Tax Fraud: What’s A Felony And What’s Not

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The number of Americans that are not paying their taxes is stunning. Did you know that 1 in 30 taxpayers fail to file their taxes each year?

This is not an insignificant amount. According to the same source, it adds up to approximately 14 million taxpayers. This group owes over $130 billion in penalties and taxes to the United States government.

Just because you owe money to the IRS does not mean you have committed a felony. Read on for a comprehensive guide explaining what constitutes a felony.

Explore the topic of tax fraud as well as other penalties the IRS may levy against you. Tax fraud is a serious allegation and can negatively affect your life forever.

What Is Tax Fraud?

Before explaining what activity constitutes tax fraud, it is important to define the term. Tax fraud is a blatant effort to reduce an individual or business entity’s tax liability. It is commonly referred to as tax evasion or cheating.

One of the key characteristics of a fraud allegation is the intent. In order to successfully litigate a tax fraud case, the IRS needs to prove it was done willfully and intentionally.

Do You Need to File a Tax Return?

You cannot commit tax fraud if you are not required to file taxes. Depending on your filing status and income, you may not need to do anything.

In general, the income threshold for filing taxes is tied to the standard deduction. A single filer earning $12,000 or less does not need to file taxes. If you are a single filer over the age of 65, this amount increases to $13,600.

For married couples filing jointly, the standard deduction increases to $24,000. Each spouse over aged 65 increases this income threshold by an additional $1,300. Therefore, if both spouses are over 65, the reporting requirement is $26,600.

This level is $18,000 and $24,000 for a head of household or qualified widow respectively. For those over 65-years old, this value increases to $19,600 or $25,300.

One significant change from the other filing statuses is for married filing separately. In this scenario, any income over $5 requires a tax filing.

What Are Some Examples of Individual Tax Fraud?

Most often, fraud is achieved by omitting or misrepresenting important tax information. Continue reading for specific examples of fraudulent behavior.

Failure to File

This is one of the simplest ways to commit tax fraud. If your earnings exceed the levels described above, a tax filing is required.

Once again, fraudulent behavior must be accompanied by intent. The government must demonstrate that you purposely failed to file your taxes.

Failure to file is considered a misdemeanor and not a felony. You will not see criminal charges, with the IRS assessing civil penalties instead.

Omitting Income

One of the most common ways to mislead the IRS is by omitting income. This is a fraudulent activity that can be performed by individuals and businesses alike.

Many people have heard about under the table income. Even if you are paid in cash, there is still an obligation to report this income to the IRS.

There is a dual benefit to under the table wages. Simply put, the employer and employee share the net tax savings of defrauding the government.

The employer pays his or her employee a lower wage. At the same time, the employee increases his take-home pay without federal or state deductions.

Misrepresenting Important Personal Details

Misrepresenting your personal information is another way to defraud the government. There are dozens of impactful ways in which people lie to the IRS.

For starters, some decide to misrepresent their marital status. There are tax benefits that come with marriage. Selecting a married filing jointly status is fraudulent if you are not married or separated.

Along similar lines, some elect to misrepresent the number of dependents that they have. This is especially true when it comes to child dependents.

There are numerous tax credits and deductions for parents and caregivers. One popular example is the $2000 tax credit for each child.

Other examples are childcare tax credits or the medical expense deduction. The benefits of these credits and deductions are significant.

Tax fraud often presents itself for divorcees or elderly care. For divorcees, one parent claims tax credits or deductions even though they were not responsible for the child.  As it pertains to the elderly, a fraudulent tax filer may claim dependent benefits that belong to a senior citizen. 

Overstatement of Deductions

Deductions are used by filers to lower their tax liability. Overstating your deductions can lead to a larger tax return or a lower payment to the IRS.

Charitable donations are a popular deduction for Americans. A fraudulent tax filer may exaggerate their charitable donations to lower their tax liability.

Falsifying Documents

Typically, income and deductions are supported by IRS documentation. For example, most employees receive a W-2 or 1099-MISC form. These standard government forms are completed by employers and report income to the IRS.

The 1098 form is a great example of deduction support. This IRS document reports on expenses like mortgage interest or tuition payments.

Falsifying any IRS form demonstrates a willful intent to defraud the government. Falsifying documents can extend beyond standard IRS forms. Some fraudulent tax filers falsify other supporting documents like medical bills or charitable donation lists.

What Is Business Fraud?

Individuals are not the only ones who commit tax fraud. Corporations and small businesses also routinely engage in tax violations.

The U.S. tax code for businesses is significantly different than it is for individuals. For example, businesses are authorized to deduct expenses like salaries, supplies, and utilities.

Embezzlement is one type of tax fraud that commonly occurs in the business world. It involves the theft or misappropriation of funds. There are many different types including cash or wire transfer embezzlement.

For example, consider a business owner that accepts a cash transaction. Instead of logging the transaction, they pocket the cash or put it directly into their bank account.

