Tax Fraud, Tax Evasion & the IRS

Last updated on March 12, 2022

Unintentional mistakes in a tax form can attract penalty up to 20 percent, depending on the severity of the mistake. Tax fraud, on the other hand, can result in penalties and/or jail time. The IRS can spot an honest mistake in a tax form as opposed to intentional “mistakes” because intentional theft usually aims at the underpayment of taxes. Honest mistakes are usually errors in social security numbers, spelling, and decimals in wrong places. In most cases, an error that does not under-determine the tax liability or exaggerate the refund is an honest error, but nevertheless there is an assessed penalty.

Studies have shown that mostly the self-employed underreport their income. The self-employed, including telemarketers, restaurateurs, clothing store owners, lawyers, doctors, and accountants are known to underreport their income the most. This information also helps the IRS determine whether a tax fraud is intentional or not.

Cases of repeated offenses will have the IRS add civil fines and penalties, and possibly pass the case over to the Criminal Investigation (CI) division of the IRS.

During recent years, tax fraud and tax evasion cases have increased. Using fraudulent tax returns to get embellished refunds is the most common scheme. Tax fraud is also one of the most difficult tax crimes to uncover. The IRS has been struggling to bust tax fraud, which has reached epidemic stage in states like Florida.

Tax evasion by the rich involves offshore accounts to store unaccounted money is another major challenge for the IRS. The Foreign Account Tax and Compliance Act (FATCA) is expected to curb tax evasion by allowing the IRS to investigate foreign accounts help by American taxpayers.