How does the IRS distinguish between tax fraud and negligence? -- III

In our previous post on this subject we began delving into the important issue of how exactly the Internal Revenue Service distinguishes between mistakes and willful acts. In other words, we looked at how tax auditors are able to differentiate between tax fraud and negligence.

The answer, as we discovered, is that they generally assume the majority of mistakes are unintentional slip-ups attributable to the complexity of the tax code, and instead look for actions or irregularities commonly used to conceal income tax fraud. We'll conclude this discussion in today's post by examining what happens when such telltale signs or suspicious behaviors are uncovered.

In the event tax auditors believe they've uncovered evidence of income tax fraud, the matter will likely be referred to the IRS' Criminal Investigations unit. While the prospect of being investigated by the law enforcement arm of the IRS might not sound especially intimidating, consider that these agents are highly trained and experienced, and readily deploy cutting-edge technology in their efforts.

It's important to understand that if evidence of income tax fraud is definitively found by CI agents and the matter is referred for prosecution, the IRS will often elect to proceed. That's because a conviction resulting in fines, prison time and other penalties is seen as having a sort of deterrent effect on those contemplating similar actions.

As to what types penalties can result from a conviction on income tax fraud charges, consider the following:

  • Willfully failing to file a return, supply information or pay taxes: A misdemeanor punishable by up to one year in prison and/or a fine of up to $25,000
  • Making false statements on tax documents: A felony punishable by up to three years in prison and/or a fine of up to $100,000
  • Attempting to evade/defeat taxes: A felony punishable by up to five years in prison and/or a fine of up to $100,000

What all of this serves to underscore is that those under investigation for any manner of federal tax crime should strongly consider consulting with a skilled legal professional as soon as possible. 

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