The IRS customarily brings criminal tax charges against preparers. Tax fraud is serious crime for the accused and for their clients, especially if the client was aware, or should have known that a false tax return was filed on their behalf. Here are a couple of recent prosecutions by the IRS:
▪ A Rhode Island man faced the long arm of the law for his habitual filing fraudulent tax returns between the years of 2011 and 2015. The accused claimed that he sought to boost refund checks for his client by making false deductions, and inflating expenses. He also increased charitable donations and falsified home mortgage and home energy enhancement deductions.
▪ Facing a similar case, a Charlotte, North Carolina woman pleaded guilty to “aiding and abetting the preparation of a falsified tax return.” The woman admitted to the most common forms of tax preparer fraud, enhancing expenses, creating fake deductions, and claiming education credits that were non-existent. The amount of tax lost to the IRS from her conduct sum up to approximately $500,000 and she gets up the three years in prison, probation, restitution, and penalties.
Tax Fraud: Precautions and Preparations
The non-profit consumer watchdog, Consumer Reports, and the IRS offer straightforward advice for choosing a reputable tax preparer. Tips include:
- Go through the credentials of your preparer: The IRS provides a Directory of Federal Tax Return Preparers as a means for finding qualified tax assistance. There are also search tools for CPAs and tax experts from association resources. Conduct an online search, request references and check them.
- Look for a preparer familiar with your background: If you have complex tax filings, including FBAR or FATCA filings, it is vital for you to work with an accountant or attorney capable of preparing a tax return that gives responds to all of your financial needs. Read carefully through your return and ask questions before signing on the bottom line.
Speak up if there are problems with your return: If you are alerted by the IRS to issues with your return, contact your tax preparer as soon as you can.
You can file a complaint with the IRS if you have financial exposure due to a tax preparer.
Questions to Ask to Avoid Tax Preparer Fraud
The IRS advises individuals and businesses to evaluate their tax preparer on a regular basis. If you can attest to any of the following questions, proceed with caution:
▪ Does your tax preparer ask you to sign a blank return or are you expected to file your return or other regulatory filings without careful assessment?
▪ Are the fees you pay to your accountant or tax preparer dependent on how much of a refund they claim to be able to provide for you?
▪ Do you feel that your accountant or preparer may not have credentials or contemporary knowledge of recent legislative and tax changes?
Consequences for Criminal Tax Fraud and Civil Tax Fraud
Civil tax fraud penalties are limited to financial consequences and do not lead to a criminal prosecution. Common civil violations and their associated penalties include:
▪ Fraudulent failure to file a tax return: The consequence is 15% of the net tax due for each month up to five months with a maximum penalty of 75% of the unpaid tax
▪ Filing a fraudulent tax return: 75% of the underpayment amount
Criminal tax fraud can lead to a significant period of imprisonment, among other penalties. For criminal tax fraud, the potential penalty is directly attached to the specific criminal charge you face. For instance, some common crimes and punishments related to criminal tax fraud include:
Tax evasion: This maximum sentence of this crime is up to five years imprisonment and a fine up to $100,000 for individuals or $500,000 for corporations.
Willful failure to pay tax, failure to file or failure to keep sufficient records:
The maximum penalty of this crime is a term of imprisonment of one year, accompanied with a potential fine up to $25,000 for individuals or $100,000 for corporations.
You’re charged with Tax Fraud. What next?
Here are tips to avoid headlines and resolve the charges of tax fraud:
▪ Respond immediately: Take rapid action if you get a notice or become aware of interest by the Internal Revenue Service (IRS). When significant wealth, complicated tax avenues, or criminal charges could be involved, hire a tax attorney experienced with IRS investigations. Working with knowledgeable legal counsel straight away could be your strongest move for avoiding tax litigation.
▪ Preserve your records: Find and preserve all records that you feel could be of interest to the IRS. Do not mishandle evidence, destroy records, or make phone calls to potential witnesses about what they should or should not say. If you destroy evidence or try to tamper with witnesses, it could make things worse.
▪ Engage the process: Your tax lawyer will lead and guide you through interactions and meetings with the IRS. Be sincere and cooperate. Although it is a stressful process, little is gained by defensive posturing. Cooperate with your attorney to ensure that your explanations are consistent across venues and align with the overall circumstance.
▪ Work toward a solution—not litigation: Even if it is found you have significant tax liability, your attorney can work toward options that may not involve trial, but offer you the chance to repay monies you are found to owe. Prosecution takes time and resources for the IRS, and you may be able to avoid a criminal charge, or face a milder charge depending on how serious the allegations are.
The suitable way to avoid a tax controversy is to ensure that you meet FBAR and foreign bank account reporting guidelines, pay your taxes, and work with best-in-class accountants and tax preparers. When there are issues or there is a pending tax crime allegation, contact a tax attorney with the defense experience you need to keep you from career or reputational damage or financial loss.
Common Employment Tax Fraud Scams
Failure to properly remit or pay over employment taxes may not appear the most serious crime, although, this is seen as a serious issue for the IRS. Conviction on one count of employment tax fraud can result in five years in prison. The IRS regularly identifies and investigates employment tax scams that take a number of forms, including:
▪ Employment leasing: When an employer gives out their personnel and payroll responsibilities it is known as “employment leasing.” While an employer contracts help from the outsourcing company, the outsourcer is accountable for collecting and paying over employment taxes.
▪ Pyramiding: A regular employment tax scam is the practice of “pyramiding,” which is the IRS term associated with business owners who withhold payroll taxes and pocket the money with no intention of remitting it to the IRS
Cashing out: When employers pay employees in cash it increases the opportunity for tax crime across the board. Further to skirting Workers’ Compensation laws, employers can falsify payroll records, underreport the number of employees on the books, or underreport the amount of payroll taxes owed.