Tax Evasion and Tax Crimes FAQs

San Diego tax attorney William D. Hartsock has been aggressively and successfully representing clients before the IRS and California Franchise Tax Board since the mid 1980's. Here, Mr. Hartsock offers answers to some of the most frequently asked questions relating to tax evasion and tax crimes.

What is tax evasion?

The most common type of tax evasion is specifically intending to under report income or overstate deductions on your income tax return, and then signing them under penalty of perjury. For tax evasion there are only three things that are required to be proved.

First, is that you are either a US citizen, resident alien or that you meet the substantial presence test.

Second, is that you under stated tax liability by over $2,600.

Third, that you specifically intended to evade taxes. The specific intent is the thing that you will spend the most time arguing over. The IRS must prove motive.

The IRS does have the burden of proof that you understated income, overstated deductions, had a foreign bank account, failed to file the correct forms, whatever the allegation happens to be. And, what they will use on specific intent is everything other than that act in order to prove that you are a bad person. and you did all of these other bad acts in addition to tax crimes. That is how they will prove specific intent.

What is considered a tax crime?

The primary tax crime is under section 7201 tax evasion. Tax evasion means that you are either a US citizen, resident alien or comply to the substantial presence test, the amount of tax liability exceeds $2,600 and that you intentionally did it. With those criteria, tax crimes are as big as the all outdoors because it encompasses a lot of items. In addition to that you have false statement, failure to file tax returns, failure to pay tax returns, failure to pay employment taxes, all of those can be civil if there is no specific intent or criminal if the IRS can demonstrate you specifically intended to commit the crime itself.

What are the penalties for tax evasion?

When people talk about penalties they are typically referring to civil penalties, when you are talking about tax evasion, that is a crime which means you are going to be doing time. That time could be in a federal penitentiary, half way house, wearing an ankle bracelet, whatever it happens to be. The amount of time that you will spend is, to a great extent, controlled by the federal sentencing guidelines. That depends on how much money was understated, prior criminal history, your other acts, it is a very complicated analysis to determine what the punishment will be.

What are the red flags for tax evasion?

The IRS uses a list of "badges of fraud". These are the things that indicate that there may be tax evasion. The most common badges of fraud are: significantly understating income, significantly overstating deductions, a double set of books, several different entities, several different bank accounts, a lot of transfers between bank accounts for no true legitimate business reason, offshore bank accounts that were unreported, and anything that just doesn't pass the smell test. If anything just really appears to be off, they will go into that in great depth in an audit.

When does failure to pay taxes become a tax crime?

Generally if you owe taxes as a result of failure to respond to a notice of deficiency, or as the result of an audit and you don't have the ability to pay, you can do an installment agreement to pay it off over a reasonable period of time based upon your income and expenses. We don't have debtors prison here in the United States so the IRS can't throw you in jail for not paying your taxes unless you have specific intent and they charge you with a tax crime, but that is a different matter.

If you don't have the ability to pay the IRS will allow you to do an Offer In Compromise, do a discharge of tax in bankruptcy, or make an installment agreement. They are going to try to collect but they won't put you in jail.

If you go to the far extreme, and you have people that file false tax returns, or try to put tax liability on a corporation instead of themselves individually or they have a lot of money, they hide that money and then they lie to the IRS in financial statements saying that they don't have that money, those are good examples of why the IRS will go after you criminally for failure to pay, but those are few and far in between.

If you are trying to, for instance, protect the equity in your house, it's better that you do nothing, rather than try to transfer the house into the name of a family member… everyone thinks that they are the first ones to do it and the IRS knows that everyone does it. They will say "it's in my brothers name, or in my kids name so they can't touch it", but yes they can! If it's transfer free of liability rules they can touch it. Just leave it in your name and you'll be fine. The IRS won't throw you out on the street. It's the over act of trying to escape it that will cause the IRS to up the ante and charge you with a crime.