Some people or businesses negligently or intentionally falsify tax information – it could be information on a tax return or could be tax matters related to sales and use tax, franchise and excise taxes, bail bond tax, motor fuel taxes, tobacco tax, or other business taxes. Those who are negligent, whether an individual or business, may not know what they have done. Others may think a small detail here or there will not matter. In either scenario, you could find yourself the subject of an investigation by the Internal Revenue Service (IRS) or by your state's taxation agency.
At the Law Offices of Trent Nichols, our tax fraud defense lawyer in Texas knows how serious civil and criminal allegations of tax fraud can be. We work to minimize risk and negotiate a timely settlement or resolution. Contact us at (361) 594-5004 in Shiner or at (361) 798-3217 in Hallettsville to schedule a consultation and to learn more about your legal options when facing tax fraud allegations.
What is Tax Fraud?
The definition of tax fraud depends on who is defining it, but generally speaking, fraud occurs when a taxpayer willfully or intentionally misleads a tax agency to avoid their tax obligations. The Internal Revenue Manual (IRM), the "bible" for IRS tax auditors, defines fraud as:
Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both: (1) a tax due and owing; and (2) fraudulent intent. (IRM 25.1.1.3)
Tax law is complex and the Internal Revenue Service recognizes that taxpayers, whether an individual or business, can make honest mistakes. Tax fraud, however, involves more than an accidental error that can be rectified rather quickly. It describes situations where a taxpayer allegedly takes deliberate and illegal steps to reduce the tax they owe. So, in cases even where a taxpayer was negligent, if the IRS believes your actions were deliberate, you still have to negotiate or defend yourself or your business.
Civil versus Criminal Tax Fraud
Tax fraud can include either civil or criminal allegations. In civil tax fraud matters, the IRS must prove fraud by clear and convincing evidence, which is a standard of proof less than proving it beyond a reasonable doubt (where probability must be close to 100%) but more than proving it by a preponderance of the evidence (where probability is typically 51%). In criminal tax fraud cases, the IRS must prove beyond a reasonable doubt that tax fraud was committed.
IRS Indicators of Tax Fraud
Whether tax fraud includes civil or criminal allegations, it will turn on the facts, circumstances, and agency making the claim against you or your business. In either case, the consequences are serious and so any suspicion of being under investigation should also be taken seriously.
The IRS uses certain indicators of tax fraud to start or develop a tax fraud investigation. Revenue Officers as skilled tax auditors start their process by using the Internal Revenue Manual, which outlines how auditors can detect and recognize these indicators of tax fraud.
Indicators of fraud are listed in the IRM at 25.1.2.3 according to the following categories:
- Income – for example, it may be indicative to the IRS that a taxpayer committed tax fraud when the IRS believes the taxpayer received a substantial amount of income, but the taxpayer failed to report it on their tax return
- Expenses or Deductions – for example, it may be indicative to the IRS that a taxpayer committed tax fraud when there is a substantial overstatement of deductions or fictitious deductions were claimed
- Books and Records – for example, a business that keeps two sets of books or no books
- Allocations of Income – for example, profits have been distributed to fictitious partners
- Conduct of Taxpayer – for example, the taxpayer destroys books and records, especially after the knowledge that their taxes are under investigation or patterns of failing to report income fully over a number of years
- Methods of Concealment – for example, the taxpayer placed assets in another's name or transferred all or most of a debtor's property
Keep in mind that simply knowing an indicator exists does not mean the IRS is likely to imminently file charges or take other legal action. It does, however, likely mean it will probe deeper into your tax situation.
Examples of Tax Fraud in Texas
Civil tax fraud can include willfully failing to file a return or willfully filing a return with incorrect information. These types of tax fraud cases are almost always resolved via the civil process rather than the criminal justice system.
