Nothing can be more terrifying for a taxpayer than receiving a notice from the Internal Review Service (IRS) accusing them of committing tax fraud. Our advice to residents of Dallas and who receive such a notice, is that they should consult an IRS tax attorney in Fort Worth, TX without any delay. Tax fraud happens when a person or organization knowingly and actively falsifies information on their tax returns in order to reduce their tax liability. It entails cheating on a tax return in an attempt to avoid paying your tax obligation. Falsely claiming deductions, classifying personal spending as business expenses, creating a fictitious Social Security number, and failing to disclose income are a few examples of tax fraud. Tax fraud also includes evading taxes, which is considered a criminal act. In this blog, we will discuss the different types of tax fraud. Let’s get started.
How Does the IRS Define Tax Fraud?
According to the IRS, tax fraud is defined as “the willful and material submission of false statements or documents in connection with an application and/or return.” The indicators of fraud include, but are not limited to:
- Underreporting income
- Using a false Social Security number
- Falsifying documents
- Intentionally failing to pay taxes
Different types of tax fraud
While it always helps to have an experienced Fort Worth tax lawyer or attorney by your side, knowing the different types of tax fraud helps you stay out of trouble with the IRS. Here are the most common types of tax fraud:
1. Willful Failure to Pay Income Taxes
According to the IRS, almost 1 in every 6 taxpayers doesn’t follow the tax code in one way or the other. Tax fraud involving the willful failure to pay income taxes takes place when a person or company willfully commits one of the following:
- Intentionally fails to pay taxes owed
- Willfully fails to file a federal income tax return
- Fails to report all income
- Makes false or fraudulent claims
2. Making a Frivolous Tax Claim
Sometimes people file returns making “unreasonable and outlandish” claims to avoid paying the taxes they owe. When you file such inaccurate returns, you are inviting trouble. No matter how reasonable your excuse might be, the IRS is very likely to have heard the argument before, taken it to court, and prevailed. In fact, if you have been following the news lately, you might have noticed that the penalties levied on people who take up the court’s valuable time with “frivolous arguments” are getting harsher day by day.
3. Employee Tax Fraud
It is very common for people to misuse company money to settle personal debts or purchase luxuries. Business owners or C-suite executives are frequently the targets of such criminal tax investigations. Employers must alert the IRS of the loss as soon as they become aware of the theft. The Law Offices of Nick Nemeth can help employers looking for tax help in Fort Worth regarding such theft. Hiring an experienced IRS tax attorney in Fort Worth, TX, will ensure the timely reporting of the loss to the IRS and classifying any potential repayments of the embezzled money.
4. Tax Preparer Fraud
“Preparer” fraud refers to the act of modifying your income reports to pay less taxes. In most cases, high net-worth individuals hire tax management firms to prepare their returns. If an individual is accused of committing tax preparer fraud, their management firm is also liable for penalties.
Tax Fraud vs. Negligence: Understanding the Difference
Tax fraud involves deliberately deceiving the government, leading to a loss of millions of dollars annually. Such actions can result in fines, penalties, interest, or imprisonment. To be considered guilty of tax evasion, the failure to pay taxes must be intentional, not resulting from mistakes or accidental reporting, which the IRS labels as negligent reporting.
Tax fraud includes exploiting legal loopholes in tax laws to minimize tax liabilities. While tax avoidance itself is not a direct violation of the law, tax authorities view it unfavorably as it might undermine the true intent of tax regulations.
For instance, falsely claiming an exemption for a dependent who doesn’t exist is a clear case of fraud, whereas mistakenly applying the long-term capital gain rate to a short-term earning might be investigated to determine if it was due to negligence. Even though negligent mistakes are unintentional, the IRS can still impose a penalty of 20 percent of the underpayment on the taxpayer at fault. To avoid such situations, one must seek help from a tax attorney in Texas.
Burden of Proof
In tax fraud cases involving the IRS, the burden of proof refers to the responsibility of the IRS to demonstrate that a taxpayer committed tax fraud. Unlike the typical burden of proof in civil tax matters where the taxpayer is required to substantiate their tax positions, in cases of tax fraud, the burden shifts to the IRS to establish the taxpayer’s intentional wrongdoing.
