What Exactly IS Tax Fraud?

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. 

What the IRS Considers Tax Fraud

According to the IRS, tax fraud is “deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it.” In other words, when someone is tricked or scammed into turning over money or something else of value—it is fraud. A second and important part of the definition of tax fraud is “intentional wrongdoing” to evade or avoid paying a legitimate liability.

The IRS specifically notes tax fraud requires two criteria:

1. A tax liability that is owed or due

2. Intent to avoid liability through fraud

 The creativity exercised by taxpayers seeking to avoid taxes can be considerable, and tax dodges take many forms. Regardless of how it looks, tax fraud will usually involve some of the following basic aspects:

• An attempt will be made to intentionally avoid or evade paying a tax liability owed. Annual tax returns often become the scene of the crime. Common attempts to avoid taxes include taking inappropriate deductions or claiming fictitious losses or loans. A taxpayer might grossly under-report their income or simply fail to report income on which taxes are due for several years. Schedules and submitted statements may be falsified to support claims on the return.
• Tax fraud comes into play when employers or business owners fail to collect or turn over payroll taxes to the government. Employment tax disputes turn into criminal tax allegations if an investigation reveals payroll taxes were withheld but not reported or submitted to the IRS. While some business owners use withheld payroll taxes to fund a lavish lifestyle, others may try to improve a bottom line awash in red. The IRS has a high interest in owners or employers who are defrauding the government through payroll taxes.
• Holding and investing assets in offshore or foreign bank accounts can also be a pathway to charges of tax fraud and evasion. While placing money in offshore accounts is a good way to protect and grow wealth—be sure to speak with your tax attorney about the need for FBAR reporting.

How Does the IRS Determine Tax Fraud?

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:

• Underreporting income
• Using a false Social Security number
• Falsifying documents
• Intentionally failing to pay taxes

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.

Understanding the Difference Between Tax Evasion and Tax Avoidance

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 U.S. 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 U.S., 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 U.S. 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.

Willful Failure to Pay Income Taxes

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:

• Intentionally fails to pay taxes owed
• Willfully fails to file a federal income tax return
• Fails to report all income
• Makes false or fraudulent claims

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.

Making a Frivolous Tax Claim

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.

Other Common Tax Fraud Crimes

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:

• Employment and payroll tax fraud: Payroll tax issues are common. Underreporting workforce numbers, collecting payroll taxes (federal unemployment, social security, and withholding taxes) and failing to pay them over to the IRS, or paying employees in cash under the table are just a few of the schemes pursued by the IRS. 
• Refund fraud: Most people know that filing a false income tax return could turn into tax litigation. Individuals and tax preparers engage in refund fraud and sometimes identity theft in order to obtain an unearned tax refund. This is also the realm where fake deductions, exemptions, and business expenses come into play.
• Abusive tax schemes: U.S. taxpayers who avoid filing regulatory reports like FBAR and FATCA could find themselves facing an IRS criminal tax investigation. With the proliferation of secrecy jurisdictions, individuals with significant wealth may seek the greater privacy available through offshore tax havens. There is often a fine line between an abusive tax scheme and a tax option used by an unwitting taxpayer trying to make legitimate use of offshore tax resources.

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. 

Employee Tax Fraud Explained

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.

Common Employment Tax Fraud Scams

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:

• Employment leasing: When an employer outsources their personnel and payroll responsibilities it is called “employment leasing.” While an employer contracts help from the outsourcing company, the outsourcer is responsible for collecting and paying over employment taxes. Sometimes these middleman organizations pocket employment taxes, close up shop, and disappear when notified of an impending IRS civil audit—leaving a significant tax liability.
• Pyramiding: A common employment tax scam is the practice of “pyramiding,” which is the IRS term for business owners who withhold payroll taxes and pocket the money with no intention of turning it over to the IRS.
• Cashing out: When employers or outsource employment agencies pay employees in cash, the opportunity for tax crime rises across the board. In addition to skirting Workers’ Compensation laws, employers can falsify payroll records, underreport the number of employees on the books, or underreport the amount of payroll taxes owed.

