Federal courts now using intended tax loss, rather than ‘actual’ tax loss in sentencing tax crimes

If you intentionally evade your tax obligations, you can spend time in prison.

Typically, your prison sentence will be determined by analyzing the amount of tax loss you caused the government to incur. Generally, defendants who create greater amounts of tax loss for the government will spend greater amounts of time in prison under the federal sentencing guidelines.

In the case of United States v. Albert William Upshur, the Third Circuit held that intended tax loss will be used in sentencing calculations for tax crimes instead of actual tax loss. The intended loss is the loss that would have occurred if the defendant had successfully evaded their tax obligations.

Third Circuit issues ruling on sentencing calculations for tax crimes

In May of 2023, the Third Circuit issued a ruling in the case of United States v. Upshur, establishing that intended tax loss will be used for tax crimes sentencing calculations, as opposed to actual tax loss. Intended tax loss refers to the financial loss the government would have sustained if a defendant's tax crimes were successfully completed.

In Upshur, the defendant was indicted on a charge of perpetrating two fraudulent tax schemes over the course of a decade. First, Upshur told others they could pay off their debts by wiring money to Upshur and allowing him to file tax forms stating a trust he operated withheld substantial amounts of income tax on their behalf, hopefully resulting in substantial tax refunds. Upshur charged individuals $500 to join his scheme and an additional $250 for each debt they wished to pay off. However, this scheme was mostly unsuccessful. The Internal Revenue Service (IRS) did issue a sizable refund for one participant in Upshur's scheme, but the agency quickly identified its mistake and managed to freeze the payment.

In Upshur's second scheme, he would issue large overpayments to the IRS in hopes of generating a significant refund. This scheme also failed to generate any sizable refunds from the IRS. Still, in conjunction with Upshur's first scheme, his actions resulted in an intended-loss figure of $325 million.

Ultimately, sentencing guidelines suggested a prison sentence between 324 and 328 months. Still, the lower court imposed a lower prison sentence of 84 months.

At the Third Circuit Court of Appeals, Upshur argued the tax loss figure used to calculate his sentence was improper. He asserted his actions had actually not caused any loss to the U.S. Treasury. However, on appeal, the Third Circuit upheld the lower court's decision to use the intended-loss figure to calculate Upshur's sentence for his tax crimes.

How the IRS catches tax fraud

There are a number of different ways the IRS catches people who cheat on their taxes. For instance, the following are all common examples of methods the agency employs:

• Using tips from whistleblowers

The IRS routinely catches tax evaders by using tips from whistleblowers. Whistleblowers are individuals who inform the IRS about illegal activities seeking a reward for the information. There are several reasons why a whistleblower may choose to report certain conduct. For example, a disgruntled employee who wants revenge may issue a report regarding their employer’s improper behavior. Furthermore, the spouse of a criminal tax evader may submit a report to the IRS simply because they want to do the right thing.

• IRS using computer AI-driven analysis to identify tax evaders

The IRS also utilizes a complex computer system that reconciles the information returns submitted by employers and various third parties (W2s & 1099s) with tax positions reported by individuals on their tax returns. If a discrepancy is identified, then the IRS will investigate the matter further. An audit or criminal tax investigation may be ordered if evidence of potential tax evasion is identified. They also are currently integrating artificial intelligence (AI) into their civil and criminal enforcement efforts.

Over time, the computer systems used to identify tax evaders have become more sophisticated. If you are concerned that you might be flagged for suspicious activity, then our dual-licensed tax attorneys and CPAs can help determine the appropriate course of action to bring you back into compliance without facing criminal tax prosecution.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

• Analyzing social media accounts

Furthermore, the IRS also can use information posted on taxpayers’ social media accounts to identify fraudulent behavior. For example, suppose someone’s public social media posts indicate that they are living a lifestyle that does not coincide with their history of reported income on their tax returns. In that case, the government may decide to perform an audit or criminal tax investigation. Still, it is not known whether the IRS can access private communications like emails or nonpublic social media posts.

When can you go to jail for tax evasion?

You are not at grave risk of going to prison for simply making minor mistakes on your tax returns. Tax evasion refers to the deliberate underpayment or nonpayment of taxes. Accordingly, in order for you to face criminal penalties for tax evasion, the government must have sufficient evidence to prove that you knowingly and willfully evaded your tax obligations.

There are several potential examples of tax evasion. For instance, an individual may commit tax evasion by purposely underreporting digital assets on their tax returns. Furthermore, an employer may simultaneously commit tax evasion and aid and abet their workers’ tax evasion by paying them in cash and not issuing W2s or 1099s to evade payroll tax obligations. Finally, people also regularly evade their taxes by failing to report overseas sources of taxable income. Lastly, people commit income tax evasion by understating taxable income, overstating deductions, and claiming credits to which they are not entitled.

The U.S. government aggressively detects and prosecutes tax crimes. The criminal tax penalties imposed against tax evaders can include significant fines and jail time. The average amount of jail time for tax evasion is between three and five years. In general, longer sentences are imposed against those who cause greater tax loss to the government. Still, other factors, such as the defendants’ criminal history, can come into play during sentencing calculations.

For support with your tax issues, contact the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or clicking here to schedule a reduce-rate initial consultation.

•The Tax Law Offices of David W. Klasing are based in California with satellite offices in other states.