Understanding Tax Fraud

The American tax code is Complicated. And enormous. But just how complicated and enormous is it? 

According to the Tax Foundation, the government printing press sells copies of the tax code in two volumes. One has 1,404 pages, and the other has 1,248 pages. This makes 2 652 pages. But that’s not it. Once congress makes policy, it’s the IRS’s job to write and implement the rules. And you guessed it; these are not brief. 

Tax statutes and IRS regulations as of 2012 stood at about 9,000 pages. And get this, from 2001 to 2012, the tax code had changed a record 4,680 times. 

With this much literature and legalese, it’s hard to keep up with the dos and don’ts of tax payments. 

What Now?

Still, some tenets are basic. For example, if you make false declarations on your tax forms, surely you know you are playing with fire. So does keeping two sets of books for a business or underestimating capital gains. 

But not everything is this black and white. 

As such, you might often wonder whether that little fib on your tax refund forms is criminal. Or whether a misstatement you made will get you into trouble. And sometimes, you are genuinely unaware you were doing something wrong. It’s all very complicated. 

The good news is that the IRS rarely focuses on small, unintentional mistakes on tax returns and other tax forms. An error on your returns doesn’t always equate to a tax crime. 

Why Does The IRS Care About Your Taxes?

The IRS is tough on tax cheats because criminal tax fraud takes money from the government every year. And we are not talking small cash here. 

According to recent reports, the government loses about $1 Trillion to tax cheats annually. As a result, revenue collection is undermined, affecting government operations and development prospects. 

This is why the IRS doesn’t take it kindly when taxpayers deliberately try to minimize their tax liability. 

If you are caught intentionally attempting to or having defrauded the government in this way, you are liable for tax fraud or tax evasion charges, and it’s not a good place to be. The IRS can come down hard depending on the particulars of the case, and you might get penalties or, in worst-case scenarios, jail time. 

A Closer Look at Tax Fraud

Tax fraud occurs when an individual or a business deliberately lies on their tax returns in order to reduce their tax liability. 

It also happens in other circumstances, such as:

• When someone makes false statements
• When someone transfers assets to avoid their tax obligations
• When one intentionally avoids tax assessment or paying the actual taxes

Going by the above, claiming false deductions, writing off personal expenses as business expenses, and not reporting extra income are all types of tax fraud. 

Another example is when businesses keep two sets of books. One records the business’ actual financial position, while the other is for the IRS. The latter bears inflated expenses, personal vacations are listed as business expenses, and so on. These actions ultimately reduce the businesses’ reported revenues and profits, thus lowering their tax liability. 

There are simpler forms of tax fraud too. 

For example, a masseuse that gets tips on top of their salary but doesn’t fill in the tips in the returns has committed tax fraud. This is because their tax burden is minimized by the fact that part of their income isn’t reported, therefore, goes untaxed. It does end there. 

This employee’s employer also commits tax fraud if they are aware that their employee gets tips but omits this information from their returns. 

Similarly, a taxpayer that falsifies the number of dependents in their tax forms commits tax fraud. So does a work-at-home freelance who writes off their utility bills as business expenses. 

While the list of what counts as tax fraud is long, we can sum it up as any action that deliberately understates what you owe in tax returns. Tax fraud can also be defined as any attempt by an individual to avoid paying taxes after assessment. 

We can therefore summarize tax fraud in the following short points:

• Overstating deductions
• Lying about dependents
• Claiming refunds, you are not eligible for 
• Filing returns using a false or stolen Social Security Number
• Willfully underreporting or not reporting income
• Concealing assets from the IRS to reduce or avoid satisfying your tax obligation

You might be guilty of some or all of the above things, thinking it’s perfectly legal. After all, businesses hire tax accountants and attorneys to help them find ways to reduce their tax bills, right? Wrong!

Tax accountants and tax attorneys that help companies reduce their tax bills are involved in something called tax planning. Part of this is finding strategies for tax avoidance by exploring loopholes in the tax code. Tax avoidance and tax evasion are two different things. 

What Is Tax Avoidance?

Let’s be honest; few people would pay taxes if they were voluntary. But since they are not, the second best thing is to find ways to control how much you pay. 

Tax avoidance is a way for businesses to minimize taxes. This is legal, and it’s done through legitimate means. Some ways to reduce tax bills via tax avoidance include:

• Determining all deductibles, you are eligible for and applying for them
• Claiming all credits, you qualify for 
• Investing in municipal bonds
• Maxing out retirement accounts and employee benefits
• Opening a health savings account
• Make charitable donations

Tax evasion, which is closely related to tax fraud, has the same goal as tax avoidance; only the means are illegal. 