Tax Preparer Fraud

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:

• A Charlotte, North Carolina woman pled guilty to “aiding and assisting the preparation of a false tax return.” The woman admitted to the most common forms of tax preparer fraud, enhancing expenses, creating fake deductions, and claiming education credits that were non-existent. The amount of tax lost to the IRS from her conduct amount to approximately $500,000 and she faces up the three years in prison, probation, restitution, and penalties.
• Facing similar consequences, a Rhode Island man also faced the long arm of the law for his habit of filing fraudulent tax returns between the years of 2011 and 2015. Like the North Carolina tax preparer, the accused sought to boost refund checks for his client by creating false deductions, and inflating expenses. He also amplified charitable donations and falsified home mortgage and home energy improvement deductions. 
• On a larger scale, a pair of Southern Florida tax preparers were shut down by the IRS and face injunctions and the permanent loss of the livelihoods for their part in scamming the IRS and their clients. Using the same sorts of tactics described above, a tax preparation business inflated deductions and expenses on the tax returns of their client to increase the amount of the refund their client would receive. When the refund returned, the tax preparers pocketed the excess without the knowledge of their victims.
  
  

Avoid Tax Fraud: Know Who is Preparing Your Return

The non-profit consumer watchdog, Consumer Reports, and the IRS offer straightforward advice for choosing a reputable tax preparer. Tips include:

• Check the credentials of your preparer: The IRS provides a Directory of Federal Tax Return Preparers as a tool for finding qualified tax assistance. There are also search tools for CPAs and tax experts from association resources. Conduct an online search, ask for references—and check them.
• Look for a preparer familiar with your background: If you have complicated tax filings, including FBAR or FATCA filings, it is critical for you to work with an accountant or attorney capable of preparing a tax return that responds to all of your financial needs. Read carefully through your return and ask questions before signing on the bottom line.
• Speak up if there are problems with your return: If you are alerted by the IRS to problems with your return, speak with your tax preparer immediately. 

You can file a complaint with the IRS if you have financial exposure due to a tax preparer.

Questions to Ask to Avoid Tax Preparer Fraud

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:

• Does your tax preparer ask you to sign a blank return or are you expected to file your return or other regulatory filings without careful review?
• Are the fees you pay your accountant or tax preparer based on how much of a refund they claim to be able to provide for you?
• Do you have concerns that your accountant or preparer may not have credentials or contemporary knowledge of recent legislative and tax changes?

Good to Know: Penalties for Criminal Tax Fraud and Civil Tax Fraud

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:

• Fraudulent failure to file a tax return: 15% of the net tax due for each month up to five months with a maximum penalty of 75% of the unpaid tax
• Filing a fraudulent tax return: 75% of the underpayment amount

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:

• Tax evasion: This crime carries a maximum sentence of five years imprisonment and a fine up to $100,000 for individuals or $500,000 for corporations.
• Willful failure to pay tax, failure to file or failure to keep sufficient records: This crime carries a maximum term of imprisonment of one year, accompanied with a potential fine up to $25,000 for individuals or $100,000 for corporations.

Tips to Protect Yourself Against Employment Tax Fraud

Diverting employment taxes is easy—but how do you protect your business and prevent an employment tax dispute with the Internal Revenue Service (IRS)?

In a business of any size, employment tax collection and pay over to the IRS is an important responsibility. Depending on your business or corporate structure, responsibility for payment of employment taxes may land in the finance department, a sole accountant, or an outsourced vendor. Regardless of your business operation, you are responsible for the money owed to the IRS.

Some business owners are deep into deliverables, growth strategies, and staying afloat amid competition. Backroom operations like payroll are easy to delegate. In Ohio and elsewhere, the IRS expects employers to accurately report on income and taxes withheld. Turning over employment taxes to the IRS is part of that. Consider these tips for keeping your books and payments to the IRS above board:

