Tax fraud is a serious charge that can carry substantial penalties. If the Internal Revenue Service (IRS) is accusing you of tax fraud, the smartest thing you can do for yourself is consult with a skilled attorney. An attorney can look over the charges against you, help you put together a defense to either get the charges dismissed or lessened, and represent you during the case.
For more on how tax fraud works, potential penalties and why you need an attorney, read on for a full guide.
What Constitutes Tax Fraud?
Mistakes on a tax return can be separated into two basic categories, which are tax fraud and negligence.
When the IRS accuses you of tax fraud, it’s charging you with intentionally taking illegal action to avoid paying taxes that you either did owe or thought you owed at the time.
Negligence, on the other hand, means that you made one or more mistakes on your taxes, but they were unintentional and you weren’t trying to lower your tax obligation. They’re what most people would call an honest mistake.
Here are some examples of actions that could be considered tax fraud:
• Reporting your income as lower than it actually was or neglecting to report income from certain clients.
• Making up false deductions.
• Deducting more than you should.
These are just a few of the many ways a person could commit tax fraud. One thing you may have noticed about the above actions is that depending on the circumstances and the evidence available, they could be considered tax fraud or negligence.
You could have intentionally underreported your income, or it could have been an unintentional math error. The same is true with deductions. And you could have made up a false deduction, or you could have thought you qualified for a deduction without verifying it.
The line between tax fraud and negligence isn’t always easy to determine, and that’s one reason an attorney is so important. Your attorney can argue that any mistakes made were simple negligence and not willful tax fraud. That can make a huge difference in the penalties you face.
Penalties of Tax Fraud and Negligence
You’re looking at a much larger penalty if you end up convicted of tax fraud than if you’re found guilty of negligence.
With negligence, you’ll need to pay whatever taxes you failed to pay because of your mistakes in your tax return, plus a civil penalty for 20 percent of the amount that you underpaid your taxes.
Although that can be expensive, it pales in comparison to the penalty for tax fraud. Again, you need to pay whatever taxes you failed to pay the first time around, plus a civil penalty that is typically for 75 percent of the amount that you underpaid your taxes. This isn’t always the case, though, and the penalty can be up to $250,000 for individuals and $500,000 for corporations.
The IRS usually focuses on civil penalties, because there’s a lower burden of proof required for these and building a case won’t require as much in the way of resources. However, there can also be criminal penalties involved. If your tax fraud becomes a criminal case, the maximum penalty is five years in prison.
Start Setting Up Your Defense Immediately
Many tax return inaccuracies slip through the cracks because of limited IRS resources, but when the IRS does charge someone with tax fraud, it puts a considerable amount of resources towards that case. Trying to defend yourself in this situation is often a big mistake. Remember that the difference between tax fraud and negligence can be tens of thousands or more in civil penalties, along with a prison term.
For accusations of tax fraud, you need to be proactive in preparing your defense, and that all starts when you consult with an experienced attorney. Your attorney can look for evidence that shows you didn’t commit tax fraud, and help you prove to the IRS that any mistakes or inaccuracies were the result of simple negligence. If there weren’t any mistakes in your tax return, your attorney can help you demonstrate that and, with any luck, get the charges dropped.