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Is It Income Tax Fraud or Negligence?

Tax season is not usually something most people look forward to, primarily because of the stress that comes with attempting to of get your taxes done without making costly errors. While most people don’t purposely file their taxes incorrectly, there are some out there who look to cut corners in order to pay less than they’re required. But what’s the difference between outright income tax fraud and mere negligence?

Understanding Income Tax Fraud

First, income tax fraud is defined by the IRS as, “an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known, or believing to be owing.” This basically means that if you purposely leave information off your tax return, or you purposely exclude income that you have earned in order to pay less in taxes, you’re probably committing tax fraud. Taking deductions that you don’t deserve, not paying your tax bill, or not reporting income at all can also result in being audited by the IRS.

The IRS Encourages Tax Fraud Whistle Blowers

Back in November, 2016, the IRS has published a document, How Do You Report Suspected Tax Fraud Activity? to assist individuals that want to report suspicious tax activity.  In it, the IRS clarifies that if a taxpayer sees or suspects activity that might amount to income tax fraud, it’s interested in receiving that information. The activities that the IRS is interested in are those that might lead someone to conclude that an individual or a business is not complying with the federal tax laws including such matters as:

• False Exemptions or Deductions;
• Kickbacks;
• False or Altered Documents;
• Failure to Pay Tax;
• Unreported Income;
• Organized Crime; or
• Failure to Withhold Taxes.

IRS Form 3949-A, Information Referral, is used by individuals to report such suspected activity.  It can either be signed or left unsigned.  If the whistle blower chooses to identify himself or herself, their identity will be kept confidential.

In lieu of filling in and mailing Form 3949-A to the IRS, whistle blowers can send a letter to the IRS at its Fresno, CA 93888 address Whistle blowers are encouraged to  include as much information in the letter as possible, such as:

• the name and address of the person or business being reported;
• the social security number or the business’ employer identification number being reported;
• a brief description of the alleged violation(s), including how the whistle blower learned about the violation(s);
• the tax year or years involved;
• the estimated dollar amount of any unreported income; and
• although not required, the name, address and telephone number of the whistle blower.

Yet a third alternative open to whistle blowers hesitant to mail in information to the IRS.  is to simply call the IRS Tax Fraud Hotline.  That telephone number is 1-800-829-0433, although the IRS doesn’t accept phoned-in allegations of tax law violation referrals.

Multiple Frauds? Multiple IRS Forms!

Much like in the carnival game of Whack-a-Mole, it’s hard to know where income tax fraud will pop up next.  Accordingly, the IRS has attempted to address the situation and has tailored its documents to several of the most common types of income tax fraud.  In line with that thinking, if a whistle blower suspects:

• someone stole his or her identity and used their social security number for employment purposes, or could use it to file a tax return, the IRS has Form 14039, Identity Theft Affidavit to report the activity;
• fraudulent activity or an abusive tax scheme by a tax return preparer, or tax preparation company, there’s Form 14157; Complaint: Tax Return Preparer;
• a tax return preparer filed a return or altered their return without their consent and/or is seeking a change to a taxpayer account, there’s Form 14157, Complaint: Tax Return Preparer and Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit;
• an abusive tax promotion or promoter, they’d use Form 14242;
• misconduct or wrongdoing by an exempt organization or employee plan, they could use Form 13909, Tax-Exempt Organization Complaint (Referral); or
• tax fraud, has information and wants to claim a reward, they’d use Form 211, Application for Award for Original Information.

What is Tax Negligence?

As anyone who has ever filed taxes knows, the Internal Revenue Code is long and confusing. The IRS definitely knows this, and are usually willing to cut people a little bit of slack if their taxes have errors. Negligence differs from fraud in the willfulness to commit the act, so if it was an honest mistake, the IRS is more likely to let it slide, as long as you make the appropriate corrections.

Penalties for Negligence and Fraud

While negligence carries milder penalties, you don’t always get away without paying in some way. There’s usually no jail time for negligence, but you will likely have to pay a fine of 20% of what you should have paid, on top of paying up what you owe.

However, the fraud penalties are far more serious and nothing to laugh at. The fine for fraud is usually a steep 75% of what you owed, along with the full amount owed. Two out of three types of tax fraud are considered felonies and carry a jail sentence of anywhere between three and five years. While the last is only a misdemeanor, it can still carry a jail sentence of at least a year and a hefty fine.

If you’ve prepared your own taxes, it’s crucial that you always double check your work just to be on the safe side. If you’re ever unsure about a deduction, look it up. Don’t just claim the deduction. You’ll save yourself time and money in the end by not being audited and potentially avoid negligence or income tax fraud charges. Seasoned tax pro or newbie, if you’re ever unsure, there’s no harm in having someone else look over your tax return for you.

Are You Facing Income Tax Fraud Charges?

If you’re facing tax law issues or worse, income tax fraud charges, a New York tax attorney at Mackay, Caswell & Callahan, P.C. may be able to help protect your interests and get relief. Complete our online contact form or call to speak with a tax attorney at 844-MCC-4TAX (622-4829).  With offices across New York State, whether you need a New York City tax attorney or a Rochester tax attorney, Mackay, Caswell & Callahan stands ready to help you today.