1. Clarity: Classify and onboard employees properly. Misclassification of employees as contractors who are operating as employees is a quick tip-off that there are systemic business problems. Employee misclassification is a form of tax evasion. Whether you onboard your employees or use a service, be sure you can defend your classification.
2. Maintain process: Payroll accounting can be complicated. Employees without adequate training may not have the expertise and current understanding of regulations to handle the job. The individual, team, or vendor you put in place to manage your company finances and withholdings have direct impact on the viability of your company and your ability to respond without fear to an IRS audit. In short—be sure you can trust the people handling your money.
3. Checks and balances: Put checks and bounds in place to avoid payroll tax fraud. Appropriately restrict access to your accounting function and spread responsibility for different payroll functions between personnel. Choose your payroll accounting system software carefully and use alerts to track inconsistent or suspicious activity. Digital time-keeping should be part of the system to avoid payroll errors and collusion between employees and finance personnel in padding hours. Overall, ensure your process is being routinely reviewed and you are signing off on at least monthly reports that your operations are clean.

There is little to no defense for a business owner who claims they delegated their employment tax function to an employee or vendor. The IRS can apply a trust fund recovery penalty (TFRP) against the business owner and anyone in the organization who is responsible for paying withholdings but willfully fails to do so. With a TFRP, your personal income and assets are not protected if the IRS chooses to go after you.

Collection and remittance of payroll taxes is an important function for any business. Failure to account for employee withholdings has long-term consequences for the business owner, the business, and the employees whose social security benefits depend upon those payments.

You’re Charged with Tax Fraud. Now What?

Here are straightforward tips to avoid headlines and resolve the charges of tax fraud:

• Respond immediately: Take quick action if you receive notice or become aware of interest by the Internal Revenue Service (IRS). When significant wealth, complicated tax avenues, or criminal charges could be involved, contact a tax attorney experienced with IRS investigations. Connecting with knowledgeable legal counsel straight away could be your strongest move for avoiding tax litigation.
• Preserve your records: Locate and preserve all records that you feel could be of interest to the IRS. Do not tamper with evidence, destroy records, or make phone calls to potential witnesses about what they should or should not say. If you destroy evidence or try to tamper with witnesses, it could make things worse.
• Engage the process: Your tax lawyer will spearhead and guide you through interactions and meetings with the IRS. Be honest and cooperate. Although it is a stressful process, little is gained by defensive posturing. Work with your attorney to ensure that your explanations are consistent across venues and align with the overall situation.
• Work toward a solution—not litigation: Even if it is found you have significant tax liability, your attorney can work toward options that may not involve trial, but allow you to repay monies you are found to owe. Prosecution takes time and resources for the IRS, and you may be able to avoid a criminal charge, or face a lesser charge depending on the seriousness of the allegations.

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.

Will I Be Charged with Criminal Tax Fraud?

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.

Filing a False Tax Return

This is the tale of a French man going to prison in the U.S. for masterminding an international tax scam.

Originally from Nigeria, Mr. Ayodele Arasokun more recently resided in Paris, France. From there, Mr. Arasokun developed a scheme to steal identities and file false tax returns in order to obtain fraudulent refunds.

From Paris, Mr. Arasokun was able to gather key pieces of identity information from his victims, including names, social security numbers, and dates of birth. Many of the individuals whose identities were stolen were from West Virginia. When he had identity information, he was able to hack the Electronic Filing Pin application on the platform of the Internal Revenue Service (IRS).

Once he established the fraudulent PIN identification with the IRS, he was able to move forward with filing false income tax returns. In all, Mr. Arasokun filed more than 1,700 fake tax returns using fictitious income amounts—which claimed more than $9 million in refunds and netted $2.2 million in actual refunds paid by the IRS.

To obtain the returns, Mr. Arasokun monitored approximately 700 bank accounts in the U.S. and directed other returns to be deposited into pre-paid credit cards.

The presence of this case in this guide points to the audacity of the crime and the seriousness of the punishment. Federal prison sentences for tax crimes are based on statutory penalties, the loss figure, and the criminal history of the defendant.

In this case, Mr. Arasokun was able to garner more than $2 million in fraudulent refunds with the intent of scoring many millions more. Said U.S. Attorney General William Ihlenfeld, “The jury's verdict sends a clear message to criminals everywhere: don't mess with the IRS. We have the best cybercrime investigators in the world and if you tamper with our tax system, we will find you, extradite you, and incarcerate you."

