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Tax Fraud and Tax Scam Laws

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What Is Tax Fraud?

Tax fraud is an intentional conduct where a person or a company purposefully underpays taxes or engages in fraud when dealing with taxes. Tax fraud has to be intentional and knowingly. Mistakes and carelessness is not considered tax evasion.

Even though you should fill out all your tax information correctly and with care, you should not be worried about being convicted for tax evasion or tax fraud for mistakes or simple errors.

In order to be convicted for tax fraud, the IRS must know that you are intentionally and purposefully trying to underpay your taxes or trying to hide your taxable assets to avoid a higher tax bill.

What Is Tax Avoidance?

Traditionally, tax fraud refers to types of crimes: tax evasion and tax avoidance. Tax evasion is when a person intentionally fails to submit a tax report in efforts to dodge tax payments. Tax avoidance is when a person makes use of lawful tax mechanisms to rearrange their statements in order to pay less tax amounts. Both are considered to be tax crimes punishable under state and federal criminal laws.

What Is Tax Preparation Scams?

More recently, tax fraud has expanded to include a string of scams and tax preparation schemes conducted by scammers who take advantage of unaware consumers. These crimes might not involve a direct offense against the U.S. government, but they are still punishable under criminal laws. These newer types of tax fraud schemes can take a wide range of forms, such as impersonating a tax official to gain information, or selling false tax documents. They are often used as methods of achieving identity theft. 

What Are Some of the Different Forms of Tax fraud?

Tax fraud can come in the form of tax evasion, tax avoidance, or tax preparation scams:

Tax Evasion:
  • Personal Income Tax evasion: 
    • Making false statements with regard to income or other factual information
  • Business tax evasion: 
    • Purposefully underreporting or omitting income amounts
    • Overstating deduction amounts
    • Keeping two sets of record books or making false statements in records
    • Categorizing personal expenses as business spending
    • Concealing income or transferring assets for purposes of hiding them
  • Employment tax evasion:
    • Failing to pay employment taxes
    • Making fraudulent statements with regards to payroll matters
    • Operating a pyramid scheme

Tax Avoidance:

  • Tax avoidance can occur by abusing the following tax mechanisms:
    • Tax deductions
    • Income deferrals
    • Charitable contributions

Tax Preparation Scams:

  • Offshore Business Arrangements: these involve a creditor urging you to use a foreign credit line in order to hide their own taxable income
  • Forged Checks: Fraudsters may sell fake checks which are then used to pay the IRS. This may subject them or you to federal tax fraud prosecution
  • “Win a Prize, Pay a Tax”: A caller may inform the person that they have won a prize, and must pay the tax due on the prize in order to collect it. A genuine prize will typically send IRS forms to the winner and have them pay directly to the IRS
  • Social Security Schemes: The tax scammer will offer to file a social security refund on your behalf for a fee of hundreds of dollars. You will not receive the refund, and your “paperwork” will not be legitimately processed either
  • Administrative Agency/Legislative Scams: These scams typically focus on a theme, such as the Americans with Disabilities Act or a “Slavery Reparation Tax” for African-Americans. The alleged tax refunds turn out to be bogus
  • Impostors: Tax schemers may pose as an IRS agent or other tax agent to gain access to your information. They may show up at your door requesting information or will present a false interpretation of tax law. Be sure to contact the police if you such an impostor has arrived at your home- IRS agents always carry ID and will call ahead of time 

You should be aware that you yourself may be liable for tax fraud if you knowingly cooperate with persons who are conducting a tax fraud scam. You should report any suspicious activities to authorities. Your information can help prosecute an entire operation, which are sometimes extensive and far-reaching.    

What Are the Penalties for Tax Fraud?

Since many taxes are considered federal taxes, federal agencies (like the IRS) are commonly in charge of prosecuting tax evasion cases rather than law enforcement. Individual federal law govern each tax evasion offense. Additionally each state might have their own tax evasion laws and penalties.

  • Prison: Tax evasion may lead to imprisonment for a term of up to five years. The term may be enhanced if their was multiple counts or if it was a repeated offense
  • Fines: Violating federal tax laws can result into substantial fines. A conviction for tax evasion can result up to $250,000 for individuals and $500,000 for corporations. Additional fines can be imposed by the courts.
  • Restitution: Tax fraud cases also can lead to court orders requiring defendant to pay for any restitution that they benefited from.
  • Probation: Courts may sentence a person convicted for tax evasion to probation. Probation sentences usually last at least 1-3 years. The probation period may be extended if the defendant fails to comply with the probation terms and conditions.

Do I Need a Lawyer for Tax Fraud Charges?

As you can see, tax fraud should not be taken lightly because it carries very severe penalties. You should contact a tax lawyer for advice if you have been charged with tax fraud. Also, you may wish to consult with an attorney if you have been the victim of a tax scam. A tax lawyer will be able to determine your course of action under federal and state tax laws.

Photo of page author Kourosh Akhbari

, LegalMatch Legal Writer

Last Modified: 11-23-2015 04:14 PM PST

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