Filing Fraudulent Tax Returns: A Federal Crime

Tax fraud is a federal crime with serious consequences and a crime that rarely stays hidden. Between the IRS’s audit computers and the Whistleblower program, high dollar tax fraud is nearly impossible to hide.  Low dollar tax fraud sometimes can be hidden for a time, but eventually most people get caught.

Filing a fraudulent return can result in fines up to $250,000 for an individual or $500,000 for a corporation and up to 3 years in jail along with the cost of prosecution for high dollar tax fraud.  For lower dollar tax fraud you can face penalties of as much as $5,000 or 100 percent of the unpaid tax.  If the IRS is charging you with high dollar tax fraud, you must hire an attorney and be prepared for a long, difficult and humiliating process.

Keep in mind that the IRS is not out to get responsible tax payers. In fact, in order to be found guilty of filing a fraudulent tax return the IRS must prove that you: “Willfully makes and 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.” (Title 26 USC § 7206(1)) In other words, you must intentionally and knowingly lie on your taxes or other tax related documents. This includes actions such as recurrently leaving certain income off of your tax statements or changing your income forms to reflect false information.

Fraudulent filings: What happens

The first step that the IRS will take when investigating someone for fraud is to pull your tax returns and send you a notice. In the notice, for smaller cases (typically those dealing with amounts less than $100,000), the IRS will request that you address the issues and make repayment immediately. Refusal to do so will result in a formal investigation.

If the amount is larger than $100,000, the IRS’s first contact with you will most likely be two IRS agents showing up at your home or office to ask you some questions. If this happens, it is time to hire an attorney. Be polite and respond to the agents by saying that you would prefer to not answer any questions until you retain an attorney. The reason for this is simple: the IRS most likely knows more than you realize and is comparing their records. Any admissions would incriminate you and can result in formal prosecution. Annually, the IRS prosecutes 75 percent of the fraud cases they investigate.

Once you retain an attorney, tell the attorney everything. If you have been fraudulent, the attorney needs to know so that they can mount the right defense. In the case of actually committing fraud, the attorney will do their best to plea bargain your case and mitigate the amount of jail time served. Keep in mind, that if you are found guilty, you name and case will be published on the IRS website and tax fraud will appear on your permanent record. Along with paying a fine and jail time, you will lose your job and credibility.

If you have not committed fraud in any way, then bring your paperwork and be prepared to prove this to the attorney. Once the attorney reviews your paperwork, they have the means to obtain the information the IRS has and investigate it for themselves. An attorney can also determine if this was a case of identity fraud or some other mix up. In any event, your attorney will be invaluable in proving your innocence and protecting your record. You have too much to lose if you do not hire a tax professional in a dispute with the IRS.

Some Examples of Tax Fraud

A. Tax fraud relating to filing status and claiming children for the purposes of exemptions and tax credits:

A huge number of married taxpayers commit very serious low dollar tax fraud by filing head of household, instead of married filing jointly, and therefore they receive thousands of dollars of refunds that they would not have been eligible to receive if they had filed a joint return.  Married individuals who are living together and who intend to continue to live together have only two options for filing status, married filing jointly, and married filing separately.   Due to the fact that credits for children can be very high, sometimes between unpaid tax and penalties, low dollar tax fraud can turn into high dollar tax fraud.

B. Tax fraud relating to self-employed individuals:

Many self-employed individuals are quite creative in their bookkeeping, which lead them to expense many things that are either fictional, or are personal expenses rather than expenses of the business.

Joe Plumber grosses $200,000 per year annually, and expenses $175,000 leaving him with a net taxable income of $25,000.  Joe is single with no dependents; therefore he pays tax in the amount of  $5779, which includes self employment tax.  However, within Joe’s expenses he has included personal vacations as travel expenses, personal vehicle mileage as business mileage, nights out at restaurants with friends as business meals, his cell phone as a 100% business expense, his internet as a 100% business expense, and materials that he purchased for his own home, and the homes of family members, as business materials.  All of that added up to $60,000 so Joe’s actual profit was $95,000 and his tax should have been $32,320, including self-employment tax.

What probably seemed to Joe like a minor cooking of his books, quickly translated into significant tax fraud.

Over the past 15 or so years the IRS has focused their attention more on the corporate taxpayers and less on the individual taxpayers.  This has now changed.  The IRS has hired many thousands of new auditors whose purpose is to identify individual tax fraud and recoup taxes and penalties for the federal government.

Case Studies: Examples of Tax Fraud

Case Study 1: Falsifying Filing Status and Dependents

John and Lisa, a married couple, decide to commit tax fraud by filing as head of household instead of married filing jointly. By doing so, they fraudulently claim additional tax credits and deductions for dependents they are not eligible to claim. They receive a substantial refund based on these false filings.

However, their fraudulent actions catch the attention of the IRS during an audit. As a result, they are required to pay back the incorrect refund amount, along with significant penalties and interest. Additionally, John and Lisa face criminal charges for tax fraud, leading to potential fines and even imprisonment.

Case Study 2: Underreporting Business Income

Sarah, a self-employed graphic designer, engages in tax fraud by underreporting her business income. She intentionally fails to report a portion of her earnings to the IRS, significantly reducing her taxable income. Sarah uses various tactics to conceal her actual income, such as inflating business expenses, not reporting cash transactions, and keeping inaccurate records.

However, the IRS detects inconsistencies during an audit and initiates a full investigation. Sarah is ultimately found guilty of tax fraud and is required to pay back the owed taxes, penalties, and interest. She also faces criminal charges and potential imprisonment.

Case Study 3: Offshore Tax Evasion

Mark, a wealthy investor, attempts to evade taxes by hiding his income and assets in offshore accounts. He establishes shell companies in tax havens and transfers funds offshore, making it difficult for tax authorities to trace his income and assets. Mark fails to report the offshore income on his tax returns, deliberately evading his tax obligations.

However, an international crackdown on offshore tax evasion prompts the sharing of financial information between countries. The IRS obtains Mark’s offshore account details and launches an investigation. Mark is ultimately caught and faces significant financial penalties, as well as potential criminal prosecution and imprisonment for his involvement in offshore tax evasion.