What is Tax Fraud – Types, Penalties & Real World Examples

tax penalties

To boost success and growth in the economy of the country, the government needs adequate resources and funds to sustain and finance different investments and developmental projects and programs. It could include the programs for education to promote literacy, health to keep the citizens strong, infrastructure to provide facilities and security, and roads and highways for convenient access and connection.

That’s why everyone has the opportunity to help the country by paying the appropriate taxes every year as our legal responsibility. However, not all people may don’t have the same understanding of the taxation system. As a result, many of them have committed various tax frauds and incurred penalties and consequences. Continue reading and you’ll get to know about tax fraud, its different types, possible penalties, and even some real-world examples.

tax fraud
Learn the penalties of committing federal tax fraud.

What is Tax Fraud?

Tax fraud is the intentional attempt to avoid payment for the taxes required by the government. An example of this fraudulent activity is when an individual fails to submit the necessary returns and documents to the IRS by the deadline. It could also be filing a false return and incorrect documents. Hence, those who have been proven guilty of tax fraud will face civil and criminal penalties.

It includes a penalty of a hundred thousand US dollars and a year of being in prison for those who have been proven guilty of tax fraud by not filing the income tax return. Besides that, those who tried to avoid any payment for the taxes will face a penalty amounting to two-hundred thousand dollars plus a maximum of five years of prison.

What Factors Does the IRS Consider When Determining Tax Fraud?

According to the Internal Revenue Service or IRS, tax fraud is an act of filing false or incorrect documents when processing an income tax return. However, before an individual is proven guilty, the IRS will conduct a thorough criminal investigation by gathering facts and pieces of evidence that will prove you of committing such fraudulent activity.

Moreover, the IRS will also look for various fraud indicators as their basis for charging you for tax fraud. These indicators include falsifying documents and willfully reporting less revenue or income than what you’ve actually earned. Besides that, they will also check if you failed to pay and file your income tax return on purpose and if you’re using your personal Social Security Number or you’re using someone else’s.

However, if the IRS hasn’t seen any of these indicators, they will consider the said incident as an involuntary mistake due to negligence of not filing return on time or submitting incorrect forms and documents. Even though an accused individual hasn’t been proven to have committed such a criminal offense, it still may lead to a possible consequence. You may get underpaid by 20 percent of what you’re supposed to receive after filing the necessary documents.

Hence, always keep in mind your tax liability and file your income tax return on the said deadline given to you. Besides that, please double-check every detail on your documents to ensure that everything is factual and accurate. However, if ever you’ll be accused of the same criminal offense in the future, always remember that you have the right to get an attorney to take care of it for you, especially when your conscience is clear that whatever mistake has been made was never your intention.

Tax Avoidance vs Tax Evasion

Tax evasion and tax avoidance have different meanings with different penalties and consequences. However, these two terms both mean that taxpayers don’t want to settle their legal tax obligations. When it comes to definition, to evade taxes is an act of utilizing unlawful methods to hide the exact amount of their income or profit and even conceal relevant information from tax authorities in the country.

On the other hand, people can commit tax avoidance when they utilize various legal methods to lessen their taxes or their taxable profit or income. Hence, the difference between these two terms relies on the taxpayer’s intention. You lie about your taxable income to evade taxes, or you hide your information to avoid any payment for the taxes owed.

tax fraud penalties
Tax evasion is illegal, whereas tax avoidance is typically legal.

Types of Tax Fraud

As mentioned earlier, tax fraud is doing something on purpose that will make you avoid any payment for legal taxes you owe. With that, check the complete details below of different types of tax frauds in the country. If anyone will be proven guilty of any of these, he’ll surely suffer from criminal charges and even face the consequences and penalties.

Intentionally Failing to File Return 

With the various fraud indicators discussed above, the IRS will conduct a thorough criminal investigation to identify those who failed to file income tax returns on purpose and those who did so due to negligence. Some people can make mistakes sometimes, but if the IRS proves you guilty of making your mistake appear unintentional when, in fact, you purposely did it yourself, you’ll undoubtedly face those possible undesirable consequences.

Tax Protestor Claims

People have the right to express themselves and say words as they please. However, they can never get rid of their lawful tax liability as citizens in the country. That’s why some may get tempted and make unreasonable claims in the IRS. Besides that, other people will sometimes make an argument about taxes being unconstitutional and immoral. These people are typically known as “tax protestors”. They argue that taxes are not constitutional and simply doesn’t apply to them. This is simply incorrect and many tax protestors have gone to jail for this type of activity. they are generally anti-government. The tax authority will never listen to them because it’s their way of thinking that they might gain favor and not pay the amount of tax they owe.

