Tax fraud is a serious crime that can result in individual taxpayers or those representing corporations being sentenced to prison time or paying massive fines. The IRS is very clear about individuals’ and businesses’ responsibilities when it comes to filing and paying taxes. When taxpayers take willful steps to defraud the government, they may be accused of tax fraud and face criminal charges.
If you are worried about tax fraud or facing tax fraud charges, you need a tax attorney. Contact Wiggam Law for help today.
Definition of Tax Fraud
Both tax fraud and tax evasion involve taxpayers willfully attempting to decrease the amount of taxes they pay illegally, but they are not the same thing.
Tax evasion typically involves concealing income or lying about income or deductions to decrease your tax burden. Tax fraud is a much broader term that encompasses tax evasion and anything else a taxpayer may do to illegally reduce their tax liability or claim payments they are not entitled to.
Tax fraud takes many different forms, including falsifying tax documents, falsifying dependents or using fake Social Security numbers to inflate dependent numbers, submitting fake tax returns to get extra refunds, and hiding income. It can also include hiding assets when you apply for an offer in compromise.
Legal Consequences of Tax Fraud
Depending on the specific charges a taxpayer faces, they may be at risk of severe legal consequences. It’s important to note that the term tax fraud can refer to both criminal and civil charges, and the penalties for different types of charges vary significantly.
This is why it’s important to discuss your concerns with a tax attorney at the first sign of legal issues; you’ll better understand the potential outcomes you’re facing.
Penalties for Individuals and Corporations
When you look over the laws used to define and punish tax fraud, you’ll notice that the penalties differ for individuals and corporations. Across the board, corporations convicted of tax fraud will pay far higher penalties than those convicted of the same crime. We’ll explain the specific differences below in our analysis of each tax fraud charge.
Important Statutes and Laws
The laws used to define an individual’s or corporation’s crimes determine the penalties they’ll face. Some of the most common laws that come into play in tax fraud cases include:
- 18 U.S. Code § 371, conspiracy to commit offense or defraud the United States: This is a very broad criminal charge that doesn’t apply solely to tax fraud. It can be used in just about any criminal case involving two or more people attempting to commit a crime against the United States. Both parties sentenced under this statute can face up to five years in prison or be charged up to $250,000 each. A corporation convicted of the same crime may be fined $500,000.
- 26 U.S. Code § 7201, attempt to evade or defeat tax: This law applies to any person who knowingly and willfully tries to evade or defeat taxes or the payment of those taxes. Individuals can be fined up to $250,000, while corporations can be fined up to $500,000. They may also be sentenced to up to five years in prison and be ordered to pay the costs of prosecution. A taxpayer may be charged under this statute if they underreport their income on their tax return, knew or should have known that they were not complying with tax requirements, and willfully took steps to pay less than they owed.
- 26 U.S. Code § 7202, willful failure to collect or pay over tax: When a taxpayer is legally obligated to collect or pay taxes imposed on another person and fails to uphold that duty, they may be found guilty of willful failure to collect or pay over. Consider, for example, an employer that is expected to withhold and pass through payroll taxes to the federal government. If an employer intentionally does not collect payroll taxes or collects payroll taxes but then does not pass them along to the IRS, they can be fined up to $10,000 and spend up to five years in prison.
- 26 U.S. Code § 7203, willful failure to file return, supply information, or pay tax: This is somewhat less serious than other tax fraud charges on this list, as it’s often used when someone tries to evade taxes via failing to file. However, because their actions do not reach the level of hiding income or falsifying documentation, they are charged at this level. Those convicted could be fined up to $25,000 and spend up to one year in prison. Corporations found guilty of willful failure to file a return may be fined up to $100,000.
- 26 U.S. Code § 7206, fraud and false statements: This serious crime covers all attempts to provide false information, file fraudulent tax returns, or otherwise defraud the IRS to lower their tax burden. Fines may be as high as $100,000 for individuals, and they may also be sentenced to up to three years in prison.
- Civil tax fraud: Civil tax fraud, as defined in U.S. Code § 6663, can come with severe financial penalties, but it does at least allow taxpayers to avoid prison time. If a taxpayer underpays their taxes due to fraud, they will be penalized an additional 75% of the amount that was underpaid due to fraud.
There’s a clear difference between punishment for criminal tax fraud cases and civil cases. In both cases, offenders face heavy financial penalties. However, only criminal tax fraud penalties focus on punishing the offender. These punishments are in place to both hold the wrongdoer accountable and prevent others from engaging in similar behavior in the future. Civil tax fraud penalties, while they do still have the effect of punishing the perpetrator, are largely in place to make the IRS whole after being defrauded.
Case Studies
The IRS provides detailed information on tax fraud cases, giving us insight into how regular people, celebrities, and successful business owners alike attempt to defraud the federal government.
