The term Tax Fraud is more than just a mere error; it is a purposeful attempt to avoid tax obligations. The main idea behind a tax fraud claim is that the person accused of the crime purposefully or intentionally committed acts to stay away from tax obligations. Instances include failing to file an income tax return or preparing a false return.

Although the consequence for making a simple mistake may seem harsh, those that apply in situations of a tax fraud conviction are even more severe. A failure to file your tax return can come with up to one-year imprisonment and a monetary penalty of $100,000, while an attempt to evade or dodge taxes can come with up to five-years imprisonment and a fine of $250,000.

How Does the IRS Determine Tax Fraud?

The IRS defines tax fraud as “the willful and material submission of false statements or false documents in relation to an application and/or return.” To make this determination, investigators will check out for any indicators of fraud such as, but not limited to:

✔                       Underreporting income

✔                       Using a false Social Security number

✔                       Falsifying documents

✔                       Intentionally failing to pay taxes

If these common indicators are not present, the IRS typically assumes that an unintentional error has occurred due to negligence. Though this does not clearly lead to criminal charges for tax fraud, errors with your taxes can lead to an accuracy-related penalty that equates to 20 percent of the underpayment.

Anyone could be caught off guard when they are assess this penalty, which is why it’s very vital to make sure all tax information is correct and truthful before submitting it to the IRS. It’s also important to bear in mind that you have right to an attorney as well, especially if you believe a tax fraud charge has been levied against you in error.

 

Types of Tax Fraud

●      Intentional Failure to Pay Income Taxes

The Internal Revenue Service claims that about 1 out of every 6 taxpayers fails in one way or the other to comply with the tax code. If the federal agency’s approximation is correct, you might reasonably expect the numbers of tax-related arrests to significantly increase more than the cases they have now.

The reason why not every sixth person you know is facing criminal charges is because the IRS differentiates between income tax fraud and negligence.

Tax fraud is a deliberate attempt to evade taxes or to defraud the IRS. Tax fraud takes place when a person or company intentionally does one of the following:

✔                       Intentionally fails to pay taxes owed

✔                       Willfully fails to file a federal income tax return

✔                       Fails to report all income

✔                       Makes false or fraudulent claims

People Make Mistakes

It goes without saying that the tax codes are long and dense and sometimes nearly impossible to read and understand even for accountants paid to make sense of them. In that regard, the IRS acknowledges that sometimes errors occur and people will assume one thing about the code when the other actually applies.

Without any prove of fraud or other criminal activity, the IRS will typically assume the mistake you made on your tax returns was actually unintentional. That’s about the extent of the agency’s willingness to pardon, however, as even unintentional mistakes can result in a 20 percent penalty to the taxpayer.

There are surely circumstances in which the IRS assumes an unintentional error is actually an attempt to defraud on purpose. In these cases, the taxpayer can face serious penalties, including prison time. Many will turn then to professional tax law attorneys to help them resolve disputes with the IRS. In some cases, negotiations can result to resolution of the issue without any criminal charges; in other cases, strong representation in court is required.

●      Making a Frivolous Tax Claim

One of the many reasons that make the U.S. a great nation is that we have the freedom to express our thoughts and opinions, even when those opinions run in opposition to official government policy. For example, people have the freedom to argue that the federal income tax is illegal and that it goes against several amendments of the Constitution.

People are at liberty to make the argument, but they are not free to refuse to pay the income tax they owe. This is because some of those who argue that the income tax is illegal, immoral and unconstitutional are articulate and persuasive; sometimes people give in to temptation and file returns making “unreasonable and bizarre claims,” the IRS says, “to avoid paying the taxes they owe.”

When you file that return, it could get you in trouble. No matter how reasonable the argument sounded in the book you read or website you visited, the IRS has very likely heard the argument before, taken it to court and prevailed. In fact, penalties levied against those who take up the court’s time with “frivolous argument” are getting harsher.

You can argue that only employees of the federal government are subject to the income tax, or that filing a return is voluntary or that Federal Reserve notes are not income, the anti-tax arguments go on and on but at the end of the day, you must send in a correct income tax return.

Other Common Tax Fraud Crimes

Within the IRS, the Criminal Investigation (CI) unit takes a close look at tax fraud, tax-associated money laundering, and illegal proceeds earned by lawful companies through a variety of fraudulent methods. Some of the crimes pursued by CI include:

• Employment and payroll tax fraud: Tax issues involving payrolls are common. Underreporting workforce numbers, collecting payroll taxes (federal unemployment, and withholding taxes) and failing to pay them over to the IRS, or paying employees in cash under the table are just a few of the schemes pursued by the IRS.
• Refund fraud:Most people are aware that filing a false income tax return could turn into tax litigation. Individuals and tax preparers engage in refund fraud and sometimes identity theft in order to get an unearned tax refund. This is also the realm where fake deductions, exemptions, and business expenses come into play.
• Abusive tax schemes:US taxpayers who avoid filing regulatory reports like FBAR and FATCA could find themselves undergoing an IRS criminal tax investigation. With the propagation of secrecy jurisdictions, individuals with considerable wealth may seek the greater privacy available. There is often a difference between an abusive tax scheme and a tax option used by an unwitting taxpayer trying to make legal use of offshore tax resources.