Tax Fraud

Tax Fraud: What Is It?

Tax Fraud
Tax Fraud

Tax fraud. This is the point where you insert scary music and artificial screams. Tax fraud is probably one of the most fear-invoking topics when tax season comes around. People think that if they forget a 1099 or W2, the IRS auditors will come for them and whisk them off to jail. Fortunately, that is not the case. Understanding tax fraud will not only eliminate fear but also give a complete understanding of what will put you at risk for tax fraud.

What You Need to Know Now

The first thing to understand about tax fraud is that it is not just one thing. Tax fraud encompasses many different laws and procedures found both in the IRS code (Title 26) and Title 18 of the United States Code.

Needless to say, tax fraud is a very complex topic. When an individual is investigated for tax fraud, the IRS looks for one central theme: willful intent to defraud the US Government. This is not as simple as miskeying a digit on a tax return. In the accusation of tax fraud, the government has the burden of proving both knowledge and deliberate intent of the taxpayer who has misreported income.

Because of the difficulty of proving willful intent, enforcing a civil penalty is normally easier for the IRS to do, as that does not require the IRS to prove anything. Forgetting a 1099 might get a person a notice of adjusted gross income and underpayment of taxes. Reporting four children on your tax return that aren’t legally yours in order to claim an Earned Income Credit is an entirely different situation.

Typically, for an accusation of tax fraud, the inaccuracy must be an obvious attempt at deception. In most cases, because the IRS will generally make the assumption that the mistake was honest in nature instead of intentional, they will impose a 20% penalty for underpayment of taxes.

These are situations that would lead the IRS to make a claim of tax fraud:

  • Blatant overstatement of deductions and exemptions that you are not due
  • Underreporting income in attempt to willfully defraud the government
  • Having more than one set of financial ledgers
  • Falsifying tax documentation
  • Attempting to conceal income
  • Using a false Social Security number
  • Declaring personal expenses as business expenses
  • Declaring false dependents (i.e. children that are legally ineligible to be your dependent)

Who Commits Tax Fraud

It is a general assumption that most people who get convicted of tax fraud are involved in some sort of corporate taxation. That assumption is false.

Seventy-five percent of those who commit tax fraud are individual taxpayers. The majority of tax fraud cases are committed by individuals in service industries and self-employed individuals in cash-based businesses. Service workers like restaurant servers and taxi drivers can easily end up at risk of being accused of tax fraud, as their business is done primarily in cash. This is also true for professions such as mechanics, handymen, retail store owners and some professional positions like lawyers, doctors, and accountants. In general, when you don’t get a record of what you were paid via a W-2 or 1099, it requires extra recordkeeping on your behalf to make sure that your income is reported accurately. When this is not done, a tax fraud accusation could be the result.

Tax Fraud and Tax Evasion

Tax fraud and tax evasion are often confused. Even though people use these words interchangeably, they are not the same. Tax evasion is a specific crime under the United States code. When discussing tax evasion, it should be generally used in the context of the criminal charge of deliberately misrepresenting taxable income to the IRS and should not be associated with the civil penalties generally assessed under the IRS code.

What Could Happen

Because of the difficulty in substantiating a charge of tax fraud, the penalties for tax fraud can be staggering. In addition to civil penalties, tax fraud can lead to jail time. Dependent on the law that you are convicted of violating, the civil penalties and the jail time could be severe.

If you are accused of tax fraud, it is imperative to get the best lawyer that you can. Whom you hire as your attorney could not only have a drastic effect on your financial penalties, it could directly affect your freedom. If this is your situation, has experienced attorneys who are ready to fight for you. Tax law is our specialty, and we will do everything we can to get you the most favorable outcome. Contact us today.