There are two types of federal income tax fraud: civil and criminal. Although these two concepts are related and even intertwined to some extent, they do have significant differences. For starters, civil tax fraud generally results in penalties asserted against a taxpayer (loss of money or assets) whereas criminal tax fraud generally results in jail time or probation (loss of freedom). Significantly, however, a taxpayer can be liable for both civil tax fraud and criminal tax fraud with respect to the same activity or activities, i.e., the Government can assert both sanctions against a wrongful taxpayer. This Insight provides some additional color on civil and criminal tax fraud.
Civil Tax Fraud
Under the Internal Revenue Code (the “Code”), the government can impose civil penalties against taxpayers for fraudulent conduct. This fraudulent conduct can include either willfully filing a return with incorrect information or willfully failing to file a tax return at all.
More specifically, Section 6663(a) of the Code permits the government to impose a fraud penalty if any part of an underpayment of tax required to be shown on a tax return is due to fraud. In these cases, the government is permitted to impose a penalty equal to 75% of the part of the underpayment attributable to fraud. Id. To assert this fraudulent underpayment penalty, the government must establish by clear and convincing evidence that any portion of an underpayment is attributable to fraud. Section 7454(a). If the government meets this showing, the entire underpayment is presumed to be attributable to fraud unless the taxpayer can show by a preponderance of the evidence that a portion is not attributable to fraud. Section 6663(b). If a joint tax return has been filed, the fraud penalty will not apply to both spouses unless a portion of the underpayment is in fact due to the fraudulent conduct of both spouses. Section 6663(c).
Notably, the fraud penalty under Section 6663 survives the death of the taxpayer who committed the fraud. See, e.g., Estate of Reimer v. Comm’r, 180 F.2d 159 (6th Cir. 1950). The Tax Court has also held in various instances that the fraud penalty under Section 6663 applies where a taxpayer files a fraudulent return and then subsequently files an amended return attempting to correct the fraud. See Gaskin v. Comm’r, T.C. Memo. 2018-89; Brown v. Comm’r, T.C. Memo. 1996-416.
Section 6651(f) of the Code provides authority for the government to impose a fraudulent failure to file penalty. Under that provision, the government may impose a 75% penalty on the tax required to be shown on a return if the taxpayer fails to file a return with the intent to evade tax. Id. To successfully impose the Section 6651(f) penalty, the government must prove by clear and convincing evidence that the taxpayer’s failure to timely file was an intentional attempt to evade tax believed to be owing. I.R.C. § 7454(a); Mohamed v. Comm’r, T.C. Memo. 2013-255 n.7.
Criminal Tax Fraud
There are a litany of criminal tax fraud provisions in the Code. These include, among others: (1) tax evasion; (2) willful failure to collect or pay over tax; and (3) failure to file a return or supply information or pay tax.
When people think of criminal tax fraud, they generally first think of tax evasion. Under Section 7201, it is a felony for any person to willfully attempt in any manner to evade or defeat any tax imposed under the Code or the payment thereof. In legal parlance, a person is guilty of tax evasion if the government can show beyond a reasonable doubt: (1) willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. See, e.g. U.S. v. Bolton, 908 F.3d 75, 89 (5th Cir. 2018). Generally, tax evasion can fall into either an evasion of an assessment of tax or an evasion of the payment of tax. Some examples of felony tax evasion follow.
Evasion of Assessment
- Filing a false tax return. See U.S. v. Habig, 390 U.S. 222 (1968); S. v. Gricco, 277 F.3d 339, 351-52 (3d Cir. 2002).
- Filing of a false amended tax return. S. v. Samara, 643 F.2d 701, 704 (10th Cir. 1981); Norwitt v. U.S., 195 F.2d 127, 133-34 (9th Cir. 1952).
- Holding property in nominee names. S. v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997).
- So-called Spies When a taxpayer fails to file a tax return coupled with an affirmative act. See Spies v. U.S., 317 U.S. 492, 498-99 (1943). Affirmative acts may include: (1) keeping a double set of books; (2) making false or altered entries; (3) making false invoices; (4) destruction of records; (5) concealing sources of income; (6) handling transactions to avoid usual records; and (7) any other conduct likely to conceal or mislead.
