October 2018 JD Supra
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Tax Fraud and the Element of Willfulness was published by JD Supra on 10/23/18.

Tax fraud is often defined as an intentional wrongdoing on the part of a Taxpayer with the specific purpose of evading a tax known or believed owed. Tax fraud requires: 

  • A tax due and owing resulting from a deliberate intent to evade tax.
  • A fraudulent intent (the willful and material submission of false statements or false documents in connection with an application and/or a return).

What is Tax Fraud?

Section 25.1 of the Internal Revenue Manual (IRM) contains the IRS Fraud Handbook.  IRS defines fraud as the deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. In simple words, obtaining something of value from someone else through deceit.

Civil versus Criminal Fraud

According to the IRM (25.1), the requirements of proof are critical for establishing fraud.  The burden of proof is on the Government in all criminal and civil tax fraud cases. The degree of required proof  differentiates a civil fraud case from a criminal fraud case.

  • Criminal fraud cases:  Government must present sufficient evidence to prove guilt beyond a reasonable doubt. These cases result in punitive action with penalties consisting of fines and/or imprisonment which are enforced only through prosecution, are provided to punish the Taxpayer for wrongdoing and serve as “deterrents” for other Taxpayers.  
  • Civil fraud cases:  Government must prove its case by clear and convincing evidence.  These cases result in remedial action taken by the Government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.

Tax fraud offenses can result in the imposition of both civil and criminal penalties for the same offense conduct.  

Avoidance or Evasion

Taxpayers have the right to reduce, avoid, or minimize taxes through shaping or preplanning events to reduce and or eliminate tax liability within the law.  Evasion involves “actually evading” a tax or the payment of a tax through deceit, subterfuge, camouflage, concealment, attempts to color or obscure events through “tax schemes” such as:  intentional understatement or omission of income, claiming fictitious or improper deductions, false allocation of income, Improper claims, credits, or exemptions; and/or concealment of assets.

Affirmative Acts

IRM (25.1) states that Taxpayers who knowingly understate their tax liability may leave identifying indicators which serve as a symptom, or signify that actions may have been done for the purpose of deceit, concealment or to make things seem other than what they are.  Indicators, in and of themselves, do not establish the occurrence of a fraudulent act because fraud cannot be established without affirmative acts of fraud. Affirmative Acts are actions that establish that a particular action was “deliberately done” for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are. Examples include omissions of specific items where similar items are included; concealment of bank accounts or other assets; failure to deposit receipts to business accounts; and covering up sources of receipts.


IRS defines willfulness as a voluntary, intentional violation of a known legal duty.  A good faith misunderstanding of the law or good faith belief by a Taxpayer that the Taxpayer is not violating the law, may negate willfulness.  

Taxpayers beware of Section 7203

Under Title 26 of the US Code, Section 7203 makes it a Crime to willfully fail to file a return, supply information or pay tax.  It states the following: “Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution”.

Don’t be a victim of your own making

Taxpayers that have not filed or paid taxes ought to recognize that there can be a fine line between a civil tax case and a criminal tax case.  IRS and its Criminal Investigation Unit are knowledgeable in establishing affirmative acts (firm indications) of fraud and are able to identify and verify income from multiple available sources.  Taxpayers that are out of compliance ought to also come forward first before IRS discovers them in order to take advantage of potential amnesty programs. Consult an IRS specialized tax advisor.