Fraud

• Author: W. Patrick Cantrell
• Pages: 359-405

359

CHAPTER 8

Fraud

Federal Tax Crimes

I. Introduction

A. Statutory Provisions in Title 26

The Internal Revenue Code (I.R.C.) contains a number of different

criminal sa nctions, generally found in Chapter 75 of the I.R.C.1 Addi-

tionally, many criminal provisions affecting taxpayers are contained

in Title 18 of the U.S. Code (the federal criminal code).2

B. Nature of Criminal Penalties

The crimina l penalties of the I.R.C. are in addition to the civil penalties

for fraud. Unlike civil penalties, criminal penalties are not collected

through the assessment procedures, but are only imposed after convic-

tion or a guilty plea in criminal proceedings.

C. Omissions versus Affirmative Acts

Omissions, such as willfu l failure to file a tax return or willful fail-

ure to pay tax, are generally misdemeanors. Tax evasion, on the other

hand, must be proved by an affirmative act, such as the filing of a false

or fraudulent tax return. Other examples of affirmative acts would

include keeping a double set of books, making false entries, and con-

cealing assets.3

D. Felony versus Misdemeanor

The structure of the federal criminal tax statute is one broad felony4

followed by a series of misdemeanors.5 Congress intended that the

felony and the misdemeanors be totally separate offenses. A violation

of either a misdemeanor statute or a felony statute does not necessarily

entail a violation of the other.6

360 FRAUD

At common law a misdemeanor offense was one that was simply

less grave than a felony. Many states have defined misdemeanors stat-

utorily to mean a crime that carries no sanction more severe than a fine

or a jail term not to exceed one year.7 There are misdemeanor criminal

sanctions in the I.R.C.8 but felony prosecution is the rule for most fraud

invest igation s.

II. Misdemeanor Statutes

A. Failure to File, Pay, or Supply Information

Any person who is required to pay any tax (including estimated tax),

file a return, keep records, or supply information and who fails to do

so is guilty of a misdemeanor. The punishment is a fine of up to $25,000

($100,000 in the case of a corporation) and imprisonment of up to one

year. In the case of failure to pay estimated tax, no criminal penalty

can apply unless the civil penalty of §6654 or § 6655 also applies. In

the case of failure to file a currency receipt form,9 this crime becomes a

felony, with up to a five-year jail term.10

If a return is fi led, but required information or schedules are omit-

ted, a taxpayer can be convicted under §7203. For example, if a part-

nership return is filed, but the balance sheet information is omitted,

this satisfies the “failure to supply information” standard.11

The government’s burden in “failure to pay” cases under §7203 is

to prove that the taxpayer possessed sufficient funds to meet his or her

obligations to the government and that the taxpayer voluntarily and

intentionally did not pay the tax due.12

For a variety of reasons, very few failure to file cases are prosecuted.

B. Failure to Furnish W-2 Form

In case an employer furnishes a false W-2 form (or fails to furnish one

at all) and does so, or fails to do so, willfully, he or she is guilty of a

misdemeanor and can be fined up to $1,000 and jailed for one year.13

If an employee fails to give his or her employer a W-4 form or sup-

plies false information thereon, he or she is guilty of a misdemeanor

and can be imprisoned for up to one year and fined up to $1,000.14 In

construing the term “false” under this section, cases hold that a state-

ment is false if it is untrue when made and known to be untrue by the

person making it.15

C. Fraudule nt Docume nt

Any person who willfully delivers to the IRS any return or other docu-

ment known by him or her to be fraudulent or false as to any material

matter is guilty of a misdemeanor, and can be fined up to $10,000 ($50,000

in the case of a corporation) or jailed for up to one year.16 Although a

willful m isstatement of a material fact on an income tax return that does

Felonies 361

not affect the stated tax liability may be a punishable offense, such con-

duct does not amount to willful tax evasion in violation of §7201.17

D. Failure to Obey Summons

If any person is served with an administrative summons18 to appear

and testify, or to appear and produce books and records, and such per-

son fails to appear, he or she can be fined up to $1,000 and imprisoned

for up to one year.19 To compel compliance with a summons, the gov-

ernment must bring suit in district court. At this point, and not before,

the summoned party may challenge the summons in district court. If

the district court compels compliance, only then might noncompliance

result in the imposition of sanctions under §7210.20

E. Antibrowsing Provisi on

Starting in 1997 it is a misdemeanor offense for an IRS employee to

“browse” through or otherwise inspect a taxpayer’s return informa-

tion. The penalties for violation of this provision are as follows:

1. A $1,000 fine;

2. Imprisonment for up to one year; and

3. Dismissal from office.21

F. Collected Payroll Taxes

Any person who fails to comply with §7512(b)22 (re depositing payroll

taxes in a separate bank account) can be fined up to $5,000 or impris-

oned up to one year.23

G. Preparer Disclosure

A person who is engaged in the business of preparing tax returns and

who, knowingly or recklessly, discloses any information obtained by

him or her in connection with preparing a ny return can be fined up to

$1,000 and imprisoned up to one year.24 The preparer disclosure rule

does not apply, however, if such disclosure is made pursuant to a court

order. Nor does it prohibit using federal information to prepare state

returns or disclosing i nformation during a quality or peer review.25

III. Felonies

A. Evasion Statute

Any taxpayer who willfully attempts to evade or defeat any federal

tax is guilty of a felony and can be fined up to $100,000 ($500,000 in the

case of a corporation), or imprisoned for up to five years.26

The elements that the prosecution must prove in a §7201 case are

as follows:

1. An attempt to evade or defeat tax in any manner;

2. The existence of a tax deficiency or tax due;