There’s nothing wrong with attempting to lower your tax burden using legal strategies, but some people take things further and end up committing tax fraud. How exactly does the IRS come to suspect that someone has committed tax fraud? What is the IRS investigation like? And how can you defend yourself in a tax fraud case?
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The Basics of Tax Fraud
Tax fraud is a serious crime, and one that’s associated with stiff penalties – and potentially jail time. But many people don’t have an accurate conception of what “tax fraud” actually is.
According to the attorneys at SBBL Law, “many of our clients understandably confuse terms like ‘tax avoidance’ and ‘tax fraud,’ because both sound like bad things related to paying taxes. In reality, tax avoidance is completely legal and legitimate; there’s nothing wrong with using legal strategies to lower your tax burden. The problem comes with fraud – deliberate criminal deception – applied to your tax returns.”
Tax fraud can come in many forms, such as omitting certain sources of income, lying about your sources of income, or falsely reporting expenses for the sake of reducing your tax burden. Essentially, if you deliberately lie about your income or other matters on your tax return, you are committing tax fraud. Also note that in many cases, taxpayers are liable for tax fraud committed by their tax preparers. Accordingly, you should choose your tax preparers wisely.
How the IRS Detects Tax Fraud
How does the IRS identify instances of potential tax fraud? In other words, what causes them to start investigating?
First, understand that the IRS doesn’t and can’t possibly detect every instance of tax fraud. There are simply too many tax returns to wade through – and many instances of tax fraud are so small or innocuous that they aren’t worth pursuing.
Still, the IRS has many tools that it can use to detect potential tax fraud.
- Computer matching. One option is computer matching. Here, the IRS employees automated systems to flag discrepancies between different sources of reporting. For example, if your employer reports that you made a certain amount of money, and you failed to report that income on your personal tax return, it might trigger a flag in the IRS system.
- Whistleblowers. The IRS also heavily relies on whistleblowers, or people who feed them information about potential tax fraud. If someone tells the IRS that you’re cheating on your taxes, they might take action.
- Tax audits. Sometimes, potential tax fraud is noticed only upon a tax audit. The IRS implements tax audits periodically, even when it doesn’t have a specific reason to initiate them.
- Local law enforcement and state officials. Local law enforcement and state officials may also flag potential tax fraud, raising the attention of the IRS to specific people or situations.
Further Investigation
At this stage, the IRS has only detected potential tax fraud. It must follow up with an investigation to determine whether tax fraud has actually occurred.
Typically, this investigation takes the form of a typical IRS audit or a more thorough criminal investigation. Note that there is no statute of limitations for tax fraud, so the IRS can initiate investigations of tax returns that are many years old.
During an audit, the IRS will likely engage with you via mail or in-person to review your records and determine whether the information in your tax returns has been accurate.
A criminal investigation is much more intensive, and it can last up to 6 years. That’s because in a criminal investigation, the IRS needs to find ample evidence to prove that an individual or business committed tax fraud. During criminal tax fraud investigations, it’s essential to hire a lawyer who can help guide you through the process – and potentially represent you in court.
Civil Fraud vs. Criminal Fraud
There’s a big difference between civil fraud and criminal fraud cases, and the IRS has discretion to choose which they pursue. Criminal investigations are much more serious, and convictions come with much steeper penalties. However, even a civil fraud case can saddle you with fines of up to 75 percent of the understated tax value – in addition to the understated tax burden you already owe.
The Burden of Proof
In criminal tax fraud investigations, the burden of proof falls on the government. That means the IRS needs to prove, beyond a doubt, that you committed fraud with respect to your taxes. In other words, you’re innocent until proven guilty.
How to Handle a Tax Fraud Investigation
If you’re currently being investigated for tax fraud, civilly or criminally, try to remain calm and patient. This is a long and complicated process, and you’ll be able to manage it much easier if you keep a clear head. Hire the best lawyer you can afford, gather your records, and trust your lawyer’s advice.
