Tax Fraud and Criminal Penalties

Tax fraud offenses are typically defined by two primary legal frameworks: the Internal Revenue Code (IRC) at the federal level and the D.C. Code for local violations.
 

Federal Statutes (IRC): The Internal Revenue Code (IRC) governs most federal tax fraud offenses, focusing on acts that constitute a willful attempt to defraud the U.S. government. Key sections include:

• IRC §7201 – Tax evasion: This is the most severe charge, addressing the willful attempt to evade or defeat any tax and requiring proof of an affirmative act of evasion.
• IRC §7206 – False statements: This makes it a felony to file fraudulent returns or documents, particularly those signed under the penalties of perjury.
• IRC §7212 – Obstruction: This statute prohibits interference with the administration of tax laws, often charged when a taxpayer attempts to corruptly impede an IRS investigation.

District of Columbia Statutes (D.C. Code): Washington D.C. supplements federal enforcement with its own statutes, allowing the Office of Tax and Revenue (OTR) and the Attorney General to pursue local violations. These laws cover District-specific income, sales, and business taxes.

• D.C. Code §47–4101: This section details civil penalties for underreporting or failing to file taxes, which typically involve fines and interest without the threat of incarceration.
• D.C. Code §47–4102: This statute sets out criminal penalties for intentional acts of tax fraud specifically targeting District taxes.
• D.C. Code §47–4103: This provides enforcement authority for the Office of Tax and Revenue (OTR), empowering it to conduct audits and investigations within the District.

Fraudulent activities can span both individual and corporate tax filings, ranging from simple omissions to complex schemes.

Individual Violations:

• Failing to report all sources of income, such as side job earnings, cryptocurrency gains, or offshore bank account interest.
• Claiming false deductions or credits, like non-existent charitable donations or inflated business expenses.
• Using fake invoices or receipts to substantiate non-qualifying expenses on a tax return.
• Filing fraudulent tax returns that contain deliberate and material misstatements of fact.

Business-Related Violations: Businesses often face higher scrutiny due to the volume of transactions and various tax types involved.

• Falsifying payroll records to underreport employee wages and avoid payroll tax liabilities.
• Understating sales revenue, particularly in cash-intensive businesses, by keeping two sets of books.
• Misclassifying employees as independent contractors to avoid paying employment taxes, a common tactic in the gig economy.
• Avoiding or failing to remit collected sales tax, which constitutes misappropriation of government funds.

Taxpayers found in violation of D.C. or federal tax laws face a cascade of financial and judicial repercussions.

Civil Penalties (Monetary Fines): Civil tax fraud, proven by a lower standard of "clear and convincing evidence," can be devastating financially.

• A significant 75% penalty on the amount of underpayment that is proven to be attributable to fraud.
• The accrual of additional interest on both the unpaid tax and the associated penalties, compounding the financial burden over time.
• For businesses, civil penalties may also include the revocation of licenses or permits necessary to operate within Washington D.C.
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Criminal Penalties (Fines and Imprisonment): Criminal prosecution, which requires the highest standard of proof—"beyond a reasonable doubt"—targets willful evasion.

• Prison sentences can be severe, with willful tax evasion under IRC §7201 or similar D.C. Code sections carrying a maximum of up to 5 years in federal prison per offense.
• Substantial financial fines: up to $100,000 for individuals and up to $500,000 for corporations for felony tax evasion.
• In almost all cases, the convicted individual or entity must pay full restitution to the government for the evaded taxes, plus civil penalties and interest.
• Other judicial consequences include probation and supervised release following any term of imprisonment.

The IRS and the D.C. Office of Tax and Revenue each have specialized divisions dedicated to identifying and prosecuting tax fraud within their respective purviews.

IRS Criminal Investigations (CI): IRS-CI agents are federal law enforcement officers who investigate and recommend prosecution for complex tax schemes. Their focus is often on the most egregious cases designed to defraud the federal government.

• Their investigative scope includes sophisticated schemes like offshore income concealment and the use of shell corporations to hide assets.
• They actively pursue high-income non-filers who willfully refuse to comply with their tax obligations.
• Recent enforcement has focused on emerging areas of evasion, such as the deliberate underreporting or non-reporting of cryptocurrency transactions.
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D.C. Office of Tax and Revenue (OTR) Enforcement: The OTR is the local agency responsible for administering and enforcing the District’s tax laws. Their enforcement activities are vital for maintaining the integrity of D.C.’s local tax base.

• The OTR oversees compliance with sales and use tax, which is a major source of revenue for the city.
• They manage business tax enforcement, including audits of corporate income and franchise taxes for entities operating within D.C.
• The OTR uses sophisticated audit and fraud detection techniques tailored to the local economic environment to uncover non-compliance at the city level.