How Civil Tax Fraud Differs From Criminal Tax Fraud
Like so many other financial and property crime, the taxpayer’s conduct is usually the biggest difference between civil tax fraud and criminal tax fraud. If Susan bounces a check to the grocery store, the merchant will most likely forget the matter if Susan makes restitution, including bank fees. But if Susan bounces three checks in three days to three different store locations, a criminal prosecution is likely forthcoming.
For the store, the result is the same either way, because in each case, the store gets its money. But the consequences to Susan are much more severe, especially since theft is a crime of moral terpitude.
Therein lies the key in both the difference between civil and criminal tax fraud and the best way to bring a criminal tax prosecution to a favorable end. If the taxpayer’s attorney can convince the IRS that the facts do not fit the profile of most other criminal tax prosecutions, the taxpayer may be able to simply make restitution and move on.
Some General Differences
The burden of proof is perhaps the biggest differences between any civil and criminal case, such as O.J. Simpson’s murder prosecution and the subsequent $25 million wrongful death verdict the families obtained against him. Prosecutors must prove guilt beyond a reasonable doubt, a term that is not very well defined but usually means a doubt based on reason as opposed to fanciful thinking. In civil tax cases, the government must establish liability by clear and convincing evidence, or a firm belief. Clear and convincing evidence is usually the burden of proof in child custody cases, so lawyers often ask potential jurors “if the state wanted to take your children away, how certain would you want the jurors to be?”
There are some other differences as well, such as the nature of the penalties (criminal tax cases involve large fimes and jail time) and the statute of limitations (typically three years in a criminal case).
The Key Difference Between Civil and Criminal Tax Fraud
It’s not too much of an oversimplification to say that civil tax cases usually involve a mathematical error, and criminal tax cases typically involve fraud or some other conduct which the IRS feels necessary to punish; criminal prosecutions also serve as a deterrent against future misconduct by that taxpayer or others similarly situated. Therefore, the presence (or absence) of fraud often determines the Service’s course of action.
- Fraud Badges: Items like spending levels that are well above one’s reported income, substantial unexplained net worth increases, mysterious bank deposits that exceed reported income, and documents which appear to be false or doctored are indications that fraud may be present, but they do not constitute fraud. If these are the facts, a criminal tax fraud case is hard to prove, because the burden of proof is very high.
- Affirmative Acts: On the other hand, if the facts show that the taxpayer omitted specific items but included other similar items, intentionally concealed assets (including bank accounts), funnelled business receipts to non-business accounts, or covered up the sources of these receipts, there is evidence of actual fraud, because the aforementioned items constitute affirmative acts of fraud.
Typically, the analysis looks something like a Venn diagram. There’s a circle of fraud badges on the left, a circle of affirmative acts on the right, and a very large area in the middle where the two overlap.
One of the most recent Supreme Court cases on this issue is 1991’s Cheek v. United States. Mr. Cheek was a tax protester who did not file any returns for almost a decade because he believed that his wages were not “income” under the Sixteenth Amendment which, he claimed, only applied to profit or gain as opposed to salaries and wages. The judge did not allow the jury to consider that defense, and on that basis, the Supreme Court overturned Mr. Cheek’s conviction. Justice Byron White wrote that the taxpayer’s beliefs only have to be subjectively reasonable.
In other words, if the taxpayer honestly believed that a form did not need to be filed or that there was no fraudulent intent, the government will be hard pressed to prove a criminal tax evasion case. Essentially, the difference between civil tax fraud and criminal tax fraud comes down to how much proof the government can come up with.