What Is Tax Fraud?

What Are Tax Fraud Penalties and What Is Tax Fraud?

Are you worried about potential criminal tax fraud charges? Have you already been charged with tax fraud? Tax fraud penalties are much higher than other penalties — up to $100,000 for individuals and $500,000 for corporations, not to mention tax fraud jail time. You need to know exactly what the tax fraud punishment is and how to move forward.

Don’t talk to anyone until you’ve spoken with our team at The W Tax Group. We are a group of experienced tax attorneys who can help you navigate these very stressful penalties or accusations. 

It’s no surprise that cheating on your taxes is considered a criminal tax act. But maybe you thought your particular omission or misstatement wasn’t a big deal. Or maybe you weren’t even aware that you were doing something wrong — after all, tax law is complicated. 

Many people make mistakes on their tax returns, and the IRS doesn’t usually go after small mistakes. In fact, most tax returns will have one or two small mistakes on them, but the IRS is generally understanding of this. Making a mistake is not the same as committing a tax crime. 

What the IRS doesn’t like is when you are deliberately trying to minimize your tax liability — this is criminal tax fraud or evasion. That’s when you’ll need a tax fraud lawyer in your corner.

Why does the IRS care so much about tax crimes and violations? Because criminal tax fraud takes hundreds of millions of dollars from the government each year. It’s illegal, and the IRS will come down hard on you if the agency thinks you are being intentionally deceptive.

There are a few things the IRS can do if it catches you cheating on your income tax return or on other taxes. To help you move forward, we’ve created this guide to the most common tax frauds and penalties. But for real assistance, you need to contact our attorneys. This is not a tax matter you should ever deal with on your own. 

Key Takeaways

• Tax fraud is criminal tax evasion or other actions.
• Tax fraud penalties include fines and possible criminal charges.
• Tax fraud is usually committed by people with no criminal history.
• There are several different types of tax fraud.
• Tax avoidance is using legal methods to reduce your tax liability.
• Tax evasion is the most popular type of tax fraud.
• You can report people to the IRS if you suspect tax fraud.
• If someone reports you for tax fraud, you will face an IRS investigation.
• Mistakes are not the same as tax fraud.
• Tax fraud costs the government billions of dollars 
• In extreme cases, you can face jail time for tax fraud.

What Is Tax Fraud?

Tax fraud is when a person intentionally lies on a tax return for the purpose of lowering their tax liability. It can also occur when someone makes false statements, transfers assets, or takes other actions to purposefully avoid the assessment or payment of taxes.

There are many ways that a person or a business can commit tax fraud. For example, a family might overstate a few deductions on a tax return. A business owner might keep two sets of books to hide the accurate amount of money they’re making. It uses one set of books to track the real numbers. It uses the other set of books when filing tax returns.

Other types of tax fraud include payroll tax fraud or refund fraud, wherein someone files a false tax return to try to get a refund. In these cases, the person or business is intentionally falsifying tax information for their own benefit.

Tax fraud continues to be a serious issue. Following the 2023 tax filing season, the IRS reported 337,662 fraudulent refund returns claiming $2.8 billion in fraudulent refunds, which was up significantly from 2022, which had 177,493 fraudulent returns for refunds identified. This is also called a frivolous redemption claim. 

Some of these frivolous claims are related to identity theft, while others are filed by the taxpayer. For example, a taxpayer making a frivolous claim for a refund may add a dependent they don’t qualify to claim. An identity thief will use a real tax ID number, but they may make up income and deductions so that the return shows a refund due. 

Penalties for Tax Crimes and Violations

If you’ve committed a tax crime, the penalties vary depending on the severity of the criminal tax act and the tax laws involved. Most tax crimes are either misdemeanors or felonies.

Felony tax evasion or other felony tax crimes can lead to a fine of up to $100,000 ($500,000 for corporations) and up to five years in prison. Misdemeanors such as failing to file a return can lead to a fraudulent failure to file penalty, which is 15% per month, up to 75% of the tax due. 