Mr. Arasokun was convicted in October 2022 on 21 counts of aggravated identity theft and wire fraud. Just about one year later, the 46-year-old was sentenced to 34 years in prison. This is a loud cautionary tale to those with an interest in scheming and scamming the IRS. While the money may seem easy up front, the fall is generally spectacular.

Tax Evasion

Tax fraud did not work out for an Ohio man who came up short in front of a federal jury.

John Everson of Liberty Center, Ohio, is a successful electrical engineer who owned his business. As any business entrepreneur knows, it can be difficult to maintain the bottom line, keeping up with tax reporting, and a myriad of other responsibilities that come from heading up your own business.

By all accounts, Mr. Everson ran a going concern. Between 2009 and 2016, he earned over $2.3 million. The narrative pauses here to consider the criminal tipping point—that space and time when an individual decides that a ploy or scheme to avoid taxes might suit their interests better than remaining compliant. Some people are driven to tax fraud by circumstance—it may seem the only way to rescue a sinking business. Or—simple proximity to the levers of business makes tax crime easy. In both scenarios, warning flags about ground-level consequences are ignored.

For Mr. Everson, the aim was to conceal income to avoid paying taxes—a common goal carried out across the U.S. every year. The mode in his case was a trust. The IRS takes a hard line on abusive trust schemes. The IRS notes scammers use abusive trusts for reasons that include:

• Reduce or eliminate income, gift and estate, and self-employment taxes
• Increase deductions for personal expenses paid out by the trust
• Ability to boost deductions for depreciation on expenses, homes, and other property

As noted by the IRS, “Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions.” Trusts are intended to separate the control of trust funds from those who benefit from the trust. In abusive trust set-ups, the owner continues to control and direct funds in the trust.

For his part, Mr. Everson directed his clients to pay invoices to his trust. He then transferred the money into financial accounts created for non-profit organizations he had created which were owned by his family members. According to the IRS, Mr. Everson registered his home and airplane as owned by a non-profit entity.

It is unclear how the IRS criminal investigation into the business of Mr. Everson began. But, in the end, he owed $658,487 via his actions. Mr. Everson was so sure of his scheme that he took his case before a federal jury—rather than negotiating a potentially more favorable resolution to his dilemma. He was convicted and sentenced to over two years in prison, along with restitution, and supervised release. It comes down to—was it worth it? Only Mr. Everson, headed for prison, can say.

Celebrity Criminal Tax Fraud

In a last-minute deal in 2023, Columbian pop star Shakira settled her case involving criminal tax charges brought by Spanish prosecutors.

The tax troubles of Shakira Isabel Mebarak Ripoll (“Shakira”) stem from the amount of time that she spent in Spain during the years 2012 through 2014. Like many countries, Spain has a residence threshold. If an individual spends 183 or more days in Spain in a year, they are considered a resident and liable for the payment of personal income taxes.

During the years in question, Shakira claimed the Bahamas as her residence. In 2015, Shakira settled in Barcelona with her longtime paramour Futbol Club Barcelona player Gerard Pique. In 2018, Spanish authorities alleged the singer owed approximately $13.9M U.S. for residing in Spain between 2012 and 2014. Shakira said she had paid additional taxes to Spain and that she could prove her time in the country did not meet the residency requirement as claimed.

Complicating the picture for Shakira was the exposure of her offshore tax dealings in the Panama Papers and the Paradise Papers—two document troves that detailed hidden offshore tax dealings of celebrities, politicians, and the wealthy around the world. The leaked documents revealed Shakira was associated with companies registered in the Netherlands, the British Virgin Islands, Malta, and Luxembourg. The use of shell and offshore companies to move and hold wealth is common but added to the explanations required by the award-winning singer to clear her name.

In July, 2022, Shakira was ordered to stand trial on six charges of tax fraud. As she continued to deny the allegations and refused to settle the matter, Spanish authorities asked for a $24 million fine and a prison sentence of eight years if the singer was convicted. More than 100 witnesses were slated to be called during the trial.

