Criminal vs. Civil Tax Penalties

Most tax liability is civil not criminal.  Failure to pay taxes can result in various actions including wage garnishment and bank restraints.  However, there are some tax liabilities that will land the taxpayer in criminal court.

The most common tax crimes are tax fraud and tax evasion.  Tax evasion occurs when individuals, corporations, trusts, and other entities avoid taxes by illegal means.  In a typical tax evasion case, the taxpayer misrepresents the true status of the taxpayer’s tax obligations to the Internal Revenue Service (IRS).  Taxpayers may do this by declaring a lower income or profit than the taxpayer truly earned, taking improper deductions, willfully withholding requested information on a tax return, or willfully not filing a tax return.

The consequences of committing tax fraud or tax evasion are severe.  Penalties range up to five years in jail, and heavy fines of up to $500,000.  In addition to the criminal penalties, the IRS can be expected to add civil tax penalties.

Tax fraud can be distinguished from making an honest mistake on a tax document submitted to the IRS. Tax fraud involves an intentional wrongdoing. Those guilty of tax fraud were found to have the intent to deceive the IRS.  On the other hand, a taxpayer who misunderstood the tax form or put a few numbers in the wrong place would not be guilty of the crime of tax fraud. 

TheIRS will consider various factors to determine whether the taxpayer committed tax fraud or an honest mistake.  Factors include inadequate records, implausible or inconsistent explanations of behavior, asset concealment, failure to cooperate with tax authorities, conducting illegal activities and attempting to conceal these activities, dealing in cash, and the failure to make estimated tax payments.

If charges have not been filed against you, but you are under investigation by the IRS, a tax attorney can use preventative measures to help you avoid having charges assessed against you or defend you if charges are assessed.  If you still discuss your finances with your accountant, it is important to remember that the information exchanged is not confidential.  With an attorney, any communication in the course of the attorney-client relationship will be kept confidential.

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