Crime does not pay, especially with regards to the IRS. Tax fraud penalties can certainly impact your finances significantly.
In this article:
- What Constitutes Tax Fraud for the IRS?
- What Are the Red Flags or Triggers for IRS Tax Fraud Penalties?
- Why Are The Penalties for IRS Tax Fraud and Other Tax Crimes like Tax Evasion?
- How Can a Taxpayer Answer the Tax Fraud Penalties?
Frequently Asked Questions About Tax Fraud Penalties
What Constitutes Tax Fraud for the IRS?
To be strict with the definition, the IRS can file for tax fraud proceedings if the entity:
- Has sent or filed a tax return with false information,
- Willfully evaded or tried to evade paying taxes with illegal means (more commonly known as tax evasion), or
- Knowingly and willfully failed to file a tax return, or gave the IRS a false reason as to why the taxpayer did not file a tax return.
Tax fraud penalties apply to both individuals and business entities. Generally speaking, if a taxpayer lies to the IRS about any communication or intentionally cheats the IRS out of what the service is due, tax fraud is a possibility.
Even falsity related to non-monetary issues, like intentionally using the wrong Social Security details, can lead to a tax fraud penalty.
To be clear, the fraud can either be 1) inaccuracy or 2) the omission of information present in a tax return.
Common examples for tax fraud cases for individual taxpayers include:
- Employee misclassification for small business owners
- Failure to file a tax return
- Reporting hobby expenses as a deductible business expense
- Willfully omitting income to get a lower tax bracket
- Not filing and paying the tax debt and giving a false reason
- Reporting inaccurate information to either get a tax credit
- Filing for tax extension due to natural emergencies for an area, even if he or she is not affected.
On the other hand, business entities can also commit tax fraud. Examples include:
- Not filing payroll taxes
- Intentionally misrepresenting salaries or wages for employees
- Sending an outdated or incorrect Tax Identity Number
- Not contributing to the employee’s Medicare or Social Security contributions
- Employing an individual or firm who does not remit to the IRS the accurate tax debts
Also, all tax fraud, evasion, and other tax cases fall under the jurisdiction of the Internal Revenue Services Criminal Investigation Unit. If a taxpayer receives any notice or letter from a different department, they should think about contacting the IRS to confirm the correspondence received.
Important: Tax evasion and tax avoidance are distinct. Avoiding taxes through legal methods is not the same as evading taxes, which is generally illegal and can land people into hot water.
What Are the Red Flags or Triggers for IRS Tax Fraud Penalties?
Generally, tax fraud penalties equal 75% of the total civil liability. For example, if the incorrectly-reported tax amount is $10,000, then the tax fraud penalty is $7,500.
Of course, other penalties have different rates, depending on the severity. For example, an employer mislabelling an employee as a freelancer to avoid paying FICA (Social Security and Medicare) contributions, the IRS will levy 100% on unpaid contributions.
Important: If the information is not fraudulent and is simply an honest mistake, the IRS usually levies a 20% penalty rather than the 75% rate. If the taxpayer can prove good faith and due diligence, the IRS will apply the lower 20% rate or even just cancel the penalty outright, depending on how good the taxpayer negotiated with the IRS.
To reiterate, anything that deals with lying to the IRS can lead to tax fraud. Commonly, these actions deal with inaccurate filing, but other fraudulent actions like lying about why you did not file can lead to tax fraud proceedings.
Most common tax fraud penalties and red flags include:
- Having two or more record books, especially if one book reports different amounts from the other;
- Moving money from offshore accounts, trusts, and corporate entities to make the money trail difficult to track;
- Adding a dependent to lower the taxable amount, even if the listed dependents are not qualified;
- Willfully giving incorrect information to an IRS officer, especially during an audit;
- Willfully avoiding record-keeping to hide expenses and income, even if reported taxable income and expenses are correct;
- Hiding or changing the contents in official records, like bookkeeping and time-in logs, as well as official communications; and
- Using false social security.
Again, these penalties accrue up to 75% of the correct tax amount fraudulently hidden.
There are other penalties that can lead to lower or higher fees.
If you or someone you know is about to receive a tax fraud penalty, it may be wise to employ a tax specialist.
Lastly, a taxpayer may unintentionally trigger a red flag in the IRS system. If the taxpayer can prove innocence, the IRS will cancel any tax fraud penalties.
What Are The Penalties for IRS Tax Fraud and Other Tax Crimes like Tax Evasion?
- Attempt to evade paying taxes can lead to either 1) imprisonment from 1 to 5 years, 2) a fine of $250,000 for individuals or $500,000 for corporations or 3) both plus the cost of proceedings. Specific language by the law can be found in 26 USC 7201.
- Fraudulent or false statements can lead to 1) imprisonment to at most 3 years, 2) a fine of $250,000 for individuals or $500,000 for corporations or 3) both plus the cost of proceedings. Specific language by the law can be found in 26 USC 7206.
- Willful failure to file a tax return, supply information or pay taxes at times required by law can lead to 1) imprisonment to at most a year, 2) a fine of $100,000 for individuals or $200,000 for corporations or 3) both plus the cost of proceedings. Specific language by the law can be found in 26 USC 7203.
Most of the time, the IRS will proceed with civil penalties rather than criminal charges through the tax court. However, some taxpayers do get imprisoned for tax crimes if the IRS proceeds with a criminal case under the state or local court with jurisdiction.
These tax fraud penalties are on top of other fees like the failure to file and failure to pay fee.
How Can a Taxpayer Answer the Tax Fraud Penalties?
Generally, after the judgment from the IRS, the taxpayer can either:
- Appeal the judgment to a superior court, like the state court of appeals regarding the imprisonment sentence,
- Accept the IRS judgment. Accepting the judgment can lead to other options like penalty abatement, and
- Employing a tax advocate, who can be an accountant or lawyer depending on the circumstances.
IRS tax fraud penalties impact not just your finances, but your whole life; the IRS can file for criminal charges. Avoid the hefty fines by always being honest and asking for help from either the IRS directly or through a tax professional.
Do you know someone who has received IRS tax fraud penalties? Do you have other questions about the process and solutions? Let us discuss in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.