The Internal Revenue Service ("Service" or "IRS") can instill fear in the hearts of even those taxpayers who make every effort to remain in full compliance with tax laws, despite the fact that only a small number of criminal tax prosecutions and convictions take place each year. Even if a case is not ripe for criminal prosecution, the Service may assert a hefty civil fraud penalty, or accuracy related penalties against the taxpayer if the taxpayer acted with negligent disregard of tax rules and regulations. With roughly 75 percent of all income tax fraud being committed by individuals instead of corporations, it is important for taxpayers to understand the distinction the IRS makes between fraudulent behavior and mere negligence.

At Rosenberg Martin Greenberg, we possess vast experience when it comes to handling tax controversies and fraud prosecutions and can guide clients through the complexity and confusion of an IRS investigation or civil examination.

Fundamentals of income tax fraud

What constitutes income tax fraud, according to the IRS? Fraud of this type involves a willful effort to defraud the taxing authority or evade established tax law, such as:

  • Intentional failure to file income tax returns that are due
  • Intentional failure to report the full amount of income received
  • Willful failure to pay tax amounts owed
  • Asserting false or fraudulent claims (i.e., inflated deductions, expenses or even income)
  • Filing false tax returns.

Differentiating fraud and negligence

Though the thought of a criminal tax investigation is something to make just about anyone shudder, the IRS does recognize the complexity and cumbersome nature of its own regulations and the difficulties they pose to everyday taxpayers. If the Service cannot meet its burden to prove that a taxpayer's conduct amounts to fraud, but instead is the product of careless mistakes, the Service may conclude that the return was filed with negligent disregard for tax rules and regulations. Though a penalty equal to twenty percent of the underpayment attributed to the understatement of tax may still be imposed, the Service will not refer the case for criminal investigation and will not assert the fraud penalty, which is equal to 75% of the underpayment attributed to fraud.

Typical badges of fraud that may catch the attention of an IRS fraud investigator include:

  • Gross overstatement of available exemptions and deduction amounts
  • Submission of false documentation
  • Attempts to conceal transfers of income
  • Mixing personal and business expenses inappropriately
  • Maintaining distinct sets of financial records
  • Intentionally misrepresenting income

Criminal tax fraud investigations

Though relatively rare in light of the true number of taxpayers who are out of compliance at any given time, the IRS does initiate criminal fraud investigations through its own law enforcement arm. The Service has powerful tools at its disposal to help discover fraudulent activity.

Criminal prosecutions are used as a means to deter others from committing tax fraud, and the publicity garnered by prison sentences, hefty fines and financial penalties encourage careful compliance with tax law. If you are concerned about possible IRS scrutiny of your tax situation, past or present, the attorneys at Rosenberg Martin Greenberg can provide the guidance you seek.

Potential sanctions for willful evasion of tax laws

Though in large part, errors made in the income tax return filing process will be labeled as negligence, cases of fraud or willful evasion can result in extremely serious penalties. The specific kind of fraud committed in an individual case will play a large role in the potential sanctions.

Taxpayers convicted of one count of making false or fraudulent statements to the IRS can be sentenced up to three years of imprisonment and fined $250,000 for individual taxpayers and $500,000 for corporate entities. The length of the sentence and sentence imposed may increase significantly depending on the total tax loss to the government, and the number of years at issue. Tax evasion convictions can subject the guilty party to five years in prison and the same fines levied for making false statements. For a willful failure to provide requested information, or file a tax return or pay taxes after the due date, a conviction can result in one year of imprisonment and a fine of up to $100,000 for an individual taxpayer. In all fraud cases, the taxpayer can also be held responsible for paying the entire cost of the criminal prosecution process.