The Most Common IRS Tax Fraud and Evasion Penalties Explained

The Most Common IRS Tax Fraud and Evasion Penalties Explained

Paying taxes is never fun, but avoiding or evading taxes can lead to serious consequences with the IRS. While a simple mistake may result in a penalty, deliberately trying to reduce your tax liability through fraud or evasion can lead to criminal charges, fines, and even jail time. This article will explain the most common penalties for tax fraud and evasion, so you can understand the potential risks and how to avoid them.

Civil vs. Criminal Tax Fraud

There are two main categories of tax fraud penalties – civil and criminal. Civil penalties involve monetary fines added onto your tax liability. Criminal penalties can include fines, but may also involve imprisonment.

According to tax law experts, over 98% of tax fraud cases are punished with civil rather than criminal penalties[1]. But criminal charges are still a possibility in the most egregious cases of intentional tax evasion.

Common Civil Tax Penalties

Here are some of the most common civil fines and penalties the IRS may impose if you are audited and found to have committed tax fraud:

• Fraud Penalty: An extra 75% of the additional tax owed. So if you underpaid by $10,000, the penalty would add another $7,500 for a total of $17,500 owed. This penalty applies to any type of tax fraud[2].
• Failure to File Penalty: Up to 25% of the net tax due for each month you are late in filing, up to a maximum of 100% of the tax due[3].
• Failure to Pay Penalty: 0.5% of the tax owed for each month you don’t pay, up to 25% maximum[3]. This fine applies even if you filed on time.
• Accuracy Penalties: 20% of the underpayment if negligence is found. 40% if there is substantial understatement of tax[4].
• Preparer Penalties: Up to $5,000 for an individual return or $10,000 for a corporate return if your tax preparer aided tax evasion[5].
• Frivolous Filing Penalty: $5,000 for filing a return that doesn’t include enough information to assess tax or contains information clearly contradicting the amount owed[4].

While these civil fines may seem harsh, they pale in comparison to potential criminal penalties.

Criminal Tax Fraud Penalties

If the IRS uncovers undeniable evidence of intentional deceit, they may pursue criminal charges including:

• Tax Evasion: Up to 5 years in prison and fines up to $250,000 for individuals or $500,000 for corporations[5].
• Filing a False Return: Up to 3 years imprisonment and fines up to $100,000[6].
• Failure to File: Up to 1 year in prison and fines up to $100,000[6].
• Tax Protestor: Up to $100,000 in fines and imprisonment for refusing to pay taxes, file returns, or provide information[4].

In addition to fines and jail time, being convicted of a felony tax crime results in having a permanent criminal record.

The IRS doesn’t take tax crimes lightly, so these severe penalties are meant to deter fraud and evasion.

Common Questions and Defenses

Many people wonder what constitutes tax fraud vs. an innocent mistake. There are also defenses that may help avoid penalties if you get audited and accused of tax evasion. Here are some common questions and scenarios:

What exactly is criminal tax fraud? The key element is willfully attempting to evade taxes by intentionally committing deceit, concealment, or misrepresentation[5]. This means knowingly lying or falsifying documents to illegally reduce taxes owed.

What if my spouse committed fraud without my knowledge? In most cases, only the spouse who actually committed fraud would face criminal charges or penalties. The innocent spouse can file an injured spouse allocation.

What if I made a mistake unintentionally? The IRS must prove you specifically intended to commit fraud. If you can demonstrate the underpayment was a mistake, you may avoid criminal charges and harsh fraud penalties[2].

What if the tax code is just too complex? Claiming the tax laws are confusing is a common defense against fraud allegations. While you are still responsible for complying, unintentional mistakes due to complexity may warrant reduced penalties.

Can penalties ever be reduced? Yes, in some cases penalties can be lowered if the underpayment was due to reasonable cause and not willful neglect. But the burden of proof is on the taxpayer to show this[3].

When should I contact a tax attorney? If you are audited and the IRS alleges fraud or tax evasion, you should retain legal counsel immediately. An experienced tax fraud lawyer can defend your case.

Preventing Tax Fraud Investigations

The best way to avoid tax fraud penalties is by filing timely, accurate returns that report all income. If you’re ever unsure about deductions or other details, consult a tax professional.

Be especially cautious about returns prepared for you by someone else. Review them carefully to make sure nothing is improperly exaggerated or falsified. Report any questionable preparer activities.

If the IRS does come after you for tax fraud, remain calm and polite in your interactions. Get legal help right away. With the right defense and documentation, you may be able to prove your actions were not willful tax evasion.

No one wants to deal with tax fraud penalties and criminal charges. But understanding exactly what constitutes illegal tax evasion, as well as the typical penalties, can help you steer clear of trouble.

References:

[1] https://www.fedortax.com/en/understanding-tax-fraud

[2] https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf

[3] https://www.reliabletaxattorney.com/tax-fraud-penalties

[4] https://www.wtaxattorney.com/tax-problems/penalties/tax-fraud/

[5] https://taxcure.com/tax-problems/tax-penalties/criminal-tax-penalties

[6] https://taxattorneydaily.com/tax-law/fraud-and-tax-crimes/

https://www.irs.gov/businesses/small-businesses-self-employed/innocent-spouse-relief