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Tax Evasion

Tax Evasion

Criminal defense attorney David M. Dudley defends individuals accused of a number of white collar crimes including tax evasion. If you are arrested for or are under suspicion of tax evasion, you should contact Mr. Dudley for an evaluation of your circumstances.

Tax evasion is when someone unlawfully pays less tax than he or she owes under the law. To be considered evasion it is up to the government to prove that someone has committed an overt act to be considered guilty of the crime of tax evasion.

Simply failing to file a tax return in a single year is a misdemeanor. If the government can show that someone consistently fails to pay taxes year after year and that this is part of a scheme to avoid paying taxes, this can be considered a felony under section 7201 of the Internal Revenue Code.

The Supreme Court in 1943 determined that an overt act must be found by the government in order to charge someone with tax evasion. In 1965, in a case called Sansone v. United States, the Supreme Court decided that the government must prove beyond a reasonable doubt the following:

  • Less taxes were paid than that which were owed
  • That a person willfully evaded paying taxes
  • That an “affirmative act” (rather than a passive lack of action) was committed in avoiding or attempting to avoid paying taxes

Not Filing and Not Paying

The IRS penalizes both. You are penalized for not filing a tax return and further penalized for not paying taxes. No matter what your financial circumstances, whether or not you are able to pay what you owe, you should always file a tax return or a request an extension by April 15, the deadline for paying taxes.

The penalty for failing to file is worse than the penalty for failing to pay. You should request an extension[1] to file if you cannot file your taxes by the April 15 deadline. You will have an automatic four-month extension of the filing deadline. Then you have until August 15 to file your return. By filing Form 4868, you may be able to get an automatic six-month extension.

If you receive an automatic extension, however, this does not extend your time to pay taxes. If you owe taxes, you should include an estimated payment with your request for an extension to file. You must pay 90 percent of your tax bill by April 15 or be charged both penalty fees and interest for the amount you failed to pay when you do file. Penalties begin at one-half percent a month and can go as high as one percent a month of the amount owed.

If your failure to file is because of fraud, you are penalized 15 percent for every month or portion of a month that your return is late. The maximum penalty goes up to 75 percent.

Tax Avoidance vs. Tax Evasion

Tax avoidance is taking advantage of legal ways to avoid paying taxes. For example, you can avoid paying federal income tax by investing in municipal bonds instead of putting your money in a savings account. The amount you earn in interest on a bond is not considered income that can be taxed whereas interest earned in a savings account is considered taxable income.

While tax avoidance is legal, tax evasion is a crime. Tax evasion indicates using unlawful means to avoid paying taxes. If any underpayment of taxes is due to fraud, the penalty is to pay 75 percent of the taxes still owed. Depending upon the circumstances, evasion of paying taxes also can carry a prison sentence.

White Collar Crimes: Selected Case Results

  • U.S. v. G.A.: The defendant owned several tobacco stores. As a result of an undercover operation, law-enforcement officers learned that he was avoiding payment of state taxes on cigarettes sold from his store by placing counterfeit tax stamps on the cigarette packages. A federal grand jury then indicted him for numerous contraband cigarette offenses through which he allegedly avoided paying over $1,500,000 in state taxes. The defense later reached a settlement of the case under which the defendant received a sentence of only 24 months. Although he was only a permanent resident, not a citizen, of the United States, the defendant was able to avoid deportation to his home country after his release from custody.
  • U.S. v. R.Y.: While directing a telemarketing operation, the defendant sold worthless art to consumers under false pretenses. According to the federal government, which indicted him for mail and wire fraud, the defendant’s conduct cost his victims over $7,000,000. After negotiating a plea agreement which held him accountable for several million dollars less than that, the defense persuaded the district court to impose a sentence of 60 months, a term far lower than that which he was originally facing.
  • U.S. v. R.S.: Paying retail clerks and medical receptionists to scan the credit cards of customers, the defendant used the information obtained to manufacture counterfeit credit cards. When he was indicted federally, the government claimed that he had caused losses of over $1,000,000 to cardholders and financial institutions. After reaching a plea bargain which left open the issue of aggregate loss, Attorney Dudley convinced the court to apply a reasonable doubt standard to the government’s claim of how much money his conduct caused victims, even though the court was not legally required to use such a high standard. Applying that standard of proof, the court found that the government could only demonstrate losses of $420,000. The court then departed slightly downward from the resulting guideline range to impose a sentence of 46 months, 41 months lower than the government’s recommendation.
  • U.S. v. T.S.: The defendant was indicted for over $6,000,000 in bank fraud in three jurisdictions: the District of Minnesota, the District of West Virginia, and the Central District of California. After extended negotiations, the defendant, who was looking at 20 to 30 years in federal custody, received a sentence of less than eight years.

“Extension of Time to File Your Tax Return,” IRS
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