Federal Tax Fraud and Tax Evasion

If the IRS has contacted you, or you or a family member has been charged with a federal tax crime, here is what the charges mean and what penalties they carry. Federal tax fraud charges, often called tax evasion, are serious and can lead to time in federal prison. Tax crimes range from misdemeanors, like willfully not filing a return, to felonies like tax evasion, which carries up to 5 years in prison for each count. Almost every one of them turns on a single question: did you act "willfully"?

Criminal Center represents people facing federal criminal charges, including tax fraud. Attorney Brandon Sample keeps clients informed at every step of a federal tax case.

How does a federal tax fraud case start?

Before a tax fraud charge is filed, the case is usually investigated by special agents of IRS Criminal Investigation (IRS-CI), the IRS's law enforcement arm. The government pursues tax evasion hard because the federal tax system depends on voluntary compliance: people are expected to report and pay what they owe on their own. When some people try to avoid paying, the government's enforcement system goes into action.

The IRS also often publicizes its wins in tax fraud cases to discourage others from breaking the tax laws. That is one more reason to talk with a lawyer as soon as IRS problems begin, or even before.

Tax evasion charges can be very broad, because at bottom the crime is avoiding paying the government the tax you owe. Several federal laws cover tax crimes. The main ones are described below.

What does "willfully" mean in a tax case?

Almost every federal tax crime requires that you acted "willfully." The Supreme Court has said this means a voluntary, intentional violation of a legal duty you knew about (Cheek v. United States, 1991).

An honest mistake or a real misunderstanding of the tax law is not willful, even if the belief was unreasonable. But a belief that the tax laws are unconstitutional is not a defense.

What are the main federal tax crimes?

Tax evasion (26 U.S.C. § 7201)

26 U.S.C. § 7201 makes it a felony to willfully try to evade or defeat a tax, either the assessment of the tax or the payment of it. To convict you, the government must prove three things: you owed more tax than you reported or paid, you took an affirmative step to evade it (like hiding income or assets), and you acted willfully (Sansone v. United States, 1965). A conviction can bring up to 5 years in federal prison and a fine of up to $100,000 ($500,000 for a corporation), plus the costs of prosecution.

Failure to file or pay (26 U.S.C. § 7203)

26 U.S.C. § 7203 makes it a crime to willfully fail to file a required tax return, keep required records, supply required information to the IRS, or pay tax you owe. Unlike § 7201, this law does not require an affirmative act. It only requires that you willfully failed to do something you had to do. The penalties are lower. It is a misdemeanor, with up to one year in jail and a fine of up to $25,000 ($100,000 for a corporation).

False withholding information to your employer (26 U.S.C. § 7205)

26 U.S.C. § 7205 makes it a crime to willfully give your employer false information to lower the tax withheld from your pay. For example, an employee cannot willfully claim more withholding allowances or exemptions than they know they are entitled to. It is a misdemeanor, with up to one year in jail and a fine of up to $1,000.

Filing a false return (26 U.S.C. § 7206)

26 U.S.C. § 7206 makes it a felony to willfully sign a tax return or other document under penalty of perjury that you do not believe is true on every important point. In short, it is a crime to lie on your tax return. It is also a crime to willfully help prepare someone else's false return. Lying to the person you hired to prepare your taxes can lead to charges too, because you still sign the return under penalty of perjury. This is one of the more serious tax crimes. A conviction can bring up to 3 years in federal prison and a fine of up to $100,000 ($500,000 for a corporation).

False documents to the IRS (26 U.S.C. § 7207)

26 U.S.C. § 7207 makes it a crime to willfully give the IRS a list, return, statement, or other document you know is false in a material way. This often comes up when someone hands over a false or altered document during an audit. It is a misdemeanor, with up to one year in jail and a fine of up to $10,000 ($50,000 for a corporation).

Obstructing the IRS (26 U.S.C. § 7212)

It is a crime to corruptly, or by force or threats, interfere with IRS employees or with the administration of the tax laws.

How much prison time can each tax crime bring?

• Tax evasion (§ 7201): up to 5 years in prison and up to a $100,000 fine.
• False return (§ 7206): up to 3 years and up to a $100,000 fine.
• Obstructing the IRS (§ 7212): up to 3 years and a $5,000 fine; up to 1 year if only threats of force were used.
• Failure to file or pay (§ 7203): up to 1 year and up to a $25,000 fine.
• False documents (§ 7207): up to 1 year and up to a $10,000 fine.
• False withholding information (§ 7205): up to 1 year and up to a $1,000 fine.

These are maximums. The fines listed are the ones in the tax code, but a general federal fine law can raise the maximum fine to $250,000 for a felony and $100,000 for a serious misdemeanor (18 U.S.C. § 3571). You may also have to pay the costs of prosecution and the tax owed.

In practice, the sentencing guidelines (the rules judges use to calculate a recommended sentence range) base the range mainly on the "tax loss," meaning how much tax the government says was not paid (U.S. Sentencing Guidelines § 2T1.1).

What should you do if the IRS is auditing you?

Why call a lawyer before charges are filed?

Get counsel as soon as you learn you may face criminal charges. A lawyer can protect your rights from the first contact with the IRS. Depending on the facts, a lawyer may also be able to explore whether the matter can be resolved without criminal charges.

What should you do next?

Book a consultation to talk it through with Brandon Sample.

Book a consultation