The IRS only wants to collect the taxes owed plus some penalties in most tax audits. The IRS may impose a negligence penalty or a late filing penalty. If the IRS suspects you of tax fraud, they may impose a civil penalty for tax fraud. The penalty for civil tax fraud is equal to 75% plus interest. The IRS tax auditor may ask the tax fraud referral specialist for a review of your case to determine if it should go to the IRS Criminal Investigation unit for criminal tax prosecution. Although the IRS tax fraud referral specialist does not usually have the experience of tax lawyers, he will consult the IRS’s tax fraud lawyers if necessary.
False tax returns, tax evasion, and filing false documents are all examples of tax crimes. Not only is it failing to report all income but it also includes overstating tax deductions. Tax evasion and criminal tax fraud penalties are severe. These penalties can lead to up to five years imprisonment, as well as fines up to $500,000 and the costs of each tax-related prosecution. After the criminal tax case has been closed, the IRS Criminal Investigation Unit will refer it back to the IRS Examination Division. Their taxes will be assessed and the IRS can expect to add the civil tax fraud penalty to any criminal tax fraud fines. It is important to note that tax bills incurred due to criminal or civil tax fraud cannot be discharged through bankruptcy. However, the actual civil fraud penalty can be discharged in Chapter 7 bankruptcy.
Sometimes clients ask “What’s the difference between tax fraud and simple mistakes?” Tax fraud and tax evasion are generally acts of intentional wrongdoing. Sometimes, it is described as an intentional violation of a legal duty. Tax fraud is not committed by mere carelessness. By looking for tax fraud badges, the IRS determines whether tax fraud was committed. These badges can be:
- Understatements of income
- Inadequate records
- Failure to file tax returns
- Behavior explanations that are inconsistent or impossible to believe
- Hidden assets
- Failure to cooperate with tax authorities
- engaging in illegal activities;
- Terrorism to hide illegal activities
- Cash transactions;
- Failure to pay estimated taxes
This article was written by Alla Tenina. Alla is the best bankruptcy attorney Los Angeles California, and the founder of Tenina Law. She has experience in bankruptcies, real estate planning, and complex tax matters. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.