Tax Fraud vs. Tax Evasion

While people use these two terms to describe the same thing, there is a slight difference. 

Tax evasion is a type of tax fraud and one of the more common forms. So anytime someone or an entity avoids paying their tax obligation or evades a tax assessment, they are liable for tax evasion, which falls under the broader category of tax fraud. 

Below is a look at the more commonly committed tax crimes and violations. 

Evasion of assessment involves adopting fraudulent actions to avoid a tax assessment. Overstating deductions on your tax returns is a good example. 

Evasion of Payment: failing or refusing to pay one’s tax liability. This can be done by simply not paying.

Willful Failure to Collect or Pay Tax: this applies to employers who fail to collect taxes when doing their payroll. Or collect taxes but don’t pay them in. 

Willful Failure to Collect or Pay Tax: this is failing to pay a tax, absolute or estimated. It’s also the failure to keep records, failure to file returns, and withholding of information. 

Fraudulent Withholding Exemptions or Failure to Supply Information: this is the failure to provide information or supply falsified information to employers about withholding tax. 

Making false certifications to reduce backup withholding tax on interest and dividends also falls under this clause. 

Fraudulent and False Statements: there are several ways you can be liable for this. The more common ones are:

• Appending your signature on tax returns or similar forms with the knowledge that the contents are inaccurate
• Helping someone deceive the IRS
• Removing or concealing goods, assets, or commodities to evade a tax assessment
• Removing or concealing goods, assets, or commodities to manipulate the outcome of an offer-in-compromise arrangement
• Withholding, destroying, or forging tax records.

Submitting Fraudulent Returns, Statements, and Other Documents means filing a return, recording a statement, or other tax forms with false information. 

Aiding with Fraudulent Returns, Statements, and Other Documents means causing or helping someone file fictitious returns.

Tax Crimes Attempts To Interfere With Administration of Internal Revenue Laws: this is anything relating to threatening tax administration staff or interfering with their ability to perform their duties. This clause also includes stealing back assets possessed by the IRS to cover unpaid taxes. 

Aiding and Abetting: helping someone commit tax fraud. Again, willfulness is a factor. This would be a crime if you knew what was being done was illegal. 

Conspiracy To Defraud The Government With Respect To Claims: this means entering into any agreements of conspiring to defraud the government.

False, Fictitious, or Fraudulent Claims: making false claims to the government.

Fictitious Obligations: forging securities and other documents issued by the US government, a foreign government, a state, or an entity of similar standing. An example is using fake money ordering purportedly from The US treasury. 

Identity Theft: stealing someone’s identity to commit a crime. An example of this is using someone else’s social security number to fraudulently file for a tax refund. 

Often, a single tax crime can have multiple violations involved. These can be felonies or misdemeanors, depending on the specifics of each case and how the IRS sees it. If ever you are caught up in any issue with the IRS regarding tax crimes, you want to speak to a reputable tax attorney immediately. They can then review the particulars of your case, advise and prepare the best defense on your behalf. 

Tax Fraud vs. Negligence

Claiming a fictitious dependent to reduce payable taxes is tax fraud, and it’s criminal. However, applying a long-term capital gain rate to a short-term earning might be scrutinized to determine whether it was done out of negligence or unlawful intent. 

Mistakes attributed to negligence are seen as non-intentional. However, if found to be negligent, the IRS might still fine you 20% of the underpayment.

Consequences of Tax Fraud

If the IRS comes after you for tax fraud, the punishment will depend on whether your crime is a misdemeanor or a felony. 

Felonies attract fines of $500 00 for corporations, $250,000 for individuals, and up to five years of prison time. On the other hand, misdemeanors lead to penalties of up to $200,000 for corporates and $ 100,000 for individuals, and up to one year in prison. For violations where the defendant enjoyed financial gain from their crime, you can be penalized up to two times what you gained. 

Similarly, for negligence, there is a $100 penalty for filing a false return. This is billed per return. 

There is also a $500 penalty for the intentional understatement of tax liability. 

There are different scenarios where negligent charges come in. for example, a tax account that files a return and fails to do their due negligence. Should their client’s accounts be flagged by the IRS, the tax accountant may be charged and fined for negligence. 

