you may pay in taxes—talk to an experienced tax attorney to learn how you can avoid taxes, without being guilty of evading them.
The Internal Revenue Service claims that about 1 out of every 6 taxpayers fails in one way or another to comply with the tax code. If the federal agency’s estimate is accurate, you might reasonably expect the numbers of tax-related arrests to be significantly higher than they are now.
The reason why not every sixth person you know is facing criminal charges is because the IRS distinguishes between income tax fraud and negligence.
Tax fraud is a deliberate attempt to evade taxes or to defraud the IRS. Tax fraud takes place when a person or company willfully does one of the following:
People Make Mistakes
It goes without saying that the tax codes are long and dense and sometimes nearly indecipherable—even for accountants paid to make sense of them. In that regard, the IRS acknowledges that sometimes mistakes happen and people will assume A about the code when B actually applies.
Without evidence of fraud or other criminal activity, the IRS will typically assume you have made an honest mistake on your returns. That’s about the extent of the agency’s willingness to forgive, however, as even unintentional mistakes can result in a 20 percent penalty to the taxpayer.
There are certainly circumstances in which the IRS assumes an unintentional error is actually a deliberate attempt to defraud. In these situations, the taxpayer can face serious consequences, including prison time. Many will turn then to experienced tax law attorneys to help them resolve disputes with the IRS. In some cases, negotiations can lead to resolution of the issue without any criminal charges; in other cases, vigorous representation in court is required.
One of the many things that makes the U.S. a great nation is that we have the freedom to express our opinions, even when those opinions run counter to official government policy. For instance, people are free to argue that the federal income tax is illegal and that it violates several amendments of the Constitution.
People are free to make the argument, but they are not free to refuse to pay the income tax they owe. Because some of those who argue that the income tax is illegal, immoral and unconstitutional are articulate and persuasive, sometimes people give in to temptation and file returns making "unreasonable and outlandish claims," the IRS says, "to avoid paying the taxes they owe."
When you file that return, trouble can begin. No matter how reasonable the argument sounded in the book you read or website you visited, the IRS has very likely heard the argument before, taken it to court and prevailed. In fact, penalties levied against those who take up the court's time with "frivolous arguments" are getting harsher.
You can argue that only employees of the federal government are subject to the income tax, or that filing a return is voluntary or that Federal Reserve notes are not income--the anti-tax arguments go on and on--but at the end of the day, you must send in an accurate income tax return.
Within the IRS, the Criminal Investigation (CI) unit takes a hard look at tax fraud, tax-associated money laundering, and illegal proceeds earned by legitimate companies through a variety of fraudulent methods. Some of the crimes pursued by CI include:
Committing tax fraud or tax evasion could provoke the interest of the IRS. But remember, the IRS is both underfunded and short-staffed these days. An important aspect of any tax crime is intent. It takes less time and money to work out a civil arrangement with a delinquent taxpayer, then it does to try and convict that same taxpayer of a criminal offense.
Criminal tax investigations are often aimed at business owners or C-suite executives. Just as often, it is the rank-and-file who perpetrate tax fraud. Monies gained from tax crime often go to pay debt or pay for personal comforts.
When an employee embezzles, it is important for an employer to obtain experienced legal advice about reporting the loss to the IRS, and properly classifying repayments on those embezzled funds should they occur. At the outset of discovery of the theft, employers can provide the IRS with information about the loss. That said, the report and steps to deal with the embezzlement should be reviewed with general counsel or a qualified tax attorney before contacting the IRS.
While failure to properly remit or pay over employment taxes may not seem the most serious crime, it is a hardball issue for the IRS. Conviction on one count of employment tax fraud can earn five years in prison. The IRS routinely identifies and investigates employment tax scams that take a number of forms, including:
The IRS routinely brings criminal tax charges against preparers. Tax fraud is serious for the accused and for their clients, especially if the client had knowledge, or should have known that a false tax return was filed on their behalf. Here are a couple of recent IRS prosecutions:
The non-profit consumer watchdog, Consumer Reports, and the IRS offer straightforward advice for choosing a reputable tax preparer. Tips include:
You can file a complaint with the IRS if you have financial exposure due to a tax preparer.