Payroll and Employment Tax Fraud

This particular tax fraud is pretty common to different companies across the globe. It’s when the company doesn’t report the accurate payroll number, even though they’re regularly collecting taxes from their salary and didn’t even file their returns with the IRS. For example, a restaurant will keep the payroll taxes it withholds from its employees’ paychecks, and does not hand it over to the IRS. Besides that, some employers will also pay their employees directly in cash to avoid processing any employment tax return.

Refund Fraud

Some people want to get a tax refund that there shouldn’t be any. Hence, they may use another person’s identity or request an invalid refund to get what they want. It’s sometimes the reason for possible tax exemptions and even false deductions of taxes. For example, a taxpayer can falsely claim they went to college to claim education credits. Or say they ran a business and had business losses (when in reality they had no business) just so they can claim bogus business loss deductions.

Abusive Tax Schemes

These tax schemes are quite common in International Business Companies, Limited Liability Partnerships, Limited Liability Companies, foreign financial accounts, and many others. It’s when a person looks for opportunities to have better profit and asset privacy and utilizes various flow-through entities to get rid of paying appropriate taxes. Abusive tax schemes also includes using offshore entities to hide assets from the IRS.

Tax Preparer Fraud

Tax preparer fraud usually happens when busy people don’t have ample time to file returns in the IRS. That’s why they may ask someone else to submit the necessary forms and documents on their behalf. However, some preparers will intentionally file false documents with the intention of gaining something from it. In fact, the IRS has been charging criminal offenses to these preparers across the country countless times. The tax preparer might falsely inflate your refunds amount and, as their fee, take a percentage of the refund. Most of the time, the clients are unaware that the preparer has done any fraud on their return in the first place.

Moreover, criminal tax fraud will result in imprisonment to the taxpayers with corresponding penalties. On the other hand, those who committed any infractions under civil tax fraud will only require them to pay a particular amount and don’t involve any criminal prosecution.

Punishments and Penalties

The usual infractions of civil tax fraud include failure to pay taxes and submit documents for return on purpose, which will result in a penalty of up to 75% of unpaid taxes and another 15% of monthly net tax up to five months. Besides that, processing fraudulent tax returns will also incur up to 75% of the penalty to be deducted from the total amount you’re supposed to receive.

On the other hand, the infractions under the criminal tax fraud include being guilty of tax evasion, resulting in paying fines up to a hundred thousand dollars for a person who committed this criminal offense and up to half a million dollars for corporations. Besides that, anyone who intentionally failed to file and pay income tax returns and those who didn’t keep sufficient records will also deal with a year in prison and a penalty amounting to twenty-five thousand dollars for a taxpayer and up to a hundred thousand dollars for corporations.

tax penalties
Tax fraud can lead to severe penalties – including fines and prison time.

Tax Fraud Examples

These are some examples of tax fraud below.

Falsifying Document Records

Basically, the CPA will give questionnaires to the taxpayers that they need to fill out with the necessary information. However, others won’t provide all accurate details and even some of their personal information. It could be putting a different Social Security Number instead of theirs and falsifying other essential data needed in processing tax returns.

Underreporting Profit and Income

Many people get tempted by this particular fraudulent tax activity. It’s when you don’t want to disclose your other sources of income so that you’ll only be paying for the least possible amount of taxes. For example, you’re working for a company as a regular employee, and at the same time, you also have a few small businesses in your city that you let your spouse manage while you’re at work.

Hence, the more income you are generating means your taxes will also increase. That’s why you may get tempted not to disclose and include in your documents that you own a few stores. Then, the amount of tax you only have to pay is from the salary you’re getting from the company you’re working for.

Assigning Income to Someone Else

Another way of avoiding paying taxes is when you tell people that a particular income is not yours and it belongs to someone else. That’s why when you file the income tax return with the IRS, you won’t surely disclose you are earning more than the amount you’ve mentioned on your form. As long as the truth won’t reach the IRS office, you might be safe. However, when the time comes that the tax authority will find evidence that you’re earning from other sources of income, you’ll surely face corresponding consequences in the future.

