8833 South Redwood Road
Suite C
West Jordan, UT 84088

Call For Free Consultation

(801) 676-5506


Call Us

Income Tax Fraud

Income Tax: Fraud vs. Negligence

Income Tax Fraud

The IRS estimates that only a small percentage of tax crime convictions, representing less than one percent of taxpayers, occur in a year. Yet the IRS also estimates that 17 percent of taxpayers fail to comply with the tax code in some way. It is individual taxpayers, rather than corporations, that commit 75 percent of income tax fraud. But are all violations of the tax code fraud?

Below are some definitions and ways in which the IRS attempts to distinguish between income tax fraud and negligence.

Income tax fraud is the willful attempt to evade tax law or defraud the IRS. Tax fraud occurs when a person or a company does any of the following:

Intentionally fails to file a income tax return

Willfully fails to pay taxes due

Intentionally fails to report all income received

Makes fraudulent or false claims

Prepares and files a false return

The IRS understands that the tax code is a complex set of regulations and rules that are difficult for most people to decipher. When careless errors occur, if signs of fraud are absent, the IRS will usually assume that it was an honest mistake rather than the willful evasion of the tax code. In this circumstance, the tax auditor will usually consider it a mistake that is attributable to negligence. Although unintentional, the IRS may still fine the taxpayer a penalty of 20 percent of the underpayment.

The IRS can usually distinguish when an error is the result of negligence or the willful evasion of the tax law. Tax auditors look for common types of suspicious and fraudulent activity, such as:

Overstatement of deductions and exemptions

Falsification of documents

Concealment or transfer of income

Keeping two sets of financial ledgers

Falsifying personal expenses as business expenses

Using a false Social Security number

Claiming an exemption for a nonexistent dependent, such as a child

Willfully underreporting income

Service workers paid mostly in cash and self-employed taxpayers running cash-based businesses have been identified as the taxpayers committing most of the tax fraud because it is easy to underreport cash income. Restaurant and clothing storeowners, car dealers, salespeople, doctors, lawyers, accountants, and hairdressers were ranked as the top offenders in a government study of income tax fraud. Service workers, such as restaurant servers, mechanics, and handymen, also commonly underreport cash income.

IRS Criminal Investigation into Income Tax Fraud

The IRS conducts investigations into alleged violations of the tax code through the IRS Criminal Investigation (CI), the law enforcement branch of the agency. CI agents investigate tax crimes, money laundering, and Bank Secrecy Act violations. Investigators use sophisticated methods to uncover computer information protected by encryption, passwords, and other barriers.

Because the tax system relies on “voluntary compliance,” or the self-assessment of the taxes owed, the IRS attempts to discourage violations by publicizing convictions, seeking prison time for offenders, and by assessing fines, civil taxes, and penalties.

Penalties for Income Tax Fraud

A taxpayer that willfully attempts to evade paying income taxes is subject to criminal and civil penalties. The type of fraud will determine the applicable penalty. The following are some examples of possible punishments for specific types of tax fraud:

Attempt to evade or defeat paying taxes: Upon conviction, the taxpayer is guilty of a felony and is subject to other penalties allowed by law, in addition to (1) imprisonment for no more than 5 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7201).

Fraud and false statements: Upon conviction, the taxpayer is guilty of a felony and is subject to (1) imprisonment for no more than 3 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7206(1)).

Willful failure to file a return, supply information, or pay tax at the time or times required by law. This includes the failure to pay estimated tax or a final tax, and the failure to make a return, keep records, or supply information. Upon conviction, the taxpayer is guilty of a misdemeanor and is subject to other penalties allowed by law, in addition to (1) imprisonment for no more than 1 year, (2) a fine of not more than $100,000 for individuals or $200,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7203).

Free Consultation with a Tax Attorney

If you are being accused or income tax fraud or need help with an IRS or Utah State tax matter, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


Recent Posts

Mediation Lawyer

Living Wills

Paying Your Taxes

Child Support Amounts

Tax Lawyer

Contract Lawyer

Share this Article

Michael Anderson

About the Author

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.