Tax fraud is a serious offense that can have drastic consequences. According to the IRS, around 2,550 financial crimes took place in 2022 involving over $31 billion. There was a 90.6 percent conviction rate on these cases – revealing the government’s determination to crack down on financial crimes.

It is essential to understand what constitutes tax fraud and take the necessary steps to prevent it. Whether you regularly file a business return or you only file a personal tax return, you can avoid legal issues by ensuring you understand tax fraud.

The following is a guide to tax fraud and steps to avoid facing charges. In this blog, we will cover tax fraud, tax fraud types (including tax evasion, tax negligence, and tax avoidance), penalties for tax fraud, how to avoid mistakes that lead to charges, and what to do if you’re facing charges.

Definition of Tax Fraud

Tax fraud usually refers to deliberately filing false or incomplete tax returns to reduce taxable income or increase refunds. This behavior can range from failing to report income accurately to claiming deductions you’re not eligible for. Sometimes, it may involve creating fake documents or using someone else’s Social Security number.

Why Pay Taxes?

Taxes keep governments funded and able to provide services such as public schools, road maintenance, and police and fire protection. When people evade taxes, it can have severe repercussions. It also creates an unfair advantage for those dodging tax liabilities.

Tax Fraud, Tax Evasion, Tax Negligence, and Tax Avoidance

Though tax fraud, tax evasion, tax negligence, and tax avoidance sound similar, they differ. Here is a closer look at each and a description of the accompanying penalties.

Tax Fraud: Tax fraud is a serious offense that encompasses several crimes punishable by state and federal law. Tax fraud is the most serious of tax-related crimes and is punishable on a federal level by fines of up to $500,000, up to five years in jail, or both.

Tax Evasion: Tax evasion is a sub-category of tax fraud that applies to existing tax debts. If you deliberately and illegally avoid paying legitimate taxes, you may be engaging in tax evasion. If found guilty of tax evasion, you may go to jail, be charged a fine of up to $500,000, or both.

Tax Negligence: Tax negligence is best described as an “honest mistake.” Unlike tax fraud, tax negligence happens when taxpayers unintentionally provide incorrect information when filing. You may have to pay a fine if found guilty of tax negligence but typically won’t face jail time. The government is often lenient on those who make honest mistakes – but only if it’s clear the mistakes are unintentional.

Tax Avoidance: Tax avoidance is a legal method to reduce tax liability. Individuals or corporations can do it by taking advantage of credits, deductions, income exclusions, and loopholes in the tax code.

Tax Avoidance is a form of a legally allowed tax break that may offer incentives for certain activities, such as saving for retirement or buying a home. A CPA or other tax advisor can often use their expertise to help you avoid paying thousands of dollars in taxes, so it’s worthwhile to seek the help of a professional if you think you qualify.

Types and Examples of Tax Fraud

Tax fraud can be divided into two broad categories: income tax fraud and deductions fraud. Here’s a snapshot of each and some more specific examples of tax fraud.

Income tax fraud includes underreporting or failing to report income, such as not declaring income from a second job or claiming false dependents.

Deductions fraud involves inflating deductions on tax returns, such as claiming unreimbursed business expenses that weren’t incurred or using fake receipts for charitable contributions.

There are a variety of instances in which someone could commit tax fraud, depending on their unique circumstances. Here are some specific examples:

• Intentionally not filing an income tax return
• Not paying tax debt
• Using a false social security number
• Filing a false tax return
• Not reporting all income
• Claiming personal expenses as business expenses
• Claiming tax deductions or tax credits that don’t apply.

Examples of tax fraud specific to payroll:

• Not withholding Federal income tax or FICA from your employees’ paychecks
• Paying employees in cash and not reporting it
• Not filing payroll tax reports
• Using a payroll service that collects taxes but doesn’t pay them to the IRS
• Misclassifying workers

Penalties for Tax Fraud

Tax fraud is a serious offense that can result in fines, prison time, or both. The penalties will depend on the severity of the offense and whether it was intentional (like tax fraud or tax evasion) or unintentional (tax negligence).

If you are found guilty of tax fraud, you may be required to pay back what you owe, plus additional interest and fees. In some cases, criminal charges may also be brought against you at the Federal and state levels.

At the federal level, tax fraud is a felony. Individuals who commit tax fraud face up to $250,000 in fines and potential jail time of up to five years. The fee is steeper for corporations, at $500,000, and jail time is up to five years.

Tax evasion in Missouri is punishable by a fine of up to $10,000 and up to five years in state prison.

Common Pitfalls of Self-Filing

While many file their taxes successfully, you may face tax negligence charges if you file incorrectly. Here are some of the most common mistakes taxpayers make:

• Choosing the wrong status. Head of household, married filing jointly, married filing separately, or something else? Your tax status dramatically affects how your return is processed and the refund or tax owed.
• Improper timing. Before filing taxes, wait until you receive all necessary documentation from your employer and the IRS. This includes forms W-2, 1099, and 1095-A, for example.
• Inaccurate or missing information. Examples include incorrect social security numbers, misspellings, false bank account numbers, inaccurate or missing numbers, and sections that are left blank or filled out inappropriately. Math errors are common when filing by hand, as well.
• Omitting a signature. It’s not always clear where you need to sign your return, and an unsigned return will be flagged as invalid, and processing will be delayed.
• Selecting the wrong credits or deductions. A wide array of credits and deductions are available, which can be challenging to understand, even when filing electronically. You may accidentally opt to receive a tax credit that doesn’t apply (or fail to select a deduction that does), which could have monetary or potentially legal consequences.

How to Avoid Mistakes When Filing

Despite the abundance of complications in the tax filing process, the IRS wants you to succeed and provides several resources to help you navigate tax season. Here are additional ways to avoid mistakes, get the best results, and prevent tax fraud or negligence charges.

File Electronically

With so many cloud-based tools and software options available today, there is no need to go through the painstaking process of filing taxes by hand. Tax preparation software or resources like IRS Free File will automatically do the math and flag common mistakes. It also prompts users for missing information, offers valuable credits or deductions, and helps maximize your return. Filing online means everything moves faster, including your tax refund, so if you’re still filing by hand, it’s time to investigate an online service like IRS Free File, TurboTax, or H&R Block Online.

Double-Check Information

Even if you’re filing online or using advanced software, it’s still wise to double-check your information carefully. Remember, inaccurate or incomplete returns are leading causes of tax negligence and fraud charges, so it’s worth taking this extra step. This includes reviewing all information before submitting your return and keeping detailed records of all transactions throughout the year. You may also want to consult an experienced tax professional to ensure your return is accurate and compliant with all applicable laws.

Work with Professionals

Suppose your tax situation is complicated; for example, owning one or multiple businesses or being self-employed. In that case, it can be safer to hire an expert rather than file on your own. You can work with a certified public accountant (CPA) or enrolled agent (EA). Not only will this save time, but it also helps ensure you’re getting applicable savings.

Find a qualified professional by searching the IRS Preparer Directory, researching CPAs in your area, or even finding one online through a freelance site like Upwork. The IRS also has certified volunteers that can prepare your taxes for free.

If you are concerned about facing tax fraud charges, it’s essential to consult a criminal defense attorney with tax liability experience.