How to Avoid Committing Tax Fraud

To avoid committing any tax fraud, you have to keep these a few things to keep in mind. Always double-check all of the information you’ve included in your form and make sure the documents you’ve submitted are all accurate. Besides that, declare all of your assets, profits, and other income-generating sources.

Moreover, you also have to make sure to file your income tax return on the deadline stipulated on the form. If ever an emergency comes out and you can’t submit it on time, you can communicate with the nearest IRS center in your area. Besides that, if you’re too busy at work or in your business, you can ask for help from one of the legit and credible tax preparers, but you also have to check the credentials of the preparer you’ve chosen. Hence, you need to keep in mind these few things to avoid committing any tax fraud when preparing your return.

What to Do When Charged With Tax Fraud?

When you’re charged with tax fraud, there are a few things you have to keep in mind to get it resolved right away. Whenever you receive a notice from the IRS, you have to respond immediately and provide the necessary documents and comply with all of the requirements as soon as possible. Besides that, secure all the records that you think might be of interest to the IRS. Please, don’t tamper or falsify any parts of the documents that can potentially cause problems in the future.

Moreover, whenever necessary, cooperate with your tax attorney and get actively engaged in the process. Make sure that all of your statements are correct and consistent. Besides that, always find a better option, so instead of litigation, you can work on the easiest solution available. Hence, if you get involved in any tax fraud in the future, always remember these few things to help you out from this situation.

FAQs

How serious an offense is tax fraud?

It’s everyone’s responsibility to file the appropriate income tax return on time. In fact, the IRS has been taking it seriously and deals with all violators and those who commit tax fraud accordingly. It’s a criminal offense that has a corresponding set of consequences and penalties.

Can you go to jail for lying on your taxes?

Lying on your taxes falls under tax evasion, and it’s one of the infractions of criminal tax fraud. The penalty is up to a hundred thousand dollars for a taxpayer and up to half a million dollars for corporations. On top of that, anyone who has been guilty of tax evasion will suffer from a minimum of one year in prison.

How long does it take for the IRS to conduct an investigation of tax fraud?

The IRS has a particular division that handles cases related to taxes. It’s the Criminal Investigation Division or CID that carries out a thorough investigation on a particular tax fraud case. However, the entire process may take up to 12 to 24 months to complete since they need enough time to thoroughly check every detail and information to prove whether you’re guilty or not for committing particular tax fraud.

How can I legally commit tax fraud?

Tax fraud is a fraudulent activity that many people have committed across the country. It’s when you avoid your tax obligations on purpose by failing to submit the necessary forms and papers and even filing inaccurate documents in the IRS. However, if you did unintentionally, the IRS will conduct a thorough investigation to find proof and evidence to substantiate your claim. Hence, committing any fraudulent activities related to taxes will never be legal unless the IRS can prove that it happened unintentionally and due to negligence, but you may still face any corresponding penalties.

Are tax fraud and tax evasion the same thing?

According to the Internal Revenue Service, tax fraud is when a person files false or incorrect documents when processing an income tax return. On the other hand, to evade taxes is when a person uses unlawful methods to hide the precise amount of their income or profit and even conceal relevant information from tax authorities in the country.

What is the most common tax fraud?

One of the most common tax frauds is when taxpayers have intentionally failed to file and pay income tax returns. Besides that, it’s also common to some companies across the country. When the company managers or owners have been regularly collecting taxes from their employees, they never file a tax return with the IRS.

What is the minimum sentence for tax fraud?

The minimum sentence for tax fraud is when you committed any infraction under civil tax fraud. It doesn’t involve any criminal prosecution, and it only requires the taxpayer to pay for the penalty. The amount is up to 75% of delinquent taxes and another 15% of monthly net tax up to five months. In other cases, it’ll be up to 75% of the penalty to be deducted from the total amount the taxpayer is supposed to receive.

Can you go to jail for tax fraud?

Yes, you can go to jail when you’ve committed a particular infraction under criminal tax fraud. One of these infractions is when you intentionally failed to file and pay income tax returns and those who didn’t keep sufficient records. Besides imprisonment, you’ll also be facing penalties that you need to settle.

Conclusion

It’s everyone’s responsibility to file an income tax return as a citizen of the country. That’s why to avoid any conflict or consequences in the future, always prepare the necessary documents and mark your calendar so that you won’t miss the deadline stipulated in your form. Hence, always remember everything discussed above to help you avoid doing anything that may result in possible tax fraud and face possible consequences and penalties.

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