Federal Tax Fraud Defense Lawyer

Federal Tax Evasion Statutes

Alleged tax fraud offenders are charged under a number of federal tax evasion statutes depending on the specific nature of the alleged offense(s). Typically, tax fraud charges fall under 26 U.S.C. §§7201, 7203, 7206 and 7207.

What Kind of Conduct is Prohibited?

• 7201 prohibits federal income tax evasion and applies specifically to taxes commonly due on April 15th. To convict a defendant under §7201, a federal prosecutor must prove, beyond a reasonable doubt, that the defendant knew they owed a tax payment and demonstrated some affirmative act to avoid paying it, with the intent to violate their legal duty to pay the tax. The definition of affirmative act under §7201 is broad, covering a wide range of conduct. Conduct that is merely misleading or construed as concealing can be considered an affirmative act. Even an otherwise lawful act could be an affirmative act under this section, if it is done with the intent to evade federal income tax (United States v. Valenti). This section covers not only evasion of paying taxes, but also attempts to evade the assessment of taxes (United States v. Voorhies). 
• 7203 criminalizes the knowing and intentional failure to simply file a federal income (or other) tax return. In contrast to §7201, §7203 applies also to corporations, partnerships, trusts and other entities in addition to individual tax filers.  Further, this section covers federal taxes due at any time throughout the year and does not limit its application to those federal taxes typically due on April 15th. 
• 7206(1) prohibits fraud and false statements related to the preparation and filing of federal tax returns. Under this section, a defendant does need not be the one who prepared the return. A defendant who enlists a tax preparer could be just as culpable. Additionally, a federal prosecutor must prove that the tax return was false or incomplete, that the defendant signed the return knowing that it was false or incomplete and then filed the return with the IRS. Here, unlike §7201, the Government does not have to prove that the defendant actually owed any taxes.

The previous three statutes target the tax-paying individual or entity. §7206(2), by contrast, holds liable those who aid, assist, or even advise in the preparation of a false tax return. The taxpayer need not even know that the return was false. A conviction also requires a federal prosecutor to prove that the defendant knew the return was false and acted with the intent to violate the law. Historically, the 7th Circuit has applied this section broadly “making all forms of willful assistance in preparing a false return an offense” (United States v. Hooks). 

§7207 applies to more than just tax returns and targets anyone (not just a taxpayer or tax return preparer) who willfully delivers or discloses any accounts, returns and other documents that the defendant knows to be fraudulent or false regarding a material matter – one that is capable of hindering the IRS’s ability determine a taxpayer’s tax liability.

Tax Evasion Penalties & Sentencing

Each of the federal tax evasion statutes carry penalties that could include fines, imprisonment, or both. In some cases, the defendant may even be liable for the costs of prosecution. Each statute above has unique penalties and certain factors that may enhance or reduce a penalty.

The possible tax evasion penalties for convictions under §7201 include fines of up to $100,000 ($500,000 for corporations and other entities), 5 years in prison, or both, including the costs of prosecution. 

• 7203 can be charged as a misdemeanor with fines as much as $25,000 ($100,000 for corporations and other entities), 1 year in prison, or both, and the costs of prosecution. However, if the §7203 offense includes a violation under 26 U.S.C. §60501 (returns related to cash received for trade or business), an offense could instead be charged as a felony with up to 5 years in prison.

Convictions under §7206(1/2) carry possible tax fraud penalties including fines up to $100,000 ($500,000 for corporations and other entities), 3 years in prison, or both, as well as the costs of prosecution.

• 7207 convictions can include fines up to $10,000 ($50,000 for corporations and other entities), 1 year in prison, or both.

Tax fraud sentences for convictions under any of these sections may be increased incrementally if the offense involves a tax loss greater than $2,500.  Sentences may also be enhanced if the offense involves unreported or falsely reported income exceeding $10,000 from a criminal activity, a pattern or scheme from which the defendant derived a substantial amount of their income, a business preparing or assisting with tax returns, or the use of sophisticated means.

Trends in IRS Federal Tax Fraud Prosecution

Deterring potential tax law violators played a key role in development of the U.S. sentencing guidelines, which are reportedly designed to ensure that the severity of the offense is commensurate with the sentence in any given case. This has played out in recent Illinois cases. 

In July 2018, a Springfield, Il. business owner was convicted of failing to report more than $1.15 million in earnings on his federal tax return. The defendant was sentenced to 18 months in prison and ordered to pay the IRS $447, 528 and $250,000 to his employees participating in a stock option plan. A month later, an Illinois paving company owner was convicted of tax evasion. This defendant was sentenced to nearly four years in prison and paid $566, 571 in back taxes and interest to the IRS.

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