The IRS faces two kinds of problems in collecting taxes for the government: negligence and tax fraud. While negligence is a less serious incident, resulting from genuine mistakes, tax fraud is more serious and covers a number of deliberate acts. From filing tax returns with false information to declining to pay due taxes, tax fraud covers every willful act. Some acts are more common than others, however. Here are just a few ways individuals and businesses attempt to defraud the government.
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1. False Income Reporting
This is, by far, the most common form of tax fraud, committed by millions of people and companies every year. In the United States, entities, whether they be individuals or corporations, are required to report all sources of income. Among items required to be reported on tax returns is income earned from sales of goods and services, gambling winnings, and tips.
Where there is no record of income, such as is the case where tips are given in exchange for exceptional service, misrepresenting income becomes very common. Depending on the situation, gambling winnings can also be underreported. except in instances where the gambling took place in an established casino, there is rarely a paper trail to show the transfer of winnings.
While this is a common practice, the misrepresentation of income, termed as underreporting by the IRS, isn’t always intentional or of a criminal nature. It can be an honest mistake to estimate what has been earned in tips and gambling winnings lower than the actual amount earned. Even so, if the IRS is able to make a case of tax fraud, even genuine errors can result in several years of imprisonment and a hefty fine of up to $250,000 for individuals and $500,000 for businesses.
2. Providing False Information
Where underreporting income can be an accidental occurrence, this type of tax fraud involves deliberately filing a tax return with false information. This includes guessing your total income for the year, because a significant error can result in criminal charges. Commonly known as “fudging numbers,” the IRS considers this to be falsifying a document and they will investigate any suspicious reporting.
When an issue of falsifying a document or filing a false tax return does go to court, the cards are stacked against the defendant. As the prosecution will have the documents filed by the defendant, it’s extremely difficult to disprove the charges. Even where the defendant claims that writing down the false income numbers was unintentional, it’s another thing to be able to prove it. The matter becomes further complicated, if the false number works in favor of the defendant, resulting in lower taxes or additional tax breaks.
Again, this type of tax fraud results in prison terms and a significant fine of up to $250,000 for individual offenders. As with any tax fraud conviction, the court also reserves the right to force the defendant to pay for the costs of prosecuting the case.
3. Committing Identity Theft
There a few a different ways identity theft is committed in regard to tax returns. Some extreme cases involve filing under a false social security number. More commonly, people claim exemptions for children or other dependents who are either not in their care or do not exist at all. By claiming additional dependents, an individual can qualify for lower tax brackets and breaks, reducing the amount to be paid at the end of the year. In many cases, claiming fictitious dependents can alternatively qualify the individual for tax refunds which they would otherwise not receive.
As with the previous examples of tax fraud, this form of deception qualifies as a felony. A conviction results in a prison term of up to three years in prison and up to a $250,000 for the individual. In the rare instances where a business attempts this kind of identity theft, the resulting fine can be as high as $500,000.
If you’re facing tax fraud charges, the best thing you can do is to consult an experienced tax attorney. Together, you can look at the circumstances of your specific situation and determine the best course of action. While it may not be possible to achieve a dismissal of the charges or a complete acquittal, a tax attorney may be able to get you a better deal than you could negotiate on your own.