Due to its steep rate, the civil fraud penalty is one of the most powerful tools that IRS has. It applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the underpayment attributable to fraud. Although IRS has the burden of proving fraud by clear and convincing evidence, if it shows that any portion of an underpayment is due to fraud, the entire underpayment is treated as attributable to fraud except for any portion hat the taxpayer shows (by a preponderance of the evidence) not to be so attributable.
What is IRS Civil Fraud Determination?
Other adverse results also flow from a civil fraud determination. For example, no time limit exists on the assessment and collection of tax if a fraudulent return is filed. Likewise, a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes. As a result, taxes shown on such a return are not normally discharged in a bankruptcy proceeding. This can be of very serious consequence to a tax payer who is trying a new start.
Definition of IRS Civil Fraud?
What is Civil Fraud? Although civil fraud is not defined by statute, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed. Fraudulent intent is rarely shown by a single act or by direct proof of a taxpayer’s intent. Instead, it’s usually shown by looking at all of the facts and circumstances.
What is the IRS Civil Fraud Penalty?
The civil fraud penalty does not apply if no underpayment exists or if no return is filed. However, a separate fraudulent failure to file penalty, imposed at a maximum rate of 75%, may apply to late-filed or non-filed returns.
Defenses of Civil Fraud Penalty
Certain constitutional defenses to the civil fraud penalty, including double jeopardy, have been rejected because the penalty is civil and not criminal in nature. The tax law clearly provides that the reasonable cause and good faith defense, which is available against certain accuracy related penalties such as the negligence penalty, is also available against the civil fraud penalty, but the usefulness of the defense is limited because the fraudulent intent that is required for imposition of the civil fraud penalty is difficult to reconcile with reasonable cause and good faith.
How to Defend IRS Civil Fraud Penalty?
However, taxpayers have often been successful in avoiding the civil fraud penalty by proving that they relied reasonably on professional advice. In invoking this defense, it’s critical for a taxpayer to show that he gave complete information to his adviser and that he actually followed the advice.