Nobody likes taxes. Everyone wants to pay less to the government. In some cases, though, taxes can lead to serious financial concerns. A struggling business may be unable to afford a high tax burden. A divorce may have drained family resources, or a spouse may not have had much knowledge about the other’s finances. Unfamiliarity with complex tax laws or difficulty in maintaining proper bookkeeping can lead to confusion over what you owe to the IRS. Your employer may ask you to go along with their own tax avoidance scheme.
It is never a good idea to lie on your taxes. But the above are all reasons that many people, year after year, get questions from the IRS over whether they paid the right amount in taxes. This article will explain in clear terms what happens when the IRS questions whether you have have been entirely forthcoming on your tax return. In other words, whether you may have committed tax fraud.
First, remember not to panic. We all realize that the IRS is powerful and can make life difficult for you and that tax fraud is also a serious crime. However, there can be many ways to resolve IRS questions and minimize potential penalties. And if you’ve done nothing wrong or simply made an honest mistake you will have the opportunity to prove your case and pay the right amount.
If the IRS has alleged you lied on your taxes, here are a few of the potential paths forward.
While the IRS requires you to self-report income, that isn’t the only way the IRS gets information. Your employer is also required to report the amount they paid you on a W-2 they send to the IRS, for example.
The IRS will send you a CP2000 notice if there is a difference between what you reported and other information about your income for the year the IRS has on file. This is not yet an audit, although it can become one.
Did you make an honest mistake? Now is the time to correct it. Just because you forgot to add a zero when filing your tax return doesn’t necessarily mean the IRS views you as a criminal, for example. Correct the mistake, recalculate your taxes, and you may be done.
If the IRS sees something suspicious on your tax return, or if you failed to file taxes at all, it may conduct an audit. This is more involved than a CP2000 notice. At this point getting legal representation is critical, as you may be facing civil and criminal penalties. A lawyer can help you to prove your case, explain your options, and avoid further mistakes.
An audit is essentially an investigation of your tax return. You will have to provide extensive documentation to the IRS so they can determine if you lied, misrepresented your income, or otherwise incorrectly paid your taxes. In some cases an audit will include in-person interviews. Lying to the IRS in an audit is itself a crime.
An audit is a lengthy, expensive, and exhausting process. Just because you are being audited does not mean you did anything wrong, however. The audit is your chance to prove to the IRS you were correct, made an honest mistake, or otherwise are innocent of intentionally lying.
Tax fraud is more than just a mistake; it is the willful avoidance of paying the taxes you owe. The government needs to prove this in court for you to be convicted.
The IRS itself is part of the executive branch and does not sentence you for tax fraud. It will, however, help prosecute the case in criminal court. Because lying to the IRS is a federal offense your case will be prosecuted in federal district court. Lying on your state taxes, on the other hand, is a state crime and will be prosecuted in state court.
You will again have the chance to prove your innocence at trial. Like the audit, this will involve extensive documentation, testimony, and other evidence.
If you are convicted of a tax crime you will face both criminal and civil penalties.
The good news is that the IRS doesn’t pursue criminal cases very frequently. For example, if you legitimately don’t have the money to pay the tax you owe it’s unlikely the IRS will pursue criminal charges (although they do not often stop trying to collect). The bad news is that if you are one of those people facing criminal charges, the consequences are significant.
The exact amount of time you spend in prison will vary depending on the specific charges you are convicted of and the amount involved. Usually, however, tax fraud and related charges are felonies. If convicted of felony tax fraud, the minimum sentence is one year and a day. But for some crimes and amounts the government can seek a sentence lasting decades.
Sentences vary according to federal sentencing guidelines and federal law, so discuss the penalties associated with particular charges with your attorney. Common criminal charges associated with taxes include tax fraud, tax evasion, failure to file, and identity theft. These are all extremely serious criminal charges and will result in significant prison time. Again, the exact sentence can vary significantly and you will need a criminal defense lawyer to help you understand whether to accept a plea bargain, fight the charges in court, and what the government is seeking as a sentence.
If you are caught lying on your taxes you can expect to pay hefty fines and fees, as well. The IRS charges interest for late payments. Fees will depend on the results of the audit. If the IRs finds that you were negligent in determining your tax amount, for example, you can expect to pay the IRS an additional 20% over the amount you originally owed. If you intentionally lied to the IRS the penalty is 75%.
With fees and interest, a taxpayer can sometimes end up paying much more than they would have if they had simply paid the tax to begin with, which is why it is a good idea to just pay the taxes you owe.
The IRS is incredibly powerful. The IRS can take your paycheck, seize your assets, and otherwise ensure that they get the money they are owed. The significant penalties associated with not paying the taxes you owe is extremely risky, as is lying on your taxes. The IRS doesn’t conduct many audits, and it pursues criminal charges even less. However, the penalties are so serious that it is simply not worth the risk. Don’t believe clients, employers, or colleagues who tell you otherwise.
There are legal ways to reduce your tax burden. If you can’t pay the taxes you owe, the IRS will enter into payment plans with you. While a difficult decision, bankruptcy is sometimes the best option for struggling small business owners. The worst path is to intentionally avoid paying taxes you can afford, especially when the amount is significant. Doing so can result in felony criminal charges, prison time, vast fees and penalties, and can have consequences that last a lifetime.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified tax lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact an attorney in your area from our directory to discuss your specific legal situation.