Tax fraud and bankruptcy dischargeability
The federal laws governing bankruptcy and taxation often intersect, although their makeup, effectiveness, and interpretation are significantly impacted by distinct policy concerns, lobbying efforts, and judicial interpretations. These factors influence the interplay between bankruptcy debt dischargeability and tax fraud liability.
Criminal tax fraud proceedings are punitive in nature. They are prosecuted by the U.S. Attorney’s Office and are brought against alleged criminally culpable taxpayers. The remedy sought by the government can range from criminal fines to imprisonment. Because they are criminal proceedings, the burden of proof is proof beyond a reasonable doubt and rests with the federal government. The government must show that a taxpayer’s violation of a federal criminal tax statute was willful.
Civil and criminal tax fraud distinguished
To summarize the major differences between civil and criminal tax fraud:
- Statute of limitation: Although the government is not restricted by a statute of limitation to impose civil tax fraud penalties, there is a six-year statute of limitation for the government to commence a criminal tax fraud prosecution.
- Burden of proof: The burden of proof imposed on the government to establish civil tax fraud is clear and convincing evidence, while the burden for a criminal tax fraud proceeding is proof beyond a reasonable doubt.
- Remedy sought: The remedy sought by the government for civil tax fraud is the collection of the recalculated tax owed, interest, and a 75% fraud penalty.30 A criminal tax fraud conviction under Sec. 7201 leads to criminal fines of up to $100,000 ($500,000 for a corporation) and up to five years of imprisonment.
- Nature of proceeding: Civil fraud is a remedial action, while criminal fraud is punitive in nature.