If this is intentional, the purpose of this action was to decrease the company’s tax liability. Keeping the transaction off the books means that it is not subjected to a tax rate. The business owner believes by hiding the money that they keep more of it.

Corporations and businesses have the ability to defraud the government of billions in tax revenue. Read on for a few examples of how businesses commit tax fraud. The common characteristic in each case is to reduce income or increase tax write-offs.

Using Company Accounts for Personal Expenses

This is a common way in which business owners commit tax fraud. They use corporate accounts to pay for personal expenses.

Consider a scenario in which a tax filer uses a business account to pay for home internet and utilities. Then, they deduct these as business expenses on a tax filing.

The goal of this scheme is two-fold. The first is to reduce personal expenses by misappropriating business funds. The second is to reduce tax liability by increasing the business expense deduction.

This example of tax fraud routinely occurs with business credit card accounts. Some individuals working for a company are entrusted with business cards. They are to be used solely for business expenses.

The tax fraud occurs when a business credit card is used for personal expense. Then, the personal expense is written off as a business expense deduction.

Misappropriation of Funds

This is one of the most common types of fraud involving business accounting. Here, a business owner or employee improperly steers funds to a personal bank account.

Many complex schemes have been developed to commit this felonious act. In some cases, a person will create a fictitious business entity.

Then, they will create fake invoices to make it appear that the business paid for goods or services. Instead, the money goes into an account controlled by a person committing the crime.

Other examples are stealing money from the company’s payroll. Another felonious act is disguising funds as business allowances and instead embezzling the money. Examples of common business allowances are automobile or entertainment funds.

Omitting Income

This topic was addressed earlier from an individual tax filing perspective. However, businesses take a different approach to concealing revenue.

Of course, the business may pocket cash payments. Some try to conceal gross receipts to make it appear that revenue is less.

Another tactic is to manipulate or misrepresent invoices. This clearly demonstrates intent as it requires falsifying documents and altering the company’s accounting system.

How Much Does the IRS Assess in Civil Penalties Each Year?

The IRS maintains a handbook to define the various civil and criminal penalties associated with tax fraud. In a single year, the IRS assessed nearly $30 billion in civil tax penalties.

Individuals are assessed with the most civil penalties. Business income tax violations rank a distant second place.

How Many Investigations Does the IRS Perform?

The IRS performs over 3,000 tax-related investigations each year. Two of the primary investigation areas are legal source tax crimes and illegal source financial crimes.

The agency’s funding has been depleted for several fiscal years. A decline in federal funding has limited the agency’s ability to enforce tax violations.

How Does the IRS Enforce Tax Violations?

The enforcement arm of the IRS is referred to as Criminal Investigations (CI). They are authorized to investigate tax crimes, as well as some other financial crimes.

The CI unit has a few different punitive tools at their disposal to encourage voluntary compliance with IRS policy. They have the ability to assess civil fines and penalties and seek prison time in federal court. They will also publicize tax convictions to embarrass Americans that cheat the system.

What Are the Standard Penalties for Tax Crimes?

The IRS Handbook publishes penalty guidelines for tax crimes. Based on the alleged crime, read on for the corresponding penalty.

False or Fraudulent Statements

In order to cover up tax crimes, some tax filers make false or fraudulent statements. This is criminal behavior and can be charged accordingly.

A federal judge has discretion over the penalty, however, the IRS does set a maximum penalty. In the case of false statements, the maximum prison sentence is 3 years. In terms of fines, the maximum is $250,000 for an individual and $500,000 for a corporation.

Tax Evasion

If a person is convicted of tax evasion, the prison sentencing is more severe. Instead of the 3 years for false statements, tax evasion carries a maximum sentence of 5 years.

The civil penalties are the same as making false statements. In addition, the defendant may be required to pay for the cost of prosecution.

Failure to File

The least severe penalties fall in the failure to file category. Here, the prison sentence is capped at 1 year. The civil penalties are $100,000 or $200,000 for individuals and corporations, respectively. The defendant may also be responsible for the cost of prosecution.

This penalty category includes a few other charges as well. If you fail to pay tax at the required time, the above penalties may apply.

Other charges in this category include a failure to maintain tax records. In addition, failure to supply information to the IRS is punishable.

Unpaid Taxes

In high-profile convictions, the reported penalty is sometimes significantly higher than the aforementioned caps. This is because the IRS is also assessing unpaid tax.

The CI unit is not going to let an individual or business off the hook for concealed income or exaggerated deductions. Therefore, the IRS is going to assess the unpaid tax amount and add it to the total penalty. For this reason, you will see IRS press releases with payments in the millions.

Wrapping It Up

Tax fraud is no laughing matter. A fraud conviction carries significant jail time and large civil penalties.

The IRS is going to give you the benefit of the doubt on mistakes or negligence of the law. However, actions like deliberately concealing money are certain to be met with IRS punishment. If you are being charged for tax fraud and need help, please contact us today to schedule an appointment.  

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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