Filing taxes and adhering to the complex tax code is a convoluted process that lends itself to confusion and mistakes. Due to the complicated nature of filing taxes, there are numerous common ways you could be committing criminal tax fraud. According to the IRS, around 75% of tax fraud is committed by individuals taxpayers. In this article, we walk through what constitutes criminal tax fraud so you can avoid any slip-ups on your taxes.
What is Criminal Tax Fraud?
Tax fraud is the willful and intentional action of evading the law regarding taxes and defrauding the IRS. According to the IRS, tax fraud includes:
- False exemptions or deductions
- Kickbacks
- A false or altered document
- Failure to pay tax
- Unreported income
- Failure to withhold
- Failure to follow the tax laws
See below for a few examples of these actions.
In Colorado, the Department of Revenue Taxation Division oversees the filing of taxes, issuing of refunds, and any needed enforcement of tax laws. The Colorado Department of Revenue states tax fraud is any attempt to evade paying taxes, a willful failure to file returns, submitting false tax forms, or any efforts to defraud taxpayers.
Fraud vs. Negligence
The difference between fraud and negligence is the difference between willfully and intentionally misrepresenting information on your taxes and carelessly or mistakenly misrepresenting your information. The operative difference between fraud and negligence is this willful and intentional act of filing false or misleading taxes. For example, you can commit criminal tax fraud if you willfully or intentionally fail to report all of your received income, file false exemptions or deductions, or fail to pay taxes you owe. Conversely, negligence involves an honest mistake or a careless error made in your tax filing. Ultimately, a tax auditor decides if the tax evasion was fraudulent or negligent.
Two Common Ways to Commit Criminal Tax Fraud
False deductions
There are multiple ways to file false deductions. For example, it is up to the taxpayer to determine which charitable donations are deductible and which are not. Another common false deduction can occur when claiming business expenses for small-business owners or the self-employed. When filing a necessary business expense deduction, both the filing of an unnecessary expense deduction and the overestimation of a deduction are considered tax fraud.
Unreported Income
This is a common type of tax fraud, and it is easily committed. For example, if you are a service worker who receives tips during your employment, those tips are income that you must report. Or perhaps you have a side business that is separate from your main employment. You must also include this source of income on your tax return. Ultimately, it is up to you to keep track of and report your taxable income.
Penalties for Committing Criminal Tax Fraud
The penalty for committing tax fraud varies depending on the type of fraud committed and its severity.
In Colorado, the Criminal Investigation/Tax Enforcement Section (CTE) is in charge of investigating and prosecuting tax fraud. Colorado breaks down tax fraud and the resulting penalties based on the nature of the infraction.
Penalties for Fraud or Evasion:
- Willful attempts to evade taxes
- Willful failure to pay taxes, including willful misrepresentation to receive a fraudulent refund
- Gross negligence or recklessness in making a materially false statement to receive a refund
Penalties for Unpaid or Late Taxes:
- Whichever is the greater of a fine of $5 or %5 for the first month the taxes are unpaid, with an added 1/2% each month they remain unpaid (C.R.S. § 39-22-621(2)(a))
If the IRS suspects you of tax fraud, they can conduct an audit of your filed tax return. A tax auditor will review your filed return for willful and intentional attempts to commit errors or misrepresent your information on the return. (see above for the difference between willful or intentional and negligent).
If a tax auditor determines you negligently committed a mistake on your tax return, you can be fined 20% of the amount you underpaid. If the auditor determines you willfully and intentionally committed mistakes or errors on your tax return, you can be subject to civil and criminal penalties. If you are found to have committed civil tax fraud, under Section 6663 of the Internal Revenue Code, the IRS can fine you up to 75% of the amount you underpaid.
In extreme cases, the IRS might pursue a criminal tax evasion investigation against you. In that case, the IRS’s Criminal Investigation division investigates your tax returns to determine if you committed tax fraud that constitutes a federal criminal charge.
Some common federal charges for tax fraud include:
- Attempting to evade or defeat tax payments
- This is a felony punishable by a fine of up to $100,000 and 5 years in prison (26 USC 7201).
- Making fraudulent or false statements
- This s a felony punishable by a fine of up to $100,000 and 3 years in prison (26 USC 7206(1).
- Willfully failing to file a return, supply information, or pay taxes
- This is a misdemeanor punishable by a fine of up to $25,000 and 1 year in prison (26 USC 7203).
The good news: Very few people are prosecuted over tax fraud compared to the total amount of people who file taxes. In 2019, the IRS investigated 1,500 cases of tax fraud. Of those 1,500 cases, only 848 tax offenders were sentenced. To put this in perspective, the IRS received over 141 million individual tax returns for 2019.
The Bottom Line
Most individuals who make a good faith effort to file and pay their taxes correctly and promptly are not audited. Even if you are audited for tax fraud, even fewer individuals receive a criminal conviction for tax fraud. One common way to avoid mistakes or misrepresentations in your taxes is to have a professional prepare your taxes and make sure they comply with IRS requirements. Likewise, avoiding the commission of other types of economic criminal activity is a safer plan of action, as well. Often, we see tax fraud counts added as lesser charges in cases involving Theft, Embezzlement, or even Forgery. The IRS and the Colorado Department of Revenue have separate financial crime investigators who regularly do an excellent job proving their case as most tax filings are filed under penalty of perjury. These are costly cases to defend, and financial defense experts and your attorney team can only poke so many holes.
Need Legal Help?
If you are in need of criminal defense or family law help and you don’t want to shoulder the risks of self-representation alone, consider reaching out to Nicol Gersch Petterson for a free 30-minute consultation. Find more information at https://colawteam.com or call 970.670.0378.
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