What is Income Tax Fraud?
Income tax fraud is the willful attempt to evade tax law
or defraud the IRS. Tax fraud occurs when a person or a company does any of the
following:
1.
Intentionally fails to
file a income tax return
2.
Willfully fails to pay
taxes due
3.
Intentionally fails to
report all income received
4.
Makes fraudulent or false
claims
5.
Prepares and files a
false return
Is it Negligence or
Income Tax Fraud?
The IRS understands that the tax code is a
complex set of regulations and rules that are difficult for most people to
decipher. When careless errors occur, if signs of fraud are absent, the IRS
will usually assume that it was an honest mistake rather than the willful
evasion of the tax code. In this circumstance, the tax auditor will usually
consider it a mistake that is attributable to negligence. Although
unintentional, the IRS may still fine the taxpayer a penalty of 20 percent of
the underpayment.
The IRS can usually distinguish when an
error is the result of negligence or the willful evasion of the tax law. Tax
auditors look for common types of suspicious and fraudulent activity, such as:
6.
Overstatement of
deductions and exemptions
7.
Falsification of documents
8.
Concealment or transfer
of income
9.
Keeping two sets of
financial ledgers
10. Falsifying personal expenses as business expenses
11. Using a false Social Security number
12. Claiming an exemption for a nonexistent dependent, such
as a child
13. Willfully underreporting income
Who Commits Income Tax
Fraud?
Service workers paid mostly in cash and
self-employed taxpayers running cash-based businesses have been identified as
the taxpayers committing most of the tax fraud because it is easy to
underreport cash income. Restaurant and clothing storeowners, car dealers,
salespeople, doctors, lawyers, accountants, and hairdressers were ranked as the
top offenders in a government study of income tax fraud. Service workers, such
as restaurant servers, mechanics, and handymen, also commonly underreport cash
income.
IRS Criminal
Investigation into Income Tax Fraud
The IRS conducts investigations into
alleged violations of the tax code through the IRS Criminal Investigation (CI),
the law enforcement branch of the agency. CI agents investigate tax crimes,
money laundering, and Bank Secrecy Act violations. Investigators use
sophisticated methods to uncover computer information protected by encryption,
passwords, and other barriers.
Because the tax system relies on
"voluntary compliance," or the self-assessment of the taxes owed, the
IRS attempts to discourage violations by publicizing convictions, seeking
prison time for offenders, and by assessing fines, civil taxes, and penalties.
Penalties for Income Tax
Fraud
A taxpayer that willfully attempts to evade
paying income taxes is subject to criminal and civil penalties. The type of
fraud will determine the applicable penalty. The following are some examples of
possible punishments for specific types of tax fraud:
Attempt to evade or defeat paying taxes:
Upon conviction, the taxpayer is guilty of a felony and is subject to other
penalties allowed by law, in addition to (1) imprisonment for no more than 5
years, (2) a fine of not more than $250,000 for individuals or $500,000 for
corporations, or (3) both penalties, plus the cost of prosecution (26 USC
7201).
Fraud and false statements: Upon
conviction, the taxpayer is guilty of a felony and is subject to (1)
imprisonment for no more than 3 years, (2) a fine of not more than $250,000 for
individuals or $500,000 for corporations, or (3) both penalties, plus the cost
of prosecution (26 USC 7206(1)).
Willful failure to file a return, supply
information, or pay tax at the time or times required by law. This includes the
failure to pay estimated tax or a final tax, and the failure to make a return,
keep records, or supply information. Upon conviction, the taxpayer is guilty of
a misdemeanor and is subject to other penalties allowed by law, in addition to
(1) imprisonment for no more than 1 year, (2) a fine of not more than $100,000
for individuals or $200,000 for corporations, or (3) both penalties, plus the
cost of prosecution (26 USC 7203).
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