The IRS cautions individuals and businesses to scrutinize their tax preparer on an ongoing basis. If you can answer “yes,” to any of the following questions, proceed with caution:
Civil tax fraud penalties are limited to monetary consequences and do not result in a criminal prosecution. Common civil infractions and their associated penalties include:
Criminal tax fraud can result in a significant period of imprisonment, among other penalties. For criminal tax fraud, the potential penalty is directly tied to the specific criminal charge you face. For example, some common crimes and punishments related to criminal tax fraud include:
Here are straightforward tips to avoid headlines and resolve the charges of tax fraud:
Of course, the best way to avoid a tax controversy is to ensure that you meet FBAR and foreign bank account reporting guidelines, pay your taxes, and work with best-in-class accountants and tax preparers. When there are issues or a tax crime allegation is pending—contact a tax attorney with the defense experience you need to keep you from career or reputational damage, financial loss, or prison.
Statistically speaking, the chances of any given taxpayer being charged with criminal tax fraud or evasion by the IRS are minimal. The IRS initiates criminal investigations against fewer than 2 percent of all American taxpayers. Of that number, only about 20 percent face criminal tax charges or fines. In a recent year, only less than 2,500 Americans were convicted of tax crimes – approximately .0022% of all taxpayers. Additionally, the “unofficial” minimum amount of taxes owed before the IRS will choose to file criminal charges is around $70,000, in cases involving multiple years of fraud.
The term tax fraud is a general one which can refer to a number of different laws found in Title 26 (the Internal Revenue Code) and Title 18 of the United States Code (or “USC”). The main distinguishing feature of tax fraud is the taxpayer’s intent to defraud the government by not paying taxes that he knows are lawfully due. Tax fraud can be punishable by civil (i.e. money), criminal (i.e. jail time and money) penalties, or both. For example, a taxpayer can commit tax fraud and be punished under 26 USC § 6663 with civil penalties, without actually being charged with criminal tax evasion under Title 26 USC § 7201.
If you have concerns or fear you may be facing criminal tax charges, this eBook will help to educate you on the basics criminal tax fraud and your personal rights. We invite you to download our eBook and as always, please contact the experience tax attorneys at Robert J. Fedor, Esq., L.L.C. with any questions.
When a business needs to tighten their belt, a tempting solution is to avoid paying taxes. But a Detroit-area businessman couldn't resist the temptation, and committed this payroll tax crime, at not just one of his businesses, but two.
We've been watching this case since last year. "Longtime business owner Johni Semma owned the Bayside Sports Bar & Grill in Walled Lake, Michigan, in the Detroit area. Mr. Semma also owned and managed an adult entertainment establishment called The Coliseum. Along with the employment tax dispute, Mr. Semma is charged with failure to file an income tax return. The employment tax charges alone amount to 24 counts against the businessman."
But in August 2019, Semma accepted his fate and plead guilty to willful failure to pay over employment taxes and failure to file an individual income tax return. From the Department of Justice Press Release:
According to the indictment and the plea agreement, Johni Semma owned Bayside Sports Bar & Grill (Bayside), a restaurant, and “The Coliseum,” an adult entertainment business. As the owner of Bayside, Semma was responsible for collecting and paying over Bayside’s employment taxes. From the first quarter of 2008 through the first quarter of 2015, Semma caused the restaurant to withhold payroll taxes from employees’ paychecks, but filed only two of the 29 Forms 941 required for those quarters and failed to pay over to the Internal Revenue Service (IRS) approximately $1.3 million in employment taxes. Although Semma sold “The Coliseum” in 2012 for more than $6 million, he did not pay the delinquent payroll taxes. Semma also did not file a 2012 individual income tax return, resulting in a tax loss of approximately $463,000.
United States District Court Judge Paul D. Borman scheduled Semma’s sentencing for Jan. 30, 2020. Semma faces up to six years in prison, as well as a term of supervised release and monetary penalties. Semma also agreed to pay almost $1.8 million in restitution to the IRS.
