Tax fraud is considered failure to file taxes or filing fraudulently. Both of these situations carry penalties to offenders. However, the severity of the penalty and how the IRS will come after you depends on which offense you’ve violated and how flagrantly you violated it.

Failure to File Taxes

There are many different reasons that people choose not to file their taxes. Some of these reasons include going through a nasty divorce, a death or illness in the family, and addiction of some kind, not liking paperwork, or just not wanting to file. While you may get away with not filing initially, eventually the IRS will catch you.

Whenever someone receives a W-2, 1099, or any other tax form, the IRS gets a copy as well so they know who’s not filing their returns. If you’ve paid your taxes and deserve a refund but don’t file, the IRS will typically look the other way. However, if you don’t file for three years, you’ll lose your right to a tax refund.

If it’s clear that someone owes taxes, the system will recognize them. You can go to prison for tax fraud, in this case not-filing, but in these cases it’s very rare that an offender will actually go to prison. The way the IRS sees it, if you go to jail you can’t work and they can’t seize the money you owe them from your paycheck.

If the IRS figures out that you owe money, they will automatically generate a tax return for every year that you’ve failed to file. Then they’ll send you a bill for those years. If you don’t respond quickly, they can begin seizing your assets. Furthermore, the IRS’ returns probably won’t include all of the deductions that you’re entitled to so most people will need to re-file each of the returns they missed. This process will involve finding old documents to prove your case.

For more complex cases, it can take more than a year for everything to be settled. This assumes that you are able to respond quickly to all of the requests the IRS makes. If you miss any of the deadlines, you’ll lose your spot in line and have to wait for your turn again. If you owe money to the government, they make you pay it in addition to interest and fines for missing the filing date. Not filing can carry a penalty of up to 25 percent of what you owe. They can also charge an additional 25 percent for failing to pay your bill on time.

Fraudulent Tax Returns

When signing a tax return, you’re doing so under the penalty of perjury. Tax fraud is a federal crime and can rarely stay hidden. There are two types of tax fraud that you could potentially commit, high dollar and low dollar fraud.

High dollar fraud are typically cases of more than $100,000 and can result in fines of up to $250,000 for an individual or $500,000 for a corporation and three years in jail plus the cost of prosecution. In these cases, the offender will need to hire an attorney and be prepared for a long, difficult, and humiliating process. Low dollar fraud is usually for cases under $100,000 and penalties include a $5,000 fine or the entirety of the unpaid tax.

If the offense is an accident, the wording of the law protects you from being prosecuted. According to 26 U.S. Code § 7206, fraud and false statements, the offender is guilty if he or she “Willfully makes or subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” In short, you must knowingly lie on your tax return or some other tax document to be guilty.

If you’re found by the IRS to have filed a fraudulent tax return, the first step they’ll take will be to pull your tax returns and send you a notice of an investigation. If it’s a low dollar case, they’ll request that you address the issue and make an immediate repayment. If you refuse to make the repayment, they’ll begin a formal investigation.

If it’s a high dollar case, your first contact will be two IRS agents that will show up at your home or workplace to ask you some questions. At this point, you’ll need to retain an attorney. Make sure to be polite and respond to the agents by telling them that you’d prefer not to answer any questions until you have an attorney present. The reason for this is that the IRS most likely knows more than you’d realize and are already comparing your records. If you admit any guilt, it can result in a formal prosecution. The IRS prosecutes approximately 75 percent of fraud cases they investigate.

When you speak to your attorney, tell them everything. If you have committed fraud, your attorney needs to know so they can properly defend you. In this case, they’ll begin to negotiate a plea bargain to limit the time you’ll spend in jail. If you are found to be guilty of tax fraud, your name will be displayed on the IRS website and the offense will go on your permanent record.

However, if you’ve been falsely accused of tax fraud, bring your paperwork and be prepared to defend yourself to your attorney. After the attorney reviews the paperwork, they can gather information from the IRS to do their own investigation. That way the attorney can determine if it was a case of identity fraud or some other mix up.

Tax fraud is a serious issue that the IRS will likely pursue should they find an offender. If you are accused of tax fraud, it’s important that you have the correct documentation to defend yourself. To ensure you don’t fall into one of these situations, come to G.I. Tax and let our tax professionals help you file your taxes.