Penalty For Filing A False Tax Return

Less than one percent of taxpayers are convicted for tax crimes in a year according to the IRS. But this doesn’t mean that the IRS is not likely to catch individuals that fudge the numbers when they are filing their returns. The IRS is the biggest tax collection agency in the world and it has resources it can use to catch taxpayers that file false tax returns. When the agency detects a false tax return they initiate an enforcement action with all the tools they have.

If they find that a taxpayer made false statements on a tax return, the taxpayer will face dire consequences that may include having to serve time in jail and substantial fines. You need to contact an experienced tax lawyer if you are facing a fraud charge with the IRS. Going it alone is not advisable because tax law is complicated.

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What Are The Penalties?

Filing fraudulent tax returns or misreporting your income can get you into serious trouble with the IRS. However, the IRS understands that the tax code is so complicated that most people find it difficult to decipher. For that reason, they are likely to be lenient if a tax payer makes careless errors while filing the return, but only if there are no signs of fraud in the tax return.

The IRS will assume that the errors were as a result of negligence or failure to strictly comply with tax laws. But that does not mean that they will not penalize taxpayers for making these careless errors. In fact, the IRS may still fine the taxpayer a penalty of 20 percent of the tax underpayment.

But when the IRS detects clear signs that the understatement in the tax return was due to fraud and that the taxpayer was willfully seeking to evade assessment of tax owed, then it turns into a case of civil fraud. The IRS must prove that the understatement was made willfully for them to have any chance of a conviction. The taxpayer faces a penalty of 75 percent of the tax underpayment if convicted.

Negligence Or Fraud

The IRS is likely to waive penalties for taxpayers that make errors on their tax returns because of negligence. A mistake attributable to negligence is an honest mistake rather than a willful act to commit fraud. The IRS will carefully review your tax returns to identify any signs of fraud before they conclude that the errors were due to negligence. Some of the signs of fraud that tax auditors look for include:

  • Using a false social security number
  • When there are multiple deductions and exemptions
  • When an individual conceals or transfers income
  • Willfully underreporting income
  • Claiming an exemption for a dependent that does not exist
  • Having two sets of financial ledgers
  • Falsifying documents

The people that are most likely to commit income tax fraud are taxpayers who are self-employed in businesses that are cash-based. It is very difficult for the IRS to track cash income unless there is some kind of written record. See also…chapter 7 bankruptcy articles.