Section 6653(b) of the Internal Revenue Code imposes substantial civil penalties for underpayment of tax if there’s “fraud.”
Section 720 1 of the Code imposes criminal penalties on [ any] person who “willfully attempts in any manner to evade or defeat any tax.”
Neither of these key concepts “fraud” or “evasion”
are anywhere defined in, the Internal Revenue Code, yet the law considers them the same: in practice, civil fraud amounts to criminal evasion, and vice versa.
Now consider the following case.
Gray was charged with three counts of tax evasion (Section 7201) for three tax years. He pleaded guilty, and was sentenced. The guilty pleas to the tax evasion charges were limited to the Section 7201 violations, and “no disposition was being made of [Gray’s] civil tax liabilities.”
Not long after, the I.R.S. informed Gray about his civil tax liability for those three tax years. At the same time, the Service also informed him about the 50% fraud penalty it had assessed. The dollars involved were substantial, so Gray went into the Tax Court to get relief. One important aspect of the tax court case was the very expensive 50% fraud penalty that had been assessed against Gray under Section 6653(b) of the Internal Revenue Code: “If any part of any underpayment. . .of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment....” But the tax court held that Gray couldn’t complain about the civil fraud penalty because he had earlier pleaded guilty to the criminal fraud/evasion charges.More