So, what happened? To avoid the possibility of prison, Shakira agreed to a deal offered by prosecutors just eight minutes into the proceeding. Shakira confirmed the criminal counts against her in court, acknowledged she has been convicted of tax fraud, and agreed to pay $7.6M (in U.S. dollars) and receive a suspended three-year prison sentence.

Shakira has won back precious time with her family and career, but there is trouble ahead. In September of 2023, Spanish authorities lodged charges against her for tax evasion involving her income in 2018. And on it goes.

Employee Embezzlement

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 March 2019, 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.

Payroll Tax Fraud

Payroll tax crimes are common and usually avoidable. The plight of one business owner highlights the federal obligation to pay over employment taxes to the IRS.

Business owners in the U.S. are required to collect and pay employment taxes to the IRS. It is a fact of business life. There are several types of taxes for which wages are withheld. These taxes include:

• Federal income
• Social Security
• Medicare
• Unemployment

Employees depend upon employers to withhold and pay these taxes on their behalf to ensure their right to participate in federal programs like unemployment and Social Security. Federal taxes are also critical for good governance. While employment tax disputes may arise over amounts owing, it is fundamentally clear that paying over payroll taxes is the responsibility of every business owner or their designee.

There are a couple of different types of payroll tax fraud. An owner may falsify documents to under-report full-time employees. Employees may be paid in cash under the table. Workers could be classified as contractors who are performing the work of employed staff. Business owners could also collect withholding taxes from employees but fail to pay the money over to the IRS. For one Michigan business owner, this type of tax fraud recently led to a prison sentence of a year and a day.

Yigal Ziv owned and operated a software development company in Walled Lake, Michigan. Mr. Ziv himself collected and paid over employment taxes owed to the IRS—at least until 2014. Between 2014 and 2018, Mr. Ziv collected employment taxes of approximately $691,000—but kept the withheld wages for his personal use. At the same time, he failed to file employment tax returns. As many do, Mr. Ziv used the money to pay personal bills and for luxury purchases. He also made mortgage payments and lease payments on a luxury vehicle.

In a twist, Mr. Ziv became aware of an ongoing IRS criminal tax investigation into his practices in May 2018. In response, he failed to file employment tax returns from the fourth quarter of 2019 to the fourth quarter of 2020 or pay over another $199,000 in withheld taxes.

Mr. Ziv pled guilty and was sentenced in March of 2023. He will also pay a fine of $5,000 and restitution of $897,271.

Business owners are responsible for employment tax returns and paying over-associated taxes, even if they designate the duty to an accountant. In this matter, Mr. Ziv has no one to blame but himself and will spend a year in prison as a result.

Tax Preparer Fraud

Tax preparer fraud is of perennial importance to the IRS. If you are an accountant or tax preparer who occasionally or usually stretches the legitimacy of tax returns that you prepare, there may be an IRS challenge in your future.

Return preparer fraud takes many forms. Sometimes, taxpayers collude with preparers and split the ill-gotten refund that result. Much of the time, return preparers operate without the knowledge of the taxpayer for whom they are working. According to the IRS, features of preparer fraud can include:

• Redirection of a refund into a bank account set up by the preparer, who may take a large fee from the refund if they have not already been paid by the taxpayer upfront.
• False tax returns often include fraudulent deductions, expenses, losses, and misstatements of income.
• Using stolen identity information, return preparers may create and file tax returns without the knowledge of the taxpayer and abscond with refunds.

To market their services, fraudulent return preparers may advertise that they can obtain large refunds for their clients. They often use pop-up businesses during tax season and usually do not sign the return as required of paid preparers. These operators are known as “ghost preparers.”

Because taxpayers trust preparers to function as an intermediary between the taxpayer and the IRS, taxpayers are often taken in, not bothering to ask about deductions or numbers on their return before they sign or authorize the preparer to file their return.

A recent example of this type of preparer is Erica Early, a Chicago-area tax preparer. Charging $1,000 to file even a basic tax return, Ms. Early claimed inappropriate tax credits for her clients, adjusting their income figures to ensure they qualified. Between 2014 and 2019, she also submitted her own fraudulent tax returns claiming credits for which she knew she was not qualified.