In contrast, the standard failure to file penalty is just a third of these amounts. In some cases, failing to file a tax return can become a felony and thus would be subject to the above penalties. If you fail an audit, you may face audit penalties as well as civil or criminal fraud penalties.

Preparer Penalties for Tax Fraud

Tax preparers may be enrolled agents, CPAs, attorneys, or any other person who exchanges tax preparation for money. These individuals can be charged with penalties if they commit fraudulent acts. 

The IRS calculates preparer penalties based on how many violations they have, which regulations they violated, the inflation rates, and the number of tax years in question. Here are a few common preparer penalties to know:

• Understatement of taxpayer’s liability: In cases where the tax preparer aided or abetted the understatement of tax liability, the penalty is the greater of $1,000 for individual returns or 50% of the amount the preparer received to do the return. However, if the mistake was willful or reckless, it could be $5,000.
• Failure to furnish a copy to the taxpayer: This penalty is $50 for each failure to give a tax return copy or refund claim to the taxpayer.
• Failure to sign return: This is also $50 for each return or refund claim that wasn’t signed by the tax preparer.
• Failure to file correct information returns: This is a $50 penalty applied when the tax preparer didn’t include correct information on tax returns.

Preparers must be careful to follow all tax laws and regulations so they avoid these tax fraud or preparation penalties.

Punishment for Tax Fraud

The punishment for tax fraud includes civil fraud penalties and potentially criminal penalties and charges. Punishments tend to be worse in the following situations:

• The offender used sophisticated means to carry out or hide the fraud.
• The offender played a leadership or supervisory role in carrying out the fraud.
• The offender abused their role in a public position. or a position of trust.
• The offended obstructed justice. 

In contrast, you’re likely to get a lesser punishment if you had minimal participation in the offense.

Who Commits Tax Fraud?

Tax fraud occurs on many different types of tax returns and by many different types of income earners and corporations. Anyone can cheat on a tax return. It’s common for tax fraud offenders to have no criminal history and to be U.S. citizens. Some people may not be aware they’re committing an illegal act, but they are still committing tax fraud.

For instance, a waitress who doesn’t report all her tips on her tax return is committing tax fraud. By not reporting all of her income, she’s minimizing her overall tax liability. At the same time, if the restaurant that pays her also knows that she’s not reporting her tips, the restaurant is also committing fraud. By law, her employer is supposed to report those tips on its employment tax returns and pay payroll taxes on them. 

Here are some stats about the types of taxpayers who commit fraud the most often:

• 73.1% of offenders are men
• The average age was 52 years
• 94.1% are U.S. citizens
• 85.4% of tax fraud offenders had no criminal record
• Median fraud losses were about $339,000
• Only 14% of fraud cases involved over $1.5 million

COVID Relief Tax Fraud

Recent instances of tax fraud have included many cases of COVID relief fraud, wherein individuals or businesses try to claim tax breaks that don’t apply to their situation. These have included tax credits, loans, and relief payments. Fraud was particularly rampant with the Employee Retention Credit (ERC). 

Often, businesses didn’t commit this fraud on their own. Instead, they were duped by ERC mills that convinced them to claim the credit fraudulently. Unfortunately, you are always responsible for the details on your tax return even if you pay a professional to do the return, but because this fraud was so widespread, the IRS has offered relief to qualifying businesses that claimed the credit incorrectly.

Examples of Tax Fraud

Wondering what qualifies as tax fraud? Again, tax fraud basically includes any actions that willfully understate the tax you owe on a tax return. It also includes attempts to willfully avoid paying tax once it’s been assessed. The following are a few examples of tax fraud in action:

• Overstating deductions
• Claiming deductions you aren’t entitled to
• Lying about dependents
• Claiming personal expenses as business expenses
• Using a false Social Security number
• Deliberately not reporting income or underreporting it
• Hiding assets

If you do many of these things on a tax return, you will end up with a lower tax liability than you should have. At this point, you might be thinking, but wait, I thought it was legal to take steps to reduce my tax bill.

