Tax fraud proceedings can be either civil or criminal, and different burdens of proof will apply in either proceeding. In criminal proceedings, the IRS must prove guilt beyond a reasonable doubt, whereas in civil proceedings the IRS need only prove fraud by clear and convincing evidence (that the thing to be proved is highly probable or reasonably certain). https://www.irs.gov/irm/part9/irm_09-005-009.
Regardless of whether the proceeding is civil or criminal, fraud can be tough to prove due to the typical dearth of direct evidence of a defendant’s fraudulent intent, the Internal Revenue Service (IRS) has noted that generally speaking, circumstantial evidence together with “reasonable inferences” can be relied upon to mount a successful tax fraud case, usually involving deception, misrepresentation of material facts, false or altered documents, or some sort of evasion (i.e. diversion or omission). IRS, Internal Revenue Manual, Evidence of Fraud 188.8.131.52, available at https://www.irs.gov/irm/part25/irm_25-001-006.html.
Courts also tend to find an “intent to evade” taxes, or an intent to defraud the IRS, when certain factors are present. These include understatement of income (omissions or failures to report substantial amounts of income); dubious deductions; accounting improprieties; taxpayer actions evidencing intent to evade (e.g. destruction of records, transfer of asserts); consistent underreporting of taxable income; inexplicable or suspicious behavior; failure to cooperate with the IRS; concealment of assets; illegal activity; inadequate records; dealing largely in cash; failure to file tax returns; education and experience. Id. While this is a non-exhaustive list, it is likely that one of these “badges” of fraud will be present in a tax fraud case.
Such evidence of tax fraud can also apply to tax planner fraud, i.e. situations in which a tax planner is the individual responsible for defrauding the IRS by employing any one of a number of techniques intended to illegally reduce tax liability. In addition to the abovementioned indicators, assertions by a tax planner that he or she can obtain larger refunds than other attorneys, or documents indicating a fee based upon a percentage of the amount refunded may be used as evidence of tax attorney fraud. https://www.irs.gov/irm/part9/irm_09-005-009.
The filer is ultimately responsible for the information contained in his or her tax return, so pointing fingers at the tax attorney after the fact will not relieve you of your obligation to disclose accurate information to the IRS. Thus, it is up to you to properly screen for the right tax specialist, and to avoid being lured in by a tax attorney promising above average tax savings.
Innocent Spouse Relief
When a person and their spouse file a joint tax return, they usually do so to take advantage of certain favorable tax benefits. However, the decision to file a joint return also comes with certain downsides, namely the liability typically incurred by both spouses for federal tax liabilities incurred on a joint return as well as both spouse’s responsibility for the accuracy and completeness of that return.
This liability is called “joint and several liability,” meaning that the IRS has the legal right to collect the entire sum of the tax liability from either you or your spouse, even if you later decide to divorce, sign a separation agreement. Even if your spouse decides to put in writing that he or she will cover the back taxes owed, the IRS remains entitled to go after you to collect. Joint and several liability derives from you and your spouse’s decision to file a joint tax return in a given year. Practically speaking, it means that if your spouse has incurred federal tax liabilities, and you have filed a joint return with your spouse, the IRS can look to you to satisfy those debts unless you seek one of several innocent spouse remedies. https://www.irs.gov/irm/part4/irm_04-011-034.html. If your money is more easily accessible than your spouse’s, it is all but guaranteed that the IRS will come after you instead.
Generally, a spouse may obtain one of three “innocent spouse” remedies: (IRC Section 6015(b)), Election to Allocate a Deficiency (IRC Section 6015(c)), and Equitable Relief (IRC Section 6015(f)). Innocent Spouse Relief requires a showing that you were unaware of your spouse’s activities that caused the tax liability, whereas Election to Allocate a Deficiency applies in cases of separation or divorce. Yet both Innocent Spouse Relief and Election to Allocate a Deficiency only apply where the IRS has made new or additional tax assessments on your joint return. Equitable relief, on the other hand, may be obtained for the entire amount due if collection from you would be “inequitable,” or unfair. https://www.unclefed.com/AuthorsRow/RobertNath/faq-isrd.html. This is a difficult standard to meet, and generally speaking, the IRS grants such relief sparingly.
In order to invoke innocent spouse relief, the so-called innocent spouse must file Forms 8857, Request for Innocent Spouse Relief, and 12507 (also be sure to consult instructions, as well as Publications 971 and 3512, and the IRS discussion on innocent spouse questions and answers, available at https://www.irs.gov/Individuals/Innocent-Spouse-Questions-&-Answers).
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.