Posted by The TaxAdvocate Group, LLC

What Happens When You Fail to Report All Income

What Happens When You Fail to Report All Income

The IRS estimated that in a year there is only a small part of tax crime convictions and these correspond to not more than one percent of taxpayers. However, it is also estimated by the IRS that the percentage of taxpayers who did not comply with the tax code is 17 percent. 75 percent of income tax fraud is committed by individual taxpayers instead of corporations. On the other hand, can we consider all violations of the tax code to be a scam?

Below are several explanations and means in which the IRS tries to differentiate between negligence and income tax fraud.

The meaning of Income Tax Fraud

The attempt to willfully evade tax law or cheat with the IRS is called income tax fraud. When a company or a person carries out any of the following, then the tax fraud happens.

  • Did not file purposely an income tax return
  • Did not pay purposely the tax due
  • Did not report purposely all of the received income
  • Fabricated claims or fraudulent
  • File and formulate a false or incorrect return

How can you call it Income Tax Fraud or Negligence?

The IRS recognizes that it is a challenging task for most people to translate the extensive collection of rules and regulations which is the tax code. Generally, the IRS assumes that when there are no signs of fraud or when it occurs to be a careless error, it was an honest mistake and not the willful evasion of the tax code. In this situation, it is usually considered by the tax auditor as a mistake that is associated with negligence. Even though it is said to be unintentional, a penalty amounting to 20 percent of the underpayment will be charged to the taxpayer.

Usually, IRS can identify when the error is the result of a willful tax law evasion or negligence. A common type of fraudulent and suspicious activity is what tax auditors are looking for, for instance:

  • Deductions and exemptions overstatement
  • Fabrication of falsification of documents
  • Income cover-up or transfer
  • Having two different sets of financial ledgers
  • Fabricating or falsifying personal expenses making it a business expenses
  • Falsifying Social Security number
  • Claiming a non-existing exemption such as child as a non-existing dependent
  • Purposely underreporting income

Who are Income Tax Fraud Perpetrators?

It has been identified that most of the self-employed taxpayers managing cash-based businesses and service workers who are paid in cash are perpetrating most of the tax fraud since underreporting cash income is easy. In a government study of income tax fraud, clothing store owners, restaurant owners, salespeople, car dealers, hairdressers, and even doctors, accountants and lawyers were on the top-ranked as top offenders. Commonly, service workers such as mechanics, handymen, and restaurant servers are underreporting cash income.

Income Tax Fraud Criminal Investigation of IRS

Through the IRS Criminal Investigation (CI), an alleged violation of the tax code is conducted by the IRS. IRS Criminal Investigation is the law enforcement branch of the agency. Money laundering, tax crimes, and Bank Secrecy Act violations are being investigated by the CI Agents. Sophisticated methods are being used by the investigators to uncover computer information protected by passwords, encryption, and other barriers.

For the reason that the tax system depends on self-assessment or “voluntary compliance” of the taxes owed, the IRS tries to stop or prevent violations by pursuing prison time for lawbreakers, exposing convictions publicly, and by calculating penalties, fines, and city taxes.

Income Tax Fraud Penalties

A taxpayer will be subjected to a civil and criminal penalty if he/she purposely attempts to get away with paying the income taxes. The applicable penalty is determined by the type of fraud. Below are possible penalties for a specific type of tax fraud: 

  • Try to evade or get away with paying taxes: The taxpayer is guilty of felony upon conviction and is subject to penalties sanctioned by law, in addition to (1) for individuals, a penalty of not more than $250,000.00 or for corporations, a penalty of not more than $500,000.00, (2) imprisonment for not more than 5 years, (3) both of the penalties with an addition of the cost of prosecution (26 USC 7201).
  • False statements and fraud: The taxpayer is guilty of felony upon conviction and is subject to penalties sanctioned by law, in addition to (1) for individuals, a penalty of not more than $250,000.00 or for corporations, a penalty of not more than $500,000.00, (2) imprisonment for not more than 3 years, (3) both of the penalties with an addition of the cost of prosecution (26 USC 7206(1)).
  • Purposely did not file a return, pay tax in the time required by law, or supply information. This comprises the failure to pay the final tax or the estimated tax, and the failure to file a return, pay tax in the time required by law, or supply information. The taxpayer is guilty of a misdemeanor upon conviction and is subject to penalties sanctioned by law, in addition to (1) for individuals, a penalty of not more than $100,000.00 or for corporations, a penalty of not more than $200,000.00, (2) imprisonment for not more than 1 year, (3) both of the penalties with an addition of the cost of prosecution (26 USC 7203).

Get Help Legally with your Problems in Income Tax

For taxpayers, unpaid taxes give a cascade of problems whether it is by fraud or due to negligence. It is best if you speak to an experienced tax attorney if you happen to have a problem with income tax to discuss your specific situation and to be able to find alternative solutions.

The TaxAdvocate Group, LLC
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