Criminal tax investigations are often aimed at business owners or C-suite executives. Just as often, it is the rank-and-file who perpetrate tax fraud.
In early March, Alabama resident Alita Edeker was sentenced to almost four years in prison for stealing from her employer and filing false income tax returns. According to the Department of Justice, Ms. Edeker was an accounts manager at a science technologies company based in Auburn, Alabama, between 2005 and 2014.
Like many individuals who embezzle from their employer, Ms. Edeker was in a position that enabled her to route and reroute monies coming into the company for the payment of goods and services. Ms. Edeker processed credit and debit card product purchases for the company. Between 2007 and 2014, Ms. Edeker transferred more than $700,000 into accounts that she controlled.
Monies gained from tax crime often go to pay debt or pay for personal comforts. Ms. Edeker used the illicit funds to pay for her car, home utilities, and mortgage. As with many types of criminal endeavors, Ms. Edeker was pursued for filing fraudulent tax returns. In addition to the embezzlement and making false statements about the money she diverted, the IRS found she filed inaccurate income tax returns between 2011 and 2013.
Ultimately, Ms. Edeker will serve her prison time, plus three years of probation. She is required to repay her employer $819,497.29 and owes the IRS another $101,604. As an accounts manager and felon, Ms. Edeker will be hard-pressed to repay her debts in her lifetime.
With stacks of cash and money changing hands quickly, it's easy to understand the temptation for restaurant owners to dip into those funds when cash is needed for personal expenses. However, two Texas restaurant owners took it to another level when they hatched a Tax Fraud scheme by skimming off their gross receipts and taking the money for their personal use. After seven years of fraud, the IRS caught up with them and they were sentenced earlier this month.
From the Department of Justice Press Release:
United States District Court Judge Xavier Rodriguez sentenced Michael Herman to 21 months in prison, and Cynthia Herman to five years of probation. On May 20, 2019, an Austin jury convicted Michael Herman and Cynthia Herman (the “Hermans”) of conspiring to defraud the United States by impeding and impairing the IRS and filing false 2010 and 2011 individual income tax returns. Michael Herman was also convicted of filing false 2010 through 2012 corporate income tax returns.
According to evidence introduced at trial and witness testimony, the Hermans owned and operated Cindy’s Gone Hog Wild, a restaurant and bar in Travis County, Texas, and two restaurants in Bastrop County, Texas, Cindy’s Downtown and Hasler Brothers Steakhouse. The Hermans skimmed cash from the restaurants by depositing only a portion of the cash receipts into their business bank accounts and reporting only those limited deposits on the corporate and individual income tax returns. The Hermans also paid for personal expenses out of the business accounts, including repair of their swimming pool, utilities for their home and the salary of a household employee. As a result, the personal returns filed by the Hermans falsely underreported income and businesses’ corporate returns and falsely deducted personal expenses as business expenses.
Judge Rodriguez also ordered the defendants to pay $157,719 in restitution, and Michael Herman to serve three years of supervised release.
A Paradise Valley, Arizona man took a familiar tax scam and made it his. His story is a cautionary tale on a couple of levels. John Propstra is going to prison for almost two years. After that, the 47-year old man will be on probation for another three years and he will be paying restitution to the tune of $700,000 to the IRS for a lot longer than that.
How did a man who owned several small businesses and provided outsourced payroll services get in this position? There is a clue in the previous sentence, and it is “payroll services.” Mr. Propstra was in the business of collecting federal employment taxes for other companies and paid them to the IRS—until he didn’t. In the process of his business dealings, Mr. Propstra slid down the slippery slope of withholding taxes he was being paid to withhold for the IRS.
Failing to pay over employment taxes is not uncommon. Business owners facing red ink may claw back employment taxes collected from their employees. Other owners may collect and spend employment tax money on personal expenses.
While it seems a straightforward scam, this tax crime usually involves multiple charges. As the subject of an IRS criminal tax investigation, Mr. Propstra faced numerous allegations. In addition to failing to pay over the monies he collected from his client companies, Mr. Propstra filed false income tax returns stating he paid more taxes than he had. Then he quit filing employment tax returns altogether and disposed of filing accurate wage reports to the Social Security Administration (SSA). For his own group of small businesses, Mr. Propstra failed to pay over $710,819.05.