The result? Ms. Early caught the attention of the IRS. She recently pled guilty to preparing false income tax returns that resulted in a loss to the government of approximately $515,900. She faces approximately three years in prison and will be sentenced in October of 2023.

Preparing fraudulent tax returns may bring in easy money at the outset—but the true cost of the fraud includes the likelihood that a preparer will be arrested and convicted.

Family Tax Fraud

It is a long shot to win the lottery, right? A father and his sons set out to beat the odds and ended up in serious trouble.

From the news, lottery proceeds seem to be getting larger—and they are. According to CBS, both Powerball and Mega Millions have slightly changed their rules in recent years which make it harder to win. The cost of playing these lotteries also increased. As headlines grow, so do the number of people buying one or more tickets. 

One Boston family made gaming the lottery a family enterprise between the years of 2011 and 2020. Along the way, they filed false tax returns, and laundered more than $20 million in lottery proceeds. How did they do it?

Ali Jaafar and his two sons Yousef and Mohamed made millions by purchasing winning lottery tickets from actual winners of the Massachusetts State Lottery. Over the course of the tax scam, they bought more than 14,000 tickets from the winning ticket holders. It turns out there are quite a lot of people who win lottery proceeds who prefer to stay anonymous and under the radar of the IRS. By selling their tickets to Jaafar family members, people holding winning tickets were not reported to the IRS and were able to (at a discount) receive cash under the table without reporting it to the IRS or seeing any of it withheld for taxes, prior tax liabilities, or past due child support.

The Jaafars then presented the winning tickets as their own. In Massachusetts in 2019, Ali Jaafar was the number one lottery ticket winner, and his sons were numbers three and four on that same list. Each family member reported the fake winnings on their tax returns and falsified their tax returns with equal gambling losses to null out taxes owed. The family members earned approximately $1.2 million in misguided tax returns.

Along the way, the family grew their network of complicit convenience store owners whom they paid off to provide them with information and assist with cashing their lottery tickets. The State of Massachusetts has now revoked or suspended the licenses of more than 40 lottery agents.

The curtain fell on the scheme, as it usually does. Mr. Jaafar and his son Yousef were sentenced to five and four years in prison respectively, plus they were required to turn over their profits and pay restitution of approximately $6 million. The other son, Mohamed Jafar, pleaded guilty in 2022 to one conspiracy charge which resulted in a six-month sentence, two-year lottery ban, and almost $100,000 in restitution to be paid.

Acting U.S. Attorney Joshua Levy noted, "This case is, at its core, an elaborate tax fraud. Over the course of a decade, this father-and-son team defrauded the Massachusetts State Lottery Commission and the IRS to pocket millions of hard-earned taxpayers' dollars. These defendants worked together to recruit a wide network of co-conspirators and spread their lottery scam across Massachusetts, avoiding detection by repeatedly lying to government officials.”

Bottom line? Winning the lottery remains exceedingly difficult to do.

Willful Evasion or Simple Mistake?

Can claiming you made an innocent mistake on your tax return get you out of hot water with the Internal Revenue Service (IRS)? Maybe so, maybe not.

Simple errors on tax returns are common. Individual taxpayers and business owners may forget a schedule, file a return with miscalculations, or misinterpret what is being asked. It happens. The IRS may catch it or may not. If you receive a letter from the IRS or become the focus of an IRS civil audit, it behooves you to speak with a tax attorney to review your tax profile and reporting. In some cases, there may be an opportunity to prove the miscalculation, while in other situations, it may be tough to prove it is not tax evasion.

Let’s look at the case of Mr. Jonathon Michael, a mechanic in Springfield, who worked with port operations in New Jersey. Like the rest of the working world, Mr. Michael was asked to designate his withholding allowance on an IRS W-4 form. The form allows an employer to calculate the amount of wages to withhold and pay the IRS on behalf of the employee. In 2014, Mr. Michael completed and submitted the W-4 form verifying he was exempt from federal income tax withholding.

Mr. Michael earned more than $260,000 per year and had no recognized exemption from paying employment taxes. At this point in the story, Mr. Michael appears to have made a serious mistake with regard to designating his withholding allowance. Signing on the bottom line of the form acknowledges that information is accurate and subject to charges of perjury if it is not. As a result of the W-4, his employer withheld no taxes for Mr. Michael.

