The Internal Revenue Service (IRS) sets forth rules and regulations within the tax code for taxpayers to follow, and when those laws are broken with intent, civil or criminal action may be initiated. An initial tax fraud investigation is conducted by the IRS when tax fraud is reported or suspected. Each tax fraud case differs based on the specific laws broken, and each has its own set of consequences and penalties.
Taxpayers are going to make mistakes, and the IRS is not going to audit or investigate every American taxpayer. An accountant or other tax preparer professional using electronic software are the modern day experts in filing tax returns. The IRS understands an error every now and then from the average individual is imminent. In those situations the IRS may contact the individual or correct the mistake themselves and mail the taxpayer information on the correction. Tax fraud laws are for those individuals and corporations that are purposely conducting business in a way to avoid paying the IRS any federal tax due.
While the IRS has conceded that “avoidance of taxes is not a criminal offense” and “any attempt to reduce, avoid, minimize or alleviate taxes by legitimate means is permissible,” the IRS has established two elements by which to determine if a suspected case of “tax avoidance” has become the government’s alleged “tax evasion”.
- Civil fraud audit
- Criminal investigation
The IRS may not necessarily conduct a civil fraud audit and criminal investigation at the same time; however, it’s possible during the audit or investigation evidence begins to point in the opposite direction. The Internal Revenue Manual, defines the differences between “tax avoidance and evasion”. If an individual avoids paying taxes, but they do not conceal or misrepresent any tax owed its labeled as “Tax Avoidance”. The individual simply outlines measures to reduce or eliminate tax liability and disclosures such information willingly. “Tax Evasion” on the other hand involves “deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than they are”.
An individual taxpayer’s state of mind is relevant for the imposition of the civil fraud penalty and is equal to what must be proven in a criminal prosecution for tax evasion (Code § 7201 of the Internal Revenue Code). While “willfulness” for criminal purposes is defined as a “voluntary, intentional violation of a known legal duty,” the “willfulness” in the grounds for civil fraud has been similarly defined as an “intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing.”
Examples of Tax Fraud
- Employment tax fraud;
- Corporate tax fraud;
- Failure to keep accurate records or any records at all;
- Not reporting income accurately;
- Laundering money in off shore accounts;
- Failure to report assets;
- Fake Social Security or Tax ID Numbers;
- Cash only payments with the attempt to avoid reporting accurately;
- Destroying evidence;
- Tax shelters;
- Lying during Audit process; and
- Other dishonest methods of evading tax responsibility.
The penalties for criminal tax fraud are very serious. This white collar crime carries penalties which range up to 5 years in Federal prison, in addition to fines up to $500,000, plus the costs of prosecution for each separate tax crime. Once the Federal criminal tax case is completed the IRS Criminal Investigation unit will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.
In the event, the IRS determines an individual taxpayer has filed taxes late or willingly, did not file taxes to evade federal tax laws it’s considered fraudulent activity. The standard failure to file penalty is 5% per month based on the amount you owe. If the failure to file is considered fraudulent according to the IRS standards the penalty increases to 15% per month with a 75% maximum penalty total penalty.
Tax Whistleblower Program
The IRS Tax Whistleblower Program will pay a reward on all civil, but not criminal, fines and penalties assessed against the taxpayer as well as a reward up to 30% of the amount of tax actually underpaid as a result of the fraud (Code § 7623 of the Internal Revenue Code). Each year, the federal government is defrauded out of hundreds of billions of dollars in tax revenue. The U.S. government estimates billions of federal revenues went unpaid as a result of tax fraud every year.
Ultimately, the responsibility of filing an accurate annual federal tax return is on the taxpayer. Every taxpayer is responsible for obeying by the Federal tax laws and filing taxes typically by April 15th of each year, unless an extension is requested and granted by the IRS.