Isn’t that why many people and businesses hire an accountant to help with their tax returns? Isn’t that what tax planning is all about? Yes, this is true. However, you have to ensure what you are doing is legal. The legality of the action determines the difference between tax avoidance and tax fraud/evasion.

What’s the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance is a legal action to reduce your tax bill. Tax evasion is an illegal action to reduce your tax bill or payment.

Most people would like to avoid paying large income tax bills, and there are legal and legitimate ways to do this. For instance, ensuring you take all of your allowable business deductions can legally help you reduce business and income tax. Claiming all the credits you’re entitled to can also help you avoid unnecessary tax bills.

Similarly, donating money to charity can minimize your taxes and ensure that your hard-earned money is going somewhere you support. You can also put money into certain retirement accounts, taking advantage of health savings accounts, and putting money into certain college savings accounts.

These examples are all considered legal ways of lowering your taxes. In contrast, tax evasion, which is essentially the same as tax fraud, is when you are trying to avoid paying taxes and you use illegal means to do so.

Not filing your tax returns when required is a form of tax evasion. If you’re trying to convince the IRS that you can’t afford to pay your tax debt, and you move money from your bank account into a family member’s, it’s called hiding assets to avoid paying taxes. Of course, that is also illegal.

It’s not just individuals that commit tax evasion. Many business owners and corporations also try to get out of paying taxes. 

If you believe the government is coming after you for tax fraud, you should get help before it’s too late. The fines and penalties for committing tax fraud or tax evasion are substantial, and you can also go to prison.

What Is Tax Evasion vs Tax Fraud?

People often use the phrases “tax evasion” and “tax fraud” interchangeably. In some cases, that works. However, tax evasion is a type of tax fraud. It is the most common type of tax-related fraud. It occurs when you try to evade tax. This can include both evading a tax assessment or evading the payment of tax.

Tax evasion can happen in many different ways. Take a look at these examples of tax fraud.

Most Common Type of Tax Assessment Evasion

The most common way to evade a tax assessment is to file a return with false information. For instance, if you overstate your business deductions, you will reduce your tax liability. If you claim a credit illegally, you will also reduce your tax bill.

Most Common Type of Tax Payment Evasion

The most common way to evade tax payment is by cheating when you apply for an offer in compromise. The offer-in-compromise program lets you pay off your tax bill for less than you owe, but to qualify, you must prove to the IRS that your offer is the most the agency is likely to collect.

This requires you to make detailed financial disclosures to the IRS. Then, the IRS reviews your situation to determine how much you can afford to pay. 

If you transfer or hide assets before you submit the application, the IRS will assume that you can’t afford to pay much, and it will reduce your tax debt accordingly. This is how people evade paying taxes in a typical case.

More Examples of Tax Fraud

Criminal tax fraud is not the only type of tax crime. There are many different types of criminal tax acts that break U.S. tax law. Here is an overview of the main types of tax crimes and violations:

• Evasion of Assessment — Taking fraudulent actions to avoid having a tax assessed against you. For instance, overstating deductions on your federal income tax return.
• Evasion of Payment — Avoiding paying tax liabilities.
• Willful Failure to Collect or Pay Tax — Not collecting or paying payroll taxes or excise taxes.
• Failure to File, Supply Information, or Pay Tax — Failing to pay a tax or estimated tax, failure to file a return, failure to keep records, and failure to supply information.
• Fraudulent Withholding Exemption or Failure to Supply Information — Withholding information or supplying false details to your employer about withholding tax. Or making false certifications to reduce backup withholding on interest and dividends.
• Fraudulent and False Statements — Signing a tax return or similar form under the penalties of perjury when you know that it’s not true or correct. Aiding someone to provide false information to the IRS. Removing or concealing goods, commodities, or property to evade a tax assessment or influence the outcome of an offer-in-compromise application. Withholding, destroying, or forging tax records.
• Submitting Fraudulent Returns, Statements, or Other Documents — Filing a return, a statement, or another document that you know is false.
• Aiding with Fraudulent Returns, Statements, or Other Documents — Helping someone prepare a fraudulent return or causing a fraudulent return to be filed.
• Tax Crimes Attempts to Interfere with Administration of Internal Revenue Laws — Threatening tax administration employees or obstructing them from doing their jobs. Stealing back property that has been seized from you to cover an unpaid tax debt.
• Aiding and Abetting — Helping someone commit a tax crime.
• Conspiracy to Defraud the Government with Respect to Claims — Making an agreement or conspiracy to defraud the United States.
• False, Fictitious, or Fraudulent Claims — Presenting false claims to the United States.
• Fictitious Obligations — Creating fake securities or other financial documents issued by the United States, a foreign government, a state, or a similar entity. For instance, making and using fake money orders that say they’re from the U.S. Treasury.
• Identity Theft — Stealing someone’s identity to commit a crime. For instance, committing identity theft and filing a fake tax return to receive a refund illegally.

