Criminal Tax Penalties vs Civil Tax Penalties
March 10, 2020

Differences Between Criminal Tax Penalties and Civil Tax Penalties


When filing our annual taxes, an audit is something everyone would prefer to avoid at all costs. Audits can be time consuming and stressful, forcing taxpayers to produce evidence and documents that may or may be readily available (often times from several years ago).

In terms of the differences between criminal tax penalties and civil tax penalties, the matter typically depends on specific facts and circumstances provided by the taxpayer under review. Cases where the action is viewed as a criminal matter tend to fall under the category of ‘tax evasion.’ Some common tax evasion or fraud issues include:

  • Unreported income
  • Underreporting income
  • Fraudulent deductions
  • Unreported foreign accounts
  • Unreported foreign income
  • Unreported foreign assets
  • Unreported foreign investments

Committing tax evasion or tax fraud allows the IRS to prosecute and send you to jail. Generally, most tax evasion criminal penalties carry a maximum five-year prison term and a fine of $100,000 ($500,000 for corporations). However, the same conduct that is considered to be criminal tax fraud can also be considered civil tax fraud.

The IRS has the power to decide whether or not it wants to impose criminal tax penalties, civil tax penalties, or both. Unlike criminal penalties for tax evasion, civil tax fraud does not result in jail time. Rather, civil tax fraud can result in a penalty of 75% of the tax due, in addition to any interest owed.

Although committing civil tax fraud does not carry criminal penalties, civil tax fraud penalties are still quite severe. Being found to be fraudulent by the IRS can lead to further audits from year-to-year, which can be a significant inconvenience. Additionally, beyond the 75% penalty on taxes due, the IRS has the power to issue additional penalties in cases where one hasn’t filed a tax return for one or more years (known as a failure-to-file), hasn’t paid the proper taxes for one or more years (known as failure-to-pay), and has undisclosed or unreported foreign accounts, assets, investments, and/or income.

Therefore, while it may seem that not being subject to criminal tax penalties is a more desirable position for one to be in, due to the potential severity of civil tax fraud penalties, civil charges should not be viewed as a lesser or better option. The IRS is able to wield great authority and power when handing down both civil and criminal penalties for tax fraud and evasion. Additionally, having criminal tax penalties imposed does not mean that civil tax penalties won’t also be imposed. In actuality, most criminal tax cases result in a convicted defendant being required to pay civil tax and penalties, as well as criminal fines.

Negligence vs. Intentional Tax Fraud:

The difference between negligence and intentional tax fraud is dependent on the circumstances of a particular situation. Never filing a return is an example of non-willful negligence. In such cases, if you are a W-2 employee who has taxes withheld from each paycheck, the fact that some taxes are automatically withheld can work in your favor.

If you failed to file a return, however, because you earned a substantial amount of income and simply refused to report it, you are now subject to criminal violations, as this is viewed as intentional tax fraud.

Different Statutes of Limitations:

Civil tax fraud and criminal tax fraud have different statutes of limitations. For civil tax fraud, there is no statute of limitations, and the tax may be assessed at any time. Conversely, a criminal statute of limitations exists, but it applies only to the prosecution of the crime (e.g. the act of tax evasion) rather than the assessment of the tax owed. In most cases, the statute for criminal tax fraud is three years after the taxpayer commits the offense.

Different Defenses for Civil and Criminal Tax Crimes:

Different defenses are available for civil tax fraud and criminal tax fraud. When a civil suit for tax fraud follows a criminal proceeding for tax fraud, the doctrine of “collateral estoppel” may apply. Under the legal theory of collateral estoppel, if certain technical requirements are met and an issue is decided in one proceeding, it may not be retried again in a second proceeding.

However, this doctrine may be beneficial to either the government or the taxpayer, depending upon the order of the civil/criminal proceeding and the outcome of the first case.

As an example, consider a criminal proceeding followed by a civil proceeding. If the government wins the criminal tax evasion suit, the taxpayer generally is “collaterally estopped” in the second (civil) proceeding from contesting that he committed fraud. The reason for this is because the government already proved fraud “beyond a reasonable doubt,” and a civil suit actually requires less evidence than that, a standard known as “clear and convincing” evidence.

As another example, if the taxpayer is acquitted of criminal tax evasion in the first suit, does the legal theory of collateral estoppel actually benefit the taxpayer? Unfortunately for the taxpayer, it will not help. The initial suit demonstrated conviction was not provable “beyond reasonable doubt.” Therefore, it remains to be seen in the civil suit whether it can be established using the lower evidentiary standard of “clear and convincing evidence.”

Alternatively, if the order of the proceedings are reversed, with the government first bringing a civil suit and losing, and then attempting to bring a criminal suit for tax fraud, collateral estoppel may actually help the taxpayer. The taxpayer may attempt to collaterally estop the government in the second (criminal) proceeding from asserting the existence of fraud. Therefore, under this specific scenario, the doctrine of collateral estoppel would help the taxpayer.

In summation, the differences between civil tax penalties and criminal tax penalties are vast. Given the nuances, the process can be confusing and often cause additional (albeit unintentional) errors by taxpayers. It is always recommended that you seek out a qualified and experienced tax attorney to guide you through the process and help ensure that, if you are subject to either criminal or civil penalties, you have an advocate who will fight to reduce those penalties and put into context your unique situation that led to the tax filing errors.

Abajian Law is a Los Angeles firm with team of experienced criminal tax attorneys who are able to answer your questions and help you navigate the difficult process of taking on the IRS.

As stated previously, the penalties for such tax infractions — both of a civil and criminal nature — can be severe, potentially resulting in jail time. Therefore, it is imperative that you hire the best criminal tax attorney available to protect your interests and potentially avoid an indictment or eventual incarceration.

Abajian Law is a firm you can trust with years of experience helping people just like you take on the IRS and win, allowing them to lead their lives without fear of unknown penalties.

For a consultation, contact us online or via telephone at 818-396-5059.

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