Business owners who make a habit of dipping into withholding taxes are taking a risk. Owners who are in the business of collecting employment taxes and fail to pay over the money to the IRS are making a blatant misjudgment.
Despite the similarity of charges faced by defendants, no two tax crimes are ever truly the same. Had Mr. Propstra consulted with a tax attorney with experience in defense of criminal tax matters prior to his arrest, some of the consequences of this crime might have been mitigated. We’ll never know.
On the local and global stage, celebrities and high-asset persons turn up in headlines for alleged tax fraud. In Spain, Shakira is facing allegations that she failed to pay more than $16 million in taxes.
Shakira Isabel Mebearak Ripoll (Shakira) is a 42-year old entertainer and businesswoman who lives in Columbia with her husband and two children. Shakira has also made a name for herself as a philanthropist and issues activist.
In 2017, Shakira was one of many high (and low) profile individuals whose name turned up in the Paradise Papers, a revealing trove of legal and tax documents that found their way into the hands of a consortium of journalists. The vast portfolio of documents details the manipulation of offshore tax havens and foreign bank accounts to obscure ownership of assets, launder funds, and muddy the visible path of taxable income around the world.
Since their release, the Paradise Papers have been a source of intrigue, investigation, and criminal tax investigations of persons and entities named within the leaked papers.
It is possible that revelations in the papers led to the investigation that focused on Shakira. In her leaked investment portfolio, it appears Shakira claimed she was a resident of the Bahamas between 2012 and 2014. The singer states she moved her residency from the Bahamas to Spain in 2015.
Investigators charge that Shakira was living in Spain during the 2012 to 2014 time period, and thus owed a significant amount of tax on income from her global enterprise. Shakira and her tax attorneys claim otherwise.
Although there are reports that Shakira has already paid a substantial amount to settle the disagreement, she has been summoned to court in June of this year to face charges of tax evasion.
If charges against Shakira go forward, her team of tax lawyers will likely argue that any tax arrears were a mistake—while offering to settle with Spanish tax authorities. For high-asset individuals facing charges of filing fraudulent tax documents, sound legal advice can provide solutions that avoid publicity—or prison time.
Against an ongoing debate over digital tax, tech giant Google paid France just over $1 billion to settle long-simmering claims of tax fraud.
While a $1 billion payout for Google is not staggering, it does give pause for wondering what sorts of practices lead to a dispute that would result in a settlement of that size.
Most wealthy individuals and companies are interested in maintaining and growing their wealth. We recently discussed a case wherein another tech giant, Amazon, emerged the victor against the IRS who questioned the business arrangements the company had made in Luxembourg. Amazon had very purposefully set up shop in Luxembourg to create a preferential tax environment for the global company.
Same thing with Google. Like many multinational companies, Google takes advantage of current EU regulations that allow companies to declare the profits it earns from the entire bloc in one state with preferential tax laws, in this case, Ireland. With its European headquarters in Dublin, Google can report profits in Ireland and pay far less tax than if the tax were assessed elsewhere or throughout the EU. The practice is contingent upon all sales contracts being completed in Ireland.
The tax litigation arose after a French raid of Google offices in Paris in 2016. The raid apparently netted evidence for a claim that all sales were not being concluded on the Emerald Isle.
France leads the charge in the EU to impose a digital tax on tech giants that reap enormous profits from EU states, but pay little back into those states by way of taxes. France was rebuffed by Denmark, Sweden, and (not surprisingly) Ireland, in its attempts to legislate the tax into existence. Instead, in July of this year, France laid down its own digital tax, targeting players like Facebook, Google, and Amazon.
The French tax, three percent on revenues earned in France, applies to 30 companies, many of which are American. While the tech giants protest the tax, and the Trump administration vows an investigation and revenge taxes on French goods, it is likely the matter will be handled diplomatically through a new coordinated tax structure in the EU.
In a statement, Google noted, “We remain convinced that a coordinated reform of the international tax system is the best way to provide a clear framework to companies operating worldwide.” Small world, big money.