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Tax Evasion and Its Punishment

Guest Author - Consuelo Herrera, CAMS, CFE

The most publicized investigation concerning tax evasion was against Al Capone. In October 1931 he was sentenced to ten years in a federal penitentiary and a fine of $50,000. Al Capone accumulated a large fortune product of gambling.

Forensic accountants and federal investigators built up strong evidences against him. The perpetrators of tax evasion at the time kept little or no records at all, according to the IRS. Al Capone’s investigation is one of the precedent of its Criminal Investigation Division.

Many unscrupulous individuals and groups have encouraged others not to comply with the law. According to the IRS, many cases have been prosecuted and the perpetrators now face large sentences. The following cases are an example of violations and punishments:

A tax preparer was sentenced to 21 months in prison and ordered to pay $175,206 in restitution to the IRS for filing false income tax returns. This tax preparer pleaded guilty by admitting that she prepared false tax returns in order to create or to increase income tax refunds for her clients. For example, in one of the cases, she placed items on the tax return claiming a false income tax refund of $4,195. Without the false items, the taxpayer was entitled to a tax refund of only $26.

In a similar case, another tax return preparer was sentenced to five years in prison for filing false claims for tax refunds and identity theft. The sentence was of 60 months in prison, to be followed by three years of supervised release, and an order to pay $62,802 in restitution to the IRS. The perpetrator admitted that she filed 31 false federal income tax returns during a three-year period. She also prepared false returns with the personal identity information and Social Security numbers stolen from former clients and had the false refunds also deposited to bank accounts she controlled.

Another professional tax return preparer was sentenced to 70 months in prison and ordered to pay $6 million in restitution. The charges included conspiring to defraud the United States by filing false tax returns claiming nearly $6 million in false claims for refunds for individuals and evading over $171,000 in personal income taxes owed by him . According to the IRS, he prepared and electronically filed more than 10,000 fraudulent income tax returns for individual clients, which claimed false and fictitious education income tax credits.

The following list issued by the IRS portrays many of the arguments presented by perpetrators of tax evasion to their clients:

Despite the courts having consistently rejected these arguments, their promoters continue to expound them, even incurring penalties for bringing frivolous cases into court or for filing frivolous tax returns. They often present their arguments in a pseudo-legal format, luring unsuspecting people into participating in their schemes to evade taxes.


Some false arguments claim that:

o There is no Internal Revenue Code that imposes taxes;
o Only "individuals" are required to pay taxes;
o Code Section 861 limits taxable income to certain sources which do not apply to most U.S. citizens; or
o The government can assess taxes only against people who file returns.

The tax law is found in Title 26 of the United States Code.

o Section 6012 of the Code makes clear that only people whose income falls below a certain minimum level do not have to file returns.
o Sections 861 through 865 determine whether income is from a U.S. or foreign source - they do not in any way exclude income from taxation for a U.S. citizen or resident.
o Section 6201 of the Code states that the Secretary of the Treasury is required to make assessments "of all taxes imposed by this title",

Constitution-Related Arguments

1. First Amendment These arguments focus on using the Freedom of Religion clause of the First Amendment to reduce income tax liability. A common scheme calls for individual taxpayers to obtain.

2. Fourth and Fifth AmendmentsThese arguments claim that filing an income tax return violates the Fourth Amendment right to privacy or the Fifth Amendment right against self-incrimination. However, the courts have consistently held that disclosure of routine financial information required on a tax return does not incriminate an individual or violate the right to privacy.

3. Sixteenth AmendmentThese arguments claim that the constitutional amendment establishing the basis for income tax was never properly ratified. However, the courts have held that none of the points presented undermine the fact that the Sixteenth Amendment was indeed ratified in 1913.

IRS Steps Against Noncompliance

IRS multi-functional compliance approach:

o Helping otherwise innocent taxpayers, who have been misled by others, to rejoin the system; and
o Vigorously pursuing enforcement actions against those who continue to promote schemes or entice others to violate the law.

Regardless of the arguments used, they have two things in common:
o The arguments are consistently rejected by the courts; and
o The participants may face IRS enforcement.


Lesson learned: Evading tax leads to many criminal charges and punishments. Compliance is the way to go and the one that should be encouraged by accountants and tax preparers.

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Content copyright © 2014 by Consuelo Herrera, CAMS, CFE. All rights reserved.
This content was written by Consuelo Herrera, CAMS, CFE. If you wish to use this content in any manner, you need written permission. Contact BellaOnline Administration for details.

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