15 Sep 23

The Most Common IRS Tax Evasion and Fraud Schemes Prosecuted

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Last Updated on: 18th September 2023, 12:31 am

The Most Common Tax Evasion and Fraud Schemes Targeted by the IRS

Paying taxes is a civic responsibility that supports communities and the country as a whole. However, some individuals and businesses illegally avoid paying their fair share of taxes. This tax evasion and fraud robs the nation of crucial funding for infrastructure, education, defense, and more. Thankfully, the Internal Revenue Service (IRS) prosecutes many tax cheats and fraudsters each year.

In this article, we’ll explore the most common types of tax evasion and fraud that the IRS criminally prosecutes. We’ll look at real-life examples of these financial crimes and the typical penalties offenders face. Understanding how to avoid running afoul of tax laws can help honest taxpayers stay in the clear.

What is Tax Evasion?

Tax evasion involves intentionally submitting false information or omitting details on a tax return to illegally reduce one’s tax liability. It often entails concealing or misrepresenting income, expenses, deductions, exemptions, credits, or other specifics. Tax evasion is a purposeful attempt to defraud the government of tax revenue the filer rightfully owes.

This felony can lead to up to 5 years in prison and fines up to $100,000 for individuals or $500,000 for corporations according to tax law experts[1]. Below are some common tax evasion schemes the IRS prosecutes.

Underreporting Income

One of the most common tax evasion tactics is simply not declaring all income earned. This can involve underreporting wages, business income, rental income, capital gains, or other earnings. Offenders may only report a portion of the income listed on their W-2, 1099, or other tax documents.

For example, in 2021, a Louisiana man was sentenced to over 3 years in prison for evading over $1.4 million in taxes. He ran a pain management clinic and underreported the clinic’s income by millions of dollars over several years according to the Department of Justice[2].

Inflating Deductions

Another way tax cheats try to lower their tax bill is by exaggerating deductions. This can include fabricating or inflating charitable donations, business expenses, medical expenses, and other write-offs. Deduction scams often involve creating fake receipts to substantiate the bogus claims.

For instance, a New York accountant was convicted of inflating itemized deductions on his clients’ returns for millions in fraudulent refunds. He reported fake deductions for things like mortgage interest, property taxes, and business expenses. His scheme cost the U.S. Treasury over $5 million according to federal prosecutors[3].

Hiding Income Sources

Failing to report income from “under the table” work, side jobs, online sales, and other sources is another form of tax evasion. Offenders simply don’t tell the IRS about earnings from certain activities or revenue streams.

For example, a North Carolina man didn’t report over $1.5 million in income from his auto sales business over three years according to the Department of Justice. He dealt extensively in cash, didn’t keep business records, and didn’t tell his tax preparer about the unreported income. He was sentenced to over 2 years in prison for tax evasion[4].

Abusive Tax Shelters

Wealthy taxpayers sometimes use complex, exaggerated, or sham transactions to illegally shelter income from taxes. Though these abusive arrangements may seem legal, they are actually tax evasion schemes. They often involve convoluted business deals, falsified losses, bogus trusts, and more according to the IRS[5].

For example, a New York businessman helped clients evade over $35 million in taxes through fraudulent tax shelters according to federal prosecutors. He designed shelters to generate fake losses that offset the clients’ real income. He was sentenced to over 8 years in prison for his role in the scheme[6].

What is Tax Fraud?

While tax evasion involves not paying taxes owed, tax fraud entails illegally obtaining undeserved refunds and benefits. This often uses identity theft, false claims, forged documents, and other scams to trick the IRS into sending unearned money.

Tax fraud carries up to 3 years in prison and fines up to $100,000 according to IRS rules. Below are some common tax fraud schemes.

Identity Theft

Identity thieves file fake returns using stolen names and Social Security numbers to claim fraudulent refunds. Oftentimes, they exploit vulnerable populations like the elderly, deceased, minors, and immigrants according to the IRS.

For instance, a Georgia woman used stolen IDs to file over 1,000 false returns claiming $12 million in refunds according to the Department of Justice. She preyed on foster children, the deceased, and even a U.S. Senator. She was sentenced to over 11 years in prison.

Fake Businesses and Expenses

Some fraudsters invent fake businesses and claim bogus expenses to generate tax refunds. This can involve making up business names, employers, deductions, and losses according to IRS investigators.

For example, an Oregon man completely fabricated over $1.1 million in business losses and expenses to claim tax refunds according to the Department of Justice. He submitted fake documents for nonexistent businesses and expenses to the IRS to fraudulently claim over $1.1 million in refunds. He was sentenced to over 3 years in prison for his crimes.

Other examples include an Oregon securities broker who fabricated business losses and expenses for nonexistent companies and was sentenced to over 4 years in prison. Also, a former IRS employee who failed to report over $500,000 in income from his tax preparation business over several years and was sentenced to 13 months in prison. Additionally, a California couple who submitted false documents and business losses to claim over $400,000 in fraudulent tax refunds, with the husband sentenced to 21 months in prison.