Proving tax fraud is more challenging than determining simple negligence or mistakes on a tax return. To establish tax fraud, the IRS must demonstrate that the taxpayer knowingly and willfully engaged in actions with the specific intent to evade taxes or deceive the government.
The burden of proof in tax fraud cases typically follows a higher standard known as “clear and convincing evidence” or “beyond a reasonable doubt.” This standard requires the IRS to provide substantial evidence that leaves little or no doubt that the taxpayer committed fraud. In other words, the evidence must be highly convincing and leave little room for uncertainty.
Note – While the burden of proof is on the government to establish tax fraud, it is crucial for individuals facing tax fraud allegations to consult a knowledgeable tax attorney in Fort Worth, TX, to protect their rights and navigate the complexities of such cases effectively.
How does the IRS uncover tax fraud?
The IRS discovers tax fraud through various methods. One approach involves computer data analysis, where information from employers and third parties is matched with individual records in the Information Returns Processing (IRP) system to identify potential tax evaders. Social media is also sometimes used to gain insights into the lifestyles of individuals under investigation, although the IRS rarely discloses details about this method. Additionally, whistle-blowers, such as former spouses or disgruntled employees, provide valuable information about tax fraud, assisting the IRS in conducting thorough investigations and potentially leading to rewards for the whistle-blowers.
Possible Consequences of Tax Fraud
Tax fraud can lead to severe consequences for individuals or entities found guilty of intentionally evading taxes or providing false information to the tax authorities. Some consequences of tax fraud include.
Civil Penalties: Taxpayers caught committing tax fraud may face civil penalties. These penalties can include fines, interest, and additional taxes owed on the underreported or unreported income or deductions.
Criminal Prosecution: In more serious cases of tax fraud, individuals may face criminal prosecution. If convicted, they could be sentenced to prison time, which can range from months to years, depending on the severity of the fraud.
Monetary Fines: Tax fraud convictions often result in monetary fines in addition to any taxes owed. These fines can be substantial and may be imposed on top of other penalties.
Restitution: Taxpayers found guilty of tax fraud may be required to repay the taxes they evaded, along with any interest and penalties.
Loss of Reputation: Tax fraud convictions can damage a person’s or a business’s reputation, leading to negative consequences in personal and professional life.
Loss of Business Licenses: For businesses involved in tax fraud, there could be repercussions, including the loss of licenses or permits necessary to operate legally.
Professional Consequences: Professionals such as accountants, lawyers, or tax advisors involved in tax fraud may face disciplinary action, loss of licenses, or legal consequences.
Future Audits: Convictions for tax fraud can trigger increased scrutiny from tax authorities, leading to more frequent and rigorous audits in the future.
Imposition of Trust Fund Recovery Penalty (TFRP): In cases of payroll tax fraud, where employers withhold payroll taxes from employees’ wages but fail to remit them to the government, the IRS can impose the TFRP on responsible individuals within the business. This penalty holds such individuals personally liable for the unpaid payroll taxes.
Seizure of Assets: In extreme cases, tax authorities may seize assets, such as property or bank accounts, to recover unpaid taxes, fines, and penalties.
It’s important to note that tax laws and consequences can vary depending on the jurisdiction and specific circumstances of the case. To avoid these severe consequences, taxpayers should always strive to comply with tax laws and report their income accurately. If uncertain about tax matters, seeking advice from a qualified tax attorney or a tax lawyer in Fort Worth is advisable.
When it comes to dealing with taxes, it is always advisable to act sooner rather than later. From interpreting the notice correctly to responding with the right documents, it is always advisable to hire an experienced tax lawyer in Dallas, TX, that can help you navigate the legalities. When looking to consult an IRS tax attorney in Fort Worth, TX, look no further than the Law Offices of Nick Nemeth. We are a leading name when it comes to providing comprehensive tax solutions for all types of IRS tax problems. To discuss your requirements and consult tax attorneys in Fort Worth, TX, call (972) 426-2905. Alternatively, you can also fill out our contact form and our representative will reach out to you at the earliest.