Inspirational Quote

Most people do not know the difference between tax avoidance and tax evasion. There is a big difference in both. And in the consequences.

Tax avoidance is reducing taxes through interpretations of the Tax Codes and other tax law. There are many techniques, some well recognized, boring and common. Others, novel, clever and sometimes aggressive. The techniques are used and when a tax return is filed, the technique is set from with appropriate and required documentation evidencing the tax avoidance technique. If the IRS disagrees with your tax return, it may audit and assess an additional tax, plus interest. If the IRS believe the actions of the taxpayer are based upon negligence, or if the demanded tax is large enough, the IRS attempt to impose an accuracy penalty. This is 20%.

If the IRS believes the return is based upon fraud, the penalty increases to 75% of the additional tax due. The IRS has the authority to make these determinations, without a criminal investigation or prosecuting the taxpayer.

Tax evasion is criminal conduct. Tax evasion may result in criminal

investigation, prosecution and incarceration. Taxes owed must be paid. A civil fraud penalty up to 75% and interest cam be imposed. The court can order an additional fine as part of punishment.

A factor distinguishing civil fraud from tax evasion is the amount of tax that is owed. If under $10,000.00, the IRS Criminal Investigation Division is not likely to prosecute. In practice, the amount is usually much higher to make the prosecution worthwhile. The IRS applies a series of factors to determine if the deficiency was caused by civil tax avoidance or criminal tax evasion.

In prosecuting tax crimes the government must prove the taxpayer knew the law and intended to violate it. The courts have ruled the government must prove an intentional act violating a known requirement. The IRS will prosecute a case as a crime, if it can prove a substantial deficiency and an intentional act to break a tax law.

What is required? What does the government, state or federal look at to prove intent to break a tax law? How does one prove willfulness?

Affirmative acts that can be proven from which a judge or jury can

determine the intent of the accused include, but are not limited to:

Is the tax return materially false? That is, are important assertions on the return incorrect? Not just the stuff people may make a mistake on.

Are there false books and records?

Has the taxpayer destroyed the accounting records?

Is there a pattern of underreporting income for several years in a row?

Is there a substantial amount of tax owed to the IRS?

Who the accused is matters. If the accused is well known in business or industry, someone with a public profile or a professional, the IRS

prosecutes to make an example and scare others in similar positions not to cheat. If your co-worker, neighbor or friend goes to jail and is ruined financially, well then you’ll think twice. There are relatively criminal investigators, both in federal and state government, so cases actually prosecuted are carefully selected. The IRS wants lots of publicity to deter other taxpayers from committing tax evasion.

When I was a Deputy Attorney General in the Delaware Department of Justice, I attended the U.S. Attorney General’s Trial Advocacy Institute in Washington D.C. Ed Meece, the Attorney General of the United States at the time spoke to the prosecutors attending and declared that only strong cases with good evidence should be prosecuted to ensure there were convictions. The policy is to make the investigators and prosecutors look strong and successful to deter crime, including tax crimes.

Understand that an investigation by a criminal investigator is different than an audit. Special Agents carry guns and badges and send people to prison. Just because people are nice does not mean they are your friend. Revenue Agents audit tax returns looking for additional tax. Fair enough. However, if you are at an interview with a Revenue Agent, and they begin to ask you and your accountant questions about buying luxury items or boats or vacations, that is the signal to shut up! Excuse yourself. Go home and call a criminal tax defense attorney. You need to lawyer up! If a Special Agent turns up at your home or office wanting to ask a few questions, decline. Don’t be like the comedian Ron White. “I had the right to remain silent but

not the ability.”