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Fraud and Tax Crimes
It should not come as a shock to hear that it is a crime to cheat on your taxes. In a recent year, however, only 2,472 Americans were convicted of tax crimes -- .0022% of all taxpayers. This number is astonishingly small, taking into account that the IRS estimates that 17% of all taxpayers are not complying with the tax laws in some way or another. Surprisingly, the number of convictions for tax crimes has decreased over the past decade.
According to the IRS, individual taxpayers do 75% of the cheating -- mostly middle-income earners. Corporations do most of the rest. Cash-intensive businesses and service industry workers, from handy-people to doctors, are the worst offenders. For example, the IRS claims that waiters and waitresses underreport their cash tips by an average of 84%.
How People Cheat on Their Taxes
Most people cheat by deliberately underreporting income. A government study found the bulk of the underreporting of income was done by self-employed restaurateurs, clothing store owners and -- you will no doubt be shocked -- car dealers. Telemarketers and salespeople came in next, followed by doctors, lawyers, accountants, and hairdressers.
Self-employed taxpayers who over-deduct business-related expenses -- such as car expenses -- came in a far distant second. Surprisingly, the IRS has concluded that only 6.8% of deductions are overstated or just plain phony.
If you are caught cheating by an auditor, she can either slap you with civil fines and penalties or worse, refer your case to the IRS' criminal investigation division.
The Auditor Suspects You of Fraud
Auditors are trained to look for tax fraud -- a willful act done with the intent to defraud the IRS -- that dark area beyond honest mistakes. Examples of tax fraud include using a false Social Security number, keeping two sets of financial books, claiming a blind spouse as a dependent when you are single, and letting another taxpayer claim your children as a deduction. While auditors are trained to look for fraud, however, they do not routinely suspect it. They know the tax law is complex and expect to find a few errors in every tax return. They will give you the benefit of the doubt most of the time and not go after you for tax fraud.
Fraud or Negligence?
A careless mistake on your tax return might tack on a 20% penalty to your tax bill. While not good, this sure beats the cost of tax fraud -- a 75% civil penalty. The line between negligence and fraud is not always clear, however, even to the IRS and the courts.
While auditors are not detectives, they are trained to spot common types of wrongdoing, called badges of fraud. Activities that may raise suspicion during an audit include a business keeping two sets of books or keeping no records at all; freshly made, false receipts; and checks altered to increase deductions. Altered checks are easy to spot by comparing written numbers with computer coding on the check or bank statements.
While the statistical likelihood of your being convicted of a tax crime is minimal, convictions do happen. If you are in the unlucky minority, hire the best tax and/or criminal lawyer you can find.
Checklist: Avoiding Behavior the IRS Considers Criminal or Fraudulent
To read and printout a copy of the Checklist please link below.
Avoiding Behavior the IRS Considers Criminal or Fraudulent
You can download a free copy of Adobe Acrobat Reader here.
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