Tax law is incredibly complicated. The laws and regulations that govern the operations of the Internal Revenue Service (IRS) and apply to taxpayers can be difficult to understand, particularly when it comes to filing your taxes. In some cases, the complexity of tax law may lead to an investigation for tax fraud or tax evasion.
Tax fraud is a broad term that involves some type of fraudulent conduct related to taxes, such as intentionally underreporting income in order to evade paying taxes. It is a criminal offense that may lead to prison time and fines. In 2019 alone, the IRS initiated 1,500 investigations related to tax crimes; of those cases, it recommended prosecution 942 times.
If you are the subject of a tax fraud investigation, you may be able to avoid prosecution with the help of an experienced New Jersey tax fraud attorney. By making a case to the IRS and/or to federal prosecutors, your lawyer may be able to help you avoid prosecution.
What Is Tax Fraud?
Tax fraud can happen in a number of ways. It can include both affirmative acts, such as signing a tax return that contains information that a person knows to be false, and omissions, such as fraudulently failing to file a tax return. In essence, tax fraud occurs when a taxpayer willfully engages in conduct that is intended to conceal, mislead, or otherwise prevent the collection of taxes that are owed. Tax evasion is a form of tax fraud.
Common examples of tax fraud include:
- Misrepresenting income on a tax return
- Overstating deductions
- Concealing bank accounts
- Failing to file a tax return when one is due
- Inflating expenses
- Misusing trusts to avoid taxes
- Committing identity theft
Tax fraud is a criminal offense that may lead to serious penalties, including steep fines and/or jail time. Tax evasion may lead to a sentence of up to 5 years in prison, up to $100,000 in fines for individuals or $500,000 for corporations, and repayment of the costs of prosecution. Making a false statement on an income tax return can lead to a prison sentence of up 3 years, fines of up to $100,000 for individuals or $500,000 for corporations, and repayment of the costs of prosecution.
If the IRS suspects that a person has engaged in tax fraud, its Criminal Investigation Division (CID) will investigate it. The investigators who work for the CID are both financial experts and federal agents who have been trained in law enforcement techniques and tactics.
CID agents are stationed in IRS field offices throughout the country. If tax fraud is suspected, then they will review your financial records and attempt to interview you as well as your family, friends, and business associates to gain information about your finances. A CID investigator may recommend prosecution based on this investigation.
If prosecution is recommended, then the IRS will conduct several additional levels of review before making a decision about sending the case to the United States Department of Justice (DOJ). There, federal prosecutors who specialize in criminal tax violations will review the case and decide whether to prosecute it. If the DOJ decides to move forward with the case, then it will be sent to the local U.S. Attorney’s office for prosecution.
How Does the IRS Identify Tax Fraud?
Criminal tax fraud investigations may be initiated from a variety of sources, including tips from the public and information received from other ongoing criminal investigations. In addition, IRS agents may report possible fraud through their review of tax returns. This is often due to what is referred to as “badges of fraud.”
Badges of fraud are behaviors and facts that suggest that an individual or an organization has engaged in tax evasion or tax fraud. They serve as red flags that a tax return may be fraudulent, and may be the basis of a criminal investigation. Badges of fraud may include:
- Omission of entire sources of income
- Substantial unexplained increases in net worth
- Failure to file a return
- Omission of specific items of income where similar items are included
- Substantial overstatement of deductions
- Hiding assets in an offshore account
- Significant amounts of personal expenditures deducted as business expenses
- Fictitious deductions
- Keeping two sets of books or no books at all
- Claiming a deduction for a dependent who does not exist or who is self-supporting
- Transfer of all or nearly all of an individual’s property
- Concealment of bank accounts
When the IRS spots these or other badges of fraud, a criminal investigation may begin immediately. In these situations, it is important to act quickly to protect yourself from potential criminal prosecution.
Avoiding Criminal Prosecution for Tax Fraud and Tax Evasion
In tax fraud/evasion investigations, there are multiple tiers of review and approval that must be performed before a criminal prosecution can move forward. This gives you several opportunities to make an argument to the IRS before an indictment is presented to the grand jury. At each stage of the process, your New Jersey tax fraud lawyer can meet with attorneys for the government to persuade them to decline prosecution of your case.
There are a number of steps that your lawyer can take throughout an investigation to advocate for you. This may include making a written request to the Regional Chief of the DOJ Tax Division for an opportunity to meet before the DOJ authorizes an indictment. A tax fraud attorney can then present evidence and argue against authorization to seek an indictment, doing so carefully to avoid divulging potential defense strategies in the event that criminal charges are filed.
There are a number of potential defenses to tax fraud charges that your attorney may present. This may include a lack of intent to defraud the federal government. For example, if you simply made a mistake on your tax return, this would not qualify as tax fraud.
In some situations, the government may simply lack the evidence necessary to prove every element of the crime of tax fraud beyond a reasonable doubt. This may also be used as a defense to a charge of tax fraud or tax evasion. Depending on the facts of your case, there may be other defenses that can be used to persuade the government to not indict you, to have the charges dismissed, or to obtain a not guilty verdict at trial.
If you have received a letter from the CID, or have otherwise been contacted by the IRS regarding potential tax fraud, you should not talk to anyone without consulting with a lawyer first. Your tax fraud attorney can work to protect your rights — as well as your freedom.
How We Can Help
Being under investigation by the IRS is incredibly scary. If you are in this situation, you may be worried about going to jail or being required to pay hefty fines and fees. A New Jersey tax fraud attorney can advocate for you throughout this process, with a goal of helping you avoid indictment for tax fraud or tax evasion.
At Paladini Law, we have substantial experience helping clients with both federal and New Jersey state tax matters. Our law firm offers consultations 7 days a week, by phone, via Skype, or at our Morristown or Bergen County locations. Contact us today at 201-381-4472 or email us to schedule a confidential consultation.