Federal TaxEvasion Charges

Two Types of Tax Evasion

Tax evasion under 26 U.S.C. § 7201 can take two distinct forms:

Evasion of Assessment

This occurs when a taxpayer attempts to evade the initial determination or assessment of tax owed. The most common example is filing a false tax return that underreports income or overstates deductions, resulting in less tax being assessed than is actually owed.

Evasion of Payment

This occurs when a taxpayer attempts to evade the payment of a tax that has been properly assessed or is due. This typically involves conduct after the tax liability has been established, such as hiding assets, transferring property to avoid collection, or using other means to prevent the IRS from collecting taxes owed.

A taxpayer can be charged with either or both types of evasion, and each tax year constitutes a separate offense.

Common Methods of Tax Evasion

Federal prosecutors pursue tax evasion cases involving various schemes and methods:

Underreporting or Omitting Income

Failing to report income from employment, business activities, investments, or other sources to reduce tax liability. This includes:

• Omitting income from side jobs or freelance work
• Failing to report cash income from business operations
• Not reporting capital gains from sales of property or securities
• Concealing income in offshore accounts
• Using nominees or shell companies to hide income

Inflating or Fabricating Business Expenses

Claiming deductions for personal expenses as business expenses, exaggerating the amount of legitimate business expenses, or claiming deductions for expenses that were never incurred. Examples include:

• Deducting personal travel, meals, or entertainment as business expenses
• Claiming personal vehicle use as business mileage
• Fabricating business expenses that never occurred
• Inflating actual business expense amounts

Concealing Assets in Offshore Accounts

Maintaining undisclosed foreign bank accounts or using foreign entities to hide income and assets from U.S. taxation. Despite legal requirements to report foreign financial accounts, many taxpayers fail to disclose these accounts and the income they generate.

Claiming False Deductions

Falsely claiming deductions for charitable contributions, medical expenses, or other itemized deductions that were never made or were substantially inflated.

Using Nominees and Shell Entities

Placing assets in the names of family members, friends, or shell corporations to conceal true ownership and avoid taxation.

Keeping Multiple Sets of Books

Maintaining one set of financial records for the IRS showing lower income or higher expenses, while keeping separate, accurate records showing the true financial situation.

Structuring Financial Transactions

Breaking up large cash transactions into smaller amounts to avoid federal reporting requirements, often called "structuring" or "smurfing."

Penalties for Violating 26 U.S.C. § 7201

The penalties for federal tax evasion are severe and can permanently impact your life, career, and financial security.

Imprisonment

Tax evasion is a felony offense punishable by up to 5 years in federal prison for each count. Because each tax year constitutes a separate offense, defendants charged with tax evasion for multiple years face the possibility of consecutive sentences. For example, a defendant convicted of tax evasion for three separate tax years could face up to 15 years in federal prison.

Federal sentencing for tax crimes is governed by the United States Sentencing Guidelines. The actual sentence imposed depends on several factors, most significantly the amount of tax loss. The guidelines calculate an offense level based on the tax loss amount, with higher tax losses resulting in higher offense levels and longer recommended sentences. Other factors that can increase the sentence include:

• Use of sophisticated means (offshore accounts, shell companies, false documents)
• More than minimal planning
• Obstruction of justice (lying to investigators, destroying documents)
• Role in the offense (organizer or leader)

Fines

Individuals convicted under 26 U.S.C. § 7201 face fines of up to $100,000 per count. Corporations face fines of up to $500,000 per count. Additionally, under 18 U.S.C. § 3571, courts may impose alternative fines equal to twice the gross gain derived from the offense or twice the gross loss caused to the government, whichever is greater. In cases involving substantial tax loss, these alternative fines can far exceed the statutory maximums.

Costs of Prosecution

In addition to fines, defendants must pay the costs of prosecution, including expenses incurred by federal law enforcement and prosecutors in investigating and prosecuting the case.

Mandatory Restitution

Courts must order restitution requiring the defendant to pay back the full amount of taxes owed, plus penalties and interest that have accrued. Restitution amounts often exceed the original tax debt by 200 to 300 percent when penalties and interest are included. The restitution obligation becomes a federal lien on all assets and remains enforceable even after the defendant completes their prison sentence.

Supervised Release

After serving any prison sentence, defendants typically face a period of supervised release (federal probation), which can last three years or more. During supervised release, defendants must comply with numerous conditions, including regular meetings with a probation officer, restrictions on travel, and potential limitations on financial activities.

Collateral Consequences

A federal tax evasion conviction carries significant collateral consequences beyond the direct criminal penalties:

• Permanent Criminal Record: A felony conviction appears on all background checks
• Professional Licenses: Many professional licenses (attorneys, CPAs, doctors, real estate agents, financial advisors) can be suspended or revoked following a conviction for a crime involving dishonesty
• Employment: Difficulty obtaining employment, particularly in positions involving financial responsibility or fiduciary duties
• Immigration Consequences: Non-citizens, including lawful permanent residents, face deportation for crimes involving moral turpitude or aggravated felonies
• Loss of Rights: Loss of the right to vote (in some states), possess firearms, serve on a jury, and hold certain government positions
• Reputation: Permanent damage to personal and professional reputation

How Federal Tax Evasion Investigations Begin

Understanding how tax evasion investigations start can help you recognize warning signs and take appropriate action:

IRS Civil Audits

Many criminal investigations begin with routine civil audits. If IRS revenue agents discover significant discrepancies, potential fraud indicators, or patterns suggesting intentional evasion, they may refer the matter to IRS Criminal Investigation.

