The tax codes are a complex system of rules and regulations, so it is unsurprising that up to 17% of taxpayers make mistakes when filing their taxes, according to IRS reports. Usually, these mistakes are due to negligence. In other words, they are oversights or genuine errors. When a mistake is intentional and intended to save the taxpayer from paying their tax bill in full, then it is considered income tax fraud, which is a crime.
The IRS only convicts roughly .0022 percent of taxpayers for tax fraud. But with 17% of individuals make mistakes, how does the IRS determine intentionality? In other words, what is the line between tax negligence and tax fraud?
What is Tax Fraud?
If an individual or corporation intentionally or willfully fails to file a tax return, fails to pay their taxes, under reports their income, or makes, prepares, or files a false claim or return, they are committing tax fraud.
Also worth mentioning is that tax evasion is a type of tax fraud. If you intentionally and willfully ignore filing a tax return at all, or avoid paying your taxes, you could be convicted of tax evasion.
Who Commits Tax Fraud?
According to the IRS, tax fraud is committed by individual taxpayers in 75% of the instances. Only 25% of offenders are companies or corporations.
Most are middle income earners, who deliberately under report their income. The most common offenders are owners or employees at restaurants and clothing stores, salespeople, small business owners, car dealers, hairdressers, and accountants.
The majority of offenders work in cash-based businesses and avoid reporting a majority of their income. Some small business owners over deduct their business related expenses, report a home office that doesn’t exist, or falsify their income.
Is it Negligence or Tax Fraud?
The tax codes are a complex system of rules and regulations that are confusing for most people. The IRS is trained to look for the possibility of wrong-doing, but they do not automatically suspect that claims are falsified. When the IRS notices a mistake on a return, they do a thorough analysis to determine if there are any red flags that indicate fraud.
If a mistake is noted, and there are no signs of suspicious or fraudulent behavior, the IRS may fine you a 20% penalty on your tax bill. Certainly an upsetting surprise, but much less painful than the 75% civil penalty for tax fraud.
There are some common types of suspicious activity that IRS employees look for to determine if tax fraud or evasion are possible. These include:
- Concealing or transfer of income
- Using an inaccurate Social Security number
- Overstating deductions and exemptions
- Maintaining multiple sets of financial ledgers or none at all
- Falsifying documents
- Claiming a non-existent dependent
- Altering checks to increase deductions
- Manufacturing false receipts
Tax fraud is a serious charge. Civil and criminal penalties can be assessed for tax fraud or tax evasion, including hefty fines and possible jail time. However, tax fraud and tax evasion are difficult to prove, as the burden of proof is on the IRS to prove that any monetary omissions were intentional and deliberate. Since the majority of tax mistakes are mathematical, it’s difficult to prove intention in many cases.
The line between income tax fraud and income tax negligence may seem thin, but the reality is that your chances of being fined or convicted of tax fraud are practically nil. However, it does happen. If you find yourself in that predicament, your best option is to choose a qualified tax lawyer to help you through the process.
If you are facing federal charges for tax fraud, we can help. Contact Tim Bower Rodriguez for a full case evaluation.