Employers annually provide the IRS with a W-2 form for each employee. The W-2 alerts the IRS to the actual wages, compensation, and withheld taxes paid by each employee. It is pretty easy math for an algorithm to compare incoming W-2s and W-4’s. The difference can mean an IRS tax investigation. In this case, that is just what happened.

In 2016, the IRS stepped in and advised the employer of Mr. Michael to disregard the W-4 he provided and to begin withholding appropriate wages on his behalf. At this point, Mr. Michael was alerted to the intervention of the IRS and their focus on his tax situation. The story might have ended here had Mr. Michael acknowledged the “mistake,” and paid and filed his taxes accordingly along with arrears and penalties for the years 2014, 2015, and 2016. To this point, Mr. Michael could have argued, if pressed, he made an unintentional mistake and intended to make good on it.

But—that is not what happened. Instead, Mr. Michael wrote a letter to his employer attesting to the correctness of the prior W-4 he had provided. As a result, his employer withheld no payroll taxes on his behalf for the year 2014 through 2018. Given fair warning that the IRS could consider his choices as a tax crime, he chose to stick to his story, pretty much foreclosing the opportunity to claim he made an unintentional error.

In April 2021, Mr. Michael was indicted by a federal grand jury for tax evasion and willful failure to file individual income tax returns. Overall, he failed to pay withholding and federal income taxes on $1.6 million in income earned over the five-year period in question.

The devil is in the details between an unintended error and willful tax evasion. Mr. Michael faces approximately ten years in prison for not responding to the IRS when he had a chance. While his sentence will likely fall well short of ten years, he owes significant money to the IRS.

Ponzi Schemes

We have two memorable schemes prosecuted in 2023 both involving Ponzi schemes. So—what is a Ponzi scheme?

A Ponzi scheme is a financial fraud that involves attracting investors into an ongoing scheme. Early investors are given impressive payouts which spreads positive word-of-mouth to others looking for high returns. New investors pour money into the scheme, which may be used to pay out original investors. Incoming funds are also siphoned off for the benefit of the fraudsters. While the scam can stay afloat if there is enough money coming in, it will eventually collapse.

The scam is named for Charles Ponzi who is believed to be the first flim-flam man to cook up the scheme. In more recent history, the infamous and now-deceased Bernie Madoff earned his illicit billions from a Ponzi scheme he ran from approximately the 1960s until 2008 when he was arrested. His Ponzi scheme is acknowledged as the largest in history.

The first of two schemes we’ll explore belongs to Paulette Carpoff who earned notoriety with her husband as perpetrating the largest criminal fraud in the history of the Eastern District of California.

Inventing a company, DC Solar, the Carpoff’s claimed to be in the business of manufacturing mobile solar generators (MSGs) which were mounted on trailers and leased for emergency cellphone towers and lighting at sporting and entertainment events. Investors bought into the company and then participated in leasing the MSGs back to the company. Of course, the MSGs were not manufactured and the continued investment income fueled the scheme and the luxe lifestyle of the Carpoffs. When arrested, Ms. Carpoff had $18,000 in cash in her purse and a spare $9,000 in her car. The price of this Ponzi? Ms. Carpoff is headed to prison for 11 years, her husband for 30, and the couple owes $790.6 million to the government.

The second scheme centers around Michael DaCorta who also ran a Ponzi scheme that attracted more than 700 investors through supposed foreign-exchange trading. Claiming the investment was risk-free and backed by collateral, Mr. DaCorta and his cronies crafted a scheme that bought them expensive vehicles, multiple luxury homes, college tuition for family members, trips, and more. While his investors lost approximately $80 million, Mr. DaCorta will lose the next 23 years of his life to prison, plus a hefty penalty for this tax crime.

Easy come—not so easy go.

National Tax Fraud

Individuals and criminal crews look at mortgage tax fraud to boost or create a tax refund. The crew led by Iran Backstrom of Georgia included several co-conspirators in Florida and around the country. The scammers recruited clients through marketing seminars. Clients were advised their debt and mortgage liability entitled them to large refunds because banks and credit companies had routinely withheld income from them. These claims had no basis in fact and fraudulent tax documents were prepared and submitted with the fake tax returns to legitimatize the refunds—and it worked.