If the accountant helped their client understate their tax liability, the charges are more serious, with a $1000 penalty for personal returns and $10,000 for company returns. Further, if the issue morphs into a felony, the repercussions are a lot worse than this. 

I Have Committed Tax Fraud; What Next?

If reading this article or other circumstances in your life have made you aware of some tax fraud on your part, what do you do now?

Whether or not the IRS has reached out to you, you need to take action to protect yourself, your business, and your assets. 

The most crucial action is to contact a tax attorney that handles criminal tax cases. This would be the right person to review your situation and all available documentation and provide a way forward. 

Some tax-related mistakes are just innocent errors. And chances are the IRS won’t come down hard on you for these, more so if you take the initiative to correct them and get back on track. However, you won’t know whether you are looking at a harmless error or tax fraud unless you talk to an expert, in this case, a tax attorney.

I know Someone That Committed Tax Fraud; What Next?

Supposing you have become aware of tax fraud, but with someone else, not yourself, what happens then?

If you think you know of a business or a person that has committed or is committing tax fraud, you can report it to the IRS. You will do this by filling in Form 3949-A-Information Referral Online. It’s the same form used for all kinds of tax violations. 

You can also fill in Form 211, Application for Award for Original Information, to apply for a reward for your whistleblowing. This award can be up to 15% – 30% of the unpaid tax. 

Now, while making such reports, the IRS would want to know a few things. These include the type of violation and how you know about it. Before filling out these forms, you need to be sure that whatever information you give does not implicate you in any way. 

For example, you cannot aid and abet tax violations, then report them later and file for a reward. Neither can you and another party conspire to defraud the government, only for you to turn around and report the other party. 

How do you ensure that your hands are clean before making a report? Speak to a tax attorney and give them the information you have, proof, and how you stumbled onto the information. They will review your case and ask you questions to determine whether whistleblowing implicates you or not and what to do about it if it does. 

Either way, the IRS will keep your identity confidential. This anonymity helps encourage people with information on tax fraud to come forward. 

Once you fill in Form-3949-A, it’s up to the IRS to review the provided information and determine whether or not to probe further. Not all reported incidents will be pursued. 

If You Are Reported For Tax Fraud

You can report someone for tax fraud, and someone else can very well report you for the same. 

What events follow if you are reported for tax crimes? Here is an overview.

Crime Detection

Criminal investigations begin after a report is made and the IRS determines it’s worth pursuing. 

For example, your auditor can come forward detailing crime violations against you or your business, or a report can be done by a whistleblower, as we saw earlier.

Crime Analysis and Investigation Approval

The IRS analyses the information provided upon receiving a possible tax crime tip. This is the primary investigation. If an auditor or an agent forwarded the information, they escalate it to their supervisor. 

At this level, we have an agent/auditor and a supervisor looking into the matter. If \they agree that fraud may have occurred, the supervisor gives the go-ahead for the issue to be investigated. 

Crime Investigation

The IRS conducts its investigations by:

• Interviewing third parties
• Conducting surveillance
• Executing search warrants
• Subpoenaing bank records
• Reviewing financial data, there are stipulations regarding how far back the IRS can review tax records.
• Taking other actions the IRS deems necessary.

In collaboration with IRS chief criminal tax attorneys, IRS special agents handle these duties. The latter ensures everything is done within the law and in accordance with the tax code. 

Pursuing Prosecution

With all the necessary information, the special agent and their supervisors can make a final determination. They can recommend prosecution if they have ample evidence of a tax crime; if not, they discontinue the case. 

For the prosecution, the agent will, at this point, prepare a report. This will be reviewed by the agent’s supervisor, a criminal investigation assistance special agent in charge, a criminal investigation quality review team, and a criminal investigation special agent in charge. 

If all parties agree, the investigations are forwarded to the Tax Division of the Department of Justice.

Most cases that get to this point are those that have an intentional aim of deceiving the IRS. The IRS is unlikely to follow this route for negligence and other minor mistakes. You may get fines for the same, but you typically won’t have criminal charges against you. 

What Do I Do About Criminal Charges?

If you run into any issues with the IRS or suspect you might have made a mistake with your taxes, talk to a tax attorney. 

With a thorough understanding of our complex tax codes, a tax attorney can review all the information, tell you where you stand, and advise on the best way to proceed. 

With the IRS coming at you, you need a sharp, experienced, aggressive tax attorney in your corner. This describes us. Do you have a matter with the IRS? Call us for a free consultation today.