One of the reasons why individuals should not evade their tax liabilities is the threat of tax penalties. The IRS is required to assess civil penalties on delinquent taxpayers. One of these civil penalties is the Civil Fraud Penalty and it’s one of the harshest tax penalties that can be assessed.
What is the Civil Fraud Penalty?
Under the 26 U.S. Code Section 6663(a), if any part of any tax underpayment required in the tax return is due to fraud, an additional tax penalty is assessed equal to seventy-five percent (75%) of the underpaid amount attributable to fraud. Hence, if you have filed a fraudulent return that resulted in underpayment of taxes, you may be penalized with seventy-five percent (75%) of the fraud-tainted portion of the underpayment.
Burden of Proof
If you are undergoing this kind of ordeal, you are probably wondering what you need to prove to avoid the penalty. You must know, though, that unlike other civil penalties imposed on taxpayers, the burden of proof that the taxpayer committed fraud is on the IRS. The IRS must prove the taxpayer’s fraud through clear and convincing evidence.
What is clear and convincing evidence? The Supreme Court defined it as the evidence is highly more likely to be true than otherwise. Therefore, the IRS must produce sufficient evidence to establish that any part of the underpayment was due to fraud.
Once the IRS has done so, the entire underpayment shall be attributable to fraud, except any portion the taxpayer establishes is not attributable to fraud. If there is a portion of the alleged underpayment that you believe is not due to fraud, your tax attorney will need to prove it by a preponderance of the evidence. You must be able to convince the fact finder that there is a greater than fifty percent (50%) chance that your claim is true.
Procedural Characteristics of the Civil Fraud Penalty
The fraud penalty is a civil sanction that has a remedial character. It primarily serves as a safeguard to protect the revenue and reimbursement to the Government for its investigation expense and loss resulting from the taxpayer’s fraud.
The IRS sends a notice of deficiency to the taxpayer following an examination to determine the tax liability. Through this, the taxpayer gains the opportunity of pre-payment review in Tax Court. In Tax Court, the IRS Commissioner has the burden of proof by clear and convincing evidence that the taxpayer committed fraud and intended to evade tax.
Fraud Penalty Survives
An interesting thing about the fraud penalty is that a taxpayer cannot evade it. In the case of a taxpayer who dies before he filed a fraudulent return, his liability for the penalty survives. The penalty survives the taxpayer’s death and is collectible from his estate even if discovery of the fraud occurred after his death.
On the other hand, in case of a discharge in bankruptcy, the taxpayer’s debt for the civil fraud penalty or liability attributable to fraud is not discharged. The IRS can claim the penalty against the bankruptcy estate or the debtor following the close of the bankruptcy case.