Evasion of Payment
- Making a false statement to the IRS that taxpayer owned no real estate and had no other assets with which to pay the tax. S. v. Shoppert, 362 F.3d 451 (8th Cir. 2004); U.S. v. Brimberry, 961 F.2d 1286 (7th Cir. 1992).
- Concealing assets by using bank accounts of family members and co-workers. S. v. McGill, 964 F.2d 222 (3d Cir. 1992).
- Using a family member as a “straw buyer” to purchase a personal residence for the benefit of the taxpayer. S. v. Yurek, No. 15-cr-934-WJM (D. Colo. July 27, 2017).
Willful Failure to Collect or Pay Over Tax
Section 7202 of the Code makes it a felony for any person to willfully fail to collect or truthfully account for and pay any tax required under the Code. To prove willful failure to collect or pay over tax, the government must prove beyond a reasonable doubt the following elements: (1) willfulness; (2) duty to collect, and/or to truthfully account for, and/or pay over tax; and (3) failure to collect, or truthfully account for, and/or pay over the tax. U.S. v. Thayer, 201 F.3d 214, 219-21 (3d Cir. 1999).
The Code has various provisions in it that require a person to collect or pay over taxes to the government. For example, employers are required to deduct from their employees’ wages the employees’ share of individual income taxes, see Section 3402(a), and FICA (Social Security and Medicare) taxes, see Section 3102(a), and pay over the withheld amounts to the United States, see Sections 3102(b) and 3403. Similar rules can apply to certain excise taxes. Section 7102 was enacted by Congress primarily to ensure compliance by these third parties.
Failure to File Return, Supply Information, or Pay Tax
Section 7203 provides that it is a misdemeanor for any person required under the Code to willfully fail to pay estimated tax or tax, make a return, keep records, or supply information at the time or times required by law or regulations. Generally, the elements the government must prove to successfully win on a Section 7203 criminal case depends on the conduct at issue. For example, if the government asserts a misdemeanor crime for failure to file a return under Section 7203, the government must prove beyond a reasonable doubt: (1) the person was required to file a return; (2) the person failed to file the return; and (3) the person’s violation was willful. U.S. v. Houser, 754 F.3d 1335, 1351 (11th Cir. 2014). Significantly, federal courts have held that a person may be guilty of a violation of Section 7203 even if the person files the return beyond the due date, i.e., the government is not required to prove merely that the return was never filed at all. See id. (concluding that the defendant was guilty under Section 7203 even where he filed 2004 return in 2008). This same rationale applies to the delayed payment of tax, discussed below.
Conversely, if the government seeks to prove a Section 7203 violation for failure to pay tax, the government must show beyond a reasonable doubt: (1) the person was required to pay taxes; (2) the person failed to pay the taxes; and (3) the person acted willfully in failing to pay. U.S. v. Curtis, 781 F.3d 904, 907 (7th Cir. 2015).
Differences Between Civil and Criminal Tax Fraud
Although some of the similarities and differences of civil and criminal tax fraud have been discussed above, the primary differences between civil and criminal tax fraud are:
- Statute of Limitations: Generally, for civil tax fraud, there is no statute of limitations for the government to assert fraud penalties. However, for most criminal tax fraud cases, the government has 6 years to bring a criminal action.
- Burden of Proof: The burden of proof is a legal term that refers to the obligation imposed upon one party in a court proceeding to offer evidence to either a judge or jury. For civil tax fraud, the burden of proof is on the government to show by clear and convincing evidence the fraudulent conduct. For criminal tax fraud cases, there is a constitutional requirement that the government prove all the elements of the statute at issue beyond a reasonable doubt.
To adequately advise their clients, tax practitioners should have a thorough understanding of the differences between civil and criminal tax fraud. In many cases, if there are allegations of civil tax fraud, there are also allegations of criminal conduct. For those with clients who have exposure to civil and/or criminal tax exposure, it may be advisable for them to take advantage of the many programs the IRS offers to taxpayers to become compliant with little criminal exposure. These have been discussed in prior Insights, see:
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