Income tax fraud is purposely disobeying tax law or working to defraud the Internal Revenue Service (IRS). The IRS is very specific about which actions constitute fraud. Filing a false tax return, failing to report all income, and purposely not filing taxes is fraud. Submitting a tax return with false information is fraud as well.
How the IRS Deciphers Fraud from a Mistake
Tax laws are difficult to understand. The IRS takes this into account when flagging tax returns for fraud. It’s possible that an honest error was made, and no fraud was intended. If that happens, then the taxpayer will not receive a charge of fraud. But they will possibly have to pay a penalty for the error.
IRS auditors look for certain types of activity to help distinguish mistakes from fraud. For example, a person who tries to hide income is doing it on purpose. Over-exaggerating deductions and exemptions is also a red flag. Claiming nonexistent dependents, and using a false social security number is also fraud. Those are activities that no one would do by mistake.
The IRS Criminal Investigation agency is the law enforcement department of the IRS. Agents in this department investigate tax fraud, money laundering, general tax crimes, and violations of the Bank Secrecy Act. Agents are highly-trained in obtaining all kinds of information, including passwords, encryption methods, and other security measures.
Punishment for Fraud
A person found guilty of tax fraud is subject to civil and criminal penalties. The severity of the punishment depends on the severity of the crime. Who commits the crime matters as well. For example, filing a false tax return can result in up to three years in prison. But if an individual filed the return, they can also get fined up to $250,000. But if the individual filed the return on behalf of a corporation, the fine can go up to $500,000.