IRS Criminal Investigation Referrals

Certain red flags trigger automatic referrals to IRS-CI, including:

• Large unreported income discovered during civil examination
• Evidence of two sets of books
• False or altered documents
• Offshore account violations
• Significant cash transactions without apparent source
• Badges of fraud (concealment, false statements, obstruction)

Informant Tips

The IRS Whistleblower Program provides substantial financial rewards to individuals who provide information leading to tax fraud prosecutions. Disgruntled business partners, ex-spouses, former employees, and others with knowledge of tax evasion may report violations to the IRS.

Bank Secrecy Act Reporting

Banks are required to report certain transactions, including currency transactions over $10,000 and suspicious activity. These reports can trigger investigations.

Other Federal Investigations

Tax charges often arise during investigations into other federal crimes, including money laundering, drug trafficking, fraud, public corruption, or organized crime.

Warning Signs of Criminal Investigation

If IRS Criminal Investigation is investigating you, warning signs include:

• Contact from IRS special agents (not regular revenue agents)
• Questions about your willfulness or intent
• Requests for original documents that could be evidence
• Delays in civil audit proceedings
• Grand jury subpoenas issued to banks, employers, or business associates
• Search warrants executed at your home or business

If you observe any of these signs, contact an experienced federal criminal defense attorney immediately. Do not speak with IRS agents without legal representation present.

Defenses to Federal Tax Evasion Charges

Defending against federal tax evasion charges requires sophisticated legal strategies, detailed financial analysis, and thorough understanding of both criminal law and tax law. Common defenses include:

Lack of Willfulness

The government must prove beyond a reasonable doubt that you intentionally violated a known legal duty. Demonstrating lack of willfulness can defeat the charge. This defense may involve showing that your actions resulted from honest mistakes, misunderstanding of complex tax laws, confusion, or reliance on professional advice rather than intentional evasion.

Good Faith Belief

If you held a good faith belief that you were complying with the tax laws, even if that belief was incorrect, this negates willfulness. The defense may show you genuinely believed your tax position was proper based on your understanding of the law or relied on information from others.

Reliance on Tax Professional

If you provided complete and accurate information to a qualified tax professional and relied in good faith on their advice, this can negate willfulness. The key requirements are that you made full disclosure to the professional and reasonably relied on their guidance. However, blind reliance without providing complete information or deliberately choosing advisors you know will take aggressive positions is insufficient.

Insufficient Evidence of Tax Deficiency

If the government cannot prove that you actually owed additional taxes, the charge fails. This may involve demonstrating that deductions were legitimate, income was properly reported, or the government's tax calculations are incorrect.

No Affirmative Act of Evasion

The defense may show that you took no affirmative steps to evade taxes. Mere failure to file or failure to pay, without additional conduct evidencing an attempt to evade, is insufficient for conviction under Section 7201 (though it may violate other tax statutes with lesser penalties).

Former Prosecutor Advantage

Federal tax evasion cases are among the most complex white collar prosecutions, involving detailed financial analysis, sophisticated legal theories, and high stakes for defendants. At the Law Offices of Matthew Cohan, our experience as a former prosecutor provides significant advantages in defending these cases:

Understanding Government Strategy: We know how federal prosecutors and IRS Criminal Investigation build tax evasion cases, what evidence they prioritize, and what weaknesses they attempt to conceal. This insider knowledge allows us to anticipate the government's approach and counter it effectively.

Recognizing Weak Cases: Not every IRS-CI referral results in prosecution. We understand what makes a strong case from the government's perspective and can identify cases where prosecution may be inappropriate or where charges can be reduced. This knowledge is invaluable during pre-indictment negotiations.

Challenging Financial Evidence: Tax cases often rely heavily on complex financial analysis and expert testimony. We know how to challenge the government's financial experts, calculations, and methodologies, and can retain qualified defense experts when necessary.

Negotiating Favorable Outcomes: Our prosecutorial background enables us to negotiate effectively with Assistant U.S. Attorneys and DOJ Tax Division prosecutors. We understand what types of resolutions are realistic and can advocate persuasively for charge reductions, favorable plea agreements, or alternative dispositions.

Sentencing Advocacy: Even if a conviction occurs, sentencing provides opportunities to minimize consequences. We understand federal sentencing guidelines for tax offenses and know how to present mitigation evidence effectively, including cooperation, acceptance of responsibility, restitution efforts, and personal circumstances that may warrant downward departures from guideline ranges.

Pre-Indictment Representation

In many tax evasion investigations, defendants become aware they are under investigation before charges are filed. This pre-indictment phase presents critical opportunities for defense intervention:

Preventing Charges

Early representation may prevent charges from being filed. This can involve demonstrating to prosecutors that the evidence is insufficient, that the defendant lacked requisite willfulness, or that civil resolution is more appropriate than criminal prosecution.

Proffer Sessions

In some cases, defense counsel can arrange proffer sessions where the defendant provides information to prosecutors under limited immunity. When handled properly, proffers can persuade prosecutors that criminal charges are unwarranted.

Voluntary Disclosure

The IRS Voluntary Disclosure Program allows taxpayers with unreported foreign accounts or undisclosed income to come forward voluntarily. While voluntary disclosure does not guarantee immunity from prosecution, it significantly reduces the likelihood of criminal charges and can limit civil penalties.

Preservation of Assets

Pre-indictment representation allows defendants to address asset protection issues before the government seeks restraining orders or seizures.