Question

1. Your client has just had a visit from an IRS special agent who suggested the possibility of a charge for tax evasion. Discuss the following:

A. What is tax evasion?

B. Who investigates?

C. Can the IRS require you to turn over your client’s tax documents?

D. Are there any civil penalties involved?

Answer 1

(A) Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.

KEY TAKEAWAYS

• Tax evasion can be either the illegal non-payment or underpayment of actual tax liabilities due.
• Tax evasion can be determined by the IRS regardless of whether or not tax forms were filed with the agency.
• To determine tax evasion, the agency must be able to show that the avoidance of taxes was willful on the part of the taxpayer.
• While tax evasion is illegal, tax avoidance includes finding legal ways (within the law) to reduce taxpayer obligations.

(B) Failure to do so by falsifying or withholding information is against the law and constitutes tax fraud. Tax fraud is investigated by the Internal Revenue Service Criminal Investigation (CI) unit.

(C) Section 10.28, which states that a “practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations.”

Records of the client are defined by Section 10.28(b) as “all documents or written or electronic materials provided to the practitioner or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client.” Records of the client include materials that were prepared by the client or a third party, such as an investment manager or a bank or a brokerage firm, and provided to the practitioner to prepare the requisite tax returns

(D) If you commit tax evasion or tax fraud, the IRS can prosecute you and send you to jail. Generally, most tax crimes carry a maximum five-year prison term and a fine of $100,000. The same conduct which constitutes criminal tax fraud may also be considered civil tax fraud. It's up to the IRS whether it wants to impose criminal tax penalties, civil tax penalties, or both; civil tax fraud can't send you to jail. However, it can result in a penalty of 75% of the tax due, plus interest