Tax fraud penalties were recently upheld against Miguel Robleto of Oregon by the 9th circuit. These were civil tax fraud penalties pursuant to IRC Section 6663, not criminal tax evasion charges under IRC Section 7201. The difference is that although you can wind up paying a lot of money if civil tax fraud penalties are imposed at least you won't go to jail. In some cases the IRS brings criminal tax evasion charges, and then goes after you for the taxes, plus a civil tax fraud penalty. Although Mr. Robleto probably doesn't think so he may have been lucky that the IRS didn't bring criminal tax evasion charges.
The civil tax fraud penalty under IRC Section 6663 is 75% of the tax that is owed. The process of imposing the civil tax fraud penalty is a lengthy one. Generally the first step is a tax audit, sometimes followed by an appeal to the Internal Revenue Service's Appeals Division. Next the IRS will issue a notice of deficiency, after which the taxpayer may petition the United States Tax Court to decide his case. In order for the Tax Court to uphold the fraud penalty it must find clear and convincing evidence of tax fraud. That's just what happened in Mr. Robleto's case.
Mr. Robleto was a small business owner, and under the auspices of the Oregon DMV charged non-English speakers a fee for administering Oregon drivers' license exams. Although the Tax Court determined, and Mr. Robleto pretty much admitted, that he failed to report over $300,000 spread over four years his excuse was that he had never operated a business before, that he was overwhelmed by all of the customers he had, that he was totally inept in handling the financial aspects of his business, that he couldn't even pay his utility bills on time, that he had unopened envelopes of cash lying around his home, and that the filing of his incorrect income tax returns was at worst grossly negligent, but not fraudulent.
The Tax Court didn't buy it. Instead the Tax Court looked at various so-called badges of fraud including inadequate books and records, concealment of ownership of assets, cash transactions and cash hoarding. As the Tax Court so subtly put it:
Dealing in large amounts of cash and not keeping any records thereof often go hand in hand with intentional underreporting of income and taxes. Noteworthy are [Robleto's] placement of assets in nominee names and [his] lack of cooperation.
Robleto probably wasn't helped by the fact that he had a safe in his house with almost $200,000 of cash contained in it, or that he had a side business of preparing tax returns. He hired an accountant to prepare his own tax returns, but neglected to tell the accountant about the income from the preparation of the tax returns.