Thursday, August 2, 2012

Civil Tax Fraud - IRS Burden of Proof and Negative Inference from Fifth Amendment Silence (8/2/12)

In the Tax Procedure class, we study fraud with respect to tax obligations.  Fraud has criminal and civil components.  Although we cover briefly the criminal components, I cover those in detail in a separate class, titled Tax Fraud and Money Laundering which will be taught next in the Spring of 2013 (see web page here).  In this Tax Procedure class we focus more on the civil components.

There are two key civil fraud penalties in the Code.  The one principally encountered in practice is Section 6663, here.  That section imposes a civil fraud penalty of 75% of the portion of an underpayment required to be shown on a return if "attributable to fraud."  The other key civil fraud penalty is Section 6651(f), here, which triples the failure to file penalty, to a maximum of 75%, if the failure to file is "fraudulent."  Each of these is viewed as a civil counterpart of the tax evasion crime under Section 7201 which can apply to a fraudulent return and a fraudulent failure to file.

Tax Procedure students might want to review an example of how the Government proves civil fraud that I discuss in a recent Federal Tax Crimes Blog entry, titled Tax Court Finds Fraud Based, in Part, On Negative Inference from Fifth Amendment Assertion (7/31/12), here.  The key points relevant to Tax Procedure that I discuss in that blog entry are:  (1) general rules of civil tax fraud cases, including certain "badges of fraud" permitting an inference of fraud for purposes of meeting the requirement that the IRS prove fraud by clear and convincing evidence and (2) the role of a negative inference when the taxpayer asserts the Fifth Amendment in a civil proceeding.

As noted in the linked Federal Tax Crimes blog entry, the civil fraud determination has two principal consequences.  First, the Section 6663 75% civil fraud penalty applies.  Second, for each year in which there is civil fraud, there is no statute of limitations on assessments for the tax, the civil penalties (civil fraud for the portion deemed attributable to civil fraud or accuracy related penalty under Section 6662 as to the portion of the tax not attributable to civil fraud).  (Note that as to fraudulent failure to file, there is no special statute of limitations necessary because Section 6501(c)(3), here, keeps the statute open for all failures to file but the second exception for willful attempt to evade (Section 6501(c)(2)) would cover it also.)

The relevant portions of the books discussions these issue civil fraud issues are:

Townsend Tax Procedure (Footnoted Version):
  • Statute of Limitations for False Return Return or Attempted Evasion (pp.. 171-174.)
  • Statute of Limitations for No Return (p. 174)
  • Civil Fraud Penalty for Fraudulent Return (pp. 298 - 302)
  • Fraudulent Failure to File Return Penalty (p. 302 - 303)
Townsend Tax Procedure (Nonfootnoted Version)
  • Statute of Limitations for False Return Return or Attempted Evasion (pp.. 121-.123)
  • Statute of Limitations for No Return (p. 123)
  • Civil Fraud Penalty for Fraudulent Return (pp. 216 - 218)
  • Fraudulent Failure to File Return Penalty (p. 218 - 219)
Errata:  The contents of this blog will not be errata to either book.  However, I do expect to add to an appropriate footnote in the footnoted text (probably footnote 940 on p. 299 that civil fraud is often proved by reference to "badges of fraud" and that, in considering whether fraud exists, a court may consider the negative inference from the assertion of the Fifth Amendment.

Please note the page in the upper right titled "Federal Tax Procedure Book and Updates/Errata" (click here) that I provide a spreadsheet with the guide to the errata and links to the particular blogs for the errata.

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