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4 ways you might be committing tax fraud

On Behalf of | Apr 25, 2023 | Criminal Defense |

While fewer than 2% of American taxpayers are convicted of tax fraud, if you are one of the unlucky few who gets investigated by the IRS, you might be looking at heavy fines and jail time. Most tax crimes are intentional, but ignorance of the law can also lead to consequences.

It is important to note that tax avoidance and tax evasion are two different concepts. Tax avoidance is a legal way to lower tax liability, while tax evasion, where you deliberately avoid paying taxes, is considered fraud.

If you do any of the following, you may be found guilty of tax evasion:

  1. Failing to file a tax return

People often give various reasons for not submitting their tax returns, from being too busy to file or finding the process overwhelming. Whatever the excuse, failing to file your taxes counts as fraud since you are keeping relevant information from the IRS and avoiding your legal duty to pay.

  1. Underreporting income

Most individuals who underreport income do so to earn more while paying less taxes. People with multiple jobs, freelancers, and business owners who fail to keep track of all their earnings may accidentally underreport their income.

It is never a good idea to intentionally underreport your income. The IRS uses its Automated Underreporter (AUR) function to find inconsistencies in the taxpayer’s reported income by matching it with information from their employer and financial institutions.

  1. Claiming false deductions

Small business owners may reduce their tax obligation by deducting necessary work-related expenses. However, inflating your costs to claim a bigger refund and lessen the taxes you owe is fraud. False deductions may include writing off personal expenses as company-related costs.

  1. Abusing tax shelters

Individuals and business owners can legally use tax shelters such as retirement accounts, real estate, or investments to minimize taxes. However, redirecting your income to these shelters to pay less or avoid taxes is abuse and may result in tax evasion penalties.

As tough as it is to pay and file taxes, complying with the IRS is a legal obligation. If you catch any minor errors in your tax return early, the IRS may adjust the amount you owe to reflect the correct amount. However, if you are found guilty of intentionally submitting a false tax return, you may face up to five years in jail and fines of up to $100,000.