Tax Fraud – What are the Types of Tax Fraud the IRS Pursues?
The IRS takes tax fraud very seriously. If the IRS finds fraudulent activity, generally through an audit, it can mean stiff penalties and even jail time.
Receiving a notice that the IRS is conducting a criminal tax investigation is not something anyone wants to experience. Should such a notification be received, look into hiring a tax fraud lawyer as soon as possible.
What is IRS tax fraud?
Tax fraud involves a conscious decision to falsify tax records and returns. In most cases, the motivation for committing such an act is to avoid paying the rightful amount of taxes due on personal income, business profits, inventories, and other types of financial assets.
Tax evasion is a subset of tax fraud. Tax evasion usually entails a deliberate act of misrepresentation of taxable income to the IRS (see IRC § 7201). Both tax fraud and tax evasion are felony charges and they generally have the same level of punishment.
Serious violations of the IRS tax code such as tax fraud may lead to criminal charges. Most of the time though, tax fraud results in civil penalties only. Criminal charges are reserved for the most severe tax fraud cases, when a taxpayer intentionally evades paying taxes or engages in an illegal act in declaring taxes.
What types of acts constitute tax fraud?
Usually, fraud cases start with an audit of a filed tax return. During the audit investigation, the auditor may find errors that the taxpayer knowingly and willingly committed. When these errors go on for several years and in large amounts, it is common to find a pattern of willful evasion.
The following are some examples of fraud:
- understatement of income. For instance, taking a second job, receiving cash on the side and not reporting it.
- claiming exemptions or deductions that are not legitimate, both personal and business
- unscrupulous activities by tax return preparers
- abusive tax schemes to hide income
- altering tax returns and financial reports in order to reduce taxes owed
- inadequate records
- accounting irregularities (i.e., two sets of books, false entries on documents)
See also, Cases of General Tax Fraud Investigations.
What are the penalties for tax fraud?
There are civil and criminal penalties associated with a finding of tax fraud. Whether it is potentially criminal or civil depends on the severity and intent of the taxpayer to defraud the IRS.
If fraud is found, but not amounting to criminal activity, a taxpayer may be charged with civil tax fraud penalties. Civil tax fraud can include a penalty of up to 75% of the underpayment of tax attributable to fraud, in addition to the taxes owed (see IRC § 6663 and the IRS Fraud Handbook—Civil Fraud Section).
A criminal conviction can result in jail time and civil penalties for the following (see IRS Fraud jail time and penalties chart):
- Persons who willfully attempt to evade or defeat any tax imposed (tax evasion). Up to five years in prison or penalties of up to $250,000 for individuals and $500,000 for corporations or both, together with the costs of prosecution.
- Fraudulent statements or returns. Up to three years in prison or penalties of up to $250,000 for individuals and $500,000 for corporations or both, together with the costs of prosecution.
- Persons who willfully aid or assist in fraudulent activity. Up to three years in prison or penalties of up to $250,000 for individuals and $500,000 for corporations or both, together with the costs of prosecution.
What do you do when accused of tax fraud?
First and foremost, taxpayers facing a tax fraud criminal investigation should never represent themselves or allow themselves to be represented by non-attorneys or inexperienced attorneys.
If you have been contacted by IRS Criminal Investigations or you suspect you are under investigation for tax fraud, do not speak to anyone, including your CPA. Any conversation between you and your CPA is not considered to be protected by any type of privilege, and the IRS can compel your CPA to testify against you. All evidence you provide is admissible in court and can be used to bring criminal penalties against you.
Only speak to a tax fraud attorney. That way the communication between your attorney and yourself will be privileged and protected by the attorney client privilege.
Taxpayers needing assistance in dealing with a potential case of tax fraud and other IRS tax problems should seek the advice of a knowledgeable tax fraud attorney. The Los Angeles Tax Attorneys at Delia Law have many years of tax fraud experience and will competently represent you before the IRS. Please call for a no-cost tax attorney consultation for tax resolution at (310) 494-0100. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only.
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