Income tax fraud usually involves a taxpayer taking steps to either avoid paying taxes, or to pay less than is owed in taxes. It involves lying about what was earned or circumstances that make the taxpayer eligible for deductions or credits. Some tax fraud charges, however, don't involve money at all.
How Does the IRS Find Out?
The attention of the Internal Revenue Service (IRS) is drawn to fraudulent returns when its computer system flags them due to some unusual factor. For example, a taxpayer might have claimed far more deductions than the reported income can support. An IRS agent reviews flagged returns to determine if something is legitimately wrong with them. This may result in a more extensive investigation, typically an audit. Tips to the IRS might also prompt audits.
Failure to File Is Fraud
Not filing a return at all is income tax evasion, and this is also a form of tax fraud. Technically, failure to file a return is a crime if you earn income. This is true even if you didn't earn very much and would not have had to pay taxes that year. It is true even if you erased your tax liability with deductions or credits.
Fraud Doesn't Always Involve Money
The IRS can charge you with fraud even if the error in your return doesn't mean you owe the IRS more money. For example, filing your taxes under the wrong Social Security number is fraud. The IRS usually adds non-monetary charges to charges that do involve money, such as if you lie to the IRS investigator during an audit. Lying to the auditor is usually a separate charge.
Penalties Can Be Severe
The IRS usually investigates fraud only when large amounts of money are involved, at least as a criminal offense. If you incorrectly claim a credit, and if it results in you paying the IRS $500 less, you're not likely to go to jail. However, you'll probably be hit with penalties and interest. If your fraudulent return results in a significant gain to you, you could go to jail. You'll also still owe the money that you avoided paying, and you'll owe steep civil fraud penalties on top of the usual IRS penalties and interest.
You May Be Unaware of the Error
If a professional you've hired to do your taxes gets a little creative when calculating your deductions and credits, you too could be guilty of fraud. The IRS expects you to understand your own tax return and know whether it's accurate. However, this will most likely result in financial penalties, not jail time. For fraud to apply as a criminal offense, the IRS must prove that you knew your tax return was inaccurate when you filed it.
A Tax Lawyer Can Help
The law surrounding income tax fraud is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.