Between 2014 and 2016, Mr. Backstrom (also known as Shariyf Noble), along with his crew, prepared false income tax returns for clients and obtained fraudulent income tax returns from the IRS to the tune of $64 million dollars overall. For preparing the returns, Mr. Backstrom and the others routinely received $10,000 to $15,000 in fees and indicated the return had been prepared by the taxpayer without other assistance.

As a result of the years-long IRS criminal tax investigation, co-conspirators throughout the country were prosecuted and received prison sentences for their part in the scheme. Mr. Backstrom earned approximately $1 million as the ring leader and failed to file tax returns between 2014 and 2016. As a result, he was sentenced to more than eight years in prison. His second-hand man, Arthur Daniels (also known as Mehef Bey), was sentenced to 11 years in prison. A Florida woman, Rebecca Cyphers, was sentenced to a year in prison for preparing false income tax returns, and other crew members are also serving prison time. The final defendant to be sentenced, Yomarie Febres, will serve a four-year prison term for preparing false returns and failing to file income tax returns.

Acting Deputy Assistant Attorney General Stuart Goldbert said, “Today’s sentence represents the culmination of years of work by the Department of Justice, the U.S. Attorney’s Office, and IRS-Criminal Investigation. The main promoters of this multimillion-dollar tax fraud conspiracy now have been identified, convicted, and sentenced to a substantial prison term. The message to other would-be tax cheats is clear:  no matter how sophisticated or complicated your scheme, we will uncover it, obtain your conviction, and seek sentences that hold you fully responsible for your criminal conduct.”

Committing a tax crime can be costly to your life and liberty. If you are involved in personal tax fraud—or a tax scheme on a larger scale—speak with an attorney experienced with criminal tax defense as soon as possible.

The Tax Fraud of an Attorney

To conclude our guide, we felt it only appropriate that the final example of criminal tax fraud features… an attorney.

In and out of the headlines for years, Michael Avenatti earned this spot in our guide for his guilty pleas to one count of obstructing the Internal Revenue Code and four counts of wire fraud. Mr. Avenatti first popped into the national consciousness as the attorney for adult entertainer Stormy Daniels. While Mr. Avenatti has a colorful background, it is his theft of money from clients and failure to collect and pay over employment taxes that made his downfall memorable.

As an attorney, Mr. Avenatti represented clients in a variety of cases. Several of his clients gained significant monetary resolutions to their cases. While an attorney may make arrangements with a client to represent them for a usual percentage of any money award the attorney may bring about—an attorney is not afforded the legal right to pilfer and steal settlement monies due to his clients.

In one case, Mr. Avenatti earned a $4 million settlement for a client who suffered an injury that resulted in paraplegia. Mr. Avenatti deposited the sum into his law firm trust account and promptly spent the settlement. Over time, Mr. Avenatti told his client he continued to work on his behalf and gave him occasional advances of $1,900 while also paying the rent on his assisted living facility.

In another matter, a client resolved a disagreement for $3 million. Mr. Avenatti siphoned $2.5 million from the settlement to buy a jet and paid the client over time a total of $227,500, after which he stopped paying the man altogether.

He took another client for $1.6 million of a $1.9 million settlement. He gave the client a “bonus” and told him he would pay him in two months. During that time Mr. Avenatti spent the money on his own legal expenses and his coffee business—for which he eventually owed the IRS $3.2 million in uncollected employment taxes. Then there was the failure to file personal or corporate tax returns, making false statements to the IRS, and on it went.

Of Mr. Avenatti, the United States Attorney said, “Michael Avenatti was a corrupt lawyer who claimed he was fighting for the little guy. In fact, he only cared about his own selfish interests.”

Abraham Lincoln once said, “The man who represents himself has a fool for a client.” Unfortunately, Mr. Avenatti did not avail himself of good legal advice until it was far too late to avoid his fate. He will be spending time in prison for another decade or so.