Al Capone, the notorious gangster and bootlegger, knew that image is everything. His charismatic demeanor and charitable donations kept him in favor with the public, despite his violent crimes and ruthless corruption. However, no amount of charisma could ultimately save him from the IRS.
The Prohibition-era crime boss was brought down and imprisoned for tax evasion – not murder, not robbery, not bribery, not operating illegal saloons, but evading his income taxes.
Of course, that was the 1920s. Things are different today!
Life has certainly changed profoundly in the last hundred years, but tax fraud could still be worthy of jailtime. While not all tax violations result in imprisonment, the IRS will impose heavy fines on those who deliberately avoid paying taxes.
What Counts as Tax Fraud?
The IRS has a reputation for being a punitive, inescapable arm of the federal government. When you realize that you’ve made a mistake on your taxes, you may start wondering how bad the consequences are going to be! For an honest mistake or willful ignorance, it’s extremely unlikely that you will be prosecuted. This is known as tax negligence, and the most likely scenario is that you’ll pay a penalty.
Intentionally evading taxes or concealing income are deliberate activities to defraud the IRS. They are taken very seriously. Typically, these activities fall into two categories:
- Tax fraud is illegally avoiding paying taxes, including failure to file, failure to pay, understating income, and fraudulently claiming credits or deductions.
- Tax evasion is a specific form of tax fraud. This is when an individual or business deliberately conceals income.
Deliberate tax fraud, including tax evasion, can be classified as a felony and can result in imprisonment. In fact, if you help someone else commit tax fraud, you can also be put in prison.
How the IRS Catches and Prosecutes Tax Fraud
If the IRS suspects something is off, they start by auditing the person or business. IRS auditors are trained to recognize signs of fraudulent activity, such as altered checks, two sets of financial records, and fake receipts. The IRS will not always tell you why you are being audited, so you may benefit from tax audit representation to help ensure all your documentation is in order.
This activity is different from tax negligence, like not keeping good records of your business expenses. Negligence can result in a civil penalty, which is 20% of the tax that should have been paid. If the auditor suspects deliberate tax fraud, the next step is at their discretion:
- The auditor may impose a civil penalty of 20%, usually for minor cases.
- For more serious cases of fraud, the auditor may impose a civil penalty of 75% of the tax that should have been paid. Add in interest and this can be almost twice as much as the original tax bill.
- If the auditor suspects they are just seeing the tip of the iceberg, they may refer the case to the Criminal Investigation Division (CID) for full investigation.
If your case reaches the CID, you will want to enlist the services of an expert tax attorney. They will help you communicate with the CID without admitting to anything incriminating.
If the CID recommends prosecution, the case will be turned over to the Justice Department, and your odds of avoiding jailtime drop dramatically. If the Justice Department accepts the case, the chance of conviction is 80%.
You may be charged with a felony for tax evasion, tax fraud, or filing a false return. You could also be charged with a misdemeanor for failing to file a tax return. Any licensed professional, like a lawyer or doctor, will lose their license if they are convicted of tax fraud.
When the government pursues jail time for tax fraud, it’s usually because of serious offenses. The median tax loss for convicted tax fraudsters is $339,071. And the average prison sentence for tax fraud is 16 months.
If you have committed tax fraud, the IRS is likely to impose a financial penalty on you, but a criminal conviction is still pretty rare. In recent years, only a handful of people were criminally charged with fraud – between 300 and 600 people per year.
If You Are Being Charged With Tax Fraud
You may be the last person to know if you are being investigated for tax fraud. The IRS will talk to your friends, family, accountant, bankers, business associates and/or employees first. They are working to build a case against you.
Much like when the police charge you with a crime, if the CID tells you that they are investigating you, your best course of action is to hire a lawyer. Instead of a criminal lawyer, you would be better off with a tax lawyer who is very familiar with the tax code and tax fraud proceedings.
The CID will want to question you, and they may try to catch you in a lie or get you to say something incriminating. The best thing you can say to them is that you need to speak to your lawyer before answering any questions.
Your lawyer will review your case and see if there is any ambiguity in the law. The Justice Department likes to keep its high rate of conviction, so if your lawyer can show that they don’t have a strong case, you may be able to avoid jail time.
A tax attorney’s nuanced knowledge of tax bureaucracy and legal research can help prove whether the situation involves deliberate inaccuracies or simple ignorance, which is an important distinction given the complication of the tax code and the gravity of the punishment.
The government needs to prove your intent to evade taxes, beyond a reasonable doubt. An expert tax attorney is an invaluable resource, their legal knowledge and guidance can be the difference between a life-changing conviction or a small tax penalty for negligence.
RELATED: Why Hire a Tax Attorney?
S.H. Block Has 50 Years of Experience in Tax Law
If you are being audited or investigated for tax fraud, you need the help of an expert tax attorney. Stanley H. Block has years of experience fighting for clients like you, using statutes and case law to defend taxpayers in and out of the courtroom.
From honest errors to deliberately failing to file taxes, a strong defense is your best bet to avoid prison. Contact S.H. Block Tax Services for a free consultation regarding your tax situation by filling out our online form or calling us at (410) 872-8376.
United States Sentencing Commission. (2021, June). Quick Facts Tax Fraud Report. Washington, DC: Office of Public Affairs. Retrieved from https://www.ussc.gov/sites/default/files/pdf/research-and-publications/quick-facts/Tax_Fraud_FY20.pdf
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.