In many cases, there may be several different violations involved in a tax crime case. For instance, someone may be accused of both evasion of assessment and making a fraudulent statement.

Some of these violations are misdemeanors, while others are felonies. Some can be either/or depending on the specifics. There are substantial differences between the penalties for misdemeanors and felonies. 

To protect yourself, you need a skilled tax attorney who can provide you with the defense you need to get the lowest charges possible.

What If I Committed Tax Fraud?

If you think you might have committed tax fraud, your first question is probably — what happens if you commit tax fraud? Criminal tax charges are no laughing matter. There are extremely serious repercussions for criminal tax fraud or other tax violations.

In a worst-case scenario, you may face up to $250,000 in fines and up to five years (or even more in some cases) in prison. To protect yourself, you need to contact a tax lawyer with experience in criminal tax law. They can help you understand if you have committed tax fraud. They can explain the potential consequences. And they can help you craft an effective defense for your case.

However, in some cases, you may not even have committed tax fraud. The criminal tax laws are extremely complicated, and the IRS understands that sometimes people make mistakes. A mistake is not fraud. But on the other hand, claiming that you made a mistake or didn’t know the law won’t work as a defense if you’re being accused of tax crimes or violations. A tax lawyer can help you ensure that you craft the best defense for your situation.

What Happens If I’m Guilty of Tax Fraud?

If you’re found guilty of tax fraud, you’re going to be in the same boat with all kinds of stars including Willie Nelson, Marc Anthony, Martha Stewart, Wesley Snipes, Lauren Hill, and many others. But this isn’t a crowd you want to be in. While Willie Nelson could cut an album to help him pay the fines and penalties, it’s not so easy for a regular taxpayer.

As explained above, the penalties for tax fraud can be extremely severe. But as you may know, whether you’re arguing a traffic ticket or a more serious crime like tax evasion, having a lawyer in your corner can make a big difference. 

Being found guilty doesn’t mean that you’ll get the maximum punishment. A lawyer can help to reduce your penalties as much as possible.

However, criminal penalties aren’t the only monetary charges you’re likely to incur. Due to the doctrine of collateral estoppel, once you have been convicted of a tax crime, you cannot present a defense against civil fraud penalties for the same tax and the same tax year. This means you cannot get any penalty relief. However, you may still argue the actual tax liability and the amount of the understatement.

What If I Know Someone Who Violated Tax Laws?

If you believe that someone violated tax laws, you can make a report to the IRS. You can’t just call the IRS. You have to use Form 3949-A (Information Referral Online) if you think that you know a person or a business that isn’t following the tax laws. You can use this form for all kinds of violations.

You can even apply for a reward. To do that, you should use Form 211 (Application for Award for Original Information). According to the IRS, the reward can be up to 15 to 30% of the unpaid tax.

When you report someone for suspected tax violations, the IRS wants to know the type of violation, but the agency also asks how you know this information. You need to ensure that the details you provide don’t cause the agency to think that you helped or participated in the tax crime. Before sending this type of report to the IRS, you may want to consult with a tax lawyer to ensure your rights are secure.

The IRS doesn’t reveal your name when you report someone for a suspected violation. That anonymity helps make more people comfortable with using the whistleblower program. Keep in mind, however, that the IRS may not respond to every accusation. The agency reviews the report and then decides whether or not to move forward with the information.

