Income Tax: Fraud vs.
Negligence
The
IRS estimates that only a small percentage of tax crime convictions,
representing less than one percent of taxpayers, occur in a year. Yet the IRS
also estimates that 17 percent of taxpayers fail to comply with the tax code in
some way. It is individual taxpayers, rather than corporations, that commit 75
percent of income tax fraud. But are all violations of the tax code fraud?
Below
are some definitions and ways in which the IRS attempts to distinguish between
income tax fraud and negligence.
Income
tax fraud is the willful attempt to evade tax law or defraud the IRS. Tax fraud
occurs when a person or a company does any of the following:
Intentionally fails to file a income tax return
Willfully fails to pay taxes due
Intentionally fails to report all income received
Makes fraudulent or false claims
Prepares and files a false return
The
IRS understands that the tax code is a complex set of regulations and rules
that are difficult for most people to decipher. When careless errors occur, if
signs of fraud are absent, the IRS will usually assume that it was an honest
mistake rather than the willful evasion of the tax code. In this circumstance,
the tax auditor will usually consider it a mistake that is attributable to
negligence. Although unintentional, the IRS may still fine the taxpayer a
penalty of 20 percent of the underpayment.
The
IRS can usually distinguish when an error is the result of negligence or the willful
evasion of the tax law. Tax auditors look for common types of suspicious and
fraudulent activity, such as:
Overstatement of deductions and exemptions
Falsification of documents
Concealment or transfer of income
Keeping two sets of financial ledgers
Falsifying personal expenses as business expenses
Using a false Social Security number
Claiming an exemption for a nonexistent dependent, such
as a child
Willfully underreporting income
Service
workers paid mostly in cash and self-employed taxpayers running cash-based
businesses have been identified as the taxpayers committing most of the tax
fraud because it is easy to underreport cash income. Restaurant and clothing
storeowners, car dealers, salespeople, doctors, lawyers, accountants, and
hairdressers were ranked as the top offenders in a government study of income
tax fraud. Service workers, such as restaurant servers, mechanics, and
handymen, also commonly underreport cash income.
IRS Criminal Investigation into Income Tax Fraud
The
IRS conducts investigations into alleged violations of the tax code through the
IRS Criminal Investigation (CI), the law enforcement branch of the agency. CI
agents investigate tax crimes, money laundering, and Bank Secrecy Act
violations. Investigators use sophisticated methods to uncover computer
information protected by encryption, passwords, and other barriers.
Because
the tax system relies on “voluntary compliance,” or the
self-assessment of the taxes owed, the IRS attempts to discourage violations by
publicizing convictions, seeking prison time for offenders, and by assessing
fines, civil taxes, and penalties.
Penalties for Income Tax Fraud
A
taxpayer that willfully attempts to evade paying income taxes is subject to
criminal and civil penalties. The type of fraud will determine the applicable
penalty. The following are some examples of possible punishments for specific
types of tax fraud:
Attempt to evade or defeat paying taxes: Upon conviction, the
taxpayer is guilty of a felony and is subject to other penalties allowed by
law, in addition to (1) imprisonment for no more than 5 years, (2) a fine of
not more than $250,000 for individuals or $500,000 for corporations, or (3)
both penalties, plus the cost of prosecution (26 USC 7201).
Fraud and false statements: Upon conviction, the
taxpayer is guilty of a felony and is subject to (1) imprisonment for no more
than 3 years, (2) a fine of not more than $250,000 for individuals or $500,000
for corporations, or (3) both penalties, plus the cost of prosecution (26 USC
7206(1)).
Willful failure to file a return, supply
information, or pay tax at the time or times required by law. This includes the failure
to pay estimated tax or a final tax, and the failure to make a return, keep
records, or supply information. Upon conviction, the taxpayer is guilty of a
misdemeanor and is subject to other penalties allowed by law, in addition to
(1) imprisonment for no more than 1 year, (2) a fine of not more than $100,000
for individuals or $200,000 for corporations, or (3) both penalties, plus the
cost of prosecution (26 USC 7203).
Free Consultation with a Tax Attorney
If you are being accused or income tax fraud or need help with an IRS or Utah State tax matter, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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