Every American citizen is responsible for filing their own federal income tax return, through what is called voluntary compliance. Most Americans do file their income tax return reporting their earning and paying the required tax liability as calculated by federal tax code. But not everyone willfully files their income tax return, and intentionally break the law by not paying the correct tax amount, or not reporting income.
There is a big difference in taking a few tax deductions for a few hundred dollars and committing tax fraud. Tax fraud means that you have intentionally broken the tax law providing incorrect information on your federal income tax return for the purpose of financial gain. Activities the IRS determines as breaking the tax laws include but are not limited to:
deliberately underreporting income
deliberately omitting income
keeping two sets of books
overstating the amount of deductions
making false entries in books and records
claiming personal expenses as business expenses
hiding assets or income
claiming false deductions
transferring assets or income
The IRS created the Criminal Investigation Division to research and correct improper tax filing and improper tax payment. The Criminal Investigation Division of the IRS investigates a wide variety of individuals and corporations including business owners and self-employed wage earners. It is the main component of the IRS’s efforts to directly influence taxpayer compliance.
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.
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.
No matter what the cause of the IRS income tax problem, J.M. Trippon & Company CPAs can assist you with resolving your IRS tax problem. Give us a call today to speak to one of our IRS tax resolution specialists at 713-661-1040.