What If Someone Reports Me to the IRS for Tax Crimes?

Wondering what’s going to happen if you’re accused of tax crimes? Curious about what can happen to someone who commits tax fraud? Here is an overview of the investigation and legal process.

Detecting a Potential Tax Crime

Generally, criminal investigations for tax fraud start when the IRS receives insights that a crime may have been committed. This may be information from an auditor. For instance, the auditor may have reported that the subject of an audit was hiding income and falsifying their returns. Or the information may come from someone who uses the whistleblower program (explained above) to report you to the IRS.

Analyzing the Crime and Requesting Approval for an Investigation.

Once the IRS thinks you might have committed tax fraud, the agency analyzes the information it has about the situation. This is the primary investigation. If an auditor or agent brought forward the information, their supervisor will review it.

At this point, two sets of eyes have reviewed the suspicious information or the tax crime report from the whistleblower. If they both agree that fraud is likely, the supervisor will ask the special agent in charge to start a subject criminal investigation.

Investigating the Crime

To investigate suspected cases of tax fraud, the IRS may do the following:

• Interview third parties.
• Conduct surveillance.
• Execute search warrants.
• Subpoena your bank records
• Review your financial data.
• Take other actions as necessary.

An IRS special agent performs these duties, and they work with the IRS Chief Criminal Tax Attorneys. The IRS has tax attorneys on its side. You need one on your side as well.

Recommending Prosecution

Once the special agent has gathered all the information, they and their supervisor review everything and make a determination. If they think that you haven’t committed a crime, they will discontinue the case. If they think that you did commit a crime, they will recommend prosecution.

The agent on the case will create a Special Agent report. The supervisory special agent, a criminal investigation quality review team, a criminal investigation assistance special agent in charge, and a criminal investigation special agent in charge will all review the report. Then, if all of these parties agree, they will forward tax investigations to the Tax Division of the Department of Justice and all other investigations to the United States Attorney.

What If I Made an Honest Mistake?

Negligence is when a taxpayer accidentally makes mistakes on their tax returns: for instance, forgetting to include income from a side job that you did months before and forgot about, or miscalculating how much you donated to a charity.

Many taxpayers also worry that not being able to pay taxes owed can lead to jail time. However, jail is usually only a risk in cases of intentional fraud. If you’re concerned about the consequences of unpaid taxes, learn more about when unpaid taxes can lead to jail time and how the IRS handles these cases. 

The IRS is mostly understanding of negligence, and while you will likely receive a penalty for this, you usually won’t be pursued for criminal behavior.

How Much Does Tax Fraud Cost the United States?

The IRS initiated 1,409 tax crime investigations in 2023, identifying $5.5 billion in tax fraud. 

A decade ago, the IRS was only losing less than half a billion to tax fraud. The agency says most of the fraud is committed by the super-wealthy or big corporations. A lot of it is also linked to fraud with cryptocurrency. 

However, the IRS doesn’t plan to lose this money anymore — as of 2022, the agency is slated to get a big budget increase, and it’s going to use the money to crack down on fraud and unpaid taxes.

What Is the Penalty for Forging a Signature on a Tax Return?

Depending on the situation, forging a signature on a tax return may be considered identity theft, tax fraud, both, or another type of crime. Similarly, if someone forges the endorsement line on a tax refund check, they are committing check fraud and theft. Penalties can include fines, criminal charges, and even jail time.

Can you go to jail for tax fraud?

Yes, you can face jail time for criminal fraud charges. However, in most cases, the IRS applies civil fraud penalties rather than pursuing criminal charges.

Get in Touch with a Tax Fraud Professional

If the IRS suspects you of committing tax fraud or evasion, you’ll want to talk to a tax professional right away. Your tax lawyer can analyze your situation to figure out the best course of action. In some cases, paying the tax liability might be enough to get the IRS to back off and not pursue criminal charges against you.

Get a free consultation and learn your options from The W Tax Group right now by contacting our team of attorneys.