Criminal Tax Fraud Overview for International & Domestic Violations

What is Tax Fraud (Is Tax Fraud a Criminal Tax Violation?)

Criminal Tax Fraud Overview

While there are many different types of tax crimes that a person may be found guilty of, the crime of tax fraud is one of the most common types of criminal tax violations. Oftentimes, the terms tax fraud and tax evasion are used interchangeably, although they are not the same. Generally, when it comes to tax evasion, there must be an affirmative act and an intent to evade tax –– this is not always the case in tax fraud cases. In addition, Tax Evasion may not stick in situations in which a person does not file a tax return. While technically they are making an intentional omission, without the affirmative act (or pattern and practice), it can be difficult for the government to prove tax evasion. The tax crime of fraud can be easier to prove because it does not necessarily require the affirmative act or a tax due and owning. For example, if a person does not file a tax return when they know they are supposed to, this could manifest into a tax fraud situation (but not always). Let’s take a walk through 26 USC 7206 and 26 USC 7207.

26 USC 7206 vs 26 USC 7207

While both Title 26 code sections 7206 and 7207 refer to fraud, the crimes are not the same. When it comes to section 7206, it refers primarily to documents being submitted under penalty of perjury in which the person does not believe the information contained to be true or the aiding and assistance of fraudulent/false statements (designed to catch preparers). On the other hand, section 7207 is more broad (and generally limited to a misdemeanor whereas 7206 is a felony).

26 U.S. Code § 7206 – Fraud and false statements

• • Any person who—

    • Declaration under penalties of perjury

      • Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

    • Aid or assistance

      • Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

    • Fraudulent bonds, permits, and entries

      • Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or

    • Removal or concealment with intent to defraud

      • Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

    • Compromises and closing agreements

      • In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully—

        • • (A) Concealment of property

            • Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

          • (B)  Withholding, falsifying, and destroying rec­ords

            • Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

              • shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

What does this mean?

While 26 USC 7206 breaks down the different types of violations that can lead to criminal tax fraud charges, the majority of the time, tax fraud violations falli into either subsection one (1) and two (2).

26 USC 7206(1) Declaration Under Penalty of Perjury

Under the first section of 7206, if a person willfully submits a document that was made under penalty of perjury, which they do not believe to be true and correct as to each and every material matter, it could be a violation of the code section. It is important to note, that there does not have to be any tax implication per se, as there does not have to be any intent to evade tax. Thus, if a person submits a document that they know to be false which they submitted under penalty of perjury, then that would be considered a violation.

As provided by the Criminal Tax Manual:

• • • Section 7206(1) makes it a felony to willfully make and subscribe a false document, if the document was signed under penalties of perjury. “[T]he primary purpose of section 7206(1) ‘is to impose the penalties of perjury upon those who willfully falsify their returns regardless of the tax consequences of the falsehood.’” United States v Romanow, 509 F.2d 26, 28 (1st Cir. 1975) (quoting Gaunt v. United States, 184 F.2d 284, 288 (1st Cir. 1950)).

    • Section 7206(1) is referred to as the “tax perjury statute,” because it makes the falsehood itself a crime. Historically, because Section 7206(1) does not require proof of a tax deficiency, it permits prosecution in cases in which there is no tax deficiency, a minimal tax deficiency, or a tax deficiency that would be difficult to prove. However, the government’s burden of proving materiality to the jury may now make it more difficult to obtain convictions in cases with no demonstrable tax loss. See § 12.10[5], infra.

26 USC 7206 (2) Aid or Assistance

This is also a very common statute, in which a person knowingly or willfully assists, procures, or advisers the preparation of documents that they know to be false. Unlike subsection (1), there is no reference to penalty of perjury under the subsection. In other words, if a person knowingly aids or assists another person with submitting forms they know to be fraudulent or false — they could violation to this subsection.

As further provided by the Criminal Tax Manual:

• • • Section 7206(2) may be used to prosecute a person who willfully prepares or in some way assists in preparing a materially false tax return or other document. The document need not be signed under penalties of perjury. The statute is also advantageous because there is no need for the prosecution to show a tax due and owing, as is necessary in § 7201 tax evasion prosecutions. Section 7206(2) is particularly useful to prosecute tax return preparers.

    • However, false claims charges under 18 U.S.C. § 287 may be preferable for tax returns claiming refunds when there is no question that the claim is fraudulent, particularly where return is filed in the name of a fictitious or unknowing taxpayer, because the case will raise no tax issues and restitution is more readily available under Title 18. In addition, 18 U.S.C. § 1341 or 1343, may be preferable for large-scale fraudulent return schemes.

    • Mail or wire fraud charges yield strategic benefits by allowing prosecutors to make the entire scheme an express element of each count, and they support restitution, moneylaundering, and asset-forfeiture charges.

    • If a tax return preparer willfully created a fraudulent refund return for an undercover agent and actually filed the agent’s tax return by mail or electronic filing, it may be strategically useful to charge the return preparer with a substantive offense for filing the agent’s return, because the defendant will have no basis to attack the credibility of the undercover agent. The preparer may be prosecuted under 18 U.S.C. § 287 or 26 U.S.C. § 7206(2) for filing the false return.

It is important to keep in mind that a violation of 26 USC 7206 is a felony.

26 U.S. Code § 7207 – Fraudulent returns, statements, or other documents

• Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047(b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

Section 7207 is generally a misdemeanor. In this type of situation, a defendant can be charged with a crime when they deliver or disclose any document that they know to be false or fraudulent as to any material matter. It would be easier to violate this code section then 7206, which is why 7207 is a misdemeanor.  In addition, it should be noted that it makes no reference to perjury —  which means the document being delivered does not have to be a document that was signed under penalty of perjury — which further opens up the potential violations that could land a person in hot water.

Golding & Golding: International Tax Lawyers Representing Clients Worldwide

Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure, including representation in VDP matters for Taxpayers who are willful.

Contact our firm for assistance.