Common Federal Tax Law Violations

Tax season can be exceptionally stressful. You may be worried about whether your return was properly prepared or concerned about how to pay an unexpected tax assessment. It may be tempting to just walk away or to make a “little white lie” to improve your tax situation. However, these choices will only create the risk of bigger problems in the future.

Does the IRS Go After Tax Fraud?

You may have heard that no one gets audited anymore. You might hope that any errors or omissions on your tax returns might just go unnoticed. It is true that historically, the IRS has only investigated a small number of federal tax law violations each year. In 2019, the IRS audited 1 out of every 220 individual taxpayers. Those audits were focused on high-income individuals and business owners. However, many common federal tax law violations are red flags to the IRS. If you are careless with your return, you could find yourself audited, assessed penalties, or even charged with criminal tax fraud.

What is Tax Fraud?

Tax fraud is a willful attempt to avoid paying taxes. It isn’t just filing your tax return late or falling behind on your quarterly payments. It requires some willful or intentional false statement (or false filings) related to your income, deductions, or tax returns.

Tax Fraud vs Tax Evasion vs Tax Avoidance

The way financial analysts, CPAs, and the IRS talk about taxes and tax planning can sometimes be confusing. Three terms that sound the same can have very different meanings to the IRS.

Tax Avoidance refers to the legal planning and processes that individuals and businesses use to structure their financial transactions in a way that minimizes their tax consequences. Tax avoidance is legal. The U.S. Tax Code is complicated. If you are engaging in an activity that could have a substantial tax consequence (such as selling a second home), it is a good idea to talk to a CPA or tax attorney to see if there are tax avoidance strategies you can use to reduce what you owe to the IRS.

Tax Fraud refers to false statements or false information provided to the IRS. Tax fraud is illegal and can carry criminal consequences. Common types of tax fraud include willful failure to file tax returns, overstating their expenses, omitting portions of their income, or falsely reporting what state they live in.

Tax Evasion relates to deceptive practices, concealment, or other actions taxpayers take to avoid paying taxes. Tax evasion is illegal and has serious and expensive criminal consequences. This could look like maintaining two sets of books, claiming children or other dependents who do not rely on your care, or hiding assets.

Federal Tax Law Violation Penalties

Not all tax law violations are treated as crimes. In many cases, the IRS treats errors or omissions as unintentional or negligent errors. However, even negligent tax filings can create expensive penalties. Generally, mistakes on your taxes will result in an accuracy-based penalty equal to 20% of the underpayment. Late payments and failure-to-file penalties are each charged at a rate of 0.5% each month upt to a maximum 25% of the unpaid balance. However, if you fail to file within 60 days of the extended deadline (October 15, 2021 for your 2020 tax returns), that penalty will increase to 100% of your unpaid taxes, or $210, whichever is less.

When the IRS determines you acted willfully or intentionally, it can trigger criminal tax penalties.

• Willful Failure to File Tax Returns carries a penalty of up to 1 year in prison and a $100,000 fine for individuals ($200,000 for corporations).
• Tax Fraud carries a penalty of up to 3 years in prison and a $250,000 fine for individuals ($500,000 for corporations).
• Tax Evasion carries a penalty of up to 5 years in prison and a $250,000 fine for individuals ($500,000 for corporations).

Certain taxpayers are also required to complete other tax disclosure forms, such as FBARs for foreign financial accounts, and trust disclosures if they are a trustee or have a material interest in a trust. Failure to file these forms carry their own civil penalties and criminal tax consequences.

Get Help Avoiding Common Federal Tax Law Violations

The worst way to avoid tax stress is to ignore it and hope it goes away. If you believe you have made a mistake on your tax returns, or if you have been avoiding filing out of fear of what you will owe, you are only making things worse for yourself in the future. I’m Attorney Patrick T. Williams, and I have been helping Houston-area taxpayers resolve their IRS tax issues for more than 20 years. As an attorney, CPA, and former IRS agent, I understand how simple mistakes or missed deadlines can quickly get out of hand. Please call me or fill out an online consultation form. I’ll help you correct your errors, manage your tax debt, and protect your rights in response to IRS allegations of tax fraud or tax evasion.