In October of 2024, the owner of a bikini barista coffee stand was sentenced to 30 days in prison, a $5,000 fine, and 100 hours of community service for underreporting his income over several years. This was part of an ongoing case against several family members in the same business, with additional sentencing updates to come.
Earlier, we discussed conspiracy and how that charge is often used in any tax fraud case involving two or more people. In another October 2024 case, two conspirators were sentenced to 49 and 57 months in prison for conspiring to defraud the IRS out of $4.4 million. They did so by stealing victims’ identities, filing fraudulent tax returns, and receiving fraudulent tax refunds. In total, the IRS paid out over $4.49 million in refunds to various bank accounts controlled by the conspirators.
A high-profile case from October 2024 involved the leader of Yoga to the People, a national yoga business that brought in millions of dollars from 2012 to 2020. Despite the massive success of this business, the owner did not file individual or business tax returns for at least eight years. During this time, he used fabricated tax returns to access loans and funding from other financial institutions, which allowed him to live a lavish lifestyle. He also engaged in fraud by only accepting yoga class payments in cash (and not reporting it), paying yoga instructors in cash (and not reporting those payments), intentionally failing to keep corporate financial records, and taking advantage of unreported income. He will be forced to pay over $2.5 million in restitution. Two other coconspirators will be tried in 2025.
Key Takeaways
As you start looking into tax fraud cases that the federal government tries, certain trends start to emerge. Key takeaways include:
- Not getting caught right away does not mean getting away with it. In many tax fraud cases, the alleged fraud occurred well over a decade ago. People tend to get bold when the IRS doesn’t automatically catch them, but the fact is that the IRS has extremely advanced tracking systems and algorithms that allow them to track down and identify fraud years after it has occurred.
- The IRS spends years investigating tax fraud. The cases you read about being sentenced this month or this year happened years ago. The IRS is extremely thorough in its investigations and does not generally recommend charges until they are certain they have what they need to get someone convicted.
- Tax fraud is not a victimless crime. People think of tax fraud as a victimless crime that only steals from the faceless federal government, but almost every case you read about involves very real victims. In the case involving fraudulent tax returns, the people whose identities the perpetrators stole will likely spend years trying to get their identity back, fix their credit, and get out of trouble with the IRS—all consequences that had nothing to do with their own actions. In the case of Yoga to the People, yoga instructors did unpaid labor and were underpaid in order to bolster the owner’s bottom line. Financial institutions and private bankers were misled into providing the owner with financing and assets he did not intend to pay back.
- One tax fraud case often reveals many other related cases. Many of the cases uncovered by the IRS involve multiple coconspirators, which is why so many press releases provide information on upcoming trials and sentencing dates. No one is safe from discovery if they engage in tax fraud; it only takes one aggravated coconspirator, employee, ex-spouse, or wronged client to turn them in.
Preventive Measures
The punishments for every type of tax fraud are stiff, and doing everything by the book can help you avoid heavy financial penalties and prison time. These preventive measures can help you stay compliant:
- Work with a tax professional: The more complex your taxes are, the easier it is to make mistakes that can land you in trouble with the IRS. When you work with a CPA and provide them with financial records throughout the year, it’s much easier to do your taxes accurately and on time.
- Do your own review of your tax records: Even if you use a tax preparer, you are still ultimately responsible for what is reported on your tax return and what refund you receive. If your tax preparer claims outlandish deductions or lies about your income and you sign off on the return, you are the responsible party in the eyes of the IRS.
- If something seems too good to be true, it probably is: If you hear about a tax “hack” or trick that gives you a massive refund without any loss on your end, be suspicious—and talk to a tax professional.
- Report everything, no matter how unimportant it seems: Report all sources of income, including interest on bank accounts, cash income, and anything else that contributes to your bottom line. Any unreported income can land you in trouble with the IRS.
- Maintain documentation: Keeping thorough records of your finances and taxes can help you be prepared for an unexpected audit. These records can also show that you did your part to do your taxes honestly and in good faith.
Legal Support and Resources
If you suspect that you may have mishandled your taxes, you must talk to a tax attorney as soon as possible. While tax fraud requires intent, even accidentally underreporting income or claiming unearned deductions can result in penalties and issues with the IRS. An experienced tax attorney, such as the ones at Wiggam Law, can thoroughly examine your tax records, explain any danger you may be in, and help you explore possible resolutions.
Tax fraud is a serious crime that has landed thousands of people in prison and led to massive fines for individuals and corporations alike. The IRS is much more well-funded and well-equipped to investigate fraud than most people realize, and it’s important to avoid assuming that you have flown under their radar. If you suspect that you may be in legal trouble due to taxes, it’s time to reach out to Wiggam Law. Schedule your consultation online or call us at (404) 233-9800.