Tax evasion is not a matter to be taken lightly. It is a serious federal offense that can lead to severe consequences, including substantial fines, interest on unpaid taxes, and even potential imprisonment under 26 U.S. Code 7201.
While criminal charges are not typically filed unless the IRS believes tax avoidance was willful or if you have failed to file, made underpayments, or made similar mistakes, the looming threat of prosecution may feel daunting regardless of whether the underpayment was intentional, especially if you owe a large amount.
Despite the potential severity of tax evasion charges, the IRS often shows leniency towards those who voluntarily disclose their underpaid taxes. This approach encourages individuals and businesses to come forward, offering the opportunity to avoid criminal charges and work towards a resolution.
26 U.S. Code 7201 attempt to evade or defeat tax says, "Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, 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 5 years, or both, together with the costs of prosecution."
Related 26 U.S. Code 7203 willful failure to file a return, supply information, or pay tax says, "Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than one year, or both, together with the costs of prosecution.
In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person concerning such failure if there is no addition to tax under section 6654 or 6655 concerning such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting "felony" for "misdemeanor" and "5 years" for "1 year."
The decision to disclose has its own advantages and disadvantages. Is voluntary disclosure the right choice for you?
What are the Pros of Voluntarily Disclosing Tax Evasion?
Let's begin by discussing some reasons someone might consider voluntarily disclosing tax evasion to the government.
Potential for Reduced Penalties
The IRS views voluntary disclosure favorably as it indicates a willingness to comply with tax laws and correct past errors. This approach can lead to reduced fines and penalties compared to those imposed if the IRS discovers the evasion independently of you.
Avoidance of Criminal Charges
Voluntary disclosure comes with a high potential for avoiding criminal charges. For many years, the IRS has implemented a voluntary disclosure practice (VDP), which provides guidelines for taxpayers to come forward voluntarily.
Suppose the disclosure is made in good faith, even if the evasion was willful. In that case, the IRS may recommend against prosecution-especially if the disclosure happens before the agency commences a criminal investigation.
Peace of Mind
Living with the fear of being discovered for tax evasion can be incredibly stressful. Voluntarily disclosing such issues can provide peace of mind and allow for proactive resolution. Taking steps to rectify the situation can alleviate the constant worry and anxiety associated with the fear of getting caught.
Opportunity to Negotiate Payment Terms
When you voluntarily disclose tax evasion, you can negotiate payment terms with the IRS that resolve your debt without overburdening you. This can include installment agreements or offers in compromise, where you settle your tax debt for less than the total amount owed.
Such arrangements can make paying back the taxes owed more manageable without causing significant financial strain.
What are the Cons of Voluntarily Disclosing Tax Evasion?
While there are many good reasons for considering voluntary disclosure, there may also be some drawbacks. Here are just a few.
Financial Burden
One significant disadvantage of voluntarily disclosing tax evasion is the immediate financial burden it may impose. You will be required to pay the owed taxes, interest, and possibly some penalties. This can be substantial, mainly if the evasion occurred over multiple years. For some, this financial strain can be overwhelming.
Lack of Guarantee Against Prosecution
While the IRS's Voluntary Disclosure Practice offers guidelines that may protect against prosecution, it does not provide a guarantee. There is still a risk that the IRS may decide to pursue criminal charges, especially in significant or egregious tax evasion cases. This uncertainty can be a considerable drawback for those considering voluntary disclosure.
Legal and Professional Fees
Voluntarily disclosing tax evasion often requires the assistance of legal and tax professionals to navigate the complex process effectively. The cost of hiring attorneys and accountants must be considered when disclosing voluntarily.
Possible Repercussions on Employment and Reputation
Admitting to tax evasion, even voluntarily, can affect your employment and personal reputation. Some employers may view tax evasion as a breach of trust or ethical standards, potentially leading to job loss or difficulty finding future employment. The stigma associated with tax evasion can also impact personal and professional relationships.
Comprehensive Disclosure Requirements
The IRS requires full disclosure of all previously undisclosed income, which can be time-consuming and stressful. For some individuals, the fear of missing details or making errors during this process can be a significant deterrent.
What is the Role of a Federal Criminal Defense Attorney?
Suppose you are facing the threat of criminal prosecution for tax evasion. Whether real or perceived, hiring a federal criminal defense attorney to assist in the voluntary disclosure process can be very beneficial.
While an attorney won't provide specific tax advice, they can provide legal representation and negotiate on your behalf to potentially reduce or eliminate criminal charges. Furthermore, having legal representation signals to the IRS that you take your responsibilities seriously and are committed to satisfactorily resolving your outstanding tax debts.
Contact our federal criminal defense law firm, Eisner Gorin LLP, in Los Angeles, California, for more information.
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