Under Section 7201 of the Internal Revenue Code, it is a federal crime for anyone to willfully attempt to evade or defeat the payment of federal income taxes. By “attempt” the statute means that the individual knew or should have known that he had taxable income, which he was required by law to report during the tax years involved, but failed to report the income.
Most individuals who fail to file tax returns, or under-report income or take inflated tax deductions — may end up being assessed a “fraud” penalty, which enhances the tax liability but does not proceed into the criminal arena. Most of the criminal cases involve individuals who fail to report large amounts of income, take unauthorized deductions for personal expenses, or park money in unreported offshore accounts. Usually they also fail to cooperate with investigators.
If in the course of an audit an IRS revenue agent suspects fraud, he can impose penalties himself, or he can refer the case to the Criminal Investigation Division (CID). The CID is part of the enforcement mechanism for the IRS.
The CID has broad powers. In fact, a taxpayer may not even know the CID is investigating him until the taxpayer is formally charged. The CID takes its task very seriously and conducts very thorough investigations.
You might be tipped off that you are the target of a CID investigation if CID agents contact any of your friends, your employer, co-workers, neighbors, bankers, credit card companies, or your spouse. CID agents are federal investigators who have been trained in law enforcement techniques, and they can obtain subpoenas of records. If records are subpoenaed you probably won’t know about it because the subpoenas can be shielded from disclosure to you.
The CID may monitor mail and may apply for a court order for a phone tap. This happens all the time.
A number of tax evasion cases involve people who don’t inform the IRS of interest earned at offshore banks, which is supposed to be reported on Form 1040, Schedule B. One is required to complete TD F90-221 if the aggregate amount held in foreign accounts exceeds $10,000 at any time during the tax year. By subpoenaing records of U. S. credit card companies or other records, the CID can, in roundabout fashion, get effective means to investigate the existence of offshore bank accounts.
Greater resources are devoted to tax evasion than in previous years because it is a means of getting large amounts of tax revenue, and criminal cases provide publicity that acts as a major deterrent to others.
The best strategy for a taxpayer who might be the subject of an investigation is to hire an attorney to intervene at an early stage, and work to settle the case.
Once an individual is indicted, the chances of obtaining a conviction are overwhelming. A conviction for tax evasion frequently entails a prison sentence and substantial fines on top of the tax liability asserted by the IRS.
In addition to charges of tax evasion, the indictment will often add the charge of filing a false return, a felony, which alleges that the taxpayer submitted false or misleading information on tax returns. In such cases, the IRS does not have to prove the taxpayer intended to evade tax laws. Rather, it merely must prove that the taxpayer filed a false return.
It is crucial, if you are faced with an audit and have unreported income or other serious issues, to consult a tax attorney because proper handling of your case can mean the difference between a civil and criminal proceeding.
[John Alan Cohan is a lawyer who has served the horse, cattle and farming industries since 1981. He can be reached by telephone at (310) 278-0203 or via e-mail at [email protected] His website is: www.JohnAlanCoh