Tax fraud occurs when an individual or business willfully and intentionally falsified information on a tax return to avoid paying the entire tax obligation.

The IRS conducts investigations into alleged violations of the tax code through the IRS Criminal Investigation (CI) which is the law enforcement branch of the agency.

Because the tax system is based on voluntary compliance or the self-assessment of taxes owed, the IRS tries to discourage violations by publicizing convictions, seeking prison term for offenders and also by assessing fines, civil taxes and penalties.

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What are Some Examples of Tax Fraud?

Tax fraud is a willful and intentional violation of the tax code. Some examples include:

  • Claiming false deductions.
  • Claiming personal expenses as business expenses.
  • Not reporting income.
  • Intentionally failing to file an income tax return.
  • Willfully failing to pay taxes due.
  • Intentionally failing to report all income received.
  • Preparing and filing a false return.

What is the Difference Between Negligence and Income Tax Fraud?

There is a distinction between negligence and income tax fraud. The tax code is a complex set of regulations and rules which are difficult for most people to understand.

When there are careless errors, the IRS will typically assume that it was an honest mistake rather than a willful evasion of the tax code if signs of fraud are absent.

In such cases, the tax auditor may consider it as a mistake based on negligence but even for unintentional violations, the IRS may fine the taxpayer a penalty of 20 percent of the underpayment.

To distinguish between negligence and willful violations, tax auditors look for certain types of suspicious and fraudulent activity such as:

  • Using a false Social Security number.
  • Falsifying documents.
  • Concealing or transferring income.
  • Claiming too many deductions and exemptions.
  • Willfully underreporting their income.

What are the Penalties for Income Tax Fraud?

A taxpayer who willfully attempts to avoid paying income taxes is subject to criminal and civil penalties and the type of fraud will determine the type of penalty. Here are examples for two types of tax fraud.

Evading or defeating paying taxes: If convicted of this, the taxpayer is guilty of a felony and is subject to other penalties applicable under law in addition to these penalties:

  • Imprisonment for no more than 5 years;
  • A fine or not more than $250,000 for individuals or $500,000 for corporations; or
  • Both penalties along with the cost of prosecution.

Fraud and false statements: If convicted of this, the taxpayer is guilty of a felony and is subject to these penalties:

  • Imprisonment for no more than 3 years;
  • A fine of not more than $250,000 for individuals or $500,000 for corporations; or
  • Both penalties along with the cost of prosecution.

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Should I Contact a Lawyer?

Unpaid taxes whether based on negligence or fraud can lead to major problems for taxpayers. If you haven't paid your taxes or know that you have committed tax fraud, then you should consult a local tax attorney.

It's important to have access to your last taxes, reports of any income you might have, and to be prepared to pay any taxes you might owe to the IRS.