Tax Fraud Laws

The Internal Revenue Code and state tax laws contain various loopholes that taxpayers can use to minimize their liability. However, some taxpayers go beyond these legal loopholes and try to defraud the government. Tax fraud may go undetected due to limited enforcement resources, but someone who commits this crime may face severe penalties. Sometimes a taxpayer may have a strong defense to an allegation, though. Rather than trying to argue their case with the IRS or prosecutors directly, they should get assistance from an attorney who understands these complex situations.

Elements of Tax Fraud

Tax fraud covers a wide range of conduct. In general, though, a prosecutor will need to prove that the defendant provided false information to the taxing authority, or failed to provide information that they were required to provide. The prosecutor also must prove a certain mental state. Under federal tax law, this is usually defined as “willfulness,” or intent.

Civil Liability for Errors

Tax returns are complex, and taxpayers often make innocent mistakes, such as calculation errors. If a taxpayer acted carelessly (or “negligently”) rather than intentionally, they may face civil liability, but they likely will not be convicted of a crime.

Examples of Tax Fraud

Penelope works as an independent contractor. She holds two jobs but reports the income from only one of the jobs on her tax return.

Patrick, a business owner, claims a deduction for alleged business expenses. These were actually personal expenses and thus did not qualify for the deduction.

Offenses Related to Tax Fraud

Some other offenses that could be charged in situations similar to those supporting tax fraud charges include:

  • Forgery: faking or falsifying an instrument with legal significance, intending to defraud
  • Perjury: violating a legally binding pledge to tell the truth
  • Bribery: could be charged when someone tries to pay off an employee or agent of a taxing authority to ignore or assist attempted fraud

A taxpayer might have sought to defraud federal and state taxing authorities at the same time. This could result in charges under both sets of laws.

Defenses to Tax Fraud

Many taxpayers fight tax fraud charges by arguing that they lacked the required mental state. Perhaps they made a careless mistake, or perhaps they misunderstood the applicable provision of the tax law or reasonably relied on advice from a tax specialist. Sometimes a taxpayer might even argue that they provided accurate information, and the taxing authority made a mistake. Or they might assert that the prosecution does not have enough evidence to prove the crime beyond a reasonable doubt.

In rare cases, a defendant might raise an entrapment argument. This means that law enforcement induced them to commit a tax fraud offense that they would not have been predisposed to commit otherwise.

Statute of Limitations Defense

Prosecutors often must pursue tax fraud charges within a certain time, known as the statute of limitations. Failing to meet this deadline generally will result in the dismissal of a charge.

Penalties for Tax Fraud

Different statutes cover different forms of tax fraud. Here are potential prison terms for a selection of federal tax fraud offenses:

  • Attempting to evade or defeat a tax (26 U.S. Code Section 7201): up to 5 years
  • Failing to collect or pay over tax, such as when an employer withholds tax on behalf of employees (Section 7202): up to 5 years
  • Failing to file a return or pay a tax (Section 7203): generally up to 1 year
  • Signing a tax document under penalties of perjury while not believing that all material information is true (Section 7206): up to 3 years
  • Filing a fraudulent return or statement (Section 7207): generally up to 1 year

State tax fraud laws impose their own penalties. For example, Arizona Revised Statutes Section 42-1127 prohibits knowingly failing to file a return, knowingly preparing a return that is fraudulent or materially false, or knowingly failing to pay a tax with intent to evade the tax, among other conduct. A first-time offense is a Class 1 misdemeanor, which carries up to six months in jail.

Meanwhile, Georgia Code Section 48-1-6 prohibits conduct such as filing a fraudulent return or using a “trick, device, scheme, or plan” to evade any tax due the state. This is a misdemeanor, which carries up to 12 months of imprisonment. 35 Illinois Compiled Statutes Section 5/1301 prohibits willfully failing to file a return, filing a fraudulent return, or willfully attempting in any other manner to evade or defeat an income tax. This is a Class 4 felony for a first offense, which carries 1-3 years of imprisonment.

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