Millions of Americans live in fear of the IRS because they owe back taxes to the IRS. However, there’s a big difference between owing a few hundred dollars because of mistakes on your previous tax return and committing tax fraud. In committing tax fraud you deliberately break the tax law by providing incorrect information on your tax returns for the purpose of some type of gain. Activities the IRS determines as breaking the tax laws include but are not limited to:
- deliberately underreporting income
- deliberately omitting income
- overstating the amount of deductions
- keeping two sets of books
- making false entries in books and records
- claiming personal expenses as business expenses
- claiming false deductions
- hiding assets or income
- transferring assets or income
The Tax Fraud Program is the Criminal Investigation Division's largest enforcement program that covers a variety of tax fraud and tax and money laundering crimes. According to IRS statistics there were 1,863 investigations initiated by the Tax Fraud Program in 2006, leading to nearly 700 people being sentenced and incarcerated for breaking the tax law.
The Tax Fraud Program classifies tax fraud crimes into two basic programs, legal source tax crimes and illegal source financial crimes. Legal source tax crimes involve people who earn wages legally but choose to evade taxes by violation of tax laws. These cases involve behaviors that threaten the tax system, such as questionable claimed refunds, unscrupulous tax return preparers, and persons who challenge the legality of income taxes. The prosecution of these cases is essential in supporting the IRS’s overall compliance goals, encouraging voluntary compliance with the tax laws, and promoting fairness and equity in the American tax system.
The second program, illegal source financial crimes, focuses on money gained through illegal sources of income, such as illegal gambling. According to the IRS, these underground operations threaten our "voluntary tax compliance system and undermine the overall public confidence in our tax system." The IRS demands that taxes be paid on money earned through any means, therefore many recipients of illegal income attempt to legitimize their income. This process of "cleaning" the illegally obtained money is known as "money laundering." The IRS deems money laundering as "tax evasion in progress."
Nowadays, money launderers use various schemes and transactions to conceal income and assets. This includes manipulation of currency reporting requirements and the layering of transactions. Since money laundering and currency violations are often intertwined with tax violations, the illegal source financial crimes program encompasses many tax and tax related violations.
The punishments and penalties for tax fraud issues vary from cases to case. However, according to the US tax code (sections 18 and 26) some violations of tax law carry penalties of up to five years in prison with fines up to $250,000.00 for individuals and $500,000.00 for corporations. According to IRS statistics, the average incarceration sentence for tax fraud crimes in 2006 was 26 months.
Recently some tax fraud issues have been making headlines. On May 25th a federal grand jury in Fresno indicted 21 California residents for bank fraud and filing false federal income tax returns. The accused were involved in a tax scheme where they filed false tax returns with the IRS then obtained bank loans from those false tax returns. According to the indictments, the accused acquired false W-2 forms that listed their real name and Social Security number. What was false was the employer, wages, and withholdings. The accused then took their forms to a tax preparer where they had their tax returns filed claiming refunds based on the Earned Income Credit. "Tax refund schemes of this magnitude will not be tolerated and will be vigorously prosecuted," claimed U.S. Attorney McGregor Scott. "These schemes undermine the tax collection process for all of those who pay their taxes."
Earlier in May, a New Mexico resident pleaded guilty to defrauding the United States government of thousands of dollars through a tax refund scheme. Between February and April of 2007, the individual prepared tax returns for taxpayers brought to him/her by a recruiter who supplied taxpayers' names, Social Security numbers, bank account information, and W-2 Forms. The individual then falsely filed the returns claiming the Earned Income Credit. The individual then took a percent of the refund amount. Over the two-month period, the individual prepared approximately 39 tax returns, with a resulting in a loss to the United States of over $100,000. "The days of not being held accountable, for unscrupulous tax returns preparers who peddle false hopes and dreams in the form of fraudulent tax refunds, are numbered," said IRS special agent Kenneth Hines.
The important thing to remember is to be completely honest when preparing your income tax returns. Alternatively, you should seek a competent professional to prepare your returns for you. If you follow your legal duty of voluntary compliance and pay your taxes without hiding income then there is never a reason to worry.