More serious cases of tax fraud can be prosecuted criminally, for example:
- Tax evasion, where a taxpayer illegally avoids the taxes they owe, for example, by filing a false tax return, intentionally underreporting income, claiming false deductions, or hiding assets
- Willfully failing to withhold federal income tax from employee's wages or pay these taxes to IRS
- Willfully failing to report cash payments made to employees
- Willfully failing to file a return or pay tax
It's worth noting that tax evasion is different from tax avoidance, which is where a taxpayer tries to legally minimize their tax liability. Evading tax obligations can lead to criminal charges.
Consequences of a Tax Fraud in Texas
Whether the tax fraud was committed in Texas or another state, if the IRS is the agency investigating you or your business, it's a federal matter, and the consequences can be dire.
Civil penalties for tax fraud involve monetary penalties imposed by the government. Typically, these fines are calculated as a percentage of the amount of taxes owed.
A criminal conviction for tax fraud can result in:
- Incarceration
- Probation
- Steep fines
- Restitution
- Cost of prosecution
When sentencing someone for tax fraud, a court takes into account the circumstances and level of the offense as well as the defendant's personal circumstances. Courts often impose harsher sentences for defendants who played a leadership role in or used sophisticated means to commit the offense.
A conviction for a tax fraud offense will also result in a criminal record. This can impact your ability to later find work, secure accommodation, and borrow money, among other collateral consequences.
Defenses to a Tax Fraud Charge
You have the right to defend yourself against allegations of tax fraud. If you are charged with criminal tax fraud, you may have a defense available to you. These defenses may be applicable in both civil and criminal proceedings and can be used, in the former instance, to negotiate a favorable settlement or resolution, or in the latter instance, to seek a favorable plea deal, dismissal of the charges, or an acquittal at trial.
Statute of Limitations
Criminal charges must be filed within a certain time after the offending conduct. For example, federal tax fraud offenses generally have a statute of limitations of 6 years. If a charge is filed against you outside of this time limit, you may have a basis to defend against the charge.
Insufficient Evidence
The government must prove every element of the charge against you beyond a reasonable doubt. This includes proving that you willfully committed the act to avoid paying taxes. If they can't do this on the evidence available to them, you may be able to defend the charge.
Mistake
You may be able to argue you made an honest mistake, for example, by forgetting to file your tax return or pay taxes by a certain deadline. Many red flags are simply mistakes made by the taxpayer, and the situation can often be rectified rather quickly. However, you cannot argue that you did not know what the law was.
Entrapment
If the government compelled, harassed, or coerced you to commit a crime you otherwise would not have committed, you may be able to argue entrapment. This defense applies to tax fraud cases as well.
Insanity
Rarely is insanity used as a defense, but when it is, to be successful you must demonstrate that you were insane at the time of the conduct or during your trial. You would need expert witnesses and professionals who can testify to your insanity.
A tax attorney can review your case and advise you of any defenses available to you.
What Should You Do If Investigated by the IRS for Tax Fraud?
Tax fraud is a serious matter. If you learn that the IRS is investigating you for potential tax fraud, you should contact our tax attorney in Texas for advice on your situation.
We at the Law Offices of Trent Nichols will help you understand the nature of the allegations against you and any potential defenses. We will also guide you through the process and deal with the IRS on your behalf, including a settlement or plea deal to avoid court.
In addition to speaking to our tax lawyer, you should keep all relevant records and avoid discussing the matter with other people, especially potential witnesses. Allegations of tampering with or destroying evidence will make your case more serious.
Contact a Tax Attorney in Shiner and Hallettsville Today
At the Law Offices of Trent Nichols, we can assure you that regardless of your situation, a strategic tax fraud defense plan is possible, and with it, we intend to get you the best possible outcome. Tax fraud is not something you ever want to ignore because it will not go away, especially if the IRS identifies an indicator and starts an investigation. Contact our tax fraud attorney today by using the online form or calling us at (361) 594-5004 in Shiner or at (361) 798-3217 in Hallettsville. We will schedule a consultation so that you can start getting answers to the questions you are bound to have.